UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended September 30, 2006.
[_] 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 - American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: NONE
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Indicate by check mark if the registrant is a well known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X
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Indicate by check mark whether the registrant is a shell company. Yes No X
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. Yes No X
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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
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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 X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
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As of November 30, 2006, there were 16,413,815 shares outstanding of the
issuer's Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
None.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The discussion contained in this annual report under Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), for the
issuer's fiscal year ended September 30, 2006 (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 2007 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"), designs,
develops, processes, 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 dental, spinal, urology,
ophthalmology, head and neck, and general surgery procedures. Our products are
distributed throughout the United States and in over twenty (20) other
countries.
The Company's corporate worldwide headquarters is located in Alachua, Florida.
In addition, the Company has a manufacturing facility in Alachua, Florida, as
well as international executive offices, 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 using 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, 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 dental, ophthalmology, urology, plastic
and reconstructive surgeries. Dermis is also used in hernia repair and 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. Processed cortical and cancellous bone material is used in a wide
variety of applications in spinal, orthopaedic and dental surgeries. All
processed tissues have a shelf life of five (5) years, at room temperature, and
require minimal time for rehydration. The Company processes bone and soft
tissues in both manufacturing facilities.
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, while maintaining its
structure and allowing it to act as a scaffold after implantation, which is
subsequently 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 responsible for AIDS), rendering the allografts safe for the
recipient. Soft tissue is also treated with chemicals shown to be effective
against prions, the agent causing Creutzfeldt-Jakob Disease ("CJD"). Once
packaged, tissues are terminally sterilized by low dosage gamma radiation.
MANUFACTURING AND PROCESSING
Tutogen considers itself a leader in the manufacturing 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. We believe our proprietary TUTOPLAST 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 and one-half million (1,500,000) 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 breaks down RNA and DNA into fragments not capable of
replication and disease transmission while preserving the biological and
mechanical properties. The TUTOPLAST process 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.
While some of the TUTOPLAST processing steps are automated, the majority are
manual and rely on highly-skilled personnel for their proper execution. Such
skilled labor is readily available in the surrounding geographic areas and
management feels that there should be no adverse affect on the business related
to the labor market.
Tutogen operates two tissue processing facilities; a 26,000 square foot facility
in Alachua, Florida and a 33,000 square foot facility in Neunkirchen, Germany.
Major expansion projects were recently completed at both facilities, and will be
in service by the first calendar quarter of 2007. These expansion projects are
intended to ensure the availability of sufficient production capacity to address
the increasing demand for the Company's allograft and xenograft products in the
foreseeable future.
1
QUALITY ASSURANCE AND REGULATORY AFFAIRS - The Company maintains comprehensive
quality assurance and regulatory compliance programs that provide oversight for
all pertinent aspects of the Company's day-to-day operational activities. Among
the responsibilities of the QA/RA organizations 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 Corrective and Preventive Action programs to reduce or
eliminate any identified non-conformances
The Quality Assurance and Regulatory Affairs departments are independent from
the manufacturing operation, functioning under the supervision of the Tissue
Bank Director (a medical doctor) and senior management staff.
MARKETING AND DISTRIBUTION
Tutogen's products and processing services are provided globally through a
combination of worldwide distributors, direct representatives and local
distributors. Tutogen's personnel, along with distributors and their
representatives, conduct product training sessions, make joint customer calls,
set objectives and evaluate their representatives' performance. Personnel also
call on select physicians and key hospital accounts in order to provide needed
clinical and technical information services. The overall strategy is to work
with each global distributor 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 international sales are derived primarily from Europe. Since
Tutogen's foreign donor procurement practices are in full compliance with the
donor suitability standards of the AATB and the U.S. Food and Drug
Administration ("FDA"), the Company has worked closely with its distributors to
expand into numerous market opportunities world wide. Tissue grafts are used in
dental, spine, urology, ophthalmology, hernia, general surgery, head and neck
applications, and plastic and reconstructive surgeries. Future objectives are to
match this penetration into additional international 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 distributors.
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 applications, for select international
markets.
Zimmer Dental Inc. ("Zimmer Dental") and Zimmer Spine Inc. ("Zimmer Spine"),
subsidiaries of Zimmer Holdings, Inc., provide marketing services for the
Company's products for the dental and spine markets. Starting in September 2000,
Zimmer Dental entered into an agreement to represent TUTOPLAST processed bone,
under the brand name Puros(R), for dental applications. Revenues from this
relationship account for 46% of total consolidated and 69% of total U.S.
revenues for the fiscal year ended September 30, 2006. Zimmer Dental markets the
products to the end user and the Company ships and bills the customer directly.
Distribution fees earned pursuant to the agreements are recognized ratably over
the terms of these respective agreements. During 2006, the Company expanded its
relationship with Zimmer Dental by adding pericardium and dermis soft tissue
grafts for dental applications. The additions of these new products provide
Zimmer Dental with a full line of products for the dental surgeons. During 2006,
the Company extended Zimmer Dental's exclusivity into select international
markets.
Also starting 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", therefore Zimmer
Spine now purchases the Company's products and distributes 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 for 2006 represented 8% and 11%, of total
consolidated and U.S. revenues, respectively.
The Company also manufactures products for surgical specialties which include
urology, ophthalmology, ENT, hernia and aesthetics products. During 2006, sales
from surgical specialties totaled 13% of consolidated revenue and 19% of US
revenues.
2
For urological indications, the Company had partnered with Mentor Corporation
("Mentor") since 1998. During 2006, Mentor sold their urology business to
Coloplast A/S of Denmark ("Coloplast"), and assigned the Tutogen agreement to
Coloplast. As a stocking distributor, Coloplast currently markets TUTOPLAST
fascia lata, pericardium, and dermis tissue implants. In April 2006, Tutogen and
Mentor signed an agreement that extended the current contracts for one year to
provide enough time for Mentor to consummate the sale of the urology business to
Coloplast. The transition to Coloplast is ongoing, and a new definitive
agreement with Coloplast is in discussion.
IOP, Inc. ("IOP") has been a distributor since 1998, and is the exclusive
distributor for TUTOPLAST processed tissue for ophthalmology applications. Sense
Medical, a distributor since December 2004, has non-exclusive rights to
distribute TUTOPLAST products for selected head and neck procedures.
In January 2006, the Company entered in to a four-year exclusive worldwide
distribution agreement with Davol, Inc. ("Davol"), a subsidiary of C. R. Bard,
Inc., to promote, market and distribute the Company's line of allograft biologic
tissues for hernia repair and the reconstruction of the chest and abdominal
walls. Under the agreement, Davol paid the Company $3.3 million in fees for the
exclusive distribution rights. Davol is a stocking distributor, and entered the
hernia market during the fourth quarter of fiscal year 2006.
In June 2006, the Company signed a new exclusive distribution agreement with
Mentor Corporation ("Mentor") for the exclusive North American rights for the
use of TUTOPLAST dermis in the dermatology and plastic surgery markets for
breast reconstruction. The Company received an upfront payment in consideration
for these distribution rights. Shipments to Mentor, and market release will
occur during fiscal year 2007.
Internationally, the Company concentrates on an in-depth penetration of markets
with major needs not covered by Tutogen's global distributors. 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, orthopedics and tissue
processing. Approximately 40% of the total international sales are xenograft
products. The Company believes that through a combination of international
distribution strategies, Tutogen can increase its penetration of the
international markets for processed tissue.
The following table summarizes the Company's markets, products, applications and
distributors:
Estimated
Distributor Market Market Size - U.S. Products Applications
------------- -------------- --------------------- ---------------------- ---------------------
Zimmer Dental Dental $169.0 million Puros Cancellous Ridge Augmentation
Puros Cortical
Puros Block
Puros Pericardium
Puros Dermis
Zimmer Spine Spine $656.0 million Puros bone Interbody Fusion
Specialty Machined Cervical and Lumbar
Grafts
(Puros C & Puros A)
Davol Hernia $150.0 million AlloMax Hernia Repair
(Human Dermis Product) Reconstruction of the
chest and abdominal
walls
Coloplast Urology $200.0 million Suspend fascia lata Urinary Incontinence
Axis dermis Pelvic Floor
Pericardium Reconstruction
Mentor Breast $25.0 - $50.0 million NeoForm dermis Breast Reconstruction
Reconstruction
IOP Ophthalmology $9.0 million IO Patch Glaucoma
BioDome Enucleation
BioElevation Brow
BioSpacer Suspension
Sense Medical ENT $55.0 million Fascia lata Tympnoplasty
Fascia temporalis Rhinoplasty
Pericardium Septoplasty
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 recipient.
3
These records accompany each donor tissue receipt, along with related
serological test samples. The test samples are evaluated by independent Clinical
Laboratory Improvement Amendment ("CLIA") 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
and C Nucleic Acid Test ("HBV/HCV NAT"), Human Immunodeficiency Virus 1&2
antibodies ("HIV 1&2 Ab"), HIV Nucleic Acid Test ("HIV NAT"), Human
T-Lymphotropic Virus 1&2 ("HTLV 1&2") and Syphilis ("RPR/STS").
In June of 2002, the FDA published its draft Guidance for Industry document,
"Preventive Measures to Reduce the Possible Risk of Transmission of
Creutzfeldt-Jakob Disease and variant Creutzfeldt-Jakob Disease ("vCJD") by
Human Cells, Tissues, and Cellular and Tissue-Based Products ("HCT/Ps")". This
document reflects the FDA'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.
The Company embarked on a program in 1993 to develop xenografts (tissue derived
from animals) as an allograft substitute. 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. Approximately 40% of the total products sold internationally
are bovine. Tutogen Germany currently obtains bovine material from a "closed
herd" in an internationally approved source country. In the US, the Company
received FDA 510(k) clearance for bovine pericardium in 2000, allowing the
Company to market the first xenograft tissues (Tutopatch(R)) domestically, for
indications of general and plastic surgery. Based on such approvals Tutogen
Germany will be able to supply bovine products in the US. The Company is
currently evaluating the introduction and timing of bovine products in the US.
The unique biomechanical properties of bovine tissue, combined with the absence
of the 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 providers are FDA registered, state licensed
and accredited by the AATB, as appropriate. Tissues are not purchased from these
companies, but rather the providers are reimbursed for the costs incurred in the
tissue recovery process itself, at the time of delivery. Due to the growing
demand for and the 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 and entered into
multiple new arrangements during 2006.
In November 2006, the company entered into strategic tissue sourcing agreements
with Regeneration Technologies, Inc. ("RTI"). Under the multi-year agreements,
RTI has the first right of refusal to all soft tissue used in sports medicine
surgeries recovered by Tutogen's tissue recovery providers. The Company, in
turn, has the first right of refusal to all dermis, fascia and pericardium
recovered by RTI donor services agencies.
Although the Company believes that it has the necessary contractual arrangements
in place to ensure that there are sufficient tissues available to meet its needs
for the foreseeable future, there can be no assurance that these supplies will
continue or materialize as planned. Unavoidable interruptions in tissue supply
(such as natural disasters, regulatory changes, financial set-backs) could have
a material adverse effect on Tutogen's business operations.
COMPETITION
Tutogen considers itself 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 1,500,000
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 and peer-reviewed articles.
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
manufacturers such as Osteotech, Inc., RTI and LifeCell, Inc., companies well
established in the fields of processing and distribution of bone and soft tissue
implants, which have substantially greater financial resources than the Company.
4
Not-for-profit tissue banks that procure and process tissue for distribution are
considered competitors for certain applications in certain markets. Management
believes that the TUTOPLAST process, with its impressive record for safety in
the surgical community, gives the Company a marked advantage over its
competitors. However, due to government regulation, disrupted sources of tissue
supply 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 over
$1.25 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
the foreseeable future. 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 the Company's internally developed new products and technology, a major
component of the Company's growth strategy will be expanding its collaborations
with each global distributor. Tutogen will continue to work with each
organization to evaluate opportunities for new products and applications, and to
determine the potential for international expansion. The ultimate goal is to
provide each distributor with a full line of procedure specific implants, for
their respective fields of use, and to leverage their sales strength in select
international markets.
Currently, the Company'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 well accepted and is
highlighted in various Zimmer Dental training courses. Globally, similar
products processed from xenograft tissue, has helped generate growth as the
Company focuses on expanding the international market for dental products.
Additionally, the Company has developed membranes from TUTOPLAST processed
dermis and pericardium for use as a barrier in dental applications. These
products have been used in Europe, and the U.S. launch for pericardium was in
February 2006 and for dermis in September 2006. The addition of these new
products in the U.S. will provide Zimmer Dental with a full line of products for
the dental surgeons.
The spine market for biologic materials was estimated at approximately $656
million in 2005. This allograft market is split between traditional allograft
bone (19%), machined specialty grafts (49%), and demineralized bone matrix
("DBM") (32%). Tutogen continues its U.S. collaboration with Zimmer Spine in
developing new, highly precise machined specialty grafts. During the fourth
quarter of fiscal year 2006, the Company shipped to Zimmer Spine the first two
machined specialty grafts (PurosC(R) - cervical graft and PurosA(R) - anterior
lumbar interbody fusion graft) for spinal surgery. Zimmer Spine will release
these products to the market during 2007. The Company will explore expanding its
spinal products internationally during 2007.
During October 2002, the Company entered the European market with Tutomesh(R), a
TUTOPLAST processed xenograft for hernia and abdominal wall repair. It has been
well received in Europe, and has already been successfully used in abdominal
wall surgery of neonates and children with hernia defects. The Company is
evaluating this opportunity globally for both the Tutomesh, as well as for
TUTOPLAST processed dermis. In December 2004, Tutogen received FDA 510(k)
marketing clearance for a xenograft product and is currently investigating
various options for its distribution in the U.S.
Internationally, the Company has internally developed a line of TUTOPLAST
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.
In January 2006, Tutogen entered into a four-year exclusive worldwide
distribution agreement with Davol, a subsidiary of C. R. Bard, Inc., to promote,
market and distribute Tutogen's line of allograft biologic tissues for hernia
repair and the reconstruction of the chest and abdominal walls. Under the
agreement, Davol paid Tutogen $3.3 million in fees for the exclusive
distribution rights. Davol is a stocking distributor, and entered the hernia
market during the fourth quarter of 2006. The US market for biologic grafts used
for hernia repair is estimated at $150 million annually. The Company will work
with Davol to grow its new hernia business during 2007 and beyond.
In June 2006, the Company signed a new exclusive distribution agreement with
Mentor for the exclusive North American rights for the use of TUTOPLAST dermis
in the dermatology and plastic surgery markets for breast reconstruction. Under
the agreement, Mentor will pay the Company an upfront payment of $.5 million in
consideration for these distribution rights. The initial estimated potential
market in the U.S. is $25-50 million. Shipments to Mentor and market release
will occur during fiscal year 2007.
5
INTERNATIONAL OPERATIONS
The Company currently has sales in more than 20 countries located primarily in
Europe. Approximately 33%, 32% and 42% of the Company's consolidated sales,
respectively for fiscal years 2006, 2005, and 2004 were derived from outside the
United States, as follows:
Revenues (IN THOUSANDS)
Year ended September 30, United States International Consolidated
------------------------ ------------- ------------- ------------
2006 $25,430 $12,517 $37,947
2005 $21,752 $10,108 $31,860
2004 $17,126 $12,204 $29,330
Approximately 40% of total international sales are bovine products and 60% are
allograft products. Products are manufactured and supplied out of the Company's
manufacturing facilities in Neunkirchen, Germany.
RESEARCH AND DEVELOPMENT
The Company continues to engage in research and development ("R&D") activities.
The Company follows an internal product development plan and coordinates all R&D
activities, including the Zimmer Dental and Zimmer Spine collaborations. R&D
expenditures remain at 5% of total sales.
In allograft-related areas, R&D activities focus primarily on the development of
surgical solutions and applications, 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 enhance tissue safety and efficacy.
Non-allograft activities relate to explorations into the use of xenografts
(specifically bovine), tissue-engineered grafts and improved healing. Clinical
studies, evaluation and follow-up are conducted on these activities. The Company
is referred to in more than 400 publications. The Company's research efforts are
subsidized by its collaboration with non-profit research institutions and
strategic business partners. These activities will be expanded pending the
availability of the necessary financial resources.
CUSTOMERS
The Company has exclusive distribution agreements with Zimmer Dental, Zimmer
Spine, Davol, Mentor, Coloplast and IOP. Zimmer Dental and Zimmer Spine
accounted for approximately 46% and 8%, respectively, of the Company's revenue
for the year ended September 30, 2006. No end user customer accounted for more
than 10% of the Company's consolidated sales for the fiscal year 2006.
PATENTS, LICENSES AND TRADEMARKS
Wherever possible, the Company seeks to protect its proprietary information,
products, methods and technology by obtaining patent and trademark protection.
The Company has certain patents pending and has multiple registered trademarks
covering several countries worldwide. In the United States, the Company is
aggressively pursuing 510(k) submissions for its various products or processes
and subsequent FDA clearances. 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
The Company procures, processes and markets its tissue products worldwide.
Although some standards of harmonization exist, 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 FDA
under Title 21 of the Code of Federal Regulations, Parts 1270 and 1271, "Current
Good Tissue Practice for Human Cell, Tissue, and Cellular and Tissue-Based
Products". Xenograft tissues are regulated as medical devices and subject to 21
CFR, Part 820 (Current Good Manufacturing Practices for Medical Devices) and
related statutes. The Company has obtained a 510(k) marketing clearance from the
FDA for bovine pericardium, for use in general and plastic surgery applications
and will be seeking further approvals for other xenograft tissues and
indications. In addition, the U.S. operation is subject to certain state and
local regulations, as well as compliance to the standards of 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 European Union ("EU").
6
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. In June of 2006, the Company received approval to sell its
first allograft product into Germany.
The FDA and international regulatory bodies conduct periodic compliance
inspections of both the Company's 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 AATB and is licensed in the states of
Florida, New York, California, Maryland, Delaware and Illinois. 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 independent, third parties 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.
EMPLOYEES
As of September 30, 2006, the Company employed a total of 222 full-time
employees, of whom 80 full-time employees were employed in the United States and
the remainder in Germany. Management believes its relations with its employees
are good.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves a number of very significant risks.
You should carefully consider the following risks and uncertainties in addition
to other information in this report in evaluating our Company and its business
before purchasing shares of our Company's common stock. Our business, operating
results and financial condition could seriously be harmed due to any of the
following risks. The risks described below are not the only ones facing our
Company. Additional risks not presently known to us may also impair our business
operations. You could lose all or part of your investment due to any of these
risks.
WE DEPEND HEAVILY UPON A LIMITED NUMBER OF SOURCES OF HUMAN TISSUE, AND ANY
FAILURE TO OBTAIN TISSUE FROM THESE SOURCES IN A TIMELY MANNER WILL INTERFERE
WITH OUR ABILITY TO PROCESS AND DISTRIBUTE ALLOGRAFTS.
Our business is dependent on the availability of donated human cadavers tissue
supplied by donor recovery groups. Donor recovery groups provide support to
donor families, are regulated by the FDA, and are often affiliated with
hospitals, universities or organ procurement groups. Our relationships with
donor recovery groups, which are critical to our supply of tissue, can be
affected by relationships they have with other organizations. Any negative
impact of the regulatory and disease transmission issues facing the industry, as
well as the negative publicity that these issues create, could have an impact on
our ability to negotiate favorable contracts with recovery groups.
If our current sources can no longer supply human cadaveric tissue or our
requirements for human cadaveric tissue exceed their current capacity, we may
not be able to locate other sources on a timely basis, or at all. Any
significant interruption in the availability of human cadaveric tissue would
likely cause us to slow down the processing and distribution of our human tissue
products, which could adversely affect our ability to supply the needs of our
customers and materially and adversely affect our results of operations and our
relationships with our customers.
AlloSource, our largest donor recovery group, supplied us with approximately 65%
of our total human tissue for the year ended September 30, 2006. Our three
largest recovery groups together supplied approximately 83% of our total tissue
for the year ended September 30, 2006. If we were to lose any one of these
sources of tissue, the unfavorable impact on our operating results would be
material.
7
WE ARE HIGHLY DEPENDENT UPON INDEPENDENT DISTRIBUTORS TO GENERATE OUR REVENUES.
We currently derive the majority of our revenues through our relationships with
two companies, Zimmer Dental and Zimmer Spine. For the year ended September 30,
2006, we derived approximately 46% and 8% of our consolidated revenues from
distribution by Zimmer Dental and Zimmer Spine, respectively.
Zimmer provides nearly all of the instrumentation, surgeon training,
distribution assistance and marketing materials for our line of dental and
spinal allografts. If our relationship with Zimmer is terminated or reduced for
any reason and we are unable to replace the relationship with other means of
distribution, we would suffer a material decrease in revenues.
WE FACE INTENSE COMPETITION FROM COMPANIES, ACADEMIC INSTITUTIONS, TISSUE BANKS,
ORGAN PROCUREMENT ORGANIZATIONS AND TISSUE PROCESSORS WITH GREATER FINANCIAL
RESOURCES AND LOWER COSTS WHICH COULD ADVERSELY AFFECT OUR REVENUES AND RESULTS
OF OPERATIONS.
The biotechnology field is highly competitive and is undergoing rapid and
significant technological changes. Our success depends upon our ability to
develop and commercialize effective products that meet medical needs as well as
our ability to accurately predict future technology and market trends. Many of
our competitors have much greater financial, technical, research, marketing,
distribution, service and other resources that are significantly greater than
ours. Moreover, our competitors may offer a broader array of tissue repair
treatment products and technologies or may have greater name recognition than we
do in the marketplace.
Our competitors may develop or market technologies that are more effective or
commercially attractive than ours, or that may render our technology
uncompetitive, uneconomical or obsolete. For example, the successful development
of a synthetic tissue product that permits remodeling of bones could result in a
decline in the demand for allograft-based products and technologies and have a
materially adverse effect on our financial condition and results of operation.
IF THIRD PARTY PAYERS FAIL TO PROVIDE APPROPRIATE LEVELS OF REIMBURSEMENT FOR
THE USE OF OUR IMPLANTS, OUR REVENUES WOULD BE ADVERSELY AFFECTED.
Political, economic and regulatory influences are subjecting the healthcare
industry in the United States to fundamental change. Any new Federal or state
legislation could result in significant changes in the availability, delivery,
pricing or payment for healthcare services and products. While we cannot predict
what form any new legislation will take, it is possible that any significant
healthcare legislation, if adopted, could lower the amounts paid to us for our
services, which would decrease our revenues.
Our revenues depend largely on the reimbursement of patients' medical expenses
by government healthcare programs and private health insurers. Governments and
private insurers closely examine medical procedures incorporating new
technologies to determine whether the procedures will be covered by payment, and
if so, the level of payment which may apply. We cannot be sure that third party
payers will continue to reimburse us or provide payment at levels which will be
profitable to us.
OUR ALLOGRAFT AND XENOGRAFT IMPLANTS AND TECHNOLOGIES COULD BECOME SUBJECT TO
SIGNIFICANTLY GREATER REGULATION BY THE FDA, WHICH COULD DISRUPT OUR BUSINESS.
The FDA and several states have statutory authority to regulate allograft
processing and allograft-based materials. The FDA could identify deficiencies in
future inspections of our facilities or promulgate future regulatory rulings
that could disrupt our business, hurting our profitability.
FDA regulations of human cellular and tissue-based products, titled "Good Tissue
Practices," went into full force as of May 2005. These regulations cover all
stages of allograft processing, from procurement of tissue to distribution of
final allografts. These regulations may increase regulatory scrutiny within our
industry and lead to increased enforcement action which affects the conduct of
our business. In addition, the effect of these regulations may have a
significant effect upon recovery agencies which supply us with tissue and
increase the cost of recovery activities. Any such increase would translate into
increased costs to us, as we compensate the recovery agencies based on their
cost of recovery.
Other regulatory entities include state agencies with statutes covering tissue
banking. Of particular relevance to our business are regulations issued by
Florida, New York, California and Maryland. Most states do not currently have
tissue banking regulations. However, recent incidents of allograft related
infections in the industry may stimulate the development of regulation in other
states. It is possible that others may make allegations against us or against
donor recovery groups or tissue banks, including those with which we have a
relationship, about non-compliance with applicable FDA regulations or other
relevant statutes and regulations. Allegations like these could cause regulators
or other authorities to take investigative or other action, or could cause
negative publicity for our business and our industry.
Some of our implants in development will contain tissue derived from animals,
commonly referred to as xenografts. Xenograft implants are medical devices that
are subject to pre-market approval or clearance by the FDA. We may not receive
FDA approval or clearance to market new implants as we attempt to expand the
quantity of xenograft implants available for distribution.
8
THE NATIONAL ORGAN TRANSPLANT ACT ("NOTA") COULD BE INTERPRETED IN A WAY THAT
COULD REDUCE OUR REVENUES AND INCOME IN THE FUTURE.
Some aspects of our business are subject to additional local, state, federal or
international regulation. Changes in the laws or new interpretations of existing
laws could negatively affect our business, revenues or prospects, and increase
the costs associated with conducting our business. The procurement and
transplantation of allograft tissue is subject to federal regulation under the
National Organ Transplant Act, or NOTA, a criminal statute that prohibits the
purchase and sale of human organs, including bone and other tissue. NOTA permits
the payment of reasonable expenses associated with the transportation,
processing, preservation, quality control and storage of human tissue, which are
the types of services we perform. If in the future, NOTA were amended or
interpreted in a way that made us unable to include some of these costs in the
amounts we charge our customers, it could reduce our revenues and therefore hurt
our business. It is possible that more restrictive interpretations or expansions
of NOTA could be adopted in the future which could require us to change one or
more aspects of our business, at a substantial cost, in order to continue to
comply with this statute.
OUR SUCCESS WILL DEPEND ON THE CONTINUED ACCEPTANCE OF OUR ALLOGRAFT AND
XENOGRAFT IMPLANTS AND TECHNOLOGIES BY THE MEDICAL COMMUNITY.
Market acceptance of our allograph and xenograph implants can be affected by
factors such as competitive tissue repair options, lack of third party
reimbursement and the training of surgeons in the use of our tissue transplants,
and rapid technological changes such as synthetic hormone tissue substitutes.
Market acceptance depends on our ability to demonstrate that our existing and
new implants and technologies are an alternative to existing tissue repair
treatment options. This will depend on surgeons' evaluations of the clinical
safety, efficacy, ease of use, reliability and cost-effectiveness of these
tissue repair options and technologies.
WE OR OUR COMPETITORS MAY BE EXPOSED TO PRODUCT LIABILITY CLAIMS WHICH COULD
CAUSE US TO BE LIABLE FOR DAMAGES OR CAUSE INVESTORS TO THINK WE WILL BE LIABLE
FOR SIMILAR CLAIMS IN THE FUTURE.
The development of allografts and technologies for human tissue repair and
treatment entails an inherent risk of product liability claims, and substantial
product liability claims may be asserted against us. We are a party to a number
of legal proceedings related to product liability.
The implantation of donated cadaveric human tissue products creates the
potential for transmissions of communicable disease. Although we comply with
Federal and state regulations and guidelines intended to prevent communicable
disease transmission, and our tissue suppliers are also required to comply with
such regulations, there can be no assurances that: (i) our tissue suppliers will
comply with such regulations intended to prevent communicable diseases
transmissions; (ii) even if such compliance is achieved, that our products have
not been or will not be associated with transmission of disease; or (iii) a
patient otherwise infected with disease would not erroneously assert a claim
that the use of our products resulted in disease transmission.
We currently have $5 million of product liability insurance to cover claims.
This amount of insurance may not be adequate for current claims if we are not
successful in our defenses, and furthermore, we may not have adequate insurance
coverage for any future claims that arise. Moreover, insurance covering our
business may not always be available in the future on commercially reasonable
terms, if at all. If our insurance proves to be inadequate to pay a damage
award, we may not have sufficient funds to do so, which would harm our financial
condition and liquidity. In addition, successful product liability claims made
against one of our competitors could cause claims to be made against us or
expose us to a perception that we are vulnerable to similar claims. In addition,
claims against us, regardless of their merit or potential outcome, may also hurt
our ability to obtain surgeon endorsement of our allografts or to expand our
business.
NEGATIVE PUBLICITY CONCERNING THE USE OF DONATED HUMAN TISSUE IN MEDICAL
PROCEDURES COULD REDUCE THE DEMAND FOR OUR PRODUCTS AND NEGATIVELY IMPACT THE
SUPPLY OF AVAILABLE DONOR TISSUE.
There has recently been negative publicity concerning the use and method of
obtaining donated human tissue that is used in medical procedures. This type of
negative publicity could reduce the demand for our products or negatively impact
the willingness of families of potential donors to agree to donate tissue, or
tissue banks to provide tissue to us. In such event, we might not be able to
obtain adequate tissue to meet the needs of our customers. As a result, our
relationships with our customers and our results of operations could be
materially and adversely affected.
OUR SUCCESS DEPENDS ON THE SCOPE OF OUR INTELLECTUAL PROPERTY RIGHTS AND NOT
INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Our ability to compete effectively with other companies is materially dependent
upon the success of our patents and how effective we are in enforcing them and
protecting our trade secrets. If we are not successful and steadfast, it is
highly likely that our competitors will exploit our proprietary technologies and
innovations and will compete more effectively against us. It is also highly
likely that our competitors, who also have greater resources than we do, will
challenge our intellectual property rights, and attempt to invalidate,
circumvent or render unenforceable any of our patents or propriety rights that
we currently own or are licensed to us.
Because of the competitive nature of the biotechnology industry, there can be no
assurances that we will not be required to litigate the enforcement of our
patents and other intellectual rights.
9
Moreover, there can be no assurances that we will not have to defend our
existing or proposed products or processes against third party claims of patent
infringement and other intellectual property claims. However the litigation may
arise, intellectual property litigation is always costly and ends up diverting
our financial and management resources and damages our business.
WE MAY NEED TO SECURE ADDITIONAL FINANCING TO FUND OUR LONG-TERM STRATEGIC PLAN.
We expect to continue to make investments in our business to support our
distribution efforts and future programs and initiatives, which may deplete our
available cash balances. We believe that our available cash, cash equivalents,
available lines of credit and anticipated future cash flow from operations will
be sufficient to meet our cash needs for the foreseeable future. Our future
liquidity and capital requirements will depend upon numerous factors, including
but not limited to, the progress of our product development programs and the
need for and associated costs relating to regulatory approval, if any, which may
be needed to commercialize some of our products under development, or those
commercialized products whose regulatory status may change.
We may need to raise additional funds through the issuance of equity and/or debt
financing in private placements or public offerings to provide funds to meet the
needs of our long-term strategic plan. Additional funds may not be available, or
if available, may not be available on favorable terms. Further equity
financings, if obtained, may substantially dilute the interest of our
pre-existing shareholders. Any additional debt financing may contain restrictive
terms that limit our operating flexibility. As a result, any future financings
could have a material adverse effect on our business, financial condition or
results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
As of September 30, 2006, there were no comment letters outstanding from the
SEC.
ITEM 2. PROPERTIES.
UNITED STATES. The Company's domestic facilities are located in Alachua,
Florida. The Company previously announced the relocation of the administrative
offices to its facility in Alachua which occurred on December 31, 2005. In April
2005, the Company's offices and manufacturing facility in Alachua, Florida
expanded from approximately 20,205 square feet to 26,000 square feet of leased
space. The Florida lease expires January 31, 2009 with a renewal option through
January 31, 2011, at a base rent of approximately $34,000 per month. There are
various options for additional expansion space in the immediate area and the
Company believes that it will have sufficient space to meet its current and
future needs into the foreseeable future.
GERMANY. The Company's facility in Neunkirchen consists of six buildings
totaling approximately 33,000 square feet on approximately two acres of land.
This property is owned by the Company and should be sufficient in size and
condition to handle anticipated production levels for international markets into
the foreseeable future. In addition, the Company is renting office space of
approximately 23,000 square feet at $12,500 per month, expiring at various
periods in the later part of 2006. The intent is to eliminate and consolidate
the current rental offices as part of the facilities expansion project that is
currently underway. The expansion project is expected to be completed by the
first calendar quarter of 2007.
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 resulted in a
reduction of the original proposed judgment received against the Company by
$406,000. At September 30, 2006 and 2005, the Company maintained an accrual of
$385,000 and $476,000, respectively (approximately 380,000 euros) with respect
to the remaining appeal and legal costs. During October 2006, the Company
completed a settlement of $360,000 (or approximately 280,000 euros) with the
former international distributor.
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 notified all customers and distributors of
record regarding this action. In connection with the recall, the Company wrote
off $1,035,000 of inventory during 2005. Additionally, as of September 30, 2005,
the Company had accrued $250,000 of related costs in connection with the recall.
As of September 30, 2006, the accrual for these costs was $0, due in part to
actual payments made for such costs and in part to an adjustment made by
management during the three months ended March 31, 2006 to reduce the accrual by
approximately $150,000 as a result of a change in management's estimate of the
total recall related costs. The effect of this adjustment was to reduce cost of
revenue by approximately $150,000.
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.
10
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.
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.
11
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 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
Fiscal 2006
-----------
First Quarter $4.40 $2.62
Second Quarter 5.00 2.92
Third Quarter 5.20 4.55
Fourth Quarter 6.24 4.21
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, 2006, the approximate number of holders of record of the
Company's Common Stock was 714.
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 plans as of September 30, 2006.
Number of securities
Weighted-average Remaining available
Number of securities to Exercise price of For future issuance under
be Issued upon exercise Outstanding Equity compensation plans
of Outstanding options, options, (excluding securities
Plan Category warrants and rights Warrants and rights reflected in column (a))
----------------------------------------- ----------------------- ------------------- -------------------------
(a)
Equity compensation plan approved by
Securities holders - 1996 Plan (1) 2,221,368 $2.63 -0-
Equity compensation plan approved by
Securities holders - 2006 Plan (1) 17,500 $4.92 982,500
Equity compensation plan not approved by
Securities holders -0- -0- -0-
Total 2,238,868 $2.65 982,500
(1) Reflects options to purchase shares of the Company's common stock and
shares available for Issuance under the Company's stock option plans.
12
ITEM 6. SELECTED FINANCIAL DATA.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
Revenue $ 37,947 $ 31,860 $ 29,330 $ 30,260 $ 20,747
Gross margin % 57% 37% 60% 67% 60%
Operating (loss) income (287) (7,227) 3,158 5,265 1,666
Net (loss) income (589) (7,017) 1,133 3,707 901
Average shares outstanding for basic
earnings (loss) per share 16,027,469 15,919,286 15,734,470 15,495,148 15,114,000
Basic earnings (loss) per share $ (0.04) $ (0.44) $ 0.07 $ 0.24 $ 0.06
Average shares outstanding for diluted
earnings (loss) per share 16,027,469 15,919,286 16,469,443 16,095,448 15,960,000
Diluted earnings (loss) per share $ (0.04) $ (0.44) $ 0.07 $ 0.23 $ 0.06
Balance Sheet Data:
Working capital $ 8,215 $ 8,433 $ 17,471 $ 15,342 $ 10,856
Total assets 38,917 26,205 33,536 29,962 23,748
Long-term debt 4,770 814 827 728 693
Stockholders' equity 15,221 13,722 21,272 17,606 13,928
The company adopted SFAS 123R for the year ended September 30, 2006. The impact
of this adoption is discussed in Item 7 below under general and administrative
expenses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Tutogen Medical, Inc., a Florida corporation, was formed in 1985 and with its
consolidated subsidiaries (collectively, the "Company" or "Tutogen"), designs,
develops, processes, manufactures and markets sterile biological implant
products made from human (allograft) and animal (xenograft) tissue. Surgeons use
our products to repair and promote the healing of a wide variety of bone and
other tissue defects, including dental, spinal, urology, ophthalmology, head,
neck and general surgery procedures. Our products are distributed in the United
States and in over twenty (20) other countries.
We pursue a market approach to the distribution of our implants and establish
strategic distribution arrangements in order to increase our penetration in
selected markets. We have distribution agreements with Zimmer Dental and Zimmer
Spine, subsidiaries of Zimmer Holdings, Inc. for the dental and spine markets,
Mentor for breast reconstruction, IOP for ophthalmology, Davol for hernia,
Coloplast for urology, and Sense Medical for ears, nose and throat. In all other
markets that we serve, we use a network of independent distributors.
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:
SHARE-BASED COMPENSATION. We adopted Statement of Financial Accounting Standards
No. 123R, SHARE-BASED PAYMENTS in the first quarter of fiscal year 2006. SFAS
123R requires the measurement and recognition of compensation expense for all
share-based payment awards including employee stock options based on estimated
fair values. Under SFAS 123R, we estimate the value of share-based payments on
the date of grant using the Black-Scholes model, which was also used previously
for the purpose of providing pro forma financial information as required under
SFAS 123. The determination of the fair value of, and the timing of expense
relating to, share-based payment awards on the date of grant using the
Black-Scholes model is affected by our stock price as well as assumptions
regarding a number of variables including the expected term of awards, expected
stock price volatility and expected forfeitures.
13
Prior to the first quarter of fiscal year 2006, we used historical stock price
volatility in preparing our pro forma information under SFAS 123. Under SFAS
123R, we use a combination of historical and implied volatility to establish the
expected volatility assumption based upon our assessment that such information
is more reflective of current market conditions and a better indicator of
expected future volatility. SFAS 123R also requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. We estimate expected forfeitures, as
well as the expected term of awards, based on historical experience. Future
changes in these assumptions, our stock price or certain other factors could
result in changes in our share-based compensation expense in future periods.
INVENTORIES. Inventories are valued at the lower of cost or market. Work in
process and finished goods includes costs attributable to direct labor and
overhead. Impairment charges for slow moving, excess and obsolete inventories
are recorded based on historical experience, current product demand including
meeting periodically with distributors, regulatory considerations, industry
trends, changes and risks and the remaining shelf life. As a result of this
analysis, the Company records an allowance to reduce the carrying value of any
impaired inventory to its fair value, which becomes its new cost basis. If the
actual product life cycles, demand or general market conditions are less
favorable than those projected by management, additional inventory impairment
charges may be required which would affect future operating results due to
increases costs from the resulting adjustment. The adequacy of these impairment
charges 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 the
Financial Accounting Standards Board - Statement of Financial Accounting
Standard (SFAS) No. 48 and allowances for doubtful accounts are based on
significant historical experience. 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 to approximate services provided under the
contract. Recognition of revenue commenced over the term of the distribution
agreement upon delivery of initial products.
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 we would be able to realize our deferred
tax assets in the future, an adjustment to the valuation allowance 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 to the valuation allowance and
charged to income in the period of such determination. We recorded a deferred
tax asset valuation allowance of $6,166,000 and $6,309,000 at September 30, 2006
and 2005, respectively; representing 100% of existing U.S. net deferred tax
assets.
FOR THE YEARS ENDED SEPTEMBER 30, 2006 AND 2005 - RESULTS OF OPERATIONS
REVENUE AND GROSS MARGIN
Revenue for the year ended September 30, 2006 increased to $37.9 million from
$31.9 million in 2005. The U.S. revenues were $25.4 million or 17% higher than
the 2005 revenues of $21.8 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, the company's
distributor. In February 2006, the Company developed, in association with Zimmer
Dental, a new pericardium product, and in September 2006, a new dermis product
to augment ridge restoration. Sales of dental products increased 28% from a year
ago. Spine revenues decreased 9% as the Company transitions from traditional
spine grafts to specialty machined grafts. The Company introduced two new
machined grafts, Puros C and Puros A during the fourth quarter of fiscal year
2006. Surgical specialties (primarily urology, ophthalmology and ENT) remained
flat for 2006 compared to 2005.
The International operation had revenues of $12.5 million for the year ended
September 30, 2006, an increase of 24% from the 2005 revenues of $10.1 million.
The increase is primarily due to additional sales in Germany related to
increased bovine product sales, dental sales and service processing and
increased sales efforts by several key distributors in various countries.
14
An analysis of revenue follows:
4th Qtr. 4th Qtr. 4th Qtr.
($000's omitted) FY 2006 FY 2005 FY 2004 FY 2006 FY 2005 FY 2004
------------------------- ------- ------- ------- -------- -------- --------
Dental $17,616 $13,785 $ 6,893 $ 4,666 $4,115 $1,996
Spine 2,877 3,128 4,850 1,461 336 607
Surgical Specialties 4,937 4,839 5,383 1,417 1,129 1,445
------- ------- ------- ------- ------ -------
Total-U.S. $25,430 $21,752 $17,126 $ 7,544 $5,580 $4,048
Germany $ 2,851 $ 1,980 $ 3,521 $ 497 $ 487 $1,390
Rest of World (ROW) 7,472 6,220 6,001 2,085 1,324 1,829
France 1,672 1,337 2,121 525 391 525
Other - Distribution Fees 522 571 561 135 170 141
------- ------- ------- ------- ------ -------
Total-International $12,517 $10,108 $12,204 $ 3,242 $2,372 $3,885
Total Consolidated $37,947 $31,860 $29,330 $10,786 $7,952 $7,933
Gross margins for the year ended September 30, 2006 increased to 57% from 37% in
2005. The higher margins were due to (1) improved efficiencies in the U.S.
manufacturing operations; and (2) the introduction of new products with higher
margins. In addition, during fiscal year 2005, the gross margin was impacted by
initial start-up manufacturing costs of $1.6 million associated with shifting
production of the dental product lines from Germany to the U.S. and the
recording of $1.25 million in expenses due to inventory write-down and certain
accruals associated with the voluntary recall of products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased in 2006 to $7.8 million from $5.8
million in 2005. The increase was due to several charges including $437,000 in
severance costs associated with the replacement of the Managing Director of the
Company's German subsidiary, $217,000 in legal, accounting and other
professional costs associated with the restatement of prior period financial
results and $262,000 related to strategic discussions with Zimmer Holdings. The
Company incurred, for the first time, $451,000 in stock option expenses
associated with the adoption of Statement of Financial Accounting Standards No.
123R. In addition, the Company incurred increased legal expenses of
approximately $250,000 and accounting and audit fees of approximately $200,000
for various projects during the year. As a result, General and Administrative
expenses, as a percentage of revenues, increased from 18% in 2005 to 20% in
2006.
DISTRIBUTION AND MARKETING
Distribution and Marketing expenses increased in 2006 to $12.3 million from
$11.5 million in 2005. The increase was due mainly to higher marketing fees paid
to Zimmer Dental of $7.2 million in 2006 versus $6.1 million a year ago as
dental revenues increased to $17.6 million in 2006 up from $13.8 million in
2005. As a percentage of revenues, Distribution and Marketing expenses decreased
from 36% in 2005 to 33% in 2006.
RESEARCH AND DEVELOPMENT
Research and Development expenses of $1.8 million were similar in 2006 to $1.7
million in 2005. As a percentage of revenues, Research and Development expenses
remained at 5% in 2006 and 2005, respectively.
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, the Company maintained an accrual of $476,000 with respect
to the remaining appeal and legal costs. At September 30, 2006, the Company
agreed to a settlement of $360,000 resulting from a dispute between the Company
and a former international distributor and recorded a change in estimate of
approximately $91,000 as a reduction of accrued expenses, which reduced the
general and administrative expense for the year. The remaining accrual will be
used to settle final nominal legal and court costs.
15
OTHER INCOME
Other income for 2006 increased to $108,000 compared to $77,000 in 2005. This
was primarily the result of higher interest income on bank balances in 2006.
INTEREST EXPENSE
Interest expense in 2006 increased to $293,000 from $130,000 in 2005 due to
increased borrowings for capital expenditures related to the facility expansion
programs in Florida and Germany and interest expense associated with a $3.0
million convertible debenture issued in June 2006.
INCOME TAX (BENEFIT) EXPENSE
The income tax benefit is mainly due to the income tax benefit on the loss from
the Company's foreign operations. The Company continues to record a full
valuation allowance on its U.S. operations.
NET (LOSS) INCOME
The net loss for the year ended September 30, 2006 totaled $.6 million, $.04
basic and diluted loss per share as compared to a net loss of $7 million or $.44
basic and diluted loss per share for 2005. The reduction in net losses between
the years is directly attributable to higher revenues and improved gross margins
during 2006.
ACCOUNTS RECEIVABLE
The accounts receivable balance increased in 2006 to $6.2 million, up from $3.5
million in 2005 due to increased revenue growth, particularly during the fourth
quarter of 2006. In addition, for certain international distributors, payment
terms have been extended from 60 to 90 days contributing to higher receivable
balances in 2006.
INVENTORY
The inventory balance increased to $12.7 million at September 30, 2006 from $9.6
million at September 30, 2005. The increase was primarily due to replacing $1.0
million of inventory written-off during 2005 due to the voluntary recall of
certain products, and increased inventories associated with the recent
introduction of new products.
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 period. The resulting translation adjustments, representing
unrealized, non-cash gains and 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 and are included in Foreign exchange loss in
the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.
The Company recognized transaction losses of $311,000, $173,000 and $700,000 in
2006, 2005 and 2004, respectively.
EFFECTS OF INFLATION
The Company believes the impact of inflation and changing prices on net sales
revenues and on operations has been minimal during the past three years.
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 $2.6 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 36%, primarily due to significant purchases by Zimmer 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 for the year ended
September 30, 2005, 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
16
("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.
Gross margins for the year ended September 30, 2005 decreased to 37% from 60% in
2004. The lower margins were due to several factors, 1), an unfavorable mix of
lower margin products from the dental product revenues versus the spine revenues
(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. (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 notified all customers and
distributors of record regarding this action. In connection with this recall,
the Company wrote off $1,035,000 of inventory, and accrued $250,000 of other
related costs during the year ended September 30, 2005.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 38% in 2005 to $5.8 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 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 18% in 2005.
DISTRIBUTION AND MARKETING
Distribution and Marketing expenses 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 Zimmer 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 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 maintained an accrual of $476,000 with respect to the
remaining appeal and legal costs.
OTHER INCOME/EXPENSE
Other income/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.
INCOME TAX (BENEFIT) EXPENSE
Income Tax (Benefit) Expense is mainly due to the income tax benefit on the loss
from the Company's foreign operations. 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
twenty-two percent (22%) in 2005.
17
CONCENTRATION OF RISK
DISTRIBUTION--The majority of the Company's revenues are derived through the
Company's relationships with two companies, Zimmer Dental and Zimmer Spine which
contributed approximately 46% and 8%, respectively, of the Company's
consolidated revenues during 2006. If the Company's relationship with Zimmer is
terminated or further reduced for any reason and we are unable to replace the
relationship with other means of distribution, the Company would suffer a
material decrease in revenues.
TISSUE SUPPLY--The Company's business is dependent on the availability of
donated human cadaver tissues supplied by donor recovery groups. Allosource, our
largest donor recovery group, supplied the Company with approximately 65% of our
total human tissue for the year ended September 30, 2006. Our three largest
recovery groups together supplied approximately 83% of our total human tissue
during 2006. Any significant interruption in the availability of human tissue
would likely cause the Company to slow down the processing and distribution of
the Company's human tissue products, which could adversely affect the Company's
ability to supply the needs of the Company's customers and materially and
adversely affect the results of operations and the relationships with customers.
TRADE RECEIVABLES--As of September 30, 2006, one customer, Zimmer Spine,
represented 15% of the Company's outstanding trade receivables. No other
customer represented more than 10% of the Company's outstanding trade
receivables.
FOREIGN CURRENCY - The exposure to risk related to foreign currency exchange is
limited primarily to inter-company transactions. At September 30, 2006 the
Company substantially reduced its foreign currency exposure through the
elimination of certain intercompany accounts.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2006 and 2005 the Company had working capital of $8.2 million
and $8.4 million, respectively.
Cash and cash equivalents remained consistent from $3.6 million in 2005 to $3.5
million in 2006.
Net cash used in investing activities, representing purchases of capital
expenditures, was $6.0 million in 2006 and $1.7 million in 2005. The continued
spending on capital expenditures is due to the facility expansion in the Florida
and German manufacturing locations and manufacturing equipment.
Net cash from financing activities in 2006 and 2005 totaled $7.9 million and
$1.0 million, respectively from proceeds related to revolving credit facilities,
a $3.0 million convertible debenture, additional long-term debt and capital
leases.
Under the terms of revolving credit facilities with two German banks, the
Company may borrow up to 1.5 million Euros (1 million Euros and .5 million
Euros, respectively) or approximately $1.9 million for working capital needs.
These renewable credit lines allow the Company to borrow at interest rates
ranging from 8.05% to 9.5%. At September 30, 2006 the Company had outstanding
borrowings of 819,000 Euros or $1 million. At September 30, 2005, the Company
had no borrowings under the revolving credit agreements. The .5 million Euro
revolving credit facility is secured by accounts receivable of the German
subsidiary. The 1 million Euro revolving credit facility is secured by a
mortgage on the Company's German facility and a guarantee by the parent Company.
In November 2005, the Company entered into a revolving credit facility in the
U.S. for up to $1.5 million, expiring on November 18, 2007. At September 30,
2006, the Company had outstanding $1.5 million on this credit facility to fund
working capital needs. The U.S. accounts receivable and inventory assets secure
the borrowing under the revolving credit facility. The Company is required to
maintain a maximum senior debt to tangible net worth ratio of 2.0 to 1.0. As of
September 30, 2006, the Company was in compliance with this covenant.
On June 30, 2006, the Company issued a $3 million convertible debenture with
detachable 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 August 1,
2007 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. The convertible debt is
included in Short-term borrowings on the consolidated balance sheet at September
30, 2006. As of September 30, 2006, the Company was in compliance with the terms
and conditions of the convertible debenture.
Senior debt consists of two loans with a German bank. The first loan ($576,000
as of September 30, 2006) has an interest rate of 5.75%, payable monthly,
maturing March of 2011. The second loan ($1,744,000 as of September 30, 2006)
has an interest rate of 5.15%, payable quarterly, maturing March of 2012.
The Senior debt, refinanced construction line of credit, and a revolving credit
facility with a German bank are secured by a mortgage on the Company's German
facility and is guaranteed up to 4.0 million euros by the parent company. There
are no financial covenants under this debt.
The Company has an interim loan of 1 million Euros or approximately $1.3
million, at an annual interest rate of 5.75%, to finance its facility expansion
project in Germany. The interim loan was converted to a long-term loan November
30, 2006. This loan has a 10 year term, payable semi-annually (55,000 Euros) at
a fixed rate of 5.6%.
18
The Capital lease debt consists of two leases. The first lease (initially $1,3
million, $1.1 million as of September 30, 2006) is payable monthly at $55,000
per month and matures April of 2008. The lease is secured by leasehold
improvements and equipment located at the Company's Florida tissue processing
facility. The second lease (initially $224,000 and $85,000 as of September 30,
2006) is payable at $22,000 quarterly and matures September of 2007. The lease
is secured by equipment located at the Company's Florida tissue processing
facility. As of September 30, 2006, the Company is in compliance with the terms
and conditions of the Capital lease 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 2010
total $2,111,000. The Company considers these commitments and obligations to be
reasonable in order to maintain the current and future business requirements.
The following table summarizes the Company's contractual obligations as of
September 30, 2006:
(In Thousands) TOTAL 2007 2008 2009 2010 2011 2012
------- ------ ------ ---- ---- ---- ------
Long Term debt (1) $ 4,770 $1,097 $1,033 $533 $545 $482 $1,080
Operating Lease obligations $ 2,111 $ 988 $ 748 $343 $ 32 $ 0 $ 0
Short-term borrowings (1) $ 5,783 $5,783 $ 0 $ 0 $ 0 $ 0 $ 0
-------------------------------------------------------
Total $12,664 $7,868 $1,781 $876 $577 $482 $1,080
(1) Does not include interest
The Company maintains current working capital credit lines totaling 1.5 million
Euros (approximately $1.9 million) with two German banks and a $1.5 million
credit line with a U.S. bank. At September 30, 2006 the Company had outstanding
balances of $1.0 million and $1.5 million for the working capital lines in
Germany and the U.S., respectively. Management believes that the working capital
as of September 30, 2006, together with the revolving lines of credit, will be
adequate to fund ongoing operations. While the Company believes that it
continues to make progress in 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. 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,
controlling costs, and the development of additional markets and surgical
applications for its products worldwide.
OFF-BALANCE SHEET ARRANGEMENTS
GUARANTEES - In October 2005, the Parent Company agreed to provide a guarantee
up to 4 million Euros for the Company's German subsidiary's debt to a German
bank. At September 30, 2006, total debt outstanding to the German bank was 3.2
million Euros.
The Company has no other off-balance sheet arrangements.
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. Except for an
interest swap associated with $1.9 million of long term debt over six years
starting March 31, 2006, 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, 2006 cash and cash equivalents
and long-term debt, a 1% change in interest rates would have a de-minimus impact
on our results of operations.
The value of the U.S. dollar compared to the euro affects our financial results.
Changes in exchange rates may positively or negatively affect revenues, gross
margins, operating expenses and net income. The international operations
currently transacts business primarily in the Euro. Intercompany transactions
translate from the Euro to the U.S. dollar. Based on September 30, 2006
outstanding intercompany balances, a 1% change in currency rates would have a
de-minimus impact on our results of operations.
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
As of the end of the period covered by this Form 10-K, the Company's management,
including the Chief Executive Officer and the Chief Financial Officer, conducted
an evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934. Any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
objectives. Based upon that evaluation and subject to the foregoing, the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, concluded that the design and operation of the Company's
disclosure controls and procedures provided reasonable assurance that the
disclosure controls and procedures are effective to accomplish their objectives.
19
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, concluded in its previous Form 10-K/A that disclosure
controls and procedures were not effective as of September 30, 2005, due to a
material weakness in the Company's internal control over financial reporting.
Such material weakness related to a control activity relating to its inventory
valuation and its policies and procedures over certain journal entries recorded
in the financial close process. The Company's management remediated the material
weakness during the quarter ended March 31, 2006, by designing and implementing
a more effective and precise analytic model for calculating intercompany profit
and 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. During the year ended September 30,
2006, there were no other changes in internal control over financial reporting
that have materially affected or are reasonably likely to affect the Company's
internal control over financial reporting.
CHANGES IN CONTROL:
There has not been any change in our internal control over financial reporting
during the quarter-ended September 30, 2006 that has materially affected, or is
reasonably likely to materially affect, those controls.
ITEM 9B. OTHER INFORMATION.
The Company maintains an internet website at www.tutogen.com. We make available,
free of charge on or through our website our annual report on Form 10-K,
quarterly reports on Form 10-Q, and current reports on Form 8K. These reports
may be found at the SEC website. Additionally, Tutogen's Board committee
charters and code of ethics are available on the Company's website and in print
to any shareholder who requests them. Tutogen does not intend for information
contained in its website to be part of this Annual Report on Form 10-K.
20
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 and the Managing Director of the German subsidiary, the
positions and offices held by each of them with the Company, and the period
during which each served in such position. Each Director serves for a term of
one (1) year, until his successor is duly elected and qualified if not
re-elected.
PERIOD SERVED IN
NAME AGE POSITIONS/OFFICES OFFICE/POSITION
--------------------------- --- ------------------------------------- -------------------------
G. Russell Cleveland 68 Director 1997 - present
Roy D. Crowninshield, Ph.D. 58 Chairman of the Board July 2004 - present
Director 2003 - present
Interim CEO July 2004 - December 2004
Neal B. Freeman 66 Director June 2005 - present
J. Harold Helderman, MD 61 Director 1997 - present
Udo Henseler, PH.D. 67 Director June 2005 - present
L. Robert Johnston, Jr. 46 Chief Financial Officer & Secretary February 2006 - Present
Guy L. Mayer 55 President & Chief Executive Officer January 2005 - present
Director January 2005 - present
Claude O. Pering 60 Vice President US Operations January 2005 - present
Clifton J. Seliga 54 Vice President Sales & Marketing January 2005 - present
Adrian J. R. Smith 62 Director June 2005 - present
Carlton E. Turner, Ph.D. 66 Director 2000 - present
Karl H. Koschatzky 59 Managing Director - German Subsidiary June 2006 - Present
The following is a summary of the business experience of each of the Company's
Officers and Directors listed in the above-referenced table, and of certain
other significant employees of the Company, during the past five (5) years.
21
OFFICERS AND DIRECTORS
G. RUSSELL CLEVELAND is the President, Chief Executive Officer, sole Director,
and majority shareholder of Renaissance Capital Group, Inc. ("Renaissance"). He
is also President, Chief Executive Officer, and a director of Renaissance
Capital Growth & Income Fund III, Inc. Mr. Cleveland is a Chartered Financial
Analyst with more than thirty-five (35) years experience as a specialist in
investments for smaller capitalization companies. A graduate of the Wharton
School of Business, Mr. Cleveland has served as President of the Dallas
Association of Investment Analysts. Mr. Cleveland currently serves on the Boards
of Directors of Renaissance U.S. Growth & Income Trust PLC, Cover-All
Technologies, Inc., Digital Recorders, Inc., Integrated Security Systems, Inc.,
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 Chief Executive Officer 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 the Dean of Admissions and Professor of Medicine,
Microbiology and Immunology (since 1999) at Vanderbilt University, Nashville,
Tennessee, and 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 currently President and principal/owner of MSI
Management-Services-International (a private business since 1994). MSI provides
services related to business development for companies at their various stages
of their corporate evolution and contract CEO engagements, for biotechnology and
life sciences firms, in domestic and international settings. From 2002 to 2005
Dr. Henseler was the CEO and Chairman and continued until February 2006 as a
Director of eGene, Inc., a public biotechnology company. Dr. Henseler has
extensive global public and private company leadership experience with over 40
years of combined service, in addition to the foregoing as: Director and EVP of
ChemoKine Therapeutics Corporation, a biopharmaceutical company; VP and CFO of
Qualicon Inc., a DuPont company; Director, SVP and CFO of the Pharmaceutical
Andrx Inc.; VP and CFO of Genetic Systems Corp. - biopharmaceuticals; 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 and
currently serves as Director of the public Spire Corporation.
L. ROBERT JOHNSTON, JR. is the Company's Chief Financial Officer and Secretary.
Prior to Tutogen, Bob served as CFO of Power Medical Interventions (from 2004 to
2005), a privately held medical device company providing surgical stapling
products and prior to Power Medical (from 2002 to 2004) as an independent
consultant for Pittsburgh Life Sciences Greenhouse Executive Corps Program. For
the 3 years prior to joining Pittsburgh Life Sciences, Mr. Johnston was
Executive Vice President and Chief Financial Officer for Cellomics, Inc. a
Pittsburgh, Pennsylvania company providing instrumentation, software and assays
for automated cellular analysis for drug discovery in pharmaceutical,
biotechnology and academia sectors. Prior experience also includes management
positions with Oncormed, Inc. as CFO, American Mobile Satellite Corporation (now
Motient Corp) as Assistant Treasurer, and Sovran Bank of Maryland as Assistant
Vice President. Bob is a 1986 MBA Graduate of the Colgate Darden Graduate School
of Business Administration, University of Virginia and received his BA in
History and Spanish in 1982 from the University of Virginia.
GUY L. MAYER is the Company's Chief Executive Officer. In November 2006, Mr.
Mayer was also appointed President of the Company. 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 Spire Corporation, a public company and private companies.
CLAUDE O. PERING is the Company's Vice President of U.S. Operations. Prior to
Tutogen, Claude served as Principal of CoperTech, LLC (from 2002-2005) providing
consulting services to client companies in the medical device, biotechnology and
pharmaceutical industries. For the 3 years prior (1999-2002) Mr. Pering was
President and Chief Operating Officer for Hayes Medical, Inc., a manufacturer
and worldwide marketer of orthopaedic total joint implant products. For the 3
years prior to joining Hayes Medical, Inc., Mr. Pering was
22
Executive Vice President and Chief Operating Officer for Norian Corporation, a
developer, manufacturer and global marketer of biotechnology products that was
acquired by Synthes, Inc. Prior experience also includes 6 years as Vice
President Operation/COO for Ace Medical Company (acquired by DePuy, Inc.) and 3
years as Corporate Director of Quality Assurance/Group Manager of Quality
Engineering for Zimmer, Inc. Claude is an MBA Graduate, Indiana Wesleyan
University, Marion, Indiana and received his BA in Chemistry, Microbiology, and
Psychology from Drury University, Springfield, Missouri.
CLIFTON J. SELIGA is the Company's Vice President of Sales & Marketing. Prior to
Tutogen, Clifton served as Principal of C. J. Seliga, LLC (from 2002-2005),
providing consulting services to senior management in the areas of business
planning, strategic development, marketing, new product planning, sales and
distribution. For the 3 years prior (1998-2001) Mr. Seliga was Senior Vice
President, General Manager for ETEX Corporation, a private biomedical company
based in Cambridge, MA. For the 6 years prior to joining ETEX, Mr. Seliga held
various senior positions at Zimmer, Inc., Division of Bristol Myers Squibb,
including Vice President - Global Marketing and Director of Product Management.
Prior experience also includes marketing and sales management positions with
Richard-Allan Medical Industries and Richard Wolf Medical Instruments
Corporation. Clifton is an MBA Graduate, Marketing and Management, Northwestern
University, Kellogg Graduate School of Management, Evanston, Illinois. He has a
Master of Science (Research), Anatomy, St. Louis University and a BA in
Biological Science, Chemistry (minor) from Southern Illinois University.
ADRIAN J.R. SMITH is Chief Executive Officer of The Woolton Group, since 1997,
and a Non-Executive Director of Carter & Carter Group plc, since 2002, a UK
company providing learning solutions and outsource services to large corporate
organizations. His business career includes 13 years in the professional
services industry and 26 years with two Fortune 500 companies. He has been a
Global Managing Partner, Marketing & Communication at Deloitte & Touche, the CEO
of Grant Thornton LLP, and a Managing Partner at Arthur Andersen in the early to
mid-1990's. He held senior international management roles with Ecolab Inc. and
also with Procter & Gamble. He serves on the board of Harbor Branch
Oceanographic Institution, and the Education Foundation of Indian River County
in Florida.
CARLTON E. TURNER, PH.D., D.SC. has been the President and Chief Executive
Officer of Carrington Laboratories, Inc. ("Carrington") (NASDAQ: CARN) since
April 1995. Carrington is a research-based pharmaceutical and medical device
company in the field of wound care products. Dr. Turner has also served as the
Chief Operating Officer from November 1994 to April 1995 and as the Executive
Vice President of Scientific Affairs from January 1994 to November 1994 at
Carrington. Before that, he was the President, Chief Operating Officer and
Founder of Princeton Diagnostic Laboratories of America from 1987 to 1993. From
1981 to 1987 he was an Assistant to President Ronald Reagan with Cabinet Rank
and Director of the White House Drug Policy Office. Previously, he was a
Research Professor and Director of the Research Institute of Pharmacological
Science, University of Mississippi.
KARL H. KOSCHATZKY, PH.D. is the Managing Director of the Company's German
subsidiary. Dr. Koschatzky has served in a variety of capacities within the
Company, beginning in 1993 as the Technical Director of international
operations. In 1994 Dr. Koschatzky's role expanded to include the planning and
implementation of US operations. In 1999 he was promoted to Vice President
Research and Development. In the third quarter 2006, Dr. Koschatzky was assigned
the additional role of General Manager of German Operations. For the 11 years
prior to Tutogen, Karl served as Manager of Operations, Wound Care Unit,
Pfrimmer-Viggo GmbH (1984-1993) and Scientific Manager, Wound Care Business,
Lyofil Pfrimmer GmbH (1982-1984). Karl received his Ph.D. from the University of
Erlangen-Nurnberg in 1979 and Diplom-Chemist 1969-1976.
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: Messrs. Helderman and Turner filed one late
Form 4 Report, each relating to two transactions and Messrs. Crowninshield,
Freeman, Henseler and Smith filed one late Form 4 Report, each relating to one
transaction. All of the aforesaid transactions involved the granting or exercise
of an option.
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 Dr. Henseler. 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.
23
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. The Chairman of the
Board receives $1,000 per month for his services as Chairman. Additionally, the
Company's outside Directors each receive annually options to purchase 12,000
shares of the Company's common stock.
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, other executive officers and
Dr. Karl Koschatzky, Managing Director of the Company's German subsidiary whose
compensation exceeded $100,000 for this period.
Annual Long Term
Compensation Compensation
-------------------------------------------------------------------------------------------------------------------------
Awards Payouts
-------------------------------------------------------------------------------------------------------------------------
Other Restricted Securities
Annual Stock Underlying LTP All Other
Name And Principal Fiscal Salary Bonus Compensation Award(s) Options Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) (1)($)
-------------------------------------------------------------------------------------------------------------------------
Guy L. Mayer (2) 2006 315,000 96,390 0 0 0 37,900
Chief Executive Officer 2005 225,000 24,300 0 0 300,000 0 0
L. Robert Johnston, Jr. 2006 149,100 21,803 0 0 60,000 0 26,300
Chief Financial Officer (3)
Dr. Karl Koschatzky 2006 157,200 9,200 0 0 0 0 47,600
Managing Director 2005 148,700 13,100 0 0 0 0 51,100
German Subsidiary 2004 140,000 0 0 0 0 0 39,100
Claude O. Pering 2006 141,900 24,131 0 0 10,000 0 7,300
Vice President - US 2005 83,100 20,925 0 0 50,000 0 0
Operations
Clifton J. Seliga 2006 141,900 24,131 0 0 0 0 16,300
Vice President - US 2005 83,100 20,925 0 0 50,000 0 0
Sales and Marketing
(1) Includes 401(k) contributions, relocation, car allowances and expenses, and
pension costs.
(2) Mr. Mayer was appointed Chief Executive Officer on January 1, 2005.
(3) Mr. Johnston was appointed Chief Financial Officer of the Company in
February 2006.
EMPLOYMENT AGREEMENTS
On December 6, 2004, the Company entered into an employment agreement with Mr.
Guy L. 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 $347,000. In addition, the employment
agreement provides for a bonus for the balance of the Company's fiscal year 2006
in an amount up to 60% of his earned salary for fiscal 2006, 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. For his performance
during 2005 Mr. Mayer was granted a ten (10) year option to purchase 50,000
shares of the Company's common stock, exercisable at the market price on the
date of grant, 25% on the date of the grant and 25% of the first three (3)
anniversaries.
24
Mr. Mayer has a "change of control" agreement whereby he is entitled to 24
months salary including medical benefits, in the event he is terminated as a
result of a change of control of the Company.
The Company has a severance agreement with L. Robert, Johnston, Jr., Chief
Financial Officer. Pursuant to that agreement, upon written notice of his
termination, the Company will provide six months salary including medical
benefits. Mr. Johnston's annual base salary is currently $200,000. 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. Johnston has a "change of control" agreement whereby he
is entitled to 6 months salary including medical benefits in the event he is
terminated as the result of a change of control of the Company.
In connection with their employment, the Company has agreed to a six (6) month
severance package for Messrs. Pering and Seliga in the event of termination due
to a change of control of the Company.
STOCK OPTION PLANS
The Company has a 1996 and 2006 Incentive and Non-Statutory Stock Option Plan
(the "Option Plans") 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 Option Plans.
This summary is qualified in its entirety by reference to the 1996 and 2006
Plan, a copy of which may be obtained from the Company.
The Option Plans authorize 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 Option Plans.
The Option Plans also authorize the granting of NSSOs to non-employee Directors
and consultants of the Company.
The 1996 Plan expired in February 2006 and no further options can be granted
under the 1996 Plan. The 1996 Plan was superseded by the Tutogen Medical, Inc.
Incentive and No-Statutory Stock Plan (the "2006 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 2006 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.
Pursuant to the 2006 Plan, an option to purchase 12,000 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 12,000 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
2006 Plan.
The Board of Directors or the Compensation and Stock Option Committee is
responsible for the administration of the 2006 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 2006 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 2006 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 2006 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 2006 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 2006 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 2006 Plan will be accelerated automatically, so that
all such options will become exercisable in full with respect to all shares that
have not been previously exercised or become exercisable. A "change in control"
includes certain mergers, consolidation, and reorganization, sales of assets, or
dissolution of the Company.
As of September 30, 2006, there were outstanding options to purchase 2,221,268
shares of common stock under the 1996 Plan.
The 2006 Plan presently reserves 1,000,000 shares of the Company's Common Stock
for issuance thereunder. As of September 30, 2006, options have been issued for
17,500 shares and 982,500 shares remain available under the 2006 Plan. Unless
sooner terminated, the 2006 Plan will expire on December 5, 2015.
25
OPTIONS GRANTED IN FISCAL YEAR 2006
The following table provides information as to options granted to the Company's
Chief Executive Officer and other Executive Officers during the fiscal year
ended September 30, 2006. All such options were granted under the Company's 1996
Stock Option Plan.
Potential Realizable
Value at Assumed
Number of Annualized Rates of
Securities Stock Price Appreciation
Underlying Percent of Total Exercise or for Option Term (2)
Options Options Granted Base Price Expiration ------------------------
Granted (#) to Employees ($/Sh) Date 5% 10%
----------- ---------------- ----------- ---------- ----------- ----------
L. Robert Johnston, Jr. (1) 60,000 56% $2.95 01/17/2016 $111,314 $282,092
Claude O. Pering 10,000 9 3.12 12/05/2015 19,622 49,725
(1) Stock options related to Mr. Johnston's appointment as the new Chief
Financial Officer of the Company in February 2006.
(2) 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, 2006. No options were exercised during this fiscal year. The market price of
the Company's common stock at September 30, 2006 was $4.50.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Number of Unexercised Value of Unexercised
Options at in-the-Money Options at
Option Exercises September 30, 2006 September 30, 2006
---------------------------- --------------------------- ---------------------------
Shares
Acquired on
Name Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
----------------------- ----------- -------------- ----------- ------------- ----------- -------------
Guy L. Mayer 0 $0 150,000 150,000 $245,750 $245,750
L. Robert Johnston, Jr. 0 0 15,000 45,000 23,250 69,750
Dr. Karl Koschatzky 0 0 115,418 11,250 282,950 18,338
Claude O. Pering 0 0 12,500 47,500 14,750 58,050
Clifton J. Seliga 0 0 12,500 37,500 14,750 44,250
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.
26
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 Option Plans. 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 AMEX Market 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 September 30, 2001. 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.
[COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS
GRAPHIC APPEARS HERE]
27
COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS
FISCAL YEAR ENDING
---------------------------------------------------------
COMPANY/INDEX/MARKET 9/30/01 9/30/02 9/30/03 9/30/04 9/30/05 9/30/06
-------------------- ------- ------- ------- ------- ------- -------
TUTOGEN MEDICAL INC 100.00 118.33 212.50 124.58 190.00 187.50
PEER GROUP INDEX 100.00 93.31 126.31 146.71 166.52 170.86
AMEX MARKET INDEX 100.00 108.63 134.25 154.97 187.60 195.30
28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of November 30, 2006, by (i) each
person known to the Company to own beneficially more than five percent (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, 2006,
there were 16,413,185 shares of common stock issued and outstanding.
AMOUNT AND NATURE PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER OF BENEFICIAL OWNER (1)(2) OF CLASS (3)
------------------------------------ -------------------------- ------------
SPV 1996 LP 1,896,794 11.56
101 Finsbury Pavement
London, England
EC2A 1EJ
Zimmer CEP (formerly Centerpulse) USA Holding Co. 5,297,124 32.27
Subsidiary of Zimmer Holdings, Inc.
345 East Main Street
Warsaw, IN 46580
G. Russell Cleveland (4) 124,300 *
Roy D. Crowninshield, Ph.D. (5) 62,000 *
Neal B. Freeman (6) 44,500 *
Dr. J. Harold Helderman (7) 117,000 *
Udo Henseler, Ph.D. (8) 24,500 *
L. Robert Johnston, Jr. (8) 15,000 *
Guy L. Mayer (8). 150,000 *
Claude Pering (8) 15,000 *
Clifton Seliga (9) 13,500 *
Adrian J. R. Smith (8) 24,500 *
Carlton E. Turner (10) 57,000 *
All directors and officers as a group (11 persons) 600,000 3.5
* Less than one percent (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 (60) 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 exercisable within sixty (60) days after November 30,
2006 held by such individual or group.
(4) Includes 47,000 shares of common stock issuable upon exercise of options
exercisable within sixty (60) days.
(5) Includes 42,000 shares of common stock issuable upon exercise of options
exercisable within sixty (60) days.
(6) Includes 24,500 shares of common stock issuable upon exercise of options
exercisable within sixty (60) days.
(7) Includes 87,000 shares of common stock issuable upon exercise of options
exercisable within sixty (60) days.
29
(8) All of the shares of common stock beneficially owned by Messrs. Henseler,
Johnston, Mayer, Pering, Seliga and Smith are derivative securities
issuable upon exercise of options exercisable within sixty (60) days.
(9) Includes 12,500 shares of common stock issuable upon exercise of options
exercisable within sixty (60) days.
(10) Includes 47,000 shares of common stock issuable upon exercise of options
exercisable within sixty (60) days.
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 years ended
September 30, 2006, 2005 and 2004 product sales to Zimmer spine totaled $2,877,
$3,128 and $4,850, respectively. Accounts receivable from Zimmer Spine were $952
and $44 at September 30, 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 years ended September 30, 2006, 2005 and 2004, Zimmer Dental
was paid commissions aggregating approximately $7,200, $6,055 and $3,213,
respectively. Accounts payable to Zimmer Dental total $1,918 and $1,740 at
September 30, 2006 and September 30, 2005, respectively.
As of September 30, 2006, Zimmer CEP (formerly Centerpulse) USA Holding Co., a
subsidiary of Zimmer Holdings, Inc., is a 32% owner of the Company's outstanding
shares of Common Stock.
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 August 9, 2006, representatives of Zimmer contacted the management of the
Company telephonically to propose to the Company a non-binding indication of
interest ("the Indication of Interest") with respect to a proposed acquisition
of the Company at an indicative price range of $5.00 - $6.00 per share of Common
Stock. Later on the same day, the Company contacted Zimmer and rejected the
Indication of Interest. Subsequently, Zimmer filed an amended 13(d) expressing
that they had determined not to pursue an acquisition of the Company at that
time, but based on other factors deemed relevant by Zimmer, including, but not
limited to, the price and availability of Common Stock, subsequent developments
affecting Zimmer and the Company, the business prospects of Zimmer and the
Company, general stock market and economic conditions and tax considerations,
Zimmer may formulate other plans and/or make other proposals and take other
actions with respect to its investment in the company that it deems to be
appropriate.
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, 2006 and
2005, and all fees billed for other services by Deloitte & Touche LLP during
those periods:
Year Ended September 30, 2006 2005
------------------------ -------- --------
Audit fees (1) $515,000 $143,000
Audit-related fees (2) 44,000 55,000
Tax fees (3) 33,000 4,000
All other fees (4) 39,000 --
-------- --------
Total Accounting Fees and Services $631,000 $202,000
(1) AUDIT FEES. These are fees for professional services for the audit of the
Company's annual financial statements, for the review of the financial
statements included in the Company's filings on Form 10-Q and for services that
are normally provided in connection with statutory and regulatory filings or
engagements. For 2006, total audit fees include $173,000 for fees associated
with the restatement of the prior year financial results in the 2005 Form
10-K/A and the results of the quarter ending December 31, 2005 in the Form
10-Q/A, $199,000 related to the 2005 audit and $56,000 for interim and planning
procedures relating to the 2006 audit.
(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.
30
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 LLP for the fiscal years
ended September 30, 2006 and 2005 were approved by the Audit Committee.
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.
31
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
3.1(a) Certificate of Incorporation (b)
3.1(b) Articles of Amendment increasing number of authorized shares of
capital stock (c)
3.1(c) Articles of Amendment effecting a reverse stock split (d)
3.2 Amended and Restated Bylaws (e)
4.1 See Exhibits 3.1 and 3.2 for the provisions of the Articles of
Incorporation and Bylaws of the Company that define the rights of
holders of the Company's common stock
10.4 1996 Incentive and Non-Statutory Option Plan (f)
10.5 2006 Incentive and Non-Statutory Option Plan (g)
10.8 Employment Agreement of Guy L. Mayer, dated December 6, 2004 (h)
10.9 Registration Rights Agreement dated June 30, 2006, by and between
Tutogen Medical, Inc. and Azimuth Opportunity, Ltd. (i)
10.10 Five percent (5%) Subordinated Convertible Debenture of Tutogen
Medical, Inc. dated June 30, 2006 in an aggregate principal amount of
$3,000,000 issued to Azimuth Opportunity, Ltd. (i)
10.11 Common stock Purchase Warrant dated June 30, 2006 issued to Azimuth
Opportunity, Ltd. for the purchase of up to 175,000 shares of the
common stock of Tutogen Medical, Inc. (i)
10.12 Securities Purchase Agreement dated June 30, 006 by and between
Tutogen Medical, Inc. and Azimuth Opportunity, Ltd. (i)
10.13 Shareholders' Rights Agreement (j)
14.1 Code of Ethics (k)
21. Subsidiaries of the Registrant (Tutogen Medical GmbH incorporated in
Germany and 100% owned).
23.1 Consent of the Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer, pursuant to Rule 13a-14. (a)
31.2 Certification of Chief Financial Officer, pursuant to Rule 13a-14. (a)
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. (a)
(a) Filed herewith.
(b) Filed as Exhibit to Company's Registration Statement on Form 20-F
effective October 2, 1987.
(c) Filed as an Exhibit to the Company's Form 10-K for the year ended
September 30, 1998.
32
(d) Filed as an Exhibit to the Company's Form 10-K for the year ended
September 30, 1998.
(e) Filed as Exhibit to Form 8-K Report August 16, 2006.
(f) Filed as Exhibit to Form S-8 filed October 31, 1996.
(g) Filed as Exhibit to Proxy Statement filed in connection with the
Company's 2006 annual meeting of shareholders.
(h) Filed as Exhibit to Form 10-K/A Report for year ended September 30,
2005.
(i) Filed as Exhibit to Form 8-K Report July 6, 2006.
(j) Filed as Exhibit to Form 8-K Report July 17, 2002.
(k) Filed as Exhibit to Form 10-K Report for year ended September 30,
2004.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts for the years ended September
30, 2006, 2005 and 2004.
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.
33
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 Form 10-K to be signed on
behalf by the undersigned, thereunto duly authorized.
Date: December 28, 2006
TUTOGEN MEDICAL, INC.
/s/ Guy L. Mayer
----------------------------------------
Guy L. Mayer
President & Chief Executive Officer
/s/ L. Robert Johnston Jr.
----------------------------------------
L. Robert Johnston Jr.
Chief Financial Officer
In accordance with the Exchange Act of 1934, this report has been signed by the
following persons on behalf of the registrant and in the capacities and the
dates indicated.
Signature Title Date
--------- ----- ----
/S/ G. RUSSELL CLEVELAND Director December 28, 2006
-------------------------------------
G. Russell Cleveland
/S/ ROY D. CROWNINSHIELD Director December 28, 2006
-------------------------------------
Roy D. Crowninshield
/S/ NEAL B. FREEMAN Director December 28, 2006
-------------------------------------
Neal B. Freeman
/S/ J. HAROLD HELDERMAN Director December 28, 2006
-------------------------------------
Dr. J. Harold Helderman
/S/ UDO HENSELER Director December 28, 2006
-------------------------------------
Dr. Udo Henseler
/S/ GUY L. MAYER Director December 28, 2006
-------------------------------------
Guy L. Mayer
/S/ ADRIAN J. R. SMITH Director December 28, 2006
-------------------------------------
Adrian J. R. Smith
/S/ CARLTON E. TURNER Director December 28, 2006
-------------------------------------
Carlton E. Turner
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Tutogen Medical, Inc.
Alachua, Florida
We have audited the accompanying consolidated balance sheets of Tutogen Medical,
Inc. and subsidiaries (the "Company") as of September 30, 2006 and 2005, 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, 2006. Our audits also included the financial
statement schedule listed in the Index at Item 15. These financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules 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 audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Tutogen Medical, Inc. and
subsidiaries as of September 30, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2006, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Orlando, Florida
December 27, 2006
F-1
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2006 AND 2005
(In Thousands, Except for Share Data)
2006 2005
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,463 $ 3,562
Accounts receivable - net of allowance for doubtful
accounts of $483 in 2006 and $462 in 2005 6,202 3,473
Inventories - net 12,678 9,554
Deferred tax asset, net 471 1,149
Other current assets 1,436 623
-------- --------
24,250 18,361
PROPERTY, PLANT, AND EQUIPMENT, NET 12,940 6,612
OTHER ASSETS 424 --
DEFERRED TAX ASSET, NET 1,303 1,232
-------- --------
TOTAL ASSETS $ 38,917 $ 26,205
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,346 $ 1,365
Accrued expenses and other current liabilities 4,314 4,977
Accrued commissions 1,918 1,765
Short-term borrowings 5,783 1,048
Current portion of deferred distribution fees 1,577 589
Current portion of long-term debt 1,097 184
-------- --------
16,035 9,928
NONCURRENT LIABILITIES
Noncurrent deferred distribution fees and other
noncurrent liabilities 3,988 1,925
Long-term debt 3,673 630
-------- --------
TOTAL LIABILITIES 23,696 12,483
-------- --------
Shareholders' Equity:
Common stock, $0.01 par value, 30,000,000 shares
authorized; 16,197,235 and 15,932,960 shares
issued and outstanding 162 159
Additional paid-in capital 37,751 36,381
Accumulated other comprehensive income 2,393 1,678
Accumulated deficit (25,085) (24,496)
-------- --------
Total shareholders' equity 15,221 13,722
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 38,917 $ 26,205
======== ========
See accompanying 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, 2006, 2005 AND 2004
(In Thousands, Except for Share and Per Share Data)
2006 2005 2004
----------- ----------- -----------
REVENUE $ 37,947 $ 31,860 $ 29,330
COST OF REVENUE 16,336 20,129 11,852
----------- ----------- -----------
Gross profit 21,611 11,731 17,478
OPERATING EXPENSES
General and administrative 7,803 5,790 4,151
Distribution and marketing 12,261 11,509 8,737
Research and development 1,834 1,659 1,432
----------- ----------- -----------
21,898 18,958 14,320
----------- ----------- -----------
OPERATING (LOSS) INCOME (287) (7,227) 3,158
FOREIGN EXCHANGE LOSS (311) (173) (700)
OTHER INCOME 108 77 99
INTEREST EXPENSE (293) (130) (118)
----------- ----------- -----------
(496) (226) (719)
----------- ----------- -----------
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE (783) (7,453) 2,439
Income tax (benefit) expense (194) (436) 1,306
----------- ----------- -----------
NET (LOSS) INCOME $ (589) $ (7,017) $ 1,133
=========== =========== ===========
Other Comprehensive Income (Loss):
Foreign currency translation adjustments 715 (570) 2,167
----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 126 $ (7,587) $ 3,300
=========== =========== ===========
AVERAGE SHARES OUTSTANDING FOR BASIC EARNINGS
(LOSS) PER SHARE 16,027,469 15,919,286 15,734,470
=========== =========== ===========
BASIC (LOSS) EARNINGS PER SHARE $ (0.04) $ (0.44) $ 0.07
=========== =========== ===========
AVERAGE SHARES OUTSTANDING FOR DILUTED EARNINGS
(LOSS) PER SHARE 16,027,469 15,919,286 16,469,443
=========== =========== ===========
DILUTED (LOSS) EARNINGS PER SHARE $ (0.04) $ (0.44) $ 0.07
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements
F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(In Thousands)
2006 2005 2004
------- ------- -------
Cash flows (used in) provided by operating activities
Net (loss) income $ (589) $(7,017) $ 1,133
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 778 984 760
Amortization of deferred distribution fees revenue (835) (640) (640)
Amortization of debt discount 69 -- --
Reserve for bad debt 19 308 (83)
Provision for inventory write-downs 246 889 (597)
Share-based compensation 451 0 0
Deferred income taxes 797 (505) 869
Changes in assets and liabilities:
Accounts receivable (2,632) 1,106 807
Inventories (3,394) 3,771 (1,810)
Other assets (513) 798 (241)
Accounts payable and other accrued expenses 145 (497) (894)
Accrued commissions 153 244 1,076
Deferred distribution fees 3,550 -- --
------- ------- -------
Net cash (used in) provided by operating activities (1,755) (559) 380
Cash flows used in investing activities
Deposits on purchases of property and equipment (300) -- --
Purchase of property and equipment (5,690) (1,682) (1,758)
------- ------- -------
Net cash used in investing activities (5,990) (1,682) (1,758)
Cash flows provided by financing activities
Issuance of common stock 647 36 366
Proceeds from long-term borrowings and capital
lease arrangements 2,365 -- 224
Proceeds from short-term borrowings 2,290 1,508 --
Issuance of convertible debt 3,000 -- --
Debt issuance costs (263) -- --
Repayment of short-term borrowings (163) (400) --
Repayment of long-term debt (543) (164) (95)
------- ------- -------
Net cash provided by financing activities 7,903 980 495
Effect of exchange rate changes on cash and cash equivalents (257) (240) 897
------- ------- -------
Net (decrease) increase in cash and cash equivalents (99) (1,501) 14
Cash and cash equivalents at beginning of period 3,562 5,063 5,049
------- ------- -------
Cash and equivalents at end of period $ 3,463 $ 3,562 $ 5,063
======= ======= =======
Supplemental cash flow disclosures
Interest paid $ 578 $ 127 $ 118
======= ======= =======
Income taxes paid $ -- $ 149 $ 251
======= ======= =======
Non-cash investing and financing activities
relating to capital lease arrangement $ 987 $ -- $ --
======= ======= =======
See accompanying Notes to Consolidated Financial Statements
F-4
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004
(In Thousands, Except for Share Data)
ACCUMULATED
COMMON OTHER COMMON SHARES
STOCK ADDITIONAL COMPREHENSIVE ACCUMULATED ISSUED AND
($.01 PAR) PAID-IN CAPITAL INCOME (1) DEFICIT TOTAL OUTSTANDING
---------- --------------- ------------- ----------- -------- -------------
BALANCE, SEPTEMBER 30, 2003 $157 $35,980 $ 81 $(18,612) $17,606 15,667,110
Stock issued on exercise of options 2 365 -- -- 367 248,850
Net income -- -- -- 1,133 1,133 --
Foreign currency translation adjustment -- -- 2,167 -- 2,167 --
---- ------- ------ -------- ------- ----------
BALANCE, SEPTEMBER 30, 2004 159 36,345 2,248 (17,479) 21,273 15,915,960
Stock issued on exercise of options -- 36 -- -- 36 17,000
Net loss -- -- -- (7,017) (7,017) --
Foreign currency translation adjustment -- -- (570) -- (570) --
---- ------- ------ -------- ------- ----------
BALANCE, SEPTEMBER 30, 2005 159 36,381 1,678 (24,496) 13,722 15,932,960
Stock issued on exercise of options 3 644 -- -- 647 264,275
Warrants issued -- 275 -- -- 275 --
Share-based compensation -- 451 -- -- 451 --
Net loss -- -- -- (589) (589) --
Foreign currency translation adjustment -- -- 715 -- 715 --
---- ------- ------ -------- ------- ----------
BALANCE, SEPTEMBER 30, 2006 $162 $37,751 $2,393 $(25,085) $15,221 16,197,235
(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, 2006, 2005 AND 2004
(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 20
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 period.
The resulting translation adjustments, representing unrealized, noncash
gains and 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 Foreign Exchange Loss in the
Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.
The Company recognized transaction losses of $311, $173, and $700 in 2006,
2005 and in 2004, 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 or market. Work
in process and finished goods includes costs attributable to direct labor
and overhead. Impairment charges for slow moving, excess and obsolete
inventories are recorded based on historical experience, current product
demand including meeting periodically with distributors, regulatory
considerations, industry trends, changes and risks and the remaining shelf
life. As a result of this analysis, the Company reduces the carrying value
of any impaired inventory to its fair value, which becomes its new cost
basis. If the actual product life cycles, demand or general market
conditions are less favorable than those projected by management,
additional inventory impairment charges may be required which would affect
future operating results due to increases costs from the resulting
adjustment. The adequacy of these impairment charges is evaluated
quarterly.
DEBT ISSUANCE COSTS - Debt issuance costs include costs incurred to obtain
financing. Upon funding of debt offerings, deferred financing costs are
capitalized as debt issuance costs and are amortized to interest expense
using the straight-line method, which approximates the effective interest
method, over the life of the related debt. At September 30, 2006, debt
issuance costs were $154 and are included in other assets in the
accompanying balance sheets. The debt issuance costs amortize at $17
monthly through June 2007.
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
F-6
Amortization expense associated with assets financed by capital lease are
included in the depreciation and amortization line of the consolidated cash
flow statements.
IMPAIRMENT OF LONG-LIVED ASSETS - Periodically, the Company evaluates the
recoverability of the net carrying amount of its property, plant and
equipment 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 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.
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.
DEFERRED REVENUE - The Company has entered into several distribution
agreements which the distributor agreed to make certain upfront lump sum
payments in exchange for certain distribution rights. These payments are
recognized as revenue ratably to approximate services provided under the
contract. Recognition of revenue commences over the term of the
distribution agreement upon delivery of initial products. During 2006,
Davol paid the Company $3,300 in fees for exclusive distribution rights and
for the commencement of the shipment of products. In addition, during 2006,
Mentor agreed to pay the Company $500 associated with the exclusive
distribution rights and the attainment of certain terms and conditions. At
September 30, 2006, $250 has been paid to the Company.
REVENUE AND COST OF REVENUE - Revenue includes amounts from surgical
product sales, tissue service processing, and distribution fees. Cost of
revenue includes depreciation of $529, $686, and $311 for the years ended
September 30, 2006, 2005 and 2004, respectively. 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. Revenue from surgical products is
recognized upon the shipment of the processed tissues. The Company's terms
of sale are FOB shipping point. Title transfers at time of shipment.
Customers are provided with a limited right of return. Reasonable and
reliable estimates of product returns are made in accordance with SFAS No.
48 and allowances for doubtful accounts are based on significant historical
experience. 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 to approximate services provided
under the contract. Recognition of revenue commenced over the term of the
distribution agreement upon delivery of initial products.
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 the exercise of
stock options and warrants or conversion of convertible debentures.
SHARE-BASED COMPENSATION - We estimate the value of share-based payments on
the date of grant using the Black-Scholes model, which was also used
previously for the purpose of providing pro forma financial information as
required under SFAS 123. The determination of the fair value of, and the
timing of expense relating to, share-based payment awards on the date of
grant using the Black-Scholes model is affected by our stock price as well
as assumptions regarding a number of variables including the expected term
of awards, expected stock price volatility and expected forfeitures.
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. Estimates related to the value of
share-based compensation, inventory, accounts receivable, and deferred tax
assets and liabilities are made by management at each reporting period.
Actual results could differ from those estimates.
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.
F-7
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.
The Company records 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 we would be able to realize our deferred tax
assets in the future, an adjustment to the valuation allowance 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 to the valuation allowance
would be made and charged to income in the period of such determination.
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 $95, $57 and $73 in 2006,
2005 and 2004, respectively.
RECLASSIFICATION - Certain reclassifications have been made to the prior
financial statements to conform to the current presentation, including
reclassing certain insurance premium costs previously expensed in cost of
revenue to general and administrative expenses, and splitting out the
previous balance sheet line item accounts payable and other accrued
expenses into separate line items of accounts payable and accrued expenses
and other current liabilities.
3. NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS, AN
AMENDMENT OF ARB NO. 43. SFAS No. 151, which 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
was effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The adoption of SFAS No. 151, effective at the
beginning of year ended September 30, 2006, had no material impact on the
Company's financial statements.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
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 at the
beginning of the fiscal year ended September 30, 2006. In March 2005, the
Securities and Exchange Commission (the "SEC") issued Staff Accounting
Bulletin ("SAB") No. 107, SHARE-BASED PAYMENT, 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 Note 4, STOCK-BASED
COMPENSATION, regarding the impact of these pronouncements on the Company's
financial statements.
In May of 2005, the FASB issued SFAS 154, ACCOUNTING CHANGES AND ERROR
CORRECTIONS. This statement replaces APB Opinion 20, ACCOUNTING CHANGES,
and SFAS 3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS.
This statement changes the requirements for the accounting for and
reporting of a change in accounting principle, and applies to all voluntary
changes in accounting principle. This statement also applies to changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. Previously,
APB Opinion 20 required that most voluntary changes in accounting principle
be recognized by including in net income of the period of the change the
cumulative effect of changing to the new accounting principle. SFAS 154
requires retrospective application to prior periods' financial statements
of changes in accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change.
This statement is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The adoption
of this standard is not expected to have a material impact on the Company's
financial statements.
In June of 2006, the FASB issued FASB Interpretation ("FIN") No. 48
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES. This interpretation clarifies
the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS 109. This
interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Under this interpretation,
the evaluation of a tax position is a two-step process. First, the
enterprise determines whether it is more-likely-than-not that a tax
position will be sustained upon examination, based on the technical merits
of the position. The second step is measuring the benefit to be recorded
from tax positions that meet the more-likely-than-not recognition
threshold, whereby the enterprise determines the largest amount of tax
benefit that is greater than 50 percent likely of being realized upon
ultimate settlement, and recognizes that benefit in its financial
statements.
F-8
FIN 48 also provides guidance on recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006. Management
has not yet determined the impact this pronouncement will have on the
Company's financial statements.
In September 2006, the FASB issued SFAS 157, FAIR VALUE MEASUREMENTS. This
standard defines fair value, establishes a framework for measuring fair
value in accounting principles generally accepted in the United States
("GAAP"), and expands disclosures about fair value measurements. This
standard is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
requirements of SFAS 157 and has not yet determined the impact on the
Company's financial statements.
In September 2006, the FASB issued SFAS 158, EMPLOYERS' ACCOUNTING FOR
DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS--An Amendment of
SFAS Nos. 87, 88, 106 and 132(R). This standard requires an employer to
recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in
which the changes occur as a component of comprehensive income. The
standard also requires an employer to measure the funded status of a plan
as of the date of its year-end statement of financial position. The
requirement to recognize the funded status of a defined benefit
postretirement plan is effective as of the end of the fiscal year ending
after December 15, 2006. The adoption of SFAS 158 is not expected to have a
material impact on the Company's financial statements.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
CONSIDERING THE EFFECTS OF PRIOR YEAR MISTATEMENTS WHEN QUANTIFYING
MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS. SAB 108 eliminates the
diversity of practice surrounding how public companies quantify financial
statement misstatements. It establishes an approach that requires
quantification of financial statement misstatements based on the effects of
the misstatements on each of the Company's financial statements and the
related financial statement disclosures. SAB 108 must be applied to annual
financial statements for their first fiscal year ending after November 15,
2006. Management does not believe the adoption of this standard will have a
material impact on the Company's financial statements.
4. SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION
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 OPTION PLANS - 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 its 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 year ended September 30, 2006 was
$451 more than if the Company had continued to account for stock-based
compensation under Accounting Principles Board Opinion ("APB") No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and its related interpretations.
F-9
Basic and diluted net loss per share for the year ended September 30, 2006
was $.03 more than if the Company had continued to account for stock-based
compensation under APB 25. In addition, there was no statement of cash flow
or 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 year ended September 30, 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 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 year ended September 30, 2006, the Company recognized
compensation expense of $451 relating to stock options granted during the
year ended September 30, 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 September
30, 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.
F-10
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
------- ------
Net (loss) income ($7,017) $1,133
Deduct: Total stock-based employee compensation
expense determined under fair value based
method, net of related tax effects 102 159
------- ------
Pro-forma net (loss) income ($7,119) $ 974
======= ======
Basic EPS:
As reported ($0.44) $ 0.07
Pro-forma ($0.45) $ 0.06
Diluted EPS:
As reported ($0.44) $ 0.07
Pro-forma ($0.45) $ 0.06
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:
September 30, 2006 September 30, 2005 September 30, 2004
------------------ ------------------ ------------------
Expected volatility 50.2% 47% 47%
Risk-free interest rate (range) 4.5 - 4.7% 2.26 - 3.12% 2.26 - 3.12%
Expected term (in years) 5 5 4
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 of 10%
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
F-11
cumulative catch-up adjustment in the period of change and will also impact
the amount of compensation expense to be recognized in future periods.
Presented below is a summary of the status of the Company's stock options
as of September 30, 2006 and related transactions for the years then ended:
Number of Common Weighted Average
Shares Exercise Price
---------------- ----------------
Outstanding at September 30, 2003 2,256,368 $2.52
Granted 225,000 $3.98
Canceled (93,750) $4.45
Exercised (248,850) $1.47
--------- -----
Outstanding at September 30, 2004 2,138,768 $2.72
Granted 622,000 $2.99
Canceled (262,400) $4.03
Exercised (17,000) $2.17
--------- -----
Outstanding at September 30, 2005 2,481,368 $2.64
Granted 125,000 $3.34
Canceled (103,225) $3.84
Exercised (264,275) $2.45
--------- -----
Outstanding at September 30, 2006 2,238,868 $2.65
Vested or expected to vest 2,014,981 $2.65
Fully Vested at September 30, 2006 1,781,493 $2.55
As of September 30, 2006, 982,500 stock options were available for grant.
F-12
The following table provides information about stock options outstanding at
September 30, 2006:
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 9/30/06 (IN YEARS) PRICE AS OF 9/30/06 PRICE
--------------- ------------- ----------- -------- ------------- ---------
$0.94 to $1.25 284,600 2.9 0.95 284,600 0.95
$1.56 to $2.22 536,568 1.7 1.76 529,068 1.76
$2.28 to $3.62 992,500 6.7 2.82 641,875 2.87
$3.95 to $11.00 425,200 5.4 4.41 325,950 4.60
$0.94 to $11.00 2,238,868 4.8 2.65 1,781,493 2.55
As of September 30, 2006, there was $371 of total unrecognized compensation
cost related to nonvested stock options. That cost is expected to be
recognized over a weighted-average period of 1.53 years. The intrinsic
value of options exercised during the years ended September 30, 2006, 2005
and 2004 were $561, $23, and $614, respectively. The total aggregate
intrinsic value of options outstanding for the years ended September 30,
2006, 2005 and 2004 were $4,151, $4,765 and $608, respectively. The total
aggregate intrinsic value of exercisable options outstanding for the years
ended September 30, 2006, 2005 and 2004 were $3,479, $3,861 and $734,
respectively. For the year ended September 30, 2006, the total fair market
value of shares vested was $361. The weighted average fair value of options
granted during the years ended September 30, 2006, 2005 and 2004 was $1.62,
$1.38 and $1.82, respectively.
5. CONCENTRATION OF RISK
DISTRIBUTION--The majority of the Company's revenues are derived through
the Company's relationships with two companies, Zimmer Dental and Zimmer
Spine which distributed approximately 46% and 8%, respectively, of the
Company's consolidated revenues during 2006. Zimmer Dental markets our
products to the end user and the Company ships and bills the customer
directly. If the Company's relationship with Zimmer is terminated or
further reduced for any reason and we are unable to replace the
relationship with other means of distribution, the Company would suffer a
material decrease in revenues.
TISSUE SUPPLY--The Company's business is dependent on the availability of
donated human cadaver tissues supplied by donor recovery groups.
Allosource, our largest donor recovery group, supplied the Company with
approximately 65% of our total human tissue for the year ended September
30, 2006. Our three largest recovery groups together supplied approximately
83% of our total human tissue during 2006. Any significant interruption in
the availability of human tissue would likely cause the Company to slow
down the processing and distribution of the Company's human tissue
products, which could adversely affect the Company's ability to supply the
needs of the Company's customers and materially and adversely affect the
results of operations and the relationships with customers.
TRADE RECEIVABLES--As of September 30, 2006, one customer, Zimmer Spine,
represented 15% of the Company's outstanding trade receivables. No other
customer represented more than 10% of the Company's outstanding trade
receivables.
6. INVENTORIES
Major classes of inventory at September 30, 2006 and 2005 were as follows:
2006 2005
------- ------
Raw materials $ 2,017 $1,228
Work in process 5,811 4,943
Finished goods 4,850 3,383
------- ------
12,678 9,554
======= ======
F-13
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 2006 and 2005 consisted of
the following:
2006 2005
------- -------
Land $ 522 $ 495
Buildings and improvements 6,275 3,835
Machinery and equipment 5,174 2,329
Office furniture and other 1,284 2,787
Construction-in-progress 3,981 883
------- -------
17,236 10,329
Less accumulated depreciation (4,296) (3,717)
------- -------
$12,940 $ 6,612
======= =======
The depreciation expense for the years ended September 30, 2006, 2005 and
2004 was $778, $984, and $760, respectively.
8. SEVERANCE COSTS
During the year ended September 30, 2006, the Company accrued compensation
expense of $437 for severance costs upon the termination of the Managing
Director of the Company's German subsidiary. These costs are a component of
general and administrative expenses in the Consolidated Statement of (Loss)
Income and Comprehensive (Loss) Income for the year ended September 30,
2006, and the accrual for these costs is included in Accrued expenses and
other current liabilities in the Consolidated Balance Sheet as of September
30, 2006. These severance costs are being paid in twelve monthly equal
payments during the period from July 1, 2006 through June 30, 2007. As of
September 30, 2006, the remaining accrual is $334.
9. REVOLVING CREDIT ARRANGEMENTS AND SHORT TERM BORROWINGS
Under the terms of revolving credit facilities with two German banks, the
Company may borrow up to 1,500 Euros (1,000 Euros and 500 Euros,
respectively) or approximately $1,900 for working capital needs. These
renewable credit lines allow the Company to borrow at interest rates
ranging from 8.05% to 9.5%. At September 30, 2006 the Company had
outstanding borrowings of 819 Euros or $1,039. At September 30, 2005, the
Company had no borrowings under the revolving credit agreements. The 500
Euro revolving credit facility is secured by accounts receivable of the
German subsidiary. The 1,000 Euro revolving credit facility is secured by a
mortgage on the Company's German facility and a guarantee up to 4.0 million
euros by the parent Company.
In November 2005, the Company entered into a revolving credit facility in
the U.S. for up to $1,500, expiring on November 18, 2007. At September 30,
2006, the interest rate on this credit facility was 8.3%. At September 30,
2006, the Company had outstanding $1,500 on this credit facility to fund
working capital needs. The U.S. accounts receivable and inventory assets
collateralize the borrowing under the revolving credit facility. The
Company is required to maintain a maximum senior debt to tangible net worth
ratio of 2.0 to 1.0. As of September 30, 2006, the Company was in
compliance with this covenant. In addition, the Company maintains a lock
box arrangement with the bank.
The Company prepays certain expenses including insurance premiums. From
time to time, the Company enters into short term notes to finance insurance
premiums. As of September 30, 2006, short term borrowings on the
consolidated balance sheet included an outstanding balance of $449 related
to such activity.
On June 30, 2006, the Company issued a $3,000 convertible debenture with
detachable 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
August 1, 2007 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. The convertible debt is included in short-term borrowings on
the Consolidated Balance Sheet at September 30, 2006. As of September 30,
2006, the Company was in compliance with the terms and conditions of the
convertible debenture.
The relative fair value of the detachable warrants at inception of the
convertible debenture agreement was $275 and was computed using the
Black-Scholes pricing model under the following assumptions: (1) expected
life of 3 years; (2) volatility of 53.5%, (3) risk free interest of 5.13%
and dividend yield of 0%. The proceeds of the convertible debenture were
allocated to debt and warrants based on their relative fair values. The
relative fair value of the warrants was recorded to additional paid-in
capital and resulted in a discount on the convertible debenture, which will
be amortized to interest expense over the one-year
F-14
term of the debenture. The remaining unamortized balance of the warrants as
of September 30, 2006 is $205. The convertible debenture balance of $2,725,
net of debt discount, is included in short-term borrowings. In addition,
$205 of direct costs incurred relating to the issuance of the convertible
debenture was recorded as debt issuance costs in other current assets,
which will also be amortized to interest expense over the one-year term of
the debenture.
10. LONG-TERM DEBT
Long-term debt at September 30, 2006 and 2005 consisted of the following:
2006 2005
------- -----
Senior debt $ 3,635 $ 651
Capital lease 1,135 163
------- -----
4,770 814
Less current portion (1,097) (184)
------- -----
$ 3,673 $ 630
======= =====
Aggregate maturities of senior debt are $480 in 2007; $515 in 2008;
$533 in 2009; $545 in 2010; $482 in 2011; $1,080 beyond 2011.
The Senior debt consists of two loans with a German bank. The first loan
($576 as of September 30, 2006) has an interest rate of 5.75%, payable
monthly, maturing March of 2011. The second loan ($1,744 as of September
30, 2006) has an interest rate of 5.15%, payable quarterly, maturing March
of 2012.
The Senior debt, refinanced construction line of credit, and a revolving
credit facility with a German bank are secured by a mortgage on the
Company's German facility and is guaranteed up to 4.0 million euros by the
parent company. There are no financial covenants under this debt.
The Company has an interim construction loan of 1,037 Euros or
approximately $1,316, at an annual interest rate of 5.75%, to finance its
facility expansion project in Germany. The interim loan was converted to a
long-term loan November 30, 2006. This loan has a 10 year term, payable
semi-annually (55 Euros) at a fixed rate of 5.6%.
The Capital lease debt consists of two leases. The first lease (initial
cost of $1,300, with $250 of accumulated amortization as of September 30,
2006) is payable monthly at $55 per month and matures April of 2008. The
lease is secured by leasehold improvements and equipment located at the
Company's Florida tissue processing facility. The second lease (initial
cost of $224, with $139 of accumulated amortization as of September 30,
2006) is payable at $22 quarterly and matures September of 2007. The lease
is secured by equipment located at the Company's Florida tissue processing
facility. As of September 30, 2006, the Company is in compliance with the
terms and conditions of the Capital lease debt. Capital lease assets and
related liabilities are included within the captions "Property, plant, and
equipment, net" and "Long-term debt" on the accompanying consolidated
balance sheet. The table below represents the future minimum capital lease
payments.
TOTAL 2007 2008
----- ---- ----
Principal $1,135 $617 $518
Interest 170 135 35
Total $1,305 $752 $553
For the year ended September 30, 2006, $987 related to a non-cash capital
lease agreement has been excluded from the purchase of property and
equipment, and proceeds from long-term borrowings on the accompanying
consolidated statement of cash flows.
For the year ended September 30, 2006, the Company incurred interest costs
of $578. Of this amount, $285 was capitalized to property, plant and
equipment for assets constructed during the year and $293 was charged to
interest expense.
11. DERIVATIVE INSTRUMENTS
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 for its 1,500 Euro ($1,900)
long-term loan is based on dealer quotes and was not significant as of
September 30, 2006. The construction loan payable is due on March 30, 2012
in monthly installments of approximately $78 (63 Euros) including principal
and interest based on an adjustable rate as determined by one month
EURIBOR, fixed by a swap agreement for the life of the loan with the lender
at 3.7% as a cash flow hedge. The proceeds were used to construct new
facilities.
As indicated in Note 9, on June 30, 2006, the Company issued a $3,000
convertible debenture which contained features that qualify as embedded
derivatives that require bifurcation, however, the value ascribed to these
features was determined to be de-minimus to the overall financial statement
presentation and accordingly, value was not allocated to these features and
the carrying value of the convertible debenture was not reduced.
As of September 30, 2006, the estimated change in the fair values of these
features remained a de-minimus amount.
F-15
12. 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 of each
segment. The Company accounts for intersegment sales and transfers at
contractually agreed-upon prices.
The Company's reportable segments are strategic business units that offer
products and services to different geographic markets. They are managed
separately because of the differences in these markets as well as their
physical location.
A summary of the operations and assets by segment as of and for the years
ended September 30, 2006, 2005 and 2004 are as follows:
2006 INTERNATIONAL UNITED STATES CONSOLIDATED
---- ------------- ------------- ------------
Gross revenue $16,039 $25,430 $41,469
Less - intercompany (3,522) -- (3,522)
------- ------- -------
Total revenue - third party $12,517 $25,430 $37,947
======= ======= =======
Depreciation and amortization $ 471 $ 307 $ 778
======= ======= =======
Operating income (loss) $ 168 $ (455) $ (287)
======= ======= =======
Interest expense $ 81 $ 212 $ 293
======= ======= =======
Income tax benefit $ (194) $ 0 $ (194)
======= ======= =======
Net income (loss) $ 332 $ (921) $ (589)
======= ======= =======
Capital expenditures $ 3,248 $ 2,742 $ 5,990
======= ======= =======
Identifiable assets $18,477 $20,440 $38,917
======= ======= =======
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
======= ======= =======
Income tax benefit $ (436) $ 0 $ (436)
======= ======= =======
Net Loss $(1,037) $(5,980) $(7,017)
======= ======= =======
Capital expenditures $ 1,468 $ 213 $ 1,682
======= ======= =======
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
======== ======== ========
F-16
Interest expense $ 79 $ 39 $ 118
======== ======== ========
Income tax expense $ 1,306 $ 0 $ 1,306
======== ======== ========
Net income (loss) $ 2,289 $ (1,156) $ 1,133
======== ======== ========
Capital expenditures $ 1,244 $ 515 $ 1,758
======== ======== ========
Identifiable assets $ 18,166 $ 15,370 $ 33,536
======== ======== ========
Total International long-lived assets of $8,995, $5,912, and $5,282 for the
years ended September 30, 2006, 2005 and 2004, respectively are located in
Germany.
A summary of revenues by segment for the years ended September 30, 2006,
2005 and 2004 are as follows:
FY 2006 FY 2005 FY 2004
------- ------- -------
Dental $17,616 $13,785 $ 6,893
Spine 2,877 3,128 4,850
Surgical Specialties 4,937 4,839 5,383
------- ------- -------
Total-U.S. $25,430 $21,752 $17,126
Germany $ 2,851 $ 1,980 $ 3,521
Rest of World (ROW) 7,472 6,220 6,001
France 1,672 1,337 2,121
Other - Distribution Fees 522 571 561
------- ------- -------
Total-International $12,517 $10,108 $12,204
Total Consolidated $37,947 $31,860 $29,330
======= ======= =======
13. INCOME TAXES
The (benefit) provision for income taxes for the years ended September 30,
2006, 2005 and 2004 are summarized as follows:
F-17
2006 2005 2004
----- ------- ------
Current:
Federal $ 8 $ -- $ --
State -- -- --
Foreign (953) -- 1,153
----- ------- ------
(945) -- 1,153
----- ------- ------
Deferred:
Federal 116 (2,260) (737)
State 19 (194) (162)
Foreign 759 (571) 153
----- ------- ------
894 (3,025) (746)
----- ------- ------
Valuation allowance (143) 2,589 899
----- ------- ------
(Benefit) provision for income taxes $(194) $ (436) $1,306
===== ======= ======
The differences between the U.S. statutory rates and those in the
consolidated statements of (loss) income and comprehensive (loss) income
are primarily due to the foreign entity being taxed at a lower rate and
certain nondeductible items, as follows.
2006 2005 2004
----- ------- ------
Income (benefit) tax at federal statutory rate (34%) $(250) $(2,536) $ 854
State tax 10 (194) (162)
Valuation allowance (143) 2,589 899
Foreign tax differential (3) (303) (293)
Foreign exchange loss (364) -- --
Stock options 124 -- --
Foreign dividend income 423 -- --
Other 9 8 8
----- ------- ------
Total $(194) $ (436) $1,306
===== ======= ======
The tax effect of the temporary differences that give rise to the Company's
net deferred taxes as of September 30, 2006, and 2005 are as follows:
F-18
2006 2005
------- -------
Deferred tax assets:
Current:
Other liabilities $ 2 $ 70
Management fees 576 402
Bad debt reserve 53 44
Inventory reserve 545 594
Vacation pay 53 --
Stock options 34 --
Distribution fees 19 --
Insurance reserve 117 39
------- -------
Subtotal 1,399 1,149
------- -------
Noncurrent:
Net operating loss carryforward and tax credits 6,737 7,006
Distribution fees 38 786
Other liabilities 17 70
------- -------
Deferred tax asset 8,191 9,011
------- -------
Deferred tax liability:
Noncurrent:
Fixed assets (252) (225)
Deferred revenue -- (96)
------- -------
Subtotal (252) (321)
Valuation allowance (6,166) (6,309)
------- -------
Net deferred tax asset $ 1,773 $ 2,381
======= =======
During 2006, the Company had approximately $192 ($65 tax effected) related
to current year excess tax deductions from the exercise of nonqualified
stock options. Because the Company has net operating loss carryforwards,
the Company has not yet realized the tax benefit from the nonqualified
stock option deduction. Pursuant to SFAS No. 123R, this excess tax benefit
is not included as a component of the Company's deferred tax assets, as
realization of the benefit has not yet occurred. Therefore, the $65 of
excess tax benefit is not reflected in the net operating loss and credit
amount in the above deferred tax asset schedule.
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
decrease in the valuation allowance is comprised primarily of the
utilization of federal and state net operating loss carryforwards to offset
current year taxable income.
As of September 30, 2006, the Company has approximately $13,281 of federal
net operating loss carry forwards expiring beginning in 2009, a $29 AMT
credit carry forward, and a $21 credit on research and development that
will expire in 2013 if unused. The Company also has state net operating
loss carry forwards of approximately $12,784 that will begin to expire in
2007.
As of September 30, 2006, the Company has a corporate net operating loss
carry forward for German income tax purposes of approximately $4,114 (3,242
Euros), and a trade net operation loss carry forward for German income tax
purposes of approximately $2,139 (1,686 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, 2006, the
Company has recorded a valuation allowance on deferred tax assets related
to its U.S. 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.
Historically, 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. During 2006,
the Company eliminated certain intercompany accounts, requiring the
utilization of some undistributed earnings of its German subsidiary. The
resulting tax was absorbed by the utilization of net operating loss
carryforwards.
Going forward, the Company does not intend to record deferred income taxes
on future 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-19
14. 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, 2006, 2005 and 2004. The Company has excluded
1,457,000, 419,000 and 367,000 shares of stock as such stock are
anti-dilutive to the calculation:
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNT DATA)
NET (LOSS) PER SHARE
2006 INCOME SHARES AMOUNT
---- ---------- ---------- ---------
Basic earnings per share $ (589) 16,027,469 $ (0.04)
Effect of dilutive securities:
Stock options, warrants and convertible debentures -- -- --
------- ---------- --------
Diluted earnings per share $ (589) 16,027,469 $ (0.04)
======= ========== ========
2005
----
Basic loss per share $(7,017) 15,919,286 $ (0.44)
Effect of dilutive securities:
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 securities:
Stock options -- 734,973 --
------- ---------- --------
Diluted earnings per share $ 1,133 16,469,443 $ 0.07
======= ========== ========
15. 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 $959, $1,212, and $1,103 for the
years ended September 30, 2006, 2005 and 2004, 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, 2006
are as follows:
2007 $ 988
2008 748
2009 343
2010 32
Thereafter --
------
$2,111
======
F-20
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 the
Company maintained an accrual of $476 with respect to the remaining appeal
and legal costs. At September 30, 2006, the Company agreed to a settlement
of $360. As a result of the settlement the Company recorded a change in
estimate of approximately $91 as a reduction of accrued expenses, which
reduced the operating loss for the year ended September 30, 2006. The
remaining accrual will be used to settle final nominal legal and court
costs.
On October 12, 2005, the Company issued a voluntary recall of all product
units, which utilized donor tissue received from BioMedical Tissue
Services/BioTissue Recovery Services ("BioMedical"). This action was taken
because the Company was unable to satisfactorily confirm that BioMedical
had properly obtained donor consent. The Company quarantined all BioMedical
products in its inventory, having a value of $1,035 and 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
reserved $861 for quarantined inventory, which was written off at
September 30, 2006. Additionally, as of September 30, 2005, the Company had
accrued $250 of related costs in connection with the recall. As of
September 30, 2006, the accrual for these costs was $0, due in part to
actual payments made for such costs and in part to an adjustment made by
management during the three months ended March 31, 2006 to reduce the
accrual by approximately $150 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. The Company intends
to vigorously defend this matter.
16. 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, 2006, 2005 and 2004 product sales to
Zimmer spine totaled $2,877, $3,128 and $4,850, respectively. Accounts
receivable from Zimmer Spine were $952 and $44 at September 30, 2006 and
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 years ended September 30,
2006, 2005 and 2004, Zimmer Dental was paid commissions aggregating
approximately $7,200, $6,055 and $3,213, respectively. Accounts payable to
Zimmer Dental total $1,918 and $1,740 at September 30, 2006 and 2005,
respectively.
Zimmer CEP (formerly Centerpulse) USA Holding Co., a subsidiary of Zimmer
Holdings, Inc., is a 32% owner of the Company's outstanding shares of
common stock.
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. During the due diligence
period in 2006, the Company incurred approximately $262,000 in legal,
accounting and other transaction related expenses. The transaction expenses
are included as a component of general and administrative expenses.
On August 9, 2006, representatives of Zimmer Holdings, Inc. contacted
management of the Company telephonically to propose to the Company a
non-binding indication of interest ("the Indication of Interest") with
respect to a proposed acquisition of the Company at an indicative price
range of $5.00 - $6.00 per share of Common Stock. Later on the same day,
the Company contacted Zimmer and rejected the Indication of Interest.
Zimmer has determined not to pursue an acquisition of the Company at this
time, but based on other factors deemed relevant by Zimmer, including, but
not limited to, the price and availability of Common Stock, subsequent
developments affecting Zimmer and the Company, the business prospects of
Zimmer and the Company, general stock market and economic conditions and
tax considerations, Zimmer may formulate other plans and/or make other
proposals and take other actions with respect to its investment in the
Company that it deems to be appropriate.
17. SUBSEQUENT EVENT
In November 2006, the Company entered into strategic tissue sourcing
agreements with Regeneration Technologies, Inc., ("RTI"). Under the
multi-year agreements, RTI has the first right of refusal to all of the
tissue used in sports medicine surgeries recovered by Tutogen's recovery
partners. The Company, in turn, has the first right of refusal to all
dermis, fascia and pericardium recovered by RTI donor services agencies.
F-21
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly financial results for the
year ended September 30, 2006:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2006 QUARTER ENDED
---------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
------------ --------- -------- -------------
Revenues $8,034 $9,115 $10,000 $10,798
Gross Profit 4,705 5,098 4,780 7,028
Operating expenses 4,948 5,236 6,026 5,688
Operating (loss) income (243) (138) (1,246) 1,340
Income tax (benefit) expense (106) (213) (413) 538
Net (loss) income (81) 22 (1,129) 599
Comprehensive (loss) income (284) 421 (752) 489
(Loss) earnings per share
Basic $(0.01) $ 0.00 $ (0.07) $ 0.04
Diluted $(0.01) $ 0.00 $ (0.07) $ 0.04
2005 QUARTER ENDED
---------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
------------ --------- -------- -------------
Revenues $ 7,073 $ 7,554 $ 9,281 $ 7,952
Gross Profit 2,875 2,957 3,275 2,624
Operating expenses 4,337 4,621 4,779 5,221
Operating loss (1,462) (1,664) (1,504) (2,597)
Income tax (benefit) expense (148) (344) 88 (32)
Net loss (1,914) (1,129) (1,278) (2,696)
Comprehensive loss (1,628) (1,473) (822) (3,664)
Loss per share
Basic $ (0.12) $ (0.07) $ (0.08) $ (0.17)
Diluted $ (0.12) $ (0.07) $ (0.08) $ (0.17)
******
F-22
TUTOGEN MEDICAL, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 2006, 2005 AND 2004
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, 2006 $ 462 $ 19 $ (2) $ 483
Year ended September 30, 2005 192 308 38 462
Year ended September 30, 2004 429 (83) 154 192
Allowance for product returns
YEAR ENDED SEPTEMBER 30, 2006 $ 244 $ 0 $ 244 $ 0
Year ended September 30, 2005 241 183 180 244
Year ended September 30, 2004 117 124 0 241
Valuation allowance for net deferred tax
assets:
YEAR ENDED SEPTEMBER 30, 2006 $6,309 $ (143) $ 0 $6,166
Year ended September 30, 2005 4,523 1,786 0 6,309
Year ended September 30, 2004 3,496 1,027 0 4,523
(1) NET WRITE-OFFS AND RECOVERIES.
S-II