SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[ ] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended September 30, 2005.
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number: 0-16128
TUTOGEN MEDICAL, INC.
(Name of Registrant as specified in Its Charter)
FLORIDA 59-3100165
(State of Incorporation) (IRS Employer Identification No.)
1130 MCBRIDE AVENUE WEST PATERSON, NEW JERSEY 07424
(Address of principal executive offices)
(973) 785-0004
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of
the Exchange Act: None Securities registered
under Section 12(g) of the Exchange Act:
COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark if no disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
The aggregate market value of the voting and non-voting common equity held by
non-affiliates (approximately 8,649,000 shares), computed by reference to the
bid and ask of such common equity on the American Stock Exchange, was
$28,282,000 as of November 30, 2005.
As of November 30, 2005, there were 15,950,460 shares outstanding of the
issuer's Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
None.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The discussion contained in this annual report under Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for the
issuer's fiscal year ended September 30, 2003 (this "Report"), contains
forward-looking statements that involve risks and uncertainties. The issuer's
actual results could differ significantly from those discussed herein. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in "Description of Business" and "Management's Discussion
and Analysis or Plan of Operation" as well as those discussed elsewhere in this
Report. Statements contained in this Report that are not historical facts are
forward-looking statements that are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995. A number of important factors
could cause the issuer's actual results for 2004 and beyond to differ materially
from those expressed in any forward-looking statement made by or on behalf of
the issuer.
PART I
ITEM 1. BUSINESS.
Tutogen Medical, Inc., a Florida corporation, was formed in 1985, and
with its consolidated subsidiaries (collectively, the "Company" or "Tutogen"),
develops, manufactures and markets sterile biological implant products made from
human (allograft) and animal (xenograft) tissue. Tutogen utilizes its
Tutoplast(R) Process of tissue preservation and viral inactivation to
manufacture and deliver sterile bio-implants used in spinal/trauma, urology,
dental, ophthalmology, head and neck and general surgery procedures.
One of the Company's wholly owned subsidiaries, Tutogen Medical GmbH,
designs, develops, processes, manufactures, markets, and distributes specialty
surgical products and services to over 30 countries through a worldwide
distribution network. Another subsidiary, Tutogen Medical (United States), Inc.,
was formed in 1994 to process, market and distribute allografts for the U.S.
market.
The Company's corporate headquarters is currently located in West
Paterson, New Jersey. However, the Company announced that effective December 31,
2005, the worldwide headquarters will be in Alachua, Florida. In addition, the
Company has a manufacturing facility in Alachua, Florida, international
executive offices and processing and manufacturing facilities in Neunkirchen,
Germany, and a sales office in Boulogne, France.
The Company contracts with independent tissue banks and procurement
organizations to provide donated human tissue for processing under the Company's
proprietary TUTOPLAST process. The TUTOPLAST process utilizes solvent
dehydration and chemical inactivation which is applied to two types of preserved
allografts: soft tissue; consisting of fascia lata, fascia temporalis,
pericardium, dermis, sclera, ligaments, tendons and cartilage, and bone tissue;
consisting of various configurations of cancellous and cortical bone material.
Processed pericardium, fascia lata and dermis are collagenous tissue used to
repair, replace or line native connective tissue primarily in neurosurgery,
ophthalmology, urology procedures, plastic and reconstructive surgeries, dermis
is also used in pelvic floor reconstruction, sclera is used in ophthalmology
procedures such as, anterior and posterior segment patch grafting applications
for glaucoma, retina and trauma surgery and oculoplastics as well as contour
wrapping of an orbital implant, while ligaments, tendons and cartilage are used
primarily in orthopedic and trauma repairs. Processed cortical and cancellous
bone material is used in a wide variety of applications in spinal and dental
surgeries. All processed tissues have a shelf life of five (5) years and require
minimal time for rehydration. The Company processes bone and soft tissues in
both manufacturing facilities.
The TUTOPLAST(R) processed allografts have been used successfully in
over 1,000,000 procedures performed for over thirty (30) years.
In contrast to other processors using freeze-drying, deep freezing or
cryopreservation for human tissues, the TUTOPLAST process utilizes a technique
in which tissues are soaked and washed in a series of aqueous solutions and
organic solvents, removing water and substances that could cause rejection or
allergic reaction. This technique dehydrates the tissue keeping the tissue's
structure intact, allowing it to act after
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implantation as a scaffold, which is replaced by newly formed autologous tissue.
During processing, the tissues are treated with agents shown to inactivate
viruses such as hepatitis and HIV, the virus that causes AIDS, to render the
allografts safe for the recipient. Soft tissue is also treated with chemicals
shown to be effective against the agent causing Creutzfeldt-Jakob Disease
("CJD"). Once packaged, tissues are terminally sterilized by low dosage
radiation, which allows them to be labeled "sterile".
MANUFACTURING AND PROCESSING
Tutogen Medical is a leader in the manufacture and marketing of human
allograft and animal xenograft tissue implant products, which significantly
improve surgical outcomes for the medical professional and quality of life for
patient recipients. Our proprietary TUTOPLAST(R) tissue preservation and
sterilization process has the greatest longevity of any similar methodology in
the industry today. In use for more than thirty (30) years, there have been well
over one million (1,000,000) Tutogen products implanted without a single
documented case of disease transmission.
Donated bone and soft tissues are received and quarantined by Tutogen
Quality Control (QC) until release by the Quality Assurance (QA) department and
Tutogen's Medical Director, a licensed physician. In the interim, tissues are
stored in a controlled environment, limited-access area according to
requirements set forth by the American Association of Tissue Banks (AATB). Each
tissue is given a unique identification number in order to maintain full
traceability. Once released for processing, tissues are transferred to
manufacturing and kept in a refrigerated or frozen state until issued to a
specific production work order.
Following assignment to a manufacturing work order, tissue materials go
through appropriate preprocessing operations and into the multi-stage Tutoplast
process. This process removes blood, lipids and extraneous materials,
inactivates viruses and prions and yields a dehydrated semi-processed product
that may be stored at room temperature for extended periods of time. This tissue
is subsequently processed to size and/or shape and packaged for terminal
sterilization. All Tutogen packaged products are subjected to low dose gamma
irradiation, which further enhances tissue safety and eliminates ancillary
contamination that may be present from pre-sterilization handling. This terminal
sterilization is performed by a third-party contractor, utilizing a validated
cycle, which yields a Sterility Assurance Level (SAL) of 10-6, or one chance in
one million of a viable microorganism remaining on the product.
While some of the TUTOPLAST processing steps are automated, the majority
are manual, and rely on highly-skilled personnel for their proper execution.
Such skilled labor is readily available in the surrounding geographic areas and
management feels that there should be no adverse affect on the business related
to the labor market.
Tutogen operates two tissue processing facilities; a 26,000 square foot
facility in Alachua, Florida and a 32,000 square foot facility in Neunkirchen,
Germany. Major expansion projects are currently underway at both facilities,
with completion dates of the first and third calendar quarters of 2006,
respectively. These expansion projects are intended to insure the availability
of sufficient production capacity in order to address the increasing demand for
the Company's allograft and xenograft products.
QUALITY ASSURANCE - Tutogen Medical maintains a comprehensive quality
assurance program that provides oversight to all pertinent aspects of the
Company's day-to-day operational activities. Among the responsibilities of the
QA organization are:
o Maintenance of an extensive documentation and change-control
system (specifications, standard operating procedures and
engineering drawings)
o Internal and external auditing for compliance with international
and domestic regulatory body or accrediting organization
regulations or requirements
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o Review and approval of donor medical record information and
screening/test documentation
o Product and process document review and release for distribution
o Evaluation and follow-up of all Tutogen-related product
complaints
o Management of a Corrective and Preventive Action program to
reduce or eliminate any identified non-conformances
The Quality Assurance department is independent from the manufacturing
operation, operating under the supervision of the Tissue Bank Director (a
medical doctor).
MARKETING AND DISTRIBUTION
Tutogen's products and processing services are provided globally through
a combination of worldwide marketing and distribution partners ("partners"),
direct representatives and local distributors. Tutogen's personnel, with
distributors and their representatives, conduct product training sessions, make
joint customer calls, set objectives and evaluate their representatives'
performance. Personnel also call on selected physicians and key hospital
accounts in order to provide needed clinical and technical information services.
The overall strategy is to work with each global partner to expand penetration
into currently covered regions, develop additional global opportunities, and to
broaden the product portfolio with procedure-specific products. In markets not
covered by its global distributors, Tutogen's focus is on adding local
distributors or direct operations capable of market penetration.
Approximately 70% of the Company's revenues are derived within the
United States, while the remaining Global sales are derived mostly from Europe.
Since Tutogen's foreign donor qualification standards are in full compliance
with the donor suitability standards of the Food and Drug Administration
("FDA"), the Company has worked with its partners to expand into numerous market
opportunities in the United States. Tissue grafts are used in Urology,
Gynecology, Ophthalmology, Orthopaedics, Spine, Dental, General Surgery, and
Head and Neck applications. Future objectives are to match this penetration into
additional global and specialty markets, using either TUTOPLAST Processed Human
Allograft or Xenograft tissue implants.
The Company's U.S. marketing efforts have concentrated on building a
Marketing and Distribution organization, capable of supporting its various
partners. The Company has entered into several exclusive marketing and
distribution agreements with global medical device companies. These agreements
have established exclusive distribution for TUTOPLAST processed implants in
specialized indications and surgical specialties, for select global markets.
Zimmer Spine Inc. ("Zimmer Spine"), and Zimmer Dental Inc. ("Zimmer
Dental"), subsidiaries of Zimmer Holdings, Inc., provide marketing services for
the Company's products for the spine and dental markets. Starting in September
2000, Zimmer Spine began representing Tutogen bone products for applications in
the Spine Market. Initially Tutogen shipped and billed the customers directly,
but in April 2003 the Company entered into an Exclusive License and Distribution
Agreement with Zimmer Spine. Effective with this agreement Zimmer Spine became a
"stocking distributor", whereby Zimmer Spine now purchases the Company's
products and invoices the customer directly. Zimmer Spine distributes both
traditional bone and specialized bone products processed with the Company's
TUTOPLAST process. Revenues from Zimmer Spine represent 10% and 14%,
respectively, of total consolidated and U.S. revenues.
Also in September 2000, Zimmer Dental entered into an agreement to
represent Tutoplast Bone, under the brand name Puros(R), for Dental
applications. Revenues from this relationship account for 43% of
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Global and 62% of U.S. revenues. Zimmer Dental represents the products to the
end user and Tutogen ships and bills the customer directly.
For urological and gynecological indications, the Company has partnered,
since 1998, with Mentor Corporation ("Mentor"). In fiscal year 2005, Mentor
accounted for 8% and 12%, respectively, of the Company's total and U.S.
revenues. As a stocking distributor, they currently market TUTOPLAST Fascia
Lata, Pericardium, and Dermis tissue implants. In April 2005, Tutogen and Mentor
signed an agreement that extended current contracts for one year. The intent of
this extension is to provide enough time to develop and sign a new definitive
agreement, incorporating points from the original 1998 agreement and the
succeeding four (4) amendments.
Other agreements signed in the past fiscal year include a new
Distribution Agreement with IOP, Inc. (IOP). IOP has been a distributor since
1998, and the new agreement extends for another two (2) years their exclusivity
to distribute TUTOPLAST processed tissue for Ophthalmology applications. During
2005, IOP represented approximately 5% of total Company revenue. A new partner,
Sense Medical signed an exclusive distribution agreement in December 2004,
expanding TUTOPLAST products into selected Head and Neck procedures. First year
sales for Sense Medical represented 1% of total Company revenue.
Internationally, the Company has implemented a marketing and sales
restructuring plan, concentrating on an in-depth penetration of markets with
major needs, not covered by Tutogen's Global partners. In Europe, the specific
focus is on countries such as Germany, France, Italy, Spain and the U.K., and in
major specialty areas, such as Dental and Orthopaedics. The Company believes
that through a combination of international distribution strategies, Tutogen can
increase its penetration of the international markets for processed tissue.
TISSUE PROCUREMENT
The Company sources donor tissues from multiple independent recovery
organizations in Europe and the United States. Recovery agencies obtain donor
consent, verify proper donor identity, conduct extensive medical and social
history evaluations and recover appropriate donated tissues. Each donor tissue
is assigned a unique identification number in order to assure full traceability,
from recovery to end user. These records accompany each donor tissue receipt,
along with related serological test samples. The test samples are evaluated by
independent CLIA (Clinical Laboratory Improvement Amendment) certified
laboratories for such transmissible diseases as Hepatitis B surface Antigen
(HBsAg), Hepatitis B total core (HBc, IgG/IgM), Hepatitis C virus antibody (HCV
Ab), Hepatitis B Nucleic Acid Test (HBV/HCV NAT), Human Immunodeficiency Virus
1&2 antibodies (HIV 1&2 Ab), HIV Nucleic Acid Test (HIV NAT), Human
T-Lymphotropic Virus 1&2 (HTLV 1&2) and Syphilis (RPR/STS).
In June of 2002, the FDA published its draft Guidance for Industry
document, "Preventive Measures to Reduce the Possible Risk of Transmission of
Creutzfeldt-Jakob Disease (CJD) and variant Creutzfeldt-Jakob Disease (vCJD) by
Human Cells, Tissues, and Cellular and Tissue-Based Products (HCT/Ps)". This
document reflects the Agency's current thinking on donor deferral criteria for
individuals that may have been exposed to a Bovine Spongiform Encephalopathy
(BSE) agent, or "Mad Cow" disease. The document draft is in the review and
comment stage, which precedes the adoption of a final version of the FDA's
position on this matter. As a part of this document, the FDA provided a listing
of countries applicable to donor deferral. None of the tissue products that
Tutogen distributes in the United States or Canada incorporate tissues from
countries identified by the FDA.
With regard to xenograft tissue, Tutogen Germany currently obtains
bovine material from a "closed herd" in an internationally approved source
country. The U.S. operation is currently in discussions with a potential U.S.
bovine tissue provider. This provider would supply specific bovine tissue from a
domestic,
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FDA registered and USDA inspected "closed herd". Failure to secure an animal
tissue source could have a material adverse effect on the Company's U.S.
operations.
The worldwide demand for allografts, tissue derived from human sources,
is anticipated to represent a significant challenge. Faced with this constraint,
the Company embarked on a program in 1993 to develop xenografts, tissue derived
from animals, as an allograft substitute. The current revenue mix worldwide is
approximately 85% allografts and 15% xenografts. As with allografts, xenografts
processed using the Company's proprietary TUTOPLAST process have their
biomechanical properties and remodeling capacity preserved with removal of
antigenicity and infection risk. Studies have shown, that TUTOPLAST processed
xenografts are at least equivalent to Allografts as demonstrated by actual
clinical use and laboratory studies. To date, the Company has received CE-Marks,
the European equivalent to an FDA medical device approval, for bovine
pericardium (1998), bovine cancellous bone (1997) and bovine compact (cortical)
bone (1999) which permits distribution throughout Europe of products derived
from such tissues. In the US the Company has received FDA 510(k) clearances for
bovine pericardium, allowing the Company to market the first xenograft tissues,
Tutopatch(R) and Tutomesh(R), for indications of general and plastic surgery.
Tutopatch(R) and Tutomesh(R) are intended to be produced from bovine pericardium
obtained from U.S. cattle, a source deemed free of Bovine Spongiform
Encephalopathy ("BSE") and inspected/cleared by the United States Department of
Agriculture (USDA).
The superior biomechanical properties of bovine tissues combined with
the absence of those supply constraints associated with allografts, permits the
use of xenograft tissues, in areas that cannot be optimally addressed with human
tissue.
Tutogen allograft tissue recovery partners are FDA or government
registered, state licensed and AATB accredited, as appropriate. Tissues are NOT
purchased from these companies, but rather they are reimbursed for the costs
incurred in the tissue recovery process, itself. Due to the growing demand for
and limited supply of allograft tissue, the Company is continually seeking to
form additional alliances with reputable hospital, tissue bank and organ
procurement organization tissue recovery firms. Although the Company believes
that it has the necessary contractual arrangements in place to insure that there
are sufficient tissues available to meet its needs for the foreseeable future,
there can be no assurance that these supplies will materialize as planned.
Unavoidable interruptions in tissue supply (natural disasters, regulatory
changes, financial set-backs, etc.) could have a material adverse effect on
Tutogen's business operations.
BACK ORDERS
While Tutogen worldwide has back orders on certain tissue types and
tissue sizes, the allograft demand is most significant in the U.S. market. The
U.S. is the largest market in the world for allografts and has historically
represented the Company's largest market. The Company currently has back orders
that are expected to be filled within the next three months; however, the
Company cannot predict with absolute certainty its ability to fill specific
orders in this time frame. As of September 30, 2005, the Company's back order
for all tissues was under $100,000. Because orders may be canceled or
rescheduled, the Company believes that backlog is not always an accurate
indicator of results of operations for specific future periods.
COMPETITION
Tutogen is a leader in safe bioimplants for tissue repair. Tutogen's
competitive advantage is based on its TUTOPLAST process of tissue preservation
and viral inactivation. The Tutoplast process consists of multiple steps that
assure a safe, viable product and, at the same time, preserves the tissue
structure, biomechanics and remodeling characteristics. The TUTOPLAST process is
very robust, and has been proven effective in removing antigenicity and
inactivating conventional and unconventional viruses and prions. The implants
are terminally sterilized, have a five (5) year shelf life, and can be stored at
room temperature. The TUTOPLAST process has an outstanding safety record. Since
its introduction over thirty (30) years ago, more
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than 1,000,000 procedures have been successfully performed using TUTOPLAST
processed tissues, with no known complications from disease transmission or
tissue rejection attributable to the implants. TUTOPLAST processed implants have
been described in more than 400 published scientific papers.
The majority of the medical procedures suitable for allografts are
currently being performed with autografts (tissues derived from the patient)
requiring a second surgical procedure. The advantages of autografts include the
decreased incident of tissue rejection and disease transmission. The
disadvantages are the dual surgical procedures, increased pain and recovery time
and the limitation on the amount and quality of tissue. Allograft advantages
include the elimination of a second surgical site resulting in lower infection
rates, the possible reduction in surgical procedure time, faster recovery times
and lower costs, while disadvantages include availability and possible
rejection. Availability and safety are the primary factors in the ability of
TUTOPLAST processed allografts to compete with autografts for use by the
surgical community.
The industry in which the Company operates is highly competitive.
Processors of allograft tissue for transplantation in the U.S. include
commercial processors such as Osteotech, Inc., Regeneration Technologies, Inc.
and LifeCell, Inc., companies well established in the fields of processing and
distribution of bone and soft tissue implants, and which have substantially
greater financial resources than the Company. Not-for-profit tissue banks that
procure and process tissue for distribution are considered competitors for
certain applications and in certain markets. Management believes that the
TUTOPLAST process, with its impressive record for safety in the surgical
community, gives the Company a competitive advantage over its competitors.
However, due to government regulation, disrupted sources of availability and
increasing competition, there can be no assurance that the Company will be able
to continue to compete successfully. In addition, there can be no assurance that
in the future the Company's allografts will be able to compete successfully with
new tissue substitutes being developed by other companies.
GROWTH STRATEGY
The Company estimates the worldwide market for its present products to
be approximately $1 billion, including all procedures in the various fields of
use. The Company's existing tissue supply network, established processing
facilities and proven TUTOPLAST technology provides the foundation for continued
growth into fiscal 2006 and beyond. Future growth will be aided by new sources
of tissue, new procedures and products, and expansion into new markets. The
Company will focus on applications for both Human allograft and Xenograft tissue
implants.
Besides Tutogen's internally developed new products and technology, a
major component of Tutogen's growth strategy will be its collaboration with each
Global partner. Tutogen will continue to work with each organization to evaluate
opportunities for new products and applications. The ultimate goal is to provide
each partner with a full line of procedure specific implants, for their
respective fields of use.
Currently, Tutogen's focus is on the introduction of new products and
applications for TUTOPLAST processed tissues. In January 2005, the Company
developed, in association with Zimmer Dental, a new bone block to augment ridge
restoration. In the U.S. the Puros block graft has been very well accepted and
is highlighted in various Zimmer Dental training courses. Globally, similar
products processed from Xenograft tissue, has helped generate growth as Tutogen
focuses on expanding the international market for dental products. Additionally,
Tutogen has developed membranes from TUTOPLAST processed dermis and pericardium
for use as a barrier in dental applications. These products are being used in
Europe and a U.S. launch is planned for early in 2006.
In October 2002, the Company entered the European market with
Tutomesh(R), a TUTOPLAST processed biological membrane for hernia and abdominal
wall repair. It has been very well received in Europe, and has already been
successfully used in abdominal wall surgery of neonates and children with hernia
defects. In December 2004, Tutogen received FDA 510(k) marketing clearance for a
product and is currently
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investigating various options for distribution in the U.S. It is estimated that,
in the U.S. approximately 1,000,000 hernia procedures are performed each year,
creating an estimated $150,000,000 market. Focus for the Company is on globally
developing this opportunity for both the Tutomesh, as well as for TUTOPLAST
processed Dermis.
The Orthopaedic market for Biologic Materials is currently estimated at
just over $1 billion for 2005. Allograft makes up about 33% of this revenue,
split between traditional allograft bone and machined specialty grafts, another
23% of this market is Demineralized Bone Matrix (DBM). Tutogen has development
programs in each of these areas. In the Spinal Market, Tutogen continues its
collaboration with Zimmer Spine in developing new, highly precise and
specialized implants for spinal fusion. In the Orthopaedic arena, Tutogen has
internally developed a line of TUTOPLAST processed, machined bone implants for
the repair of orthopaedic fractures and soft tissue ruptures. The Tutofix(R)
line of implants was released in Europe in 2004. The current strategy is to
broaden its release internationally, and to develop a distribution strategy for
the U.S. market.
The Company's tissues and products have application in numerous surgical
indications. The Company, in association with its partners and distributors,
enjoys high degrees of success in various markets, including ophthalmology,
urological/gynecological, spine, and dental. The Company will continue its
efforts in developing new products for these specialties, and in investigating
potential new markets for its TUTOPLAST processed tissue.
INTERNATIONAL OPERATIONS
Approximately 32%, 42% and 30% of the Company's net sales, respectively
for fiscal years 2005, 2004 and 2003 were derived from outside the United
States. The Company currently has sales in more than 30 countries located
primarily in the United States and Europe. As a result of it foreign sales and
facilities, the Company's operations are subject to the risks of doing business
internationally.
----------------------------- ----------------- ----------------- ----------------
(IN THOUSANDS) United States International Consolidated
----------------------------- ----------------- ----------------- ----------------
Revenues
----------------------------- ----------------- ----------------- ----------------
Year ended September 30,
----------------------------- ----------------- ----------------- ----------------
2005 $21,752 $10,108 $31,860
----------------------------- ----------------- ----------------- ----------------
2004 $17,126 $12,204 $29,330
----------------------------- ----------------- ----------------- ----------------
2003 $21,168 $ 9,092 $30,260
----------------------------- ----------------- ----------------- ----------------
For a discussion of the Company's long-lived assets as of September 30,
2005, 2004 and 2003 see Note 9 of "Notes to Consolidated Financial Statements"
and for the deferred tax assets for the years ended September 30, 2005, 2004 and
2003 see Note 10 of "Notes to Consolidated Financial Statements".
RESEARCH AND DEVELOPMENT
Tutogen continues to engage in research and development ("R&D"). The
Company's scientific personnel and university level consultants contractively
collaborate on research activities related to allograft and non-allograft tissue
development. The Company follows an Internal Product Development plan and
organizes all R&D activities, including the Zimmer Spine and Zimmer Dental
collaboration. R & D expenditures increased 16% from $1,432,000 in 2004 to
$1,659,000 in 2005.
In allograft-related areas, R&D activities focus primarily on the
development of surgical solutions, standardized and tailor-made products instead
of offering grafting material to the surgeon. Also, continuing progress on the
application of the Company's proprietary TUTOPLAST process to various other
tissues has met with success. The Company continues to independently review its
processing technology to improve tissue
8
safety and efficacy. Non-allograft activities relate to explorations into the
use of xenografts, tissue-engineered grafts and improving healing. Clinical
studies, evaluation and follow-up are conducted on these activities. The
Company's research efforts are subsidized by its collaboration with non-profit
research institutions. These activities will be expanded substantially pending
the availability of the necessary financial resources. The Company is referred
to in more than 400 publications.
CUSTOMERS
Zimmer Spine and Mentor are principal customers to the Company,
accounting for approximately 10% and 8%, respectively, of the Company's net
sales for the year ended September 30, 2005. No other customer accounted for
more than 10% of the Company's net sales for the fiscal year 2005. In June 2005,
the Company entered into an Amendment of its Exclusive License and Distribution
Agreement with Spine redefining the terms governing its relationship. The
Company has Exclusive Distribution Agreements with Mentor granting a license to
exclusively distribute the TUTOPLAST Processed Fascia Lata, Pericardium and
Dermis in their field of use, which is defined as all urological and
gynecological applications and procedures in the United States and certain
foreign markets.
PATENTS, LICENSES AND TRADEMARKS
Wherever possible, Tutogen seeks to protect its proprietary information,
products, methods and technology by obtaining patent and trademark protection.
Tutogen has 18 patents pending and has 15 registered trademarks covering several
countries worldwide. In the United States, the Company has two FDA accepted
510(k) applications for its various products or processes. The Company believes
that it has established itself through the TUTOPLAST trademark identity and a
record of safety and quality assurance that will survive beyond the life of the
patents.
GOVERNMENT REGULATION
Tutogen procures, processes and markets its tissue products worldwide.
Although some standards harmonization exists, each country in which the Company
does business has its own specific regulatory requirements. These requirements
are dynamic in nature and, as such, are continually changing. New regulations
may be promulgated at any time and with limited notice. While the Company
believes that it is in compliance with all existing pertinent international and
domestic laws and regulations, there can be no assurance that changes in
governmental administrations and regulations will not negatively impact the
Company's operations.
In the United States, the Company's allograft products are regulated by
the Food and Drug Administration under Title 21 of the Code of Federal
Regulations, Parts 1270 and 1271, "Current Good Tissue Practice for Human Cell,
Tissue, and Cellular and Tissue-Based Products". Xenograft tissues are regulated
as medical devices and subject to 21 CFR, Part 820 (Current Good Manufacturing
Practices for Medical Devices) and related statutes. The Company has obtained a
510(k) marketing clearance from the FDA for bovine pericardium, for use in
general and plastic surgery applications and will be seeking further approvals
for other xenograft tissues and indications. In addition, the U.S. operation is
subject to certain state and local regulations, as well as compliance to the
Tissue Bank industry's accrediting organization, the AATB.
In Germany, allografts are classified as drugs and the German government
regulates such products in accordance with German Drug Law. On April 7, 2004,
the European Commission issued a human tissue directive to regulate allografts
within the EU. Tutogen's Neunkirchen facility is presently licensed by the
German Health Authorities and in compliance with applicable international laws
and regulations, allowing the Company to market its human and animal implant
products globally.
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The FDA and international regulatory bodies conduct periodic compliance
inspections of both the Tutogen U.S. and German processing facilities. Both
operations are registered with the U.S. FDA Center for Biologics Evaluation and
Research (CBER) and are certified to ISO 9001:2000 and ISO 13485:2003. The
Alachua facility is also accredited by the American Association of Tissue Banks
and is licensed in the states of Florida, New York and California. The
Neunckirchen facility is registered with the German Health Authority (BfArM) as
a pharmaceutical and medical device manufacturer and is subject to German drug
law. The Company believes that worldwide regulation of allografts and xenografts
is likely to intensify as the international regulatory community focuses on the
growing demand for these implant products and the attendant safety and efficacy
issues of citizen recipients. Changes in governing laws and regulations could
have a material adverse effect on the Company's financial condition and results
of operations. Company management further believes that it can mitigate this
exposure by continuing to work closely with government and industry regulators
in understanding the basic tenets of the business and participating in the
drafting of reasonable and appropriate legislation.
ENVIRONMENTAL REGULATIONS
The Company's allografts and xenografts as well as the chemicals used in
processing are handled and disposed of in accordance with country-specific,
federal, state and local regulations. Since 1995, the Company has used outside
third parties to perform all biohazard waste disposal.
The Company contracts with a third party to perform all gamma-terminal
sterilization of its allografts. In view of the engagement of a third party to
perform irradiation services, the requirements for compliance with radiation
hazardous waste does not apply, and therefore the Company does not anticipate
that having any material adverse effect upon its capital expenditures, results
of operations or financial condition. However, the Company is responsible for
assuring that the service is being performed in accordance with applicable
regulations. Although the Company believes it is in compliance with all
applicable environmental regulations, the failure to fully comply with any such
regulations could result in the imposition of penalties, fines and/or sanctions
which could have a material adverse effect on the Company's business.
TECHNOLOGICAL CHANGE AND COMPETITION
The biomedical field continues to experience rapid and significant
technological change. Tutogen's success will depend upon its ability to
establish and maintain a competitive position in the marketplace with its
products and its ability to develop and apply its technology. There are many
well-established companies and academic institutions with greater resources that
are capable of developing products based on similar or new technology that could
effectively compete with those products offered by the Company.
FOREIGN EXCHANGE RATES AND FOREIGN TRANSACTIONS
A significant portion of the Company's revenues is derived from its
German operations, all of which are denominated in Euros. Fluctuations in the
U.S. Dollar/Euro exchange rate may therefore have a significant effect on the
Company's dollar results. Transactions with foreign suppliers and foreign
customers could be materially adversely affected by possible import, export,
tariff and other restrictions that may be imposed by the United States or other
countries.
EMPLOYEES
As of September 30, 2005, the Company employed a total of 193 full-time
and 20 part-time employees, of whom 49 full-time and 7 part-time were employed
in the United States and the remainder in Germany. Management believes its
relations with its employees are good.
10
ITEM 2. PROPERTIES.
UNITED STATES. The Company's domestic facilities are located in New
Jersey and Florida. In West Paterson, New Jersey, the Company leases
approximately 1,400 square feet of office space in which its administrative
headquarters is located. The lease will expire in December 2006 and has a base
rent of approximately $2,500 per month. The Company announced the relocation of
the administrative offices to its facility in Alachua, Florida at December 31,
2005. The Company's offices and manufacturing facility in Alachua, Florida have
expanded from approximately 20,205 square feet to 25,525 square feet of leased
space. The Florida lease expires January 31, 2009 with an option through January
31, 2011 at a current base rent of approximately $36,500 per month. The Company
believes it is adequate in space and condition for its current needs.
GERMANY. The Company's facility in Neunkirchen consists of six buildings
totaling approximately 32,000 square feet on approximately two acres of land.
This property is owned by the Company and should be sufficient in size and
condition to handle anticipated production levels for international markets into
the foreseeable future. In addition, the Company is renting office space of
approximately 23,000 square feet at $ 12,500 per month expiring at various
periods in the later part of 2006. The intent is to eliminate and consolidate
the current rental offices as part of expansion efforts underway. The expansion
project is expected to be completed by the fourth fiscal quarter 2006.
ITEM 3. LEGAL PROCEEDINGS.
In 2003, the Company received a proposed judgment in Germany as the
result of a dispute between the Company and a former international distributor.
The estimated settlement, including legal costs was accrued as a litigation
contingency. In 2004, a decision by the court of appeal in Germany has resulted
in a reduction of the original proposed judgment received against the Company.
At September 30, 2005 and 2004, the Company maintains an accrual of $476,000
with respect to the remaining appeal and legal costs. Management believes that
such accrual is sufficient and the final settlement will not have a material
impact on its results of operations or financial opinion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There was no submission of matters to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION
Since August 17, 2000, the Company's Common Stock has been traded on the
American Stock Exchange under the symbol "TTG". The following table sets forth
the range of high and low closing price information for the Company's Common
Stock for each quarter within the last two fiscal years.
Fiscal 2004 High Low
----------- ---- ---
First Quarter $ 5.50 $ 4.05
Second Quarter 5.06 3.85
Third Quarter 4.59 3.89
Fourth Quarter 4.16 2.79
11
Fiscal 2005
-----------
First Quarter $ 3.13 $ 2.24
Second Quarter 2.60 2.30
Third Quarter 2.42 2.11
Fourth Quarter 4.56 2.35
Such market quotations reflect inter-dealer prices, without retail
mark-ups, markdowns or commissions and may not necessarily represent actual
transactions.
HOLDERS
As of November 30, 2005, the approximate number of holders of record of
the Company's Common Stock was 828. The Company estimates that there are
approximately 2,700 beneficial holders.
DIVIDENDS
The Company has not paid any cash dividends to date and does not
anticipate or contemplate paying cash dividends in the foreseeable future until
earnings would generate funds in excess of those required to provide for the
growth needs of the Company.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information regarding the
Company's equity compensation plan as of September 30, 2005.
----------------------------------------------- ------------------------- --------------------- -----------------------
Number of securities
Remaining available
For future issuance
Weighted-average under Equity
Number of securities to Exercise price of compensation plans
be Issued upon exercise Outstanding (excluding securities
of Outstanding options, options, reflected in column
PLAN CATEGORY warrants and rights Warrants and rights (a))
----------------------------------------------- ------------------------- --------------------- -----------------------
(a) (b) (c)
Equity compensation plan approved by
Securities holders (1)................... 2,481,368 $ 2.64 548,303
----------------------------------------------- ------------------------- --------------------- -----------------------
Equity compensation plan not approved by
Securities holders....................... -0- -0- -0-
----------------------------------------------- ------------------------- --------------------- -----------------------
----------------------------------------------- ------------------------- --------------------- -----------------------
Total 2,481,368 $ 2.64 548,303
----------------------------------------------- ------------------------- --------------------- -----------------------
-----------------------------------------------------------------------------------------------------------------------
(1) Reflects options to purchase shares of the Company's common stock and shares available for Issuance under the
Company's Stock Option Plan.
-----------------------------------------------------------------------------------------------------------------------
12
ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED SEPTEMBER 30,
2005 2004 2003 20021 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 31,860 $ 29,330 $ 30,260 $ 20,747 $ 13,162
Gross margin % 36% 60% 62% 59% 34%
Operating income (loss) (6,966) 3,528 3,820 1,666 (2,295)
Net income (loss) (6,621) 1,503 2,262 901 (672)
Average shares outstanding for basic
earnings (loss) per share 15,919,286 15,734,000 15,495,000 15,114,000 14,749,000
Basic earnings (loss) per share (0.42) 0.10 0.15 0 .06 (0.05)
Average shares outstanding for diluted
earnings (loss) per share 15,919,286 16,469,000 16,095,000 15,960,000 14,749,000
Diluted earnings (loss) per share (0.42) 0.09 0.14 0.06 (0.05)
Balance Sheet Data:
Working capital $ 9,052 $ 18,173 $ 15,783 $ 10,856 $ 8,805
Total assets 27,142 34,347 30,403 23,748 19,277
Long-term debt 630 827 728 693 707
Stockholders' equity 14,728 22,083 18,046 13,928 12,457
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004
RESULTS OF OPERATIONS
REVENUE AND GROSS MARGIN
Revenue for the year ended September 30, 2005 increased $2.5 million or
9% to $31.9 million from $29.3 million in 2004. The U.S. revenues were $21.8
million or 27% higher than the 2004 revenues of $17.1 million. The increase in
U.S. revenues was fueled by the continuing increase in the demand for the
company's TUTOPLAST(R) bone products for dental applications sold by Zimmer
Dental ("Dental"), the company's marketing partner. In January 2005, The Company
developed, in association with Zimmer Dental, a new bone block to augment ridge
restoration. The Dental business increased 100% from a year ago. The spine
revenues decreased 37%, primarily due to significant purchases by Zimmer Spine
("Spine") in 2004. The urology business was essentially flat with a decrease of
6% from a year ago as this business is decreasing due to the increased reliance
on synthetics for incontinence. However, Mentor continues to do well in the
pelvic floor reconstruction market, with a slight increase in revenues for this
product line. The Ophthalmic business was essentially flat as this is a mature
and niche business.
13
The International operation had revenues of $10.1 million, a decrease
of $2.1 million or 17% from the 2004 revenues of $12.2 million. The decrease in
revenues was primarily due to the temporary delay in the renewal of the CE marks
("European Conformity") on certain products, which was resolved at the end of
the first quarter, the resolution of certain regulatory issues in France and the
temporary backlog of xenograft product lines.
An analysis of revenues are as follows:
------------------------- -------------- -------------- -------------- --------------
($000's omitted) FY 2005 FY 2004 4th Qtr. 4th Qtr.
FY 2005 FY 2004
------------------------- -------------- -------------- -------------- --------------
------------------------- -------------- -------------- -------------- --------------
Dental 13,785 6,893 4,115 1,996
------------------------- -------------- -------------- -------------- --------------
Spine 3,318 4,850 336 607
------------------------- -------------- -------------- -------------- --------------
Urology 2,633 2,809 540 770
------------------------- -------------- -------------- -------------- --------------
Ophthalmic 1,505 1,553 452 414
------------------------- -------------- -------------- -------------- --------------
Other 701 1,021 136 361
------------------------- -------------- -------------- -------------- --------------
Total - U.S. 21,752 17,126 5,579 4,049
------------------------- -------------- -------------- -------------- --------------
------------------------- -------------- -------------- -------------- --------------
Germany 1,980 3,521 487 1,390
------------------------- -------------- -------------- -------------- --------------
ROW 6,220 6,001 1,324 1,829
------------------------- -------------- -------------- -------------- --------------
France 1,337 2,121 391 525
------------------------- -------------- -------------- -------------- --------------
Other 571 561 170 141
------------------------- -------------- -------------- -------------- --------------
Total-International 10,108 12,204 2,372 3,885
------------------------- -------------- -------------- -------------- --------------
------------------------- -------------- -------------- -------------- --------------
Total Consolidated 31,860 29,330 7,951 7,934
------------------------- -------------- -------------- -------------- --------------
Gross margins for the year ended September 30, 2005 decreased to 36%
from 60% in 2004. The lower margins were due to several factors, 1), an
unfavorable mix of lower margin products from the dental product revenues versus
the spine revenues. The dental revenues as a percentage of total revenues
increased to 43% of total revenues versus 24% a year ago, 2), initial start-up
manufacturing costs of $1.6 million, expensed in the third quarter, associated
with shifting production of the dental product lines from Germany to the U.S.
The production transfer has been fully completed, 3), the recording in the
fourth quarter of $1.0 million for the inventory reserve impact of the voluntary
recall of products and 4), the estimated patient testing and other related
expenses of $250,000 as a result of the product recall recorded in the fourth
quarter.
VOLUNTARY RECALL. On October 12, 2005, the Company issued a voluntary
recall of all product units, which utilized donor tissue received from
BioMedical Tissue Services/BioTissue Recovery Services ("BioMedical"). This
action was taken because the Company was unable to satisfactorily confirm that
BioMedical had properly obtained donor consent. The Company quarantined all
BioMedical products in its inventory, having a value of $1,035,000 and has
notified all customers and distributors of record regarding this action. In
connection with this recall, the Company has destroyed $174,000 and accrued
$861,000 of inventory reserve and $250,000 of other related costs at September
30, 2005.
GENERAL AND ADMINISTRATIVE
General and Administrative expenses increased 28% in 2005 to $5.4
million from $4.2 million in 2004. The increase was due to higher compensation
from new and unfilled positions ($534,000), expenses related to the closing of
the New Jersey Corporate Offices ($444,000), expenses related to the Sarbanes
-Oxley compliance ($118,000), unfavorable translation of Euro-based expenses
($84,000), and other expenses
14
($20,000). As a result, General and Administrative expenses, as a percentage of
revenues, increased from 14% in 2004 to 17% in 2005.
DISTRIBUTION AND MARKETING
Distribution and Marketing expenses were increased 32% or $2.8 million
in 2005 to $11.5 million from $8.7 million in 2004. The increase was soley due
to higher marketing fees paid to Dental of $6.1 million in 2005 versus $3.2
million a year ago or an increase of $2.9 million. This is a result of a 100%
increase in dental revenues in 2005, from $6.9 million of revenues in 2004 to
$13.8 million in 2005. As a result, Distribution and Marketing expenses, as a
percentage of revenues, increased from 30% in 2004 to 36% in 2005.
RESEARCH AND DEVELOPMENT
Research and Development expenses increased 16% or $0.2 million in 2005
to $1.6 million. The increase was due to increased development efforts in the
dental and spine product areas. As a percentage of revenues, Research and
Development expenses remained at 5% in 2005 and 2004.
LITIGATION CONTINGENCY
In 2003, the Company received a proposed judgment in Germany as the
result of a dispute between the Company and a former international distributor.
The estimated settlement, including legal costs was accrued as a litigation
contingency. In 2004, a decision by the court of appeal in Germany has resulted
in a reduction of the original proposed judgment received against the Company by
$406,000. At September 30, 2005 and 2004, the Company continues to maintain an
accrual of $476,000 with respect to the remaining appeal and legal costs.
Management believes that such accrual is sufficient and the final settlement
will not have a material impact on its results of operations or financial
position.
OTHER INCOME/EXPENSE
Other expense for 2005 decreased $505,000 from $601,000 in 2004 to
$96,000 in 2005. This was primarily the result of lower foreign exchange losses
due to the strengthening of the dollar versus the euro and lower inter-company
balances at year-end.
INTEREST EXPENSE
Interest expense in 2005 increased due to the leasing of capital
expenditure equipment related to the facility expansion programs in Florida and
Germany.
(BENEFIT OF) PROVISION FOR INCOME TAXES
The (benefit of) provision for income taxes is solely due to the income
tax benefit on the loss from the foreign entity. The Company continues to record
the existing valuation allowance on its U.S. operations.
NET (LOSS) INCOME
As a result of the above, net loss for the year ended September 30, 2005
totaled $6.6 million, $0.42 basic and diluted loss per share as compared to a
net income of $1.5 million, $0.10 basic and $0.09 diluted earnings per share for
2004. As a percentage of revenues, net income decreased from 5.1% in 2004 to a
net loss of 20.8% in 2005.
15
ACCOUNTS RECEIVABLE
The accounts receivable balance decreased in 2005 by 29% due to an
increase in collection efforts resulting in a 16% improvement of the day's sales
outstanding from 50 in 2004 to 42 in 2005.
INVENTORY
The inventory balance decreased to $10.6 million at September 30, 2005
or 30% from $15.1 million at September 30, 2004. The decrease was primarily due
to the successful effort to improve production planning and control and reduce
overall inventory levels. Approximately $1.0 million of the decrease represents
inventory written-off due to the voluntary recall of certain products.
FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003
RESULTS OF OPERATIONS
REVENUE AND COST OF REVENUE
Revenue for the year ended September 30, 2004 decreased $1.0 million or
3% to $29.3 million from $30.3 million in 2003. The US operation revenues were
$17.1 million or 19% lower than the 2003 revenues of $21.2 million. The decrease
in revenue was due to the new arrangement with Zimmer Spine ("Spine"). In April
2003, the Company signed a renegotiated U.S. Distribution Agreement with
Centerpulse Spine-Tech, now known as Zimmer Spine, whereby Spine has become a
"stocking distributor". The effect of this new arrangement means that Spine has
now been invoicing the end customer directly. The new agreement also has
eliminated marketing fees paid to Spine included in Distribution and Marketing.
The Company's U.S. revenues for the prior year would have been $17.2 million or
$4.0 million lower under the new agreement with Spine as compared to the U.S.
revenues of $17.1 million for 2004. The Spine business, after considering the
new arrangement, decreased by $2.0 million, which is the direct result of
over-buying by Spine at the end of the prior year. This decrease in the Spine
business was fully offset by an increase in the demand for the Company's
TUTOPLAST processed Puros(TM) Bone Grafting Material for dental applications
sold by Zimmer Dental ("Dental"), the Company's marketing partner. This product
line contributed an increase in revenue of $3.2 million from the comparable
year.
The International operation had revenues of $12.2 million or an increase
of 24% or $2.2 million from the 2003 revenues of $9.1 million. The increase in
revenues was positively impacted in the amount of $1.3 million by currency
exchange rates. The balance of the increase in revenues was primarily due to
increased penetration of the French market and improved distributor revenues
worldwide.
Gross margins for the year ended September 30, 2004 decreased to 60%
from 61% in 2003. The slightly lower margins were primarily due to an
unfavorable mix of lower margin products from the dental product revenues versus
the spine revenues. The Dental revenues as a percentage of total revenues
increased to 24% of total revenues versus 12% a year ago. This unfavorable mix
was partially offset by improved manufacturing efficiencies.
GENERAL AND ADMINISTRATIVE
General and Administrative expenses decreased 6% in 2004 to $4.2 million
from $4.5 million in 2003. The overall decrease was due primarily to lower
compensation from unfilled positions and lower bonus ($462,000) and reduced bad
debt reserves ($237,000), partially offset by unfavorable foreign exchange
variance ($227,000), merger and acquisition expenses ($190,000) and other
expenses ($3,000). As a percentage of revenues, General and Administrative
expenses remained at 15% in 2004 and 2003.
16
DISTRIBUTION AND MARKETING
Distribution and Marketing expenses were essentially flat decreasing
$0.1 million in 2004 to $8.7 million from $8.8 million in 2003. The decrease was
primarily due to lower marketing fees as a result of the new agreement with
Spine, whereby the Spine marketing fees have been eliminated since May 1, 2003.
The Spine marketing fees of $2.9 million in 2003 were completely eliminated in
2004, while the marketing fees paid to Dental increased from $1.7 million in
2003 to $3.2 million in 2004 as a result of increased Dental revenues. The
reduction in overall marketing fees of $1.4 million was offset by unfavorable
foreign exchange variance ($526,000), higher compensation due to the re-building
of the direct sales force in Germany and new product managers in the U.S.
($398,000), product brochures and other marketing expenses ($175,000), higher
travel expenses ($107,000), office expenses ($104,000), increased commissions
($80,000) and other expenses ($10,000). As a percentage of revenues,
Distribution and Marketing expenses increased from 29% in 2003 to 30% in 2004.
RESEARCH AND DEVELOPMENT
Research and Development expenses increased 75% in 2004 to $1.4 million
from $0.8 million in 2003. The increase was due to increased development efforts
in the spine, dental and ligament product areas. It was noted in last years MD &
A that the Company's R & D effort would increase in 2004. As a percentage of
revenues, Research and Development expenses increased from 3% in 2003 to 5% in
2004.
LITIGATION CONTINGENCY
In 2003, the Company received a proposed judgment in Germany as the
result of a dispute between the Company and a former international distributor.
The estimated settlement, including legal costs was accrued as a litigation
contingency. In 2004, a decision by the court of appeal in Germany has resulted
in a reduction of the original proposed judgment received against the Company by
$406,000. At September 30, 2004 and 2003, the Company accrued $476,000 and
$836,000, respectively with respect to the remaining appeal and legal costs.
Management believes that such accrual is sufficient and the final settlement
will not have a material impact on its results of operations or financial
position.
OTHER EXPENSE
Other expense for 2004 increased $233,000 from $368,000 in 2003 to
$601,000 in 2004. This was primarily the result of higher foreign exchange
losses due to the weakness of the dollar versus the euro and higher
inter-company balances at year-end.
INTEREST EXPENSE
Interest expense in 2004 increased due to the leasing of capital
expenditure equipment.
PROVISION FOR INCOME TAXES
The provision for income taxes is solely due to the foreign entity being
taxed. The Company continues to record the existing valuation allowance on its
U.S. operations.
NET INCOME
As a result of the above, net income for the year ended September 30,
2004 totaled $1.5 million, $0.10 basic and $0.09 diluted earnings per share as
compared to a net income of $2.3 million, $0.15 basic and $0.14 diluted earnings
per share for 2003. As a percentage of revenues, net income decreased from 7.5%
in 2003 to 5.1% in 2004.
17
ACCOUNTS RECEIVABLE
The accounts receivable balance decreased in 2004 by 11% due to an
increase in collection efforts resulting in a 32% improvement of the day's sales
outstanding from 71 in 2003 to 50 in 2004.
INVENTORY
The inventory balance increased to $15.1 million at September 30, 2004
or 26% from $12.0 million at September 30, 2003. This increase was partially due
to a 12% weakening of the dollar against the euro. The higher inventory also
reflects the meeting of contractual commitments in terms of safety stock with
its two major marketing partners, Spine and Dental and the building of inventory
associated with the introduction of two new product lines for dental
applications.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are more fully described
in Note 2 to the consolidated financial statements in the annual report.
However, certain of the accounting policies are particularly important to the
portrayal of the financial position and results of operations and require the
application of significant judgment by management; as a result, they are subject
to an inherent degree of uncertainty. In applying those policies, management
uses its judgment to determine the appropriate assumptions to be used in the
determination of certain estimates. Those estimates are based on historical
experience, terms of existing contracts, observance of trends in the industry,
information provided by customers and information available from other outside
sources, as appropriate. The Company's significant accounting policies include:
INVENTORIES. Inventories are valued at the lower of cost (weighted
average basis) or market. Work in process and finished goods includes costs
attributable to direct labor and overhead. Reserves for slow moving and obsolete
inventories are provided based on historical experience, current product demand
and the remaining shelf life. The adequacy of these reserves are evaluated
quarterly.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE. Revenue on product sales is
recognized when persuasive evidence of an arrangement exists, the price is fixed
and final, delivery has occurred and there is a reasonable assurance of
collection of the sales proceeds. Oral or written purchase authorizations are
generally obtained from customers for a specified amount of product at a
specified price. Delivery is to have occurred at the time of shipment. Customers
are provided with a limited right of return. Revenue is recognized at shipment.
Reasonable and reliable estimates of product returns are made in accordance with
SFAS No. 48 and allowances for doubtful accounts based on significant historical
experience. Revenue from service sales is recognized when the service procedures
have been completed or applicable milestones have been achieved. Revenue from
distribution fees includes nonrefundable payments received as a result of
exclusive distribution agreements between the Company and independent
distributors. Distribution fees under these arrangements are recognized as
revenue as products are delivered.
FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's
German subsidiary is the Euro for the years 2005, 2004 and 2003. Assets and
liabilities of foreign subsidiaries are translated at the period end exchange
rate while revenues and expenses are translated at the average exchange rate for
the year. The resulting translation adjustments, representing unrealized,
non-cash losses are made directly to comprehensive income. Gains and losses
resulting from transactions between the Company and its subsidiaries, which are
made in currencies different from their own, are included in income as they
occur. The Company recognized currency losses of $173,000, $700,000 and $350,000
in 2005, 2004 and 2003, respectively.
18
CONCENTRATION OF CREDIT RISK
The exposure to risk related to foreign currency exchange is limited
primarily to inter-company transactions. The Company currently does not utilize
forward exchange contracts or any other type of hedging instruments.
The Company's principal concentration of credit risk consists of trade
receivables. Distribution of products and revenues is provided through a broad
base of independent distributors. Two customers accounted for 18% of
consolidated revenue in 2005 while the same two customers accounted for 22% of
consolidated revenue in 2004 and 30% in 2003. The Company does not believe that
this concentration of sales and credit risks represents a material risk of loss
with respect to the financial position as of September 30, 2005 and 2004.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2005 and 2004 the Company had working capital of $9.1
million and $18.0 million, respectively, a decrease of 49%. In the past, the
Company has relied upon its available working capital lines and institutional
investors to fund operational cash flow, when needed. This decrease is primarily
due to a concerted effort to reduce inventory levels by $4.5 million and an
improvement in the accounts receivable DSO (days sales outstanding) from 50 to
42 or $1.5 million, partially offset by an increase in short-term borrowing of
$1.0 million.
Net cash decreased from $5.0 million in 2004 to $3.6 million 2005
primarily as the result of the effect of the net loss in 2005 of $6.4 million
versus a net income of $1.5 million in 2004. The decrease in cash due to the net
loss in 2005 was partially offset by significant reductions in inventory levels
and accounts receivable balances as aforementioned above.
Net cash used in operating activities was $561,000 in 2005 compared to
net cash provided from operating activities of $380,000 in 2004. The decrease
resulted primarily from the decrease in net income partially offset by the
reductions on inventory and accounts receivable.
Net cash used in investing activities, representing purchases of capital
expenditures, was $1,681,000 in 2005 and $1,759,000 in 2004. The continued
spending on capital expenditure is due to the facility expansion in the Florida
and German manufacturing locations and replacement manufacturing equipment.
Net cash from financing activities in 2005 and 2004 of $981,000 and
$496,000 relates primarily to the proceeds from revolving credit arrangements to
finance the expansion program in Germany, partially offset by the repayments of
long-term debt.
The Company's future minimum commitments and obligations under current
operating leases for its offices and manufacturing facilities in the U.S. and
Germany, as well as several leases related to office equipment and automobiles
through 2009 total $3,340,000. The Company considers these commitments and
obligations to be reasonable in order to maintain the current and future
business requirements.
The following table summarizes the Company's contractual obligations as
of September 30, 2005:
------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands) Total 2006 2007 2008 2009 2010
------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Long-term debt $ 814 $ 184 $ 197 $ 433 $ 0 $ 0
------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Operating lease obligations $ 3,340 $ 1,064 $ 787 $ 632 $ 557 $ 300
------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
19
The Company maintains current working capital credit lines totaling 1.5
million euros (approximately $1.8 million) with three German banks and a $1.0
million credit line with a U.S. bank. At September 30, 2005 the Company had no
borrowings against these lines. There are no covenants on the credit lines and
senior and equipment debt. The Company's ability to generate positive
operational cash flow is dependent upon increasing processing revenue through
increased recoveries by tissue banks in the U.S. and Europe, and the development
of additional markets and surgical applications for its products worldwide.
While the Company believes that it continues to make progress in both these
areas, there can be no assurances that changing governmental regulations will
not have a material adverse effect on results of operations or cash flow.
The Company may seek additional financing to meet the needs of its
long-term strategic plan. The Company can provide no assurance that such
additional financing will be available, or if available, that such funds will be
available on favorable terms.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the United States and in Germany the Company is exposed to interest
rate risk. Changes in interest rates affect interest income earned on cash and
cash equivalents and interest expense on revolving credit arrangements. The
Company does not enter into derivative transactions related to cash and cash
equivalents or debt. Accordingly, we are subject to changes in interest rates.
Based on September 30, 2005 cash and cash equivalents and long-term debt, a 1%
change in interest rates would have a negligible impact on our results of
operations.
The value of the U.S. dollar affects our financial results. Changes in
exchange rates may positively or negatively affect revenues, gross margins,
operating expenses and net income. The Company does not maintain hedging
programs to mitigate the potential exposures of exchange rate risk. Accordingly,
the results of operations are adversely affected by the weakening of the U.S.
dollar against the Euro, since certain products are manufactured and imported
form the Company's wholly owned subsidiary in Germany. Because of the foregoing
factors, as well as other variables affecting the operating results, past
financial performance should not be considered a reliable indictor of future
performance.
ITEM 8. FINANCIAL STATEMENTS.
The information required by this Item is found immediately following the
signature page of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
The Company's principal executive officer and principal financial
officer evaluated the Company's disclosure controls and procedures (as defined
in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended) as of a date within 90 days before the filing of this annual report
(the "Evaluation Date"). Based on that evaluation, the principal executive
officer and principal financial officer of the Company concluded that, as of the
Evaluation Date, the disclosure controls and procedures, established by the
Company were adequate to ensure that information required to be disclosed by the
Company in reports that the Company files under the Exchange Act, is recorded,
processed, summarized and reported on a timely basis in accordance with
applicable rules and regulations. There have been no significant changes in
internal controls or in other factors that could significantly affect internal
controls
20
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
ITEM 9B. OTHER INFORMATION.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names and ages of the directors and
executive officers of the Company (each, a "Director" and/or "Officer"), the
positions and offices that each Director and Officer held with the Company, and
the period during which each served in such positions and offices. Each Director
serves for a term of one (1) year, until his successor is duly elected and
qualified.
TABLE OF DIRECTORS AND EXECUTIVE OFFICERS
-------------------------------- -------- ---------------------------------- ----------------------------
NAME AGE POSITIONS/OFFICES PERIOD SERVED IN
OFFICE/POSITION
-------------------------------- -------- ---------------------------------- ----------------------------
G. Russell Cleveland 67 Director 1997 - present
-------------------------------- -------- ---------------------------------- ----------------------------
Roy D. Crowninshield, Ph.D. 57 Chairman of the Board July 2004 - present
Director 2003 - present
Interim CEO July 2004 - December 2004
-------------------------------- -------- ---------------------------------- ----------------------------
Neal B. Freeman 65 Director June 2005 - present
-------------------------------- -------- ---------------------------------- ----------------------------
J. Harold Helderman, MD 60 Director 1997 - present
-------------------------------- -------- ---------------------------------- ----------------------------
Udo Henseler, PH.D. 65 Director June 2005 - present
-------------------------------- -------- ---------------------------------- ----------------------------
Manfred K. Kruger 59 President, International January 2005 - present
President July 1999 - December 2004
Chief Executive Officer December 1999 - June
2004
Chief Operating Officer July 1999 - December 2004
Director June 1997 - March 2005
-------------------------------- -------- ---------------------------------- ----------------------------
George Lombardi 62 Chief Financial Officer, 1998 - present
Treasurer and Secretary
-------------------------------- -------- ---------------------------------- ----------------------------
Guy L. Mayer 54 Chief Executive Officer January 2005 - present
Director January 2005 - present
-------------------------------- -------- ---------------------------------- ----------------------------
Adrian J. R. Smith 61 Director June 2005 - present
-------------------------------- -------- ---------------------------------- ----------------------------
Carlton E. Turner, Ph.D. 65 Director 2000 - present
-------------------------------- -------- ---------------------------------- ----------------------------
The following is a summary of the business experience of each of the Company's
Officers and Directors listed in the above-referenced table, and of certain
other significant employees of the Company, during the past five (5) years.
21
OFFICERS AND DIRECTORS
G. RUSSELL CLEVELAND is the President, Chief Executive Officer, sole
Director, and majority shareholder of Renaissance Capital Group, Inc.
("Renaissance"). He is also President, Chief Executive Officer, and a director
of Renaissance Capital Growth & Income Fund III, Inc. Mr. Cleveland is a
Chartered Financial Analyst with more than thirty-five (35) years experience as
a specialist in investments for smaller capitalization companies. A graduate of
the Wharton School of Business, Mr. Cleveland has served as President of the
Dallas Association of Investment Analysts. Mr. Cleveland currently serves on the
Boards of Directors of Renaissance U.S. Growth & Income Trust PLC, Cover-All
Technologies, Inc., Digital Recorders, Inc., Integrated Security Systems, Inc.,
and Camino-Soft, Inc. and Precis, Inc.
ROY D. CROWNINSHIELD, PH.D. is the current Chairman of the Board. From
July 2004 to December 2004, Dr. Crowninshield was the Interim Chief Executive
Officer of the Company. Prior to joining Tutogen, Dr. Crowninshield served
twenty-one (21) years in various capacities at Zimmer Holdings, Inc., including
President of Zimmer's U.S. operations and most recently as the Company's Chief
Scientific Officer. Prior to joining Zimmer, Inc. in 1983, he was a faculty
member at the University of Iowa where he led many research projects evaluating
the function of total joint implants. He currently holds academic appointments
as a professor in the Orthopedic Surgery Department at Rush Medical College in
Chicago, Illinois and as an adjunct professor in the College of Engineering of
the University of Notre Dame. He holds undergraduate and doctorate degrees from
the University of Vermont. He has worked in the orthopedic industry for over
twenty (20) years and has extensive experience in the research and development,
manufacture, and clinical investigation of orthopedic implants. He has authored
more than 100 journal articles, book chapters, and published abstracts in
orthopedics and engineering.
NEAL B. FREEMAN is the Chairman and CEO of The Blackwell Corporation
(since 1981), an advisory firm, with clients in the communications, defense and
wealth management industries. He is also Chairman of the Foundation Management
Institute; Chairman of the Board of Advisors of the investment advisory firm,
Train Babcock Advisors and Director of North American Management Corp.
J. HAROLD HELDERMAN, MD is Dean of Admissions and Professor of Medicine,
Microbiology and Immunology, since 1999, at Vanderbilt University, Nashville,
Tennessee, and is the Medical Director of the Vanderbilt Transplant Center since
1989. Dr. Helderman received his MD from the State University of New York,
Downstate Medical Center in 1971, Summa Cum Laude. In addition to book and
monograph writings, he has authored more than 125 publications in his field of
transplant medicine. Dr. Helderman is past President of the American Society of
Transplantation.
UDO HENSELER, PH.D., is presently acting as the principal/owner of MSI
Management Services International (first activated 1994) and serves currently on
the Board of Directors of the public companies of eGene, Inc., Spire Corporation
and Tutogen Medical, Inc. From 2002 to July 2005 Dr. Henseler was CEO, Director
and Chairman of eGene, Inc., a public biotechnology company. From 1999 to June
2002, Dr. Henseler was a Director and from June 2001 to March 2002, he was the
Executive Vice President, Director and CFO of ChemoKine Therapeutics
Corporation. From 2000 to June 2001, he was the Senior Vice President and CFO of
Isotag Technology, Inc., a biotechnology Company. Dr. Henseler has extensive
global public company leadership experience with approximately 40 years of
combined service as: VP and CFO of the biotechnology Qualicon Inc., a DuPont
company; Director, Senior VP and CFO of the Pharmaceutical Andrx Inc.; VP and
CFO of Genetic Systems Corp.; Chair Executive Committee, VP and CFO of Coulter
Corporation (life Sciences); group Finance Chief at Beckman, Inc.
(life-sciences). Dr. Henseler earned his B.A. in Germany, and Master's and Ph.D.
degrees from the Claremont Graduate University in Claremont, California. Dr.
Henseler is also a Certified Public Accountant.
MANFRED K. KRUGER is the Company's President, International Operations.
He joined the Company in June 1997 as General Manager of the Company's German
subsidiary. In that capacity, he was responsible for all scientific research and
development, production, and distribution and sales. In February 1999, he
22
became Chief Operating Officer and a member of the Company's Board of Directors.
On July 1, 1999 he was appointed President of the Company. Prior to joining the
Company, Mr. Kruger was Executive Vice President of Fresenius Critical Care
International, a division of Fresenius Medical Care, AG. Prior to Fresenius, Mr.
Kruger held management positions with Squibb Medical Systems and American
Hospital Supply.
GEORGE LOMBARDI is the Company's Chief Financial Officer, Treasurer and
Secretary. He joined the Company in March 1998. Mr. Lombardi was the Vice
President, Chief Financial Officer of Sheffield Pharmaceuticals, Inc., a
publicly held (AMEX) development stage pharmaceutical/biotech Company. Before
that, he was the CFO and Director of Fidelity Medical, Inc. and a Senior
Financial Executive for the New Jersey and New England Operations of National
Health Laboratories, Inc. Prior to this, Mr. Lombardi held Senior Financial
positions at the Boehringer Ingelheim Pharmaceutical Company and the Revlon
Healthcare Group in New York. Mr. Lombardi is a CPA certified in the state of
New Jersey and has a degree in accounting from Fairleigh Dickinson University.
GUY MAYER is the Company's CEO. Prior to Tutogen, Guy served as Chairman
and CEO of Visen Medical (from 2003 to 2004), a private Biotech company focused
on Molecular Imaging technologies and prior to Visen (from 2000 to 2003), as
President and CEO of ETEX Corporation, a private biomedical company based in
Cambridge, MA. For 13 years prior to joining ETEX, Mr. Mayer held various senior
positions at Zimmer Inc., then a division of Bristol Myers Squibb, with sales in
excess of $1.2 billion. Mr. Mayer's positions at Zimmer included President
Global Products Group, President Orthopedics Implant division, President Zimmer
Japan and Sr. Vice President Zimmer International. Prior experience includes
general management positions with Picker International in diagnostic imaging,
and American Hospital Supply Corporation. Guy is a 1974 Graduate of the
University of Ottawa and currently serves on the Board of Directors of several
public and private companies.
MR. ADRIAN J.R. SMITH is CEO of The Woolton Group, since 1997, and a
Non-Executive Director of Carter & Carter Group plc, since 2002), a UK company
providing learning solutions and outsource services to large corporate
organizations. His business career includes 13 years in the professional
services industry and 26 years with two Fortune 500 companies. He has been a
Global Managing Partner, Marketing & Communication at Deloitte & Touche, the CEO
of Grant Thornton LLP, and a Managing Partner at Arthur Andersen in the early to
mid-1990's. He held senior international management roles with Ecolab Inc. and
also with Procter & Gamble. He serves on the board of Harbor Branch
Oceanographic Institution, and the Education Foundation of Indian River County
in Florida.
CARLTON E. TURNER, PH.D., D.SC. has been the President and Chief
Executive Officer of Carrington Laboratories, Inc. ("Carrington") (NASDAQ: CARN)
since April 1995. Carrington is a research-based pharmaceutical and medical
device company in the field of wound care products. Dr. Turner has also served
as the Chief Operating Officer from November 1994 to April 1995 and as the
Executive Vice President of Scientific Affairs from January 1994 to November
1994 at Carrington. Before that, he was the President, Chief Operating Officer
and Founder of Princeton Diagnostic Laboratories of America from 1987 to 1993.
From 1981 to 1987 he was an Assistant to President Ronald Reagan with Cabinet
Rank and Director of the White House Drug Policy Office. Previously, he was a
Research Professor and Director of the Research Institute of Pharmacological
Science, University of Mississippi.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The Company believes that the reporting requirements, under Section
16(a) of the Exchange Act, for all its executive officers, directors, and each
person who is the beneficial owner of more than 10% of the common stock of a
company were satisfied.
23
COMMITTEES OF THE BOARD OF DIRECTORS
Compensation Committee. The Compensation Committee is composed of Dr.
Helderman, Dr. Turner and Mr. Freeman, and is chaired by Dr. Turner. This
Committee approves, administers and interprets our compensation and benefit
policies, including our executive bonus programs. It reviews and makes
recommendations to our board of directors to ensure that our compensation and
benefit policies are consistent with our compensation philosophy and corporate
governance principles. This Committee is also responsible for establishing our
CEO's compensation.
Audit Committee. The Audit Committee is composed of Messrs. Cleveland,
Smith and Dr. Henseler and is chaired by Mr. Cleveland. This Committee has
general responsibility for the oversight and surveillance of our accounting,
reporting and financial control practices. Among other functions, the Committee
retains our independent public accountants. Each member of the Committee is a
non-management director. All members of the Audit Committee are considered to be
"financial experts" within the definition of that term under the regulations of
the Securities Act.
Nominating Committee. The Nominating Committee is composed of Messrs
Smith, Freeman, Dr. Helderman, and Dr. Henseler and is chaired by Dr. Helderman.
This committee nominates directors for election by the board or by stockholders
and nominates directors for membership on the committees of the board.
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION OF DIRECTORS
The Company's outside Directors each receive a $6,000 annual retainer,
$1,500 per in-person attendance at Board and Committee meetings, $500 per
telephonic meetings, plus reimbursement of out-of-pocket expenses.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation awarded to, or paid to
all persons who have served as Chief Executive Officer and other officers or
individuals whose compensation exceeded $100,000 for this period.
24
SUMMARY COMPENSATION TABLE
---------------------------- ------- --------------------------------------- ---------------------------------- ---------------
Annual Compensation Long Term Compensation
---------------------------- ------- --------------------------------------- ---------------------------------- ---------------
Awards Payouts
---------------------------- ------- ------------ ----------- -------------- ------------------------ --------- ---------------
Other Restricted Securities
Annual Stock Underlying LTP All Other
Name And Principal Fiscal Salary Bonus Compensation Award(s) Options Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) (1)($)
---------------------------- ------- ------------ ----------- -------------- ----------- ------------ --------- ---------------
Guy L. Mayer (2) 2005 225,000 24,300 0 0 300,000 0 0
Chief Executive Officer
Roy D. Crowninshield (2) 2005 21,000 0 0 0 0 0 0
Chief Executive Officer 2004 21,000 0 0 0 100,000 0 0
Manfred K. Kruger 2005 391,000 34,700 0 0 0 0 77,700
President, International 2004 428,550 0 0 0 0 0 67,600
Operations 2003 352,500 179,700 0 0 37,500 0 76,900
George Lombardi 2005 166,500 20,500 0 0 0 0 0
Chief Financial Officer 2004 166,500 0 0 0 0 0 0
Treasurer and Secretary 2003 160,125 67,500 0 0 20,000 0 0
Dr. Karl Koschatzky 2005 148,700 13,100 0 0 0 0 51,100
Vice President of 2004 140,000 0 0 0 0 0 39,100
R & D Worldwide 2003 107,600 32,400 0 0 45,000 0 28,800
---------------------------- ------- ------------ ----------- -------------- ----------- ------------ --------- ---------------
(1) Includes pension and automobile leasing and other automobile related
expenses.
(2) Dr. Crowninshield was appointed Chairman and interim Chief Executive
Officer on July 1, 2004. As CEO of the Company, Dr. Crowninshield
devoted at least one-third of his time on Company affairs for which he
was compensated at the rate of $7,000 per month and was granted options
to purchase 100,000 shares of the Company's common stock. Dr.
Crowninshield resigned as the interim Chief Executive Officer on
December 31, 2005, but retained his current position as Chairman of the
Company. Dr. Crowninshield was replaced by Mr. Mayer on January 1, 2005.
EMPLOYMENT AGREEMENTS
On December 6, 2004, the Company entered into an employment agreement
with Mr. Guy W. Mayer to serve as Chief Executive Officer (CEO) of the Company,
commencing January 1, 2005. The term of employment is indefinite and terminates
upon written notice by the Company, notice of termination by Mr. Mayer or
termination of employment for cause. Minimum notice of termination by the
Company, except for cause, is one (1) year from the end of any calendar quarter.
Mr. Mayer's current annual base salary is $315,000. In addition, the employment
agreement provides for a bonus for the balance of the Company's fiscal year 2005
in an amount up to 90% of his earned salary for fiscal 2005, subject to the
Company realizing certain performance goals based on revenue and operating
income. In addition, Mr. Mayer was granted a ten (10) year option, upon
commencement of employment, to purchase 250,000 shares of the Company's common
stock, exercisable at the market price on the date of grant, 25% on the date of
grant and 25% on each of the first three (3) anniversaries.
The Company has an employment agreement with Manfred Kruger, its
President, International Operations. Pursuant to that agreement, the term of Mr.
Kruger's employment with the Company commenced on June 16,1997. The agreement is
for an indefinite period and shall terminate upon written notice by the Company,
notice of his election to terminate, or the Company terminates his employment
for cause. Minimum notice of termination by the Company, except for cause, is
one year from the end of a calendar quarter. Mr. Kruger's annual base salary
commencing April 1, 2005 is currently $320,000. In addition, the employment
agreement provides for an annual bonus in an amount up to 35% of his annual base
salary, subject to the satisfaction of reasonable performance goals established
by the board. In addition, Mr. Kruger has a "change of control" agreement
whereby he is entitled to 12 months salary in the event he is terminated as the
result of a change of control of the Company.
The Company has a severance agreement with George Lombardi, its Chief
Financial Officer, Treasurer and Secretary. Pursuant to that agreement, upon
written notice of his termination at least six weeks
25
before a calendar quarter, the Company will provide six months salary including
medical and 401(K) benefits. Mr. Lombardi's annual base salary is currently
$166,500. The Company also provides an annual bonus in an amount up to 30% of
his annual base salary, subject to the satisfaction of reasonable performance
goals established by the board. In addition, Mr. Lombardi has a "change of
control" agreement whereby he is entitled to 12 months salary including medical
benefits in the event he is terminated as the result of a change of control of
the Company.
STOCK OPTION PLANS
The Company has a 1996 Incentive and Non-Statutory Stock Option Plan
(the "1996 Plan") to attract, maintain and develop management by encouraging
ownership of the Company's Common Stock by Directors, Officers and other key
employees. The following is a summary of the provisions of the 1996 Plan. This
summary is qualified in its entirety by reference to the 1996 Plan, a copy of
which may be obtained from the Company.
The 1996 Plan authorizes the granting of both incentive stock options,
as defined under Section 422 of the Internal Revenue Code of 1986 ("ISO"), and
non-statutory stock options ("NSSO") to purchase Common Stock. All employees of
the Company and its affiliates are eligible to participate in the 1996 Plan. The
1996 Plan also authorizes the granting of NSSOs to non-employee Directors and
consultants of the Company. Pursuant to the 1996 Plan, an option to purchase
10,000 shares of Common Stock shall be granted automatically to each outside
Director who is newly elected to the Board. In addition, an option to purchase
2,500 shares of Common Stock shall be granted automatically, on the date of each
annual meeting of shareholders of the Company, to each outside Director who has
served in that capacity for the past six months and continues to serve following
such meeting. Any outside Director may decline to accept any option granted to
him under the 1996 Plan.
The Board of Directors or the Compensation and Stock Option Committee is
responsible for the administration of the 1996 Plan and determines the employees
to which options will be granted, the period during which each option will be
exercisable, the exercise price, the number of shares of the Common Stock
covered by each option, and whether an option will be a non-qualified or an
incentive stock option. The exercise price, however, for the purchase of shares
subject to such an option, cannot be less than 100% of the fair market value of
the Common Stock on the date the option is granted. The Stock Option Committee
has no authority to administer or interpret the provisions of the 1996 Plan
relating to the grant of options to outside Directors. The current members of
the Compensation and Stock Option committee are Dr. Turner, Dr. Helderman and
Mr. Freeman.
No option granted pursuant to the 1996 Plan is transferable otherwise
than by will or the laws of descent and distribution. The term of each option
granted to an employee under the 1996 Plan is determined by the Board of
Directors or the Compensation and Stock Option Committee, but in no event may
such term exceed ten (10) years from the date of grant. Each option granted to
an outside Director under the 1996 Plan shall be exercisable in whole or in part
during the four (4) year period commencing on the date of the grant of such
option. Any option granted to an outside Director should remain effective during
the entire term, regardless of whether such Director continues to serve as a
Director. The purchase price per share of Common Stock under each option granted
to a Director will be the fair market value of such share on the date of grant.
The vesting period for options granted under the 1996 Plan are set forth
in an option agreement entered into with the optionee. Options granted to an
optionee terminate three (3) years after retirement. In the event of death or
disability, all vested options expire one (1) year from the date of death or
termination of employment due to disability. Upon the occurrence of a "change in
control" of the Company, the maturity of all options then outstanding under the
1996 Plan will be accelerated automatically, so that all such options will
become exercisable in full with respect to all shares that have not been
previously exercised or become
26
exercisable. A "change in control" includes certain mergers, consolidation, and
reorganization, sales of assets, or dissolution of the Company.
The 1996 Plan presently reserves 4,000,000 shares of the Company's
Common Stock for issuance thereunder. As of September 30, 2005, options have
been issued for 3,451,697 shares and 548,303 shares remain available under the
1996 Plan. Unless sooner terminated, the 1996 Plan will expire on February 27,
2006.
OPTIONS GRANTED IN FISCAL YEAR 2005
The following table provides information as to options granted to the
Company's Chief Executive Officer during the fiscal year ended September 30,
2005. All such options were granted under the Company's 1996 Stock Option Plan.
----------------------- ------------------- ---------------- ------------- ------------------ --------------------------
Potential Realizable
Value at Assumed
Number of Annualized Rates of
Securities Percent of Stock Price Appreciation
Underlying Total Exercise or for Option Term (1)
Options Granted Options Granted Base Price Expiration 5% 10%
(#) To Employees ($/Sh) Date ----- -----
----------------------- ------------------- ---------------- ------------- ------------------ --------------------------
Guy L. Mayer 250,000 40.2% $2.60 January 3, 2015 $547,000 $604,000
50,000 8.0% $4.17 September 26, 2015 $ 30,900 $42,300
----------------------- ------------------- ---------------- ------------- ------------------ --------------------------
(1) Potental realizable value is based on the assumption that the Common
Stock appreciates at the annual rate shown (compounded annually) from
the due date of grant until the expiration of the option term. These
numbers are calculated based on the requirements of the SEC and do not
reflect the Company's estimate of future price growth.
The following table sets forth the value of the unexercised options at
September 30, 2005. No options were exercised during this fiscal year. The
market price of the Company's common stock at September 30, 2005 was $4.56.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
------------------------------------ ------------------------------------ ------------------------------------
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
Name September 30, 2005 September 30, 2005
------------------------------------ ------------------------------------ ------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------------------------------ ------------------ ----------------- ------------------ -----------------
Guy L. Mayer 75,000 225,000 $ 127,375 $ 382,125
------------------------------------ ------------------ ----------------- ------------------ -----------------
Manfred K. Kruger 590,625 9,375 $ 1,363,600 $ 12,094
------------------------------------ ------------------ ----------------- ------------------ -----------------
George Lombardi 213,000 5,000 $ 542,475 $ 9,450
------------------------------------ ------------------ ----------------- ------------------ -----------------
Dr. Karl Koschatzky 104,168 22,500 $ 258,087 $ 28,350
------------------------------------ ------------------ ----------------- ------------------ -----------------
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Dr. Turner, Dr. Helderman and Mr.
Freeman. There are no "interlocks" as defined by the SEC with respect ot any
member of the committee.
27
COMPENSATION COMMITTEE REPORT
The following Report of the Compensation Committee and the information
under the heading Performance Graph below shall not be deemed incorporated by
reference by any general statement incorporating by reference into any filing
under the Securities Act of 1933 or under the Securities Exchange Act of 1934
together, the "Acts"), except to the extent that the Company specifically
incorporates the information by reference, and shall not otherwise be deemed
filed uner the Acts.
The Compensation Committee oversees the Company's compensation program.
The goals of the Company's compensation program are to attract, retain, motivate
and reward highly qualified management personnel and to provide them with
long-term career opportunities. The Company's compensation philosophy is to
provide its executives with a competitive total compensation package which
motivates superior job performance, the achievement of the Company's business
objectives, and the enhancement of shareholder value.
Compensation of the Company's executive officers is reviewed annually by
the Board of Directors and the Compensation Committee. Changes proposed for
these employees are evaluated and approved by the Compensation Committee on an
individual basis. The Company's general approach to compensating executive
officers is to pay cash salaries which generally are competitive within ranges
of salaries paid to executives of other similar companies, although the Company
does not attempt to meet salary levels of such companies. Instead, the Committee
sets overall compensation at a level it believes to be fair, based upon a
subjective analysis of the individual executive's experience and past and
potential contributions to the Company. The Committee also establishes bonus
goals for executive officers so as to compensate them on a performance basis. To
assist in determining appropriate overall compensation, the Compensation
Committee also reviews information regarding the Company's revenues and income.
Stock option grants to employees of the Company, including the Chief
Executive Oficer, are made at the discretion of the Compensation Committee
pursuant to the Company's 1996 Stock Option Plan. Factors and criteria to be
used by the Committee in the award of stock options include individual
responsibilities, individual prerformenace and direct and indirect contributions
to the profitability performance and direct and indirect contributions to the
profitability of the Company.
Respectfully submitted,
The Compensation Committee
Dr. Carlton E. Turner, Chairman
Dr. J. Harold Helderman
Neal B. Freeman
PERFORMANCE GRAPH
The following graph shows a comparison of cumulative five (5) year total
stockholder returns for the Company's Common Stock, with the cumulative return
of the Nasdaq Stock Market - U.S. Index and an industry peer group. The industry
peer group of companies selected by the Company is made up of the Company's
publicly held competitors in the Medical Device industry. The graph assumes the
investment of $100 on August 17, 2000, the date on which trading commenced on
the American Stock Exchange. The comparisons reflect in the table and graph,
however, are not intended to forcast the future performance of the Common Stock
and may not be indicative of such future performance.
28
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG TUTOGEN MEDICAL INC.,
AMEX MARKET INDEX AND PEER GROUP INDEX
[PERFORMANCE GRAPH]
ASSUMES $100 INVESTED ON SEPT. 30, 2000
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING SEPT. 30, 2005
Note: Assumes $100 invested on August 17, 2000 assumes dividends reinvested.
COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS
-------------- FISCAL YEAR ENDING ----------------
COMPANY/INDEX/MARKET 9/30/00 9/30/01 9/30/02 9/30/03 9/30/04 9/30/05
TUTOGEN MEDICAL INC 100.00 40.85 48.34 86.81 50.89 77.62
NASDAQ MEDICAL DEVICE 100.00 97.71 91.18 123.43 143.36 162.71
AMEX MARKET INDEX 100.00 74.98 81.46 100.67 116.21 140.67
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of November 30, 2005, by
(i) each person known to the Company to own beneficially more than 5% of its
Common Stock, (ii) each director and executive officer of the Company, and (iii)
all directors and executive officers as a group. As of November 30, 2005, there
were approximately 15,950,460 shares of Common Stock issued and outstanding.
-------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS AMOUNT AND NATURE PERCENTAGE
OF BENEFICIAL OWNER OF BENEFICIAL OWNER (1)(2) OF CLASS (3)
-------------------------------------------------------------------------------------------------------------
SPV 1996 LP............................................... 1,896,794 11.90%
101 Finsbury Pavement
London, England
EC2A 1EJ
Zimmer CEP (formerly Centerpulse) USA Holding Co.......... 5,297,124 33.25%
Subsidiary of Zimmer Holdings, Inc.
345 East Main Street
Warsaw, IN 46580
29
G. Russell Cleveland (4).................................. 99,800 *
Roy D. Crowninshield (5).................................. 47,500 *
Neal B. Freeman (7)....................................... 20,000 *
Dr. J. Harold Helderman (8)............................... 102,500 *
Udo Henseler, Ph.D (6).................................... 10,000 *
Dr. Karl Koschatsky (6)................................... 107,918 *
Manfred K. Kruger (6)..................................... 590,625 3.57%
George Lombardi (6)....................................... 215,000 1.33%
Guy L. Mayer (6).......................................... 75,000 *
Adrian J. R. Smith (6).................................... 10,000 *
Carlton E. Turner (6)..................................... 42,500 *
All directors and officers as a group (11 persons)........ 1,321,343 7.71%
* Less than 1%
1 In accordance with Rule 13d-3 promulgated pursuant to the Exchange Act,
a person is deemed to be the beneficial owner of the security for
purposes of the rule if he or she has or shares voting power or
dispositive power with respect to such security or has the right to
acquire such ownership within sixty days. As used herein, "voting power"
is the power to vote or direct the voting of shares and "dispositive
power" is the power to dispose or direct the disposition of shares,
irrespective of any economic interest therein.
2 Except as otherwise indicated by footnote, the persons named in the
table have sole voting and investment power with respect to all of the
common stock beneficially owned by them.
3 In calculating the percentage ownership for a given individual or group,
the number of shares of common stock outstanding includes unissued
shares subject to options, warrants, rights or conversion privileges
exercisable within sixty days after November 30, 2005 held by such
individual or group.
4 Includes 42,500 shares of common stock issuable upon exercise of options
exercisable within sixty (60) days. Mr. Cleveland is the President and
majority shareholder of Renaissance Capital Group, Inc. His business
address is 8080 N. Central Expressway, Suite 210-LB 59, Dallas, TX
75206.
5 Includes 27,500 shares of common stock issuable upon exercise of options
and warrants exercisable within sixty (60) days.
6 All of the shares of common stock beneficially owned by Messrs.
Henseler, Koschatzky, Kruger, Lombardi, Mayer, Smith and Turner are
derivative securities issuable upon exercise of options exercisable
within sixty (60) days.
7 Includes 10,000 of common stock issuable upon exercise of options and
warrants exercisable within sixty (60) days.
8 Includes 82,500 of common stock issuable upon exercise of options and
warrants exercisable within sixty (60) days.
30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has an exclusive license and distribution agreement with
Zimmer Spine, a wholly owned subsidiary of Zimmer Holdings, Inc., whereby Zimmer
Spine has been granted the right to act as the Company's exclusive distributor
of bone tissue for spinal applications in the United States. For the year ended
September 30, 2005, Spine revenues were $3.3 million.
The Company has also engaged Zimmer Dental, a wholly owned subsidiary of
Zimmer Holdings, Inc., to act as an exclusive distributor for the Company's bone
tissue for dental applications in the United States and certain international
markets. For the year ended September 30, 2005, Zimmer Dental was paid
commissions aggregating approximately $6.1 million on revenues of $13.8 million.
Zimmer CEP (formerly Centerpulse) USA Holding Co. is the owner of
approximately 33.3% of the Company's outstanding shares of Common Stock.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table represents the aggregate fees billed for
professional audit services rendered to the Company by Deloitte & Touche, LLP
for the audit of the Company's annual financial statements for the years ended
September 30, 2005 and 2004, and all fees billed for other services by Deloitte
& Touche LLP during those periods:
------------------------------------- -- ------------- -- -------------
Year Ended September 30, 2005 2004
------------------------------------- -- ------------- -- -------------
------------------------------------- -- ------------- -- -------------
Audit fees (1) $143,000 $105,500
------------------------------------- -- ------------- -- -------------
Audit-related fees (2) 55,000 27,900
------------------------------------- -- ------------- -- -------------
Tax fees (3) 4,000 3,100
------------------------------------- -- ------------- -- -------------
All other fees (4) - -
------------------------------------- -- ------------- -- -------------
Total Accounting Fees and Services $202,000 $136,500
------------------------------------- -- ------------- -- -------------
(1) AUDIT FEES. These are fees for professional services for the
audit of the Company's annual financial statements, and for the
review of the financial statements included in the Company's
filings on Form 10Q and for services that are normally provided
in connection with statutory and regulatory filings or
engagements.
(2) AUDIT-RELATED FEES. These are fees for the assurance and related
services reasonably related to the performance of the audit or
the review of the Company's financial statements.
(3) TAX FEES. These are fees for professional services with respect
to tax compliance, tax advice, and tax planning.
(4) ALL OTHER FEES. These are fees for permissible work that does
not fall within any of the other fee categories, i.e., Audit
Fees, Audit-Related Fees, or Tax Fees.
PRE-APPROVAL POLICY FOR AUDIT AND NON-AUDIT SERVICES
The Company's Audit Committee has responsibility for the approval of all
audit and non-audit services before the Company engages an accountant. All of
the services rendered to the Company by
31
Deloitte & Touche for the fiscal years ended September 30, 2005 and 2004 were
pre-approved by the Audit Committee before the engagement of the auditors for
such services.
The Company and the Audit Committee are working with the Company's legal
counsel to establish formal pre-approval policies and procedures for all future
engagements of the Company's accountants. In accordance with the rules and
regulations of the U.S. Securities and Exchange Commission relating to the
independence of auditors, the Company's new pre-approval policies and procedures
will be detailed as to particular services, will require that the Audit
Committee be informed of each service, and will prohibit the delegation of any
pre-approval responsibilities to the Company's management.
The Company's pre-approval policy will expressly provide for the annual
pre-approval of all audit, audit-related and all non-audit services proposed to
be rendered by the independent auditor for the fiscal year, as specifically
described in the auditor's engagement letter, such annual pre-approval to be
performed by the Audit Committee. The new policy will also provide that all
additional engagements of the auditor that were not approved in the annual
pre-approval process, and all engagements that are anticipated to exceed
previously approved thresholds, shall be presented by the President or Chief
Financial Officer of the Company to the Audit Committee for pre-approval, on a
case-by-case basis, before management engages the auditors for any such
purposes. The Audit Committee may be authorized to delegate, to one or more of
its members, the authority to pre-approve certain permitted services, provided
that the estimated fee for any such service does not exceed a specified dollar
amount.
All pre-approvals shall be contingent on a finding, by the Audit
Committee, or delegates thereof, as the case may be, that the provision of the
proposed services by the Company's auditor is compatible with the maintenance of
the auditor's independence in the conduct of its auditing functions. In no event
shall any non-audit related service be approved that would result in the
independent auditor no longer being considered independent under the applicable
rules and regulations of the Securities and Exchange Commission.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) INDEX TO EXHIBITS
3.2 Articles of Incorporation of Registrant.**
3.3 Articles of Amendment to Articles of Incorporation
Establishing Series A Preferred Stock.*
3.4 Articles of Amendment to Articles of Incorporation
Establishing Series B Preferred Stock.*
3.5 Articles of Amendment to Articles of Incorporation
Establishing Series C Preferred Stock.*
3.6 Articles of Amendment to Articles of Incorporation
Increasing the Number of Authorized Shares.*
3.7 Articles of Amendment to Articles of Incorporation
Amending the Terms of the Series C Preferred Stock.*
3.8 Articles of Amendment to Articles of Incorporation Effecting
Reverse Stock Split*
10.7 Employment Agreement between the Registrant and Manfred Kruger
dated June 9, 1997. *
10.9 Employment Agreement between the Registrant and Mr. Guy Mayer
dated December 6, 2004.***
14 Code of Ethics****
32
21 Subsidiaries of Registrant*
* Document incorporated by reference from previous Form 10-KSB
filings.
** Document incorporated by reference from Exhibit 2 of
Registration Statement, on Form 20-F, of American Biodynamics,
Inc., effective October 2, 1987.
*** Filed herewith.
**** Filed with the Company Form 10-K for the year ended September
30, 2004.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because they are not required or are
not applicable or because the information required to be set forth therein
either is not material or is included in the financial statements or notes
thereto.
REPORTS ON 8-K
Reference is made to the Company's Form 8-K reports, dated April
13, 2005 and June 8, 2005.
33
SIGNATURES
In accordance with the Section 13 or 15(d) of the Exchange Act of 1934,
the registrant has duly caused this report to be signed on behalf by the
undersigned, thereunto duly authorized.
Date December 21, 2005
TUTOGEN MEDICAL, INC.
/s/ Guy L. Mayer
----------------
Guy L. Mayer
Chief Executive Officer
/s/ George Lombardi
-------------------
George Lombardi
Chief Financial Officer, Treasurer and
Secretary
In accordance with the Exchange Act of 1934, this report has been signed
by the following persons on behalf of the registrant and in the capacities and
the dates indicated.
Signature Title Date
--------- ----- ----
/S/ G. RUSSELL CLEVELAND Director December 21, 2005
--------------------------------
G. Russell Cleveland
/S/ ROY D. CROWNINSHIELD Director December 21, 2005
--------------------------------
Roy D. Crowninshield
/S/ NEAL B. FREEMAN Director December 21, 2005
--------------------------------
Neal B. Freeman
/S/ J. HAROLD HELDERMAN Director December 21, 2005
--------------------------------
Dr. J. Harold Helderman
/S/ UDO HENSELER Director December 21, 2005
--------------------------------
Dr. Udo Henseler
/S/ GUY L. MAYER Director December 21, 2005
--------------------------------
Guy L. Mayer
/S/ ADRIAN J. R. SMITH Director December 21, 2005
--------------------------------
Adrian J. R. Smith
/S/ CARLTON E. TURNER Director December 21, 2005
--------------------------------
Carlton E. Turner
34
TUTOGEN MEDICAL, INC. AND
SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2005, 2004 and 2003
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Tutogen Medical, Inc. and Subsidiaries
West Paterson, New Jersey
We have audited the accompanying consolidated balance sheets of Tutogen Medical,
Inc. and subsidiaries (the "Company") as of September 30, 2005 and 2004, and the
related consolidated statements of (loss) income and comprehensive (loss)
income, stockholders' equity, and cash flows for each of the three years in the
period ended September 30, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
2005 and 2004, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 2005, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
December 8, 2005
New York, New York
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND 2004
(In Thousands)
------------------------------------------------------------------------------------------
2005 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,562 $ 5,063
Accounts receivable, net of allowance for doubtful
accounts of $462 in 2005 and $192 in 2004 3,473 4,922
Inventories - net 10,558 15,072
Deferred income taxes 695 425
Other current assets 623 1,409
---------- ----------
Total current assets 18,911 26,891
PROPERTY, PLANT AND EQUIPMENT - Net 6,612 6,138
DEFERRED INCOME TAXES 1,619 1,318
---------- ----------
TOTAL ASSETS $ 27,142 $ 34,347
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued expenses $ 6,273 $ 6,521
Accrued commissions 1,765 1,521
Short term borrowing 1,048 -
Current portion of deferred distribution fees 589 642
Current portion of long-term debt 184 173
---------- ----------
Total current liabilities 9,859 8,857
OTHER LIABILITIES:
Deferred distribution fees 1,925 2,580
Long-term debt 630 827
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY 14,728 22,083
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 27,142 $ 34,347
========== ==========
See notes to consolidated financial statements.
F-2
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME
YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003
(In Thousands, Except for Share Data)
----------------------------------------------------------------------------------------------------
2005 2004 2003
REVENUE $ 31,860 $ 29,330 $ 30,260
COST OF REVENUE 20,295 11,836 11,640
------------- ------------- -------------
Gross profit 11,565 17,494 18,620
------------- ------------- -------------
OPERATING EXPENSES:
General and administrative 5,371 4,203 4,482
Distribution and marketing 11,501 8,737 8,835
Research and development 1,659 1,432 826
Litigation contingency - (406) 657
------------- ------------- -------------
Total operating expenses 18,531 13,966 14,800
------------- ------------- -------------
OPERATING (LOSS) INCOME (6,966) 3,528 3,820
OTHER EXPENSE (96) (601) (368)
INTEREST EXPENSE (130) (118) (53)
------------- ------------- -------------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR
INCOME TAXES (7,192) 2,809 3,399
(BENEFIT OF) PROVISION FOR INCOME TAXES (571) 1,306 1,137
------------- ------------- -------------
NET (LOSS) INCOME (6,621) 1,503 2,262
COMPREHENSIVE (LOSS) INCOME:
Foreign currency translation adjustments (770) 2,167 1,006
------------- ------------- -------------
COMPREHENSIVE (LOSS) INCOME $ (7,391) $ 3,670 $ 3,268
============= ============= =============
AVERAGE SHARES OUTSTANDING FOR BASIC
(LOSS) EARNINGS PER SHARE 15,919,286 15,734,470 15,495,148
============= ============= =============
BASIC (LOSS) EARNINGS PER SHARE: $ (0.42) $ 0.10 $ 0.15
============= ============= =============
AVERAGE SHARES OUTSTANDING FOR DILUTED
(LOSS) EARNINGS PER SHARE 15,919,286 16,469,443 16,095,448
============= ============= =============
DILUTED (LOSS) EARNINGS PER SHARE: $ (0.42) $ 0.09 $ 0.14
============= ============= =============
See notes to consolidated financial statements.
F-3
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003
(IN THOUSANDS)
----------------------------------------------------------------------------------------------------------------------
2005 2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (6,621) $ 1,503 $ 2,262
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 984 760 611
Deferred distribution fees revenue (640) (640) (579)
Reserve for bad debts 175 (245) 250
Reserve for obsolescence 889 (953) 1,185
Deferred income taxes (571) 869 1,152
Changes in assets and liabilities:
Accounts receivable 1,239 969 (2,388)
Inventories 3,508 (1,824) (2,545)
Other current assets 798 (241) (637)
Accounts payable and other accrued expenses (566) (894) 2,750
Accrued commissions 244 1,076 (945)
---------- ---------- ----------
Net cash (used in) provided by operating activities (561) 380 1,116
---------- ---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of property and equipment (1,681) (1,759) (690)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 36 367 850
Proceeds from revolving credit arrangements 1,509 - 343
Repayment of revolving credit arrangements (400) - (343)
Proceeds from long-term borrowings - 224 -
Repayment of long-term debt (164) (95) (81)
---------- ---------- ----------
Net cash provided by financing activities 981 496 769
---------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (240) 897 771
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,501) 14 1,966
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,063 5,049 3,083
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,562 $ 5,063 $ 5,049
========== ========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE -
Interest paid $ 127 $ 118 $ 53
========== ========== ==========
Income taxes paid $ 149 $ 251 $ -
========== ========== ==========
See notes to consolidated financial statements.
F-4
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003
(In Thousands, Except for Share Data)
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED COMMON
COMMON ADDITIONAL OTHER SHARES
SHARES PAID-IN COMPREHENSIVE ACCUMULATED ISSUED AND
($.01 PAR) CAPITAL INCOME (LOSS) (1) DEFICIT TOTAL OUTSTANDING
BALANCE, OCTOBER 1, 2002 $ 152 $ 35,135 $ (925) $ (20,434) $ 13,928 15,158,110
Stock issued on exercise of options 5 845 - - 850 509,000
Net income - - - 2,262 2,262 -
Foreign currency translation adjustment - - 1,006 - 1,006 -
----- --------- ------- --------- -------- ------------
BALANCE, SEPTEMBER 30, 2003 157 35,980 81 (18,172) 18,046 15,667,110
Stock issued on exercise of options 2 365 - - 367 248,850
Net income - - - 1,503 1,503 -
Foreign currency translation adjustment - - 2,167 - 2,167 -
----- --------- ------- --------- -------- ------------
BALANCE, SEPTEMBER 30, 2004 159 36,345 2,248 (16,669) 22,083 15,915,960
Stock issued on exercise of options - 36 - - 36 17,000
Net loss - - - (6,621) (6,621) -
Foreign currency translation adjustment - - (770) - (770) -
----- --------- ------- --------- -------- ------------
BALANCE, SEPTEMBER 30, 2005 $ 159 $ 36,381 $ 1,478 $ (23,290) $ 14,728 15,932,960
===== ========= ======= ========= ======== ============
(1) Represents foreign currency translation adjustments.
See notes to consolidated financial statements.
F-5
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
--------------------------------------------------------------------------------
1. OPERATIONS AND ORGANIZATION
Tutogen Medical, Inc. with its consolidated subsidiaries (the "Company")
processes, manufactures and distributes worldwide, specialty surgical
products and performs tissue processing services for neuro, orthopedic,
reconstructive and general surgical applications. The Company's core
business is processing human donor tissue, utilizing its patented
Tutoplast(R) process, for distribution to hospitals and surgeons. The
Company processes at its two manufacturing facilities in Germany and the
United States and distributes its products and services to over 30
countries worldwide.
2. SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies of the Company are presented below.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
All intercompany transactions and balances are eliminated in
consolidation.
FOREIGN CURRENCY TRANSLATION - The functional currency of the Company's
German subsidiary is the Euro. Assets and liabilities of foreign
subsidiaries are translated at the period end exchange rate while
revenues and expenses are translated at the average exchange rate for
the year. The resulting translation adjustments, representing
unrealized, noncash losses are made directly to comprehensive income.
Gains and losses resulting from transactions of the Company and its
subsidiaries, which are made in currencies different from their own, are
included in income as they occur and are included in Other Expense
(Income) in the Consolidated Statements of Income and Comprehensive
Income. The Company recognized currency losses of $173, $700 and $350 in
2005, 2004 and in 2003, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of all current
assets and current liabilities approximates fair value because of their
short-term nature. The estimated fair value of all other amounts has
been determined by using available market information and appropriate
valuation methodologies. The carrying value of long-term debt
approximates fair value.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with a remaining maturity of three months or less
to be cash equivalents. For cash and cash equivalents, the carrying
amount approximates fair value due to the short maturity of those
instruments.
INVENTORIES - Inventories are valued at the lower of cost (weighted
average basis) or market. Work in process and finished goods includes
costs attributable to direct labor and overhead. Reserves for slow
moving and obsolete inventories are provided based on historical
experience and current product demand. The adequacy of these reserves
are evaluated quarterly.
F-6
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated
at cost. Depreciation is computed by using the straight-line method over
the following estimated useful lives of the assets:
Building and improvements 40 years
Machinery, equipment, furniture and fixtures 3-10 years
REVENUE AND COST OF REVENUE - Revenue includes amounts from surgical
products and related services and distribution fees. Cost of revenue
includes depreciation of $686, $311 and $404 for the years ended
September 30, 2005, 2004 and 2003, respectively. Revenue from surgical
products and related services is recognized upon the shipment of the
processed tissues and when services are performed. The Company's terms
of sale are FOB shipping point. Revenue from distribution fees includes
nonrefundable payments received as a result of exclusive distribution
agreements between the Company and independent distributors.
Distribution fees under these arrangements are recognized as revenue on
a straight-line basis over the contract period.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are
charged to operations as incurred.
EARNINGS PER SHARE - Basic earnings per share are computed by dividing
net income by the weighted-average number of common shares outstanding.
Diluted earnings per share are computed by dividing net income by the
sum of the weighted-average number of common shares outstanding plus the
dilutive effect of shares issuable through deferred stock units and the
exercise of stock options and warrants.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
TOTAL COMPREHENSIVE INCOME (LOSS) - The Company follows Statement of
Financial Accounting Standard ("SFAS") No. 130, REPORTING COMPREHENSIVE
INCOME (LOSS). Comprehensive income is defined as the total change in
shareholders' equity during the period other than from transactions with
shareholders, and for the Company, includes net income and cumulative
translation adjustments.
INCOME TAXES - Deferred taxes are provided for the expected future
income tax consequences of events that have been recognized in the
Company's financial statements. Deferred tax assets and liabilities are
determined based on the temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the temporary
differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to amounts,
which are more likely than not to be realized.
STOCK-BASED COMPENSATION - SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"), requires expanded disclosure of stock-based
compensation arrangements with employees and encourages (but does not
require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Corporations are permitted, however, to
continue to apply Accounting Principles Board ("APB") Opinion No. 25,
which recognizes compensation cost based on the intrinsic value of the
equity instrument awarded. The Company has continued to apply APB
Opinion No. 25 to its stock-based compensation awards to employees and
has disclosed the required pro forma effect on net income.
F-7
The FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which amends SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. (Under the
fair value based method, compensation cost for stock options is measured
when options are issued). In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and
more frequent disclosures in financial statements of the effects of
stock-based compensation. The Company adopted SFAS No. 148 beginning in
the second fiscal quarter of fiscal 2003 and such disclosures are
included as herein.
The following table reconciles net income and basic and diluted earnings
pre share (EPS), as reported, to pro-forma net income and basic and
diluted EPS, as if the Company had expensed the fair value of stock
options.
2005 2004 2003
---- ---- ----
Net (loss) income, as reported: ($6,621) $1,503 $2,262
Pro-forma expense as if stock options were
charged against net (loss) income 102 159 104
------- ------- -------
Pro-forma net (loss) income using the
fair value method ($6,723) $1,344 $2,158
======= ======= =======
Basic EPS:
As reported ($0.42) $0.10 $0.15
Pro forma using the fair value method ($0.42) $0.09 $0.14
Diluted EPS:
As reported ($0.42) $0.09 $0.14
Pro forma using the fair value method ($0.42) $0.08 $0.13
NEW ACCOUNTING PRONOUNCEMENTS - In December 2004, the Financial
Accounting Standards Board ("FASB") issued Statement 123R ("SFAS 123R"),
SHARE-BASED PAYMENT, that will require compensation costs related to
share-based payment transactions to be recognized in the financial
statements. On April 14, 2005, the compliance date for SFAS 123R was
extended. The Company will be required to comply with SFAS 123R for the
three months ended December 31, 2005. The Company is currently assessing
the impact of SFAS 123R on the results of operations or financial
position of the Company.
In March 2005, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 107, SHARE-BASED PAYMENT ("SAB No.
107"), which provides interpretive guidance related to the interaction
between SFAS No. 123R and certain SEC rules and regulations, as well as
provides the SEC staff"s views regarding the valuation of share-based
payment arrangements. The Company is currently assessing the impact of
SAB No. 107 on the results of operations or financial position of the
Company.
In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS, AN
AMENDMENT OF ARB NO. 43. SFAS No. 151 requires idle facility expenses,
freight, handling costs, and wasted material (spoilage) costs to be
excluded from the cost of inventory and expensed when incurred. It also
requires that allocation of fixed overheads to the costs of conversion
be based on the normal capacity of the production facilities. This
statement is effective for inventory costs incurred during fiscal years
F-8
beginning after June 15, 2005. The adoption of SFAS No. 151 is not
expected to have a material impact on the results of operations or
financial position of the Company.
EMPLOYEE SAVINGS PLAN - The Company maintains the Tutogen Medical, Inc.
401(k) Plan (the "Plan") for which all of the United States Employees
are eligible. The Plan requires the attainment of the age of 21 and a
minimum of six months of employment to become a participant.
Participants may contribute up to the maximum dollar limit set by the
Internal Revenue Service. The expenses incurred for the Plan were $57,
$73 and $55 in 2005, 2004 and 2003, respectively.
RECLASSIFICATION - Certain reclassifications have been made to the prior
financial statements to conform to the current presentation.
3. CONCENTRATION OF CREDIT RISK
The exposure to risk related to foreign currency exchange rate changes
is limited primarily to intercompany transactions. The Company currently
does not utilize forward exchange contracts or any other type of hedging
instruments.
The Company's principal concentration of credit risk consists of trade
receivables. Distribution of products and revenues is provided through a
broad base of independent distributors. Two customers accounted for 10%
and 8%, respectively, of consolidated revenue in 2005, while the same
two customers accounted for 13% and 9%, respectively of consolidated
revenue in 2004 and 17% and 13%, respectively in 2003. The 10% and 8%
customers had accounts receivable balances at September 30, 2005 of $6
and $3, respectively. There are no other customers accounting for
greater than 10% of consolidated revenue in 2005, 2004 and 2003. The
Company does not believe that this concentration of sales and credit
risks represents a material risk of loss with respect to the results of
operations or financial position.
4. INVENTORIES
Major classes of inventory at September 30, 2005 and 2004 were as
follows:
2005 2004
Raw materials $ 1,753 $ 2,171
Work in process 4,469 6,560
Finished goods 7,614 8,791
--------- ---------
13,836 17,522
Less reserves for obsolescence 3,278 2,450
--------- ---------
$ 10,558 $ 15,072
========= =========
F-9
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 2005 and 2004 consisted
of the following:
2005 2004
Land $ 495 $ 512
Buildings and improvements 3,835 3,876
Machinery and equipment 2,329 2,201
Office furniture and equipment 2,787 2,570
Construction-in-progress 883 472
--------- ---------
10,329 9,631
Less accumulated depreciation and amortization (3,717) (3,493)
--------- ---------
$ 6,612 $ 6,138
========= =========
The depreciation expense for the years ended September 30, 2005, 2004
and 2003 was $984, $760 and $611, respectively.
6. REVOLVING CREDIT ARRANGEMENTS
Under the terms of revolving credit facilities with three German banks,
all of which have no expiration, the Company may borrow up to Euros 1.5
million or approximately $1.8 million for working capital needs. These
renewable credit lines allow the Company to borrow at interest rates
ranging from 9.15% to 10.5%. At September 30, 2005, and 2004 the Company
had no borrowings under the revolving credit agreements.
The Company has a revolving credit facility in the U.S. for up to $1.0
million, expiring on January 1, 2006. At September 2005 and 2004, the
Company had no borrowings under this credit facility. The U.S. accounts
receivable and inventory assets secure the borrowing under the revolving
credit facility.
The Company has an interim loan of up to Euros 1.5 million or
approximately $1.8 million, at an annual interest rate of 5%, to finance
its facility expansion project in Germany. The interim loan will convert
to a long-term arrangement at the completion of approximately $1.8
million of funding, estimated to be no later than March 31, 2006. At
September 30, 2005, the Company had short-term borrowings of $1,048.
F-10
7. LONG-TERM DEBT
Long-term debt at September 30, 2005 and 2004 consisted of the
following:
2005 2004
Senior debt, 5.75% interest until March 30,
2008 when terms are renegotiable, due 2008 $ 651 $ 776
Equipment lease debt, 6.50% interest until
September 1, 2007 163 224
------ ------
814 1,000
Less current portion (184) (173)
------ ------
$ 630 $ 827
====== ======
Aggregate maturities of long-term debt are $184 in 2006; $197 in 2007;
$433 in 2008.
The Senior debt and one of the revolving credit facilities are with a
German bank and are secured by a mortgage on the Company's German
facility. The Senior debt is repayable in monthly installments through
2008. The debt has been incurred by the Company's German subsidiary but
is guaranteed by the parent company. There are no financial covenants
under this debt.
The Equipment lease debt is secured by a specific piece of equipment, a
walk-in freezer, located at the Company's Florida manufacturing
facility. The lease is payable in twelve quarterly installments of $21.
There are no financial covenants under this lease.
8. SHAREHOLDERS' EQUITY
STOCK - The authorized stock of the Company consists of 30,000,000
shares of Common Stock and 1,000,000 shares of Preferred Stock.
PREFERRED SHARE PURCHASE RIGHT - On July 17, 2002, the Board of
Directors of the Company declared a dividend distribution of one
Preferred Share Purchase Right for each outstanding share of its common
stock of record on July 31, 2002. The rights, which expire on July 30,
2012, are designed to assure that all of the Company's shareholders
receive fair and equal treatment in the event of any proposed takeover
of the Company. Each right will entitle its holder to purchase, at the
right's then current exercise price, a number of the Company's common
shares having a market value of twice such price.
STOCK OPTIONS - The Company maintains a 1996 Stock Option Plan (the
"Plan") (4,000,000 shares authorized) under which incentive and
nonqualified options have been granted to employees, directors and
certain key affiliates. Under the Plan, options may be granted at not
less than the fair market value on the date of grant. Options may be
subject to a vesting schedule and expire four, five or ten years from
grant.
Changes in outstanding options for the Plan were as follows:
F-11
Outstanding October 1, 2002 2,217,668 $ 2.44
Granted 452,500 2.91
Canceled (204,800) 3.33
Exercised (209,000) 1.81
----------
Outstanding September 30, 2003 2,256,368 2.52
Granted 225,000 3.98
Canceled (93,750) 4.45
Exercised (248,850) 1.47
----------
Outstanding September 30, 2004 2,138,768 2.72
Granted 622,000 2.99
Canceled (262,400) 4.03
Exercised (17,000) 2.17
---------- ------
Outstanding September 30, 2005 2,481,368 $ 2.64
========== ======
The following table provides information about stock options outstanding
at September 30, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -----------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED-
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING LIFE EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE AS OF 9/30/05 (IN YEARS) PRICE AS OF 9/30/05 PRICE
--------------
$0.94 to $1.25 299,600 3.9 $ 0.95 299,600 $ 0.95
$1.56 to $2.22 652,568 2.7 1.77 602,568 1.73
$2.40 to $3.62 1,051,500 6.5 2.83 637,375 2.91
$3.75 to $11.00 477,700 6.2 4.46 306,950 4.58
---------- ---- ------ ---------- ------
$0.94 to $11.00 2,481,368 5.1 $ 2.64 1,846,493 $ 2.48
========== ==== ====== ========== ======
The fair value of each option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected volatility of 47%, a risk-free
interest rate range of 2.26% to 3.12% and an expected life of four
years. A dividend yield of zero has been assumed. The weighted average
fair value of options granted during the years ended September 30, 2005,
2004 and 2003 was $2.99, $3.98 and $2.91 respectively.
9. SEGMENT DATA
The Company operates principally in one industry providing specialty
surgical products and tissue processing services. These operations
include two geographically determined segments: the United
F-12
States and Europe ("International"). The accounting policies of these
segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on the
operating income. The Company accounts for intersegment sales and
transfers at contractually agreed-upon prices.
The Company's reportable segments are strategic business units that
offer products and services to different geographic markets. They are
managed separately because of the differences in these markets as well
as their physical location.
A summary of the operations and assets by segment as of and for the
years ended September 30, 2005, 2004 and 2003 are as follows:
2005 INTERNATIONAL UNITED STATES CONSOLIDATED
Gross revenue $ 17,344 $ 21,752 $ 39,096
Less - intercompany (7,236) - (7,236)
-------- -------- --------
Total revenue - third party $ 10,108 $ 21,752 $ 31,860
======== ======== ========
Depreciation and amortization $ 615 $ 369 $ 984
======== ======== ========
Operating income (Loss) $ (782) $ (6,184) $ (6,966)
======== ======== ========
Interest expense $ 61 $ 69 $ 130
======== ======== ========
Net income (Loss) $ (845) $ (5,776) $ (6,621)
======== ======== ========
Capital expenditures $ 1,468 $ 213 $ 1,681
======== ======== ========
Identifiable assets $ 16,045 $ 11,298 $ 27,343
======== ======== ========
F-13
2004 INTERNATIONAL UNITED STATES CONSOLIDATED
Gross revenue $ 22,830 $ 17,126 $ 39,956
Less - intercompany (10,626) - (10,626)
-------- -------- --------
Total revenue - third party $ 12,204 $ 17,126 $ 29,330
======== ======== ========
Depreciation and amortization $ 506 $ 254 $ 760
======== ======== ========
Operating income $ 4,549 $ (1,021) $ 3,528
======== ======== ========
Interest expense $ 79 $ 39 $ 118
======== ======== ========
Net income $ 2,659 $ (1,156) $ 1,503
======== ======== ========
Capital expenditures $ 1,244 $ 515 $ 1,759
======== ======== ========
Identifiable assets $ 18,166 $ 16,181 $ 34,347
======== ======== ========
2003 INTERNATIONAL UNITED STATES CONSOLIDATED
Gross revenue $ 18,079 $ 21,168 $ 39,247
Less - intercompany (8,987) - (8,987)
-------- -------- --------
Total revenue - third party $ 9,092 $ 21,168 $ 30,260
======== ======== ========
Depreciation and amortization $ 376 $ 235 $ 611
======== ======== ========
Operating income $ 4,005 $ (185) $ 3,820
======== ======== ========
Interest expense $ 47 $ 6 $ 53
======== ======== ========
Net income $ 2,144 $ 118 $ 2,262
======== ======== ========
Capital expenditures $ 470 $ 220 $ 690
======== ======== ========
Identifiable assets $ 10,983 $ 19,420 $ 30,403
======== ======== ========
Total International long-lived assets of $5,912, $5,282 and $4,247 for
the years ended September 30, 2005, 2004 and 2003, respectively are
located in Germany.
10. INCOME TAXES
The (benefit of) provision for income taxes for the years ended
September 30, 2005, 2004 and 2003 are summarized as follows:
F-14
2005 2004 2003
Current:
Federal $ - $ - $ (15)
State - - -
Foreign - 1,153 -
-------- -------- --------
- 1,153 (15)
-------- -------- --------
Deferred:
Federal 2,169 607 171
State 187 133 36
Foreign (571) 153 1,152
-------- -------- --------
1,785 893 1,359
-------- -------- --------
Valuation allowance (2,356) (740) (207)
-------- -------- --------
(Benefit of) provision for income taxes $ (571) $ 1,306 $ 1,137
======== ======== ========
The differences between the U.S. statutory rates and those in the
consolidated financial statements of operations and comprehensive income
are primarily due to the foreign entity being taxed at a lower rate and
certain nondeductible items, as follows.
2005 2004 2003
Income tax at federal statutory rate (34%) $(2,445) $ 983 $ 1,190
State tax (187) (133) (29)
Valuation allowance 2,356 740 207
Foreign tax differential (303) (292) (221)
Other 8 8 (10)
------- ------- -------
Total $ (571) $ 1,306 $ 1,137
======= ======= =======
The tax effect of the temporary differences that give rise to the
Company's net deferred taxes as of September 30, 2005, and 2004 are as
follows:
F-15
2005 2004
Assets
Deferred tax assets:
Current:
Bad debt reserve $ 44 $ 35
Inventory reserve 612 390
Insurance reserve 39 -
-------- --------
Subtotal 695 425
-------- --------
Noncurrent:
Net operating loss & credits 7,725 5,745
-------- --------
Deferred tax asset 8,420 6,170
-------- --------
Liability
Deferred tax liability:
Noncurrent:
Fixed assets (145) (166)
Deferred revenue (96) (84)
-------- --------
Subtotal (241) (250)
Valuation allowance (5,865) (4,177)
-------- --------
Net deferred tax asset $ 2,314 $ 1,743
======== ========
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets that may not be realized due to the
expiration of net operating losses and tax credit carryovers. The net
increase in the valuation allowance is comprised primarily of increases
in federal and state net operating losses and credit carryovers, which
may not be realized.
The Company has approximately $13,800 of federal net operating loss
carryforwards expiring beginning in 2008, a $21 AMT credit carryforward,
and a $21 credit on research and development that will expire in 2013 if
unused. The Company also has state net operating loss carryforwards of
approximately $13,300 that will begin to expire in 2006.
The Company has a corporate net operating loss carryforward for German
income tax purposes of approximately $3,677 (3,052 Euros), and a trade
net operation loss carryforward for German income tax purposes of
approximately $1,241 (1,030 Euros), which can be carried forward
indefinitely. The Company continually reviews the adequacy and necessity
of the valuation allowance in accordance with the provisions of FASB
Statement No. 109, ACCOUNTING FOR INCOME TAXES. As of September 30,
2002, the Company eliminated the full valuation allowance on its
International operations based upon future taxable income projections.
As of September 30, 2005, the Company continues to record the existing
valuation allowance on its U.S. operations.
The Company has not recorded deferred income taxes on the undistributed
earnings of its foreign subsidiaries because it is management's intent
to indefinitely reinvest such earnings. Upon distribution of these
earnings, the Company may be subject to U.S. income taxes and/or foreign
withholding taxes.
F-16
11. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted (loss) earnings per share computations for the
years ended September 30, 2005, 2004 and 2003. The Company has excluded
419 shares of stock options for the diluted loss per share calculation
for the year ended September 30, 2005 as such options are anti-dilutive
to the calculation:
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNT DATA )
NET PER SHARE
INCOME SHARES AMOUNT
2005
Basic loss per share $ (6,621) 15,919,286 $ (0.42)
Effect of dilutive secured:
Stock options - - -
-------- ----------- -------
Diluted loss per share $ (6,621) 15,919,286 $ (0.42)
======== =========== =======
2004
Basic earnings per share $ 1,503 15,734,470 $ 0.10
Effect of dilutive secured:
Stock options - 734,973 (0.01)
-------- ----------- -------
Diluted earnings per share $ 1,503 16,469,443 $ 0.09
======== =========== =======
2003
Basic earnings per share $ 2,262 15,495,148 $ 0.15
Effect of dilutive secured:
Stock options - 600,300 (0.01)
-------- ----------- -------
Diluted earnings per share $ 2,262 16,095,448 $ 0.14
======== =========== =======
12. COMMITMENTS AND CONTINGENCIES
The Company currently has operating leases for its corporate offices in
the U.S. and Germany, as well as several leases related to office
equipment and automobiles. Total rental expense was $1,212, $1,103 and
$759 per year for the years ended September 30, 2005, 2004 and 2003,
respectively. Future minimum rental payments required under these leases
that have initial or remaining noncancelable lease terms in excess of
one year as of September 30, 2005 are as follows:
F-17
2006 $ 1,064
2007 787
2008 632
2009 557
2010 300
Thereafter -
-
----------
$ 3,340
==========
The Company is party to various claims, legal actions, complaints and
administrative proceedings arising in the ordinary course of business.
In management's opinion, the ultimate disposition of these matters will
not have a material adverse effect on its financial condition, cash
flows or results of operations. In 2003, the Company received a proposed
judgment in Germany as the result of a dispute between the Company and a
former international distributor. The estimated settlement, including
legal costs was accrued as a litigation contingency. In 2004, a decision
by the court of appeal in Germany has resulted in a reduction of the
original proposed judgment received against the Company by $406. At
September 30, 2005 and 2004, the Company maintains an accrual $476 with
respect to the remaining appeal and legal costs. Management believes
that such accrual is sufficient and the final settlement will not have a
material impact on its results of operations or financial position.
13. SUBSEQUENT EVENT
On October 12, 2005, the Company issued a voluntary recall of all
product units, which utilized donor tissue received from BioMedical
Tissue Services/BioTissue Recovery Services ("BioMedical"). This action
was taken because the Company was unable to satisfactorily confirm that
BioMedical had properly obtained donor consent. The Company quarantined
all BioMedical products in its inventory, having a value of $1,035, and
has notified all customers and distributors of record regarding this
action. In connection with this recall, the Company has destroyed $174
and accrued $861 of inventory reserve and $250 of other related costs at
September 30, 2005.
F-18
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2005 QUARTER ENDED
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 7,073 $ 7,554 $ 9,281 $ 7,952
Gross profit 3,313 2,753 3,025 2,474
Operating expenses 4,243 4,527 4,683 5,078
Operating loss (930) (1,774) (1,658) (2,604)
Net loss (1,382) (1,239) (1,432) (2,568)
Loss per share
Basic $ (0.09) $ (0.08) $ (0.09) $ (0.16)
Diluted $ (0.09) $ (0.08) $ (0.09) $ (0.16)
2004 QUARTER ENDED
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 7,485 $ 7,089 $ 6,823 $ 7,933
Gross profit 4,496 5,091 4,536 3,371
Operating expenses 3,638 3,899 3,466 2,963
Operating income 858 1,192 1,070 408
Net income (loss) 582 653 635 (367)
Earnings per share
Basic $ 0.04 $ 0.04 $ 0.04 $ (0.02)
Diluted $ 0.04 $ 0.03 $ 0.04 $ (0.02)
2003 QUARTER ENDED
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 6,574 $ 6,743 $ 8,933 $ 8,010
Gross profit 3,728 4,223 5,312 5,357
Operating expenses 3,560 3,893 3,882 3,465
Operating income 168 330 1,430 1,892
Net income 131 135 818 1,178
Earnings per share
Basic $ 0.01 $ 0.01 $ 0.05 $ 0.08
Diluted $ 0.01 $ 0.01 $ 0.05 $ 0.07
******
F-19
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10K of Tutogen Medical,
Inc. (the "Company") for the year ended September 30, 2005 as filed with the
Securities and Exchange commission on the date hereof (the "Report"), I George
Lombardi, as the Chief Financial Officer of the Company, hereby certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13
(a) or 15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operation of the Company.
Date: December 21, 2005
TUTOGEN MEDICAL, INC.
/s/ George Lombardi
-------------------
George Lombardi
Chief Financial Officer, Treasurer
and Secretary
CERTIFICATION OF THE PRESIDENT AND CHIEF OPERATING OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10K of Tutogen Medical,
Inc. (the "Company") for the year ended September 30, 2005 as filed with the
Securities and Exchange commission on the date hereof (the "Report"), I Guy L.
Mayer, as the Chief Executive Officer of the Company, hereby certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act
of 2002, that to the best of my knowledge:
(2) The Report fully complies with the requirements of Section 13
(a) or 15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operation of the Company.
Date: December 21, 2005
TUTOGEN MEDICAL, INC.
/s/ Guy L. Mayer
----------------
Guy L. Mayer
Chief Executive Officer
CERTIFICATION
I, George Lombardi certify that:
1. I have reviewed this Annual Report on Form 10-K of Tutogen Medical, Inc.
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Annual Report;
3. Based on my knowledge, the financial statements and other financial
information included in the Annual Report fairly present in all material
respects, the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this Annual
Report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15e and 15d-15e) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15f and
15d-15f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this Annual Report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
Annual Report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the Audit Committee of registrant's
Board of Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal controls which are reasonably
likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Date: December 21, 2005
BY:
Name: /s/ George Lombardi
Title: Chief Financial Officer, Treasurer and Secretary
CERTIFICATION
I, Guy L. Mayer certify that:
1. I have reviewed this Annual Report on Form 10-K of Tutogen Medical, Inc.
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Annual Report;
3. Based on my knowledge, the financial statements and other financial
information included in the Annual Report fairly present in all material
respects, the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this Annual
Report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15e and 15d-15e) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15f and
15d-15f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this Annual Report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
Annual Report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the Audit Committee of registrant's
Board of Directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal controls which are reasonably
likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Date: December 21, 2005
BY:
Name: /s/ Guy L. Mayer
Title: Chief Executive Officer