UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(AMENDMENT NO. 1)
[X] 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 Number)
13709 PROGRESS BOULEVARD, BOX 19, ALACHUA FLORIDA 32615
(Address of principal executive offices)
(386) 462-0402
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of
the Exchange Act: COMMON STOCK, $0.01 par value
Securities registered
under Section 12(g) of the Exchange Act:
NONE
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 No X
--- ---
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. Yes No 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.
EXPLANATORY NOTE
Tutogen Medical, Inc. ("the Company") is filing this Amendment to its Annual
report on Form 10-K for the Company's fiscal year ended September 30, 2005,
which was originally filed with the Securities and Exchange Commission (the
"SEC") on December 22, 2005 (the "Original Filing"), to reflect the restatement
of the Company's audited consolidated financial statements for the fiscal year
ended September 30, 2005, 2004, and 2003 as well as the notes related thereto,
as described in Note 16 ("Restatement") to the accompanying audited consolidated
financial statements in Part II, Item 8 of this Form 10-K/A. In addition,
Schedule II, "Valuation and Qualifying Accounts for the years ended September
30, 2005, 2004, and 2003" has been included in this Form 10-K/A.
As part of the financial review for the three and six months ended March 31,
2006, the Company became aware of misstatements in previously reported inventory
and cost of revenue. The Company discovered that the misstatements were
attributable to errors in the calculation of intercompany profit to be
eliminated during the consolidation process in prior periods. While
investigating the inventory errors, the Company also discovered other errors
affecting the Company's deferred tax benefit, accrued expenses, general and
administrative and distribution and marketing expenses for the fiscal year ended
September 30, 2005. As a result, the Company has restated the accompanying
consolidated financial statements for the years ended September 30, 2005, 2004,
and 2003 to correct these errors in this Form 10-K/A.
In addition, the Company's management has determined that the accounting errors
referenced above were the result of a material weakness in the company's
internal control over financial reporting related to its inventory valuation and
certain journal entries recorded in the financial close process. The Company has
taken steps to remediate the weakness as of the date of this report. See Item 9A
"Controls and Procedures".
This Form 10-K/A sets forth the Original Filing in its entirety. However, this
Form 10-K/A amends and restates certain information in Items 6, 7, 8, and 9A of
Part II and 15A and 15B of Part III of the Original filing, in each case, solely
as a result of, and to reflect, the restatement and amends Item 15B of Part III
to add Schedule II "Valuation and Qualifying Accounts for the Years Ended
September 30, 2005, 2004 and 2003." No Other information in the Original Filing
is amended hereby.
Except for the amended information referred to above, this Form 10-K/A continues
to describe conditions as of the date of the Original Filing and the company has
not modified or updated other disclosures presented in the Original Filing. This
Form 10-K/A does not reflect events occurring after the date of the Original
Filing or modify or update disclosures (including, except as otherwise provided
herein, the exhibits to the Original Filing) affected by subsequent events.
Accordingly, this Form 10-K/A includes updated certifications from the Company's
Chief Executive Officer and Chief Financial Officer at Exhibits 31.1, 31.2, and
32.
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, 2005 (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 2006 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 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.
1
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
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 total Global and 62% of total U.S.
revenues for the fiscal year ended September 30, 2005. Zimmer Dental represents
the products to the end user and Tutogen ships and bills the customer directly.
Distribution fees earned pursuant to the agreements are recognized ratably over
the terms of these respective agreements.
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.
2
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 Food and Drug Administration (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, 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 the American Association of Tissue Banks (the "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 at the time of delivery. 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.
3
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 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 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.
4
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, including foreign currency fluctuation risk.
(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". For discussion of
the Company's sales by product, see the analysis of revenue in Item 7.
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 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
Zimmer 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
5
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.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
As of September 30, 2005, there were no comment letters outstanding from the
SEC.
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 which occurred at December 31, 2005.
In April 2005, the Company's offices and manufacturing facility in Alachua,
Florida 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
6
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.
7
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
Fiscal 2005 High Low
----------- ---- ---
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
Number of securities to Weighted-average Remaining available
be Issued upon exercise Exercise price of For future issuance under
of Outstanding options, Outstanding Equity compensation plans
Plan Category warrants and rights options, (excluding securities
Warrants and rights reflected in column (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.
------------------------------------------------------------------------------------------------------------------------------
8
ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED SEPTEMBER 30,
2005 (1) 2004 (1) 2003 (1) 2002 (2) 2001 (2)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue 31,860 29,330 30,260 20,747 13,162
Gross margin % 36% 58% 66% 59% 34%
Operating (loss) income (7,227) 3,158 5,265 1,666 (2,295)
Net (loss) income (7,017) 1,133 3,707 901 (672)
Average shares outstanding for basic
earnings (loss) per share 15,919,286 15,734,470 15,495,148 15,114,000 14,749,000
Basic earnings (loss) per share $ (0.44) $ 0.07 $ 0.24 $ 0.06 $ (0.06)
Average shares outstanding for
diluted earnings (loss) per share 15,919,286 16,469,443 16,095,448 15,960,000 14,749,000
Diluted earnings (loss) per share $ (0.44) $ 0.07 $ 0.23 $ 0.06 $ (0.05)
Balance Sheet Data:
Working capital 8,434 17,421 15,342 10,856 8,805
Total assets 26,206 33,536 29,962 23,748 19,277
Long-term debt 630 827 728 693 707
Stockholders' equity 13,723 21,272 17,606 13,928 12,457
(1) As restated, see note 16 to the consolidated financial statements
(2) Not restated, presented as originally reported
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESTATEMENT OF FINANCIAL STATEMENTS
As more fully stated in the Explanatory Note following the cover page to this
amended report and in Note 16 to the audited consolidated financial statements,
the Company is filing this amended report to reflect the restatement of the
Company's audited consolidated financial statements for the fiscal years ended
September 30, 2005, 2004 and 2003, as well as the notes related thereto in Part
II, Item 8 of this Form 10-K/A. The accompanying management's discussion and
analysis of the Company's financial condition and results of operations included
in this report reflects the impact of the restatement.
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.
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 of 2005, the resolution of certain regulatory issues in France
and the temporary backlog of xenograft product lines.
9
An analysis of revenue follows:
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
($000's omitted) FY 2005 FY 2004 FY 2003 4th Qtr. 4th Qtr. 4th Qtr
FY 2005 FY 2004 FY 2003
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Dental 13,785 6,893 3,720 4,115 1,996 1,033
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Spine 3,318 4,850 10,847 336 607 2,952
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Urology 2,633 2,809 3,880 540 770 1,032
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Ophthalmic 1,505 1,553 1,352 452 414 384
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Other 701 1,021 1,369 137 360 260
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Total-U.S. 21,752 17,126 21,168 5,580 4,048 5,660
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Germany 1,980 3,521 2,624 487 1,390 677
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
ROW 6,220 6,001 4,883 1,324 1,829 1,261
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
France 1,337 2,121 1,085 391 525 282
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Other 571 561 500 170 141 130,
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Total-International 10,108 12,204 9,092 2,372 3,885 2,350
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Total Consolidated 31,860 29,330 30,260 7,952 7,933 8,011
--------------------------- ------------- ------------- ------------- ------------- ------------- -------------
Gross margins for the year ended September 30, 2005 decreased to 36% from 58% 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 during fiscal year 2005, 4), the estimated patient testing and other
related expenses of $250,000 as a result of the product recall recorded in the
fourth quarter of fiscal year 2005.
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 of inventory 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 29% in 2005 to $5.4 million from
$4.2 million in 2004. The increase was due to higher compensation costs related
to new personnel ($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 ($26,000). 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 due mainly 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 $0.3 million in 2005 to $1.7
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 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 between the Company and a former international distributor. 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.
10
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 borrowings for 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 mainly due to the income tax
benefit on the loss from the foreign entity. The Company continues to record a
full 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
$7.0 million, $0.44 basic and diluted loss per share as compared to a net income
of $1.1 million, $0.07 basic and diluted earnings per share for 2004. As a
percentage of revenues, net income decreased from 3.9% in 2004 to a net loss of
22.0% in 2005.
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 $9.5 million at September 30, 2005 or 33%
from $14.3 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 58% from 66% 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 costs related to open 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.
11
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, which was consistent with
management's plans. 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.
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 a full 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 $1.1 million, $0.07 basic and diluted earnings per share as compared to
a net income of $3.7 million, $0.24 basic and $0.23 diluted earnings per share
for 2003. As a percentage of revenues, net income decreased from 12.2% in 2003
to 3.9% in 2004.
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 $14.3 million at September 30, 2004 or 24%
from $11.5 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. 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:
12
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 is 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. Title transfers 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.
VALUATION OF DEFERRED TAX ASSET. We record valuation allowances to reduce the
deferred tax assets to the amounts estimated to be recognized. While we consider
taxable income in assessing the need for a valuation allowance, in the event we
determine it is more likely than not that we would be able to realize our
deferred tax assets in the future, an adjustment would be made and income
increased in the period of such determination. Likewise, in the event we
determine we would not be able to realize all or part of our deferred tax assets
in the future, an adjustment would be made and charged to income in the period
of such determination. We recorded a deferred tax asset valuation allowance of
$6,309 and $4,523 at September 30, 2005 and 2004, respectively, representing
100% of existing U.S. deferred tax assets.
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 $8.4 million
and $17.5 million, respectively, a decrease of 52%. 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 $4.7 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 in 2005 primarily
as the result of the effect of the net loss in 2005 of $7.0 million versus a net
income of $1.1 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 $560,000 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 in 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.
13
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 (1) $ 814 $ 184 $ 197 $ 433 $ 0 $ 0
Operating lease obligations (1) $ 3,340 $ 1,064 $ 787 $ 632 $ 557 $ 300
Short-term borrowings (1) $ 1,048 $ 1,048
(1) Does not include interest
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 from 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.
DISCLOSURE CONTROLS AND PROCEDURE
In the Form 10-K for the Company's fiscal year ended September 30, 2005,
initially filed with the SEC on December 22, 2005, the Company's management,
with the participation of the Company's chief executive officer and former chief
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 (the "34 Act")) as of September 30, 2005 (the "Evaluation
Date"). Based on that evaluation, the chief executive officer and former chief
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.
Subsequent to that filing (and as part of the financial review for the three and
six months ended March 31, 2006), under the direction of the Company's chief
executive officer and new chief financial officer, the Company conducted an
analysis of the Company's inventory on hand as of prior reporting periods, its
policies and procedures over certain journal entries recorded in the financial
close process, and the effectiveness of the design and operation of the
Company's disclosure controls and procedures, (as defined in Rule 13(a) - 15(e)
under the 34 Act). The evaluation led the Company to conclude that as of
September 30, 2005, the Company's controls and procedures relating to the
calculation of intercompany profit and certain journal entries recorded in the
financial close process were deficient, resulting in a material weakness in
internal control over financial reporting. Accordingly, the Company concluded
that as of September 30, 2005 our disclosure controls and procedures were not
effective in ensuring that information required to be disclosed by us in the
reports that we file under the Securities and Exchange Act is recorded,
processed, summarized and reported within the time periods specified by the
Securities and Exchange Commission rules and forms.
As a result, the Company has restated its financial statements for the periods
covered in the Company's annual report on Form 10-K/A for the fiscal year ended
September 30, 2005 (see Note 16 to the accompanying audited Consolidated
Financial Statements).
A material weakness in internal control is a significant deficiency or
combination of significant deficiencies that results in more than a remote
likelihood that a material misstatement of the financial statements would not be
prevented or detected on a timely basis by the Company. The
14
Company has subsequently taken steps to remediate this material weakness
including designing and implementing a more effective and precise analytic model
for calculating intercompany profit. Additionally, the Company has developed a
system for assuring the accuracy of this model. This system includes an enhanced
reporting process for determining actual costs and transfer prices used in the
calculation of intercompany profit to be eliminated during the consolidation
process. Also, the Company has designed and documented new policies and
procedures to strengthen its controls over certain journal entries recorded in
its financial close process.
Management believes that these subsequent changes in the design of internal
controls will strengthen the Company's disclosure controls and procedures, as
well as its internal control over financial reporting, and will remediate the
material weakness that the Company identified in its internal control over
financial reporting as of September 30, 2005. The Company has discussed this
material weakness and its remediation program with our Audit Committee. The
Company recognizes that controls and procedures can provide only reasonable
assurance of achieving the desired control objectives. Accordingly, the Company
intends to continue to refine its internal control over financial reporting on
an ongoing basis as it deems appropriate.
The Company instituted the changes noted above during its financial close
process during the quarter ended March 31, 2006 to materially enhance its
internal control over financial reporting of inventory, net revenues, cost of
revenues and financial close process.
CHANGES IN CONTROL:
Except as described above, there has not been any change in our internal
control over financial reporting during the quarter ended September 30, 2005
that has materially affected, or is reasonably likely to materially affect,
those controls.
ITEM 9B. OTHER INFORMATION.
None.
15
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.
-----------------------------------------------------------------------------------------------------------------
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.
16
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 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, a member of the audit committee, 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
17
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 except for the following: Mr. Guy Mayer who filed one late Form 4
Report relating to one transaction. Mr. Roy Crowninsheild who filed two late
Form 4 Reports relating to two transactions and Mr. Carlton Turner who filed two
late Form 4 Reports relating to two transactions.
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.
18
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 $100,000 for this period.
------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
------------------------------------------------------------------------------------------------------------------------------
Awards Payouts
------------------------------------------------------------------------------------------------------------------------------
Other Restricted Securities
Annual Stock Underlying LTP All Other
Name And Principal Fiscal Salary Bonus Compensation Award(s) Options Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) (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.
19
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 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 and unvested options are forfeited. 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 becomeexercisable. 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
Number of Value at Assumed
Securities Percent of Annualized Rates of
Underlying Total Exercise or Stock Price Appreciation
Options Granted Options Granted Base Price Expiration for Option Term (1)
(#) To Employees ($/Sh) Date 5% 10%
250,000 40.2% $ 2.60 January 3, 2015 $ 547,000 $ 604,000
Guy L. Mayer 50,000 8.0% $ 4.17 September 26, 2015 $ 30,900 $ 42,300
20
(1) Potential 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 to any
member of the committee.
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 under 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
Officer, 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 performance 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 forecast the future performance of the Common Stock
and may not be indicative of such future performance.
21
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
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
22
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
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.
23
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 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 audits, 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.
24
PART V
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****
21 Subsidiaries of Registrant*
31.1 Certification of Chief Executive Officer, pursuant to Rule 13a-14. ***
31.2 Certification of Chief Financial Officer, pursuant to Rule 13a-14. ***
32. Certification of Chief Executive Officer and 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.***
-------------
* 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's Form 10-K for the year ended September 30, 2004.
***** Filed with the Company's Form 10-K for the year ended September 30, 2005.
(B) FINANCIAL STATEMENT SCHEDULES
Report of Independent Registered Public Accounting Firm on Schedule II***
Schedule II - Valuation and Qualifying Accounts for the years ended September
30, 2005, 2004 and 2003.
Schedules other than that listed 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.
25
SIGNATURES
In accordance with the Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this Amendment No. 1 to its
Annual Report on Form 10-K/A to be signed on behalf by the undersigned,
thereunto duly authorized.
Date: July 6, 2006
TUTOGEN MEDICAL, INC.
/s/ Guy L. Mayer
--------------------------
Guy L. Mayer
Chief Executive Officer
/s/ L. Robert Johnston Jr.
--------------------------
L. Robert Johnston Jr.
Chief Financial Officer, Treasurer and
Secretary
26
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, shareholders' 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 consolidated 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.
As discussed in Note 16, the accompanying consolidated financial statements have
been restated.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Orlando, Florida
December 8, 2005
(July 5, 2006, as to the effects of the restatements discussed in Note 16)
F-1
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND 2004
(In Thousands)
---------------------------------------------------------------------------------------------------
2005 2004
---- ----
ASSETS (AS RESTATED, SEE NOTE 16)
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 9,554 14,261
Deferred tax asset 1,149 673
Other current assets 623 1,409
----------- -----------
Total current assets 18,361 26,328
PROPERTY, PLANT AND EQUIPMENT - Net 6,612 6,138
DEFERRED TAX ASSET 1,232 1,070
----------- -----------
TOTAL ASSETS $ 26,205 $ 33,536
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued expenses $ 6,342 $ 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 9,928 8,857
NONCURRENT LIABILITIES:
Deferred distribution fees 1,925 2,580
Long-term debt 630 827
----------- -----------
TOTAL LIABILITIES 12,483 12,264
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value, 30,000,000 authorized; 15,932,960 and
15,915,960 shares issued and outstanding, respectively 159 158
Additional Paid-in Capital 36,381 36,345
Accumulated other comprehensive income 1,678 2,248
Accumulated Deficit (24,496) (17,479)
----------- -----------
Total shareholders' equity 13,722 21,272
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 26,205 $ 33,536
=========== ===========
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 and Per Share Data)
------------------------------------------------------------------------------------------------------
2005 2004 2003
(AS RESTATED, SEE NOTE 16)
REVENUE $ 31,860 $ 29,330 $ 30,260
COST OF REVENUE 20,510 12,206 10,195
-------------- -------------- --------------
Gross profit 11,350 17,124 20,065
-------------- -------------- --------------
OPERATING EXPENSES:
General and administrative 5,409 4,203 4,482
Distribution and marketing 11,509 8,737 8,835
Research and development 1,659 1,432 826
Litigation contingency - (406) 657
-------------- -------------- --------------
Total operating expenses 18,577 13,966 14,800
-------------- -------------- --------------
OPERATING (LOSS) INCOME (7,227) 3,158 5,265
OTHER EXPENSE (96) (601) (368)
INTEREST EXPENSE (130) (118) (53)
-------------- -------------- --------------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR
INCOME TAXES (7,453) 2,439 4,844
(BENEFIT) PROVISION FOR INCOME TAXES (436) 1,306 1,137
-------------- -------------- --------------
NET (LOSS) INCOME (7,017) 1,133 3,707
COMPREHENSIVE (LOSS) INCOME:
Foreign currency translation (loss) gain (570) 2,167 1,006
-------------- -------------- --------------
COMPREHENSIVE (LOSS) INCOME $ (7,587) $ 3,300 $ 4,713
============== ============== ==============
AVERAGE SHARES OUTSTANDING FOR BASIC
(LOSS) EARNINGS PER SHARE 15,919,286 15,734,470 15,495,148
============== ============== ==============
BASIC (LOSS) EARNINGS PER SHARE: $ (0.44) $ 0.07 $ 0.24
============== ============== ==============
AVERAGE SHARES OUTSTANDING FOR DILUTED
(LOSS) EARNINGS PER SHARE 15,919,286 16,469,443 16,095,448
============== ============== ==============
DILUTED (LOSS) EARNINGS PER SHARE: $ (0.44) $ 0.07 $ 0.23
============== ============== ==============
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: (AS RESTATED, SEE NOTE 16)
Net (loss) income $ (7,017) $ 1,133 $ 3,707
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 (505) 869 1,152
Changes in assets and liabilities:
Accounts receivable 1,239 969 (2,388)
Inventories 3,771 (1,454) (3,990)
Other current assets 798 (241) (637)
Accounts payable and other accrued expenses (497) (894) 2,750
Accrued commissions 244 1,076 (945)
----------- ----------- -----------
Net cash (used in) provided by operating activities (559) 380 1,116
----------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (1,682) (1,758) (690)
----------- ----------- -----------
Net cash used in investing activities (1,682) (1,758) (690)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 36 366 850
Proceeds from revolving credit arrangements 1,508 - 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 980 495 769
----------- ----------- -----------
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, SEPTEMBER 30, 2002, as
previously reported $ 152 $ 35,135 $ (925) $ (20,434) $ 13,928 15,158,110
Prior period adjustment
(see Note 16) - - - (1,885) (1,885) -
----- -------- ------- --------- -------- ----------
BALANCE, SEPTEMBER 30, 2002 (as
restated, see Note 16) 152 35,135 (925) (22,319) 12,043 15,158,110
Stock issued on exercise of options 5 845 - - 850 509,000
Net income (as restated, see Note 16) - - - 3,707 3,707 -
Foreign currency translation adjustment - - 1,006 - 1,006 -
----- -------- ------- --------- -------- ----------
BALANCE, SEPTEMBER 30, 2003
(as restated, see Note 16) 157 35,980 81 (18,612) 17,606 15,667,110
Stock issued on exercise of options 2 365 - - 367 248,850
Net income (as restated, see Note 16) - - - 1,133 1,133 -
Foreign currency
translation adjustment - - 2,167 - 2,167 -
----- -------- ------- --------- -------- ----------
BALANCE, SEPTEMBER 30, 2004
(as restated, see Note 16) 159 36,345 2,248 (17,479) 21,273 15,915,960
Stock issued on exercise of options - 36 - - 36 17,000
Net loss (as restated, see Note 16) - - - (7,017) (7,017) -
Foreign currency translation adjustment
(as restated, see Note 16) - - (570) - (570) -
----- -------- ------- --------- -------- ----------
BALANCE, SEPTEMBER 30, 2005 (as
restated, see Note 16) $ 159 $ 36,381 $ 1,678 $ (24,496) $ 13,722 15,932,960
===== ======== ======= ========= ======== ==========
(1) Represents foreign currency translation adjustments.
See accompanying 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 (Loss) Income and
Comprehensive (Loss) Income. The Company recognized translation 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 is
evaluated quarterly.
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
IMPAIRMENT OF LONG-LIVED ASSETS -Periodically, the Company evaluates the
recoverability of the net carrying amount of its property, plant and
equipment and its intangible assets by comparing the carrying amounts to
the estimated future undiscounted cash flows generated by those assets.
If the sum of the estimated future undiscounted cash flows were less
than the carrying amount of the asset, a loss would be recognized for
the difference between the fair value and the carrying amount.
In the event that facts and circumstances indicate that the cost of
long-lived assets, primarily property, plant and equipment and certain
identifiable intangible assets may be impaired, the Company performs a
recoverability evaluation. If an evaluation is required, the
undiscounted estimated future cash flows associated with the assets are
compared to the assets' carrying amount to determine whether a
write-down to fair value is required.
F-6
Impairment losses are measured as the amount by which the carrying
amount of the assets exceeds the fair value of the assets. When fair
values are not available, the Company estimates fair value using the
expected future cash flows discounted at a rate commensurate with the
risks associated with the recovery of the assets. Assets to be disposed
of are reported at the lower of carrying amount or fair value less costs
to sell.
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 (loss) by the weighted-average number of common shares
outstanding. Diluted earnings per share are computed by dividing net
income (loss) by the sum of the weighted-average number of common shares
outstanding plus the potentially 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.
The Financial Accounting Standards Board ("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.
F-7
The following table reconciles net income (loss) and basic and diluted
earnings (loss) per share (EPS), as reported, to pro-forma net income
(loss) and basic and diluted EPS, as if the Company had expensed the
fair value of stock options.
2005 2004 2003
---- ---- ----
Net (loss) income: $ (7,017) $ 1,133 $ 3,707
Deduct: Total stock-based employee compensation
expense determined under fair value based method,
net of related tax effects 102 159 104
Pro forma net (loss) income $ (7,119) $ 974 $ 3,603
========= ========= =========
Basic EPS:
As reported $ (0.44) $ 0.07 $ 0.24
Pro forma using the fair value method $ (0.45) $ 0.06 $ 0.23
Diluted EPS:
As reported $ (0.44) $ 0.07 $ 0.23
Pro forma using the fair value method $ (0.45) $ 0.06 $ 0.22
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 adopting 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
adopting 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
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
F-8
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 $347 and $288, 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 4,219 6,035
Finished goods 6,860 8,505
--------- ---------
12,832 16,711
Less reserves for obsolescence 3,278 2,450
--------- ---------
$ 9,554 $ 14,261
========= =========
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
1,500 million or approximately $1,800 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
$1,000, 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 1,500 million or
approximately $1,800, 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 $1,800 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-9
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.
F-10
Changes in outstanding options for the Plan were as follows:
WEIGHTED
NUMBER OF AVERAGE
COMMON EXERCISE
SHARES PRICE
Outstanding October 1, 2002 2,217,668 $ 2.44
Granted 452,500 2.91
Canceled (204,800) 3.33
Exercised (209,000) (1) 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
=========== ======
(1) Does not include 300,000 stock options exercised into common
shares that represented a special stock option grant in 1997,
to a former executive officer outside of the 1996 stock option
plan. The shares vested 120,000 upon issue, and 180,000 one year
after issue.
As of September 30, 2005, 348,303 stock options were available for
grant.
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 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.
F-11
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 Loss $ (974) $ (6,253) $ (7,227)
======== ======== ========
Interest expense $ 61 $ 69 $ 130
======== ======== ========
Net Loss $ (1,037) $ (5,980) $ (7,017)
======== ======== ========
Capital expenditures $ 1,468 $ 213 $ 1,681
======== ======== ========
Identifiable assets $ 16,200 $ 10,005 $ 26,205
======== ======== ========
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 (loss) $ 4,179 $ (1,021) $ 3,158
======== ======== ========
Interest expense $ 79 $ 39 $ 118
======== ======== ========
Net income (loss) $ 2,289 $ (1,156) $ 1,133
======== ======== ========
Capital expenditures $ 1,244 $ 515 $ 1,759
======== ======== ========
Identifiable assets $ 18,166 $ 15,370 $ 33,536
======== ======== ========
F-12
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 (loss) $ 5,450 $ (185) $ 5,265
======== ======== ========
Interest expense $ 47 $ 6 $ 53
======== ======== ========
Net income $ 3,589 $ 118 $ 3,707
======== ======== ========
Capital expenditures $ 470 $ 220 $ 690
======== ======== ========
Identifiable assets $ 16,105 $ 13,846 $ 29,951
======== ======== ========
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:
2005 2004 2003
Current:
Federal $ - $ - $ (15)
State - - -
Foreign - 1,153 -
-------- -------- --------
- 1,153 (15)
-------- -------- --------
Deferred:
Federal (2,260) (737) 335
State (194) (162) 75
Foreign (571) 153 1,152
-------- -------- --------
(3,025) (746) 1,562
-------- -------- --------
Valuation allowance 2,589 899 (410)
-------- -------- --------
(Benefit of) provision for income taxes $ (436) $ 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.
F-13
2005 2004 2003
Income tax/(benefit) at federal statutory rate (34%) $ (2,536) $ 854 $ 1,696
State tax (194) (162) 82
Valuation allowance 2,589 899 (410)
Foreign tax differential (303) (293) (221)
Other 8 8 (10)
-------- -------- --------
Total $ (436) $ 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:
2005 2004
Assets
Deferred tax assets:
Current:
Other Liabilities 70 70
Management Fees 402 231
Bad debt reserve $ 44 $ 35
Inventory reserve 594 337
Insurance reserve 39 -
-------- --------
Subtotal 1,149 673
-------- --------
Noncurrent:
Net operating loss & credits 7,006 5,158
Distribution Fees 786 673
Other Liabilities 70 70
-------- --------
Deferred tax asset 9,011 6,574
-------- --------
Liability
Deferred tax liability:
Noncurrent:
Fixed assets (225) (224)
Deferred revenue (96) (84)
-------- --------
Subtotal (321) (308)
Valuation allowance (6,309) (4,523)
-------- --------
Net deferred tax asset $ 2,381 $ 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 $14,900 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 $14,400 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 SFAS No.
109, ACCOUNTING FOR INCOME TAXES. As of September 30, 2005, the Company
has recorded a valuation allowance on deferred tax assets related to 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-14
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 (LOSS) PER SHARE
INCOME SHARES AMOUNT
2005
Basic loss per share $ (7,017) 15,919,286 $ (0.44)
Effect of dilutive secured:
Stock options - - -
--------- ----------- ----------
Diluted loss per share $ (7,017) 15,919,286 $ (0.44)
========= =========== ==========
2004
Basic earnings per share $ 1,133 15,734,470 $ 0.07
Effect of dilutive secured:
Stock options - 734,973 -
--------- ----------- ----------
Diluted earnings per share $ 1,133 16,469,443 $ 0.07
========= =========== ==========
2003
Basic earnings per share $ 3,707 15,495,148 $ 0.24
Effect of dilutive secured:
Stock options - 600,300 (0.01)
--------- ----------- ----------
Diluted earnings per share $ 3,707 16,095,448 $ 0.23
========= =========== ==========
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 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:
2006 $ 1,064
2007 787
2008 632
2009 557
2010 300
Thereafter -
-
---------
$ 3,340
=========
F-15
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 of $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. RELATED PARTY
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 years ended September 30, 2005, 2004 and 2003
product sales to Zimmer spine totaled $3,318, $4,850 and $4,999,
respectively. Representing 10.4%, 16.5% and 16.5% respectively of our
total revenues. Accounts receivable from Zimmer Spine were $44 and $723
at September 30, 2005 and 2004 respectively.
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. Under this distribution agreement, the
Company sells directly to Zimmer Dental's customers. For the years ended
September 30, 2005, 2004 and 2003, Zimmer Dental was paid commissions
aggregating approximately $6,055, $3,213 and $1,654, respectively.
Accounts payable to Zimmer Dental total $1,740 and $1,456 at September
30, 2005 and 2004.
Zimmer CEP (formerly Centerpulse) USA Holding Co., a subsidiary of
Zimmer Holdings, Inc., is a significant owner of the Company's
outstanding shares of Common Stock.
14. 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 $1,046, and
has notified all customers and distributors of record regarding this
action. In connection with this recall, the Company wrote-off $174
of inventory and accrued $872 of inventory reserve and $250 of other
related costs at September 30, 2005.
15. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following is a summary of unaudited quarterly financial results for
the year ended September 30, 2005:
December 31, 2004 March 31, 2005 June 30, 2005 September 30, 2005
As As As As
(in 000's, except Previously As Restated Previously As Restated Previously As Restated Previously As Restated
per share data) Reported (a) Reported (a) Reported (a) Reported (a)
----------------------------------------------------------------------------------------------------------------------------
Revenues $ 7,073 $ 7,073 $ 7,554 $ 7,554 $ 9,281 $ 9,281 $ 7,952 $ 7,952
Gross Profit 3,313 2,781 2,753 2,863 3,025 3,180 2,474 2,527
Operating expenses 4,243 4,243 4,527 4,527 4,683 4,683 5,078 5,124
Operating loss (930) (1,462) (1,774) (1,664) (1,658) (1,503) (2,604) (2,597)
Net loss (1,382) (1,914) (1,239) (1,129) (1,432) (1,277) (2,568) (2,697)
Loss per share
Basic $ (0.09) $ (0.12) $ (0.08) $ (0.07) $ (0.09) $ (0.08) $ (0.16) $ (0.17)
Diluted $ (0.09) $ (0.12) $ (0.08) $ (0.07) $ (0.09) $ (0.08) $ (0.16) $ (0.17)
(a) As restated, see Note 16.
F-16
The following is a summary of unaudited quarterly financial results for the year
ended September 30, 2004:
December 31, 2003 March 31, 2004 June 30, 2004 September 30, 2004
As As As As
(in 000's, except Previously As Restated Previously As Restated Previously As Restated Previously As Restated
per share data) Reported (a) Reported (a) Reported (a) Reported (a)
----------------------------------------------------------------------------------------------------------------------------
Revenues $ 7,485 $ 7,485 $ 7,089 $ 7,089 $ 6,823 $ 6,823 $ 7,933 $ 7,933
Gross Profit 4,496 4,485 5,091 4,522 4,536 6,270 3,371 1,846
Operating expenses 3,638 3,638 3,899 3,899 3,466 3,466 2,963 2,963
Operating loss 858 847 1,192 623 1,070 2,804 408 (1,117)
Net income (loss) 582 571 653 84 635 2,369 (367) (1,892)
Earnings (loss)
per share
Basic $ 0.04 $ 0.04 $ 0.04 $ 0.01 $ 0.04 $ 0.15 $ (0.02) $ (0.12)
Diluted $ 0.04 $ 0.04 $ 0.03 $ 0.01 $ 0.04 $ 0.14 $ (0.02) $ (0.11)
(a) As restated, see Note 16.
16. RESTATEMENT
As part of the financial review for the three and six months ended March
31, 2006, the Company became aware of misstatements in previously
reported inventory and cost of revenue. The Company discovered that the
misstatements were attributable to errors in the calculation of
intercompany profit to be eliminated during the consolidation process
for prior periods. While investigating in inventory errors, the Company
also discovered other errors affecting the Company's deferred tax
benefit, accrued expenses, general and administrative and distribution
and marketing expenses for the fiscal year ended September 30, 2005. As
a result, the Company has restated the accompanying consolidated
financial statements for the years ended September 30, 2005, 2004, and
2003 to correct these errors.
The cumulative effect of these errors on accumulated deficit and total
shareholders' equity as of the beginning of the year ended September 30,
2003 was an increase of $1,885 and a reduction of $1,885, respectively.
F-17
The impact of this restatement on the accompanying consolidated financial
statements is summarized below:
As
Previously As
FOR THE YEAR ENDED SEPTEMBER 30, 2005 Reported Adjustments Restated
------------------------------------- ----------------------------------------------
Cost of revenues $ 20,295 $ 215 $ 20,510
Gross profit 11,565 (215) 11,350
General and administrative expenses 5,371 38 5,409
Distribution and marketing expenses 11,501 8 11,509
Operating loss (6,966) (261) (7,227)
Income tax benefit (571) 135 (436)
Net loss (6,621) (396) (7,017)
Foreign currency translation (loss) (770) 200 (570)
Comprehensive loss (7,391) (196) (7,587)
Basic loss per share (0.42) (0.02) (0.44)
Diluted loss per share (0.42) (0.02) (0.44)
Cash flows from operating activities:
Net loss (6,621) (396) (7,017)
Deferred income taxes (571) 66 (505)
Changes in inventories 3,508 263 3,771
Changes in accounts payable and other accrued expenses (566) 69 (497)
AS OF SEPTEMBER 30, 2005:
Inventories, net 10,558 (1,004) 9,554
Deferred tax asset 2,314 67 2,381
Accounts payable and other accrued expenses 6,273 69 6,342
Accumulated other comprehensive income 1,478 200 1,678
Acculated deficit (23,290) (1,206) (24,496)
Shareholders' equity 14,728 (1,006) 13,722
As
Previously As
FOR THE YEAR ENDED SEPTEMBER 30, 2004 Reported Adjustments Restated
------------------------------------- ----------------------------------------------
Cost of revenue $ 11,836 $ 370 $ 12,206
Gross profit 17,494 (370) 17,124
Net income 1,503 (370) 1,133
Basic loss per share 0.10 (0.03) 0.07
Diluted loss per share 0.09 (0.02) 0.07
Cash flows from operating activities:
Net loss 1,503 (370) 1,133
Changes in inventories (1,824) 370 (1,454)
AS OF SEPTEMBER 30, 2004:
Inventories, net 15,072 (811) 14,261
Accumulated deficit (16,669) (810) (17,479)
Shareholders' equity 22,083 (811) 21,272
As
Previously As
FOR THE YEAR ENDED SEPTEMBER 30, 2003 Reported Adjustments Restated
------------------------------------- ----------------------------------------------
Cost of revenue $ 11,640 $ (1,445) $ 10,195
Gross profit 18,620 1,445 20,065
Net income 2,262 1,445 3,707
Basic loss per share 0.15 0.09 0.24
Diluted loss per share 0.14 0.09 0.23
Cash flows from operating activities:
Net loss 2,262 1,445 3,707
Changes in inventories (2,545) (1,445) (3,990)
******
F-18
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 consolidated financial statements of Tutogen Medical, Inc.
and subsidiaries (the "Company") as of September 30, 2005 and 2004, and for each
of the three years in the period ended September 30, 2005, and have issued our
report thereon dated December 8, 2005 (July 5, 2006 as to the effects of the
restatement discussed in Note 16) (which report expresses an unqualified opinion
and includes an explanatory paragraph concerning the restatement as discussed in
Note 16); such financial statements and report are included elsewhere herein.
Our audits also included the financial statement schedule of the Company listed
in the accompanying Index at Item 15B. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Orlando, Florida
December 8, 2005
TUTOGEN MEDICAL, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003
Additions
(Reversals)
Charged to
Balance at (Credited) to Balance at
Beginning Costs and End of
of Period Expenses Deductions (1) Period
Allowance for doubtful accounts:
YEAR ENDED SEPTEMBER 30, 2005 $ 192 $ 308 $ 39 $ 462
Year ended September 30, 2004 429 (83) 154 192
Year ended September 30, 2003 193 264 28 429
Allowance for product returns
YEAR ENDED SEPTEMBER 30, 2005 $ 241 $ 183 $ 180 $ 244
Year ended September 30, 2004 117 124 0 241
Year ended September 30, 2003 0 117 0 117
Allowance for obsolescence
YEAR ENDED SEPTEMBER 30, 2005 $ 2,210 $ 1,460 $ 636 $ 3,034
Year ended September 30, 2004 2,981 (597) 174 2,210
Year ended September 30, 2003 1,757 1,434 210 2,981
Valuation allowance for net deferred tax assets:
YEAR ENDED SEPTEMBER 30, 2005 $ 4,523 $ 1,786 $ 0 $ 6,309
Year ended September 30, 2004 3,496 1,027 0 4,523
Year ended September 30, 2003 3,906 0 410 3,496
(1) Net write-offs and recoveries.