UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.c. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934.
For the period ended March 31, 2006.
Transition Report Pursuant to 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.
(Exact name of registrant as specified in its charter)
Florida 59-3100165
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13709 Progress Boulevard, Alachua, Florida 32615
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (386) 462-0402
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 checkmark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2of the Exchange Act). (Check
one):
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
As of May 31, 2006 there were outstanding 16,083,135 shares of Tutogen Medical,
Inc. Common Stock, par value $0.01.
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
INDEX
PART I. Financial Information. Page
No.
ITEM 1. Financial Statements.
Unaudited - Condensed Consolidated Balance 1
Sheets - March 31, 2006 and September 30, 2005.
Unaudited - Condensed Consolidated Statements 2
of Operations for the three and six months ended
March 31, 2006 and 2005 (as restated).
Unaudited - Condensed Consolidated Statements of 3
Cash Flows for the six months ended
March 31, 2006 and 2005 (as restated).
Unaudited - Condensed Consolidated Statements of 4
Stockholders'Equity for the year ended September 30,
2005 and the six months ended March 31, 2006.
Notes to Condensed Consolidated Financial 5
Statements (unaudited).
ITEM 2. Management's Discussion and Analysis of Financial 15
Condition and Results of Operations.
ITEM 3. Quantitative Statements and Supplementary 20
Data.
ITEM 4. Controls and Procedures. 20
PART II.
ITEM 4. Submission of Matters to a Vote of Security- 22
Holders
ITEM 5. Other Information 23
ITEM 6. Exhibits 23
SIGNATURES 23
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
MARCH 31, SEPTEMBER 30,
2006 2005
------------- -------------
ASSETS
Current Assets
Cash and cash equivalents $ 2,305 $ 3,562
Restricted cash 892 -
Accounts receivable - net of allowance for doubtful accounts
of $506 in March 2006 and $462 in September 2005 4,261 3,473
Inventories - net 11,366 9,554
Deferred tax asset 1,205 1,149
Other current assets 1,002 623
------------- -------------
Total current assets 21,031 18,361
Property, plant and equipment, net 9,505 6,612
Deposits 386 0
Deferred tax asset 1,509 1,232
------------- -------------
TOTAL ASSETS $ 32,431 $ 26,205
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,543 $ 1,365
Accounts expenses 2,778 3,767
Other current liabilities 1,752 1,210
Accrued commissions 1,793 1,765
Short-term borrowing 2,441 1,048
Current portion of deferred distribution fees 975 589
Current portion of long-term debt 492 184
------------- -------------
Total current liabilities 11,774 9,928
Noncurrent Liabilities
Deferred distribution fees 2,919 1,925
Long-term debt 3,358 630
------------- -------------
TOTAL LIABILITIES 18,051 12,483
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value, 30,000,000 authorized; 16,038,585
and 15,932,960 shares issued and outstanding 161 159
Additional paid-in capital 36,900 36,381
Accumulated other comprehensive income 1,874 1,678
Accumulated deficit (24,555) (24,496)
------------- -------------
Total shareholders' equity 14,380 13,722
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 32,431 $ 26,205
============= =============
See accompanying Notes to Condensed Consolidated Financial Statements.
1
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(unaudited)
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
2006 2005 2006 2005
(as restated see Note 14) (as restated see Note 14)
REVENUE $ 9,115 $ 7,554 $ 17,149 $ 14,627
COST OF REVENUE 4,111 4,691 7,526 8,983
------------ ------------ ------------ ----------------
Gross profit 5,004 2,863 9,623 5,644
OPERATING EXPENSES
General and administrative 1,498 1,289 3,074 2,431
Distribution and marketing 3,201 2,786 6,060 5,497
Research and development 443 452 870 842
------------ ------------ ------------ ----------------
5,142 4,527 10,004 8,770
OPERATING LOSS (138) (1,664) (381) (3,126)
FOREIGN EXCHANGE (LOSS) GAIN (146) 183 (28) (397)
OTHER INCOME (EXPENSE) (7) 24 9 20
INTEREST INCOME (EXPENSE) 100 (16) 21 (32)
------------ ------------ ------------ ----------------
(53) 191 2 (409)
LOSS BEFORE INCOME TAX BENEFIT (191) (1,473) (379) (3,535)
Income tax benefit (213) (344) (320) (492)
------------ ------------ ------------ ----------------
NET INCOME (LOSS) $ 22 $ (1,129) $ (59) $ (3,043)
============ ============ ============ ================
Comprehensive Income (Loss):
Foreign currency translation gain (loss) 399 (344) 196 (58)
------------ ------------ ------------ ----------------
COMPREHENSIVE INCOME (LOSS) $ 421 $ (1,473) $ 137 $ (3,101)
============ ============ ============ ================
AVERAGE SHARES OUTSTANDING FOR BASIC
(LOSS) PER SHARE 15,972,871 15,915,960 15,961,542 15,915,960
============ ============ ============ ================
BASIC EARNINGS (LOSS) PER SHARE $ 0.00 $ (0.07) $ 0.00 $ (0.19)
============ ============ ============ ================
AVERAGE SHARES OUTSTANDING FOR DILUTED
INCOME (LOSS) PER SHARE 16,538,916 15,915,960 15,961,542 15,915,960
============ ============ ============ ================
DILUTED (LOSS) PER SHARE $ 0.00 $ (0.07) $ 0.00 $ (0.19)
============ ============ ============ ================
See accompanying Notes to Consolidated Financial Statements
2
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED MARCH 31,
2006 2005
(as restated see Note 14)
Cash flows used in operating activities
Net loss $ (59) $ (3,043)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 257 382
Amortization of deferred distribution fees revenue (271) (326)
Deferred income taxes (334) 115
Provision for inventory write-downs 105 (492)
Share-based compensation 235 -
Changes in assets and liabilities:
Accounts receivable (787) 520
Inventories (1,916) 2,094
Other current assets (379) 134
Accounts payable (7) (753)
Accrued expenses (990) (415)
Other current liabilities 542 (400)
Accrued commissions 28 423
Deferred distribution fees 1,650 -
------------ ------------
Net cash used in operating activities (1,926) (1,761)
Cash flows used in investing activities
Investment in a marketable security - (491)
Change in restricted cash (892)
Deposits on purchases of property and equipment (386) -
Purchase of property and equipment (2,964) (617)
------------ ------------
Net cash used in investing activities (4,242) (1,108)
Cash flows from financing activities
Issuance of common stock 286 -
Proceeds from long-term borrowings 3,120 -
Proceeds from short-term borrowings 1,504 -
Repayment of short-term borrowings (110) -
Repayment of long-term debt (85) (67)
------------ ------------
Net cash provided by (used in) financing activities 4,715 (67)
Effect of exchange rate changes on cash 196 424
------------ ------------
Net decrease in cash and cash equivalents (1,257) (2,512)
Cash and cash equivalents at beginning of period 3,562 5,063
------------ ------------
Cash and Equivalents at end of period $ 2,305 $ 2,551
============ ============
------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Interest paid $ 147 $ 32
============ ============
Income taxes paid $ - $ 61
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements
3
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 2006
(Unaudited)
(In Thousands, Except for Share Data)
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Accumulated Common
Common Additional Other Shares
Stock Paid-in Comprehensive Accumulated Issued and
($.01 par) Capital Income (1) Deficit Total Outstanding
BALANCE, SEPTEMBER 30, 2005 159 36,381 1,678 (24,496) 13,722 15,932,960
Stock issued on exercise of options 2 284 - - 286 105,625
Share-based compensation 235 - - 235 -
Net loss (as restated, see Note 13) - - - (59) (59) -
Foreign currency translation adjustment - - 196 - 196 -
BALANCE, March 31, 2006 $ 161 $ 36,900 $ 1,874 $ (24,555) $ 14,380 16,038,585
(1) Represents foreign currency translation adjustments.
See accompanying Notes to Condensed Consolidated Financial Statements.
4
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2006
(in thousands, except 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) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in conformity with accounting principles
generally accepted in the United States for interim financial reporting. In
the opinion of management, all adjustments necessary in order to make the
financial statements not misleading have been made. Operating results for
the three and six months ended March 31, 2006 are not necessarily
indicative of the results which may be expected for the fiscal year ending
September 30, 2006. The interim financial statements should be read in
conjunction with the audited consolidated financial statements of the
Company included in the Company's Annual Report on Form 10-K/A for the
year ended September 30, 2005.
(3) NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123R "SFAS No. 123R", Share-Based Payment, that requires
compensation costs related to share-based payment transactions to be
recognized in the financial statements. The Company began complying with
SFAS No. 123R for the three months ended December 31, 2005. 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.
See footnote 4, "stock-based awards", regarding the impact of these
pronouncements on the Company's financial statements.
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 during the three months
ended December 31, 2005 did not have a material impact on the results of
operations or financial position of the Company.
5
(4) STOCK-BASED AWARDS
The Company maintains the 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. This plan remains in effect for all
options issued during it's life.
The Plan was superseded by the Tutogen Medical Inc. Incentive and
Non-Statutory Stock Option Plan (the "New Plan") (1,000,000 shares
authorized), adopted by the Board of Directors on December 5, 2005 and
ratified by the shareholders on March 13, 2006. Under the New 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.
Effective October 1, 2005, the Company adopted the provisions of SFAS No.
123R which establishes the financial accounting and reporting standards
for stock-based compensation plans. SFAS No. 123R requires the measurement
and recognition of compensation expense for all stock-based awards made to
employees and directors. Under the provisions of SFAS No. 123R,
stock-based compensation cost is measured at the grant date, based on the
calculated fair value of the award, and is recognized as an expense over
the requisite service period of the entire award (generally the vesting
period of the award). As a result of adopting SFAS No. 123R, the Company's
net loss before income taxes and net loss for the three and six months
ended March 31, 2006 was $139 and $235, respectively, more than if the
Company had continued to account for stock-based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and its related interpretations. Basic and
diluted net loss per share for the three and six months ended March 31,
2006 was not affected by the adoption SFAS No. 123R. In addition, there
was no tax effect related to the adoption of SFAS No. 123R due to the
recording of a full valuation allowance against U.S. net deferred tax
assets.
The Company elected to use the modified prospective transition method as
permitted by SFAS No. 123R and, therefore, financial results for prior
periods have not been restated. Under this transition method, stock-based
compensation expense for the three and six months ended March 31, 2006
includes expense for all equity awards granted prior to, but not yet
vested as of October 1, 2005, based on the grant date fair value estimated
in accordance with the original provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123,") as amended by SFAS No.
148, "Accounting for Stock-Based Compensation--Transition and Disclosure."
Since the adoption of SFAS No. 123R, there have been no changes to the
Company's stock compensation plans or modifications to outstanding
stock-based awards which would increase the value of any awards
outstanding. Compensation expense for all stock-based compensation awards
granted subsequent to October 1, 2005 was based on the grant-date fair
value determined in accordance with the provisions of SFAS No. 123R.
During the quarter and six months ended March 31, 2006, the Company
recognized compensation expense of $139 and $235, respectively relating to
stock options granted during the three and six months ended March 31, 2006
in addition to the vesting of options outstanding as of October 1, 2005.
All such expense was recognized within "General and administrative
expense" in the Statement of Operations. There were no significant
capitalized stock-based compensation costs at March 31, 2006.
Prior to October 1, 2005, the Company accounted for stock-based
compensation in accordance with APB 25 and also followed the disclosure
requirements of SFAS No. 123. Under APB 25, the Company accounted for
stock-based awards to employees and directors using the intrinsic value
method as allowed under SFAS No. 123. Under the intrinsic value method, no
stock-based compensation expense had been recognized in the Company's
Statement of Operations because the exercise price of the Company's stock
options granted to employees and directors equaled the fair market value
of the underlying stock at the date of grant. The following table sets
forth the computation of basic and diluted loss per share for the three
and six months ended March 31, 2005 and illustrates the effect on net loss
and loss per share as if the Company had applied the fair value
recognition provisions of SFAS 123 to its stock plans:
6
Three Months Ended Six Months Ended
March 31, March 31,
2005 2005
------------------ ----------------
Net loss: $(1,129) $(3,043)
Deduct:
Total stock-based employee
compensation expense determined under
fair value based method, net of related tax effects 22 31
------- -------
Pro forma net loss $(1,151) $(3,074)
======= =======
Basic and diluted loss per share:
As reported $(0.07) $(0.19)
Pro forma using the fair value method $(0.07) $(0.19)
The fair value of each stock option grant is estimated on the grant date
using the Black-Scholes option-pricing model with the following assumptions:
Expected Volatility 54.3% 48.6%
Risk-free interest rate (range) 4-4.1% 4-4.1%
Expected term (in years) 5.00 5.00
EXPECTED VOLATILITY. The Company's methodology for computing
the expected volatility is based solely on the Company's
historical volatility.
EXPECTED TERM. The expected term is based on employee exercise patterns
during the Company's history and expectations of employee exercise
behavior in the future giving consideration to the contractual terms of
the stock-based awards.
RISK-FREE INTEREST RATE. The interest rate used in valuing awards is
based on the yield at the time of grant of a U.S. Treasury security
with an equivalent remaining term.
DIVIDEND YIELD. The Company has never paid cash dividends, and does not
currently intend to pay cash dividends, and thus has assumed a 0%
dividend yield.
PRE-VESTING FORFEITURES. Estimates of pre-vesting option forfeitures
are based on Company experience and industry trends. The Company will
adjust its estimate of forfeitures over the requisite service period
based on the extent to which actual forfeitures differ, or are expected
to differ, from such estimates. Changes in estimated forfeitures will
be recognized through a cumulative catch-up adjustment in the period of
change and will also impact the amount of compensation expense to be
recognized in future periods.
7
Presented below is a summary of the status of the Company's stock options
as of December 31, 2005, and related transactions for the quarter then
ended:
WEIGHTED
WEIGHTED AVERAGE
NUMBER OF AVERAGE REMAINING AGGREGATE
COMMON EXERCISE CONTRACTUAL INTRINSIC
STOCK OPTIONS SHARES (000'S) PRICE LIFE VALUE
-----------------------------------------------------
Outstanding at September 30, 2005 2,481 $ 2.64 5.1 $ -
Granted 28 3.12 10.0 -
Canceled
Exercised (18) 2.53 - -
-------------------------------------------------------
Outstanding at December 31, 2005 2,491 $ 2.65 5.3 $ -
Granted 88 3.22 10.0 -
Canceled (6) 3.58
Exercised (88) 2.70 - -
-------------------------------------------------------
Outstanding at March 31, 2006 2,485 $ 2.66 4.9 $ -
Vested or expected to vest 2,236 $ 2.66 4.8 $ -
Fully vested at March 31, 2006 1,883 $ 2.49 2.1 $ -
As of March 31, 2006, 239,178 stock options were available for grant. The
weighted-average grant-date fair value of options granted during the six
months ended March 31, 2006 and March 31, 2005 was $3.20 and $1.43,
respectively. Cash received from option exercises for the six months ended
March 31, 2006 and March 31, 2005, was $285 and $0 respectively.
As of March 31, 2006, there was $445 of total unrecognized compensation
cost related to nonvested stock options. That cost is expected to be
recognized over a weighted-average period of 1.2 years.
(5) EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted Earnings (loss) per EPS for net income and net income
available to common shareholders (in thousands, except per share amounts):
Three Months Ended Three Months Ended
March 31, 2006 March 31, 2005
------------------------------------- -------------------------------------
Income Shares Per Income Shares Per
Numerator Denominator Share Numerator Denominator Share
----------- ------------- ------- ----------- ------------- -------
Net Income (loss) $ 22 $ (1,129)
BASIC EPS:
Net income (loss) $ 22 15,973 $0.00 $ (1,129) 15,916 $ 0.07
======= ========
Effect of dilutive
securities:
Stock options 629 -
DILUTED EPS:
Net income (loss)
assumed conversions $ 22 16,602 $0.00 $ (1,129) 15,916 $ 0.07
======= ========
For the three months ended March 31, 2006, weighted average options to
purchase 387,960 shares of common stock at exercise prices ranging from
$3.62 to $11.00 per share were outstanding but were not included in the
computation of the duluted EPS because the options werer antidilutive
under the treasury stock method. A reconciliation of the numerators and
denominators for the six months ended March 31, 2006 and March 31, 2005
has not been included as the Company incurred net losses during those
respective periods.
8
(6) INVENTORIES
Major classes of inventory at March 31, 2006 and September 30, 2005 were as
follows:
March 31, September 30,
2006 2005
------------- -------------
Raw materials $ 2,377 $ 1,753
Work in process 5,414 4,219
Finished goods 7,476 6,860
----------- -----------
15,267 12,832
Less reserves for obsolescence 3,901 3,278
----------- -----------
$ 11,366 $ 9,554
=========== ===========
(7) INCOME TAXES
The Company has approximately $15,200 of federal net operating loss
carryforwards expiring beginning in 2008 and state net operating loss
carryforwards of approximately $14,700 that will begin to expire in
September 2006.
The Company has a corporate net operating loss carryforward for German
income tax purposes of approximately $4,283 (3,546 Euros), and a trade net
operation loss carryforward for German income tax purposes of approximately
$1,828 (1,514 Euros), which can be carried forward indefinitely.
The Company continually reviews the adequacy and necessity of the valuation
allowance in accordance with the provisions of FASB Statement No. 109,
Accounting for Income Taxes. As of March 31, 2006, the Company continues to
maintain a full valuation allowance on the net deferred tax assets
attributable to its domestic operations. The Company does not maintain a
valuation allowance on its International deferred tax assets, because
management believes it is more likely than not that these tax benefits will
be realized through the generation of future International taxable income.
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.
(8) LONG-TERM DEBT
As of March 31, 2006, the Company has a $1,300 construction loan with a
financing company which has provided funding for the expansion of its U.S.
manufacturing facility. With the completion of the manufacturing facility
in May 2006, the construction loan converted into a long-term capital
lease. The Company will commence lease payments of $55 per month over 24
months. At the end of the term, the company has the option to purchase the
property for a price determined by the company and the lessor or continue
to extend the lease for additional time periods.
On March 31, 2006, the Company refinanced a $1,800 construction loan which
provided funding for the expansion of its German manufacturing facility.
The loan has a term of six years and an interest rate of 5.15% which was
fixed by an interest rate swap entered into on March 31, 2006 (See Note 9
for hedging activities). As of March 31, 2006, approximately $900 of the
proceeds received in this financing were restricted for the purpose of
funding the continued construction of the German manufacturing facility.
9
(9) HEDGING ACTIVITIES
The Company accounts for its hedging activities in accordance with SFAS
No. 133, "Accounting for Derivatives and Hedging Activities", as amended.
SFAS No. 133 requires that all hedging activities be recognized in the
balance sheet as assets or liabilities and be measured at fair value.
Gains or losses from the change in fair value of hedging instruments that
qualify for hedge accounting are recorded in other comprehensive income.
The Company's policy is to specifically identify the assets, liabilities
or future commitments being hedged and monitor the hedge to determine if
it continues to be effective. The Company does not enter into or hold
derivative instruments for trading or speculative purposes. The fair value
of the Company's interest rate swap agreement is based on dealer quotes.
The fair value of the interest rate swap was approximately $0 on March 31,
2006.
(10) 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
consistent with prior periods. The Company evaluates performance based on
the operating income of each segment. The Company accounts for
inter-segment 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 unique regulatory and marketing differences in
these markets as well as their physical location.
A summary of the operations and assets by segment as of and for the three
months ended March 31, 2006 and 2005, respectively are as follows:
THREE MONTHS - 2006
---------------------------------------------
SEGMENT DATA INTERNATIONAL US TOTAL
---------------------------------------------
GROSS REVENUE $ 3,742 $ 5,973 $ 9,715
LESS: INTERCOMPANY (600) - (600)
=============================================
TOTAL REVENUE - THIRD PARTY $ 3,142 $ 5,973 $ 9,115
OPERATING LOSS $ (47) $ (91) $ (138)
NET (LOSS) INCOME $ (5) $ 27 $ 22
TOTAL IDENTIFIABLE ASSETS $ 17,589 $ 14,842 $ 32,431
==============================================
THREE MONTHS - 2005
---------------------------------------------
SEGMENT DATA INTERNATIONAL US TOTAL
---------------------------------------------
GROSS REVENUE $ 4,285 $ 4,728 $ 9,013
LESS: INTERCOMPANY (1,459) - (1,459)
=============================================
10
TOTAL REVENUE - THIRD PARTY $ 2,826 $ 4,728 $ 7,554
OPERATING LOSS $ (668) $ (996) $ (1,664)
NET LOSS $ (477) $ (652) $ (1,129)
TOTAL IDENTIFIABLE ASSETS $ 17,455 $ 12,286 $ 29,741
==============================================
SIX MONTHS - 2006
---------------------------------------------
SEGMENT DATA INTERNATIONAL US TOTAL
---------------------------------------------
GROSS REVENUE $ 7,558 $ 11,382 $ 18,940
LESS: INTERCOMPANY (1,791) - (1,791)
=============================================
TOTAL REVENUE - THIRD PARTY $ 5,767 $ 11,382 $ 17,149
OPERATING INCOME (LOSS) $ 177 $ (558) $ (381)
NET INCOME (LOSS) $ 137 $ (196) $ (59)
TOTAL IDENTIFIABLE ASSETS $ 17,589 $ 14,842 $ 32,431
==============================================
SIX MONTHS - 2005
---------------------------------------------
SEGMENT DATA INTERNATIONAL US TOTAL
---------------------------------------------
GROSS REVENUE $ 8,249 $ 9,644 $ 17,893
LESS: INTERCOMPANY (3,266) - (3,266)
=============================================
TOTAL REVENUE - THIRD PARTY $ 4,983 $ 9,644 $ 14,627
OPERATING LOSS $ (1,605) $ (1,521) $ (3,126)
NET LOSS $ (1,446) $ (1,597) $ (3,043)
TOTAL IDENTIFIABLE ASSETS $ 17,455 $ 12,286 $ 29,741
==============================================
(11) 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 resulted in a reduction of the original proposed judgment received
against the Company by $406. At March 31, 2006 and September 30, 2005, the
Company maintained an accrual of $459 with respect to the remaining
11
appeal and legal costs. Management believes that such accrual is sufficient
and that the final settlement will not have a material impact on results of
operations.
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 notified all
customers and distributors of record regarding this action. In connection
with the recall, the Company wrote off $174 of inventory during 2005,
and currently has reserved $872 for quarantined unprocessed tissue.
Additionally, as of September 30, 2005, the Company had accrued $250 of
related costs in connection with the recall. During the three months ended
March 31, 2006, the Company recorded an adjustment of approximately $150 to
reduce this accrual as a result of a change in management's estimate of
other related costs. The effect of this adjustment was to reduce cost of
revenue by approximately $150.
In January 2006, the Company was named as one of several defendants in a
class action suit related to the BioMedical recall. It is management's
opinion that it is too early in the process to determine the effect of this
class action on the financial condition of the Company. However, the
Company intends to vigorously defend this matter and does not believe that
settlement of this class action will have an adverse material effect on the
Company's operations, cash flow or financial position.
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.
12
(12) 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 quarters ended March 31, 2006 and 2005 product sales to Zimmer
spine totaled $425 and $483, respectively, representing 4.7% and 6.4%
respectively of our total revenues. For the six months ended March 31, 2006
and 2005 product sales to Zimmer spine totaled $799 and $1,533,
respectively, representing 4.7% and 10.5% respectively of our total
revenues. Accounts receivable from Zimmer Spine were $156 and $44 at March
31, 2006 and September 30, 2005 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 quarters ended March 31,
2006 and 2005, Zimmer Dental was paid commissions aggregating approximately
$1,793 and $1,308, respectively. For the six months ended March 31, 2006
and 2005, Zimmer Dental was paid commissions aggregating approximately
$3,358 and $2,502, respectively. Accounts payable to Zimmer Dental total
$1,793 and $1,740 at March 31, 2006 and September 30, 2005, respectively.
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.
(13) SUBSEQUENT EVENTS
On March 10, 2006, Zimmer Holdings Inc. ("Zimmer") filed an amended
Schedule 13 (d) expressing its intention to initiate discussions with the
Company which could possibly include further investment by Zimmer in
securities of the Company or the acquisition by Zimmer of some or all of
the outstanding common stock of the Company.
On June 28, 2006, the Company entered into a three year distribution
agreement (with options to extend) with Mentor Corporation. Mentor has the
exclusive North American rights for the use of Tutoplast Dermis in the
dermatology and plastic surgery markets for breast reconstruction. The
Company is currently evaluating the effect that this agreement will have on
its financial statements.
On June 30, 2006, the company issued a $3,000 convertible debenture and
warrants to purchase up to 175,000 shares of its common stock. The
debenture bears interest at 5.0% per year, is due upon the earlier of 12
months or upon a change of control of the Company and is convertible into
common stock at a price of $5.15 per share at any time at the election of
the holder. The warrants are exercisable at $5.15 per share at any time at
the election of the shareholder until the earlier of the third anniversary
of the date of issuance or upon a change in control of the Company.
On June 30 2006, the Company announced the appointment of Dr. Karl
Koschatzky as Managing Director of the Company's German subsidiary
replacing Mr. Manfred Kruger. In connection with Mr. Kruger's separation
from the Company, he will be paid 278,607 Euro plus benefits in twelve
equal monthly payments of 23,217 Euro during the period from July 1, 2006
through June 30, 2007.
13
(14) RESTATEMENT
As part of the financial review for the three and six months ended March
31, 2005, 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 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 condensed consolidated
financial statements for the three and six months ended March 31, 2005 to
correct these errors.
The impact of this restatement on the accompanying consolidated financial
statements is summarized below:
As
Previously As
For the three months ended March 31, 2005 Reported Adjustments Restated
--------------------------------------------------------
Cost of revenues $ 4,801 $ (110) $ 4,691
Gross profit 2,753 110 2,863
Operating loss (1,774) 110 (1,664)
Net loss (1,239) 110 (1,129)
Comprehensive loss (1,583) 110 (1,473)
Basic and diluted loss per share (0.08) (0.01) (0.07)
As
Previously As
For the six months Ended March 31, 2005 Reported Adjustments Restated
--------------------------------------------------------
Cost of revenues $ 8,561 $ 422 $ 8,983
Gross profit 6,066 (422) 5,644
Operating loss (2,704) (422) (3,126)
Net loss (2,621) (422) (3,043)
Comprehensive loss (2,679) (422) (3,101)
Basic and diluted loss per share (0.16) (0.03) (0.19)
Cash flows from operating activities
Net loss (2,621) (422) (3,043)
Inventories 1672 422 2094
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(IN THOUSANDS)
RESTATED FINANCIAL STATEMENTS
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 described in Note 14 to the unaudited condensed consolidated
financial statements.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements typically are identified by use of terms such as
"may," "will," "should," "plan," "expect," "anticipate," "estimate," and similar
words, although some forward-looking statements are expressed differently.
Actual results could differ significantly from those discussed herein. Some of
the matters described in the "Risk Factors" and "Description of Business"
sections of its Form 10-K and other reports filed with the Securities and
Exchange Commission, constitute cautionary statements, including certain risks
and uncertainties, that could cause actual results to vary materially from the
future results indicated in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results indicated
in such forward-looking statements. The following discussion of our results of
operations should be read in conjunction with the Financial Statements and Notes
included in Part I. "Financial Information".
BUSINESS
Dental sales continue to grow. For spine sales, management believes
that the second half of fiscal year 2006 will improve as Zimmer has commenced
purchases for new products. The Company will be entering the important hernia
repair market with Davol as the Company's distribution partner the second half
of the fiscal 2006 year. The expansion of the US facility will be completed
during the third quarter. We expect gross margins to continue to improve by
fiscal year end 2006 as a result of continued efficiencies.
Europe continues to grow at double-digit growth patterns. In conjunction with
this, the Company is also expanding the physical plant in Neunkirchen, Germany
in order to fully support the growing and important international segment.
The Company's ability to generate positive operational cash flow is dependent
upon increasing revenues supported by increased tissue procurement, controlling
costs and the development of additional markets and surgical applications
worldwide. While the Company believes that it continues to make progress in
these areas, there can be no assurances.
15
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
Revenues for the three months ended March 31, 2006, increased 21% to $9,115 from
$7,554 for the same period in 2005. The U.S. operation had an 26% increase in
revenues to $5,973 for the three months ended March 31, 2006 compared to $4,728
for the same period last year. This increase was fueled primarily by the
continued increase in the demand for the Company's Tutoplast(R) bone products
for dental applications sold by Zimmer Dental, the Company's marketing partner.
The dental business in the U.S. increased 40% from the three-month period a year
ago. The International operation had an increase of 11% in revenue from $2,826
to $3,142 for the three-month periods ended March 31, 2005 and 2006,
respectively. The increase in International revenue was primarily due to
increased sales in Germany and France through direct sales force efforts and as
certain regulatory provisions which have been cleared. An analysis of revenues
by major business segment is as follows:
Three Three
Months Months
(000'S OMITTED) 03/31/06 03/31/05
--------------------------
Spine $ 425 $ 483
Dental 4,338 3,102
Surgical Specialties 1,210 1,143
--------------------------
Total - U.S. $ 5,973 $ 4,728
Germany $ 780 $ 579
France 560 212
ROW 1,675 1,884
Other 127 151
--------------------------
Total - International $ 3,142 $ 2,826
Total Consolidated $ 9,115 $ 7,554
==========================
Gross margin for the three months ended March 31, 2006 was 55% as compared to
38% for the comparable period last year. The higher gross margin was due to
greater efficiencies in the U.S. operations as manufacturing capabilities have
come on line.
General and administrative expenses increased 16% for the three months ended
March 31, 2006 over the comparable period last year. The increase from prior
year quarter to this quarter was primarily due to increased costs of $139
associated with stock option expenses, and costs related to new personnel.
General and Administrative expenses were 16 % and 17% of total revenues for both
the three months ended March 31, 2006 and 2005, respectively.
Distribution and marketing expenses increased 15% for the three months ended
March 31, 2006 over the comparable period last year. The increase was primarily
due to higher marketing fees paid to Zimmer Dental of $1,798 versus $1,416 a
year ago as a result of the 40% increase in dental revenues in the U.S. As a
percentage of revenues, distribution and marketing expenses were 35% and 37% for
the three months ended 2006 and 2005, respectively.
16
Research and development expenses remained at similar levels for the three
months ended March 31, 2006, over the comparable period last year. As a
percentage of revenues, research and development expenses decreased from 6% for
quarter ended March 31, 2005 to 5% for the quarter ended March 31, 2006.
The Company had a foreign exchange loss for the quarter of $146. This was the
result of a higher volume inter-company transactions between the U.S. subsidiary
and the foreign subsidiary and the currency fluctuations of the dollar during
this quarter versus the euro during this quarter last year.
Interest expense decreased $116 for the three months ended March 31, 2006
compared to the prior period last year. The decrease in interest expense is
primarily associated with the capitalization of interest related to the debt
facilities to fund the expansion of the manufacturing facilities in the U.S. and
Germany.
As a result of the above, net income for the three months ended March 31, 2006
totaled $22 or $0.00 basic and diluted loss per share as compared to a net loss
of $1,129 or $0.07 basic and diluted loss per share for the comparable period in
2005. The net loss decreased due to increased sales and improved gross margins.
Six months ended March 31, 2006 and 2005
Revenues for the six months ended March 31, 2006, increased 17% to $17,149 from
$14,627 for the same period in 2005. The U.S. operation had an 18% increase in
revenues from $9,644 for the three months ended March 31, 2005 to $11,382 for
the current six-month period. This increase was fueled by the continuing
increase in the demand for the Company's Tutoplast(R) bone products for dental
applications sold by Zimmer Dental, the Company's marketing partner. The dental
business in the U.S. increased 44% from the six-month period a year ago. The
spine revenues continue to be impacted by the high inventory levels at the
Company's marketing partner, Zimmer Spine. The International operation had an
increase of 16% from $4,983 for the six-months ended March 31, 2005 to $5,767
for the six-month period ended March 31, 2006. The increase in International
revenue was primarily due to increased sales in Germany and France through
direct sales force efforts and as certain regulatory provisions have been
cleared. An analysis of revenues for the six months ended March 31, 2006 by
major business segment is as follows:
Six Six
Months Months
(000's omitted) 03/31/06 03/31/05
--------------------------
Spine $ 799 $ 1,533
Dental 8,223 5,701
Surgical Specialties 2,360 2,410
--------------------------
Total - U.S. $ 11,382 $ 9,644
Germany $ 1,575 $ 899
France 834 627
ROW 3,105 3,157
Other 253 300
--------------------------
Total - International $ 5,767 $ 4,983
Total Consolidated $ 17,149 $ 14,627
==========================
Gross margin for the six months ended March 31, 2006 was 56% as compared to 39%
for the comparable period last year. The higher gross margin was due to greater
efficiencies in the U.S. operations as manufacturing capabilities have come on
line.
17
General and administrative expenses increased 26% for the six months ended March
31, 2006 over the comparable period last year. The increase for the six-month
period was primarily due to the increased costs of $235 associated with stock
option expenses, additional costs related to Sarbanes Oxley and personnel costs.
As a percentage of revenues general and administrative expenses were 18% and 17%
for the six months ended 2006 and 2005, respectively.
Distribution and marketing expenses increased 10% for the six months ended March
31, 2006 over the comparable period last year. The increase was primarily due to
higher distribution fees paid to Zimmer Dental of $3,347 versus $2,668 a year
ago as a result of the 44% increase in dental revenues in the U.S. As a
percentage of revenues, distribution and marketing expenses were 35% and 38% for
the six months ended 2006 and 2005, respectively.
Research and development expenses remained at similar levels for the six months
ended March 31, 2006 as compared to the comparable period last year. As a
percentage of revenues, research and development expenses decreased from 6% for
the six-months ended March 31, 2006 to 5% for the six months ended 2006.
The Company had a foreign exchange loss for the six-month period of $28. This
was the result of a higher volume of inter-company transactions between the U.S.
subsidiary and the foreign subsidiary and the currency fluctuations of the
dollar versus the Euro during this period in 2005.
Interest expense decreased $53 for the six months ended March 31, 2006 compared
to the same period last year. The decrease in interest expense is primarily
associated with the capitalization of interest related to the debt facilities to
fund the expansion of the manufacturing facilities in the U.S. and Germany.
As a result of the above, the net loss for the six months ended March 31, 2006
totaled $59 or $0.00 basic and diluted loss per share as compared to a net loss
of $3,043 or $0.19 basic and diluted loss per share for the comparable period in
2005. The decrease in net loss is associated with increased sales and improved
gross margins.
Inventory
Net Inventory increased 19%, from $9,555 at last fiscal year-end to $11,366 at
March 31, 2006. Raw material levels increased 21% due to increased sales and
purchase orders. Similarly, work-in-process ("WIP") is up 28%. Finished goods
levels are up 9%.
Critical Accounting Policies
The Company's significant accounting policies are more fully described
in Note 2 to the condensed consolidated financial statements in the annual
report. However, certain of the accounting policies are particularly important
to the portrayal of the financial position and results of operations and require
the application of significant judgment by management; as a result, they are
subject to an inherent degree of uncertainty. In applying those policies,
management uses its judgment to determine the appropriate assumptions to be used
in the determination of certain estimates. Those estimates are based on
historical experience, terms of existing contracts, observance of trends in the
industry, information provided by customers and information available from other
outside sources, as appropriate. The Company's significant accounting policies
include:
Inventories. Inventories are valued at the lower of cost (weighted
average basis) or market. Work in process and finished goods include 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.
18
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 is 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 ratably
over the life of the contract.
Foreign Currency Translation. The functional currency of the Company's
German subsidiary is the Euro for the years 2006 and 2005. Assets and
liabilities of foreign subsidiaries are translated at the period end exchange
rate ("spot rate") while revenues and expenses are translated at the average
exchange rate for the period. The resulting translation adjustments,
representing unrealized, non-cash losses or gains 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 net income as they occur. The Company recognized a foreign
currency translation loss of $146 for the quarter ended March 31, 2006 as
compared to a gain of $183 for the quarter ended March 31, 2005. The Company
recognized a foreign currency translation loss of $29 for the six months ending
March 31, 2006 versus a loss of $397 for the six months ended March 31, 2005.
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 we would be able to realize our deferred tax assets in
the future, it is more likely than not, that 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.
Liquidity and Capital Resources
At March 31, 2006, the Company has working capital of $9,257 as compared to
$8,434 at September 30, 2005. The Company maintains current working capital
credit lines totaling 1,500 euros (approximately $1,800) with two German banks
and a $1,500 credit line with a U.S. bank. At March 31, 2006, the Company had
outstanding $900 on the credit lines in Germany and $1,500 outstanding on the
U.S. credit line to support ongoing working capital initiatives.
The Company had a negative cash flow from operations of $2,311 for the six
months ended March 31, 2006 as compared to a negative cash flow from operations
of $1,761 for the same period in 2005. The primary reasons for the increased
cash utilized for operating activities in 2006 was due mainly to increased
inventory purchase, offset somewhat by the receipt of a deferred distribution
payment and a reduced net loss for the six-month period. Cash flows used in
investing activities increased to $4,242 as the company continued to expand its
manufacturing facilities in the U.S. and Germany. The increase in investing
activities has been financed by interim construction facilities of $1,300 and
$1,800 in the U.S. and Germany, respectively. The Company's ability to generate
positive operational cash flow is dependent upon increased revenues supported by
increased tissue procurement, controlling costs and the development of
additional markets and surgical applications worldwide. While the Company
believes that it continues to make progress in these areas, there can be no
assurances.
19
Future minimum rental payments required under Company's leases that have initial
or remaining non-cancelable lease terms in excess of one year as of March 31,
2006 are as follows:
2006 $ 562
2007 995
2008 755
2009 388
2010 65
----------
$ 2,765
==========
Long-term debt consists of senior debt construction loans. Future minimum
payments as of March 31, 2006 are as follows: (1)
2006 $ 565
2007 1,143
2008 690
2009 1,452
----------
$ 3,850
Less current portion 492
----------
$ 3,358
==========
(1) The above payments do not include interest.
Item 3. QUANTITATIVE STATEMENTS AND SUPPLEMENTARY DATA
For information regarding the Company's exposure to certain market risks, see
Item 7A, Quantitative Statements and Supplementary Data, in the Annual Report on
Form 10-K/A for the year ended September 30, 2005. There have been no
significant changes in our market risk exposures from the fiscal 2005 year-end.
We are subject to market risk from exposure to changes in interest rates based
upon our financing, investing and cash management activities. A 1% increase in
interest rates would not have a material effect on our results of operations.
Item 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
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 procdures 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 and December
31, 2005 the Company's 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 the financial statements for prior
periods. (See Note 13 to the accompanying unaudited interim condensed
Consolidated Financial Statements.)
20
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. For the quarter ended
March 31, 2006, the 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 have strengthened the Company's disclosure controls and procedures, as
well as its internal control over financial reporting, and have remediated the
material weakness that the Company identified in its internal control over
financial reporting as of September 30, 2005 and December 31, 2005. The Company
has discussed this material weakness and its remediation program with its 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 and cost of
revenues.
Changes in Control:
Except as described above, there has not been any change in our internal control
over financial reporting during the quarter ended March 31, 2006 that has
materially affected, or is reasonably likely to materially affect, those
controls.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please refer to Footnote 8 of the Interim Financial Statements.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
An annual Meeting of Stockholders was held on March 14,
2005. All management's nominees for director, as listed in
the Proxy Statement for the Annual Meeting, were elected.
Listed below are the matters voted on by stockholders and
the number of votes cast at the Annual Meeting:
(a) Election of eight members of the Board of Directors.
Broker
Voted Votes Non-Votes
Name Voted For Against Withheld and Abstentions
---- --------- ------- -------- ---------------
G. Russell Cleveland 11,730,141 0 611,988 0
Roy D. Crowninshield 12,088,562 0 253,567 0
Neal Freeman 12,074,904 0 267,225 0
J. Harold Helderman 12,067,131 0 274,998 0
Udo Henseler 12,085,914 0 256,215 0
Guy L. Mayer 12,088,081 0 254,048 0
Adrian J. R. Smith 12,082,066 0 260,063 0
Carlton E. Turner 12,080,879 0 261,250 0
(b) Adopt an Incentive and Non-Statutory Stock Option Plan
covering 1,000,000 shares of the Company's Common Stock
Voted For: 8,007,221
Voted Against: 794,348
Votes Abstained: 85,889
Broker Non-Votes 3,454,671
(c) Ratification of the appointment of Deloitte and
Touche L.L.P. as independent auditors of the Company
for the fiscal year ending September 30, 2006.
Voted For: 12,305,091
Voted Against: 21,240
Votes Abstained: 15,798
22
ITEM 5. OTHER INFORMATION
The Company filed three reports on Form 8-K during the quarter
ended March 31, 2006.
ITEM 6. EXHIBITS
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.***
*** Filed herewith
SIGNATURES
Registrant has duly caused this report to be signed on its behalf by the
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
undersigned, thereunto duly authorized.
TUTOGEN MEDICAL, INC.
Date: July 6, 2006 /s/ Guy L. Mayer
--------------------------------
Chief Executive Officer
Date: July 6, 2006 /s/ L. Robert Johnston, Jr.
--------------------------------
Chief Financial Officer
(Principal Financial
and Accounting Officer)
23