SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
/ / Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended September 30, 2003
/ / 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 Small Business Issuer in Its Charter)
FLORIDA 59-3100165
(State of Incorporation) (IRS Employer Identification No.)
1130 MCBRIDE AVENUE WEST PATERSON, NEW JERSEY 07424
(Address of Principal Executive Offices, Zip Code)
(973) 785-0004
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB.
The issuer's revenues for the fiscal year ended September 30, 2003 were
$30,260,000.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates (approximately 4,590,000 shares), computed by reference to the
closing price of such common equity on the American Stock Exchange, was
$25,245,000 as of November 30, 2003.
As of November 30, 2003, there were 15,667,110 shares outstanding of the
issuer's Common Stock, par value $.01 per share.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
None.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The discussion contained in this annual report under Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for the
issuer's fiscal year ended September 30, 2003 (this "Report"), contains
forward-looking statements that involve risks and uncertainties. The issuer's
actual results could differ significantly from those discussed herein. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in "Description of Business" and "Management's Discussion
and Analysis or Plan of Operation" as well as those discussed elsewhere in this
Report. Statements contained in this Report that are not historical facts are
forward-looking statements that are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995. A number of important factors
could cause the issuer's actual results for 2004 and beyond to differ materially
from those expressed in any forward-looking statement made by or on behalf of
the issuer.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Tutogen Medical, Inc., a Florida corporation, was formed in 1985, and with
its consolidated subsidiaries (collectively, the "Company" or "Tutogen"),
develops, manufactures and markets sterile biological implant products made from
human (allograft) and animal (xenograft) tissue. Tutogen utilizes its Tutoplast
Process(R) of tissue preservation and viral inactivation to manufacture and
deliver sterile bio-implants used in spinal/trauma, urology, dental,
ophthalmology, head and neck and general surgery procedures.
One of the Company's wholly owned subsidiaries, Tutogen Medical GmbH,
designs, develops, processes, manufactures, markets, and distributes specialty
surgical products and services to over 40 countries through a worldwide
distribution network. Another subsidiary, Tutogen Medical (United States), Inc.,
was formed in 1994 to process, market and distribute allografts for the U.S.
market.
The Company's corporate headquarters is in West Paterson, New Jersey, a
manufacturing facility in Alachua, Florida, international executive offices and
processing and manufacturing facilities in Neunkirchen, Germany, and a sales
office in Boulogne, France.
The Company contracts with independent tissue banks and procurement
organizations to provide donated human tissue for processing under the Company's
proprietary Tutoplast(R) process. The Tutoplast(R) process utilizes solvent
dehydration and chemical inactivation which is applied to two types of preserved
allografts: soft tissue; consisting of fascia lata, fascia temporalis,
pericardium, dermis, sclera, ligaments, tendons and cartilage, and bone tissue;
consisting of various configurations of cancellous and cortical bone material.
Processed pericardium, fascia lata and dermis are collagenous tissue used to
repair, replace or line native connective tissue primarily in neurosurgery,
ophthalmology, urology sling procedures, plastic and reconstructive surgeries,
dermis is also used in pelvic floor reconstruction, sclera is used in
ophthalmology procedures such as, anterior and posterior segment patch grafting
applications: Glaucoma, Retina, Trauma and Oculoplastics and contour wrapping of
an orbital implant, while ligaments, tendons and cartilage are used primarily in
orthopedic and trauma repairs. Processed cortical and cancellous bone material
is used in a wide variety of applications in spinal and dental surgeries. All
processed tissues have a shelf life of five years and require minimal time for
rehydration. The Company processes both bone and soft tissues in both
manufacturing facilities.
The Tutoplast(R) processed allografts have been used successfully in over
1,000,000 procedures performed in over 30 years.
In contrast to other processors using freeze-drying, deep freezing or
cryopreservation for human tissues, the Tutoplast(R) process utilizes a
technique in which tissues are soaked and washed in a series of aqueous
solutions and solvents, removing water and substances that could cause rejection
or allergic reaction. This technique dehydrates the tissue keeping the tissue's
structure intact, that acts after
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implantation as a scaffold, which is replaced by the body's own tissue. During
processing, the tissues are treated with agents shown to inactivate viruses such
as hepatitis and HIV, the virus that causes AIDS, to render the allografts safe
for the recipient. Soft tissue is also treated with chemicals shown to be
effective against the agent causing Creutzfeldt-Jakob Disease ("CJD"). Once
packaged, tissues are terminally sterilized by low dosage radiation.
Manufacturing and Processing
----------------------------
All of the Company's Allografts and Xenografts are prepared, preserved and
processed by application of Tutogen's proprietary manufacturing process, the
Tutoplast(R) processes. Allograft tissues are obtained from approved tissue
procurement organizations and institutions and undergo an extensive donor
screening regimen prior to processing. Although several operations are
automated, most of the process is manual and relies on trained, highly skilled
personnel. The entire process, including packaging and sterilization, takes
place under controlled clean room processing conditions. All incoming, untreated
tissue is stored in special quarantine cold-storage rooms or refrigerators until
released by quality assurance for processing. To prevent possible
cross-contamination and ensure constant tissue identification, all tissue is
marked and strictly maintained in individual containers during the entire
process. Reference samples are taken from each tissue for test purposes and are
retained for 10 years beyond the date of expiration. Documentation allows
reverse traceability of tissue implants to the donor and the retrieving
institution. All processed implants have a batch number and a donor number
printed on each single package. Processed tissue may be safely stored for up to
five years at room temperature storage.
QUALITY ASSURANCE - All tissues are accompanied by specific medical and
donor documentation, including blood serum infectious disease testing results
performed by independent laboratories appropriately certified for these tests
under the Clinical Laboratory Improvement Amendment of 1988 (CLIA 1988).
Tutogen's implants and processed tissues are subject to a series of biological,
physical and chemical tests, from incoming unprocessed donated tissues to
sterile, finished goods. Tissues that do not meet regulatory standards are
rejected and destroyed. See "Government Regulations".
Marketing and Distribution
--------------------------
Tutogen's products and processing services are provided through direct
representatives in Germany and France, with the Company billing the hospital or
end-user directly. Internationally, with a focus on Europe, the Company
distributes and invoices direct to a network of contract distributors. Tutogen's
personnel, with distributors and their representatives, conduct product training
sessions, make joint customer calls, set objectives and evaluate their
representatives' performance. Personnel also call on selected physicians and key
hospital accounts in order to provide needed clinical and technical information
services. In the U.S., Centerpulse Spine-Tech Inc. ("Spine"), a subsidiary of
Zimmer Holdings, Inc. and Centerpulse Dental Inc. ("Dental"), a subsidiary of
Zimmer Holdings, Inc., provide marketing services for the Company's products to
the spine and dental markets, with the Company, beginning in May 2003 billing
Spine directly and in the case of Dental, billing the hospital or end-user
directly.
Approximately 30% of the Company's revenues come from outside the United
States. As a result of its foreign sales and facilities, the Company's
operations are subject to the risks of doing business on an international level.
A major effort is underway to increase penetration in the U.S. market, as it
accounts for 70% of the world market for biomaterials. The Company's marketing
efforts in the U.S. in recent years have focused on creating a market for the
pericardium and fascia lata tissues from donor tissues sourced in the U.S. In
addition, the strategic decision was made to re-open the U.S. market for
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tissues obtained from abroad, because the Company's foreign donor qualification
standards are in full compliance with the donor suitability standards of the
Food and Drug Administration ("FDA").
The Company's U.S. marketing efforts have concentrated on rebuilding the
marketing and distribution organization and re-entering the bone markets.
Presently, allografts are provided to hospitals in the U.S. either directly by
the Company with the assistance of marketing services or through independent
distribution companies. These distributors employ, in the aggregate, over 300
field representatives who call on hospital and office-based medical
practitioners, primarily surgeons. Tutogen supports their activities with
various types of technical allograft literature, informational programs,
reference materials, and training sessions and programs designed to increase
distributor call volume. In 2003, the Company increased its independent
distributor network for the distribution of allografts for fields of use (i.e.,
sports medicine/ligament repair, ENT, and general surgery) that are not
otherwise covered under exclusivity. In addition, the Company has entered into
exclusive marketing and distribution agreements with other medical device
companies, under the Tutoplast(R) label, for specialized indications. One such
distribution agreement with IOP, Inc., ("IOP") which has been in effect since
1998, is for Tutoplast(R) implants for ophthalmic use. A second project, for use
of Tutoplast(R) fascia lata in urological and gynecological indications, was
concluded in January 1998 with Mentor Corporation ("Mentor"). In Fiscal Year
2003, Mentor has accounted for 13% and 18%, respectively, of the Company's total
and U.S. revenues. In March 2000, a project was concluded with Spine for
marketing in the U.S and distribution internationally of Tutoplast(R) processed
bone tissues for spinal applications. Marketing of these products began in
September 2000. In September 2000, the Company entered into an agreement with
Dental, whereby Dental will market in the U.S. and distribute Tutoplast(R)
processed bone tissue for dental applications in certain international markets.
In October 2001, the Company entered into a project with Mentor for use of
Tutoplast(R) processed Dermis in urological and gynecological indications. In
October 2002, the Company entered into a distribution agreement with TMC
Orthopedic LP, the largest distributor of orthopedic and sports medicine
products in Texas. The agreement covers such products as, bone-tendon-bone (BTB)
implants used for ACL (anterior cruciate ligament) procedures. Finally, in April
2003, the Company entered into an Exclusive License and Distribution Agreement
("Agreement") with Spine redefining the terms governing its relationship.
Effective with this agreement, Spine will continue to market the Tutoplast
products for the spine market, however, Spine has become a "stocking
distributor", whereby Spine now purchases the Company's products and invoices
the customer directly.
Internationally, the Company has implemented a marketing and sales
restructuring plan, concentrating on an in-depth penetration of markets with
major needs, i.e. in Europe, specifically with a "focus" on countries such as
Germany, France, Italy, Spain and the U.K. The Company believes that the recent
collaborations with Spine and Dental will substantially increase its penetration
of the international markets for processed bone tissue.
Sources of Tissue and Products
------------------------------
The Company receives donor tissue from multiple sites in Europe and the
United States. This tissue is procured by independent procurement organizations
and the Company reimburses these organizations for the costs of their
procurement (recovery fees). The Company continuously strives to comply and
remain current with existing laws and regulations related to procurement, donor
screening, donor suitability, testing, processing, storage and distribution. It
is anticipated that government laws and regulations involving human donor
tissues will continue to change in the countries presently serviced by the
Company (see Government Regulations). Accordingly, the Company continues to seek
additional contacts with authorized health care agencies, accredited tissue
banks, organ procurement organizations and governments. The Company expects
that, in most markets, demand for its Tutoplast(R) processed allografts will
continue to exceed the current donor tissues available to the Company for
processing.
4
Tissue recoveries, both in the United States and internationally, continue
to improve. The import program from Europe to the U.S. has been given high
priority, and the levels of shipments are increasing steadily. The international
tissue recovery base will be expanded to include Tissue Services Coordinators
who will monitor the levels and types of recoveries. Domestic and European
tissue recoveries are on track to meet the plan for fiscal 2004. While the
Company continues to emphasize expanding its supply base, there can be no
assurance that changing laws or donation trends, in the countries from which it
presently obtains tissues, will not have a material adverse effect on the
Company's operations.
The FDA has published a Draft-not for implementation Donor Eligibility
Guidance to Industry document that discusses measures to reduce the possible
risk of transmission of Creutzfeldt-Jakob Disease (CJD) and variant
Creutzfeldt-Jakob Disease (vCJD) by human cells, tissue, and cellular and
tissue-based products. This document represents the agencies current thinking on
donor deferral criteria for donors that could have been potentially exposed to
the Bovine Spongiform Encephalopathy (BSE) agent ("Mad Cow" disease). The draft
is in the review stage, which precedes the adoption of a final version of the
FDA's position on this matter. Since 1996 the vCJD and BSE epidemics have
continued to evolve, and more BSE cases have been reported in Europe, including
new reports of BSE in Spain, Italy, Germany, the Czech Republic, Greece,
Slovenia, Slovakia, Austria, and Finland. Japan and Israel have also reported
BSE, and many other countries, which also imported meat and bone meal from the
UK from 1980 to 1996, may also have BSE. The impact of adoption of the draft
document for Tutogen may be the ban of tissue from countries with known cases of
BSE. This may result in a 10-15% reduction in importation of tissues to the US,
however management does not believe that it will have material adverse affect on
the Company's business, as new sources of tissues have been identified and are
available.
Back Order
----------
While Tutogen worldwide has back orders on certain tissue types and tissue
sizes, the allograft demand is most significant in the U.S. market. The U.S. is
the largest market in the world for allografts and has historically represented
the Company's largest market. The Company currently has back orders, that are
expected to be filled within the next three months; however, the Company cannot
predict with absolute certainty its ability to fill specific orders in this time
frame. As of September 30, 2003, the Company's back order for all tissues was
approximately $1,132,000. Because orders may be canceled or rescheduled, the
Company believes that backlog is not always an accurate indicator of results of
operations for specific future periods.
Competition
-----------
Tutogen is a leader in safe bioimplants for tissue repair. Tutogen's
competitive advantage is based on its Tutoplast(R) process of tissue
preservation and viral inactivation. The Tutoplast(R) process is based upon
solvent dehydration, which preserves the tissue's integrity, and allows the
implants to remodel in the course of normal healing. The Tutoplast(R) process
has an outstanding safety record. Since its introduction more than 30 years ago,
more than 1,000,000 procedures have been successfully performed using
Tutoplast(R) processed tissues, with no known complications from disease
transmission or tissue rejection attributable to the implants. Tutoplast(R)
processed implants have been described in more than 400 published scientific
papers.
The majority of the medical procedures suitable for allografts are
currently being performed with autografts (tissues derived from the patient)
requiring a second surgical procedure. The advantages of autografts include the
decrease incident of tissue rejection and disease transmission. The
disadvantages
5
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(R)
processed allografts to compete with autografts for use by the surgical
community.
The industry in which the Company operates is highly competitive. The 1996
departure of a major German competitor from the business of soft tissue
allografts left Tutogen as the largest processor in the international market.
Processors of allograft tissue for transplantation in the U.S. include
commercial processors such as Osteotech, Inc., Regeneration Technologies, Inc.
and CryoLife, Inc., companies well established in the fields of bones and heart
valves respectively, and which have substantially greater financial resources
than the Company. Not-for-profit tissue banks that procure and process tissue
for distribution are considered competitors for certain applications and in
certain markets. Management believes that it's Tutoplast(R) process, with its
impressive record for safety in the surgical community, gives the Company a
competitive advantage over its competitors. However, due to government
regulation, disrupted sources of availability and increasing competition, there
can be no assurance that the Company will be able to continue to compete
successfully. In addition, there can be no assurance that in the future the
Company's allografts will be able to compete successfully with newly developed
tissue substitutes being developed by other companies.
Growth Strategy
---------------
The Company estimates the worldwide market for its present products to be
about $1 billion, including all procedures in its field of use. The Company's
existing tissue supply network, established processing facilities and proven
Tutoplast(R) technology provides the foundation for continued growth into fiscal
2004 and beyond. This growth will be aided by new sources of tissue, new
applications and products and expansion into new markets.
TISSUE SUPPLY AND PROCESSING
The Company has an established network in the United States and Europe for
tissue supply that meets or exceeds the high standards set by the FDA, the
German Health Authority ("BfArM") and other regulatory agencies. This network
incorporates a reliable logistic system that provides for a continuous supply of
tissue with complete traceability. Individual tissue reference samples are
stored for 10 years beyond the date of expiration. These high standards of
recovery permit such tissue to be imported into the U.S. The Company is engaged
in an aggressive program to expand its donor network in the U.S.
Tutogen operates two processing facilities, one in Alachua, Florida and the
other in Neunkirchen, Germany. Both facilities are registered with the FDA
Center for Biologics Evaluation and Research (CBER) in accordance with
registration and listing requirements for human tissue based products and have
ISO 9001 and ISO 13485 certification. The Alachua, Florida facility is
registered with the FDA Center for Devices and Radiological health (CDRH) as a
medical device manufacturer and is licensed in the States of New York and
Florida. The German facility is registered as a pharmaceutical and medical
device manufacturer. Tutogen is an accredited member of The American Association
of Tissue Banks ("AATB"). The recent expansion of the Alachua facility into bone
production complements a major expansion and modernization being planned at the
Neunkirchen facility. These expansions will allow the Company to keep pace with
growing product demands for the next several years.
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XENOGRAFTS
The worldwide demand for allografts, tissue derived from human sources, is
anticipated to represent a significant challenge. Faced with this constraint,
the Company embarked on a program in 1993 to develop xenografts, tissue derived
from animals, as an allograft substitute. The current revenue mix worldwide is
approximately 85% allografts and the balance xenografts. As with Allografts,
xenografts processed using the Company's proprietary Tutoplast(R) process have
their biomechanical properties and remodeling capacity preserved with removal of
antigenicity and infection risk. Studies have shown, that Tutoplast(R) processed
xenografts are at least equivalent to Allografts as demonstrated by actual
clinical use and laboratory studies. To date, the Company has received CE-Marks,
the European equivalent to an FDA medical device approval, for bovine
pericardium (1998), bovine cancellous bone (1997) and bovine compact (cortical)
bone (1999) which permits distribution throughout Europe of products derived
from such tissues. In the US the Company has received FDA 510(k) clearances for
bovine pericardium, allowing the Company to market the first xenografts tissue,
Tutopatch(R), for indications of general and plastic surgery. Tutopatch(R) is
produced from bovine pericardium obtained from U.S. cattle, a source deemed free
of Bovine Spongiform Encephalopathy ("BSE") and inspected/cleared by the United
States Department of Agriculture (USDA).
The superior biomechanical properties of bovine tissues combined with the
absence of those supply constraints associated with allografts, permits the use
of xenograft tissues, in areas that cannot be optimally addressed with human
tissue.
NEW APPLICATIONS AND PRODUCTS
A major component of Tutogen's growth strategy is focused on the
introduction of new products and applications for Tutoplast(R) processed
tissues.
In November 2001, the Company developed a Tutoplast(R) Processed Dermis(TM)
product to be exclusively distributed by the Mentor Corporation. The
Tutoplast(R) Processed Dermis(TM) has application in Mentor's Suspend(TM)
procedure that is used to treat female incontinence as well as other pelvic
floor surgical procedures. Female incontinence is an extremely unpleasant
medical condition suffered by a large and growing population. In the procedure
the surgeon repositions and levels the bladder by creating a sling that cradles
the bladder. The procedure was developed and pioneered by Mentor. The Company
contributed their tissue engineering and preservation expertise knowledge to in
the support of the development of the procedure. The procedure has won rapid and
wide acceptance as a safe and effective treatment for this condition. The number
of women electing to have this procedure each year continues to climb.
7
In September 2002, Tutogen entered the market for sports medicine with the
introduction of its LigaTech(TM) product line for ligament replacement and
repair. This product line includes Tutoplast processed specialty allograft
products utilizing soft tissue and BTB combination products for ACL repair and
reconstruction. There are over 200,000 ACL procedures performed in the U.S.
annually with an aggregate market size of $500 million. Tutoplast soft membrane
and bone allograft products have also been successfully used in shoulder, hip,
and hand repair, as well as achilles tendon repair and reconstruction. These
products are being distributed through a network of independent distributors in
the U.S. and Europe.
In October 2002, the Company entered the European market with Tutomesh,(R)
a Tutoplast processed biological membrane for hernia and abdominal wall repair.
In 2001, there were 880,000 hernia surgery procedures alone, with an aggregate
market size of $250 million. Tutomesh(R) has already been successfully implanted
in abdominal wall surgery in children with hernia defects. These products are
initially being sold through the Company's direct sales force in Germany. In
Europe, a distributor network is being established, focusing on Italy, Spain and
Great Britain.
In February 2003, the Company introduced the Cervical Spacer, an anterior
cervical intervertebral fusion, marketed and distributed by Spine.
Several patents and trademarks have been submitted in 2003 to the
appropriate agencies in order to assist and accomplish the goals for expansion
and growth.
EXPANSION INTO NEW MARKETS
Tutoplast(R) processed tissues and products have application in numerous
surgical indications. The Company enjoys high degrees of success in two such
niches, ophthamology and urological/gynecological with its strategic partners
IOP and Mentor, and has established similar relationships to address additional
markets. One such relationship was established in March 2000 with Spine for the
worldwide distribution of Tutoplast(R) processed bone tissues for spinal
applications. Marketing of the traditional bone products began in September
2000. In November 2001, Spine commenced marketing of the Company's first
biological specialty graft, the Tutogen Medical ALIF (Anterior Lumbar Interbody
Fusion). Also, in September 2000, the Company entered into a collaboration with
Dental whereby Dental will market in the U.S. and distribute internationally
Tutoplast(R) processed bone tissue for dental applications. In February 2002,
Spine commenced marketing of an additional specialty graft, the Tutogen PLIF
(Posterior Lumbar Interbody Fusion). In February 2003, Spine commenced marketing
of the Cervical Spacer (anterior cervical intervertebral fusion) developed by
the Company.
Research and Development
------------------------
Tutogen continues to engage in research and development ("R&D"). The
Company's scientific personnel and university level consultants contractively
collaborate on research activities related to allograft and non-allograft tissue
development. The Company follows an Internal Product Development plan and
organizes all R&D activities, including the Spine-Tech and Dental collaboration.
R & D expenditures decreased 10% from $886,000 in 2002 to $799,000 in 2003.
In allograft-related areas, R&D activities focus primarily on the
development of surgical solutions, standardized and tailor-made products instead
of offering grafting material to the surgeon. Also, continuing progress on the
application of the Company's proprietary Tutoplast(R) process to various
8
other tissues has met with success. The Company continues to independently
review its processing technology to improve tissue safety and efficacy.
Non-allograft activities relate to explorations into the use of xenografts,
tissue-engineered grafts and improving healing. Clinical studies, evaluation and
follow-up are conducted on these activities. The Company's research efforts are
subsidized by its collaboration with non-profit research institutions. These
activities will be expanded substantially pending the availability of the
necessary financial resources. The Company is referred to in more than 400
publications.
Customers
---------
Spine and Mentor are principal customers to the Company, accounting for
approximately 17% and 13%, respectively, of the Company's net sales for the year
ended September 30, 2003. No other customer accounted for more than 10% of the
Company's net sales for the fiscal year 2003. In April 2003, the Company entered
into an Exclusive License and Distribution Agreement with Spine redefining the
terms governing its relationship. Effective with this agreement, Spine will
continue to market the Tutoplast(R) products for the spine market, however,
Spine has become a "stocking distributor", whereby Spine now purchases the spine
products from the company and invoices the customers directly. The Company has
Exclusive Distribution Agreements with Mentor granting a license to exclusively
distribute the Tutoplast(R) Processed Fascia Lata, Pericardium and Dermis in
their field of use, which is defined as all urological and gynecological
applications and procedures in the United States and certain foreign markets.
Patents, Licenses and Trademarks
--------------------------------
Wherever possible, Tutogen seeks to protect its proprietary information,
products, methods and technology by obtaining patent and trademark protection.
Tutogen has 18 patents pending and has 14 registered trademarks covering several
countries worldwide. In the United States, the Company has two FDA accepted
510(k) applications for its various products or processes. The Company believes
that it has established itself through the Tutoplast(R) trademark identity and a
record of safety and quality assurance, that will survive the life of the
patents.
Government Regulation
---------------------
Tutogen has contracts to receive, process and provide tissues worldwide.
Every country has its own regulatory requirements that are constantly under
review and subject to change. The Company believes it currently complies with
all appropriate governmental requirements and standards in each country where it
does business. There can be no assurance that changing governmental
administration or laws will not negatively impact the Company.
In Germany, allografts are classified as drugs and the German government
regulates Tutogen tissue processing and distribution within Germany under a
pharmaceutical license. The European Commission is in the legislature process to
regulate allografts within the European Community. At present, Tutogen's German
facility is licensed and in compliance with German law.
In the United States, the FDA has determined that all xenograft tissues are
subject to all provisions of the Food, Drug and Cosmetic Act and are regulated
as a medical device. The FDA Title 21, code of Federal Regulations, Part 1270
Human Tissue Intended for Transplantation, currently regulates all human tissues
processed currently by the Company. Similarly, tissue banks and procurement
organizations, which provide the tissues to the Company for processing, also
must comply with the FDA Part 1270 and its own country/state regulatory
requirements.
9
Both the FDA and German regulatory agencies conduct inspections of
processing facilities. The Company believes that worldwide regulation of
allografts is likely to intensify as governments increase their focus on the
growing demand for this type of tissue and the need to ensure the health and
welfare of its citizens. Management believes that the Company and its industry
will always be subject to changing regulations that could have a material
adverse effect on its financial condition and results of operations. Management
further believes that they can reduce this exposure by continuing to work
closely with government regulators in understanding the industry and drafting
reasonable and proper legislation. While the Company believes that it is in
compliance with all existing regulations, there can be no assurance that
changing laws or interpretations of existing laws will not have a material
adverse effect on the results of operations and cash flow.
Environmental Regulations
-------------------------
The Company's allografts and xenografts as well as the chemicals used in
processing are handled and disposed in accordance with country-specific,
federal, state and local regulations. Since 1995, the Company has used outside
third parties to perform all biohazard waste disposal.
The Company contracts with a third party to perform all gamma-terminal
sterilization of its allografts. In view of the engagement of a third party to
perform irradiation services, the requirements for compliance with radiation
hazardous waste does not apply, and therefore the Company does not anticipate
having any material adverse effect upon its capital expenditures, results of
operations or financial condition. However, the Company is responsible for
assuring that the service is being performed in accordance with applicable
regulations. Although the Company believes it is in compliance with all
applicable environmental regulations, the failure to fully comply with any such
regulations could result in the imposition of penalties, fines and/or sanctions
which could have a material adverse effect on the Company's business.
Technological Change and Competition
------------------------------------
The biomedical field continues to experience rapid and significant
technological change. Tutogen's success will depend upon its ability to
establish and maintain a competitive position in the marketplace with its
products and its ability to develop and apply its technology. There are many
well-established companies and academic institutions with greater resources that
are capable of developing products based on similar or new technology that could
effectively compete with those products offered by the Company.
Foreign Exchange Rates and Foreign Transactions
-----------------------------------------------
A significant portion of the Company's revenues is derived from its German
operations, all of which are denominated in Euros. Fluctuations in the U.S.
Dollar/Euro exchange rate may therefore have a significant effect on the
Company's dollar results. Transactions with foreign suppliers and foreign
customers could be materially adversely affected by possible import, export,
tariff and other restrictions that may be imposed by the United States or other
countries.
10
Employees
---------
As of September 30, 2003, the Company employed a total of 178 full-time and
14 part-time employees, of whom 43 were employed in the United States and the
remainder in Germany. Management believes its relations with its employees are
good.
ITEM 2. DESCRIPTION OF PROPERTY.
United States. The Company's domestic facilities are located in New
Jersey and Florida. In West Paterson, New Jersey, the Company leases
approximately 1,400 square feet of office space in which its administrative
headquarters is located. The lease will expire in December 2004 and has a base
rent of approximately $2,500 per month. The Company's processing plant in
Alachua, Florida has expanded from approximately 13,449 square feet to 20,205
square feet of leased space. The Florida lease expires January 31, 2006 and
rents for approximately $25,913 per month. The Company believes it is adequate
in space and condition for its current needs.
Germany. The Company's facility in Neunkirchen consists of six
buildings totaling some 28,000 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.
ITEM 3. LEGAL PROCEEDINGS.
There were no material legal proceedings pending as of September 30,
2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no submission of matters to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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 2002 High Low
------------ ---- ---
First Quarter $ 3.09 $ 2.25
Second Quarter 5.05 2.95
Third Quarter 4.95 3.55
Fourth Quarter 3.75 2.76
Fiscal 2003
-----------
First Quarter $ 3.50 $ 2.30
Second Quarter 3.60 2.45
Third Quarter 3.49 2.40
Fourth Quarter 5.55 3.30
11
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, 2003, the approximate number of holders of record of the
Company's Common Stock was 372. The Company estimates that there are
approximately 2,100 beneficial holders.
Dividends
---------
The Company has not paid any cash dividends to date and does not anticipate
or contemplate paying cash dividends in the foreseeable future until earnings
would generate funds in excess of those required to provide for the growth needs
of the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
REVENUE AND COST OF REVENUE
Revenue for the year ended September 30, 2003 increased $9.5 million or 46% to
$30.3 million from $20.7 million in 2002. The US operation revenues were $21.2
million or 54% higher than 2002. The revenue increase was primarily due to an
increase in the demand for the Company's Tutoplast(R) processed bone products
for spinal and dental applications sold by Spine and Dental, the Company's
marketing partners. These products contributed $8.1 million of the increase in
revenue. This increase was fueled by the introduction, by Spine in February of a
new Tutoplast(R) specialty graft, the C-Graft for cervical spine fusion, and
increased sales levels for the Puros(TM) Symmetry(TM) PLIF Allograft System for
spine applications and the Puros(TM) Bone Grafting Material for dental
applications. The International operation had revenues of $9.1 million or an
increase of 30% from 2002. The increase in revenues was primarily due to
increased penetration of the German market and improved distributor revenues
worldwide.
Gross margins for the year ended September 30, 2003 increased to 62% from 59% in
2002. The higher margins were primarily due to a favorable mix of higher margin
products from the spinal revenues. The Spine revenues contributed $10.8 million
versus $5.1 million in 2002. This combined with improved manufacturing
efficiencies resulted in higher margins.
GENERAL AND ADMINISTRATIVE
General and Administrative expenses increased 34% in 2003 to $4.4 million from
$3.3 million in 2002. The overall increase was due primarily to support the
Company's 46% increase in revenue growth, resulting in additional staff
($359,000), foreign exchange variance ($296,000), increased provision for bad
debts ($250,000), higher office expenses ($122,000), telephone expenses
($48,000), investor relations/banker ($23,000) and other expenses ($234,000). As
a percentage of revenues, General and Administrative expenses decreased from 16%
in 2002 to 15% in 2003.
12
DISTRIBUTION AND MARKETING
Distribution and Marketing expenses increased $2.5 million or 39% in 2003 to
$8.7 million from $6.3 million in 2002. The increase was primarily due to the
re-building of the direct sales force in Germany ($595,000), foreign exchange
variance ($549,000), higher travel expenses ($124,000), product brochures and
other marketing expenses ($295,000) and increased marketing fees paid under the
agreements with Spine and Dental as a result of the increase in the spine and
dental revenues ($897,000). Such fees increased from $3.7 million in 2002 to
$4.6 million in 2003. As a percentage of revenues, Distribution and Marketing
expenses decreased from 30% in 2002 to 29% in 2003.
RESEARCH AND DEVELOPMENT
Research and Development expenses decreased 10% in 2003 to $0.8 million from
$0.9 million in 2002. The decrease was due to the timing of certain projects. It
is anticipated that the Company's R & D effort will increase in 2004. As a
percentage of revenues, Research and Development expenses decreased from 4% in
2002 to 3% in 2003.
LITIGATION CONTINGENCY
This represents a provision for a judgment received against the Company in
Germany regarding a dispute between the Company and a former international
distributor in the amount of $657,000 in 2003 and $46,000 in 2002. The judgment
is expected to be appealed.
OTHER INCOME/EXPENSE
Other expense for 2003 increased substantially from income of $75,000 in 2002 to
expense of $368,000 in 2003. This was primarily the result of unfavorable
foreign exchange losses due to the weakness of the dollar versus the euro
($350,000) and other miscellaneous expense ($18,000).
INTEREST EXPENSE
Interest expenses in 2003 decreased 15% due to the Company's ability to maintain
minimum revolving credit balances.
PROVISION FOR INCOME TAXES
The provision for income taxes is solely due to the foreign entity being taxed.
The Company continues to record the existing valuation allowance on its U.S.
operations.
NET INCOME
As a result of the above, net income for the year ended September 30, 2003
totaled $2.3 million $0.15 basic earnings and $0.14 diluted earnings per share
as compared to a net income of $0.9 million or $0.06 basic and $0.06 diluted
earnings per share for 2002. As a percentage of revenues, net income increased
from 4.3% in 2002 to 7.5% in 2003.
13
ACCOUNTS RECEIVABLE
The accounts receivable balance increased in 2003 by 74% due to the 46% increase
in revenues and a significant change in the mix of class of customer (doctors,
hospitals, etc.) as a result of the increase in the spine and dental product
revenues from year to year. The days sales outstanding has increased from 60 in
2002 to 71 in 2003.
INVENTORY
The inventory balance increased in 2003 by 21% or $2.0 million while the total
revenues increased by 46%. This increase was primarily due to the weakening of
the dollar against the euro as the result of a 17% weakening of the dollar. The
higher inventory also reflects the meeting of contractual commitments in terms
of safety stock with its two major marketing partners, Spine and Dental.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are more fully described in Note 2
to the consolidated financial statements in the annual report. However, certain
of the accounting policies are particularly important to the portrayal of the
financial position and results of operations and require the application of
significant judgment by management; as a result, they are subject to an inherent
degree of uncertainty. In applying those policies, management uses its judgment
to determine the appropriate assumptions to be used in the determination of
certain estimates. Those estimates are based on historical experience, terms of
existing contracts, observance of trends in the industry, information provided
by customers and information available from other outside sources, as
appropriate. The Company's significant accounting policies include:
INVENTORIES. Inventories are valued at the lower of cost (weighted average
basis) or market. Work in process and finished goods includes costs attributable
to direct labor and overhead. Reserves for slow moving and obsolete inventories
are provided based on historical experience, current product demand and the
remaining shelf life. The adequacy of these reserves are evaluated quarterly.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE. Revenue on product sales is
recognized when persuasive evidence of an arrangement exists, the price is fixed
and final, delivery has occurred and there is a reasonable assurance of
collection of the sales proceeds. Oral or written purchase authorizations are
generally obtained from customers for a specified amount of product at a
specified price. Delivery is to have occurred at the time of shipment. Customers
are provided with a limited right of return. Revenue is recognized at shipment.
Reasonable and reliable estimates of product returns are made in accordance with
SFAS No. 48 and allowances for doubtful accounts based on significant historical
experience. Revenue from service sales is recognized when the service procedures
have been completed or applicable milestones have been achieved. Revenue from
distribution fees includes nonrefundable payments received as a result of
exclusive distribution agreements between the Company and independent
distributors. Distribution fees under these arrangements are recognized as
revenue as products are delivered.
FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's
German subsidiary is the Euro in both 2003 and 2002. Assets and liabilities of
foreign subsidiaries are translated at the period end exchange rate while
revenues and expenses are translated at the average exchange rate for the year.
The resulting translation adjustments, representing unrealized, non-cash losses
are made directly to comprehensive income. Gains and losses resulting from
transactions of the Company and its subsidiaries, which are made in currencies
different from their own, are included in income as they occur. The Company
recognized currency losses of $350,000 and $51,000 in 2003 and 2002,
respectively. The
14
exchange rates at September 30, 2003 and 2002 were Euro 0.86/U.S. Dollar and
Euro 1.01/U.S. Dollar, respectively.
CONCENTRATION OF CREDIT RISK
The exposure to risk related to foreign currency exchange is limited primarily
to intercompany transactions. The company currently does not utilize forward
exchange contracts or any other type of hedging instruments.
The Company's principal concentration of credit risk consists of trade
receivables. Distribution of products and revenues is provided through a broad
base of independent distributors. Two customers accounted for 30% of
consolidated revenue in 2003 while one customer accounted for 22% of
consolidated revenue in 2002. The Company does not believe that this
concentration of sales and credit risks represents a material risk of loss with
respect to the financial position as of September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003 and 2002 the Company had working capital of $15.8 million
and $10.9 million, respectively, an increase of 45%. In the past, the Company
has relied upon its available working capital lines and institutional investors
to fund operational cash flow, when needed.
Net cash increased from a negative $677,000 used in operations in 2002 to
$1,116,000 provided by operations in 2003, a significant turnaround of
$1,793,000. This was primarily due to the increase in net income, from $901,000
in 2002 to $2,262,000 in 2003 and the improvement in the growth of inventory
levels.
Net cash increased from a negative of $339,000 used in financing activities in
2002 to $769,000 provided by financing activities in 2003. This was primarily
due to an increase in cash received from the exercise of stock options, from
$317,000 in 2002 to $850,000 in 2003.
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 2007
total $1,741,000. The Company considers these commitments and obligations to be
reasonable in order to maintain the current and future business requirements.
The Company maintains current working capital credit lines totaling 1.5 million
euros (approximately $1.8 million) with three German banks and a $1.0 million
credit line with a U.S. bank. At September 30, 2003 the Company had no
borrowings against these lines. The Company's ability to generate positive
operational cash flow is dependent upon increasing processing revenue through
increased recoveries by tissue banks in the U.S. and Europe, and the development
of additional markets and surgical applications for its products worldwide.
While the Company believes that it continues to make progress in both these
areas, there can be no assurances that changing governmental regulations will
not have a material adverse effect on results of operations or cash flow.
15
CONTROLS AND PROCEDURES
The Company's principal executive officer and principal financial officer
evaluated the Company's disclosure controls and procedures (as defined in Rule
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
as of a date within 90 days before the filing of this annual report (the
"Evaluation Date"). Based on that evaluation, the principal executive officer
and principal financial officer of the Company concluded that, as of the
Evaluation Date, the disclosure controls and procedures, established by the
Company were adequate to ensure that information required to be disclosed by the
Company in reports that the Company files under the Exchange Act, is recorded,
processed,, summarized and reported on a timely basis in accordance with
applicable rules and regulations. There have been no significant changes in
internal controls or in other factors that could significantly effect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
ITEM 7. FINANCIAL STATEMENTS
The information required by this Item is found immediately following the
signature page of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth the names and ages of the directors and
executive officers of the Company (each, a "Director" and/or "Officer"), the
positions and offices that each Director and Officer held with the Company, and
the period during which each served in such positions and offices. Each Director
serves for a term of one year, until his successor is duly elected and
qualified.
TABLE OF DIRECTORS AND EXECUTIVE OFFICERS
------------------------------ ------- --------------------------------- ---------------------------
NAME AGE POSITIONS/OFFICES PERIOD SERVED IN
---- --- ----------------- ----------------
OFFICE/POSITION
---------------
------------------------------ ------- --------------------------------- ---------------------------
G. Russell Cleveland 65 Director 1997 - present
------------------------------ ------- --------------------------------- ---------------------------
Robert C. Farone 61 Director May 1999 - present
------------------------------ ------- --------------------------------- ---------------------------
Steven E. Hanson 50 Director 2003 - present
------------------------------ ------- --------------------------------- ---------------------------
J. Harold Helderman, MD 58 Director 1997 - present
------------------------------ ------- --------------------------------- ---------------------------
16
------------------------------ ------- --------------------------------- ---------------------------
Manfred K. Kruger 57 Chief Executive Officer December 1999 -
President present
Chief Operating Officer July 1999 - present
Director June 1997 - present
------------------------------ ------- --------------------------------- ---------------------------
George Lombardi 60 Chief Financial Officer, 1998 - present
Treasurer and Secretary
------------------------------ ------- --------------------------------- ---------------------------
Thomas W. Pauken 59 Chairman of the Board April 2000 - present
Director January 1999 - present
------------------------------ ------- --------------------------------- ---------------------------
Carlton E. Turner, Ph.D. 63 Director 2000 - present
------------------------------ ------- --------------------------------- ---------------------------
Roy D. Crowninshield, Ph.D. 55 Director 2003 - 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 years.
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 35 years experience as a specialist
in investments for smaller capitalization companies. A graduate of the Wharton
School of Business, Mr. Cleveland has served as President of the Dallas
Association of Investment Analysts. Mr. Cleveland currently serves on the Boards
of Directors of Renaissance U.S. Growth & Income Trust PLC, Cover-All
Technologies, Inc., Digital Recorders, Inc., Integrated Security Systems, Inc.,
and BFS U.S. Special Opportunities Trust PLC (London).
ROBERT C. FARONE has been Vice President/General Manager of Samsonite
Company Stores since June 2001. Samsonite Company Stores is a chain of 202
retail luggage stores. Mr. Farone had been President of Bag'n Baggage, Ltd. from
June 1985 through February 2001. Bag'n Baggage is an 80-store retailer of
luggage and leather goods operating in eight (8) states under the trade names
Bag'n Baggage, Biagio, Houston Trunk Factory, Malm and Roberto's. Mr. Farone has
also served as a director on the board of Caribbean Marine, Inc. from June 1985
to April 2001. From September 1985 to July 1986 he served as a director on the
board of 50 Off Stores, and from August 1988 to September 1991 he served as
Chairman of the Board. 50 Off Stores was a regional chain of deep discount
stores specializing in ready to wear having 72 locations in five states.
STEVEN E. HANSON has been President of Centerpulse Dental Inc. ("Dental") a
subsidiary of Centerpulse USA Holding Co. ("Centerpulse") since 1992. Mr. Hanson
joined Dental as a manager and has held various operational and management
positions, including the current position as President of Dental, Vice President
International, Sulzer Intermedics Inc. from 1987 to 1992 and Director
International, Sulzer Intermedics Inc. from 1982 to 1987. Prior to joining
Sulzer Intermedics, Mr. Hanson was Vice President, Sales and Marketing at
American Pacemaker Corporation. Mr. Hansen is serving on the board as a
representative of Centerpulse, a subsidiary of Zimmer Holdings, Inc. Mr. Hanson
received a B.A. in Geology at Skidmore College and his MBA from Boston College.
17
J. HAROLD HELDERMAN, MD is Dean of Admissions and Professor of Medicine,
Microbiology and Immunology at Vanderbilt University, Nashville, Tennessee, and
is the Medical Director of the Vanderbilt Transplant Center. 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.
MANFRED K. KRUGER joined the Company in June 1997, serving as Chief
Operating Officer and Managing Director for International Operations. On July 1,
1999 he became the Company's President and on December 1, 1999, he became Chief
Executive Officer. Prior to joining the Company, Mr. Kruger was Executive Vice
President of Fresenius Critical Care International, a division of Fresenius
Medical Care, AG. Prior to Fresenius, Mr. Kruger held management positions with
Squibb Medical Systems and American Hospital Supply.
GEORGE LOMBARDI is the Company's Chief Financial Officer, Treasurer and
Secretary. He joined the Company in March 1998. Mr. Lombardi was the Vice
President, Chief Financial Officer of Sheffield Pharmaceuticals, Inc., a
publicly held (AMEX) development stage pharmaceutical/biotech Company. Before
that, he was the CFO and Director of Fidelity Medical, Inc. and a Senior
Financial Executive for the New Jersey and New England Operations of National
Health Laboratories, Inc. Prior to this, Mr. Lombardi held Senior Financial
positions at the Boehringer Ingelheim Pharmaceutical Company and the Revlon
Healthcare Group in New York. Mr. Lombardi is a CPA certified in the state of
New Jersey and has a degree in accounting from Fairleigh Dickinson University.
THOMAS W. PAUKEN is the current Chairman of the Board. Mr. Pauken currently
serves as the Trustee for Capital Partners II, Ltd. Liquidating Trust. He also
serves on the Board of TOR Minerals International, Inc. For six years, Mr.
Pauken served as Vice President and Corporate Counsel of Garvon, Inc., a
Dallas-based venture capital company. From 1981 to 1985, Mr. Pauken served as
Director of ACTION, an independent federal agency. He also served on the White
House legal Counsel's staff during the Reagan Administration. Mr. Pauken's
military service included a tour of duty in Vietnam as a Military Intelligence
Officer. Mr. Pauken received a B.A. from Georgetown University and J.D. degree
from Southern Methodist University Law School.
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.
ROY D. CROWNINSHIELD, PH.D. is the Chief Scientific Officer of Zimmer
Holdings, Inc. in Warsaw, Indiana. He received a Ph.D. in mechanical engineering
from the University of Vermont. He has worked in the orthopaedic industry for
over 20 years and has extensive experience in the research and development,
manufacture, and clinical investigation of orthopaedic implants. He has authored
more than 100 journal articles, book chapters, and published abstracts in
orthopaedics and engineering. Prior to joining Zimmer, Inc. in 1983, he was a
faculty member at the University of Iowa where he led many
18
research projecs evaluating the function of total joint implants. Mr.
Crowninshield is serving on the board as a representative of Zimmer Holdings,
Inc.
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.
ITEM 10. 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.
Compensation of Executive Officers
----------------------------------
The following table sets forth the compensation awarded to, or paid to all
persons who have served as Chief Executive Officer and other officers or
individuals whose compensation exceeded $100,000 for this period.
19
SUMMARY COMPENSATION TABLE
---------------------- -------- -------------------------------------- ------------------------------------ ----------------
Annual Compensation Long Term Compensation
---------------------- -------- -------------------------------------- ------------------------------------ ----------------
Awards Payouts
---------------------- -------- ---------- ---------- ---------------- ------------------------- ---------- ----------------
Other Restricted Securities
Name And Principal Fiscal Annual Stock Underlying LTIP All Other
Position Year Salary Bonus Compensation Award(s) Options Payouts Compensation
($) ($) ($) ($) (#) ($) ($)
(1)
---------------------- -------- ---------- ---------- ---------------- ----------- ------------- ---------- ----------------
Manfred K. Kruger
President, Chief 2003 352,500 179,700 0 0 37,500 0 76,900
Executive Officer & 2002 282,500 68,000 0 0 50,000 0 58,600
Chief Operating 2001 230,000 42,000 0 0 35,000 0 48,100
Officer
George Lombardi
Chief Financial 2003 160,125 67,500 0 0 20,000 0 0
Officer, Treasurer 2002 152,300 29,000 0 0 0 0 0
and Secretary 2001 150,000 10,000 0 0 15,000 0 0
---------------------- -------- ---------- ---------- ---------------- ----------- ------------- ---------- ----------------
Dr. Karl Koschatzky
Vice President of
R & D Worldwide 2003 107,600 32,400 0 0 45,000 0 28,800
2002 91,200 18,750 0 0 15,000 0 17,600
2001 83,000 4,300 0 0 10,000 0 14,400
---------------------- -------- ---------- ---------- ---------------- ----------- ------------- ---------- ----------------
(1) Includes pension and automobile leasing and other automobile related
expenses.
Employment Agreements
---------------------
The Company has an employment agreement with Manfred Kruger, its President,
Chief Executive Officer, Chief Operating Officer and Managing Director,
International Operations. Pursuant to that agreement, the term of Mr. Kruger's
employment with the Company commenced on June 16,1997. The agreement is for an
indefinite period and shall terminate upon written notice by the Company, notice
of his election to terminate, or the Company terminates his employment for
cause. Minimum notice of termination by the Company, except for cause, is one
year from the end of a calendar quarter. Mr. Kruger's annual base salary is
currently Euros 338,591 (approximately $342,000). In addition, the employment
agreement provides for an annual bonus in an amount up to 35% of his annual base
salary, subject to the satisfaction of reasonable performance goals established
by the board. In addition, Mr. Kruger has a "change of control" agreement
whereby he is entitled to 12 months salary in the event he is terminated as the
result of a change of control of the Company.
The Company has a severance agreement with George Lombardi, its Chief
Financial Officer, Treasurer and Secretary. Pursuant to that agreement, upon
written notice of his termination at least six weeks before a calendar quarter,
the Company will provide six months salary including medical benefits. Mr.
Lombardi's annual base salary is currently $166,500. The Company also provides
an annual bonus in an amount up to 30% of his annual base salary, subject to the
satisfaction of reasonable performance goals established by the board. In
addition, Mr. Lombardi has a "change of control" agreement whereby he is
entitled to 12 months salary including medical benefits in the event he is
terminated as the result of a change of control of the Company.
Stock Option Plans
------------------
The Company has a 1996 Incentive and Non-Statutory Stock Option Plan (the
"1996 Plan") to attract, maintain and develop management by encouraging
ownership of the Company's Common Stock by Directors, Officers and other key
employees. The following is a summary of the provisions of the
20
1996 Plan. This summary is qualified in its entirety by reference to the 1996
Plan, a copy of which may be obtained from the Company.
The 1996 Plan authorizes the granting of both incentive stock options, as
defined under Section 422 of the Internal Revenue Code of 1986 ("ISO"), and
non-statutory stock options ("NSSO") to purchase Common Stock. All employees of
the Company and its affiliates are eligible to participate in the 1996 Plan. The
1996 Plan also authorizes the granting of NSSOs to non-employee Directors and
consultants of the Company. Pursuant to the 1996 Plan, an option to purchase
10,000 shares of Common Stock shall be granted automatically to each outside
Director who is newly elected to the Board. In addition, an option to purchase
10,000 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 1996 Plan.
The Board of Directors or the Compensation and Stock Option Committee is
responsible for the administration of the 1996 Plan and determines the employees
to which options will be granted, the period during which each option will be
exercisable, the exercise price, the number of shares of the Common Stock
covered by each option, and whether an option will be a non-qualified or an
incentive stock option. The exercise price, however, for the purchase of shares
subject to such an option, cannot be less than 100% of the fair market value of
the Common Stock on the date the option is granted. The Stock Option Committee
has no authority to administer or interpret the provisions of the 1996 Plan
relating to the grant of options to outside Directors. The current members of
the Compensation and Stock Option committee are Robert C. Farone, J. Harold
Helderman and Steven E. Hanson.
No option granted pursuant to the 1996 Plan is transferable otherwise than
by will or the laws of descent and distribution. The term of each option granted
to an employee under the 1996 Plan is determined by the Board of Directors or
the Compensation and Stock Option Committee, but in no event may such term
exceed 10 years from the date of grant. Each option granted to an outside
Director under the 1996 Plan shall be exercisable in whole or in part during the
four year period commencing on the date of the grant of such option. Any option
granted to an outside Director should remain effective during the entire term,
regardless of whether such Director continues to serve as a Director. The
purchase price per share of Common Stock under each option granted to a Director
will be the fair market value of such share on the date of grant.
The vesting period for options granted under the 1996 Plan are set forth in
an option agreement entered into with the optionee. Options granted to an
optionee terminate three years after retirement. In the event of death or
disability, all vested options expire one year from the date of death or
termination of employment due to disability. Upon the occurrence of a "change in
control" of the Company, the maturity of all options then outstanding under the
1996 Plan will be accelerated automatically, so that all such options will
become exercisable in full with respect to all shares that have not been
previously exercised or become exercisable. A "change in control" includes
certain mergers, consolidation, and reorganization, sales of assets, or
dissolution of the Company.
The 1996 Plan presently reserves 3,500,000 shares of the Company's Common
Stock for issuance thereunder. As of September 30, 2003, options have been
issued for 2,960,847 shares and 539,153 shares remain available under the 1996
Plan. Unless sooner terminated, the 1996 Plan will expire on February 27, 2006.
21
OPTIONS GRANTED IN FISCAL YEAR 2003
(Individual Grants)
------------------------- ------------------------ ------------------------ ------------- ------------------------
Number of Securities
Underlying Options Percent of Total
Granted Options Granted To Exercise or
(#) Employees Base Price Expiration
Name ($/Sh) Date
------------------------- ------------------------ ------------------------ ------------- ------------------------
Manfred K. Kruger 37,500 8.3% $3.27 June 17, 2013
------------------------- ------------------------ ------------------------ ------------- ------------------------
George Lombardi 10,000 2.2% $2.63 December 9, 2012
10,000 2.2% $2.71 April 8, 2013
------------------------- ------------------------ ------------------------ ------------- ------------------------
Dr. Karl Koschatzky 15,000 3.3% $2.63 December 9, 2012
15,000 3.3% $2.71 April 8, 2013
15,000 3.3% $3.27 June 17, 2013
------------------------- ------------------------ ------------------------ ------------- ------------------------
The following table sets forth the value of the unexercised options at
September 30, 2003. No options were exercised during this fiscal year. The
market price of the Company's common stock at September 30, 2003 was $5.10.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
------------------------------------ ----------------------------------- ------------------------------------
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
Name September 30, 2003 September 30, 2003
------------------------------------ ----------------------------------- ------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------------------------------ ------------------ ---------------- ------------------ -----------------
Manfred K. Kruger 538,125 61,875 $ 1,021,206 $ 194,219
------------------------------------ ------------------ ---------------- ------------------ -----------------
George Lombardi 199,250 18,750 $ 367,455 $ 51,300
------------------------------------ ------------------ ---------------- ------------------ -----------------
Dr. Karl Koschatzky 76,668 50,000 $ 118,879 $ 150,400
------------------------------------ ------------------ ---------------- ------------------ -----------------
ITEM 11. 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, 2003, by (i) each
person known to the Company to own beneficially more than 5% of its Common
Stock, (ii) each director and executive officer of the Company, and (iii) all
directors and executive officers as a group. As of November 30, 2003, there were
approximately 15,667,110 shares of Common Stock issued and outstanding.
---------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS AMOUNT AND NATURE PERCENTAGE
OF BENEFICIAL OWNER OF BENEFICIAL OWNER (1)(2) OF CLASS (3)
---------------------------------------------------------------------------------------------------------------
Capital Partners II, Ltd. Liquidating Trust (5) (9).............. 3,624,926 23.14%
5646 Milton Street
Suite 900
Dallas, TX 75206
SPV 1996 LP...................................................... 1,896,794 12.11%
101 Finsbury Pavement
London, England
EC2A 1EJ
22
Centerpulse USA Holding Co. ................................. 5,297,124 33.81%
Subsidiary of Zimmer Holdings, Inc.
345 East Main Street
Warsaw, IN 46580
G. Russell Cleveland (4)......................................... 97,300 *
Robert C. Farone (5)............................................. 135,814 *
Steven E. Hanson (6)............................................. - 0 - *
Dr. J. Harold Helderman (7)...................................... 108,535 *
Dr. Karl Koschatsky (8).......................................... 76,918 *
Manfred K. Kruger (8)............................................ 550,625 3.40%
George Lombardi (8).............................................. 201,750 1.27%
Thomas W. Pauken (9)............................................. 3,952,966 24.99%
Carlton E. Turner (8)............................................ 50,000 *
Roy D. Crowninshield (6)......................................... - 0 - *
All directors and officers as a group (10 persons) (10).......... 10,471032 64.32%
-------------------
* Less than 1%
1 In accordance with Rule 13d-3 promulgated pursuant to the Exchange Act, a
person is deemed to be the beneficial owner of the security for purposes of
the rule if he or she has or shares voting power or dispositive power with
respect to such security or has the right to acquire such ownership within
sixty days. As used herein, "voting power" is the power to vote or direct
the voting of shares and "dispositive power" is the power to dispose or
direct the disposition of shares, irrespective of any economic interest
therein.
2 Except as otherwise indicated by footnote, the persons named in the table
have sole voting and investment power with respect to all of the common
stock beneficially owned by them.
3 In calculating the percentage ownership for a given individual or group,
the number of shares of common stock outstanding includes unissued shares
subject to options, warrants, rights or conversion privileges exercisable
within sixty days after November 30, 2003 held by such individual or group.
4 Includes 80,000 shares of common stock issuable upon exercise of options
exercisable within sixty (60) days. Mr. Cleveland is the President and
majority shareholder of Renaissance Capital Group, Inc. His business
address is 8080 N. Central Expressway, Suite 210-LB 59, Dallas, TX 75206.
5 Includes 80,000 shares of common stock issuable upon exercise of options
exercisable within sixty (60) days. Mr. Farone is a Supervisory Trustee of
Capital Partners II, Ltd. Liquidating Trust.
23
6 Messrs. Hanson and Crowninshield serve on the board as representatives of
Zimmer Holdings, Inc. Each disclaim beneficial ownership of the shares
owned by Centerpulse USA Holding Co., a subsidiary of Zimmer Holdings, Inc.
7 Includes 100,000 shares of common stock issuable upon exercise of options
and warrants exercisable within sixty (60) days.
8 All of the shares of common stock beneficially owned by Messrs. Koschatzky,
Kruger, Lombardi, and Turner are derivative securities issuable upon
exercise of options exercisable within sixty (60) days.
9 Includes all of the shares of common stock beneficially owned by Capital
Partners II, Ltd Liquidating Trust. Mr. Pauken is the Trustee of Capital
Partners II, Ltd. Liquidating Trust and has voting rights to all of the
shares owned by the Trust. Mr. Pauken separately has beneficial ownership
in 328,040 shares of common stock. It also includes 150,000 shares of
common stock issuable upon exercise of options and warrants exercisable
within sixty (60) days.
10 Includes shares owned by Centerpulse USA Holding Co., a subsidiary of
Zimmer Holdings, Inc.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has an exclusive license and distribution agreement with Spine,
a wholly owned subsidiary of Zimmer Holdings, Inc., whereby Spine has been
granted the right to act as the Company's exclusive distributor of bone tissue
for spinal applications in the United States. During the period from October 1,
2002 to April 30, 2003, the Company paid to Spine commissions of approximately
$2.9 million on revenues of approximately $6.0 million. Commencing in May 2003,
product is being sold and billed directly to Spine and spine revenues billed
directly to the customer for the period of May 1, 2003 through September 30,
2003 amounted to approximately $4.8 million.
The Company has also engaged Dental to act as an exclusive distributor for
the Company's bone tissue for dental applications in the United States and
certain international markets. For the year ended September 30, 2003, Dental was
paid commissions aggregating approximately $1.7 million on revenues of
approximately $3.4 million.
Centerpulse, a wholly owned subsidiary of Zimmer Holdings, Inc. is the
owner of approximately 33.8% of the Company's outstanding shares of Common Stock
and has representation on the Company's board of directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Index to Exhibits
-----------------
3.2 Articles of Incorporation of Registrant.**
3.3 Articles of Amendment to Articles of Incorporation
Establishing Series A Preferred Stock.*
3.4 Articles of Amendment to Articles of Incorporation
Establishing Series B Preferred Stock.*
3.5 Articles of Amendment to Articles of Incorporation
Establishing Series C Preferred Stock.*
3.6 Articles of Amendment to Articles of Incorporation
Increasing the Number of Authorized Shares.*
24
3.7 Articles of Amendment to Articles of Incorporation
Amending the Terms of the Series C Preferred Stock.*
3.8 Articles of Amendment to Articles of Incorporation
Effecting the Reverse Stock Split.*
10.1 Convertible Debenture Loan Agreement, dated November 11, 1997,
By and between Biodynamics International, Inc., and its
Wholly-Owned Subsidiaries, and Renaissance Capital Partners
II, Ltd.*
10.2 Nine Percent (9%) Convertible Debenture of Biodynamics
International, Inc., Issued to Renaissance Capital Partners II,
Ltd., dated November 11, 1997.*
10.3 Second Amendment to Security Agreement, dated December 31, 1997,
By Biodynamics International, Inc., for the benefit of
Renaissance Capital Partners II, Ltd.*
10.4 Second Amendment to Security Agreement (Stock Pledge Agreement),
dated December 1, 1997, by Biodynamics International, Inc.
for the benefit of Renaissance Capital Partners II, Ltd.*
10.7 Employment Agreement between Biodynamics International, Inc. and
Manfred Kruger, dated June 9, 1997.*
10.8 Employment Agreement between Biodynamics International, Inc,. and
George Lombardi, dated March 30, 1998.*
21 Subsidiaries of Registrant.*
* Document incorporated by reference from previous Form 10-KSB
filings.
** Document incorporated by reference from Exhibit 2 of Registration
Statement, on Form 20-F, of American Biodynamics, Inc., effective
October 2, 1987.
(b) Reports on 8-K
--------------
Reference is made to the Company's Form 8-K reports, dated
November 3, 2003 and December 16, 2003, responding to Item 13.
25
SIGNATURES
In accordance with the Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on behalf by the undersigned,
thereunto duly authorized.
Date December 16, 2003
TUTOGEN MEDICAL, INC.
/s/ Manfred K. Kruger
---------------------
Manfred K. Kruger
President, Chief Executive Officer
and Chief Operating Officer
/s/ George Lombardi
-------------------
George Lombardi
Chief Financial Officer, Treasurer
and Secretary
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities indicated.
Signature Title Date
/s/ G. Russell Cleveland Director December 16, 2003
----------------------------------
G. Russell Cleveland
/s/ Robert C. Farone Director December 16, 2003
----------------------------------
Robert C. Farone
/s/ Steven E. Hanson Director December 16, 2003
----------------------------------
Steven E. Hanson
/s/ J. Harold Helderman Director December 16, 2003
----------------------------------
Dr. J. Harold Helderman
/s/ Manfred K. Kruger Director December 16, 2003
----------------------------------
Manfred K. Kruger
26
/s/ Thomas W. Pauken Director December 16, 2003
----------------------------------
Thomas W. Pauken
/s/ Carlton E. Turner Director December 16, 2003
----------------------------------
Carlton E. Turner
/s/ Roy D. Crowninshield Director December 16, 2003
----------------------------------
Roy D. Crowninshield
27
TUTOGEN MEDICAL,.INC. AND
SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2003 and 2002
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Tutogen Medical, Inc. and Subsidiaries
West Paterson, New Jersey
We have audited the accompanying consolidated balance sheets of Tutogen Medical,
Inc. and Subsidiaries (the "Company") as of September 30, 2003 and 2002, and the
related consolidated statements of operations and comprehensive income, cash
flows and shareholders' equity for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30, 2003
and 2002, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte & Touche LLP
December 1, 2003
New York, New York
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS)
---------------------------------------------------------------------------------------------------
2003 2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,049 $ 3,083
Accounts receivable, net of allowance for doubtful
accounts of $429 in 2003 and $182 in 2002 5,526 3,175
Inventories - net 11,992 9,950
Deferred income taxes 709 221
Other current assets 1,098 373
--------- ---------
Total current assets 24,374 16,802
PROPERTY, PLANT AND EQUIPMENT - Net 4,842 4,119
DEFERRED INCOME TAXES 1,187 2,827
--------- ---------
TOTAL ASSETS $ 30,403 $ 23,748
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued expenses $ 7,438 $ 3,982
Accrued commissions 445 1,390
Current portion of deferred distribution fees 617 501
Current portion of long-term debt 91 73
--------- ---------
Total current liabilities 8,591 5,946
OTHER LIABILITIES:
Deferred distribution fees 3,038 3,181
Long-term debt 728 693
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY 18,046 13,928
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 30,403 $ 23,748
========= =========
See notes to consolidated financial statements.
F-2
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSOF OPERATIONS AND COMPREHENSIVE INCOME
YEARS ENDED SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------
2003 2002
REVENUE $ 30,260 $ 20,747
COST OF REVENUE 11,640 8,434
------------ ------------
Gross margin 18,620 12,313
------------ ------------
OPERATING EXPENSES:
General and administrative 4,405 3,287
Distribution and marketing 8,732 6,294
Research and development 799 886
Litigation contingency 657 46
Depreciation and amortization 207 134
------------ ------------
Total operating expenses 14,800 10,647
------------ ------------
OPERATING INCOME 3,820 1,666
OTHER (EXPENSE) INCOME (368) 75
INTEREST EXPENSE (53) (62)
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,399 1,679
PROVISION FOR INCOME TAXES 1,137 778
------------ ------------
NET INCOME 2,262 901
COMPREHENSIVE INCOME:
Foreign currency translation adjustments 1,006 253
------------ ------------
COMPREHENSIVE INCOME $ 3,268 $ 1,154
============ ============
AVERAGE SHARES OUTSTANDING FOR BASIC
EARNINGS PER SHARE 15,495,148 15,114,412
============ ============
BASIC EARNINGS PER SHARE: $ 0.15 $ 0.06
============ ============
AVERAGE SHARES OUTSTANDING FOR DILUTED
EARNINGS PER SHARE 16,095,448 15,959,975
============ ============
DILUTED EARNINGS PER SHARE: $ 0.14 $ 0.06
============ ============
See notes to consolidated financial statements.
F-3
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2003 AND 2002
(In Thousands)
--------------------------------------------------------------------------------------------------------
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,262 $ 901
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 611 414
Reserve for bad debts 250 15
Reserve for obsolescence 1,185 740
Deferred income taxes 1,152 135
Changes in assets and liabilities:
Accounts receivable (2,388) (1,601)
Inventories (2,545) (4,941)
Other current assets (637) 935
Accounts payable and accrued expenses 2,750 1,128
Accrued commissions (945) 951
Deferred distribution fees (579) 646
---------- ---------
Net cash provided by (used in) operating activities 1,116 (677)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of property and equipment (690) (354)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 850 317
Proceeds from revolving credit arrangements 343 39
Repayment of revolving credit arrangements (343) (628)
Repayment of long-term debt (81) (67)
---------- ---------
Net cash provided by (used in) financing activities 769 (339)
---------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 771 101
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,966 (1,269)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,083 4,352
---------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,049 $ 3,083
========== =========
SUPPLEMENTAL CASH FLOW DISCLOSURE -
Interest paid $ 53 $ 62
========== =========
See notes to consolidated financial statements.
F-4
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED COMMON
COMMON ADDITIONAL OTHER SHARES
STOCK PAID-IN COMPREHENSIVE ACCUMULATED ISSUED AND
($.01 PAR) CAPITAL INCOME (LOSS) (1) DEFICIT TOTAL OUTSTANDING
BALANCE, OCTOBER 1, 2001 $ 150 $ 34,820 $(1,178) $(21,335) $ 12,457 14,931,360
Stock issued on exercise of options 2 315 - - 317 226,750
Net income - - - 901 901 -
Foreign currency translation adjustment - - 253 - 253 -
----- -------- ------- -------- -------- ----------
BALANCE, SEPTEMBER 30, 2002 152 35,135 (925) (20,434) 13,928 15,158,110
Stock issued on exercise of options 5 845 - - 850 509,000
Net income - - - 2,262 2,262 -
Foreign currency translation adjustment - - 1,006 - 1,006 -
----- -------- ------- -------- -------- ----------
BALANCE, SEPTEMBER 30, 2003 $ 157 $ 35,980 $ 81 $(18,172) $ 18,046 15,667,110
===== ======== ======= ======== ======== ==========
(1) Represents foreign currency translation adjustments.
See notes to consolidated financial statements.
F-5
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
--------------------------------------------------------------------------------
1. OPERATIONS AND ORGANIZATION
Tutogen Medical, Inc. with its consolidated subsidiaries (the "Company")
processes, manufactures and distributes worldwide, specialty surgical
products and performs tissue processing services for neuro, orthopedic,
reconstructive and general surgical applications. The Company's core
business is processing human donor tissue, utilizing its patented
Tutoplast(R) process, for distribution to hospitals and surgeons. The
Company processes at its two manufacturing facilities in Germany and the
United States and distributes its products and services to over 30
countries worldwide.
2. SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies of the Company are presented below.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All
intercompany transactions and balances are eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION - The functional currency of the Company's
German subsidiary is the Euro. Assets and liabilities of foreign
subsidiaries are translated at the period end exchange rate while revenues
and expenses are translated at the average exchange rate for the year. The
resulting translation adjustments, representing unrealized, noncash losses
are made directly to comprehensive income. Gains and losses resulting from
transactions of the Company and its subsidiaries, which are made in
currencies different from their own, are included in income as they occur.
The Company recognized currency losses of $350 in 2003 and $51 in 2002. The
exchange rates at September 30, 2003 and 2002 were Euro 0.86/U.S. Dollar
and Euro 1.01/U.S. Dollar, 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.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with a remaining maturity of three months or less to
be cash equivalents. For cash and cash equivalents, the carrying amount
approximates fair value due to the short maturity of those instruments.
INVENTORIES - Inventories are valued at the lower of cost (weighted average
basis) or market. Work in process and finished goods includes costs
attributable to direct labor and overhead. Reserves for slow moving and
obsolete inventories are provided based on historical experience and
current product demand. The adequacy of these reserves are evaluated
quarterly.
F-6
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost. Depreciation is computed by using the straight-line method over the
following estimated useful lives of the assets:
Building and improvements 40 years
Machinery, equipment, furniture and fixtures 3-10 years
LONG-TERM DEBT - The carrying value of long-term debt approximates fair
value.
REVENUE AND COST OF REVENUE - Revenue includes amounts from surgical
products and related services and distribution fees from strategic
partnerships. Cost of revenue includes depreciation of $404 and $280 for
the years ended September 30, 2003 and 2002, respectively. Revenue from
surgical products and related services is recognized upon the shipment of
the processed tissues and when services are performed. The Company's terms
of sale are FOB shipping point. Revenue from distribution fees includes
nonrefundable payments received as a result of exclusive distribution
agreements between the Company and independent distributors. Distribution
fees under these arrangements are recognized as revenue as products are
delivered over the periods.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are charged
to operations as incurred.
EARNINGS PER SHARE - Basic earnings per share are computed by dividing net
income by the weighted-average number of common shares outstanding. Diluted
earnings per share are computed by dividing net income by the sum of the
weighted-average number of common shares outstanding plus the dilutive
effect of shares issuable through deferred stock units and the exercise of
stock options and warrants.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
TOTAL COMPREHENSIVE INCOME - The Company follows Statement of Financial
Accounting Standard ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME
(LOSS). Comprehensive income is defined as the total change in
shareholders' equity during the period other than from transactions with
shareholders, and for the Company, includes net income and cumulative
translation adjustments.
INCOME TAXES - Deferred taxes are provided for the expected future income
tax consequences of events that have been recognized in the Company's
financial statements. Deferred tax assets and liabilities are determined
based on the temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities using enacted tax rates
in effect in the years in which the temporary differences are expected to
reverse.
STOCK-BASED COMPENSATION - SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"), requires expanded disclosure of stock-based
compensation arrangements with employees and encourages (but does not
require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Corporations are permitted, however, to continue
to apply Accounting Principles Board ("APB") Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company has continued to apply APB Opinion No. 25
to its stock-based compensation awards to employees and has disclosed the
required pro forma effect on net income.
F-7
NEW ACCOUNTING PRONOUNCEMENTS - In July 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. SFAS No. 142 supercedes APB Opinion No. 17, INTANGIBLE ASSETS.
Under SFAS No. 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually, or more frequently if
impairment indicators arise, for impairment. The Company plans to adopt the
provisions of SFAS No. 141 for any business combination that is initiated
after June 30, 2001. The provisions of SFAS No. 142 are effective for
fiscal years beginning after December 15, 2001. The Company adopted SFAS
No. 142 in the first fiscal quarter of fiscal 2003. The adoption of SFAS
No. 142 did not have a material impact on its results of operations or
financial position.
In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS. SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred. The Company adopted SFAS No. 143 beginning in the
first fiscal quarter of fiscal 2003. The adoption of SFAS No. 143 did not
have a material impact on its results of operations or financial position.
In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 supercedes SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. The primary objectives of SFAS No. 144
were to develop one accounting model based on the framework established in
SFAS No. 121, and to address significant implementation issues. The Company
adopted SFAS No. 144 beginning in the first fiscal quarter of fiscal 2003.
The adoption of SFAS No. 144 did not have a material impact on its results
of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS
4, 44 AND 64, AMENDMENT OF FASB STATEMENT 13, AND TECHNICAL CORRECTIONS.
SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires companies
to classify certain gains and losses from debt extinguishments as
extraordinary items, eliminates the provisions of SFAS No. 44 regarding
transition to the Motor Carrier Act of 1980 and amends the provisions of
SFAS No. 13 to require that certain lease modifications be treated as sale
leaseback transactions. The provisions of SFAS No. 145 related to
classification of debt extinguishment are effective for fiscal years
beginning after May 15, 2002. Commencing October 1, 2002, the Company will
classify debt extinguishment costs within income from operations and will
reclassify previously reported debt extinguishments as such. The provisions
of SFAS No. 145 related to lease modification are effective for
transactions occurring after May 15, 2002. The adoption of SFAS No. 145 did
not have a material impact on its financial position or results of
operations.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 nullifies Emerging Issues
Task Force ("EITF") No. 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE
TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN
COSTS INCURRED IN AS RESTRUCTURING). The principal difference between SFAS
No. 146 and EITF No. 94-3 relates to its requirements for recognition of a
liability for a cost associated with an exit or disposal activity. SFAS No.
146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under EITF
No. 94-3, a liability for an exit cost was recognized at the date of an
entity's commitment to an exit plan. SFAS No. 146 was effective for exit
and disposal activities that are initiated after December 31, 2002. The
provisions of SFAS No. 146 did not have a material impact on its financial
position or results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, which amends SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based
F-8
method of accounting for stock-based employee compensation. (Under the fair
value based method, compensation cost for stock options is measured when
options are issued). In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements of the effects of stock-based
compensation. The Company adopted SFAS No. 148 beginning in the second
fiscal quarter of fiscal 2003 and such disclosures are included as herein.
The following table reconciles net income and basic and diluted earnings
pre share (EPS), as reported, to pro-forma net income and basic and diluted
EPS, as if the Company had expensed the fair value of stock options as
permitted by SFAS No. 123, as amended by SFAS No. 148, since it permits
alternative methods of adoption.
2003 2002
---- ----
Net Income, as reported: $2,262 $901
Pro-forma expense as if stock options were
charged against net income 104 244
------ ----
Pro-forma net income using the fair value method $2,158 $657
====== ====
Basic EPS:
As reported $0.15 $0.06
Pro forma using the fair value method $0.14 $0.04
Diluted EPS:
As reported $0.14 $0.06
Pro forma using the fair value method $0.13 $0.04
In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 149 amends SFAS No.
133 for certain decisions made by the Board as part of the Derivatives
Implementation Group ("DIG") process and is effective for contracts entered
into or modified after June 30, 2003. In addition, SFAS No. 149 should be
applied prospectively. The provisions of SFAS No. 149 that relate to SFAS
No. 133 Implementation Issues that have been effective for fiscal quarters
that began prior to June 15, 2003, should continue to be applied in
accordance with their respective effective dates. The Company believes that
the adoption of SFAS No. 149 will not have an impact on the results of
operations or financial position.
In June 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY
to improve the accuracy of securities issuers' accounting for such
financial instruments. For earlier transactions, the provisions of SFAS No.
150 take effect at the start of the first interim period beginning after
December 15, 2003. The Company believes that the adoption of SFAS No. 150
will not have a material impact on the results of operations or financial
position.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. FIN No. 45
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this interpretation are applicable on a prospective basis to
guarantees
F-9
issued or modified after December 31, 2002. The interpretation also
requires enhanced and additional disclosures of guarantees in financial
statements ending after December 15, 2002. In the normal course of
business, the Company does not issue guarantees to third-parties;
accordingly, this interpretation does not effect the disclosures included
herein.
In January 2003, the FASB issued FIN No. 46, CONSOLIDATION OF VARIABLE
INTEREST ENTITIES, AND AN INTERPRETATION OF ARB 51. FIN No. 46 defines when
a business enterprise must consolidate a variable interest entity. This
interpretation applies immediately to variable interest entities created
after January 31, 2003. It applies in the first fiscal year or interim
period beginning after December 15, 2003, to entities in which an
enterprise holds a variable interest that it acquired before February 1,
2003. The Company does not have variable interest entities as of September
30, 2003.
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 $55 and $26 in 2003 and
2002, respectively.
RECLASSIFICATION - Certain reclassifications have been made to the 2002
financial statements to conform to the 2003 presentation.
3. CONCENTRATION OF CREDIT RISK
The exposure to risk related to foreign currency exchange rate changes is
limited primarily to intercompany transactions. The Company currently does
not utilize forward exchange contracts or any other type of hedging
instruments.
The Company's principal concentration of credit risk consists of trade
receivables. Distribution of products and revenues is provided through a
broad base of independent distributors. Two customers accounted for 17% and
13%, respectively, of consolidated revenue in 2003 and one customer
accounted for 22% of consolidated revenue in 2002. The 17% and 13%
customers had accounts receivable balances at September 30, 2003 of $3,101
and $214, respectively. There are no other customers accounting for greater
than 10% of consolidated revenue in 2003 and 2002. The Company does not
believe that this concentration of sales and credit risks represents a
material risk of loss with respect to the financial position as of
September 30, 2003.
F-10
4. INVENTORIES
Major classes of inventory at September 30, 2003 and 2002 were as
follows:[OBJECT OMITTED]
2003 2002
Raw materials $ 2,439 $ 1,868
Work in process 3,316 3,209
Finished goods 9,335 6,630
-------- --------
15,090 11,707
Less reserves for obsolescence 3,098 1,757
-------- --------
$ 11,992 $ 9,950
======== ========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 2003 and 2002 consisted of
the following:
2003 2002
Land $ 480 $ 406
Buildings and improvements 3,306 2,964
Machinery and equipment 1,583 1,194
Office furniture and equipment 2,446 1,852
-------- --------
7,815 6,416
Less accumulated depreciation and amortization (2,973) (2,297)
-------- --------
$ 4,842 $ 4,119
======== ========
The depreciation expense for the years ended September 30, 2003 and 2002
was approximately $611 and $414, respectively.
6. REVOLVING CREDIT ARRANGEMENTS
Under the terms of revolving credit facilities with three German banks, all
of which expire by September 30, 2004, the Company may borrow up to Euros
1.5 million or approximately $1.8 million for working capital needs. These
renewable credit lines allow the Company to borrow at interest rates
ranging from 9.15% to 10.5%. At September 30, 2003 and 2002, the Company
had no borrowings under the revolving credit agreements.
The Company has a revolving credit facility in the U.S. for up to $1.0
million, expiring on February 1, 2004. At September 2003 and 2002, the
Company had no borrowings under this credit facility. The U.S. accounts
receivable and inventory assets secure the borrowing under the revolving
credit facility.
F-11
7. LONG-TERM DEBT
Long-term debt at September 30, 2003 and 2002 consisted of the following:
2003 2002
Senior debt, 5.75% interest until March 30, 2008
when terms are renegotiable, due 2008 $ 819 $ 766
Less current portion (91) (73)
----- -----
$ 728 $ 693
===== =====
Aggregate maturities of long-term debt are $91 in 2004; $97 in 2005; $101
in 2006; $108 in 2007; and $422 in 2008.
The Senior debt and one of the revolving credit facilities are with a
German bank and are secured by a mortgage on the Company's German facility.
The Senior debt is repayable in monthly installments through 2008. The debt
has been incurred by the Company's German subsidiary but is guaranteed by
the parent company.
8. SHAREHOLDERS' EQUITY
STOCK - The authorized stock of the Company consists of 30,000,000 shares
of Common Stock and 1,000,000 shares of Preferred Stock.
PREFERRED SHARE PURCHASE RIGHT - On July 17, 2002, the Board of Directors
of the Company declared a dividend distribution of one Preferred Share
Purchase Right for each outstanding share of its common stock of record on
July 31, 2002. The rights, which expire on July 30, 2012, are designed to
assure that all of the Company's shareholders receive fair and equal
treatment in the event of any proposed takeover of the Company. Each right
will entitle its holder to purchase, at the right's then current exercise
price, a number of the Company's common shares having a market value of
twice such price.
STOCK OPTIONS - The Company maintains a 1996 Stock Option Plan (the "Plan")
(3,500,000 shares authorized) under which incentive and nonqualified
options have been granted to employees, directors and certain key
affiliates. Under the Plan, options may be granted at not less than the
fair market value on the date of grant. Options may be subject to a vesting
schedule and expire four, five or ten years from grant.
F-12
Changes in outstanding options for the Plan were as follows:
WEIGHTED
NUMBER OF AVERAGE
COMMON EXERCISE
SHARES PRICE
Outstanding October 1, 2001 2,247,068 $ 2.18
Granted 349,000 3.67
Canceled (151,650) 2.82
Exercised (226,750) 1.40
----------
Outstanding September 30, 2002 2,217,668 2.44
Granted 452,500 2.91
Canceled (204,800) 3.33
Exercised (209,000) 1.81
---------- ------
Outstanding September 30, 2003 2,256,368 $ 2.52
========== ======
The following table provides information about stock options outstanding at
September 30, 2003:
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 9/30/03 (IN YEARS) PRICE ASOF 9/30/03 PRICE
--------------
$0.94 to $1.38 486,600 3.4 $ 1.04 462,950 $ 1.04
$1.50 to $2.22 601,568 4.5 1.70 601,568 1.70
$2.31 to $3.19 699,500 6.2 2.83 325,875 2.80
$3.75 to $11.00 468,700 5.0 4.64 349,375 4.74
---------- ---- ------ ---------- ------
$0.94 to $11.00 2,256,368 4.9 $ 2.52 1,739,768 $ 2.34
========== ==== ====== ========== ======
F-13
The following table provides information about stock options outstanding at
September 30, 2002:
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 9/30/03 (IN YEARS) PRICE ASOF 9/30/03 PRICE
--------------
$0.94 to $1.38 527,600 4.9 $ 1.05 425,300 $ 1.08
$1.50 to $2.22 771,568 4.4 1.76 747,318 1.76
$2.31 to $3.44 397,000 6.4 2.85 225,500 2.93
$4.00 to $7.81 521,500 6.0 4.56 276,325 4.85
---------- ---- ------ ---------- ------
$0.94 to $7.81 2,217,668 5.2 $ 2.44 1,674,443 $ 2.26
========== ==== ====== ========== ======
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: expected volatility of 10%, a risk-free interest rate range of
2.26% to 3.12% and an expected life of four years. A dividend yield of zero
has been assumed. The weighted average fair value of options granted during
the years ended September 30, 2003 and 2002 was $2.91 and $3.67,
respectively.
9. SEGMENT DATA
The Company operates principally in one industry providing specialty
surgical products and tissue processing services. These operations include
in 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 profit or loss from operations
before income taxes not including nonrecurring and foreign exchange gains
or losses. 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, 2003 and 2002 are as follows:
F-14
2003 INTERNATIONAL UNITED STATES CONSOLIDATED
Gross revenue $ 18,079 $ 21,168 $ 39,247
Less - intercompany (8,987) - (8,987)
-------- -------- --------
Total revenue - third party $ 9,092 $ 21,168 $ 30,260
======== ======== ========
Depreciation and amortization $ 376 $ 235 $ 611
======== ======== ========
Interest expense $ 47 $ 6 $ 53
======== ======== ========
Net income $ 2,144 $ 118 $ 2,262
======== ======== ========
Capital expenditures $ 470 $ 220 $ 690
======== ======== ========
Total assets $ 10,983 $ 32,617 $ 43,600
Less intercompany advances - (13,197) (13,197)
-------- -------- --------
Net assets $ 10,983 $ 19,420 $ 30,403
======== ======== ========
2002 INTERNATIONAL UNITED STATES CONSOLIDATED
Gross revenue $ 13,122 $ 13,716 $ 26,838
Less - intercompany (6,091) - (6,091)
-------- -------- --------
Total revenue - third party $ 7,031 $ 13,716 $ 20,747
======== ======== ========
Depreciation and amortization $ 182 $ 232 $ 414
======== ======== ========
Interest expense $ 57 $ 5 $ 62
======== ======== ========
Net income (loss) $ 1,102 $ (201) $ 901
======== ======== ========
Capital expenditures $ 148 $ 206 $ 354
======== ======== ========
Total assets $ 14,485 $ 29,886 $ 44,371
Less intercompany advances - (20,623) (20,623)
-------- -------- --------
Net assets $ 14,485 $ 9,263 $ 23,748
======== ======== ========
F-15
Total International long-lived assets of $4,247 and $3,508 for the years
ended September 30, 2003 and 2002, respectively are located in Germany.
10. INCOME TAXES
The provision for income taxes for the years ended September 30, 2003 and
2002 are summarized as follows:
2003 2002
Current:
Federal $ (15) $ -
State - -
Foreign - 643
------- -------
(15) 643
------- -------
Deferred:
Federal 171 (93)
State 36 (14)
Foreign 1,152 778
------- -------
1,359 671
------- -------
Valuation allowance (207) (536)
------- -------
Provision for income taxes $ 1,137 $ 778
======= =======
The differences between the U.S. statutory rates and those in the consolidated
financial statements of operations and comprehensive income are primarily due to
the foreign entity being taxed at a lower rate and certain nondeductible items,
as follows.
2003 2002
Income tax at federal statutory rate (35%) $ 1,190 $ 592
Valuation allowance 207 64
Foreign tax differential (221) 120
Other (39) 2
------- -------
Total $ 1,137 $ 778
======= =======
F-16
The tax effect of the temporary differences that give rise to the Company's
net deferred taxes as of September 30, 2003 and 2002 are as follows:
2003 2002
Assets
Deferred tax assets:
Valuation allowance
Current:
Bad debt reserve $ 121 $ 54
Inventory reserve 283 167
------- -------
Subtotal 404 221
------- -------
Noncurrent:
Net operating loss & credits 5,025 6,114
------- -------
Net deferred tax asset 5,429 6,335
------- -------
Liability
Deferred tax liability:
Noncurrent:
Fixed assets (166) (152)
Deferred revenue (59) (34)
------- -------
Subtotal (225) (186)
Valuation allowance (3,308) (3,101)
------- -------
Net deferred tax asset $ 1,896 $ 3,048
======= =======
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 primarily increases in federal and
state net operating losses and credit carryovers, which may not be
realized, offset by the utilization of foreign net operating loss
carryovers not previously benefited.
The Company has approximately $8,000 of federal net operating loss
carryforwards expiring beginning in 2013, a $21 AMT credit carryforward,
and a $15 credit on research and development that will expire in 2013 if
unused. The Company also has state net operating loss carryforwards of
approximately $9,200 that will begin to expire in 2004.
The Company has a corporate net operating loss carryforward for German
income tax purposes of approximately $9,700 (8,300 Euros), and a trade net
operation loss carryforward for German income tax purposes of approximately
$7,500 (6,400 Euros), which can be carried forward indefinitely. The
Company continually reviews the adequacy and necessity of the valuation
allowance in accordance with the provisions of FASB Statement No. 109,
ACCOUNTING FOR INCOME TAXES. As of September 30, 2002, the Company
eliminated the full valuation allowance on its International operations
based upon future taxable income projections. As of September 30, 2003, the
Company continues to record the existing valuation allowance on its U.S.
operations.
F-17
11. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the years ended
September 30, 2003 and 2002:
2003 2002
----------------------------------- -----------------------------------
NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
Basic earnings per share $ 2,262 15,495,148 $ 0.15 $ 901 15,114,412 $ 0.06
Effect of dilutive secured:
Stock options - 600,300 (0.01) - 845,563 -
------- ----------- ------- ------- ----------- -------
Diluted earnings
per share $ 2,262 16,095,448 $ 0.14 $ 901 15,959,975 $ 0.06
======= =========== ======= ======= =========== =======
(In thousands, except share and per share amount data)
12. COMMITMENTS AND CONTINGENCIES
The Company currently has operating leases for its corporate offices in the
U.S. and Germany, as well as several leases related to office equipment and
automobiles. Total rental expense was $759 and $610 per year for the years
ended September 30, 2003 and 2002, 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, 2003
are as follows:
2004 $ 976
2005 557
2006 153
2007 55
-------
$ 1,741
=======
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 or results of
operations.
F-18
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2003 QUARTER ENDED
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 6,574 $ 6,743 $ 8,933 $ 8,010
Gross margin 3,728 4,223 5,312 5,357
Operating expenses 3,560 3,893 3,882 3,465
Operating income 168 330 1,430 1,892
Net income 131 135 818 1,178
Earnings per share
Basic $ 0.01 $ 0.01 $ 0.05 $ 0.08
Diluted $ 0.01 $ 0.01 $ 0.05 $ 0.07
2002 QUARTER ENDED
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 5,012 $ 5,332 $ 5,400 $ 5,003
Gross margin 2,210 2,893 3,218 3,992
Operating expenses 2,059 2,597 2,881 3,064
Operating income 151 296 337 928
Net income 125 230 212 334
Earnings per share
Basic $ 0.01 $ 0.02 $ 0.01 $ 0.02
Diluted $ 0.01 $ 0.01 $ 0.01 $ 0.02
14. LITIGATION CONTINGENCY
The Company received a judgment in Germany as the result of a dispute
between the Company and a former international distributor in the amount of
$703. A provision of $657 and $46 was made in 2003 and 2002, respectively.
The judgment is in the process of being appealed.
15. SUBSEQUENT EVENT
In November 2003, the Company entered into a non-binding letter agreement
with an unaffiliated private equity firm proposing to acquire all of the
outstanding shares of common stock of Tutogen for $6.00 per share in cash.
The proposal is subject to a due diligence review and execution of
definitive transaction documents.
******
F-19
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10KSB of Tutogen Medical, Inc. (the
"Company") for the year ended September 30, 2003 as filed with the Securities
and Exchange commission on the date hereof (the "Report"), I George Lombardi, as
the Chief Financial Officer of the Company, hereby certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13 (a) or
15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of
the Company.
Date: December 16, 2003
TUTOGEN MEDICAL, INC.
/s/ George Lombardi
-------------------
George Lombardi
Chief Financial Officer,
Treasurer and Secretary
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10KSB of Tutogen Medical, Inc.
(the "Company") for the year ended September 30, 2003 as filed with the
Securities and Exchange commission on the date hereof (the "Report"), I Manfred
Krueger, as the Chief Executive Officer, President and Chief Operating Officer
of the Company, hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my
knowledge:
(2) The Report fully complies with the requirements of Section 13 (a) or
15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of
the Company.
Date: December 16, 2003
TUTOGEN MEDICAL, INC.
/s/ Manfred Krueger
-------------------
Manfred Krueger
Chief Executive Officer, President
and Chief Operating Officer
29
CERTIFICATION
I George Lombardi certify that:
1. I have reviewed this Annual Report on Form 10-KSB of Tutogen Medical, Inc.
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;
3. Based on my knowledge, the financial statements and other financial
information included in the Annual Report fairly present in all material
respects, the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this Annual Report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Annual Report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Annual Report (the "Evaluation Date"); and
c) Presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the Audit
Committee of registrant's Board of Directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves Management or
other employees who have a significant role in the registrant's
internal controls.
CERTIFICATION Page 2
-------------
6. The registrant's other certifying officers and I have indicated in this
Annual Report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 16, 2003
BY:
Name: /s/ George Lombardi
Title: Chief Financial Officer,
Treasurer and Secretary
CERTIFICATION
I Manfred Krueger certify that:
1. I have reviewed this Annual Report on Form 10-KSB of Tutogen Medical, Inc.
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;
3. Based on my knowledge, the financial statements and other financial
information included in the Annual Report fairly present in all material
respects, the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this Annual Report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Annual Report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Annual Report (the "Evaluation Date"); and
c) Presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the Audit
Committee of registrant's Board of Directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves Management or
other employees who have a significant role in the registrant's
internal controls.
CERTIFICATION Page 2
-------------
6. The registrant's other certifying officers and I have indicated in this
Annual Report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 16, 2003
BY:
Name: /s/ Manfred Krueger
Title: CEO, President and Chief Operating Officer