UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

SCHEDULE 14A

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

þ  Preliminary Proxy Statement
o  Confidential, for use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o  Definitive Proxy Statement
o  Definitive Additional Materials
o  Soliciting Material Under Rule 14a-12

 

Cardiogenesis Corporation

(Name of Registrant as Specified in its Charter)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CARDIOGENESIS CORPORATION
11 Musick
Irvine, CA 92618
(949) 420-1800

 

[             ], 2011

 

Dear Shareholders:

 

You are cordially invited to attend a special meeting of shareholders (the “Special Meeting”) of Cardiogenesis Corporation, a California corporation (“Cardiogenesis,” “we,” “us” or “our”) to be held on [          ] [          ], 2011 at [          ], Pacific Time, at Cardiogenesis’ principal offices, 11 Musick, Irvine, California 92618.

 

On March 28, 2011, we entered into an Agreement and Plan of Merger with CryoLife, Inc. (“CryoLife”) and CL Falcon, Inc. (“Merger Sub”), a wholly-owned subsidiary of CryoLife (the “Merger Agreement”). At the Special Meeting, we will ask you to approve and adopt the Merger Agreement. The Merger is the second and final step of the acquisition of Cardiogenesis by CryoLife. The first step was a tender offer by Merger Sub for all of the outstanding common shares of Cardiogenesis at a price of $0.457 per share, which was completed on [May [          ]], 2011. The second, and final, step of CryoLife’s acquisition of us consists of the merger of Merger Sub with and into Cardiogenesis pursuant to the Merger Agreement (the “Merger”). As a result of the Merger, Cardiogenesis will become a wholly-owned subsidiary of CryoLife.

 

If the Merger is completed, you will be entitled to receive $0.457 in cash, without interest thereon and less any required withholding taxes, for each share of Cardiogenesis common stock you own.

 

Our board of directors unanimously approved the Merger Agreement and the Merger and related transactions and unanimously determined that the Merger is advisable and fair to, and in the best interests of Cardiogenesis shareholders. Our board of directors unanimously recommends that you vote “FOR” the proposal to approve and adopt the Merger Agreement.

 

The Merger cannot be completed unless shareholders holding at least a majority of the outstanding common shares on the record date approve and adopt the Merger Agreement. Your vote is very important. Whether or not you plan to attend the Special Meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy card in the accompanying prepaid reply envelope. If you attend the Special Meeting and vote in person, your vote by ballot will revoke any proxy previously submitted. The failure to vote your shares of our common stock will have the same effect as a vote “AGAINST” approval of the proposal to adopt the Merger Agreement.

 

If your shares of our common stock are held in “street name” by your bank, brokerage firm or other nominee, your bank, brokerage firm or other nominee will be unable to voter your shares of our common stock without instructions from you. You should instruct your bank, brokerage firm or other nominee to vote your shares of our common stock in accordance with the procedures provided by your bank, brokerage firm or other nominee. The failure to instruct your bank, brokerage firm or other nominee to vote your shares of our common stock “FOR” approval of the proposal to adopt the Merger Agreement will have the same effect as voting “AGAINST” the proposal to adopt the Merger Agreement.

 

The accompanying proxy statement provides you with detailed information about the Special Meeting, the Merger Agreement and the Merger. A copy of the Merger Agreement is attached as Annex A to the proxy statement. We encourage you to read the accompanying proxy statement in its entirety because it explains the proposed Merger, the documents related to the Merger and other related matters.

 

Whether or not you plan to attend the Special Meeting, please take the time to submit a proxy by following the instructions on your proxy card as soon as possible. If your shares of our common stock are held in an account at a broker, dealer, commercial bank, trust company or other nominee, you should instruct your broker, dealer, commercial bank, trust company or other nominee how to vote in accordance with the voting instruction form furnished by your broker, dealer, commercial bank, trust company or other nominee.

 

On behalf of our board of directors and management of Cardiogenesis, we thank you for your support.

 

Best Regards,

 

Paul McCormick

Executive Chairman

 

This transaction has not been approved or disapproved by the Securities and Exchange Commission or any state securities commission. Neither the Securities and Exchange Commission nor any state securities commission has passed upon the merits or fairness of this transaction or upon the adequacy or accuracy of the information contained in this proxy statement. Any representation to the contrary is a criminal offense.

 

The accompanying proxy statement is dated [          ], 2011 and is first being mailed to shareholders on or about [          ], 2011.

 

CARDIOGENESIS CORPORATION
11 Musick
Irvine, CA 92618
(949) 420-1800

 

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held [•], 2011

 

NOTICE IS HEREBY GIVEN that the Special Meeting of Shareholders (the “Special Meeting”) of Cardiogenesis Corporation, a California corporation, will be held on [             ], 2011 at [       ] Pacific Time at our principal executive offices, located at 11 Musick, Irvine, California, 92618 for the following purposes:

 

(1) To approve and adopt the Agreement and Plan of Merger (the “Merger Agreement”), dated as of March 28, 2011, by and among Cardiogenesis Corporation, a California corporation (“Cardiogenesis,” “we,” “us” or “our”), CryoLife, Inc., a Florida corporation (“CryoLife”), and CL Falcon, Inc., a Florida corporation and a wholly-owned subsidiary of CryoLife (“Merger Sub”).

 

(2) To consider and vote on a proposal to adjourn the Special Meeting, if necessary or appropriate, to do so.

 

(3) To transact any other business as may properly come before the Special Meeting or any reconvened meeting after any adjournment or postponement of the Special Meeting.

 

For more information about the Merger and the other transactions contemplated by the Merger Agreement, please review the accompanying proxy statement and the Merger Agreement attached as Annex A.

 

Our board of directors has fixed the close of business of [May] [4], 2011 as the record date for the determination of shareholders entitled to notice of and to vote and this Special Meeting and at any adjournment or postponement thereof. For ten days prior to the Special Meeting, a complete list of shareholders entitled to vote at the Special Meeting will be available for examination by any shareholder, for any purpose relating to the Special Meeting, during ordinary business hours at our principal offices located at 11 Musick, Irvine, California, 92618.

 

Please submit your proxy or voting instructions as soon as possible to make sure that your shares are represented and voted at the Special Meeting, whether or not you plan to attend the Special Meeting. Whether you attend the Special Meeting or not, you may revoke a proxy at any time before it is voted by filing with our corporate secretary a duly executed revocation of proxy, by properly submitting a proxy by mail with a later date or by appearing at the Special Meeting and voting in person. You may revoke a proxy by any of these methods, regardless of the method used to deliver your previous proxy. Attendance at the Special Meeting without voting will not itself revoke a proxy. If your shares are held in an account at a broker, dealer, commercial bank, trust company or other nominee, you must contact your broker, dealer, commercial bank, trust company or other nominee to revoke your proxy.

 

Cardiogenesis shareholders who do not vote in favor of approval and adoption of the Merger Agreement will have the right to seek appraisal and the fair value of their shares but only if they perfect their dissenters’ rights by complying with the required procedures under California law. See “Approval of the Merger Agreement — Dissenters’ Rights” beginning on page 41 of the accompanying proxy statement.

 

After careful consideration, our board of directors has unanimously determined that the Merger is advisable, fair to and in the best interests of the shareholders of Cardiogenesis, and approved the Merger Agreement, the Merger and other transaction contemplated by the Merger Agreement. Accordingly, Cardiogenesis’ board of directors recommends that you vote “FOR” approval of the proposal to adopt the Merger Agreement and “FOR” approval of the proposal to adjourn

All shareholders are cordially invited to attend the Special Meeting.

 

YOUR VOTE IS VERY IMPORTANT TO US WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. SHAREHOLDERS ARE URGED TO VOTE THEIR SHARES PROMPTLY BY MAIL AS INSTRUCTED ON THE ENCLOSED PROXY CARD OR VOTING INSTRUCTION CARD. PROXIES FORWARDED BY OR FOR BROKERS OR FIDUCIARIES SHOULD BE RETURNED AS REQUESTED BY THEM.

 

By Order of Our Board of Directors,

 

Paul McCormick

Executive Chairman

 

Irvine, California

[          ] [  ], 2011

SUMMARY VOTING INSTRUCTIONS

 

Ensure that your shares of Cardiogenesis common stock can be voted at the Special Meeting by submitting your proxy or contacting your broker, dealer, commercial bank, trust company or other nominee.

 

If your shares of Cardiogenesis common stock are registered in the name of a broker, dealer, commercial bank, trust company or other nominee: check the voting instruction card forwarded by your broker, dealer, commercial bank, trust company or other nominee to see which voting options are available or contact your broker, dealer, commercial bank, trust company or other nominee in order to obtain directions as to how to ensure that your shares of our common stock are voted in favor of the proposals at the Special Meeting.

 

If your shares of Cardiogenesis common stock are registered in your name: submit your proxy as soon as possible by signing, dating and returning the enclosed proxy card in the enclosed postage-paid envelope, so that your shares of our common stock can be voted in favor of the proposals at the Special Meeting.

 

For additional questions about the Merger, assistance in submitting proxies or voting shares of Cardiogenesis common stock, or to request additional copies of the proxy statement or the enclosed proxy card, please contact William R. Abbott, our Chief Financial Officer, at 11 Musick, Irvine, California, 92618, or via telephone at (949) 420-1800.

 

TABLE OF CONTENTS

 

CARDIOGENESIS CORPORATION

11 Musick

Irvine, CA 92618

(949) 420-1800

 

 

PROXY STATEMENT

 

 

This proxy statement contains information related to a Special Meeting of shareholders of Cardiogenesis Corporation, a California corporation, or Cardiogenesis, we, us or our, to be held on [          ], 2011, at [          ], Pacific Time, at Cardiogenesis’ principal executive offices, 11 Musick, Irvine, CA 92618 and at any adjournments or postponements thereof. We are furnishing this proxy statement to shareholders of Cardiogenesis as part of the solicitation of proxies by Cardiogenesis’ board of directors for use at the Special Meeting. This proxy statement is dated [          ], 2011 and is first being mailed to shareholders on or about [          ], 2011.

 

This summary highlights selected information in this proxy statement and may not contain all the information about the Merger that is important to you. We have included page references in parentheses to direct you to more complete descriptions of the topics presented in this summary term sheet. You should carefully read this proxy statement in its entirety, including the annexes and the other documents to which we have referred you, for a more complete understanding of the matters being considered at the Special Meeting.

 

Cardiogenesis Corporation

11 Musick,

Irvine, CA 92618

(949) 420-1800

 

We are a California corporation and we develop and market surgical products for the treatment of refractory angina in patients with chronic cardiac ischemia caused by coronary artery disease, or CAD, which remains a leading cause of death for persons over the age of 65. Our products are used to create transmural laser channels into the myocardium, commonly referred to as transmyocardial revascularization, or TMR, which has proven effective in reducing symptoms in patients with refractory angina compared to optimal medical management. We are also currently developing proprietary catheter-based systems for the delivery of biologics, such as stem cells, as an adjunctive therapy. Our PHOENIX Combination Delivery System^tm, for which we have received an Investigational Device Exemption, or IDE, is the first device developed for this purpose.

 

CryoLife, Inc.

1655 Roberts Boulevard, NW

Kennesaw, GA 30144

 

Incorporated in Florida in 1984, CryoLife, Inc., which we refer to as CryoLife, 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. CryoLife’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. CryoLife’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. CryoLife’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 and was recently approved in Japan for use in the repair of aortic dissections. CryoLife’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. CryoLife also distributes PerClot^®, an absorbable powder hemostat that has CE Mark designation allowing commercial distribution into the European Community. PerClot is also distributed in other countries outside of the European Community.

 

CL Falcon, Inc.

1655 Roberts Boulevard, NW

Kennesaw, GA 30144

 

CL Falcon, Inc., which we refer to as Merger Sub, is a Florida corporation and a wholly-owned subsidiary of CryoLife that was formed by CryoLife solely for the purpose of facilitating the acquisition of Cardiogenesis. To date, Merger Sub has not carried on any activities other than those related to its formation and completing the transaction contemplated by the Merger Agreement. Merger Sub currently owns [          ] shares of our common stock, representing approximately [          ]% of our outstanding shares of common stock. Upon consummation of the proposed Merger, Merger Sub will merge with and into Cardiogenesis and will cease to exist with Cardiogenesis continuing as the surviving corporation and a wholly-owned subsidiary of CryoLife.

(page 14)

 

Cardiogenesis, CryoLife and Merger Sub entered into the Merger Agreement on March 28, 2011. In the Merger Agreement, CryoLife agreed to acquire Cardiogenesis through a two-step process. The first step was a tender offer by Merger Sub for all of the outstanding shares of our common stock at a price of $0.457 per share, net to the seller in cash without interest thereon and less any applicable withholding tax, which was completed on [May [  ]], 2011 and resulted in Merger Sub acquiring 49.9% of the outstanding shares of our common stock. The second step is a merger of Merger Sub with and into Cardiogenesis, with Cardiogenesis surviving as a wholly-owned subsidiary of CryoLife. The following will occur in connection with the Merger:

 

 

Following and as a result of the Merger:

 

 

(page 11)

 

The Special Meeting will be held on [             ], 2011 at [     ] Pacific Time at Cardiogenesis’ principal executive offices, 11 Musick, Irvine, California 92618. At the Special Meeting, you will be asked to, among other things, approve and adopt the Merger Agreement. Please see the section of this proxy statement captioned “Questions and Answers About the Special Meeting and the Merger” beginning on page 7 for additional information on the Special Meeting, including how to vote your shares of our common stock.

(page 11)

 

You may vote at the Special Meeting if you owned shares of our common stock at the close of business on [May 4], 2011, the record date for the Special Meeting. On that date, there were [          ] shares of our common stock outstanding and entitled to vote. Approval and adoption of the Merger Agreement requires the affirmative vote of the holders of at least a majority of the shares of our common stock outstanding and entitled to vote at the Special Meeting. Merger Sub owns [     ]% of the shares of our common stock as a result of the tender offer made pursuant to the Merger Agreement and will vote such shares in favor of approving and adopting the Merger Agreement.

(page 12)

 

You may vote at the special meeting if you owned shares of our common stock at the close of business on [May] [4], 2011, the record date for the special meeting. On that date, there were [          ] shares of our common stock outstanding and entitled to vote. You may cast one vote for each Cardiogenesis common share that you owned on that date. Approval and adoption of the Merger Agreement requires the affirmative vote of the holders of at least a majority of the shares of our common stock outstanding and entitled to vote at the special meeting. CryoLife, either directly or indirectly through Merger Sub, owns [          ]% of the shares of our common stock as a result of the tender offer made pursuant to the Merger Agreement and will vote such shares in favor of approving and adopting the Merger Agreement. These shares, together with shares held by the parties to the Support Agreement constitute a majority of the shares of Cardiogenesis common stock outstanding; as a result, we believe that approval of the Merger by Cardiogenesis shareholders is assured. See “Support Agreement” at page 59.

(page 50)

 

Computershare Inc. has been appointed as the Paying Agent to coordinate the payment of the Merger consideration to our shareholders. The Paying Agent will send written instructions for surrendering your Cardiogenesis common share certificates, if your shares of our common stock are certificated, and obtaining the Merger consideration after we have completed the Merger. Do not return your stock certificates with your proxy card and do not forward your stock certificates to the Paying Agent prior to receipt of the written instructions. If you hold uncertificated shares of our common stock (i.e., you hold your shares in book entry form), you will receive your cash consideration once you send in your letter of transmittal and any other documents requested in the Paying Agent’s instructions.

(page 64)

 

The shares of our common stock are currently quoted on the OTCQB under the symbol “CGCP.PK.” On March 28, 2011, the trading day prior to announcement of the signing of the Merger Agreement, the last sale price

per common share was $0.32. The $0.457 per share to be paid for each Cardiogenesis common share in the Merger represents a premium of approximately 43% to the closing price on March 28, 2011. On [             ], 2011, the last trading day before the printing of this proxy statement, the closing price per share was $[          ].

(page 20)

 

On March 22, 2011, our board of directors (all of whom were unaffiliated with CryoLife at the time) unanimously determined that the Merger Agreement and the transactions contemplated thereby, including the tender offer and the Merger, are advisable and in the best interests of and are fair to Cardiogenesis and its shareholders and approved the Merger Agreement and the transactions contemplated thereby, including the tender offer and the Merger. Accordingly, our board of directors recommends that our shareholders vote “FOR” approval and adoption of the Merger Agreement.

 

In adopting the Merger Agreement and making the determination to recommend that the Merger Agreement be approved and adopted, Cardiogenesis’ board of directors consulted with Cardiogenesis’ management, as well as its financial and legal advisors, and considered a number of factors that the board members believed supported their decision. In particular, Cardiogenesis’ board of directors reviewed the possible alternatives to an acquisition by CryoLife and perceived risks of those alternatives, the range of potential benefits to shareholders of these alternatives and the timing and the likelihood of accomplishing the goals of such alternatives, and concluded that none of these alternatives were reasonably likely to present superior opportunities for Cardiogenesis to create greater value for shareholders, taking into account risks to the successful completion of a transaction as well as business, competitive, industry and market risks.

(pages 14 and 20)

 

For a description of the events leading to the adoption of the Merger Agreement by our board of directors, you should refer to “Approval of the Merger Agreement — Background of the Merger” and “Recommendation of Our Board of Directors; Reasons for Recommending the Approval of the Merger Agreement.”

(page 24)

 

B. Riley, on March 22, 2011 as updated and confirmed in writing on March 28, 2011, rendered its oral opinion to our board of directors to the effect that, as of such dates, the $0.457 per share to be received by Cardiogenesis shareholders pursuant to the Merger Agreement was fair, from a financial point of view, to such shareholders.

 

The full text of the written opinion of B. Riley is attached to this proxy statement as Annex B. We encourage you to read this opinion carefully in its entirety for a complete description of the procedures followed, assumptions made, matters considered, qualifications and limitations on review undertaken and other matters considered by B. Riley in preparing its opinion. The opinion is directed to our board of directors and only addresses the fairness from a financial point of view of the per share consideration to be received by shareholders pursuant to the Merger and does not address any other aspect or implication of the transactions or any other agreement, arrangement or understanding entered into in connection with the Merger Agreement, including, without limitation, the support agreement, which we refer to as the “Support Agreement.”

 

B. Riley acted as a financial advisor to Cardiogenesis in connection with the tender offer and the Merger and will receive an estimated fee of approximately $192,000 from Cardiogenesis, of which approximately $146,000 is contingent upon the consummation of the tender offer and the Merger. B. Riley also received a fee of $100,000 for rendering its written opinion. The written opinion fee was not contingent upon the consummation of the tender offer and the Merger or the conclusions reached in B. Riley’s written opinion. Cardiogenesis has also agreed to indemnify B. Riley against certain liabilities and reimburse B. Riley for certain expenses in connection with its services. The written opinion has been approved by the Fairness Opinion Committee of B. Riley & Co., LLC. In the ordinary course of its business, B. Riley and its affiliates may actively trade securities of Cardiogenesis and CryoLife for its

own account or the account of its customers and, accordingly, may at any time hold a long or short position in such securities. B. Riley may also, in the future, provide investment banking and financial advisory services to Cardiogenesis or CryoLife or entities that are affiliated with Cardiogenesis or CryoLife, for which B. Riley would expect to receive compensation.

(page 33)

 

Consummation of the Merger and the other transactions contemplated by the Merger Agreement are not conditioned upon CryoLife or Merger Sub obtaining any financing. As of the date of this proxy statement, CryoLife has sufficient funds to complete the Merger.

(page 34)

 

Members of our board of directors and our executive officers may have interests in the transactions contemplated by the Merger Agreement that differ from, or are in addition to, those of our other shareholders. For example:

 

 

(page 59)

 

We are working to complete the Merger as soon as possible. The Merger is subject to the satisfaction of several conditions, including the conditions described immediately below. As such, we cannot predict the exact time of the Merger’s completion.

 

The completion of the Merger depends on satisfaction of the conditions below:

 

 

Where legally permissible, a party may waive a condition to its obligation to complete the Merger even though that condition has not been satisfied, although the shareholder approval condition cannot be waived. None of Cardiogenesis, CryoLife or Merger Sub, however, has any intention to waive any condition as of the date of this proxy statement.

(pages 42 and C-1)

 

If the Merger is consummated, persons who are then shareholders will have certain rights under California law to dissent and demand appraisal of, and payment in cash of the fair value of, their shares of our common stock. Any shares of our common stock held by a person who demands appraisal of such shares and who complies with the applicable provisions of California law shall not be converted into the right to receive Merger consideration. Such dissenters’ rights, if the statutory procedures were complied with, will lead to a judicial determination of the fair value (excluding any element of value arising from the accomplishment or expectation of the Merger) required to be paid in cash to such dissenting shareholders for their shares of our common stock. The value so determined could be more or less than, or the same as, the purchase price per share pursuant to the tender offer or the consideration per share to be paid in the Merger.

 

You should read “Approval of the Merger Agreement — Dissenters’ Rights” beginning on page 42 for a more complete discussion of the dissenters’ rights in relation to the Merger as well as Annex C which contains a full text of the applicable California statutes.

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If you properly transmit your proxy, but do not indicate how you want to vote, your proxy will be voted “FOR” the approval and adoption of the Merger Agreement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This proxy statement, and the documents to which we refer you in this proxy statement, as well as information included in oral statements or other written statements made or to be made by us, contain statements that, in our opinion, may constitute “forward-looking statements” that are not historical facts.

 

Cardiogenesis has identified some of these forward-looking statements with words like “believe,” “may,” “could,” “would,” “might,” “possible,” “potential,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “estimate,” “approximate” “outlook” or “continue” or the negative of these words, other terms of similar meaning or the use of future dates. Forward-looking statements in this proxy statement include without limitation statements regarding the anticipated timing of filings and approvals relating to the Merger; statements regarding the expected timing of the completion of the Merger; statements regarding the ability to complete the Merger considering the various closing conditions; statements regarding expected tax treatment for the Merger; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Investors and security holders are cautioned not to place undue reliance on these forward-looking statements. Actual results could differ materially from those currently anticipated due to a number of risks and uncertainties. Risks and uncertainties that could cause results to differ from expectations include: uncertainties as to the timing of the Merger; uncertainties as to how many of Cardiogenesis’ shareholders will vote their shares of our common stock in favor of the Merger; the risk that competing offers will be made; the possibility that various closing conditions for the transactions contemplated by the Merger Agreement may not be satisfied or waived, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of such transactions; the effects of disruption from the transactions contemplated by the Merger Agreement making it more difficult to maintain relationships with employees, customers, vendors and other business partners; the risk that shareholder litigation in connection with the Merger may result in significant costs of defense, indemnification and liability or otherwise delay or prevent the Merger; other business effects, including the effects of industry, economic or political conditions outside of Cardiogenesis’ control; transaction costs; actual or contingent liabilities; and other risks and uncertainties discussed in Cardiogenesis’ filings with the SEC, including the “Risk Factors” sections of Cardiogenesis’ most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q, as well as the Risk Factors set forth in the Offer to Purchase previously mailed to Cardiogenesis’ shareholders.

 

Copies of Cardiogenesis’ filings with the U.S. Securities and Exchange Commission, or the SEC, may be obtained at the “Investors” section of Cardiogenesis’ website at http://www.cardiogenesis.com under the caption “SEC Filings.” Cardiogenesis does not undertake any obligation to update any forward-looking statements as a result of new information, future developments or otherwise, except as expressly required by law. All forward-looking statements in this proxy statement are qualified in their entirety by this cautionary statement.

 

We are furnishing this proxy statement to Cardiogenesis shareholders as part of the solicitation of proxies by the Cardiogenesis board of directors for use at the Special Meeting.

 

We will hold the Special Meeting on [          ], 2011, at [          ], Pacific Time, at Cardiogenesis’ principal executive offices, 11 Musick, Irvine, California 92618. Seating will be limited to shareholders. Admission to the Special Meeting will be on a first-come, first-served basis.

 

The Special Meeting is being held for the following purposes:

 

 

Cardiogenesis’ board of directors unanimously recommends that our shareholders vote “FOR” the approval and adoption of the Merger Agreement, and, if necessary, “FOR” an adjournment of the Special Meeting.

 

Only holders of record of shares of our common stock at the close of business on [May 4], 2011, the record date, are entitled to notice of and to vote at the Special Meeting. On the record date, [          ] shares of our common stock were issued and outstanding and held by [          ] holders of record. Holders of record of shares of our common stock on the record date are entitled to one vote per common share at the Special Meeting on each proposal. For ten days prior to the Special Meeting, a complete list of shareholders entitled to vote at the Special Meeting will be available for examination by any shareholder, for any purpose relating to the Special Meeting, during ordinary business hours at our principal offices located at 11 Musick, Irvine, California 92618.

 

A quorum is necessary to hold a valid Special Meeting. A quorum will be present at the Special Meeting if the holders of a majority of shares of our common stock outstanding and entitled to vote on the record date are present, in person or by proxy.

 

Voting by Proxy or in Person at the Special Meeting

 

Holders of record can ensure that their shares of our common stock are voted at the Special Meeting by completing, signing, dating and delivering the enclosed proxy card in the enclosed postage-paid envelope. Submitting by this method will not affect your right to attend the Special Meeting and to vote in person. If you plan to attend the Special Meeting and wish to vote in person, you will be given a ballot at the Special Meeting. Please note, however, that if your shares of our common stock are held in “street name” by a broker, dealer, commercial bank, trust company or other nominee and you wish to vote at the Special Meeting, you must bring to the Special Meeting a proxy from the record holder of the shares of our common stock authorizing you to vote at the Special Meeting.

 

Abstentions

 

When an eligible voter attends the Special Meeting but decides not to vote, his or her decision not to vote is called an “abstention.” Properly executed proxy cards that are marked “abstain” or “withhold authority” on any

proposal will be treated as abstentions for that proposal. Abstention shares will have the same effect as votes AGAINST a proposal if the minimum vote required for approval of the proposal is a majority of (i) the shares present and entitled to vote, or (ii) all shares outstanding and entitled to vote.

 

Broker Non-Votes

 

Broker non-votes occur when shares held by a broker for a beneficial owner are not voted with respect to a particular proposal because (i) the broker does not receive voting instructions from the beneficial owner, and (ii) the broker lacks discretionary authority to vote the shares. Broker non-votes will not be treated as shares present and entitled to vote for purposes of any matter requiring the affirmative vote of a majority or other proportion of the shares present and entitled to vote (even though the same shares may be considered present for quorum purposes and may be entitled to vote on other matters). Thus, a broker non-vote will have the same effect as a vote AGAINST a proposal the passage of which requires an affirmative vote of the holders of a majority of the outstanding shares entitled to vote on such proposal. The inspector of elections appointed for the Special Meeting will determine whether a quorum is present, and will tabulate affirmative and negative votes, abstentions and broker non-votes.

 

Approval of the Merger Agreement

 

The approval and adoption of the Merger Agreement by our shareholders requires the affirmative vote of the holders of at least a majority of the shares of our common stock present in person or represented by proxy and entitled to vote at the Special Meeting as of the record date, either in person or by proxy. Merger Sub already owns [          ]% of the shares of our common stock as a result of the tender offer made pursuant to the Merger Agreement and will vote such shares for the approval and adoption of the Merger Agreement. The shares held by CryoLife, together with the shares subject to the Support Agreement, represent a majority of our outstanding shares, so we believe that shareholder approval is assured. Abstentions and broker non-votes will have the same effect as a vote AGAINST the proposal to adopt the Merger Agreement.

 

Approval of the Adjournment of the Special Meeting

 

If necessary, the approval of an adjournment to the Special Meeting requires the affirmative vote of the holders of at least a majority of the shares of our common stock outstanding and entitled to vote at the Special Meeting as of the record date, either in person or by proxy. Merger Sub already owns [          ]% of the shares of our common stock as a result of the tender offer made pursuant to the Merger Agreement and will vote such shares for an approval of the adjournment of the Special Meeting. The shares held by CryoLife, together with the shares subject to the Support Agreement, represent a majority of our outstanding shares, so we believe that shareholder approval is assured. Abstentions will have the same effect as a vote AGAINST the proposal to approve any adjournment. Broker non-votes will not be relevant to the outcome.

 

Submitting a proxy on the enclosed form does not preclude a shareholder from voting in person at the Special Meeting. A shareholder of record may revoke a proxy at any time before it is voted by filing with our corporate secretary a duly executed revocation of proxy, by properly submitting a proxy by mail with a later date or by appearing at the Special Meeting and voting in person. A shareholder of record may revoke a proxy by any of these methods, regardless of the method used to deliver the shareholder’s previous proxy. Attendance at the Special Meeting without voting will not itself revoke a proxy. If the shares of our common stock you own are held in street name, you must contact your broker, dealer, commercial bank, trust company or other nominee to revoke your proxy.

 

[CryoLife and Merger Sub have retained [PROXY SOLICITOR] to assist in the solicitation of proxies for the Special Meeting for a fee of $[          ], plus reimbursement of reasonable out-of-pocket expenses.] Cardiogenesis’ directors, officers and employees may also solicit proxies by personal interview, mail, e-mail, telephone,

facsimile or other means of communication. These persons will not be paid additional remuneration for their efforts. Cardiogenesis will also request brokers and other fiduciaries to forward proxy solicitation material to the beneficial owners of shares of Cardiogenesis common stock that the brokers and fiduciaries hold of record. Upon request, Cardiogenesis will reimburse them for their reasonable out-of-pocket expenses. The expense of the solicitation of proxies will be borne by Cardiogenesis.

 

If you need assistance in completing your proxy card or have questions regarding the Special Meeting, please contact William R. Abbott, our Chief Financial Officer, at (949) 420-1800 or at 11 Musick, Irvine, California, 92618.

 

The following is a description of the material aspects of the Merger. While we believe that the following description covers the material terms of the Merger, the description may not contain all of the information that is important to you. We encourage you to read carefully this entire document, including the Merger Agreement attached to this proxy statement as Annex A, for a more complete understanding of the Merger. The following description is subject to, and is qualified in its entirety by reference to, the Merger Agreement.

 

Cardiogenesis, CryoLife and Merger Sub entered into the Merger Agreement on March 28, 2011. In the Merger Agreement, CryoLife agreed to acquire Cardiogenesis through a two-step process. The first step was a tender offer by Merger Sub for all of the outstanding shares of our common stock at a price of $0.457 per share, net to the seller in cash without interest thereon and less any applicable withholding tax, which was completed on [          ] [          ], 2011, resulting in Merger Sub acquiring 49.9% of our outstanding common stock. The second step is a Merger of Merger Sub with and into Cardiogenesis, with Cardiogenesis surviving as a wholly-owned subsidiary of CryoLife. The following will occur in connection with the Merger:

 

 

Following and as a result of the Merger:

 

 

The directors and officers of Merger Sub immediately prior to the effective time will be the initial directors and officers of the surviving corporation.

 

The following chronology summarizes the key meetings, conversations and events that led to the signing of the Merger Agreement. This chronology covers only key events leading up to the Merger Agreement and does not

purport to catalogue every communication between representatives of Cardiogenesis, CryoLife, Merger Sub and other parties.

 

As part of the ongoing evaluation of Cardiogenesis’ business, Cardiogenesis’ board and our senior management regularly review and assess opportunities to achieve long-term strategic goals and to maximize shareholder value, including potential opportunities for business combinations, acquisitions, dispositions, internal restructurings and other strategic alternatives. In July 2009, Cardiogenesis’ board discussed potential strategies capable of supporting Cardiogenesis’ future prospects while maximizing shareholder value. The strategies included (i) identifying privately-held companies with synergistic technologies with Cardiogenesis’ products with which a merger would provide a partial liquidity event for the shareholders of the private company while Cardiogenesis could acquire a pathway to regain a listing on a national exchange, (ii) a merger of equals with a candidate focused on regenerative medicine in which Cardiogenesis would represent the combined company’s cardiovascular application, (iii) a sale of Cardiogenesis, and (iv) a financing transaction to provide Cardiogenesis with adequate resources to fund its research and development initiatives, increase product sales and to regain a listing on a national exchange. Although our board of directors did not determine that Cardiogenesis was for sale at such time, our board authorized Paul McCormick, Cardiogenesis’ Executive Chairman, to proceed with contacting those potential candidates who met the criteria described above.

 

Based on his extensive industry experience, Mr. McCormick identified the companies that would possibly satisfy the criteria discussed with our board of directors. In addition, Mr. McCormick had several informal discussions with representatives of investment banks that had experience in the medical device industry regarding alternative strategies, including the possibility of raising equity or debt capital under current market conditions, and identities of companies that might be interested in a strategic transaction with Cardiogenesis. Cardiogenesis did not engage a financial advisor at that time. Between July 2009 and July 2010, Mr. McCormick participated in multiple discussions with 23 strategic and financial parties to ascertain their potential interest in a transaction with Cardiogenesis. This resulted in Cardiogenesis presenting a summary of its publicly available information to 14 parties and entering into non-disclosure agreements with three parties, including CryoLife, to further discuss a potential transaction.

 

On October 6, 2009, Cardiogenesis entered into the 2009 NDA and the management of CryoLife attended a meeting with Cardiogenesis’ senior management to gain better understanding of Cardiogenesis’ business. Attending for CryoLife were Steven G. Anderson, Chief Executive Officer, D. Ashley Lee, Chief Operating Officer and Chief Financial Officer, Gerald B. Seery, Senior Vice President of Sales and Marketing, Scott B. Capps, Vice President of Clinical Research, Timothy M. Neja, Vice President of Laboratory Operations and William F. Northrup III, MD, Vice President of Physician Relations and Education, and for Cardiogenesis were Messrs. McCormick and Lanigan.

 

On October 16, 2009, Mr. Lee called Mr. McCormick to provide feedback on the October 14, 2009 meeting. Mr. Lee indicated that while CryoLife had interest in a transaction with Cardiogenesis, it had other opportunities that were of a higher priority at that time to CryoLife.

 

Of the 23 strategic and financial parties approached between July 2009 and July 2010, one candidate other than CryoLife expressed preliminary interest in discussing a potential transaction with Cardiogenesis. Company A expressed an interest in exploring a potential merger transaction with Cardiogenesis. During the summer and fall of 2010, Mr. McCormick had several in-person meetings and engaged in intermittent discussions with, and provided requested information to, representatives of Company A.

 

On August 12, 2010, Mr. Lee contacted Mr. McCormick to express CryoLife’s renewed interest in evaluating a potential acquisition of Cardiogenesis, and requested additional information about Cardiogenesis’ business. On August 24, 2010, Cardiogenesis’ senior management met with representatives of Company A to discuss the scope and process of conducting due diligence. In addition, Cardiogenesis was presented with information about Company A’s current business and technology and the potential strategic advantages of a transaction between Cardiogenesis and Company A. Senior management of Company A provided Mr. McCormick with an outline of the process they believed would be required to complete a transaction with Cardiogenesis in a timely manner.

On September 13, 2010, at a regularly scheduled meeting of our board of directors, Mr. McCormick updated our board of directors on discussions with Company A. A representative of K&L Gates LLP, which we refer to as K&L Gates, Cardiogenesis’ outside counsel, counseled our board of directors on its fiduciary duties in connection with a potential strategic transaction and outlined the process our board of directors should implement to properly evaluate a potential offer, including the retention of a financial advisor. In order to be in a better position to properly evaluate a potential transaction, our board of directors instructed Cardiogenesis’ senior management to interview and retain an investment bank to act as Cardiogenesis’ financial advisor.

 

In mid-September 2010, Mr. McCormick began discussions with representatives of Company A regarding the terms of a non-binding letter of intent which would set forth the general business terms of a proposed strategic transaction. Mr. McCormick continued to negotiate the terms of a potential transaction with Company A through October. Company A’s verbal proposals involved a merger of equals transaction, but no formal offer was presented to Cardiogenesis. Mr. McCormick continued to interview investment banks as possible financial advisors.

 

On September 15, 2010, Mr. Lee held a telephone conference with Mr. McCormick to continue gathering information regarding Cardiogenesis’ business as CryoLife evaluated the potential acquisition of Cardiogenesis.

 

On September 29, 2010, Cardiogenesis entered into the 2010 NDA.

 

On October 1, 2010, Messrs. Anderson, Lee, Capps, Seery and David Fronk, Vice President, Regulatory Affairs and Quality Assurance, of CryoLife and Messrs. McCormick and Lanigan of Cardiogenesis held a telephone conference to continue CryoLife’s evaluation of the potential acquisition and to gain more insight into Cardiogenesis’ business.

 

On October 6 and 7, 2010, members of CryoLife’s management, with the assistance of Cardiogenesis’ management, participated in customer calls to discuss Cardiogenesis’ products.

 

On October 13, 2010, Mr. Lee had a telephone conference with Mr. McCormick to continue discussions about Cardiogenesis’ financial and operating performance and gather further information to aid in the evaluation of Cardiogenesis’ business. Mr. McCormick notified Mr. Lee that he was in discussions with Company A and expected to receive a draft letter of intent shortly that would include an exclusivity provision in the event CryoLife was interested in making a formal proposal.

 

On October 20, 2010, representatives of Piper Jaffray & Co., which we refer to as Piper Jaffray, financial advisor to CryoLife, sent a letter, on behalf of CryoLife, to Mr. McCormick which set forth the terms of a proposed strategic transaction. This indication of interest expressed CryoLife’s preliminary interest in exploring a potential transaction involving Cardiogenesis at a range of between $0.36 and $0.40 per Share; was non-binding in nature and could be withdrawn or modified by CryoLife at any time, and was subject to due diligence conducted by CryoLife. Mr. McCormick discussed the indication of interest with a representative of K&L Gates. Mr. McCormick also had separate informal discussions with members of our board of directors regarding the indication of interest.

 

On October 22, 2010, Mr. Lee received a call from Mr. McCormick indicating that he did not think the proposal represented fair value based on revenues in comparable deals and did not believe the tender offer would be of interest to our board of directors. Mr. Lee indicated to Mr. McCormick that a portion of the consideration could be paid in CryoLife’s stock, which CryoLife believed was undervalued. Mr. Lee suggested that senior management of CryoLife meet with our board of directors to provide more detail regarding CryoLife’s business. Our board of directors agreed to a meeting with CryoLife’s senior management and CryoLife’s financial advisor, Piper Jaffray.

 

Our board of directors decided not to contact other potential purchasers at that time, since CryoLife’s proposal was only preliminary, the range of consideration in the proposal to move forward with a transaction and our board of directors had not otherwise determined that Cardiogenesis was for sale. Our board of directors was also concerned with the potential risks of contacting other parties at that time, including market communication risk and risks of disruption to its relationships with its stakeholders. However, Mr. McCormick continued to have discussions with representatives of Company A regarding a potential transaction.

 

Cardiogenesis entered into an engagement letter with B. Riley & Co., which we refer to as B. Riley, dated November 7, 2010, to act as Cardiogenesis’ financial advisor in connection with evaluating potential transactions. Our board of directors selected B. Riley based on its experience and reputation with respect to business combination

transactions, as well as its familiarity with Cardiogenesis’ business, products and pipeline. B. Riley had not been engaged to provide financial advisory services to Cardiogenesis in at least the prior three years. Following our board of directors’ decision to engage B. Riley, neither Cardiogenesis nor CryoLife held discussions with B. Riley regarding possible future engagements of B. Riley following this engagement by our board of directors. B. Riley immediately assisted Cardiogenesis in reviewing the indication of interest received from CryoLife and the status of the negotiations with Company A. In order to efficiently manage the process of reviewing potential proposals from third parties, our board of directors authorized Cardiogenesis’ senior management to review, analyze, and negotiate proposals from third parties, but no definitive steps relating to any such proposal could be made without the approval of our board of directors.

 

On November 9, 2010, CryoLife’s senior management met in-person with our board of directors at the offices of K&L Gates to discuss the transaction proposed by the indication of interest and to provide information regarding CryoLife’s current business and technology. Representatives from Piper Jaffray, B. Riley and K&L Gates were present at the meeting. Following the departure of CryoLife’s senior management, representatives of B. Riley provided our board of directors a valuation overview of Cardiogenesis and metrics to consider when evaluating the alternatives presented by CryoLife and Company A. Our board of directors requested B. Riley to provide a more detailed valuation analysis of Cardiogenesis for our board of directors to consider. Our board of directors also engaged in extensive discussion regarding the benefits and risks of receiving stock consideration from either CryoLife or Company A.

 

On November 12, 2010, representatives of B. Riley contacted representatives of Piper Jaffray to indicate that Cardiogenesis may be interested in discussing a possible transaction with CryoLife, but would need review a financial analysis of Cardiogenesis by B. Riley to better understand CryoLife’s offer.

 

On November 18, 2010, at a regular meeting of our board of directors, B. Riley made a presentation that analyzed the results and effect of a potential transaction with either CryoLife or Company A. B. Riley also presented to our board of directors information regarding Cardiogenesis’ current valuation. A representative from K&L Gates also attended the meeting. After considering, among other things, B. Riley’s analysis, our board of directors concluded that, while the proposed price range in CryoLife’s preliminary offer was insufficient, there was a potential opportunity to generate higher value through engaging in negotiations with CryoLife. Following this meeting, our board of directors instructed B. Riley to propose a counter-offer to CryoLife’s previous indication of interest including the issuance of CryoLife’s stock as part of the consideration, increasing the value of the total consideration to $0.50 per Share and requesting a “go-shop” period to allow Cardiogenesis to solicit competing bids after announcement of a transaction.

 

Between November 18, 2010 and late November, Mr. McCormick continued to negotiate with each of CryoLife and Company A. In late November, 2010, representatives of B. Riley approached 18 strategic partners, many of whom had already been previously contacted by Mr. McCormick, in order to gauge their interest in a potential transaction with Cardiogenesis. However, other than Company A, there was no additional interest in a potential transaction from any of the parties contacted. Company A sent a draft proposal to Cardiogenesis regarding a merger of equals transaction. However, our board of directors believed that a transaction with Company A was not desirable due to the impending delisting of Company A from its national securities exchange, Company A’s uncertain capital resources and the integration risks of the combined company.

 

On November 26, 2010, representatives of B. Riley contacted representatives of Piper Jaffray to indicate that Cardiogenesis was interested in a potential transaction with CryoLife, but that the terms of the indication of interest would be insufficient. Representatives of B. Riley indicated Cardiogenesis may be interested in a transaction in which the consideration would be all stock and the consideration for each Share would be valued at $0.50.

 

On November 29, 2010, Cardiogenesis received a letter of intent from Piper Jaffray on behalf of CryoLife. Among other terms revised by CryoLife, the letter of intent proposed merger consideration consisting of both cash and stock consideration. CryoLife’s letter of intent also increased the consideration for each Share to $0.50, required a $1 million termination fee, did not allow our board of directors to have a “go-shop” period to solicit higher bids for a transaction, and required both parties to enter into a thirty-day exclusivity period whereby Cardiogenesis would be required to break off discussions with all other parties to allow for due diligence and the negotiation of a definitive Merger Agreement.

On December 3, 2010, our board of directors held a special meeting to discuss the letter of intent from CryoLife. Representatives from K&L Gates and B. Riley also participated in the meeting. K&L Gates reviewed the legal terms of the letter of intent as well as discussed with our board of directors their fiduciary duties owed to Cardiogenesis’ shareholders under applicable state law when considering the proposed transaction. B. Riley then reviewed with our board of directors the discussions to date with CryoLife and the terms of the letter of intent. B. Riley then presented an update regarding the status of discussions with Company A. Our board of directors then extensively discussed, among other things, the prospects for Cardiogenesis remaining as an independent company, and whether a possible sale of Cardiogenesis would maximize value for Cardiogenesis’ shareholders. B. Riley was instructed to communicate to Piper Jaffray that our board of directors requested a 45-day go-shop provision.

 

On December 4, 2010, Mr. Lee notified Mr. McCormick that CryoLife was willing to agree to a 20 day go-shop provision, but the break up fee after the 20 day go-shop expired would increase to $1.5 million. CryoLife provided a letter of intent reflecting those additional terms.

 

On December 6, 2010, at a special meeting, our board of directors continued its review and discussion of CryoLife’s letter of intent. Our board of directors considered the positive and negative factors and risks in connection with the proposed transaction, as discussed in the section entitled “Recommendation of Our Board of Directors; Reasons for Recommending the Approval of the Merger Agreement” beginning on page 20. K&L Gates reviewed our board of directors’ fiduciary duties owed to Cardiogenesis’ shareholders under applicable state law. Following such review and discussion, our board of directors authorized Mr. McCormick to execute the revised letter of intent and move forward with finalizing due diligence and preparing a definitive Merger Agreement. Cardiogenesis subsequently informed Company A that, as a result of the 30 day exclusivity period contained in the letter of intent, it was prohibited from engaging in further discussions with Company A due to contractual requirements.

 

On December 14, 2010, CryoLife commenced its confirmatory due diligence review of Cardiogenesis, including access to Cardiogenesis’ online data room.

 

In December 2010, CryoLife continued its due diligence efforts. On December 22, 2010, Cardiogenesis received a first draft of the Merger Agreement from Arnall Golden Gregory, LLP, which we refer to as AGG, CryoLife’s outside counsel. K&L Gates immediately began to negotiate the Merger Agreement with AGG.

 

Several due diligence meetings between members of the management teams of Cardiogenesis and CryoLife were held from October 2010 through March 2011. These meetings covered numerous business, regulatory, legal and financial topics. The due diligence process also included telephonic due diligence discussions between Cardiogenesis’ and CryoLife’s respective management and outside financial, legal and accounting advisors, and in-person due diligence review sessions, on-site due diligence visits to Cardiogenesis’ facilities and access to Cardiogenesis’ on-line data room containing financial, operational, regulatory, intellectual property, human resource, legal and other information concerning Cardiogenesis.

 

On January 4, 2011, Piper Jaffray informed B. Riley that, based upon the results of CryoLife’s due diligence, CryoLife desired to revise the terms of its letter of intent. CryoLife now proposed, on a non-binding basis, an offer of either $0.50 per Share in all-cash consideration, or $0.45 per Share in an unspecified combination of cash and common stock of CryoLife. Cardiogenesis rejected such offer, which resulted in CryoLife submitting a new letter of intent on January 5, 2011 of either $0.50 per Share in all-cash consideration, or $0.47 per Share in 60% cash and 40% in common stock of CryoLife.

 

Our board of directors continued to discuss and review the revised proposal with the assistance of K&L Gates and B. Riley. On January 10, 2011, our board of directors unanimously agreed to accept the all-cash consideration offer of $0.50 per Share.

 

CryoLife continued its due diligence efforts through January and February 2011. During March 2011, CryoLife informed Cardiogenesis that, based on the completion of its final diligence review, it was willing to pay $0.45 per Share in the transaction. On March 4, 2011, our board of directors met to review the open issues identified from the diligence review and the revised offer. Mr. McCormick and B. Riley continued negotiating with CryoLife throughout March while K&L Gates and AGG continued their negotiation of the terms of the Merger Agreement.

On March 21, 2011, CryoLife responded to the negotiation efforts with a final, all-cash offer of $0.457 per share, subject to our board of directors’ approval. On March 22, 2011, our board of directors met to consider the proposed transaction at the price of $0.457 per share. Representatives of K&L Gates and B. Riley also attended the meeting. Representatives of B. Riley reviewed with our board of directors its financial analysis of the proposed transaction. Representatives of K&L Gates reviewed with our board of directors the current status and terms of the proposed Merger Agreement including the mechanics of the Top-Up Option, CryoLife and Cardiogenesis’ respective termination rights, CryoLife’s match rights, the Support Agreement, and the two-tier termination fee, as well as the fiduciary duties of directors in connection with their consideration of the transaction. Our board of directors discussed positive and negative factors relating to the proposed transaction, including the terms of the Top-Up Option, as well as the prospects of Cardiogenesis if it remained independent, including potential challenges, the timing and likelihood of accomplishing performance goals associated with success as an independent company, and the shareholders’ ability to gain or lose from Cardiogenesis’ future prospects as an independent company versus their ability to receive cash for their shares of our common stock in the proposed transaction. Representatives of B. Riley made a financial presentation and rendered to our board of directors its oral opinion on March 22, 2011 and confirmed by delivery of a written opinion, dated the same day, which opinion was subsequently updated on March 28, 2011 and confirmed by delivery of a written opinion, dated March 28, 2011, to the effect that the $0.457 per Share in cash to be paid to the holders of the shares of our common stock pursuant to the Merger Agreement was fair, from a financial point of view, to such holders as discussed in the section entitled “Opinion of Our Financial Advisor” beginning on page 24. B. Riley’s written opinion, dated March 22, 2011 is attached hereto as Annex B and is incorporated by reference herein.

 

Between March 21, 2011 and March 28, 2011, representatives of K&L Gates and AGG finalized the Merger Agreement and the other definitive transaction agreements.

 

Our board of directors considered whether Cardiogenesis should spend additional time negotiating with CryoLife in an attempt to gain improved transaction terms and whether Cardiogenesis should seek negotiations with other potential acquirers, but believed that CryoLife would be unlikely to improve its price or other transaction terms and would be unlikely to keep its offer open while Cardiogenesis sought to solicit other parties, and that any delay would jeopardize the possibility of closing a transaction. In addition, as our board of directors had previously determined in the negotiations leading up to execution of the letter of intent, any attempt to solicit other potential acquirers would likely result in CryoLife withdrawing its proposal, and our board of directors believed that there may be no likely strategic acquirer of Cardiogenesis at this time who would offer a higher price than CryoLife. Our board of directors also considered that, if there were any other potential acquirers that would offer a higher price, the termination provisions in both the Merger Agreement and Support Agreement would enable such a superior transaction to be successfully pursued. Our board of directors believed that any continuation or expansion of the negotiation process at this time would provide a further distraction to Cardiogenesis’ senior management from running the business and would risk the confidentiality of the process as more parties potentially became involved over a longer period of time, which could result in disruption to Cardiogenesis’ relationships with employees, customers, vendors, distributors and others and require early disclosure of negotiations in the marketplace, which in turn could jeopardize Cardiogenesis’ bargaining position in any such negotiations.

 

After consideration of all of the factors discussed at this meeting and prior meetings, and the advice of its legal and financial advisors, our board of directors considered whether to accept CryoLife’s offer and enter into the Merger Agreement at this time or to remain an independent company. Cardiogenesis’ senior management and Cardiogenesis’ financial and legal advisors answered questions from the members of our board of directors. B. Riley rendered an oral opinion to our board of directors, which was updated and confirmed in writing on March 28, 2011, to the effect that, based upon and subject to the matters described in the opinion, the consideration to be received by Cardiogenesis’ shareholders in the tender offer and related Merger was fair from a financial point of view. Following further discussion, our board of directors voted unanimously to approve and adopt the Merger Agreement with CryoLife and recommend that Cardiogenesis’ shareholders accept the tender offer.

 

On March 28, 2011, subsequent to the close of trading on the OTCQB and NYSE, CryoLife, Merger Sub and Cardiogenesis executed the Merger Agreement. Concurrently, Messrs. McCormick, Lanigan and Abbott and Cardiogenesis’ directors who together held approximately 2.7% of the outstanding shares of our common stock

entered into the Support Agreement, by which they agreed to tender all of their shares of our common stock into the tender offer and/or vote them in favor of the Merger, subject to the terms and conditions set forth in such agreement.

 

On March 29, 2011, before the opening of trading on the OTCQB and NYSE, Cardiogenesis and CryoLife issued a joint press release announcing the execution of the Merger Agreement.

 

Also beginning on March 29, 2011, the day following the execution of the Merger Agreement, at the direction of our board of directors and under the supervision of Cardiogenesis’ senior management, representatives of B. Riley began the process of contacting parties to determine whether they might be interested in pursuing a transaction that would be superior to the proposed transaction with CryoLife.

 

On April 5, 2011, CryoLife and Merger Sub commenced the tender offer, which has an initial expiration date of May 2, 2011.

 

[As of April 18, 2011, none of the parties contacted during the go-shop process, on behalf of Cardiogenesis and at the direction of our board of directors, had submitted an acquisition proposal for Cardiogenesis, and there can be no assurance that such efforts will result in an alternative transaction being proposed or in a definitive agreement for such a transaction being entered into. We do not intend to announce further developments with respect to the solicitation process until our board of directors has made a decision regarding an alternative proposal, if any.] On [          ], 2011, Merger Sub accepted for payment approximately [          ] million shares of our common stock that were validly tendered into, and not withdrawn from the tender.

 

On [May      ], 2011, CryoLife exercised its rights under the Merger Agreement to appoint its designees, [          ], [          ], and [          ], to our board of directors.

 

On [          ], 2011, the subsequent offering period expired. Merger Sub acquired an additional [          ] shares of our common stock that were validly tendered during the subsequent offering period.

 

The portions of the history of the transaction set forth above that relate solely to CryoLife are based on statements made by CryoLife in the Offer to Purchase and Schedule TO, and have not been independently verified by Cardiogenesis.

 

Our Board of Directors Recommendation

 

At a special meeting of our board of directors convened on March 22, 2011, our board of directors (all of whom were unaffiliated with CryoLife or Merger Sub at that time) unanimously adopted and declared advisable the Merger Agreement, the tender offer and the Merger and unanimously determined that the Merger is in the best interests of Cardiogenesis and its shareholders. Accordingly, our board of directors recommends that our shareholders vote “FOR” approval and adoption of the Merger Agreement.

 

Reasons for the Recommendation of Cardiogenesis’ Board

 

In evaluating the Merger Agreement and the other transactions contemplated thereby, including the tender offer and the Merger, our board of directors consulted with Cardiogenesis’ senior management and legal counsel and financial advisor, and considered a number of positive and negative factors in recommending that all shareholders vote for the approval and adoption of the Merger Agreement:

 

Cardiogenesis’ Operating and Financial Condition; Prospects of Cardiogenesis

 

Our board of directors considered the current and historical financial condition, results of operations, and business of Cardiogenesis, as well as Cardiogenesis’ financial plan and prospects, if it were to remain an independent company. Our board of directors evaluated Cardiogenesis’ financial plan, including the execution risks and uncertainties, and the potential impact on the trading price of the shares of our common stock (which is not feasible to quantify in a definitive manner), if Cardiogenesis were to execute or fail to execute upon its financial plan. In particular, our board of directors considered the probability that Cardiogenesis would have to obtain

additional debt or equity financing to complete its clinical trials for its PHOENIX Combination Delivery System and the potential difficulty in obtaining any financing. Our board of directors also considered the difficulty in expanding the market for transmyocardial revascularization with Cardiogenesis’ limited resources, and the fact that Cardiogenesis would need to seek additional capital resources to operate and grow its existing business as an independent company.

 

Available Alternatives; Results of Discussions with Third Parties

 

Our board of directors considered the possible alternatives to the acquisition by CryoLife and perceived risks of those alternatives, the range of potential benefits to shareholders of these alternatives and the timing and the likelihood of accomplishing the goals of such alternatives, as well as our board of directors’ assessment that none of these alternatives were reasonably likely to present superior opportunities for Cardiogenesis to create greater value for shareholders, taking into account risks to the successful completion of a transaction as well as regulatory, business, competitive, industry and market risks. Our board of directors also considered the results of the process that it had conducted, with the assistance of Cardiogenesis’ management and its financial and legal advisors, to evaluate strategic alternatives and the results of discussions with third parties regarding business combination and change of control transactions. Our board of directors considered the risk of CryoLife terminating its bid for Cardiogenesis. Our board of directors considered the indication of interest in a merger transaction expressed by Company A, including the investigation and diligence Company A had completed and the execution and business risks of any transaction with Company A.

 

Financial Market Conditions; Historical Trading Prices

 

Our board of directors considered the current regional, national and international economic climate and the conditions of the financial markets. Specifically, our board of directors considered the fact that our shares of our common stock were not quoted on a national securities exchange and there was limited trading volume, which they believed made achieving a successful financing transaction more difficult. Our board of directors considered historical market prices, volatility and trading information with respect to our shares of our common stock, including the fact that the tender offer represented a premium of approximately 52.3% over the closing price per share of our common stock on March 21, 2011, the last full trading day prior to the date of the meeting of our board of directors to consider and approve the Merger Agreement.

 

Opinion of the Cardiogenesis’ Financial Advisor

 

Our board of directors considered the written opinion of B. Riley delivered on March 22, 2010 and updated and confirmed in writing on March 28, 2011, to our board of directors as to the fairness, from a financial point of view and as of such date, of the tender offer price to be paid to shareholders pursuant to the Merger Agreement, as more fully described in the section entitled “Opinion of Our Financial Advisor” beginning on page 24.

 

Cash Consideration; Certainty of Value

 

Our board of directors considered the form of consideration to be paid to the shareholders in the tender offer and the Merger and the certainty of the value of cash consideration compared to stock or other forms of consideration, as well as the fact that CryoLife’s proposal was not subject to obtaining any outside financing. Our board of directors considered the business reputation of CryoLife and its management and the substantial financial resources of CryoLife and, by extension, Merger Sub, which our board of directors believed supported the conclusion that a transaction with CryoLife and Merger Sub could be completed relatively quickly and in an orderly manner.

 

Terms of the Merger Agreement

 

Our board of directors considered provisions of the Merger Agreement, including the respective representations and warranties (as qualified by information in confidential disclosure schedules provided by Cardiogenesis in connection with the signing of the Merger Agreement, which modify, qualify and create exceptions to the representations and warranties and allocate risk between Cardiogenesis, CryoLife, and Merger Sub, rather than

establishing matters of fact, and, accordingly, may not constitute the actual state of facts about Cardiogenesis, CryoLife, or Merger Sub) and covenants and termination rights of the parties and termination fees payable by Cardiogenesis, including without limitation:

 

(1) Cash Tender Offer. The tender offer and the Merger provided for a prompt cash tender offer for all shares of our common stock to be followed by a Merger for the same consideration, thereby enabling shareholders, in an expeditious time frame, to obtain the benefits of the transaction in exchange for their shares of our common stock.

 

(2) No Financing Condition. CryoLife’s obligations under the Merger Agreement are not subject to any financing condition, CryoLife’s representations in the Merger Agreement that it has and will have sufficient funds available to it to consummate the tender offer and the Merger and CryoLife’s financial strength.

 

(3) Go Shop Provisions. The provisions in the Merger Agreement that provided Cardiogenesis, for a period of twenty days from the execution of the Merger Agreement, which we refer to as the Go-Shop Period, the ability to initiate, solicit and encourage alternative acquisition proposals from third parties and to provide non-public information and to and engage in discussion or negotiations with third parties with respect to alternative acquisition proposals.

 

(4) Ability to Respond to Certain Unsolicited Takeover Proposals. The provisions in the Merger Agreement that provided for the ability of our board of directors, after the expiration of the Go-Shop Period, which we refer to as the No-Shop Period Start Date, in furtherance of the exercise of its fiduciary duties under California law, to engage in negotiations or discussions with any third party that had made a bona fide, written takeover proposal that our board of directors believed in good faith was reasonably likely to lead to a Superior Proposal (as defined in Section 6.2(h)(iv) of the Merger Agreement) and to furnish to such third party non-public information relating to Cardiogenesis pursuant to a confidentiality agreement that contained confidentiality provisions that were no less favorable to Cardiogenesis than those contained in the confidentiality agreement entered into with CryoLife.

 

(5) Change of Recommendation; Fiduciary Termination Right. In the event Cardiogenesis receives a takeover proposal that constitutes a Superior Proposal, our board of directors has the right, prior to the acceptance of the shares of our common stock in the tender offer by Merger Sub, to fail to make, withdraw or modify in a manner adverse to CryoLife its approval or recommendation to its shareholders of the tender offer or declaration of advisability of the Merger Agreement, the tender offer, or the Merger. However, our board of directors could not make such an adverse recommendation change in response to a takeover proposal received from a third party unless Cardiogenesis gave CryoLife five business days after delivery of such notice to propose revisions to the terms of the Merger Agreement (or make another proposal) and if CryoLife proposed to revise the terms of the Merger Agreement or make another proposal, Cardiogenesis, during such period, negotiated in good faith with CryoLife with respect to such proposed revisions or other proposal (with any material changes to an acquisition proposal requiring a new notice and a new one business day period for negotiations). Our board of directors had the ability to terminate the Merger Agreement to accept a Superior Proposal if (i) our board of directors determined in good faith, after consultation with outside legal counsel, that the failure to take such action was inconsistent with its fiduciary duties, (ii) Cardiogenesis complied with requirements set forth in the prior sentence and (iii) Cardiogenesis paid CryoLife the applicable termination fees of $1 million or $1.5 million.

 

(6) Conditions to Consummation of the Tender Offer and the Merger; Likelihood of Closing. The reasonable likelihood of the consummation of the transactions contemplated by the Merger Agreement and the fact that Merger Sub’s and CryoLife’s obligations to purchase shares of our common stock in the tender offer and to close the Merger are subject to limited conditions.

 

(7) Top-Up Option. Our board of directors considered that CryoLife had been granted a “top-up option” to purchase from Cardiogenesis, under certain circumstances following consummation of the tender offer, at a price per Share equal to $0.457, up to a number of additional shares of our common stock sufficient to cause Merger Sub to own one share of our common stock more than 90% of the shares of our common stock then

outstanding (calculated on a fully-diluted basis), and that this could permit Merger Sub to consummate the Merger more quickly as a short form merger under California law.

 

Failure to Close; Public Announcement

 

Our board of directors considered the possibility that the transactions contemplated by the Merger Agreement may not be consummated, and the effect of a public announcement of the Merger Agreement, including effects on Cardiogenesis’ sales, operating results, stock price and employee retention.

 

Termination Fee

 

The Merger Agreement provides for a two tiered termination fee. If the termination fee becomes payable as a result of Cardiogenesis terminating the Merger Agreement in order to enter into a definitive acquisition agreement with respect to a Superior Proposal that is entered into prior to the No-Shop Period Start Date, the amount of the termination fee will be $1 million. If the termination fee becomes payable in other circumstances, the amount of the termination fee will be $1.5 million. Our board of directors considered that these provisions in the Merger Agreement could have had the effect of deterring third parties who might have been interested in exploring an acquisition of Cardiogenesis but was of the view that the payment of the termination fee was comparable to termination fees in transactions of a similar size, was reasonable and would not likely deter competing bids. In addition, our board of directors recognized that the provisions in the Merger Agreement relating to termination fees and non-solicitation of acquisition proposals were insisted upon by CryoLife as a condition to entering into the Merger Agreement and that the termination fee would not likely be required to be paid unless Cardiogenesis entered into, or intended to enter into, a definitive agreement with respect to a Superior Proposal.

 

Support Agreement

 

Our board of directors considered the fact that CryoLife required each executive officer and all members of our board of directors, who together owned approximately 2.7% of the outstanding shares of our common stock as of March 25, 2011, to enter into the Support Agreement, pursuant to which such persons were required to (i) tender in the tender offer, and not withdraw, 100% of the shares of our common stock owned by them, if so requested by CryoLife, (ii) vote 100% of the shares of our common stock owned by them in favor of the adoption of the Merger Agreement and to approve the Merger in the event shareholder approval is required to consummate the Merger pursuant to Section 1201 of the CGCL and against any competing transactions, (iii) appoint CryoLife as a proxy to vote 100% of the shares of our common stock owned by them in connection with the Merger Agreement, and (iv) not otherwise transfer the share of our common stock. Our board of directors further considered that the Support Agreement and the obligations of such shareholders thereunder would terminate in the event the Merger Agreement was terminated. Our board of directors also considered whether the terms of the Support Agreement could limit our board of directors’ ability to consider, recommend or accept a competing bid and create a barrier to potential competing offers and concluded that it did not because the Support Agreement terminated upon termination of the Merger Agreement, including a termination arising in connection with Cardiogenesis’ acceptance of a Superior Proposal.

 

The foregoing discussion of information and factors considered and given weight by our board of directors is not intended to be exhaustive, but is believed to include all of the material factors considered by our board of directors. In view of the variety of factors considered in connection with its evaluation of the tender offer and the Merger, our board of directors did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determinations and recommendations. In addition, individual members of our board of directors may have given different weights to different factors.

 

Our board of directors determined that the factors described above under “Cardiogenesis’ Operating and Financial Condition; Prospects of Cardiogenesis,” “Available Alternatives; Results of Discussions with Third Parties,” “Financial Market Conditions; Historical Trading Prices,” “Opinion of Cardiogenesis’ Financial Advisor,” “Cash Consideration; Certainty of Value,” and “Terms of the Merger Agreement” are reasons in support of our board of directors’ decision to recommend that all shareholders accept the tender offer and tender their shares of our common stock pursuant to the tender offer and vote to approve and adopt the Merger Agreement. Our board of

directors considered the other factors described above as neutral or negative and concluded that the reasons for recommending that all shareholders accept the tender offer and tender their shares of our common stock pursuant to the tender offer and vote to approve and adopt the Merger Agreement outweighed the neutral and negative factors. In arriving at their respective recommendations, our directors were aware of the interests of Cardiogenesis’ executive officers and directors as described in more detail throughout this proxy statement.

 

Pursuant to an engagement letter dated November 7, 2010, Cardiogenesis retained B. Riley to deliver its opinion, which we refer to as the Opinion, as to the fairness, from a financial point of view, of the consideration to be received by the holders of the shares of our common stock in the tender offer and the Merger, which we sometimes refer to together as the Transaction. At a meeting of our board of directors on March 22, 2011, B. Riley delivered its oral Opinion to our board of directors which was confirmed in a written Opinion, dated the same day, (subsequently such Opinion was updated as of March 28, 2011 and confirmed in a written opinion dated March 28, 2011) that based upon and subject to the assumptions, procedures, considerations and limitations set forth in the written opinion and based upon such other factors as B. Riley considered relevant, that the consideration (as defined below) to be paid in connection with the tender offer and the Merger is fair, from a financial point of view, to the holders of the shares of our common stock as of the date of the Opinion.

 

The full text of the written Opinion of B. Riley, dated March 22, 2011, which sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by B. Riley in rendering its opinion, is attached as Annex B to this Proxy Statement and is incorporated by reference herein. The Opinion addresses only the fairness, from a financial point of view as of the date of the Opinion, of the consideration to be paid pursuant to the Merger Agreement to the holders of the shares of our common stock. B. Riley’s Opinion was directed solely to our board of directors in connection with its consideration of the Transaction and was not intended to be, and does not constitute, a recommendation to any shareholder as to how such holders should act, vote or tender their shares of our common stock in regards to the Transaction.

 

In connection with rendering the Opinion described above and performing its financial analyses, B. Riley, among other things performed the following:

 

 

 

In addition, B. Riley conducted such other financial studies, analyses and investigations and evaluated such other information as it deemed necessary in arriving at its opinion.

 

The following is a summary of the material financial analyses performed by B. Riley in connection with the preparation of its Opinion, which was reviewed with, and verbally delivered to, our board of directors at a meeting held on March 22, 2011 and confirmed in a written opinion, dated the same day, and which was updated on March 28, 2011 and confirmed in a written opinion dated March 28, 2011. The preparation of analyses and a fairness opinion is a complex analytic process involving numerous determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. Therefore, this summary does not purport to be a complete description of all of the analyses performed by B. Riley.

 

This summary includes financial information and tables, which must be read and considered as a whole with other information discussed or presented in order to fully understand the financial analyses presented by B. Riley. The tables alone do not constitute a complete summary of the financial position of Cardiogenesis or of the analyses performed. The order in which these analyses are presented below, and the results of those analyses, should not be taken as any indication of the relative importance or weight given to these analyses by B. Riley or our board of directors. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, as it existed on or before March 28, 2011, does not necessarily reflect current market conditions.

 

Transaction Overview

 

In performing its analysis, B. Riley noted that Cardiogenesis’ shareholders would receive a cash consideration of approximately $21.7 million, at a price per share of $0.457. For purposes of its analyses, B. Riley calculated (i) Cardiogenesis’ equity value implied by the Transaction to be approximately $21.7 million, based on approximately 47,588,457 shares of our common stock and common stock equivalents outstanding, consisting of options, warrants, and shares of restricted stock, calculated using the treasury stock method and the tender offer price, and (ii) Cardiogenesis’ enterprise value, or EV (for the purposes of this analysis, implied EV equates to implied equity value, plus debt, less cash) to be approximately $20.5 million.

 

Analysis of Cardiogenesis

 

Historical Trading Analysis.

 

B. Riley reviewed the historical closing prices and trading volumes for the shares of our common stock for the last three years, in order to provide background information on the prices at which the shares of our common stock have historically traded. The following table summarizes these historical closing prices relative to the implied value of the tender offer price for the shares of our common stock.

 

From January 1, 2008 to March 28, 2011, Cardiogenesis’ closing stock price has been reported within a range of $0.11 to $0.42.

 

 

Selected Public Companies Analysis.

 

B. Riley reviewed selected historical financial data of Cardiogenesis and estimated financial data prepared by Cardiogenesis’ management as its internal forecast for calendar year 2011 and compared them to corresponding financial data, where applicable, for public companies in the medical device industry with a primary focus on vascular and cardiology surgical products, as is the case for Cardiogenesis. Additionally, B. Riley selected public companies with a similar industry segment focus and financial profile. B. Riley selected companies based on information obtained from SEC filings, public company disclosures, press releases, industry and popular press reports, databases, professional judgment and other sources and by applying the following general criteria:

 

 

Based on these criteria, B. Riley identified and analyzed the following selected companies:

 

 

For the selected public companies analysis, B. Riley compared:

 

 

Due to Cardiogenesis’ negative EBITDA (calculated throughout as earnings before interest, taxes, depreciation and amortization and stock-based compensation) for the LTM and projected calendar 2011, B. Riley could not analyze comparable EV / EBITDA valuation multiples.

Selected Vascular and Cardiology Public Companies.

 

 

 

 

The selected public companies analysis showed that, based on the estimates and assumptions used in the analysis, the implied valuation multiples of Cardiogenesis were within or above the range of valuation multiples of the selected public companies when comparing the ratio of EV to LTM revenue and projected 2011 revenue.

 

No company utilized in the selected public companies analysis is identical to Cardiogenesis. B. Riley did not weigh the results of any selected public company more than the others, due to the fact that the target companies have different business, size or growth and profitability characteristics than Cardiogenesis.

 

In evaluating and selecting the public companies, B. Riley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters.

 

Selected M&A Transaction Analysis

 

B. Riley reviewed merger and acquisition transactions involving target companies in the medical device industry with a primary focus on vascular and cardiology products that it deemed comparable to Cardiogenesis. B. Riley selected the merger and acquisition transactions in order to provide a comparison of targets with a similar industry focus and financial profile. B. Riley selected these transactions based on information obtained by searching SEC filings, public company disclosures, press releases, industry and popular press reports, databases, professional judgment and other sources and by applying the following criteria:

 

 

Based on the foregoing, the following transactions were selected:

 

 

B. Riley calculated the ratio of EV to historical LTM revenue, as available, for each transaction. B. Riley then compared the results of these calculations with similar calculations for Cardiogenesis based on the implied value of the tender offer price.

 

Due to Cardiogenesis’ negative EBITDA in calendar 2010 and projected calendar 2011, B. Riley did not consider it meaningful to analyze comparable EV / EBITDA valuation multiples.

 

Selected Vascular and Cardiology M&A Transactions.

 

 

 

 

The selected vascular and cardiology transactions analysis showed that, based on the estimates and assumptions used in the analysis, the implied valuation multiples of Cardiogenesis based on the tender offer price were within or above the range of valuation multiples of the selected transactions when comparing the ratio of EV to historical LTM revenue.

 

A selected M&A transactions analysis generates an implied value of a company based on publicly available financial terms of selected change of control transactions involving companies that share certain characteristics with the company being valued. However, no company or transaction utilized in the selected M&A transactions analysis is identical to Cardiogenesis or the tender offer and the Merger, respectively.

B. Riley did not weigh the results of any selected transactions more than the others, due to the fact that the target companies have different business, size or growth and profitability characteristics than Cardiogenesis.

 

Premiums Paid Analysis

 

B. Riley reviewed publicly available information for selected completed or pending M&A transactions to determine the premiums paid in the transactions over recent trading prices of the target companies prior to announcement of the transaction. B. Riley selected these transactions from various database services and proprietary market information, the Securities Data Corporation database, if B. Riley determined the target was a public medical device company based upon SIC codes and professional judgment, and applied, among others, the following criteria:

 

 

The table below shows a comparison of premiums paid in these transactions to the premium that would be paid to Cardiogenesis’ shareholders based on the tender offer price.

 

 

 

 

This premiums paid analysis showed that, based on the estimates and assumptions used in the analysis, the premiums paid over the market prices at the reference dates for the shares implied by the tender offer price are within the range of premiums paid in the selected M&A transactions.

 

Discounted Cash Flow Analysis

 

Using a discounted cash flows analysis, B. Riley calculated an estimated range of theoretical values for Cardiogenesis based on the net present value of (i) projected free cash flows from January 1, 2011 to December 31, 2015, discounted back to January 1, 2011, based on management projections, and (ii) a terminal value at calendar year end 2015 based upon a terminal growth rate, discounted back to January 1, 2011. The discounted cash flows were calculated using a single set of projections, updated for calendar 2010 results, as provided by Cardiogenesis’ management. The free cash flows for each year were calculated from the management projections as: EBIT less taxes (39.5% through 2015), plus depreciation and amortization, plus stock-based compensation, less capital expenditures, less the change in net working capital.

 

B. Riley calculated the range of net present values for each period from 2011 through 2015 based on discount rates ranging from 21.9% to 26.8%. The discount rate range reflects 90% and 110% of the weighted average cost of capital, or WACC, for Cardiogenesis, determined using a WACC analysis performed by B. Riley. B. Riley calculated the cost of equity used in the weighted average cost of capital analysis by summing a risk-free rate, a beta adjusted equity risk premium, and a size premium based on the implied equity value of Cardiogenesis. B. Riley

calculated terminal values using a terminal growth rate ranging from 8% to 12% applied to projected calendar year 2015 net free cash flow, and discounted back to January 1, 2011. The terminal growth rate range of 8% to 12% was based on management’s estimate of 10%. This analysis resulted in implied per share values of the shares of our common stock ranging from a low of $0.20 per share of our common stock to a high of $0.42 per share of our common stock. B. Riley observed that the tender offer price was within the range of values derived from this analysis.

 

Miscellaneous

 

The summary set forth above does not contain a complete description of the analyses performed by B. Riley, but does summarize the material analyses performed by B. Riley in rendering its Opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. B. Riley believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses or of the summary, without considering the analyses as a whole or all of the factors included in its analyses, would create an incomplete view of the processes underlying the analyses set forth in the Opinion. In arriving at its Opinion, B. Riley considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis. Instead, B. Riley made its determination as to fairness on the basis of its experience and financial judgment after considering the results of all of its analyses. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that this analysis was given greater weight than any other analysis. In addition, the ranges of valuations resulting from any particular analysis described above should not be taken to be B. Riley’s view of the actual value of the shares of our common stock.

 

None of the selected companies or transactions used in the analyses above is directly comparable to Cardiogenesis or the tender offer and the Merger and the other transactions contemplated by the Merger Agreement. Accordingly, an analysis of the results of the comparisons is not purely mathematical; rather, it involves complex considerations and judgments concerning differences in historical and projected financial and operating characteristics of the selected companies and target companies in the selected transactions and other factors that could affect the public trading value or transaction value of the companies involved.

 

B. Riley performed its analyses solely for purposes of providing its Opinion to our board of directors. In performing its analyses, B. Riley made numerous assumptions with respect to industry performance, general business and economic conditions and other matters. Certain of the analyses performed by B. Riley are based upon forecasts of future results furnished to B. Riley by Cardiogenesis’ management, which are not necessarily indicative of actual future results and may be significantly more or less favorable than actual future results. These forecasts are inherently subject to uncertainty because, among other things, they are based upon numerous factors or events beyond the control of the parties or their respective advisors. B. Riley does not assume responsibility if future results are materially different from forecasted results.

 

B. Riley’s Opinion was one of many factors taken into consideration by our board of directors in making the determination to approve the Merger Agreement and recommend that Cardiogenesis’ shareholders tender their shares of our common stock in connection with the tender offer. The above summary does not purport to be a complete description of the analyses performed by B. Riley in connection with the opinion and is qualified in its entirety by reference to the written opinion of B. Riley attached as Annex B hereto.

 

B. Riley relied upon and assumed, without assuming liability or responsibility for independent verification, the accuracy and completeness of all information that was publicly available or was furnished, or otherwise made available, to B. Riley or discussed with or reviewed by B. Riley. For the purpose of B. Riley’s Opinion, B. Riley assumed that with respect to financial forecasts, estimates and other forward-looking information reviewed by B. Riley, that such information was reasonably prepared based on assumptions reflecting the best currently available estimates and judgments of the management of Cardiogenesis as to the expected future results of operations and financial condition of Cardiogenesis to which such financial forecasts, estimates and other forward-looking information relate. B. Riley expressed no opinion as to any such financial forecasts, estimates or forward-looking information or the assumptions on which they were based.

 

B. Riley undertook no independent analysis of any pending or threatened litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which Cardiogenesis was a party or may be subject, and made no

assumption concerning, and therefore did not consider, the possible assertion of claims, outcomes or damages arising out of any such matters.

 

B. Riley’s Opinion was necessarily based upon the information available to it and facts and circumstances as they existed at the time it rendered its Opinion and were subject to evaluation on the date of its opinion. Events occurring after the date of its Opinion could materially affect the assumptions used in preparing its opinion. B. Riley expresses no opinion as to the price at which the shares of our common stock may trade following announcement of the Merger or at any future time. B. Riley did not undertake to reaffirm or revise its Opinion or otherwise comment upon any events occurring after the date of its Opinion and does not have any obligation to update, revise or reaffirm its Opinion.

 

B. Riley’s opinion addressed solely the fairness, from a financial point of view, to holders of the shares of our common stock of the tender offer price, as set forth in the Merger Agreement, to be paid by Merger Sub and did not address any other terms or agreement relating to the tender offer, Merger or any other terms of the Merger Agreement. B. Riley was not requested to opine as to, and its opinion does not address, the underlying business decision to proceed with the tender offer or effect the Merger.

 

Information About B. Riley

 

As a part of its investment banking business, B. Riley and/or its predecessor has been regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, underwritings, secondary distributions of listed and unlisted securities, private placements, and valuations for corporate and other purposes since 1984. Our board of directors selected B. Riley to be its financial advisor and render its fairness opinion in connection with the transactions contemplated by the Merger Agreement on the basis of such experience and its familiarity with Cardiogenesis.

 

B. Riley acted as a financial advisor to Cardiogenesis in connection with the tender offer and the Merger and will receive an estimated fee of approximately $192,000 from Cardiogenesis, of which approximately $146,000 is contingent upon the consummation of the tender offer and the Merger. B. Riley also received a fee of $100,000 for rendering its Opinion. The Opinion fee was not contingent upon the consummation of the tender offer and the Merger or the conclusions reached in B. Riley’s Opinion. Cardiogenesis has also agreed to indemnify B. Riley against certain liabilities and reimburse B. Riley for certain expenses in connection with its services. The Opinion has been approved by the Fairness Opinion Committee of B. Riley & Co., LLC. In the ordinary course of its business, B. Riley and its affiliates may actively trade securities of Cardiogenesis and CryoLife for its own account or the account of its customers and, accordingly, may at any time hold a long or short position in such securities. B. Riley may also, in the future, provide investment banking and financial advisory services to Cardiogenesis or CryoLife or entities that are affiliated with Cardiogenesis or CryoLife, for which B. Riley would expect to receive compensation.

 

Consistent with applicable legal and regulatory requirements, B. Riley has adopted policies and procedures to establish and maintain the independence of B. Riley’s research Department and Personnel. As a result, B. Riley’s research analysts may hold opinions, make statements or investment recommendations and/or publish research reports with respect to Cardiogenesis and the Merger and other participants in the Merger (including CryoLife) that differ from the opinions of B. Riley’s investment banking personnel.

 

Cardiogenesis does not as a matter of course make public projections as to future performance, earnings or other results beyond the current fiscal year due to the unpredictability of the underlying assumptions and estimates. However, as described under the heading “Opinion of Our Financial Advisor” beginning on page 24, Cardiogenesis provided to B. Riley for use in connection with the rendering of its Opinion to our board of directors and performing its related financial analysis, Cardiogenesis’ management’s internal non-public four-year financial forecasts regarding Cardiogenesis’ anticipated future operations, which we refer to as the Projections. Cardiogenesis’ management also provided the Projections to our board of directors and to CryoLife in connection with its due diligence review. CryoLife has informed Cardiogenesis that it did not rely on these Projections in any material respect in its analysis of the transaction.

The Projections were prepared by, and are the responsibility of, Cardiogenesis’ management. The Projections were not prepared with a view toward public disclosure, and, accordingly, they do not necessarily comply with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial forecasts, or generally accepted accounting principles. Windes & McClaughry Accountancy Corporation, Cardiogenesis’ independent registered public accounting firm, has not audited, reviewed, compiled or performed any procedures with respect to the Projections and does not express an opinion or any form of assurance related thereto. Cardiogenesis has included below a summary of the Projections to give its shareholders access to certain non-public information because such information was considered by B. Riley for purposes of rendering its opinion and was also provided to our board of directors and CryoLife. The summary of the Projections below is not being included in this proxy statement to influence a Cardiogenesis shareholder’s decision whether to vote for or against the Merger and the Merger Agreement.

 

The Projections, while presented with numerical specificity, necessarily were based on numerous variables and assumptions that are inherently uncertain and many of which are beyond the control of Cardiogenesis’ management. Because the Projections cover multiple years, by their nature, they become subject to greater uncertainty with each successive year. The assumptions upon which the Projections were based necessarily involve judgments with respect to, among other things, future economic, competitive and regulatory conditions and financial market conditions, all of which are difficult or impossible to predict accurately and many of which are beyond Cardiogenesis’ control. The Projections also reflect assumptions as to certain business decisions that are subject to change.

 

Important factors that may affect actual results and result in the Projections not being achieved include, but are not limited to, the following: any inability by Cardiogenesis to sustain profitable operations or obtain additional financing on favorable terms if and when needed; any failure to obtain required regulatory approvals; failure of the medical community to expand its acceptance of transmyocardial revascularization procedures; possible adverse governmental rulings or regulations, including any FDA regulations or rulings; Cardiogenesis’ ability to comply with international and domestic regulatory requirements; the impact of healthcare policy laws, regulations and reforms upon Cardiogenesis’ industry; possible adverse Medicare or other third-party reimbursement policies or adverse changes in those policies; any inability by Cardiogenesis to ship product on a timely basis; Cardiogenesis’ ability to manage its growth; the effects of recent disruptions in global credit and equity markets and other adverse economic developments that could adversely affect the market for our products or our ability to raise needed financing; actions by our competitors; and Cardiogenesis’ ability to protect its intellectual property. Other factors that could cause Cardiogenesis’ actual results to differ materially are discussed in the “Risk Factors” section of Cardiogenesis’ Annual Report on Form 10-K for the year ended December 31, 2010 and Cardiogenesis’ other filings with the SEC. Cardiogenesis disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this statement. In addition, the Projections may be affected by Cardiogenesis’ ability to achieve strategic goals, objectives and targets over the applicable period. This information constitutes “forward-looking statements” and actual results may differ materially and adversely from them. See “Cautionary Statement Regarding Forward-Looking Information” on page 10.

 

Accordingly, there can be no assurance that the Projections will be realized, and actual results may vary materially from those shown. The inclusion of the Projections in this proxy statement should not be regarded as an indication that Cardiogenesis or any of its affiliates, advisors or representatives considered or consider the Projections to be predictive of actual future events, and the Projections should not be relied upon as such.

 

Neither Cardiogenesis nor any of its affiliates, advisors, officers, directors or representatives can give any assurance that actual results will not differ from the Projections, and none of them undertakes any obligation to update or otherwise revise or reconcile the Projections to reflect circumstances existing after the date the Projections were generated or to reflect the occurrence of future events even in the event that any or all of the assumptions underlying the Projections are shown to be in error, but Cardiogenesis will amend the Projections provided in this proxy statement and promptly disseminate revised information in the event that the existing disclosure materially changes. Neither Cardiogenesis nor any of its affiliates, advisors, officers, directors or representatives has made or makes any representation to any Cardiogenesis shareholder or other person regarding the ultimate performance of Cardiogenesis compared to the information contained in the Projections or that the Projections will be achieved. Cardiogenesis has made no representation to CryoLife or Merger Sub, in the Merger Agreement or otherwise, concerning the Projections.

In light of the foregoing factors and the uncertainties inherent in the Projections, Cardiogenesis’ shareholders are cautioned not to place undue, if any, reliance on the Projections.

 

The following is a description of the Projections provided to B. Riley, our board of directors, and CryoLife:

 

Projected Financial Information
(dollar amounts are in thousands; all amounts are approximate)

 

 

 

 

The Projections include non-GAAP financial measures, including Adjusted EBITDA. Adjusted EBITDA means earnings before interest income, interest expense, provision for taxes, depreciation and amortization and expenses associated with stock-based compensation. Cardiogenesis believes that Adjusted EBITDA provides important information about the operating trends of Cardiogenesis. Cardiogenesis uses Adjusted EBITDA to evaluate performance of its business operations. These non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with GAAP and may be different from similarly titled measures used by other companies. Adjusted EBITDA is not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Cardiogenesis’ results of operations as determined in accordance with GAAP. These measures should only be used to evaluate Cardiogenesis’ results of operations in conjunction with the corresponding GAAP measures.

 

Set forth below is a reconciliation of Adjusted EBITDA to the most comparable GAAP financial measure based on the Projections, Net Income. This reconciliation was not provided to CryoLife in connection with its due diligence review or to B. Riley.

 

 

CryoLife will provide Merger Sub with sufficient funds to pay for all shares of our common stock to be acquired in the Merger. The total amount of funds necessary to pay all Merger consideration and customary fees and expenses in connection with the Merger Agreement and the transactions contemplated therein, including the tender offer, is estimated to be approximately $24.9 million, which will be used to pay shareholders of Cardiogenesis and holders of Cardiogenesis’ other equity-based interests. CryoLife has advised us that it expects to provide funds for these payments to Merger Sub, either as a capital contribution or as an intercompany loan. CryoLife will obtain such funds from cash on hand. CryoLife and Merger Sub do not have any alternative financing plans or arrangements. The consummation of the Merger is not conditioned upon any financing arrangements.

 

In considering the recommendation of our board of directors to vote for the proposal to approve and adopt the Merger Agreement, shareholders should be aware that Cardiogenesis’ executive officers and directors have agreements or arrangements that may provide them with interests that may differ from, or be in addition to, those of shareholders generally. Our board of directors was aware of these interests and considered them, among other matters, in determining the recommendation set forth in this proxy statement.

 

Consideration Payable Pursuant to the Merger

 

As of March 25, 2011, Cardiogenesis’ directors and executive officers (and affiliates and affiliated investment entities) owned in the aggregate 911,561 shares of our common stock (excluding shares of our common stock issuable upon the exercise of options to purchase Common Stock and the vesting of restricted stock). The beneficial ownership of each director and executive officer as of March 25, 2011 is further described in this proxy statement under the heading “Securities Ownership of Certain Beneficial Owners and Management” beginning on page 61.

 

Effect of the Merger Agreement on Options and Restricted Stock

 

Options

 

As of March 25, 2011, Cardiogenesis’ directors and executive officers held options to purchase 2,077,634 shares of our common stock in the aggregate, with exercise prices ranging from $0.13 to $2.57 per share. The Merger Agreement provides that any outstanding option to acquire shares of our common stock, whether vested or unvested, shall vest and become fully exercisable immediately prior to the effective time of the Merger in accordance with the terms and conditions of the applicable stock plan under which such option was granted and the applicable stock option agreement for such option. At the effective time of the Merger, each holder of an option will be entitled to receive an amount equal to the excess, if any, of the Merger consideration, without interest, over the exercise price per share of such option, less any required withholding taxes. If the exercise price per share of any option equals or exceeds $0.457, such amount shall be zero.

The table below sets forth information regarding the options held by Cardiogenesis’ directors and executive officers as of March 25, 2011 with an exercise price per share less than $0.457.

 

Restricted Stock

 

As of March 25, 2011, Cardiogenesis’ executive officers and directors held, in the aggregate, 365,318 shares of restricted stock. Each share of restricted stock outstanding immediately prior to the purchase of the shares of our common stock pursuant to the tender offer, which we refer to as the Acceptance Time, will fully vest immediately prior to the Acceptance Time pursuant to the terms of the Merger Agreement. Thereafter, immediately prior to the effective time of the Merger, such shares will convert into the right to receive the Merger consideration.

 

The table below sets forth information regarding the shares of restricted stock held by Cardiogenesis’ directors and executive officers as of March 25, 2011.

 

 

Employment Agreements between Cardiogenesis and its Executive Officers

 

Employment Agreement with Mr. McCormick

 

On June 24, 2009, our board of directors appointed Paul McCormick, a member of our board of directors, to serve as the Executive Chairman of our board of directors and principal executive officer of Cardiogenesis effective July 1, 2009, pursuant to an employment agreement. Under the terms of the employment agreement, Mr. McCormick is entitled to an annual base salary of $250,000, provided that he devotes at least 75% of his time to his duties and responsibilities as Executive Chairman under the employment agreement. On May 17, 2010, Mr. McCormick’s employment agreement was amended to reduce his base salary to $200,000. Mr. McCormick is entitled to receive certain benefits which will include, at a minimum, medical insurance for Mr. McCormick and his spouse, as well as no less than three weeks paid vacation per year. In addition, Mr. McCormick will also be reimbursed for all reasonable expenses incurred by him in respect of his services to us. The employment agreement has an initial term of one year, which term will be automatically renewed for successive additional one year periods, unless terminated upon 30 days written notice by either Mr. McCormick or us.

 

In the event of a termination for “cause,” as defined below, or in the event of a resignation without “good reason,” as defined below (other than in connection with a “change of control” or “corporate transaction,” as such terms are defined below), Mr. McCormick is only entitled to receive any accrued but unpaid base salary and benefits through the date of termination. In the event of a termination by us without “cause” or by Mr. McCormick with “good reason,” or in the event of a termination by us in connection with a “change of control” or a “corporate transaction,” Mr. McCormick is entitled to receive (i) the remainder of his then current base salary for the remainder of the then current term and (ii) any payments for unused vacation and reimbursement expenses, which are due, accrued or payable at the date of Mr. McCormick’s termination.

 

Under Mr. McCormick’s employment agreement, the following terms have the following meanings:

 

“Cause” means:

 

 

 

“Good Reason” means:

 

 

“Change of Control” means a change in ownership or control of Cardiogenesis effected through the acquisition, directly or indirectly, by any person or related group of persons (other than Cardiogenesis or a person that directly or indirectly controls, is controlled by, or is under common control with, Cardiogenesis), of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of our outstanding securities pursuant to a tender or exchange offer made directly to our shareholders which our board of directors does not recommend such shareholders to accept.

 

“Corporate Transaction” means either of the following shareholder-approved transactions to which we are a party:

 

 

The employment agreement also provides that all outstanding options will accelerate and become exercisable in full and all rights of repurchase with respect to restricted stock (if any) shall terminate in the event of a change of control or a corporate transaction. Mr. McCormick’s employment agreement replaces the consulting agreement he previously entered into with us, which was simultaneously terminated.

 

Also on June 24, 2009, in connection with Mr. McCormick’s appointment to Executive Chairman, the board of directors granted him 300,000 shares of restricted stock under our Stock Option Plan. The restrictions on Mr. McCormick’s shares of restricted stock will lapse in equal installments upon the first and second anniversaries of the date of grant.

 

Employment Agreement with Mr. Lanigan

 

On July 30, 2007, we entered into a written employment agreement with Mr. Lanigan. On June 24, 2009, we entered into an amendment to that employment agreement, pursuant to which we and Mr. Lanigan agreed to: (i) change his position from President to Executive Vice President, Marketing, and (ii) change his annual base salary to $225,000, which represented a decrease of $22,500 per year.

 

Pursuant to the terms of Mr. Lanigan’s employment agreement, as amended, we agreed to set his annual discretionary target bonus at 30% of his base salary (both of which reflected his base salary and target bonus then in effect). In addition, the agreement provided that Mr. Lanigan’s benefits were to remain unchanged and include, at a minimum, medical insurance (including prescription drug benefits) for Mr. Lanigan and his spouse, as well as no

less than three weeks of paid vacation per year. On January 7, 2010, our board of directors set Mr. Lanigan’s maximum discretionary target bonus for fiscal year 2010 to 30% of his base salary, or $67,500.

 

Our employment agreement with Mr. Lanigan also provides for certain payments following the termination of his employment with us. In the event we terminate Mr. Lanigan’s employment with us for “Cause,” or in the event of a resignation without “Good Reason” (other than in connection with a Change of Control or Corporate Transaction, as described above), we are obligated to pay Mr. Lanigan only his accrued but unpaid base salary and benefits through the date of termination. In the event we terminate his employment without “Cause” or Mr. Lanigan terminates his employment with us for “Good Reason,” we are obligated to pay Mr. Lanigan the following:

 

 

In addition, to the extent not already vested, all options to purchase shares of our common stock and restricted stock shall vest by six additional months.

 

In the event we terminate Mr. Lanigan’s employment in connection with a “Change of Control” or a “Corporate Transaction” or Mr. Lanigan terminates his employment with us following a Change in Control or Corporate Transaction under certain circumstances, we are obligated to pay Mr. Lanigan the following:

 

 

In addition, to the extent not already vested, all options to purchase shares of our common stock and restricted stock shall vest in full.

 

The definitions of “Cause,” “Good Reason,” “Change of Control” and “Corporate Transaction” are substantially the same as those summarized above under the section entitled “Employment Agreement with Mr. McCormick.”

 

Employment Agreement with Mr. Abbott

 

On July 30, 2007, we entered into an employment agreement with Mr. Abbott. The terms of our employment agreement with Mr. Abbott are substantially the same as the terms of our agreement with Mr. Lanigan, discussed above, provided, however, that the initial base salary to be paid to Mr. Abbott upon execution of his agreement with us was $200,000 per year.

 

Arrangements between Executive Officers and CryoLife or Merger Sub

 

Management Retention Agreements

 

CryoLife has agreed to employ Mr. Abbott after the Merger for a transition period. Mr. Abbott is expected to be employed until September 30, 2011 pursuant to his current employment agreement, and will remain eligible to receive the severance benefits described above.

 

CryoLife has agreed to employ Mr. Lanigan after the Merger under an employment agreement with an initial term of two years. During his employment in 2011, Mr. Lanigan will be paid an annual salary of $225,000, and will receive a commission of 1.25% of sales of Cardiogenesis products during 2011 after the closing of the Merger. He will also receive the 2011 bonus under his Cardiogenesis employment agreement, pro-rated for the portion of the

year from January 1 until the day of the closing of the Merger. He will also receive a relocation allowance to move to Atlanta, and the customary benefits received by CryoLife’s officers related to that relocation. The relocation package will be CryoLife’s standard executive relocation policy but there will be allowance for up to 150 days of temporary living expenses. Upon closing of the Merger, he will also receive 10,000 shares of CryoLifes’ restricted stock which will vest on the third anniversary of the grant date, and 25,000 CryoLife stock options which will vest one-third per year beginning on the first anniversary of the agreement, all pursuant to CryoLife’s standard forms of grant agreement. Mr. Lanigan’s employment agreement will provide for severance payments of one year salary plus bonus if Mr. Lanigan is terminated without cause or if Mr. Lanigan terminates the agreement for good reason which includes an assignment of duties materially inconsistent with his position, authority, duties or responsibilities or any action by CryoLife which results in a material diminution in his position, authority, duties or responsibilities. In order to obtain this employment package, Mr. Lanigan will be required to waive the severance benefits described above. The terms of Mr. Lanigan’s employment are subject to approval by CryoLife’s compensation committee and the execution of a definitive agreement.

 

Support Agreement

 

Concurrently with the execution of the Merger Agreement, Messrs. McCormick, Lanigan, Abbott and the members of our board of directors entered into a Support Agreement with CryoLife, pursuant to which they have agreed to tender, at the request of CryoLife, an aggregate of 1,276,859 shares of our common stock, which represent approximately 2.7% of the outstanding shares of our common stock as of April 5, 2011. The Support Agreement also requires such shareholders to take certain other actions in connection with the Merger Agreement, including voting in favor of matters contemplated by the Merger Agreement if a meeting of Cardiogenesis’ shareholders is called:

 

 

The Support Agreement will terminate upon the earliest to occur of the following: (i) the Effective Time, (ii) written notice of termination of the Support Agreement to the parties thereto, (iii) August 31, 2011, (iv) the termination of the Merger Agreement by its terms, (v) the date CryoLife or Merger Sub terminates, withdraws, or abandons the tender offer (without making a new tender offer), (vi) the date on which the tender offer or a new offer is revised (except in the context of CryoLife’s “matching right”) to (A) reduce the cash consideration payable in the tender offer, (B) change the form of consideration payable, (C) reduce the number of shares of our common stock to be purchased by Merger Sub, (D) waive or amend the minimum condition or certain other conditions to the consummation of the tender offer, (E) add to the conditions to the consummation of the tender offer, (F) extend the expiration date beyond August 31, 2011, or (G) otherwise amend, modify, or supplement any conditions to the consummation of the tender offer or any term of the tender offer set forth in the Merger Agreement in a manner

adverse to the holders of shares of our common stock, or (vii) the date on which a third party acquires more than 50% of Cardiogenesis’ outstanding voting securities on a fully diluted basis.

 

Indemnification of Directors and Officers

 

Cardiogenesis is organized under the laws of the State of California. Section 204(10) of the CGCL permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by current law. Cardiogenesis’ articles of incorporation provides for the indemnification of Cardiogenesis’ directors to the fullest extent permissible under the CGCL. Consequently, no director will be personally liable to Cardiogenesis or its shareholders for monetary damages for any breach of fiduciary duties as a director, except liability for:

 

 

In addition, Cardiogenesis’ bylaws provide that Cardiogenesis is required to indemnify its directors, officers, employees and agents, in each case to the fullest extent permitted by the CGCL. Cardiogenesis’ bylaws also provide that Cardiogenesis shall advance expenses incurred by a director, officer, employee or certain agents in advance of the final disposition of any action or proceeding, and permit Cardiogenesis to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether Cardiogenesis would otherwise be permitted to indemnify him or her under the provisions of the CGCL.

 

Cardiogenesis has entered into agreements to indemnify its directors, officers and other employees as determined by our board of directors. These agreements generally provide for indemnification for related expenses including, among other things, attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. Cardiogenesis also maintains directors’ and officers’ liability insurance that insures its directors and officers against certain losses and insures Cardiogenesis with respect to its obligations to indemnify its directors and officers.

 

The Merger Agreement provides that CryoLife and the surviving corporation will honor and fulfill in all respects the indemnification obligations of Cardiogenesis, including the advancement of expenses incurred in the defense of any action or suit, incurred prior to the effective time of the Merger. Furthermore, until the sixth anniversary of the effective time of the Merger, CryoLife will maintain in effect directors’ and officers’ liability insurance with benefits and coverage levels that are no less favorable than Cardiogenesis’ existing policies in respect of acts or omissions occurring at or prior to the effective time of the Merger, provided that in satisfying such obligations, CryoLife and Cardiogenesis will not be obligated to pay annual premiums in excess of 150% of the amount paid by Cardiogenesis for coverage for its last full fiscal year. If the annual premiums of such insurance coverage exceed such amount, CryoLife and the surviving corporation will obtain a policy with the greatest coverage available for a cost not exceeding the 150% amount.

Summary of Aggregate Proceeds that May be Received by Cardiogenesis’ Directors and Executive Officers

 

The table below sets forth information regarding the aggregate proceeds that may be received by each of Cardiogenesis’ directors and executive officers in connection with the tender offer and the Merger. Such amounts are described in further detail above under “Consideration Payable Pursuant to the Merger,” “Effect of the Merger Agreement on Options and Restricted Stock,” “Arrangements Between Executive Officers and CryoLife or Merger Sub,” and “Employment Agreements between Cardiogenesis and its Executive Officers.” The table below sets forth, as of March 28, 2011, the day Cardiogenesis entered into the Merger Agreement, the amounts payable to each of Cardiogenesis’ executive officers and each member of our board of directors if each such person (1) tendered all of the shares of our common stock that each person own for the tender offer price (assuming no exercise of outstanding options), (2) received remuneration for the cash-out of options at the time of the Merger, and (3) in the case of our executive officers, were terminated without cause in connection with the Merger.

 

 

 

 

Pursuant to the Merger Agreement, we are prohibited from declaring any dividends following execution of the Merger Agreement on March 28, 2011.

 

The Merger consideration was determined through arm’s-length negotiations between Cardiogenesis and CryoLife.

 

In connection with the Merger, we are required to make certain filings with, and comply with certain laws of, various federal and state governmental agencies, including the following:

 

 

B. Riley

 

Pursuant to an engagement letter dated November 7, 2010, Cardiogenesis retained B. Riley to deliver its opinion, which is referred to as the Opinion, as to the fairness, from a financial point of view, of the consideration to be received by the holders of the shares of our common stock in the tender offer and the Merger, which are sometimes referred together as the Transaction. At a meeting of our board of directors on March 22, 2011, B. Riley delivered its oral opinion to our board of directors which was confirmed in a written opinion, dated the same day, subsequently such opinion was updated as of March 28, 2011 and confirmed in a written opinion dated March 28, 2011, that based upon and subject to the assumptions, procedures, considerations and limitations set forth in the written opinion and based upon such other factors as B. Riley considered relevant, that the consideration (as defined below) to be paid in connection with the tender offer and the Merger is fair, from a financial point of view, to the holders of the shares of our common stock as of the date of the Opinion.

 

The following is a summary of Chapter 13 of the California General Corporation Law, which we refer to as the CGCL, which sets forth the procedures for our shareholders to dissent from the Merger and to demand statutory dissenters’ rights under the CGCL. Shares of our common stock held by shareholders who have perfected their dissenters’ rights in accordance with Chapter 13 of the CGCL and have not withdrawn their demands or otherwise lost their rights are referred to in this summary as dissenting shares. This summary does not purport to be a complete statement of the provisions of California law relating to the rights of our shareholders to an appraisal of the value of their shares and is qualified in its entirety by reference to Chapter 13 of the CGCL, the full text of which is attached as Annex C hereto. Please note, failure to follow the procedures required by the CGCL could result in the loss of dissenters’ rights.

 

Under Sections 181 and 1201 of the CGCL, the Merger constitutes a “reorganization.” Chapter 13 of the CGCL provides dissenters’ rights for shareholders dissenting from reorganizations in certain circumstances. While there are generally no dissenters’ rights in connection with securities listed on national securities exchanges, Cardiogenesis’ common stock is quoted on the OTCQB, which is not a national securities exchange, and therefore, our shareholders will be entitled to dissent from the Merger and seek appraisal for their shares of Cardiogenesis common stock if they follow the procedures required by the CGCL.

 

For a Cardiogenesis shareholder to exercise dissenters’ rights as to any shares of Cardiogenesis’ common stock in connection with the Merger, the shareholder must not vote in favor of the Merger and must make a written demand to Cardiogenesis that it purchase the shares at their fair market value. Thus, if a shareholder wishes to dissent, any proxy card submitted must be marked to be either voted “AGAINST” or “ABSTAIN.” If the shareholder returns the proxy card without voting instructions, while his or her shares will have the same effect as a vote “AGAINST” approval and adoption of the Merger Agreement, the return of a proxy card without voting instructions will cause the shareholder to lose his or her dissenters’ rights. A shareholder who returns the proxy card with voting instructions “FOR” the approval and adoption of the Merger Agreement will cause the shareholder to lose his or her dissenter’s rights.

 

The shareholder’s written demand must:

 

 

 

In addition, within 30 days after notice of the approval of the Merger is mailed to shareholders, the shareholder must also submit to us or our transfer agent, for endorsement as dissenting shares, the stock certificates representing the Cardiogenesis shares as to which the shareholder is exercising dissenters’ rights. A holder of dissenting shares may not withdraw a demand for payment unless we consent to the withdrawal.

 

Simply failing to vote for or against, or voting against, the proposed Merger will not be sufficient to constitute the demand described above.

 

If the Merger is approved by our shareholders, we will have 10 days after the approval to send to those shareholders who did not vote in favor of the Merger and who could potentially exercise dissenters’ rights in accordance with the CGCL, a written notice of such approval accompanied by:

 

 

If Cardiogenesis and a dissenting shareholder agree that the shares are dissenting shares and agree on the price of the shares, the dissenting shareholder is entitled to receive the agreed-upon price with interest from the date of such agreement. The applicable interest rate will be the rate then set by law for the accrual of interest on judgments for money. Payment for the dissenting shares must be made within 30 days after the later of the date of that agreement or the date on which all statutory and contractual conditions to the Merger are satisfied. Payments are also conditioned on the surrender to us of the certificates representing the dissenting shares.

 

If we deny that shares are dissenting shares or the shareholder fails to agree with us as to the fair market value of the shares, then, within six months after the notice of approval is mailed, any shareholder demanding purchase of such shares as dissenting shares or any interested corporation may file a complaint in the superior court in the proper California county requesting a determination as to whether the shares are dissenting shares or as to the fair market value of the holder’s shares, or both, or may intervene in any action pending on such a complaint. If the complaint is not filed or intervention in a pending action is not made within the specified six-month period, the dissenters’ rights are lost. The court will first determine any issues as to the status of the dissenting shares. If the fair market value of the dissenting shares is at issue, the court will determine, or will appoint one or more impartial appraisers to determine, such fair market value.

 

If the court appoints an appraiser or appraisers, they will proceed to determine the fair market value per share. Within the time fixed by the court, the appraisers, or a majority of the appraisers, will make and file a report in the office of the clerk of the court. Thereafter, on the motion of any party, the report is submitted to the court and considered on such evidence as the court considers relevant. If the court finds the report reasonable, the court may confirm it.

 

If the single appraiser or a majority of the appraisers fails to make and file a report within 10 days after the date of their appointment or within such further time as the court allows, or if the court does not confirm the report, the court will determine the fair market value of the dissenting shares. Subject to Section 1306 of Chapter 13 of the CGCL, judgment is rendered against the corporation for payment of an amount equal to the fair market value of each dissenting share multiplied by the number of dissenting shares that any dissenting shareholder who is a party,

or who has intervened, is entitled to require the corporation to purchase, with interest at the legal rate from the date on which the judgment is entered.

 

The costs of the action, including reasonable compensation to the appraisers to be fixed by the court, is assessed or apportioned as the court considers equitable. However, if the price determined by the court is more than the price offered by the corporation, the corporation pays the costs (including, in the discretion of the court, attorneys’ fees, fees of expert witnesses and interest at the legal rate on judgments from the date the shareholder made the demand and submitted shares for endorsement if the price determined by the court is more than 125% of the price offered by the corporation).

 

Except as expressly limited by Chapter 13, holders of dissenting shares continue to have all of the rights and privileges incident to their shares until the fair market value of their shares is agreed upon or determined.

 

Dissenting shares lose their status as dissenting shares, and dissenting shareholders cease to be entitled to require Cardiogenesis to purchase their shares, if:

 

 

To the extent that the provisions of Chapter 5 of the CGCL (which places conditions on the power of a California corporation to make distributions to its shareholders) prevent the payment to any holders of dissenting shares of the fair market value of the dissenting shares, the dissenting shareholders will become creditors of the corporation for the amount that they otherwise would have received in the repurchase of their dissenting shares, plus interest at the legal rate on judgments until the date of payment, but subordinate to all other creditors of the corporation in any liquidation proceeding, with the debt to be payable when permissible under the provisions of Chapter 5 of the CGCL.

 

For U.S. federal income tax purposes, shareholders who receive cash for their shares of our stock pursuant to the exercise of dissenters’ rights will generally recognize taxable gain or loss. Each holder should consult its own tax advisor as to the particular tax consequences of the exercise of dissenters’ rights to such holder.

 

CHAPTER 13 OF THE CGCL PROVIDES THAT THE VALUE OF OUR COMMON STOCK FOR PURPOSES OF THE EXERCISE OF DISSENTERS’ RIGHTS IS THE “FAIR MARKET VALUE” ON THE DAY PRIOR TO ANNOUNCEMENT OF THE TRANSACTION. AS A RESULT, THE BOARD INTENDS TO FIX THE VALUE FOR PURPOSES OF ANY SHAREHOLDER EXERCISING DISSENTERS’ RIGHTS AT $0.32 PER SHARE, THE PRICE OF OUR COMMON STOCK ON MARCH 28, 2011, AND AN AMOUNT SUBSTANTIALLY LESS THAN THE MERGER CONSIDERATION.

 

The following is a summary of certain material U.S. federal income tax consequences to holders of shares of our common stock upon the exchange of such shares for cash pursuant to the Merger. This summary does not purport to be a comprehensive description of all of the tax consequences that may be relevant to a decision to dispose of shares of our common stock in the Merger, including tax considerations that arise from rules of general application to all taxpayers or to certain classes of investors or that are generally assumed to be known by investors. This summary is based on the Internal Revenue Code of 1986, as amended, which we refer to as the Code, Treasury regulations, administrative rulings and court decisions, all as in effect as of the date hereof and all of which are subject to differing interpretations and/or change at any time (possibly with retroactive effect). In addition, this summary is not a complete description of all the tax consequences of the Merger and, in particular, may not address

U.S. federal income tax considerations to holders of shares of our common stock subject to special treatment under U.S. federal income tax law (including, for example, financial institutions, dealers in securities or currencies, traders that mark to market, holders who hold their shares of our common stock as part of a hedge, straddle or conversion transaction, insurance companies, tax-exempt entities and holders who obtained their shares of our common stock by exercising options or warrants). In addition, this summary does not discuss any consequences to holders of options or warrants to purchase shares of our common stock or any aspect of state, local or foreign tax law that may be applicable to any holder of shares of our common stock, or any U.S. federal tax considerations other than U.S. federal income tax considerations. This summary assumes that holders own shares of our common stock as capital assets. No ruling from the Internal Revenue Service and no tax opinion of counsel has been or will be sought with respect to any of the tax matters discussed herein.

 

We urge holders of shares of our common stock to consult their own tax advisors with respect to the specific tax consequences to them in connection with the Merger in light of their own particular circumstances, including the tax consequences under state, local, foreign and other tax laws.

 

U.S. Holders

 

Except as otherwise set forth below, the following discussion is limited to the U.S. federal income tax consequences relevant to a beneficial owner of shares of our common stock that is a citizen or resident of the United States, a domestic corporation (or any other entity or arrangement treated as a domestic corporation for U.S. federal income tax purposes), any estate (the income of which is subject to U.S., federal income taxation regardless of its source), and any trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust, and (ii) one or more U.S. persons have the authority to control all substantial decisions of the trust, which we refer to as a U.S. Holder.

 

If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds shares of our common stock, the tax treatment of a holder that is a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. Such holders should consult their own tax advisors regarding the tax consequences of exchanging the shares of our common stock pursuant to the tender offer or pursuant to the Merger.

 

Payments with Respect to Shares of Our Common Stock

 

The exchange of shares of our common stock for cash pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes, and a U.S. Holder who receives cash for shares of our common stock pursuant to the Merger will recognize gain or loss, if any, equal to the difference between the amount of cash received and the holder’s adjusted tax basis in the shares of our common stock gain or loss must be determined separately for each block of shares (i.e., shares acquired at the same cost in a single transaction) exchanged for cash in the merger. Such gain or loss will be capital gain or loss, and will be long-term capital gain or loss if such U.S. Holder’s holding period for the shares of our common stock is more than one year at the time of the exchange of such holder’s shares of our common stock for cash. Long-term capital gains recognized by an individual holder generally are subject to tax at a lower rate than short-term capital gains or ordinary income. There are limitations on the deductibility of capital losses.

 

Backup Withholding Tax and Information Reporting

 

Payments made with respect to shares of our common stock exchanged for cash in the Merger will be subject to information reporting and potential U.S. federal backup withholding tax (currently at a rate of 28 percent). To avoid such backup withholding, a U.S. holder should provide the exchange agent or other applicable person a properly completed Form W-9 (or appropriate substitute form), signed under penalties of perjury, including such holder’s current Taxpayer Identification Number, or “TIN,” and other certifications.

 

Certain U.S. holders are exempt from these backup withholding and reporting requirements. Exempt holders who are not subject to backup withholding should indicate their exempt status on a Form W-9 by entering their correct TIN, marking the appropriate box and signing and dating the W-9 in the space provided.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a United States holder’s United States federal income tax liability provided the required information is timely furnished to the IRS.

 

Non-U.S. Holders

 

The following is a summary of certain U.S. federal income tax consequences that will apply to you if you are a Non-U.S. Holder of shares of our common stock. The term “Non-U.S. Holder” means a beneficial owner, other than a partnership, of shares of our common stock that is not a U.S. Holder.

 

Non-U.S. Holders should consult their own tax advisors to determine the specific U.S. federal, state, local and foreign tax consequences that may be relevant to them.

 

Payments with Respect to Shares of Our Common Stock

 

Payments made to a Non-U.S. Holder with respect to shares of our common stock exchanged for cash pursuant to the Merger generally will be exempt from U.S. federal income tax, unless:

 

 

 

 

Backup Withholding Tax and Information Reporting

 

In general, if you are a Non-U.S. Holder you will not be subject to backup withholding and information reporting with respect to a payment made with respect to shares of our common stock exchanged for cash in the Merger if you have provided the Depositary with an IRS Form W-8BEN (or a Form W-8ECI if your gain is effectively connected with the conduct of a U.S. trade or business). If shares are held through a foreign partnership or other flow-through entity, certain documentation requirements also apply to the partnership or other flow-through entity.

 

If the Merger is completed, shares of our common stock will be no longer be quoted on the OTCQB and will be deregistered under the Securities Exchange Act of 1934, as amended, and the shares of our common stock will no longer be publicly traded.

 

On April 7, 2011, two plaintiffs filed purported class actions against Cardiogenesis, its directors, and CryoLife and Merger Sub, in connection with the proposed Offer and Merger. These suits were filed in California Superior Court for Orange County and allege that the defendants breached and/or aided and abetted the breach of their fiduciary duties to Cardiogenesis by seeking to sell Cardiogenesis through an allegedly unfair process and for an unfair price and on unfair terms. The suits seek various equitable relief that would delay or enjoin the Merger based

on allegations regarding the process by which offers or potential offers were evaluated by Cardiogenesis, as well as fees and expenses of the plaintiffs’ attorneys and experts.

 

 

Cardiogenesis believes the allegations in the lawsuits are without merit, and intends to defend the actions vigorously. The absence of an injunction or court order preventing the consummation of the transaction is a condition to CryoLife’s obligation to complete the Merger pursuant to the Merger Agreement.

 

This section describes the material terms of the Merger Agreement. The description in this section and elsewhere in this proxy statement is qualified in its entirety by reference to the complete text of the Merger Agreement, a copy of which is attached as Annex A and is incorporated by reference into this proxy statement. This summary does not purport to be complete and may not contain all of the information about the Merger Agreement that is important to you. We encourage you to read the Merger Agreement carefully and in its entirety. This section is not intended to provide you with any factual information about us. Such information can be found elsewhere in this proxy statement and in the public filings we make with the SEC, as described in the section entitled, “Where You Can Find More Information,” beginning on page 65.

 

The Merger Agreement is included to provide you with information regarding its terms. Factual disclosures about Cardiogenesis contained in this proxy statement or in Cardiogenesis’ public reports filed with the SEC may supplement, update or modify the factual disclosures about Cardiogenesis contained in the Merger Agreement. The representations, warranties and covenants made in the Merger Agreement by Cardiogenesis, CryoLife and Merger Sub were qualified and subject to important limitations agreed to by Cardiogenesis, CryoLife and Merger Sub in connection with negotiating the terms of the Merger Agreement. In particular, in your review of the representations and warranties contained in the Merger Agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the Merger Agreement may have the right not to consummate the merger if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise, and allocating risk between the parties to the Merger Agreement, rather than establishing matters as facts. The representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable to shareholders and reports and documents filed with the SEC and in some cases were qualified by the matters contained in the disclosure schedule that Cardiogenesis delivered in connection with the Merger Agreement, which disclosures were not reflected in the Merger Agreement. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this proxy statement, may have changed since the date of the Merger Agreement and subsequent developments or new information qualifying a representation or warranty may have been included in this proxy statement.

 

The Merger Agreement provides for the merger of Merger Sub with and into Cardiogenesis upon the terms, and subject to the conditions, set forth in the Merger Agreement. As the surviving corporation, Cardiogenesis will continue to exist following the merger.

 

The board of directors of the surviving corporation will, from and after the effective time of the Merger, consist of the directors of Merger Sub until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the certificate of incorporation and bylaws of the surviving corporation. The officers of Cardiogenesis immediately prior to the effective time of the Merger will, from and after the effective time of the Merger, be the officers of the surviving corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the certificate of incorporation and bylaws of the surviving corporation.

 

The articles of incorporation of the surviving corporation will be in the form of the certificate of incorporation attached as an exhibit to the Merger Agreement, until amended in accordance with its terms or by applicable law. The by-laws of Merger Sub as in effect immediately prior to the effective time of the Merger will be the by-laws of the surviving corporation, until amended in accordance with its terms or by applicable law.

 

Following the completion of the Merger, Cardiogenesis’ common stock will no longer be quoted on the OTCQB and will be deregistered under the Exchange Act and to cease to be publicly traded.

 

The following is a summary of certain provisions of the Merger Agreement. This summary does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, a copy of which is attached hereto as Annex A, which is incorporated herein by reference. Copies of the Merger Agreement, and any other filings that we make with the SEC with respect to the tender offer or the merger, may be obtained in the manner set forth in “Where You Can Find More Information” beginning on page 65. Shareholders and other interested parties should read the Merger Agreement for a more complete description of the provisions summarized below.

 

The Tender Offer.  On April 5, 2011, Merger Sub commenced the tender offer for all of the outstanding shares of our common stock at a price of $0.457 per share, net to the seller in cash without interest thereon and less any required withholding taxes. As a result of the tender offer, Merger Sub acquired a total of           shares, or 49.9% of the outstanding Cardiogenesis shares.

 

Recommendation.  Cardiogenesis has represented in the Merger Agreement that our board of directors has, at a meeting duly called and held, duly adopted resolutions for which all directors present voted in favor of (i) determining that the terms of the Merger Agreement, the tender offer, the Merger and the other transactions contemplated thereby are fair to and in the best interests of Cardiogenesis’ shareholders, (ii) approved and declared advisable the Merger Agreement and the transactions contemplated thereby, including the tender offer and the Merger, (iii) directed that the Merger Agreement be submitted to Cardiogenesis’ shareholders for adoption and approval (unless the Merger is consummated in accordance with the provisions of California’s short-form merger statute and (iv) resolved to recommend that Cardiogenesis’ shareholders accept the tender offer, tender their shares of our common stock pursuant to the tender offer and vote in favor of the adoption and approval of the Merger Agreement and the transactions contemplated thereby, including the tender offer and the Merger (if required by applicable law). We refer to the recommendation in clause (iv) above as the Recommendation.

 

The Merger; Closing; Effective Time.  The Merger Agreement provides that, after satisfaction or waiver of certain conditions, Merger Sub will be merged with and into Cardiogenesis and Cardiogenesis will be the surviving corporation. The closing date of the Merger will occur on a date to be specified by the parties to the Merger Agreement, which shall be no later than the second business day after satisfaction or waiver of all of the conditions to the Merger (other than any such conditions which by their nature cannot be satisfied until the closing) set forth in the Merger Agreement (or such other date as the parties to the Merger Agreement may agree), which conditions are described below in “Conditions to the Merger” beginning on page 59. The Merger will be completed and become effective when the certificates of merger are filed with the Secretary of State of Florida and the Secretary of State of California.

 

Charter, Bylaws, Directors, and Officers.  At the effective time of the Merger, the articles of incorporation of Cardiogenesis will be amended to conform to Exhibit C of the Merger Agreement. Also at the effective time of the Merger, the bylaws of Cardiogenesis will be amended to read as the bylaws of Merger Sub as in effect immediately prior to the effective time of the Merger, except that such bylaws will be amended to reflect that the name of the surviving corporation will be “Cardiogenesis Corporation.” The directors of Merger Sub immediately prior to the effective time of the Merger will be the initial directors of the surviving corporation and the officers of Cardiogenesis immediately prior to the effective time of the Merger will be the initial officers of the surviving corporation.

 

Appointment of Directors.  [On [May      ], 2011, CryoLife exercised its rights under the Merger Agreement to appoint its designees, [          ], [          ], and [          ], to our board of directors.]

 

Conversion of Shares of Our Common Stock.  Each common share issued and outstanding immediately prior to the effective time of the Merger (other than shares of our common stock held by us, CryoLife, or Merger Sub, or by any direct or indirect wholly-owned subsidiary of CryoLife, Merger Sub or Cardiogenesis, in each case immediately prior to the effective time of the Merger and any shares of our common stock that are issued and outstanding immediately prior to the effective time of the Merger and held by a Cardiogenesis shareholder who is entitled to demand and properly demands appraisal of such shares of common stock pursuant to, and who complies in all material respects with, Sections 1300-1313 of the CGCL, which is attached hereto as Annex C, will, by virtue of the Merger and without any action on the part of CryoLife, Merger Sub, Cardiogenesis or the holder, be cancelled

and converted at the effective time of the Merger into the right to receive the Merger consideration, without interest thereon and less any required withholding tax. At the effective time of the Merger, each common share of Cardiogenesis owned by CryoLife, Merger Sub or any wholly-owned subsidiary of CryoLife or Cardiogenesis and shares of our common stock held by Cardiogenesis in treasury will be cancelled, and no payment or distribution will be made with respect to such shares of our common stock. At the effective time of the Merger, each share of Merger Sub common stock issued and outstanding immediately prior to the effective time of the Merger will, by virtue of the Merger and without any action on the part of the holder thereof, be converted into one share of common stock of the surviving corporation.

 

Payment for Shares of Our Common Stock in the Merger.  CryoLife will deposit with Computershare Inc., as Paying Agent for the Merger, for the benefit of the holders of shares of our common stock, sufficient funds to pay the aggregate Merger consideration in an payment fund. After the Merger is completed, you will have the right to receive $0.457 per common share, but you will no longer have any rights as a Cardiogenesis shareholder. You will receive the Merger consideration in exchange for your shares of our common stock in accordance with the instructions that will be contained in the letter of transmittal that will be sent to you shortly after completion of the Merger. If your shares of our common stock are held in “street name” by your broker, dealer, commercial bank, trust company or other nominee, you will receive instructions from your broker, dealer, commercial bank, trust company or other nominee as to how to surrender your “street name” shares of our common stock and receive cash for those shares. If your shares of our common stock are held in book-entry form, you will receive instructions from the paying agent as to how to surrender your “book-entry” shares and receive cash for those shares.

 

Any portion of the payment fund (including the proceeds of any investments thereof) that remains unclaimed for one year after the effective time of the Merger will be delivered to CryoLife. Holders of shares outstanding before the effective time of the Merger will thereafter be entitled to look only to CryoLife for payment of any claims for Merger consideration to which they may be entitled (after giving effect to any required withholding tax). None of the surviving corporation, CryoLife, the Paying Agent or any other person will be liable to any person in respect of any Merger consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar laws.

 

Transfer of Shares of Our Common Stock.  After the effective time of the Merger, there will be no transfers on our share transfer books of shares of our common stock outstanding immediately prior to the effective time of the Merger. If, after the effective time of the Merger, any certificate for our shares of our common stock is presented to the surviving corporation, CryoLife or the Paying Agent for transfer, it will be cancelled and exchanged for the per share Merger consideration, multiplied by the number of shares represented by the certificate.

 

The Merger Agreement contains representations and warranties of Cardiogenesis, CryoLife and Merger Sub, to each other, as to, among other things:

 

 

 

 

The Merger Agreement contains additional representations and warranties of Cardiogenesis to CryoLife as to, among other things:

 

 

 

The Merger Agreement contains additional representations and warranties of CryoLife to Cardiogenesis as to, among other things:

 

 

The representations and warranties given in the Merger Agreement will not survive the Merger. The assertions embodied in the representations and warranties are qualified by information in confidential disclosure schedules that Cardiogenesis has provided to CryoLife in connection with signing the Merger Agreement. While neither CryoLife nor Cardiogenesis believes that the disclosure schedules contain information that the securities laws require to be publicly disclosed, the disclosure schedules do contain information that modifies, qualifies and creates exceptions to the representations and warranties of the parties.

 

These representations, warranties and covenants were made only for the purpose of the Merger Agreement and solely for the benefit of the parties to the Merger Agreement as of specific dates, and may be subject to important limitations and qualifications (including exceptions thereto set forth in a disclosure letter or CryoLife’s or Cardiogenesis’ public filings with the SEC) agreed to by the contracting parties and may not be complete.

Furthermore, these representations, warranties and covenants may have been made for the purposes of allocating contractual risk between the parties to the Merger Agreement instead of establishing these matters as facts, and may or may not have been accurate as of any specific date and do not purport to be accurate as of the date of this offer to purchase. Accordingly, Cardiogenesis shareholders should not rely upon the descriptions of representations, warranties and covenants contained in this offer to purchase or the actual representations, warranties and covenants contained in the Merger Agreement as statements of factual information.

 

The Merger Agreement provides that the Cardiogenesis board of directors shall take such action so that, at the effective time of the Merger, and without any action on the part of any holder of any outstanding option, whether vested or unvested, exercisable or unexercisable, each option that is outstanding and unexercised immediately prior thereto shall be cancelled and each holder of an option will be entitled to receive an amount equal to the excess, if any, of the Merger consideration, without interest, over the exercise price per common share of such option, less any required withholding taxes. If the exercise price per share of any option equals or exceeds the Merger consideration, such amount shall be zero.

 

The Merger Agreement further provides that the Cardiogenesis board or directors shall take such action so that, at the Acceptance Date, each share of restricted stock that is outstanding under any Stock Plan immediately prior to the effective time of the Merger, whether or not then vested or earned, shall without any action on the part of the holder thereof, immediately prior to the Acceptance Date shall fully vest and shall thereafter be eligible to be converted into the right to receive the Merger consideration.

 

The Merger Agreement provided that, for a period of 20 days after the signing of the Merger Agreement, Cardiogenesis could initiate, solicit and encourage, whether publicly or otherwise, alternative acquisition proposals, and enter into, engage in, and maintain discussions or negotiations with respect to acquisition proposals (or inquiries, proposals or offers or other efforts or attempts that may reasonably be expected to lead to an acquisition proposal) or otherwise cooperate with or assist or participate in, or facilitate any such inquiries, proposals, offers, efforts, attempts, discussions or negotiations. This is referred to as a “go shop” period, and it ended on April 18, 2011 (the “No Shop Period Start Date”). [As of such date, none of the parties contacted during the go-shop process, on behalf of Cardiogenesis and at the direction of our board of directors, had submitted an acquisition proposal for Cardiogenesis, and there can be no assurance that such efforts will result in an alternative transaction being proposed or in a definitive agreement for such a transaction being entered into. We do not intend to announce further developments with respect to the solicitation process until our board of directors has made a decision regarding an alternative proposal, if any.] After the No Shop Period Start Date, the Merger Agreement has a “no-shop” provision which prohibits Cardiogenesis from soliciting any additional offers or proposals, subject to limited exceptions described below.

 

Under the terms of the no-shop provision of the Merger Agreement, subject to certain exceptions described below, Cardiogenesis has agreed that it will not, and that it will not permit or authorize any of its subsidiaries or any director, officer, employee, investment banker, financial advisor, attorney, accountant or other advisor, agent or representative (collectively, the “representatives”) to, directly or indirectly:

 

 

In addition, Cardiogenesis has agreed that it will cease and terminate, and that it will direct each of its subsidiaries and the representatives of Cardiogenesis and its subsidiaries to immediately cease and cause to be

terminated, all existing discussions or negotiations with any person previously conducted with respect to any acquisition proposal.

 

Notwithstanding the foregoing, if at any time on or after the No-Shop Period Start Date and prior to obtaining the approval of the Cardiogenesis shareholders of the Merger, Cardiogenesis or any of its representatives receives a written acquisition proposal that was made or renewed on or after the No-Shop Period Start Date and did not result from any breach of Cardiogenesis’ obligations under the Merger Agreement, (i) Cardiogenesis and its representatives may contact the person(s) making the acquisition proposal to clarify its terms and conditions and (ii) if the Board of Directors of Cardiogenesis determines in good faith, after consultation with independent financial advisors and outside legal counsel, that the acquisition proposal constitutes or could reasonably be expected to lead to a superior proposal, then Cardiogenesis and its representatives may do the following:

 

 

From and after the No-Shop Period Start Date, Cardiogenesis will provide to CryoLife within 48 hours a written summary of the material terms of any acquisition proposal (including any financing commitments relating thereto).

 

Following the No-Shop Period Start Date, Cardiogenesis will keep CryoLife reasonably informed of any material developments, discussions or negotiations regarding any acquisition proposal on a prompt basis and upon the request of CryoLife shall apprise CryoLife of the status of each acquisition proposal. Cardiogenesis agrees that it and its subsidiaries will not enter into any confidentiality agreement with any person after March 28, 2011 that prohibits Cardiogenesis from providing any information to CryoLife.

 

Except as expressly permitted by the Merger Agreement, the Board of Directors of Cardiogenesis will not:

 

 

 

 

Notwithstanding anything to the contrary set forth in the Merger Agreement, prior to the time the Cardiogenesis shareholders approve the Merger Agreement, but not after, the Board of Directors of Cardiogenesis may:

 

 

 

 

 

Nothing in the Merger Agreement prohibits Cardiogenesis from taking and disclosing to the Cardiogenesis shareholders a position contemplated by Rule 14e-2(a), Rule 14d-9 or Item 1012(a) of Regulation M-A promulgated under the Exchange Act or making any disclosure to the Cardiogenesis shareholders that is required by applicable law.

As used in this proxy statement:

 

 

 

 

Following the Acceptance Date, no party to the Merger Agreement may terminate the Merger Agreement. CryoLife only is required to consummate the Merger if the shareholders of Cardiogenesis approve the Merger and no temporary restraining orders, preliminary or permanent injunctions or other judgments, orders or decrees have been issued by any court of competent jurisdiction or other legal restraint or prohibition shall be in effect, and no law has been enacted, entered, promulgated, enforced or deemed applicable by any governmental entity that, in any case, prohibits or makes illegal the consummation of the Merger. In addition, Cardiogenesis must have obtained, or CryoLife has otherwise waived the requirement to obtain, all required consents from third parties.

 

Termination Fees and Expenses

 

Following the Acceptance Date, if CryoLife is unable to consummate the Merger, then no party to the Merger Agreement is required to pay a termination fee or any expense to any other party to the Merger Agreement.

 

Subject to certain exceptions, all fees and expenses incurred in connection with the Merger Agreement, the tender offer, the Merger, and the other transactions contemplated by the Merger Agreement will be paid by the party incurring such fees or expenses, whether or not the tender offer or the Merger is consummated, except that the expenses incurred in connection with the filing, printing and mailing of the Offer to Purchase and other documents related to the tender offer, the Schedule 14D-9 and the proxy statement, and all filing and other fees paid to the SEC, in each case in connection with the Merger (other than attorneys’ fees, accountants’ fees and related expenses), will be borne by CryoLife. Any fees and expenses incurred in connection with the Merger Agreement, the tender offer, the Merger and the other transactions contemplated by the Merger Agreement incurred by a Cardiogenesis shareholder (such as fees and expenses of separate counsel to such shareholder) will be borne by such shareholder.

 

Cardiogenesis has agreed, unless CryoLife’s prior written consent is obtained or expressly contemplated by the Merger Agreement, that from the date of the Merger Agreement until the effective date of the Merger or the date on which CryoLife appoints a majority of our board of directors, if earlier, it will, and it will cause each of its subsidiaries to do the following:

 

 

Except as expressly contemplated by the Merger Agreement or as required by law, Cardiogenesis has further agreed that without the prior written consent of CryoLife, it and each of its subsidiaries will not, among other things:

 

 

 

 

Cardiogenesis has agreed that it shall use commercially reasonable efforts to:

 

 

The Merger Agreement provides that, subject to its terms and conditions, each of Cardiogenesis, Merger Sub and CryoLife will use its reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate the tender offer, the Merger and the other transactions contemplated by the Merger Agreement, including (i) obtaining all consents, approvals, authorizations and actions or nonactions required for or in connection with the consummation by the parties of the tender offer, the Merger and the other transactions, (ii) the taking of all steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, a governmental authority, (iii) the obtaining of all necessary consents from third parties, (iv) contesting and resisting of any action, including any administrative or judicial action, and seeking to have vacated, lifted, reversed or overturned, any judgment (whether temporary, preliminary or permanent) that restricts, prevents or prohibits the consummation of the tender

offer, the Merger or the other transactions and (v) the execution and delivery of any additional instruments necessary to consummate the transactions and to fully carry out the purposes of the Merger Agreement.

 

[Pursuant to the Merger Agreement, and following the Acceptance Date, CryoLife has designated the following individuals as directors on our board of directors:          ,          ,          .

 

The Merger Agreement requires that until the effective time of the Merger, our board of directors maintain at least three independent directors.]

 

In the Merger Agreement, CryoLife and Merger Sub have agreed that the articles of incorporation and bylaws of the surviving corporation in the Merger will contain provisions no less favorable with respect to indemnification and exculpation from liabilities of the present and former directors, officers and employees of Cardiogenesis than those in effect as of the date of the Merger Agreement.

 

The Merger Agreement further provides that Cardiogenesis shall maintain its officers’ and directors’ liability insurance policies, in effect on the date of the Merger Agreement, but only to the extent related to actions or omissions prior to the effective time of the Merger. Cardiogenesis may cause coverage to be extended by obtaining a six-year “tail” policy on terms and conditions no less advantageous than Cardiogenesis’ current insurance to satisfy this obligation. Under the terms of the Merger Agreement, such insurance coverage is required to be maintained only to the extent that the coverage can be maintained at an aggregate cost of not greater than 150 percent of the current annual premium for Cardiogenesis’ directors’ and officers’ liability insurance policies.

 

The obligations of the parties to complete the Merger are subject to the satisfaction or waiver of the following mutual conditions:

 

 

The Merger Agreement may be amended by the parties, by an instrument in writing signed on behalf of each of the parties, at any time (subject, in the case of Cardiogenesis, to an amendment requiring the approval of the Independent Directors (as defined in the Merger Agreement)) before or after approval of the Merger Agreement and the transactions by Cardiogenesis’ board of directors, but after adoption of the Merger Agreement by Cardiogenesis

shareholders, no amendment may be made for which the CGCL requires the further approval of Cardiogenesis shareholders without such further approval.

 

In order to induce CryoLife to enter into the Merger Agreement, Paul McCormick, the Executive Chairman of Cardiogenesis, Richard P. Lanigan, the Executive Vice President, Marketing of Cardiogenesis, and William R. Abbott, the Senior Vice President, Chief Financial Officer, Secretary and Treasurer of Cardiogenesis, and each member of our board of directors (holding an aggregate of approximately 2.7% of the outstanding shares of Cardiogenesis common stock as of April 5, 2011) entered into the Support Agreement with CryoLife.

 

Pursuant to the Support Agreement, such persons have agreed, in their capacity as shareholders, to tender into the tender offer, but only if requested in writing by CryoLife, prior to the termination date of the Support Agreement and except as otherwise described below, their shares of Cardiogenesis common stock (including any shares obtained upon any exercise of options). As of the Acceptance Date, CryoLife has not requested that such persons tender their shares of our common stock (including shares obtained upon exercise of options) and none of such persons has tendered their shares of our common stock (including shares obtained upon exercise of options).

 

Also pursuant to the Support Agreement, such persons have agreed, in their capacity as shareholders, to vote such shares at any meeting of the shareholders of Cardiogenesis or in connection with any written consent of the shareholders of Cardiogenesis (including the Special Meeting):

 

 

Each shareholder who is party to the Support Agreement also agreed that prior to the termination date of the Support Agreement such shareholder will not:

 

 

The Support Agreement requires each signing shareholder, within five business days of the commencement of the tender offer, to deliver to the exchange agent properly completed letters of election and transmittal, stock

certificates for any Cardiogenesis shares held in certificated form, and any other documents required to be delivered pursuant to the terms of the tender offer, and to instruct the broker who holds any such shares to promptly tender the shares pursuant to the tender offer.

 

The Support Agreement will terminate automatically upon the earliest to occur of the following: (i) the effective time of the Merger, (ii) written notice of termination of the Support Agreement is delivered by CryoLife to the shareholders, (iii) August 31, 2011, (iv) the termination of the Merger Agreement in accordance with its terms, (v) the date CryoLife or Merger Sub terminates, withdraws, or abandons the tender offer, (vi) the date on which the tender offer is revised (except in the context of CryoLife’s “matching right”) for (A) a reduction of the cash consideration in the Merger, (B) subject to the terms of the Merger Agreement, a change in the form of consideration payable in the tender offer, (C) subject to the terms of the Merger Agreement, a reduction in the number of shares to be purchased by Merger Sub in the tender offer, (D) subject to the terms of the Merger Agreement, a waiver or amendment of the Minimum Condition, (E) any addition to the conditions to the tender offer or imposition of any other conditions to the tender offer, (F) the extension of the expiration date of the tender offer, except as required or allowed by the Merger Agreement, (G) other amendment, modification, or addition of a supplemental condition to the tender offer or any term of the tender offer in a manner adverse to the holders of the shares of Cardiogenesis common stock, or, or (vii) the date on which a third party acquires more than 50% of Cardiogenesis’ outstanding voting securities on a fully diluted basis.

 

The table below sets forth information known to us regarding the beneficial ownership of our common stock as of [May 4], 2011, the Record Date, by each of the following:

 

 

 

 

 

 

Shares of our common stock are currently quoted on the OTCQB under the symbol “CGCP.PK.” The following table sets forth the high and low sales prices per common share quoted on the OTCQB for the periods indicated.

 

 

 

 

Dividends

 

Cardiogenesis has never paid dividends.  Pursuant to the Merger Agreement, we are prohibited from declaring any dividends following execution of the Merger Agreement on March 28, 2011. Accordingly, we do not expect to declare or pay any dividends prior to the Merger.

 

On March 28, 2011, the last full trading day prior to the public announcement of the terms of the tender offer and the Merger, the reported closing sales price per common share on the OTCQB was $0.32 per share. The $0.457 per share to be paid for each Cardiogenesis common share in the Merger represents a premium of approximately 42.8% to the closing price on March 28, 2011. You are encouraged to obtain current market quotations for the shares of our common stock in connection with voting your shares.

 

As of [May 4], 2011, there were approximately [          ] record holders of shares of our common stock.

 

As of the date of this proxy statement, our board of directors knows of no other matters which may be presented for consideration at the Special Meeting. However, if any other matter is presented properly for consideration and action at the Special Meeting or any adjournment or postponement thereof, it is intended that the proxies will be voted with respect thereto in accordance with the best judgment and in the discretion of the proxy holders.

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy this information at the SEC’s public reference room, Room 1580, 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website, located at www.sec.gov, that contains reports, proxy statements and other information regarding companies and individuals that file electronically with the SEC.

 

Statements contained in this proxy statement, or in any document incorporated by reference in this proxy statement regarding the contents of any contract or other document, are not necessarily complete and each such statement is qualified in its entirety by reference to that contract or other document filed as an exhibit with the SEC. The SEC allows us to “incorporate by reference” into this proxy statement documents we file with the SEC. This means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this proxy statement, and later information that we file with the SEC will update and supersede that information. We incorporate by reference the documents listed below and any documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this proxy statement and before the date of the Special Meeting.

 

 

Notwithstanding the foregoing, information furnished under Items 2.02 and 7.01 of any Current Report on Form 8-K, including the related exhibits, is not incorporated by reference into this proxy statement.

 

Any person, including any beneficial owner, to whom this proxy statement is delivered may request copies of proxy statements and any of the documents incorporated by reference in this document or other information concerning us, without charge, by written or telephonic request directed to Investor Relations Department, Cardiogenesis Corporation, 11 Musick, Irvine, California 92618, telephone number (949) 420-1800 or from the SEC through the SEC website at the address provided above. Documents incorporated by reference are available without charge, excluding any exhibits to those documents unless the exhibit is specifically incorporated by reference into those documents.

 

You should rely only on the information contained in this proxy statement. We have not authorized anyone to provide you with information that is different from what is contained in this proxy statement. Therefore, if anyone does give you information of this sort, you should not rely on it. If you are in a jurisdiction where the solicitation of proxies is unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this proxy statement does not extend to you. You should not assume that the information contained in this proxy statement is accurate as of any date other than the date of this proxy statement, unless the information specifically indicates that another date applies. The mailing of this proxy statement to our shareholders does not create any implication to the contrary.

Annex A

 

 

AGREEMENT AND PLAN OF MERGER
among
CRYOLIFE, INC.,

 

CL FALCON, INC.
and
CARDIOGENESIS CORPORATION
Dated as of March 28, 2011

TABLE OF CONTENTS