UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC
20549
FORM
10-K
[ X ]
Annual report under Section 13 or 15(d) of the Securities Exchange
Act
of
1934
For
the
fiscal year ended September 30, 2007
[ ]
Transition report under Section 13 or 15(d) of the Securities
Exchange
Act of 1934
For
the
transition period from _________ to _________
Commission
File Number: 0-16128
TUTOGEN
MEDICAL, INC.
(Name
of Registrant as specified in Its Charter)
|
Florida
(State
of Incorporation)
|
|
59-3100165
IRS
Employer Identification Number)
|
13709
PROGRESS BOULEVARD, BOX 19, ALACHUA FLORIDA 32615
(Address
of principal executive offices)
(386)
462-0402
(Registrant's
telephone number, including area code)
Securities
registered under Section 12(b) of the Exchange Act
COMMON
STOCK, $0.01 par value – American Stock Exchange
Securities
registered under Section 12(g) of the Exchange
Act:
None
Indicate
by check mark if the registrant is a well known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
o
Yes
x
No
Indicate
by check mark whether the registrant is a shell company.
o
Yes
x
No
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or 15(d) of the Exchange Act.
o
Yes
x
No
Indicate
by check mark whether the registrant: (1) filed all reports required to be
filed
by Section 13 or 15(d) of the Securities Exchange Act during the preceding
12
months (or for such shorter period that the registrant was required to file
such
reports), and (2) has been subject to such filing requirements for the past
90
days.
x
Yes
o
No
Indicate
by check mark if no disclosure of delinquent filers pursuant to Item 405
of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K.
x
Yes
o
No
Indicate
by check mark whether the registrant is an accelerated filer (as defined
in Rule
12b-2 of the Act).
x
Yes
o
No
As
of
November 30, 2007, there were 19,376,939 shares outstanding of the issuer's
Common Stock, par value $.01 per share.
DOCUMENTS
INCORPORATED BY REFERENCE
CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain
statements in this Annual Report on Form 10-K under Section 13 or 15(d)
of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), for the
registrant’s fiscal year ended September 30, 2007 (this "Report"), are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”) and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that
involve a number of substantial risks and uncertainties. When used in this
Annual Report on Form 10-K, the words “anticipate,” “may,” “could,” “plan,”
“believe,” “estimate,” “expect” and “intend” and similar expressions are
intended to identify such forward-looking statements.
Such
statements are based upon management’s current expectations and are subject to
risks and uncertainties that could cause actual results to differ materially
from those set forth in or implied by the forward-looking statements. Actual
results may differ materially from those projected or suggested in such
forward-looking statements as a result of various factors, including, but
not
limited to, the risks discussed in Item 1 of Part 1,
“Business”, Item 1A of Part 1, “Risk Factors” and Item 7 of
Part II,
.
"Management's Discussion and Analysis of Financial Condition and Results
of
Operations".
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
registrant’s actual results for 2007 and beyond to differ materially from those
expressed in any forward-looking statement made by or on behalf of the
registrant.
Neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We do not intend to update any of the forward-looking statements
after the date of this Report to conform these statements to actual results
or
to changes in our expectations, except as may be required by
law.
ITEM
1. BUSINESS.
Tutogen
Medical, Inc., a Florida corporation, was formed in 1985 and with its
consolidated subsidiaries (collectively, the “Company,” “Tutogen,” “we,” “us” or
“our”), designs, develops, processes, manufactures and markets sterile
biological implant products made from human (allograft) and animal (xenograft)
tissue. Tutogen utilizes its TUTOPLAST® Process of tissue preservation and viral
inactivation to manufacture and deliver sterile bio-implants used in dental,
spinal, urology, ophthalmology, head and neck, and general surgery
procedures. Our products are distributed throughout the United States
and in over twenty (20) other countries.
The
Company's corporate worldwide headquarters is located in Alachua,
Florida. In addition, the Company has a manufacturing facility in
Alachua, Florida, as well as international executive offices, processing
and
manufacturing facilities in Neunkirchen, Germany, and a sales office in
Marseilles, France.
The
Company contracts with independent tissue banks and procurement organizations
to
provide donated human tissue for processing using the Company's proprietary
TUTOPLAST process. The TUTOPLAST process utilizes solvent dehydration and
chemical inactivation which is applied to two types of preserved allografts:
soft tissue; consisting of fascia lata, fascia temporalis, pericardium,
dermis,
sclera, and bone tissue; consisting of various configurations of cancellous
and
cortical bone material. Processed pericardium, fascia lata and dermis are
collagenous tissue used to repair, replace or line native connective tissue
primarily in dental, ophthalmology, urology, plastic and reconstructive
surgeries. Dermis is also used in hernia repair and pelvic floor
reconstruction. Sclera is used in ophthalmology procedures such as, anterior
and
posterior segment patch grafting applications for glaucoma, retina and
trauma
surgery and oculoplastics, as well as contour wrapping of an orbital implant.
Processed cortical and cancellous bone material is used in a wide variety
of
applications in spinal, orthopaedic and dental surgeries. All processed
tissues
have a shelf life of five (5) years, at room temperature, and require minimal
time for rehydration. The Company processes bone and soft tissues in both
manufacturing facilities.
In
contrast to other processors using freeze-drying, deep freezing or
cryopreservation for human tissues, the TUTOPLAST process utilizes a technique
in which tissues are soaked and washed in a series of aqueous solutions
and
organic solvents, removing water and substances that could cause rejection
or
allergic reaction. This technique dehydrates the tissue, while maintaining
its
structure and allowing it to act as a scaffold after implantation, which
is
subsequently replaced by newly formed autologous tissue. During processing,
the
tissues are treated with agents shown to inactivate viruses such as hepatitis
and HIV (the virus responsible for AIDS), rendering the allografts safe
for the
recipient. Soft tissue is also treated with chemicals shown to be effective
against prions, the agent causing Creutzfeldt-Jakob Disease ("CJD"). Once
packaged, all tissues are terminally sterilized by low dosage gamma
radiation.
Proposed
Merger
On
November 12, 2007, the Company, Regeneration Technologies, Inc. and Rockets
FL
Corp., a newly formed, wholly owned subsidiary of Regeneration Technologies,
entered into an Agreement and Plan of Merger to combine Regeneration
Technologies and the Company in a tax-free, stock-for-stock
exchange. The merger is discussed more fully below under the caption
“Proposed Merger with Regeneration Technologies.”
The
Company maintains an internet website at
www.tutogen.com
. The
Company makes available, free of charge on or through the Investor Relations
section of our website our annual report on Form 10-K, quarterly reports
on Form
10-Q, and current reports on Form 8-K, and all amendments to these reports,
as
soon as reasonably practicable after such materials have been electronically
filed with, or furnished to, the Securities and Exchange Commission
(“SEC”). These reports also may be found at the SEC’s website at
www.sec.gov. Additionally, Tutogen’s Board committee charters and
code of ethics are available on the Company’s website and in print to any
shareholder who requests them. Tutogen does not intend for
information contained in its website to be part of this Annual Report on
Form
10-K.
MANUFACTURING
AND PROCESSING
Tutogen
considers itself a leader in the manufacturing and marketing of human allograft
and animal xenograft tissue implant products, which significantly improve
surgical outcomes for the medical professional and quality of life for
patient
recipients. We believe our proprietary TUTOPLAST tissue preservation and
sterilization process has the greatest longevity of any similar methodology
in
the industry today. In use for more than thirty (30) years, there have
been well
over one and one-half million (1,500,000) Tutogen products implanted without
a
single documented case of disease transmission.
Donated
bone and soft tissues are received and quarantined by Tutogen Quality Control
(“QC”) until release by the Quality Assurance (“QA”) department and Tutogen's
Medical Director, a licensed physician. In the interim, tissues are stored
in a
controlled environment, limited-access area according to requirements set
forth
by the American Association of Tissue Banks (“AATB”). Each tissue is given a
unique identification number in order to maintain full traceability. Once
released for processing, tissues are transferred to manufacturing and kept
in a
refrigerated or frozen state until issued to a specific production work
order.
Following
assignment to a manufacturing work order, tissue materials go through
appropriate preprocessing operations and into the multi-stage TUTOPLAST
process.
This process removes blood, lipids and extraneous materials, inactivates
viruses
and prions, and breaks down RNA and DNA into fragments not capable of
replication and disease transmission while preserving the biological and
mechanical properties. The TUTOPLAST process yields a dehydrated,
semi-processed product that may be stored at room temperature for extended
periods of time. This tissue is subsequently processed to size and/or shape
and
packaged for terminal sterilization. All Tutogen packaged products are
subjected
to low dose gamma irradiation, which further enhances tissue safety and
eliminates ancillary contamination that may be present from pre-sterilization
handling. This terminal sterilization is performed by a third-party contractor
utilizing a validated cycle.
While
some of the TUTOPLAST processing steps are automated, the majority are
manual
and rely on highly-skilled personnel for their proper execution. Such skilled
labor is readily available in the surrounding geographic areas and management
feels that there should be no adverse affect on the business related to
the
labor market.
Tutogen
operates two tissue processing facilities: a 34,384 square foot facility
in
Alachua, Florida and a 33,000 square foot facility in Neunkirchen, Germany.
Major expansion projects were recently completed at both facilities. These
expansion projects are intended to ensure the availability of sufficient
production capacity to address the increasing demand for the Company's
allograft
and xenograft products in the foreseeable future.
QUALITY
ASSURANCE AND REGULATORY AFFAIRS - The Company maintains comprehensive
quality
assurance and regulatory compliance programs that provide oversight for
all
pertinent aspects of the Company's day-to-day operational activities. Among
the
responsibilities of the QA/RA organizations are:
|
·
|
Maintenance
of an extensive
documentation and change-control system (specifications, standard
operating procedures and engineering
drawings);
|
|
·
|
Internal
and external auditing for compliance with international and domestic
regulatory body or accrediting organization regulations or
requirements;
|
|
·
|
Review
and approval of donor
medical record information and screening/test
documentation;
|
|
·
|
Product
and process document
review and release for
distribution;
|
|
·
|
Evaluation
and follow-up of all
Tutogen-related product complaints;
and
|
|
·
|
Management
of Corrective and
Preventive Action programs to reduce or eliminate any identified
non-conformances.
|
The
Quality Assurance and Regulatory Affairs departments are independent from
the
manufacturing operation, functioning under the supervision of the Tissue
Bank
Director (a medical doctor) and senior management staff.
MARKETING
AND DISTRIBUTION
Tutogen's
products and processing services are provided primarily in the United States
and
Europe through a combination of worldwide distributors, direct
representatives and local distributors. Tutogen's personnel, along with
distributors and their representatives, conduct product training sessions,
make
joint customer calls, set objectives and evaluate their representatives'
performance. Personnel also call on select physicians and key hospital
accounts
in order to provide needed clinical and technical information services.
The
overall strategy is to work with each distributor to expand penetration
into
currently covered markets, develop additional global opportunities, and
to
broaden the product portfolio with procedure-specific products. In markets
not
covered by its distributors, Tutogen's focus is on adding local distributors
or
direct operations capable of market penetration.
Approximately
70% of the Company's revenues are derived within the United States while
the
remaining international sales are derived primarily from Europe. Since
Tutogen's
foreign donor procurement practices are in full compliance with the donor
suitability standards of the AATB and the U.S. Food and Drug Administration
(“FDA”), the Company has worked closely with its partners to expand into
numerous market opportunities world wide. Tissue grafts are used in dental,
spine, urology, ophthalmology, hernia, general surgery, head and neck
applications, and plastic and reconstructive surgeries. Future objectives
are to
match this penetration into additional international and specialty markets,
using either TUTOPLAST processed human allograft or xenograft tissue
implants.
The
Company's U.S. marketing efforts have concentrated on building a marketing
and
distribution organization, capable of supporting its various distributors.
The
Company has entered into several exclusive marketing and distribution agreements
with global medical device companies. These agreements have established
exclusive distribution for TUTOPLAST processed implants in specialized
indications and surgical applications, for select domestic and international
markets.
Zimmer
Dental Inc. ("Zimmer Dental") and Zimmer Spine Inc. ("Zimmer Spine"),
subsidiaries of Zimmer Holdings, Inc., provide marketing services for the
Company's products for the dental and spine markets. Starting in September
2000,
Zimmer Dental entered into an agreement to represent TUTOPLAST processed
bone,
under the brand name Puros®, for dental applications. Revenues from this
relationship account for 48% of total consolidated and 69% of total U.S.
revenues for the fiscal year ended September 30, 2007. Zimmer Dental markets
the
products to the end user and the Company ships and bills the customer
directly. Distribution fees earned pursuant to the agreements are
recognized ratably over the terms of these respective
agreements. During 2006, the Company expanded its relationship with
Zimmer Dental by adding pericardium and dermis soft tissue grafts for dental
applications. The additions of these new products provide Zimmer
Dental with a full line of products for the dental surgeons. In August
2007, the
Company entered into an agreement to extend Zimmer Dental’s exclusivity
internationally into Europe, the Middle East and Asia. The new
international agreement includes both human and bovine bone and soft tissue
grafts and allows Zimmer to provide the dentist with a complete product
offering
for the regenerative procedure.
Also
starting September 2000, Zimmer Spine began representing Tutogen bone products
for applications in the spine market. Initially, Tutogen shipped and billed
the
customers directly, but in April 2003 the Company entered into an exclusive
license and distribution agreement with Zimmer Spine. Effective with this
agreement Zimmer Spine became a "stocking distributor", therefore Zimmer
Spine
now purchases the Company's products and distributes and invoices the customer
directly. Zimmer Spine distributes both traditional bone and specialized
bone
products processed with the Company's TUTOPLAST process. Revenues from
Zimmer
Spine for 2007 represented 10% and 11% of total consolidated and U.S. revenues,
respectively.
The
Company also manufactures products for surgical specialties which include
urology, gynecology, ophthalmology, ENT, hernia and reconstruction
products. During 2007, sales from surgical specialties totaled 15% of
consolidated revenue and 21% of U.S. revenues.
For
urological indications, the Company had partnered with Mentor Corporation
("Mentor") since 1998. During 2006, Mentor sold their urology business
to
Coloplast A/S of Denmark (“Coloplast”), and assigned the Tutogen agreement to
Coloplast. In May 2007, Tutogen signed a new agreement with Coloplast
extending the current distribution agreement and expanding its scope both
internationally, and to include Tutogen’s Tutoplast processed Bovine
Pericardium. As a stocking distributor, Coloplast currently markets
TUTOPLAST fascia lata, pericardium, and dermis tissue grafts.
IOP,
Inc.
(“IOP”) has been a distributor since 1998, and is the exclusive distributor for
TUTOPLAST processed tissue for ophthalmology applications.
In
January 2006, the Company entered in to a four-year exclusive worldwide
distribution agreement with Davol, Inc. (“Davol”), a subsidiary of C. R. Bard,
Inc., to promote, market and distribute the Company’s line of allograft biologic
tissues for hernia repair and the reconstruction of the chest and abdominal
walls. Under the agreement, Davol paid the Company $3.3 million in
fees for the exclusive distribution rights. Davol is a stocking
distributor, and initially entered the hernia market during the fourth
quarter
of fiscal year 2006 and has continued to expand release during
2007.
In
June
2006, the Company signed a new distribution agreement with Mentor Corporation
(“Mentor”) for the exclusive North American rights for the use of TUTOPLAST
dermis in the dermatology and plastic surgery markets for breast
reconstruction. The Company received an upfront payment in
consideration for these distribution rights. Mentor initiated
distribution during the fourth quarter of fiscal year 2007.
Internationally,
the Company concentrates on an in-depth penetration of markets with major
needs
not covered by Tutogen's global distributors. In Europe, the specific focus
is
on countries such as Germany, France, Italy, Spain and the U.K., and in
major
specialty areas, such as dental, orthopedics and tissue
processing. Approximately 30% of the total international sales are
xenograft products. The Company believes that through a combination
of international distribution strategies, Tutogen can increase its penetration
of the international markets for processed tissue.
The
following table summarizes the Company’s markets, products, applications and
distributors:
|
Distributor
|
Market
|
Estimated
Market
Size – U.S.
|
Products
|
Applications
|
|
Zimmer
Dental
|
Dental
|
$169.0
million
|
Puros
Cancellous
Puros
Cortical
Puros
Block
Puros
Pericardium
Puros
Dermis
|
Ridge
Augmentation
|
|
Zimmer
Spine
|
Spine
|
$656.0
million
|
Puros
bone
Specialty
Machined Grafts
(Puros
C, Puros A & Puros P)
|
Interbody
Fusion,
Cervical
and Lumbar
|
|
Davol
|
Hernia
|
$150.0
million
|
AlloMax
(Human
Dermis Product)
|
Hernia
Repair
Reconstruction
of the chest and abdominal walls
|
|
Coloplast
|
Urology
|
$200.0
million
|
Suspend
fascia lata
Axis
dermis
Pericardium
|
Urinary
Incontinence
Pelvic
Floor Reconstruction
|
|
Mentor
|
Breast
Reconstruction
|
$25.0
- $50.0 million
|
NeoForm
dermis
|
Breast
Reconstruction
|
|
IOP
|
Ophthalmology
|
$9.0
million
|
IO
Patch
BioDome
BioElevation
BioSpacer
|
Glaucoma
Enucleation
Brow
Suspension
|
|
TBD
|
ENT
|
$55.0
million
|
Fascia
lata
Fascia
temporalis
Pericardium
|
Tympnoplasty
Rhinoplasty
Septoplasty
|
TISSUE
PROCUREMENT
The
Company sources donor tissues from multiple independent recovery organizations
in Europe and the United States. Recovery agencies obtain donor consent,
verify
proper donor identity, conduct extensive medical and social history evaluations
and recover appropriate donated tissues. Each donor tissue is assigned
a unique
identification number in order to assure full traceability, from recovery
to
recipient. These records accompany each donor tissue receipt, along with
related
serological test samples. The test samples are evaluated by independent
Clinical
Laboratory Improvement Amendment (“CLIA”) certified laboratories for
such transmissible diseases as Hepatitis B surface Antigen (“HBsAg”), Hepatitis
B total core (“HBc, IgG/IgM”), Hepatitis C virus antibody (“HCV Ab”), Hepatitis
B and C Nucleic Acid Test (“HBV/HCV NAT”), Human Immunodeficiency Virus 1&2
antibodies (“HIV 1&2 Ab”), HIV Nucleic Acid Test (“HIV NAT”), Human
T-Lymphotropic Virus 1&2 (“HTLV 1&2”) and Syphilis
(“RPR/STS”).
In
June
of 2002, the FDA published its draft Guidance for Industry document, "Preventive
Measures to Reduce the Possible Risk of Transmission of Creutzfeldt-Jakob
Disease and variant Creutzfeldt-Jakob Disease (“vCJD”) by Human Cells, Tissues,
and Cellular and Tissue-Based Products (“HCT/Ps”)". This document reflects the
FDA's current thinking on donor deferral criteria for individuals that
may have
been exposed to a Bovine Spongiform Encephalopathy (“BSE”) agent, or "Mad Cow"
disease. The document draft is in the review and comment stage, which precedes
the adoption of a final version of the FDA's position on this matter. As
a part
of this document, the FDA provided a listing of countries applicable to
donor
deferral. None of the tissue products that Tutogen distributes in the United
States or Canada incorporate tissues from countries identified by the
FDA.
The
Company embarked on a program in 1993 to develop xenografts (tissue derived
from
animals) as an allograft substitute. As with allografts, xenografts processed
using the Company's proprietary TUTOPLAST process have their biomechanical
properties and remodeling capacity preserved with removal of antigenicity
and
infection risk. Studies have shown that TUTOPLAST processed xenografts
are at
least equivalent to allografts as demonstrated by actual clinical use and
laboratory studies. To date, the Company has received CE-Marks, the European
equivalent to an FDA medical device approval, for bovine pericardium (1998),
bovine cancellous bone (1997) and bovine compact (cortical) bone (1999),
which
permits distribution throughout Europe of products derived from such tissues.
Approximately 30% of the total products sold internationally are bovine.
Tutogen
Germany currently obtains bovine material from a "closed herd" in an
internationally approved source country. In the U.S., the Company
received FDA 510(k) clearance for bovine pericardium in 2000, allowing
the
Company to market the first xenograft tissues (Tutopatch
®
) domestically,
for indications of general and plastic surgery. Based on such approvals
Tutogen
Germany will be able to supply bovine products in the U.S. The
Company plans to introduce bovine products in the U.S. for dental, hernia
and
other surgical specialty applications during 2008. The unique
biomechanical properties of bovine tissue, combined with the absence of
the
supply constraints associated with allografts, permits the use of xenograft
tissues in areas that cannot be optimally addressed with human
tissue.
Tutogen
allograft tissue recovery providers are FDA registered, state licensed and
accredited by the AATB, as appropriate. Tissues are not purchased from
these
companies, but rather the providers are reimbursed for the costs incurred
in the
tissue recovery process itself, at the time of delivery. Due to the growing
demand for and the limited supply of allograft tissue, the Company is
continually seeking to form additional alliances with reputable hospital,
tissue
bank and organ procurement organization tissue recovery firms and entered
into
multiple new arrangements during 2007.
In
November 2006, the Company entered into strategic tissue sourcing agreements
with Regeneration Technologies, Inc. (“RTI”). Under the multi-year
agreements, RTI has the first right of refusal to all soft tissue used
in sports
medicine surgeries recovered by Tutogen’s tissue recovery
providers. The Company, in turn, has the first right of refusal to
all dermis, fascia and pericardium recovered by RTI donor services
agencies.
Although
the Company believes that it has the necessary contractual arrangements
in place
to ensure that there are sufficient tissues available to meet its needs
for the
foreseeable future, there can be no assurance that these supplies will
continue
or materialize as planned. Unavoidable interruptions in tissue supply (such
as
natural disasters, regulatory changes, financial set-backs) could have
a
material adverse effect on Tutogen's business operations.
COMPETITION
Tutogen
considers itself a leader in safe bioimplants for tissue repair. Tutogen's
competitive advantage is based on its TUTOPLAST process of tissue preservation
and viral inactivation. The TUTOPLAST process consists of multiple steps
that
assure a safe, viable product and, at the same time, preserves the tissue
structure, biomechanics and remodeling characteristics. The TUTOPLAST process
is
very robust, and has been proven effective in removing antigenicity and
inactivating conventional and unconventional viruses and prions. The implants
are terminally sterilized, have a five (5) year shelf life, and can be
stored at
room temperature. The TUTOPLAST process has an outstanding safety record.
Since
its introduction over thirty (30) years ago, more than 1,500,000 procedures
have
been successfully performed using TUTOPLAST processed tissues, with no
known
complications from disease transmission or tissue rejection attributable
to the
implants. TUTOPLAST processed implants have been described in more than
400
published scientific papers and peer-reviewed articles.
Many
of
the medical procedures suitable for allografts are currently being performed
with autografts (tissues derived from the patient), requiring a second
surgical
procedure. The advantages of autografts include the decreased incident
of tissue
rejection and disease transmission. The disadvantages are the dual surgical
procedures, increased pain and recovery time and the limitation on the
amount
and quality of tissue. Allograft advantages include the elimination of
a second
surgical site, resulting in lower infection rates, the possible reduction
in
surgical procedure time, faster recovery times and lower costs, while
disadvantages include availability and possible rejection. Availability
and
safety are the primary factors in the ability of TUTOPLAST processed allografts
to compete with autografts for use by the surgical community.
The
industry in which the Company operates is highly competitive. Processors
of
allograft tissue for transplantation in the U.S. include commercial
manufacturers such as Osteotech, Inc., RTI and LifeCell, Inc., companies
well
established in the fields of processing and distribution of bone and soft
tissue
implants, which have substantially greater financial resources than the
Company.
Not-for-profit tissue banks that procure and process tissue for distribution
are
considered competitors for certain applications in certain markets. Also,
Tutogen competes with well established companies in the area of xenograft
tissue
processing, such as Synovis, LifeCell, and Cook Surgical. Management
believes that the TUTOPLAST process, with its impressive record for safety
in
the surgical community, gives the Company a marked advantage over its
competitors. However, due to government regulation, disrupted sources of
tissue
supply and increasing competition, there can be no assurance that the Company
will be able to continue to compete successfully. In addition, there can
be no
assurance that in the future the Company's allografts will be able to compete
successfully with new tissue substitutes being developed by other
companies.
GROWTH
STRATEGY
The
Company estimates the worldwide market for its present products to be over
$1.25
billion including all procedures in the various fields of use. The Company's
existing tissue supply network, established processing facilities and proven
TUTOPLAST technology provides the foundation for continued growth into
the
foreseeable future. Future growth will be aided by new sources of tissue,
new
procedures and products, and expansion into new markets. The Company will
focus
on applications for both human allograft and xenograft tissue
implants.
Besides
the Company’s internally developed new products and technology, a major
component of the Company’s growth strategy will be expanding its collaborations
with each global distributor. Tutogen will continue to work with each
organization to evaluate opportunities for new products and applications,
and to
determine the potential for international expansion. The ultimate goal
is to
provide each distributor with a full line of procedure specific implants,
for
their respective fields of use, and to leverage their sales strength in
select
international markets.
Currently,
the Company's focus is on the introduction of new products and applications
for
TUTOPLAST processed tissues, both allograft and xenograft. In January 2005,
the
Company developed, in association with Zimmer Dental, a new bone block
to
augment ridge restoration. In the U.S. the Puros block graft has been well
accepted and is highlighted in various Zimmer Dental training courses.
Globally,
similar products processed from xenograft tissue, has helped generate growth
as
the Company focuses on expanding the international market for dental products.
Additionally, the Company has developed membranes from TUTOPLAST processed
dermis and pericardium for use as a barrier in dental applications. These
products have been used in Europe, and the U.S. launch for pericardium
was in
February 2006 and for dermis in September 2006. The addition of these
new products in the U.S. provides Zimmer Dental with a full line of products
for
the dental surgeons.
The
spine
market for biologic materials was estimated at approximately $656 million
in
2005. This allograft market is split between traditional allograft
bone (19%), machined specialty grafts (49%), and demineralized bone
matrix (“DBM”) (32%). Tutogen continues its U.S. collaboration with
Zimmer Spine in developing new, highly precise machined specialty
grafts. During the fourth quarter of fiscal year 2006, the Company
shipped to Zimmer Spine the first two machined specialty grafts (PurosC® -
cervical graft and PurosA® - anterior lumbar interbody fusion graft) for spinal
surgery. Zimmer Spine released these products to the market during
2007. The Company added a Puros P® specialty graft and plans to
introduce two new specialty grafts during 2008. The Company will also
explore expanding its spine products internationally during 2008.
During
October 2002, the Company entered the European market with Tutomesh®, a
TUTOPLAST processed xenograft for hernia and abdominal wall repair. It
has been
well received in Europe, and has already been successfully used in abdominal
wall surgery of neonates and children with hernia defects. The Company
is
evaluating this opportunity globally for both the Tutomesh, as well as
for
TUTOPLAST processed dermis. In December 2004, Tutogen received FDA 510(k)
marketing clearance for a xenograft product and is currently investigating
various options for its distribution in the U.S.
Internationally,
the Company has internally developed a line of TUTOPLAST machined bone
implants
for the repair of orthopaedic fractures and soft tissue ruptures. The
Tutofix® line of implants was released in Europe in 2004. The current
strategy is to broaden its release internationally.
In
January 2006, Tutogen entered into a four-year exclusive worldwide distribution
agreement with Davol, a subsidiary of C. R. Bard, Inc., to promote, market
and
distribute Tutogen’s line of allograft biologic tissues for hernia repair and
the reconstruction of the chest and abdominal walls. Under the
agreement, Davol paid Tutogen $3.3 million in fees for the exclusive
distribution rights. Davol is a stocking distributor, and initially
entered the hernia market during the fourth quarter of 2006 and further
expanded
distribution during the second quarter of fiscal year 2007. The U.S.
market for biologic grafts used for hernia repair is estimated at $150
million
annually.
In
June
2006, the Company signed a new exclusive distribution agreement with Mentor
for
the exclusive North American rights for the use of TUTOPLAST dermis in
the
dermatology and plastic surgery markets for breast reconstruction. Under
the
agreement, Mentor paid the Company $.5 million in consideration for these
distribution rights. The initial estimated potential market in the U.S.
is
$25-50 million. Mentor initiated distribution during the fourth
quarter of fiscal year 2007.
INTERNATIONAL
OPERATIONS
The
Company currently has sales in more than 20 countries located primarily
in
Europe. Approximately 29%, 33%, and 32% of the Company's consolidated
sales, respectively, for fiscal years 2007, 2006, and 2005 were derived
from
outside the United States, as follows:
|
|
|
United
States
|
|
|
International
|
|
|
Consolidated
|
|
|
Revenues
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Year
ended September 30,
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
37,984
|
|
|
$
|
15,835
|
|
|
$
|
53,819
|
|
|
2006
|
|
$
|
25,430
|
|
|
$
|
12,517
|
|
|
$
|
37,947
|
|
|
2005
|
|
$
|
21,752
|
|
|
$
|
10,108
|
|
|
$
|
31,860
|
|
Approximately
30% of total international sales are bovine products and 70% are allograft
products. Products are manufactured and supplied out of the Company’s
manufacturing facilities in Neunkirchen, Germany.
RESEARCH
AND DEVELOPMENT
The
Company continues to engage in research and development ("R&D") activities.
The Company follows an internal product development plan and coordinates
all
R&D activities, including the Zimmer Dental and Zimmer Spine collaborations.
R&D expenditures remain at approximately 5% of total sales.
In
allograft-related areas, R&D activities focus primarily on the development
of surgical solutions and applications, standardized and tailor-made products
instead of offering grafting material to the surgeon. Also, continuing progress
on the application of the Company's proprietary TUTOPLAST process to various
other tissues has met with success. The Company continues to independently
review its processing technology to enhance tissue safety and efficacy.
Non-allograft activities relate to explorations into the use of xenografts
(specifically bovine), tissue-engineered grafts and improved healing. Clinical
studies, evaluation and follow-up are conducted on these activities. The
Company
is referred to in more than 400 publications.
CUSTOMERS
The
Company has exclusive distribution agreements with Zimmer Dental, Zimmer
Spine,
Davol, Mentor, Coloplast and IOP. Zimmer Dental and Zimmer Spine
accounted for approximately 48% and 10%, respectively, of the Company’s revenue
for the year ended September 30, 2007. No end user customer accounted
for more than 10% of the Company’s consolidated sales for the fiscal year
2007.
PATENTS,
LICENSES AND TRADEMARKS
Wherever
possible, the Company seeks to protect its proprietary information, products,
methods and technology by obtaining patent and trademark protection. The
Company
has certain patents pending and has multiple registered trademarks covering
several countries worldwide. In the United States, the Company is aggressively
pursuing 510(k) submissions for its various products or processes and subsequent
FDA clearances. The Company believes that it has established itself through
the
TUTOPLAST trademark identity and a record of safety and quality assurance
that
will survive beyond the life of the patents.
GOVERNMENT
REGULATION
The
Company procures, processes and markets its tissue products worldwide. Although
some standards of harmonization exist, each country in which the
Company does business has its own specific regulatory requirements. These
requirements are dynamic in nature and, as such, are continually changing.
New
regulations may be promulgated at any time and with limited notice. While
the
Company believes that it is in compliance with all existing pertinent
international and domestic laws and regulations, there can be no assurance
that
changes in governmental administrations and regulations will not negatively
impact the Company's operations.
In
the
United States, the Company's allograft products are regulated by the FDA
under
Title 21 of the Code of Federal Regulations, Parts 1270 and 1271, "Current
Good
Tissue Practice for Human Cell, Tissue, and Cellular and Tissue-Based Products".
Xenograft tissues are regulated as medical devices and subject to 21 CFR,
Part
820 (Current Good Manufacturing Practices for Medical Devices) and related
statutes. The Company has obtained a 510(k) marketing clearance from the
FDA for
bovine pericardium, for use in general and plastic surgery applications and
will
be seeking further approvals for other xenograft tissues and indications.
In
addition, the U.S. operation is subject to certain state and local regulations,
as well as compliance to the standards of the tissue bank industry's accrediting
organization, the AATB.
In
Germany, allografts are classified as drugs and the German government regulates
such products in accordance with German Drug Law. On April 7, 2004, the European
Commission issued a human tissue directive to regulate allografts within
the
European Union (“EU”). Tutogen's Neunkirchen facility is presently licensed by
the German Health Authorities and in compliance with applicable international
laws and regulations, allowing the Company to market its human and animal
implant products globally. In June of 2006, the Company received
approval to sell its first allograft product into Germany.
The
FDA
and international regulatory bodies conduct periodic compliance inspections
of
both the Company’s U.S. and German processing facilities. Both operations are
registered with the U.S. FDA Center for Biologics Evaluation and Research
(“CBER”) and are certified to ISO 9001:2000 and ISO 13485:2003. The Alachua
facility is also accredited by the AATB and is licensed in the states of
Florida, New York, California, Maryland, Delaware and Illinois. The Neunckirchen
facility is registered with the German Health Authority (“BfArM”) as a
pharmaceutical and medical device manufacturer and is subject to German drug
law. The Company believes that worldwide regulation of allografts and xenografts
is likely to intensify as the international regulatory community focuses
on the
growing demand for these implant products and the attendant safety and efficacy
issues of citizen recipients. Changes in governing laws and regulations could
have a material adverse effect on the Company's financial condition and results
of operations. Company management further believes that it can mitigate this
exposure by continuing to work closely with government and industry regulators
in understanding the basic tenets of the business and participating in the
drafting of reasonable and appropriate legislation.
ENVIRONMENTAL
REGULATIONS
The
Company's allografts and xenografts, as well as the chemicals used in
processing, are handled and disposed of in accordance with country-specific,
federal, state and local regulations. Since 1995, the Company has used outside
third parties to perform all biohazard waste disposal.
The
Company contracts with independent, third parties to perform all gamma-terminal
sterilization of its allografts. In view of the engagement of a third party
to
perform irradiation services, the requirements for compliance with radiation
hazardous waste does not apply, and therefore the Company does not anticipate
that having any material adverse effect upon its capital expenditures, results
of operations or financial condition. However, the Company is responsible
for
assuring that the service is being performed in accordance with applicable
regulations. Although the Company believes it is in compliance with all
applicable environmental regulations, the failure to fully comply with any
such
regulations could result in the imposition of penalties, fines and/or sanctions
which could have a material adverse effect on the Company's
business.
EMPLOYEES
As
of
September 30, 2007, the Company employed a total of 239 full-time employees,
of
whom 107 full-time employees were employed in the United States and the
remainder in Germany. Management believes its relations with its employees
are
good.
PROPOSED
MERGER WITH REGENERATION TECHNOLOGIES
On
November 12, 2007, the Company entered into an Agreement and Plan of Merger
with
Regeneration Technologies, Inc. and Rockets FL Corp
., a newly formed, wholly
owned
subsidiary of Regeneration Technologies. Under the terms of the
Agreement, Rockets FL Corp. shall be merged with and into the Company, with
the
Company being the surviving corporation. As a result, the Company
will become a wholly owned subsidiary of Regeneration
Technologies. The proposed merger is structured as a tax free
stock-for-stock exchange pursuant to which the Company’s shareholders will
receive 1.22 shares of Regeneration Technologies’ common stock for each share of
the Company’s common stock. Upon completion of the merger,
Regeneration Technologies stockholders will own approximately 55 percent
of the
combined company and the Company’s stockholders will own approximately 45
percent of the combined company, on a fully diluted basis.
The
proposed merger is subject to
approval by the respective shareholders of the Company and Regeneration
Technologies, as well as customary closing conditions and regulatory
approvals. If the Company terminates the proposed Agreement and Plan
of Merger, under certain limited conditions, the Company could owe a termination
fee of $6.5 million. The proposed merger is estimated to be completed
during March, 2008.
The
combined company will be headquartered in Alachua, FL. Brian K.
Hutchison, currently Chairman, President and Chief Executive Officer of
Regeneration Technologies, will be the Chairman and Chief Executive Officer
of
the combined company. Thomas F. Rose, currently Vice President, Chief
Financial Officer and Secretary of Regeneration Technologies, will serve
in the
same capacity of the combined entity. Guy L. Mayer, currently
President and Chief Executive Officer of Tutogen, will become President of
the
combined company, with a focus on international activities and sales and
marketing. Mr. Mayer will also join the board of directors of the
combined company. L. Robert Johnston, currently Vice President and
Chief Financial Officer of Tutogen, will serve as Vice President of Finance
for
the combined company.
The
board
of directors of the combined company will be comprised of all seven directors
from Regeneration Technologies’ current board and five directors from Tutogen’s
board, bringing the total number of directors to 12, including Messrs. Hutchison
and Mayer.
The
Company’s board of directors and the board of directors of Regeneration
Technologies have both approved the merger.
The
foregoing description of the merger does not purport to be complete and is
qualified in its entirety by reference to the Company’s Current Report on Form
8-K, filed November 19, 2007, and the merger agreement filed as an exhibit
to
that Form 8-K and incorporated into this report by reference.
Satisfaction
of the closing conditions could take several months or longer. There
can be no assurance that the conditions necessary to complete the merger
will be
met, or that the proposed merger will be completed at all.
Statements
made in this Form 10-K relating to the Company’s business strategies, operating
plans, planned expenditures, expected capital requirements and other
forward-looking statements regarding the Company’s business do not take into
account potential future impacts of the Company’s proposed merger with
Regeneration Technologies
ITEM
1A. RISK FACTORS.
An
investment in our common stock involves a number of very significant
risks. You should carefully consider the following risks and
uncertainties in addition to other information in this Report in evaluating
our
Company and its business before purchasing shares of our common
stock. Our business, operating results and financial condition could
seriously be harmed due to any of the following risks. The risks
described below are not the only ones facing our Company. Additional
risks not presently known to us may also impair our business
operations. You could lose all or part of your investment due to any
of these risks.
The
pending merger with Regeneration Technologies may create uncertainty for
our
suppliers, employees and business partners.
On
November 13, 2007, we announced that we had entered into a merger agreement
with
Regeneration Technologies, Inc. The merger is currently expected to
close in March, 2008. While the merger is pending, donor recovery
groups may delay or defer decisions to become Tutogen suppliers and existing
suppliers may experience uncertainty about our service, including the results
of
any integration of our business with that of Regeneration
Technologies. This may adversely affect our ability to gain new
suppliers and retain existing suppliers, which could adversely affect our
revenues as well as the market price of our common stock. Current
employees may experience uncertainty about their post-merger roles with Tutogen
and key employees may depart because of issues relating to the uncertainty
and
difficulty of integration or a desire not to remain with Tutogen following
the
merger. Other parties with whom we have or are pursuing
relationships, such as distributors, hospitals and surgeons, may defer agreeing
to further arrangements with us, or may opt not to become a business partner
of
ours at all.
The
merger with Regeneration Technologies is subject to various approvals and
may
not occur.
We
and
Regeneration Technologies must obtain shareholder approval and governmental
approvals, including approvals related to antitrust matters. If we do
not receive these approvals, or do not receive them in a timely manner or
on
satisfactory terms, then we may not be able to complete the
merger. Governmental agencies may impose limitations on the business
of the combined company or require divestiture of assets as a condition to
approval of the merger, which may result in one of the parties to the merger
being entitled to and electing not to proceed with the merger or reduce the
anticipated benefits of the merger. We cannot assure you that the
merger will be completed in the anticipated time frame or at all. A
failure to complete the merger may result in a decline in the market price of
our common stock.
We
will incur significant transaction and merger-related costs in connection
with
the merger.
We
have
already incurred and will continue to incur transaction fees and other costs
related to the merger, and expect to incur significant costs associated with
completing the merger and combining the operations of the two companies,
which
cannot be estimated accurately at this time. Further, diversion of
attention from ongoing operations on the part of management and employees
could
adversely affect our business. Although, after the merger closes, we
expect that the elimination of duplicative costs, as well as the realization
of
other efficiencies related to the integration of the businesses, may offset
incremental transaction and transaction-related costs over time, this net
benefit may not be achieved in the near term, or at all. In addition,
speculation regarding the likelihood of closing the merger could increase
the
volatility of our stock price, and pendency of the merger could make it
difficult to effect other significant transactions, to the extent opportunities
arise to engage in such transactions. We will incur these costs, as
well as face the disruptions to our business and the potential harm to our
relationships with suppliers, employees and business partners discussed above,
even if the merger is not completed.
The
merger may not provide all of the anticipated benefits.
If
we are
able to complete the merger, we expect to achieve various benefits from
combining our and Regeneration Technologies’ resources, as well as significant
cost savings from a combined operation. Achieving the anticipated
benefits of the merger will depend in part upon whether our two companies
integrate our businesses in an efficient and effective manner. To
date, we have operated independently from Regeneration Technologies and legal
restrictions have in the past and will in the future limit planning for
integration of the two companies. Accordingly, we may not be able to accomplish
this integration process smoothly or successfully or in a timely
manner. Any inability of management to integrate successfully the
operations of our two companies, or to do so in a timely manner, could have
an
adverse effect on the combined company or the expected benefits from the
merger.
We
depend heavily upon a limited number of sources of
human tissue,
and any failure to obtain tissue from these sources in
a timely
manner will interfere with our ability to process and distribute
allografts.
Our
business is dependent on the availability of donated human cadavers tissue
supplied by donor recovery groups. Donor recovery groups provide support
to
donor families, are regulated by the FDA, and are often affiliated with
hospitals, universities or organ procurement groups. Our relationships with
donor recovery groups, which are critical to our supply of tissue, can be
affected by relationships they have with other organizations. Any negative
impact of the regulatory and disease transmission issues facing the industry,
as
well as the negative publicity that these issues create, could have an impact
on
our ability to negotiate favorable contracts with recovery groups.
If
our
current sources can no longer supply human cadaveric tissue or our requirements
for human cadaveric tissue exceed their current capacity, we may not be
able to
locate other sources on a timely basis, or at all. Any significant
interruption in the availability of human cadaveric tissue would likely
cause us
to slow down the processing and distribution of our human tissue products,
which
could adversely affect our ability to supply the needs of our customers
and
materially and adversely affect our results of operations and our relationships
with our customers.
In
October, 2007, we entered into a new five year Tissue Procurement, Processing
and Supply Agreement with Allosource, Inc. pursuant to which Allosource
will
provide us with various human tissues used in our dental and spinal product
lines. We also entered into multiple other tissue sourcing agreements during
2007.
In
November 2006, we entered into strategic tissue sourcing agreements with
Regeneration Technologies, Inc. (“RTI”). Under the multi-year
agreements, RTI has the first right of refusal to all soft tissue used
in sports
medicine surgeries recovered by Tutogen’s tissue recovery
providers. We, in turn, have the first right of refusal to all
dermis, fascia and pericardium recovered by RTI donor services
agencies.
Our
four
largest recovery groups together supplied approximately 91% of our total
human
tissue during 2007. If we were to lose any one of these sources of
tissue, the unfavorable impact on our operating results would be
material.
We
are highly dependent upon independent distributors to generate our
revenues.
We
currently derive the majority of our revenues through our relationships with
two
companies, Zimmer Dental and Zimmer Spine. For the year ended September 30,
2007, we derived approximately 48% and 10% of our consolidated revenues from
distribution by Zimmer Dental and Zimmer Spine, respectively.
Zimmer
provides nearly all of the instrumentation, surgeon training, distribution
assistance and marketing materials for our line of dental and spinal
allografts. If our relationship with Zimmer is terminated or reduced
for any reason and we are unable to replace the relationship with other means
of
distribution, we would suffer a material decrease in revenues.
We
face intense competition from companies, academic institutions, tissue banks,
organ procurement organizations and tissue processors with greater financial
resources and lower costs which could adversely affect our revenues and results
of operations.
The
biotechnology field is highly competitive and is undergoing rapid and
significant technological changes. Our success depends upon our
ability to develop and commercialize effective products that meet medical
needs
as well as our ability to accurately predict future technology and market
trends. Many of our competitors have much greater financial,
technical, research, marketing, distribution, service and other resources
that
are significantly greater than ours. Moreover, our competitors may
offer a broader array of tissue repair treatment products and technologies
or
may have greater name recognition than we do in the marketplace.
Our
competitors may develop or market technologies that are more effective or
commercially attractive than ours, or that may render our technology
uncompetitive, uneconomical or obsolete. For example, the successful
development of a synthetic tissue product that permits remodeling of bones
could
result in a decline in the demand for allograft-based products and technologies
and have a materially adverse effect on our financial condition and results
of
operation.
If
third party payers fail to provide appropriate levels of reimbursement for
the
use of our implants, our revenues would be adversely
affected.
Political,
economic and regulatory influences are subjecting the healthcare industry
in the
United States to fundamental change. Any new Federal or state
legislation could result in significant changes in the availability, delivery,
pricing or payment for healthcare services and products. While we
cannot predict what form any new legislation will take, it is possible that
any
significant healthcare legislation, if adopted, could lower the amounts paid
to
us for our services, which would decrease our revenues.
Our
revenues depend largely on the reimbursement of patients’ medical expenses by
government healthcare programs and private health
insurers. Governments and private insurers closely examine medical
procedures incorporating new technologies to determine whether the procedures
will be covered by payment, and if so, the level of payment which may
apply. We cannot be sure that third party payers will continue to
reimburse us or provide payment at levels which will be profitable to
us.
Our
allograft and xenograft implants and technologies could become subject to
significantly greater regulation by the FDA, which could disrupt our
business.
The
FDA
and several states have statutory authority to regulate allograft processing
and
allograft-based materials. The FDA could identify deficiencies in
future inspections of our facilities or promulgate future regulatory rulings
that could disrupt our business, hurting our profitability.
FDA
regulations of human cellular and tissue-based products, titled “Good Tissue
Practices,” went into full force as of May 2005. These regulations
cover all stages of allograft processing, from procurement of tissue to
distribution of final allografts. These regulations may increase
regulatory scrutiny within our industry and lead to increased enforcement
action
which affects the conduct of our business. In addition, the effect of
these regulations may have a significant effect upon recovery agencies which
supply us with tissue and increase the cost of recovery
activities. Any such increase would translate into increased costs to
us, as we compensate the recovery agencies based on their cost of
recovery.
Other
regulatory entities include state agencies with statutes covering tissue
banking. Of particular relevance to our business are regulations
issued by Florida, New York, California and Maryland. Most states do
not currently have tissue banking regulations. However, recent
incidents of allograft related infections in the industry may stimulate the
development of regulation in other states. It is possible that others
may make allegations against us or against donor recovery groups or tissue
banks, including those with which we have a relationship, about non-compliance
with applicable FDA regulations or other relevant statutes and
regulations. Allegations like these could cause regulators or other
authorities to take investigative or other action, or could cause negative
publicity for our business and our industry.
Some
of
our implants in development will contain tissue derived from animals, commonly
referred to as xenografts. Xenograft implants are medical devices
that are subject to pre-market approval or clearance by the FDA. We
may not receive FDA approval or clearance to market new implants as we
attempt
to expand the quantity of xenograft implants available for
distribution.
The
National Organ Transplant Act could be interpreted in a way that
could reduce our revenues and income in the future.
Some
aspects of our business are subject to additional local, state, federal or
international regulation. Changes in the laws or new interpretations of existing
laws could negatively affect our business, revenues or prospects, and increase
the costs associated with conducting our business. The procurement
and transplantation of allograft tissue is subject to federal regulation
under
the National Organ Transplant Act, or NOTA, a criminal statute that prohibits
the purchase and sale of human organs, including bone and other tissue. NOTA
permits the payment of reasonable expenses associated with the transportation,
processing, preservation, quality control and storage of human tissue, which
are
the types of services we perform. If in the future, NOTA were amended
or interpreted in a way that made us unable to include some of these costs
in
the amounts we charge our customers, it could reduce our revenues and therefore
hurt our business. It is possible that more restrictive
interpretations or expansions of NOTA could be adopted in the future which
could
require us to change one or more aspects of our business, at a substantial
cost,
in order to continue to comply with this statute.
Our
success will depend on the continued acceptance of our allograft and xenograft
implants and technologies by the medical community.
Market
acceptance of our allograph and xenograph implants can be affected by factors
such as competitive tissue repair options, lack of third party reimbursement
and
the training of surgeons in the use of our tissue transplants, and rapid
technological changes such as synthetic hormone tissue
substitutes.
Market
acceptance depends on our ability to demonstrate that our existing and new
implants and technologies are an alternative to existing tissue repair treatment
options. This will depend on surgeons’ evaluations of the clinical
safety, efficacy, ease of use, reliability and cost-effectiveness of these
tissue repair options and technologies.
We
or our competitors may be exposed to product liability claims which could
cause
us to be liable for damages or cause investors to think we will be liable
for
similar claims in the future.
The
development of allografts and technologies for human tissue repair and treatment
entails an inherent risk of product liability claims, and substantial product
liability claims may be asserted against us. We are a party to a
number of legal proceedings related to product liability.
The
implantation of donated cadaveric human tissue products creates the potential
for transmissions of communicable disease. Although we comply with
Federal and state regulations and guidelines intended to prevent communicable
disease transmission, and our tissue suppliers are also required to comply
with
such regulations, there can be no assurances that: (i) our tissue suppliers
will
comply with such regulations intended to prevent communicable diseases
transmissions; (ii) even if such compliance is achieved, that our products
have
not been or will not be associated with transmission of disease; or (iii)
a
patient otherwise infected with disease would not erroneously assert a claim
that the use of our products resulted in disease transmission.
We
currently have $5 million of product liability insurance to cover
claims. This amount of insurance may not be adequate for current
claims if we are not successful in our defenses, and furthermore, we may
not
have adequate insurance coverage for any future claims that
arise. Moreover, insurance covering our business may not always be
available in the future on commercially reasonable terms, if at
all. If our insurance proves to be inadequate to pay a damage award,
we may not have sufficient funds to do so, which would harm our financial
condition and liquidity. In addition, successful product liability
claims made against one of our competitors could cause claims to be made
against
us or expose us to a perception that we are vulnerable to similar
claims. In addition, claims against us, regardless of their merit or
potential outcome, may also hurt our ability to obtain surgeon endorsement
of
our allografts or to expand our business.
Negative
publicity concerning the use of donated human tissue in medical procedures
could
reduce the demand for our products and negatively impact the supply of available
donor tissue.
There
has
recently been negative publicity concerning the use and method of obtaining
donated human tissue that is used in medical procedures. This type of
negative publicity could reduce the demand for our products or negatively
impact
the willingness of families of potential donors to agree to donate tissue,
or
tissue banks to provide tissue to us. In such event, we might not be
able to obtain adequate tissue to meet the needs of our customers. As
a result, our relationships with our customers and our results of operations
could be materially and adversely affected.
Our
success depends on the scope of our intellectual property rights and not
infringing the intellectual property rights of others.
Our
ability to compete effectively with other companies is materially dependent
upon
the success of our patents and how effective we are in enforcing them and
protecting our trade secrets. If we are not successful and steadfast,
it is highly likely that our competitors will exploit our proprietary
technologies and innovations and will compete more effectively against
us. It is also highly likely that our competitors, who also have
greater resources than we do, will challenge our intellectual property rights,
and attempt to invalidate, circumvent or render unenforceable any of our
patents
or propriety rights that we currently own or are licensed to us.
Because
of the competitive nature of the biotechnology industry, there can be no
assurances that we will not be required to litigate the enforcement of our
patents and other intellectual rights. Moreover, there can be no
assurances that we will not have to defend our existing or proposed products
or
processes against third party claims of patent infringement and other
intellectual property claims. However the litigation may arise,
intellectual property litigation is always costly and ends up diverting our
financial and management resources and damages our business.
We
may need to secure additional financing to fund our long-term strategic
plan.
We
expect
to continue to make investments in our business to support our distribution
efforts and future programs and initiatives, which may deplete our available
cash balances. We believe that our available cash, cash equivalents,
available lines of credit and anticipated future cash flow from operations
will
be sufficient to meet our cash needs for the foreseeable future. Our
future liquidity and capital requirements will depend upon numerous factors,
including but not limited to, the progress of our product development programs
and the need for and associated costs relating to regulatory approval, if
any,
which may be needed to commercialize some of our products under development,
or
those commercialized products whose regulatory status may change.
We
may
need to raise additional funds through the issuance of equity and/or debt
financing in private placements or public offerings to provide funds to meet
the
needs of our long-term strategic plan. Additional funds may not be
available, or if available, may not be available on favorable
terms. Further equity financings, if obtained, may substantially
dilute the interest of our pre-existing shareholders. Any additional
debt financing may contain restrictive terms that limit our operating
flexibility. As a result, any future financings could have a material
adverse effect on our business, financial condition or results of
operations.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
As
of
September 30, 2007, there were no comment letters outstanding from the
SEC.
ITEM
2. PROPERTIES.
UNITED
STATES. The Company's headquarters and U.S. manufacturing facilities are
located
in Alachua, Florida and total approximately 34,384 square feet of leased
space
as of September 30, 2007. The Florida lease expires January 31, 2009 with
a
renewal option through January 31, 2011. There are various options for
additional expansion space in the immediate area and the Company believes
that
it will have sufficient space to meet its current and future needs into the
foreseeable future.
GERMANY.
The Company's facility in Neunkirchen consists of six buildings totaling
approximately 33,000 square feet on approximately two acres of land. This
property is owned by the Company and should be sufficient in size and condition
to handle anticipated production levels for international markets into the
foreseeable future.
ITEM
3. LEGAL PROCEEDINGS.
At
September 30, 2005, the Company had an accrual recorded of $476,000
(approximately 395,000 Euros) related to a dispute with a former international
distributor. During 2006, the dispute was settled for $360,000
(approximately 280,000 Euros) and the Company recorded a change in estimate
and
reduced the accrual by approximately $91,000 (approximately 71,400 Euros),
which
also reduced general and administrative expense. The settlement
amount and outstanding legal costs were paid in 2007.
On
October 12, 2005, the Company issued a voluntary recall of all product units,
which utilized donor tissue received from BioMedical Tissue Services/BioTissue
Recovery Services (“BioMedical”). This action was taken because the
Company was unable to satisfactorily confirm that BioMedical had properly
obtained donor consent. The Company quarantined all BioMedical
products in its inventory, having a value of $1,035,000 and notified all
customers and distributors of record regarding this action. In
connection with the recall, the Company wrote off $174,000 of inventory during
2005 and $861,000 for quarantined inventory at September 30,
2006. Additionally, as of September 30, 2005, the Company had accrued
$250,000 of related costs in connection with the recall. As of
September 30, 2006, the accrual for these costs was $0, due in part to actual
payments made for such costs and in part to an adjustment made by management
during the three months ended March 31, 2006 to reduce the accrual by
approximately $150,000 as a result of a change in management's estimate of
the
total recall related costs. The effect of this adjustment was to reduce cost
of
revenue by approximately $150,000 during fiscal year 2006.
In
January 2006, the Company was named as one of several defendants in a class
action suit related to the BioMedical recall. The Company intends to
vigorously defend this matter and does not believe that the outcome of this
class action will have an adverse material effect on the Company’s operations,
cash flows, financial position, or financial statement disclosures.
The
Company is party to various claims, legal actions, complaints and administrative
proceedings arising in the ordinary course of business. In
management’s opinion, the ultimate disposition of these matters will not have a
material adverse effect on its financial condition, cash flows or results
of
operations.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There
was
no submission of matters to a vote of security holders during the fourth
quarter
of the fiscal year covered by this Report.
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER
PURCHASES OF EQUITY SECURITIES.
MARKET
INFORMATION
Since
August 17, 2000, the Company's common stock has been traded on the American
Stock Exchange under the symbol "TTG". The following table sets forth the
range
of high and low closing price information for the Company's Common Stock
for
each quarter within the last two fiscal years.
The
Company adopted Statement of Financial Accounting Standards (SFAS) No.
123R
“
Share Based Payment
” (“SFAS 123(R)”) for the year ended September 30,
2006. The impact of this adoption is discussed in Item 7 below under
general and administrative expenses.
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
PROPOSED
MERGER
On
November 12, 2007, the Company entered into an Agreement and Plan of Merger
with
Regeneration Technologies, Inc. and Rockets FL Corp
., a newly formed, wholly
owned
subsidiary of Regeneration Technologies. Under the terms of the
Agreement, Rockets FL Corp. shall be merged with and into the Company,
with the
Company being the surviving corporation
Statements
in the following discussion and analysis relating to the Company’s business
strategies, operating plans, planned expenditures, expected capital requirements
and other forward-looking statements regarding the Company’s business do not
take into account potential future impacts of the Company’s proposed merger with
Regeneration Technologies.
Tutogen
Medical, Inc., a Florida corporation, was formed in 1985 and with its
consolidated subsidiaries (collectively, the “Company” or “Tutogen”), designs,
develops, processes, manufactures and markets sterile biological implant
products made from human (allograft) and animal (xenograft)
tissue. Surgeons use our products to repair and promote the healing
of a wide variety of bone and other tissue defects, including dental, spinal,
urology, ophthalmology, head, neck and general surgery
procedures. Our products are distributed in the United States and in
over twenty (20) other countries.
We
pursue
a market approach to the distribution of our implants and establish strategic
distribution arrangements in order to increase our penetration in selected
markets. We have distribution agreements with Zimmer Dental and
Zimmer Spine, subsidiaries of Zimmer Holdings, Inc. for the dental and
spine
markets, Mentor for breast reconstruction, IOP for ophthalmology, Davol
for
hernia repair and Coloplast for urology. In all other markets that we serve,
we
use a network of independent distributors.
CRITICAL
ACCOUNTING POLICIES
The
Company's significant accounting policies are more fully described in Note
2 to
the consolidated financial statements. However, certain of the accounting
policies are particularly important to the portrayal of the financial position
and results of operations and require the application of significant judgment
by
management; as a result, they are subject to an inherent degree of uncertainty.
In applying those policies, management uses its judgment to determine the
appropriate assumptions to be used in the determination of certain estimates.
Those estimates are based on historical experience, terms of existing contracts,
observance of trends in the industry, information provided by customers
and
information available from other outside sources, as appropriate. The Company's
significant accounting policies include:
Share-Based
Compensation
. We adopted SFAS No. 123(R) in the first quarter of fiscal
year 2006. SFAS 123(R) requires the measurement and recognition of compensation
expense for all share-based payment awards including employee stock options
based on estimated fair values. Under SFAS 123(R), we estimate the value
of
share-based payments on the date of grant using the Black-Scholes model,
which
was also used previously for the purpose of providing pro forma financial
information as required under SFAS 123. The determination of the fair value
of,
and the timing of expense relating to, share-based payment awards on the
date of
grant using the Black-Scholes model is affected by our stock price as well
as
assumptions regarding a number of variables including the expected term
of
awards, expected stock price volatility, vesting periods and expected
forfeitures.
Prior
to
the first quarter of fiscal year 2006, we used historical stock price volatility
in preparing our pro forma information under SFAS 123. Under SFAS 123(R),
we use
a combination of historical and implied volatility to establish the expected
volatility assumption based upon our assessment that such information is
more
reflective of current market conditions and a better indicator of expected
future volatility. SFAS 123(R) also requires forfeitures to be estimated
at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. We estimate expected forfeitures,
as
well as the expected term of awards, based on historical experience. Future
changes in these assumptions, our stock price or certain other factors
could
result in changes in our share-based compensation expense in future
periods.
Inventories
.
Inventories are valued at the lower of cost or market, with cost determined
using the first-in-first-out method. Work in process and finished goods
includes
costs attributable to direct labor and overhead. Impairment charges for
slow
moving, excess and obsolete inventories are recorded based on historical
experience, current product demand determined in part through periodic
meetings
with distributors, regulatory considerations, industry trends, changes
and risks
and the remaining shelf life. As a result of this analysis, the Company
records
an allowance to reduce the carrying value of any impaired inventory to
its fair
value, which becomes its new cost basis. If the actual product life
cycles, demand or general market conditions are less favorable than those
projected by management, additional inventory impairment charges may be
required
which would affect future operating results. The adequacy of these
inventory impairment charges is evaluated quarterly.
Revenue
Recognition and Accounts Receivable
. Revenue on product sales and tissue
processing is recognized when persuasive evidence of an arrangement exists,
the
price is fixed and final, delivery has occurred and there is a reasonable
assurance of collection of the sales proceeds. Oral or written purchase
authorizations are generally obtained from customers for a specified amount
of
product at a specified price. Title transfers at the time of shipment.
Customers
are provided with a limited right of return. Revenue is recognized at shipment.
Reasonable and reliable estimates of product returns are made in accordance
with
SFAS No. 48 “
Revenue Recognition When Right of Return Exists”
(“SFAS
48”) and allowances for doubtful accounts are based on significant historical
experience. Revenue from distribution fees includes nonrefundable payments
received as a result of exclusive distribution agreements between the Company
and independent distributors. Distribution fees under these arrangements
are
recognized as revenue ratably to approximate services provided under the
contract. Recognition of revenue commenced over the term of the
distribution agreement upon delivery of initial products.
Valuation
of Deferred Tax Assets
.
We record valuation
allowances to reduce
the
net
deferred
tax assets to the amounts
estimated to be re
alizable
.
While we consider taxable income in
assessing the need for a valuation allowance, in the event we determine
it is more likely
than not
we would be able
to realize
our deferred tax assets in the future, an adjustment
to the valuation
allowance
would be made and
income increased in
the period of such determination. Likewise, in the event we determine we
would
not be able to realize all or part of our deferred tax assets in the future,
an
adjustment would be made
to
the valuation allowance
and
charged to income in the period of such determination.
During 2007, the
Company recorded a tax
benefit of $6.2 million due to the reversal of a previously recorded valuation
allowance related to our U.S. operations since we have determined that
it is
more likely than not that our existing deferred tax assets will be
utilized.
Valuation
of Long-Lived
Assets
. Long-lived assets
on our
balance sheet are stated at the lower of cost, net of depreciation and
amortization, or fair value. The factors in this valuation which
require significant estimates and judgments are: (1) determination of the
estimated useful life of each asset, which determines expense per period,
number
of periods of expense, and the carrying value of each asset at any time;
and (2)
determination of the fair value of assets, which may result in other than
temporary impairment charges when fair value is lower than the carrying
value of
assets, which we would recognize as a charge to earnings during the period
in
which we made the determination. If we overestimate the useful life
of an asset, or overestimate the fair value of an asset, and at some time
in the
future we dispose of that asset for a lower amount than its carrying value,
our
historically reported total assets and net income would have been higher
than
they would have been during periods prior to our recognition of the loss
on
disposal of assets, and lower during the period when we recognize the
loss.
FOR
THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006 - RESULTS OF
OPERATIONS
REVENUE
AND GROSS MARGIN
Consolidated
revenue for the year ended September 30, 2007 increased to $53.8 million
from
$37.9 million in 2006, or a 42% increase. The U.S. revenues were $38.0
million
or 49% higher than the 2006 revenues of $25.4 million. The increase in
U.S.
revenues was fueled by the continuing increase in the demand for the Company's
TUTOPLAST® bone products for dental applications sold by Zimmer Dental, the
Company's distributor. In February 2006, the Company developed, in association
with Zimmer Dental, a new pericardium product, and in September 2006, a
new
dermis product to augment ridge restoration. Sales of dental products increased
from $17.6 million a year ago to $24.3 million in 2007, or a 38%
increase. Spine revenues increased 92%, from $2.9 million to $5.5
million, as the Company introduced two new machined grafts, Puros C and
Puros A
during the fourth quarter of fiscal year 2006 and an additional machined
graft,
Puros P, during 2007. Surgical specialties (primarily hernia repair,
breast reconstruction, urology, ophthalmology and ENT) increased to $8.1
million
in 2007 compared to $4.9 million in 2006, or a 65% increase, due to increased
product sales in the new markets of hernia repair and breast
reconstruction.
The
International operation had revenues of $15.8 million for the
year ended September 30, 2007, an increase of 27% from the 2006 revenues
of
$12.5 million. The increase is primarily due to increased sales in
certain key countries as well as $1.0 million in product sales to Zimmer
Dental
International related to the sale of an initial stocking order in August
2007.
An
analysis of revenue follows (In Thousands):
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
4th
Qtr
FY
2007
|
|
|
4th
Qtr
FY
2006
|
|
|
4th
Qtr
FY
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dental
|
|
$
|
24,329
|
|
|
$
|
17,616
|
|
|
$
|
13,785
|
|
|
$
|
6,232
|
|
|
$
|
4,666
|
|
|
$
|
4,115
|
|
|
Spine
|
|
|
5,516
|
|
|
|
2,877
|
|
|
|
3,128
|
|
|
|
1,794
|
|
|
|
1,461
|
|
|
|
336
|
|
|
Surgical
Specialties
|
|
|
8,139
|
|
|
|
4,937
|
|
|
|
4,839
|
|
|
|
2,394
|
|
|
|
1,417
|
|
|
|
1,129
|
|
|
Total
U.S.
|
|
|
37,984
|
|
|
|
25,430
|
|
|
|
21,752
|
|
|
|
10,420
|
|
|
|
7,544
|
|
|
|
5,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gemany
|
|
|
4,667
|
|
|
|
2,851
|
|
|
|
1,980
|
|
|
|
1,937
|
|
|
|
497
|
|
|
|
487
|
|
|
Rest
of
World
|
|
|
9,179
|
|
|
|
7,472
|
|
|
|
6,220
|
|
|
|
2,334
|
|
|
|
2,085
|
|
|
|
1,324
|
|
|
France
|
|
|
1,425
|
|
|
|
1,672
|
|
|
|
1,337
|
|
|
|
340
|
|
|
|
525
|
|
|
|
391
|
|
|
Other
- Distribution
Fees
|
|
|
564
|
|
|
|
522
|
|
|
|
571
|
|
|
|
146
|
|
|
|
135
|
|
|
|
170
|
|
|
Total
International
|
|
|
15,835
|
|
|
|
12,517
|
|
|
|
10,108
|
|
|
|
4,757
|
|
|
|
3,242
|
|
|
|
2,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated
|
|
$
|
53,819
|
|
|
$
|
37,947
|
|
|
$
|
31,860
|
|
|
$
|
15,177
|
|
|
$
|
10,786
|
|
|
$
|
7,952
|
|
Gross
margins for the year ended September 30, 2007 remained the same at 57%
compared
to 2006.
GENERAL
AND ADMINISTRATIVE
General
and administrative expenses increased in 2007 to $9.3 million from $7.8
million
in 2006. The increase was due
to unusual charges during the
fourth quarter of 2007 of $717,000 (associated with initial year audit
and
consulting costs related to complying with the Sarbanes-Oxley Act of 2002
of
$427,000 and the relocation of Company executives of $290,000), as well
as
increased stock option expense related to increased option activity in
2007 of
$310,000. We also had increased personnel salary, benefit and other
compensation expense of $696,000 which was directly related to the growth
of the
Company during 2007. General and Administrative expenses, as a percentage
of
revenues, decreased from 20% in 2006 to 17% in 2007.
DISTRIBUTION
AND MARKETING
Distribution
and marketing expenses increased in 2007 to $15.8 million from $12.3 million
in
2006. The increase was due mainly to higher marketing fees paid to Zimmer
Dental
of $9.8 million in 2007 versus $7.2 million a year ago as U.S. dental revenues
increased to $24.3 million in 2007 up from $17.6 million in 2006. In
addition sales and marketing expenses increased internationally due to
increased
expenses related to personnel, travel and other expenses due to the continued
growth internationally. As a percentage of revenues, Distribution and Marketing
expenses decreased from 32% in 2006 to 29% in 2007.
RESEARCH
AND DEVELOPMENT
Research
and development expenses totaled $2.2 million in 2007 compared to $1.8
million
in 2006. As a percentage of revenues, Research and development
expenses were 4% and 5% in 2007 and 2006, respectively.
INTEREST
AND OTHER INCOME
Other
income for 2007 increased to $367,000 compared to $108,000 in 2006. This
was
primarily the result of higher interest income from the $11.5 million in
net
proceeds received by the Company upon the completion of a private placement
financing in April 2007.
INTEREST
AND OTHER EXPENSE
Interest
expense in 2007 increased to $1,198,000 from $293,000 in 2006 due to increased
borrowings for capital expenditures related to the facility expansion programs
in Florida and Germany and interest expense associated with a $3.0 million
convertible debenture issued in June 2006.
INCOME
TAX (BENEFIT) EXPENSE
In
2007,
an income tax benefit of $4.2 million was recorded that consisted primarily
of a
valuation allowance reversal in the U.S. of $6.2 million, offset by income
tax
expense of $334,000 resulting from a reduction of the Company’s German tax rate,
with the remaining $1.7 million primarily relating to the utilization of
net
operating losses associated with taxable income. The valuation
allowance in the U.S. was reversed since we have determined that it is
more
likely than not that our existing deferred tax assets will be
realized.
NET
(LOSS) INCOME
The
net
income for the year ended September 30, 2007 totaled $6.8 million, $0.38
basic
and $0.36 diluted income per share as compared to a net loss of $0.6 million
or
$0.04 basic and diluted loss per share for 2006. The increase in net
income between the years is directly attributable to higher revenues,
maintaining gross margins and the overall tax benefit of $4.2
million.
ACCOUNTS
RECEIVABLE
The
accounts receivable balance nominally increased in 2007 to $6.5 million,
up from
$6.2 million in 2006.
INVENTORY
The
inventory balance increased to $17.4 million at September 30, 2007 from
$12.7
million at September 30, 2006. The increase was primarily due to the continued
growth of the Company and increased inventories associated with the introduction
of new spine, hernia and breast reconstruction products.
FOREIGN
CURRENCY TRANSLATION
The
functional currency of the Company’s German subsidiary is the Euro. Assets and
liabilities of foreign subsidiaries are translated at the period end exchange
rate while revenues and expenses are translated at the average exchange
rate for
the period. The resulting translation adjustments, representing unrealized,
non-cash gains and losses are recorded and presented as a component of
comprehensive income. Gains and losses resulting from transactions between
the
Company and its subsidiaries, which are made in currencies different from
their
own, are included in income as they occur and are included in Foreign exchange
loss in the Consolidated Statements of (Loss) Income and Comprehensive
(Loss)
Income. The Company recognized transaction losses of $118,000, $311,000
and
$173,000 in 2007, 2006 and 2005, respectively.
EFFECTS
OF INFLATION
The
Company believes the impact of inflation and changing prices on net sales
revenues and on operations has been minimal during the past three
years.
FOR
THE YEARS ENDED SEPTEMBER 30, 2006 AND 2005 - RESULTS OF
OPERATIONS
REVENUE
AND GROSS MARGIN
Revenue
for the year ended September 30, 2006 increased to $37.9 million from $31.9
million in 2005. The U.S. revenues were $25.4 million or 17% higher than
the
2005 revenues of $21.8 million. The increase in U.S. revenues was fueled
by the
continuing increase in the demand for the Company's TUTOPLAST® bone products for
dental applications sold by Zimmer Dental, the Company's distributor. In
February 2006, the Company developed, in association with Zimmer Dental,
a new
pericardium product, and in September 2006, a new dermis product to augment
ridge restoration. Sales of dental products increased 28% from a year
ago. Spine revenues decreased 9% as the Company transitions from
traditional spine grafts to specialty machined grafts. The Company
introduced two new machined grafts, Puros C and Puros A during the fourth
quarter of fiscal year 2006. Surgical specialties (primarily urology,
ophthalmology and ENT) remained flat for 2006 compared to 2005.
The
International operation had revenues of $12.5 million for the year ended
September 30, 2006, an increase of 24% from the 2005 revenues of $10.1
million. The increase is primarily due to additional sales in Germany
related to increased bovine product sales, dental sales and service processing
and increased sales efforts by several key distributors in various
countries.
Gross
margins for the year ended September 30, 2006 increased to 57% from 37%
in
2005. The higher margins were due to (1) improved efficiencies in the
U.S. manufacturing operations; and (2) the introduction of new products
with
higher margins. In addition, during fiscal year 2005, the gross
margin was impacted by initial start-up manufacturing costs of $1.6 million
associated with shifting production of the dental product lines from Germany
to
the U.S. and the recording of $1.25 million in expenses due to inventory
write-down and certain accruals associated with the voluntary recall of
products.
GENERAL
AND ADMINISTRATIVE
General
and administrative expenses increased in 2006 to $7.8 million from $5.8
million
in 2005. The increase was due to several charges including $437,000 in
severance
costs associated with the replacement of the Managing Director of the Company’s
German subsidiary, $217,000 in legal, accounting and other professional
costs
associated with the restatement of prior period financial results and $262,000
related to strategic discussions with Zimmer Holdings. The Company
incurred, for the first time, $451,000 in stock option expenses associated
with
the adoption of Statement of Financial Accounting Standards No.
123(R). In addition, the Company incurred increased legal expenses of
approximately $250,000 and accounting and audit fees of approximately $200,000
for various projects in 2006. As a result, General and Administrative
expenses, as a percentage of revenues, increased from 18% in 2005 to 20%
in
2006.
DISTRIBUTION
AND MARKETING
Distribution
and Marketing expenses increased in 2006 to $12.3 million from $11.5 million
in
2005. The increase was due mainly to higher marketing fees paid to Zimmer
Dental
of $7.2 million in 2006 versus $6.1 million in 2005 as dental
revenues increased to $17.6 million in 2006 up from $13.8 million in
2005. As a percentage of revenues, Distribution and Marketing
expenses decreased from 36% in 2005 to 33% in 2006.
RESEARCH
AND DEVELOPMENT
Research
and Development expenses of $1.8 million were similar in 2006 to $1.7 million
in
2005. As a percentage of revenues, Research and Development expenses
remained at 5% in 2006 and 2005, respectively.
LITIGATION
CONTINGENCY
In
2004,
a decision by the court of appeal in Germany has resulted in a reduction
of the
original proposed judgment received against the Company by $406,000 between
the
Company and a former international distributor. At September 30, 2005,
the
Company maintained an accrual of $476,000 with respect to the remaining
appeal
and legal costs. At September 30, 2006, the Company agreed to a
settlement of $360,000 resulting from a dispute between the Company and
a former
international distributor and recorded a change in estimate of approximately
$91,000 as a reduction of accrued expenses, which reduced the general and
administrative expense for the year. The remaining accrual will be
used to settle final nominal legal and court costs.
OTHER
INCOME
Other
income for 2006 increased to $108,000 compared to $77,000 in 2005. This
was
primarily the result of higher interest income on bank balances in
2006.
INTEREST
EXPENSE
Interest
expense in 2006 increased to $293,000 from $130,000 in 2005 due to increased
borrowings for capital expenditures related to the facility expansion programs
in Florida and Germany and interest expense associated with a $3.0 million
convertible debenture issued in June 2006.
INCOME
TAX (BENEFIT) EXPENSE
The
income tax benefit is mainly due to the income tax benefit on the loss
from the
Company’s foreign operations. There was no effect related to
the U.S. operations since the Company had recorded a full valuation
allowance.
NET
(LOSS) INCOME
The
net
loss for the year ended September 30, 2006 totaled $.6 million, $.04 basic
and
diluted loss per share as compared to a net loss of $7 million or $.44
basic and
diluted loss per share for 2005. The reduction in net losses between
the years is directly attributable to higher revenues and improved gross
margins
during 2006.
ACCOUNTS
RECEIVABLE
The
accounts receivable balance increased in 2006 to $6.2 million, up from
$3.5
million in 2005 due to increased revenue growth, particularly during the
fourth
quarter of 2006. In addition, for certain international distributors,
payment terms have been extended from 60 to 90 days contributing to higher
receivable balances in 2006.
INVENTORY
The
inventory balance increased to $12.7 million at September 30, 2006 from
$9.6
million at September 30, 2005. The increase was primarily due to replacing
$1.0
million of inventory written-off during 2005 due to the voluntary recall
of
certain products, and increased inventories associated with the recent
introduction of new products.
FOREIGN
CURRENCY TRANSLATION
The
functional currency of the Company’s German subsidiary is the Euro. Assets and
liabilities of foreign subsidiaries are translated at the period end exchange
rate while revenues and expenses are translated at the average exchange
rate for
the period. The resulting translation adjustments, representing unrealized,
non-cash gains and losses are made directly to comprehensive income. Gains
and
losses resulting from transactions between the Company and its subsidiaries,
which are made in currencies different from their own, are included in
income as
they occur and are included in Foreign exchange loss in the Consolidated
Statements of (Loss) Income and Comprehensive (Loss) Income. The Company
recognized transaction losses of $311,000, $173,000 and $700,000 in 2006,
2005
and 2004, respectively.
EFFECTS
OF INFLATION
The
Company believes the impact of inflation and changing prices on net sales
revenues and on operations has been minimal during the past three
years.
CONCENTRATION
OF RISK
Distribution
— The majority of the Company’s revenues are derived through the
Company’s relationships with two companies, Zimmer Dental and Zimmer Spine which
contributed approximately 48% and 10%, respectively, of the Company’s
consolidated revenues during 2007. Internationally, Zimmer Dental is
a stocking distributor for the Company. If the Company’s relationship
with Zimmer is terminated or further reduced for any reason and we are
unable to
replace the relationship with other means of distribution, the Company
would
suffer a material decrease in revenues and it would materially and adversely
affect the results of operations.
Tissue
Supply
— The Company’s business is dependent on the
availability of donated human cadaver tissues supplied by donor recovery
groups. Our four largest recovery groups together supplied
approximately 91% of our total human tissue during 2007. Any
significant interruption in the availability of human tissue would likely
cause
the Company to slow down the processing and distribution of the Company’s human
tissue products, which could adversely affect the Company’s ability to supply
the needs of the Company’s customers and materially and adversely affect the
results of operations and the relationships with customers.
Trade
Receivables
— As of September 30, 2007, there were no customers
that represented more than 10% of the Company’s outstanding trade
receivables.
LIQUIDITY
AND CAPITAL
RESOURCES
At
September 30, 2007 and 2006, the Company had working capital of $29.1 million
and $8.2 million, respectively. The increase was primarily due from
net proceeds of $11.5 million from a private placement financing completed
in
April 2007, increased revenues and profits for 2007 and the reduction of
short
term borrowings and long-term debt in 2007 of $5.6 million.
Cash,
cash equivalents and short-term marketable securities increased to $12.8
million
in 2007 from $3.5 million in 2006 as a direct result of the private placement
financing in April and increased revenues and profits during 2007.
Net
cash
used in investing activities, representing purchases of capital expenditures,
was $2.3 million in 2007 and $6.0 million in 2006. The continued
spending on capital expenditures is due to the facility expansion in the
Florida
and German manufacturing locations and manufacturing equipment to support
the
continued growth of the Company.
Net
cash
from financing activities in 2007 totaled $9.8 million as a result of net
proceeds of $11.5 million, and $1.8 million from the exercise of stock
options
offset by the repayment of short-term and long-term debt. Net cash
from financing activities for 2006 totaled $7.9 million as a result of
proceeds
related to revolving credit facilities, a $3.0 million convertible debenture,
additional long-term debt and capital leases.
Under
the
terms of revolving credit facilities with two German banks, the Company
may
borrow up to 1.5 million Euros (1 million Euros and .5 million Euros,
respectively) or approximately $2.1 million for working capital
needs. These renewable credit lines allow the Company to borrow at
interest rates ranging from 7.25% to 10.25%. At September 30, 2007,
the Company had no borrowings under the revolving credit
agreements. At September 30, 2006, the Company had outstanding
borrowings of 819,000 Euros or $1 million. The .5 million Euro
revolving credit facility is secured by accounts receivable of the German
subsidiary. The 1 million Euro revolving credit facility is secured
by a mortgage on the Company’s German facility and a guarantee by the parent
company.
In
November 2005, the Company entered into a revolving credit facility in
the U.S.
for up to $1.5 million, expiring on November 18, 2008. At September 30,
2007,
the Company had no outstanding borrowings on this credit facility. At September
30, 2006, the Company had outstanding $1.5 million on this credit facility
to
fund working capital needs. The U.S. accounts receivable and
inventory assets secure the borrowing under the revolving credit
facility. The Company is required to maintain a maximum senior debt
to tangible net worth ratio of 2.0 to 1.0. As of September 30, 2007,
the Company was in compliance with this covenant.
On
June
30, 2006, the Company issued a $3.0 million convertible debenture with
detachable warrants to purchase up to 175,000 shares of its common stock.
The
debenture bears interest at 5.0% per year, is due upon the earlier of 12
months
or upon a change of control of the Company and is convertible into common
stock
at a price of $5.15 per share at any time at the election of the holder.
The
warrants are exercisable at $5.15 per share at any time at the election
of the
shareholder until the earlier of the third anniversary of the date of issuance
or upon a change in control of the Company. The convertible debt is
included in short-term borrowings on the consolidated balance sheet at
September
30, 2006. In April and May of 2007, the $3.0 million debenture
holders fully converted into common stock. In November, 2007, the
175,000 warrants had been fully exercised into common stock.
Senior
debt consists of four loans with a German bank. The first loan
($516,000 as of September 30, 2007) has an interest rate of 5.75%, payable
monthly, maturing March of 2011. The second loan ($1,606,000 as of
September 30, 2007) has an interest rate of 5.15%, payable quarterly, maturing
March of 2012. The third loan ($1,491,000 as of September 30, 2007)
payable semi-annually (55,000 Euros) is at a fixed rate of 5.6% maturing
December 2016. The fourth loan ($321,000 as of September 30, 2007) is
payable quarterly at a fixed rate of 5.75% maturing September 2012.
The
senior debt and a revolving credit facility with a German bank are secured
by a
mortgage on the Company's German facility and is guaranteed by the parent
company. There are no financial covenants under this debt.
The
capital lease debt consists of two leases. The first lease (initially
$1.3 million, with $470,000 of accumulated amortization as of September
30,
2007) is payable monthly at $55,000 per month and matures April of
2008. The lease is secured by leasehold improvements and equipment
located at the Company's Florida tissue processing facility. The second
lease
(initially $240,000, with $157,000 of accumulated amortization as of September
30, 2007) is payable at $21,000 quarterly and matures March 31, 2008. The
lease
is secured by equipment located at the Company’s Florida tissue processing
facility. As of September 30, 2007, the Company is in compliance with
the terms and conditions of the capital lease debt.
The
Company's future minimum commitments and obligations under current operating
leases for its offices and manufacturing facilities in the U.S. and Germany,
as
well as several leases related to office equipment and automobiles through
2013
total $2,295,000. The Company considers these commitments and obligations
to be
reasonable in order to maintain the current and future business
requirements.
The
following table summarizes the Company's contractual obligations as of
September
30, 2007:
|
(In
Thousands)
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt obligations
(1)
|
|
$
|
4,047
|
|
|
$
|
769
|
|
|
$
|
772
|
|
|
$
|
756
|
|
|
$
|
684
|
|
|
$
|
360
|
|
|
$
|
706
|
|
|
Operating
lease
obligations
|
|
|
2,295
|
|
|
|
1,336
|
|
|
|
691
|
|
|
|
162
|
|
|
|
83
|
|
|
|
21
|
|
|
|
2
|
|
|
Capital
lease obligations
(1)
|
|
|
512
|
|
|
|
512
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Short-term
borrowings
(1)
|
|
|
356
|
|
|
|
356
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
7,210
|
|
|
$
|
2,973
|
|
|
$
|
1,463
|
|
|
$
|
918
|
|
|
$
|
767
|
|
|
$
|
381
|
|
|
$
|
708
|
|
The
Company maintains current working capital credit lines totaling 1.5 million
Euros (approximately $2.1 million at September 30, 2007) with two German
banks
and a $1.5 million credit line with a U.S. bank. At September 30, 2007,
the
Company had no outstanding balances on the working capital lines in Germany
and
the U.S. Management believes that the working capital as of September
30, 2007 is adequate to fund ongoing operations for at least the next
12-months. The Company may seek additional financing to meet the
needs of its long-term strategic plan. The Company can provide no assurance
that
such additional financing will be available, or if available, that such
funds
will be available on favorable terms.
The
Company's ability to generate positive operational cash flow is dependent
upon
increasing processing revenue through increased recoveries by tissue banks
in
the U.S. and Europe, controlling costs, and the development of additional
markets and surgical applications for its products worldwide. While the
Company
believes that it continues to make progress in these areas, there can be
no
assurances.
OFF-BALANCE
SHEET ARRANGEMENTS
Guarantees
–
In October 2005, the parent company agreed to provide a guarantee up to
4
million Euros for the Company’s German subsidiary’s debt to a German
bank. At September 30, 2007, total debt outstanding to the German
bank was 2.8 million Euros.
The
Company has no other off-balance sheet arrangements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
In
the
United States and in Germany, the Company is exposed to interest rate risk.
Changes in interest rates affect interest income earned on cash and cash
equivalents and interest expense on revolving credit arrangements. Except
for an
interest swap associated with $1.6 million of long term debt over six years
starting March 31, 2006, the Company does not enter into derivative transactions
related to cash and cash equivalents or debt. Accordingly, we are subject
to
changes in interest rates. Based on September 30, 2007 cash and cash equivalents
and long-term debt, a 1% change in interest rates would have a de-minimus
impact
on our results of operations.
The
value
of the U.S. dollar compared to the euro affects our financial results.
Changes
in exchange rates may positively or negatively affect revenues, gross margins,
operating expenses and net income.
The international
operations currently transacts
business primarily in the Euro. Intercompany transactions translate
from the Euro to the U.S. dollar. Based on September 30, 2007
outstanding intercompany balances, a 1% change in currency rates would
have a
de-minimus impact on our results of operations.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The
information required by this Item is found immediately following the signature
page of this Report.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
ITEM
9A. CONTROLS AND PROCEDURES.
Evaluation
of Disclosure Controls and
Procedures
Our
management carried out an evaluation
required by
paragraph (b)
of
Rule 13a-15
and
15d-15
under the Securities
Exchange Act of
1934, as amended (the “Exchange Act”), under the supervision and with the
participation of our Chairman, President and Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as defined in Rule 13a-15
(e) and 15d-15(f)
under the Exchange Act (“Disclosure
Controls”). Based on the evaluation, our C
hief
E
xecutive
O
fficer
and C
hief
F
inancial
O
fficer
concluded that as of
September 30, 2007
,
our Disclosure Controls are effective
in timely alerting them to material information required to be included
in our
reports filed with the SEC.
Management’s
Report on Internal Control
Over Financi
al
Reporting
Management
is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Securities
Exchange Act of 1934. Under the supervision and with the participation
of the
Company’s management, including its principal executive officer and principal
financial officer, the Company conducted an evaluation of the effectiveness
of
the Company’s internal control over financial reporting as of September 30,
2007 as required by the Securities Exchange Act of 1934 Rule 13a-15(c). In
making this assessment, the Company used the criteria set forth by the
Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control
-
Integrated Framework. Based
on its evaluation, management concluded that its internal control over
financial
reporting was effective as of September 30, 2007.
The
Company’s internal control over
financial reporting as of September 30, 2007 has been audited by
Deloitte &
Touche
LLP, an independent
registered public accounting firm, as stated in their report which
is included herein.
.
Changes
in Internal Controls
There
were no changes in our internal control over financial reporting, identified
in
connection with the evaluation of such internal control that occurred during
the
fourth quarter of our last fiscal year, that have materially affected,
or are
reasonably likely to materially affect, our internal control over financial
reporting.
Attestation
Report of Independent Registered Public Accounting Firm
Please
see page F-1 of our financial statements included herein.
ITEM
9B. OTHER INFORMATION.
Not
Applicable.
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
.
The
following table sets forth the names and ages of the directors and executive
officers of the Company and the Managing Director of the German subsidiary
(who
is determined to be a key employee), the positions and offices held by
each of
them with the Company, and the period during which each served in such
position.
Each Director serves for a term of one (1) year, until his successor is
duly
elected and qualified.
|
Name
|
Age
|
Positions/Offices
|
Period
Served in
Office/Position
|
|
G.
Russell
Cleveland
|
69
|
Director
|
1997
– present
|
|
Roy
D. Crowninshield, Ph.D.
|
59
|
Chairman
of the Board
Director
Interim
Chief Executive Officer
|
July
2004 – present
2003
– present
July
2004 - December 2004
|
|
Neal
B. Freeman
|
67
|
Director
|
June
2005 – present
|
|
J.
Harold Helderman, MD
|
62
|
Director
|
1997
– present
|
|
Udo
Henseler, PH.D.
|
68
|
Director
|
June
2005 – present
|
|
L.
Robert Johnston, Jr.
|
47
|
Chief
Financial Officer & Secretary
|
February
2006 – Present
|
|
Guy
L. Mayer
|
56
|
President
& Chief Executive Officer
Director
|
January
2005 – present
January
2005 – present
|
|
Claude
O. Pering
|
61
|
Vice
President and Chief Operating Officer
|
January
2005 – present
|
|
Clifton
J. Seliga
|
55
|
Vice
President of Global Sales & Marketing
|
January
2005 – present
|
|
Adrian
J. R. Smith
|
63
|
Director
|
June
2005 – present
|
|
Carlton
E. Turner, Ph.D.
|
67
|
Director
|
2000
- present
|
|
Karl
H. Koschatzky
|
60
|
President
of International Operations
|
June
2006 – Present
|
The
following is a summary of the business experience of each of the persons
listed
in the above-referenced table.
G.
RUSSELL CLEVELAND has been the President, Chief
Executive Officer, sole Director, and majority shareholder of Renaissance
Capital Group, Inc. He is also President, Chief Executive Officer,
and a director of Renaissance Capital Growth & Income Fund III, Inc. Mr.
Cleveland is a Chartered Financial Analyst with more than thirty-five (35)
years
experience as a specialist in investments for smaller capitalization companies.
A graduate of the Wharton School of Business, Mr. Cleveland has served
as
President of the Dallas Association of Investment Analysts. Mr. Cleveland
currently serves on the Boards of Directors of Renaissance U.S. Growth
&
Income Trust PLC, Cover-All Technologies, Inc., Digital Recorders, Inc.,
Integrated Security Systems, Inc., Camino-Soft, Inc. and Precis,
Inc.
ROY
D.
CROWNINSHIELD, PH.D. is the current Chairman of the Board. From July 2004
to
December 2004, Dr. Crowninshield was the Interim Chief Executive Officer
of the
Company. Prior to joining Tutogen, Dr. Crowninshield served twenty-one
(21)
years in various capacities at Zimmer Holdings, Inc., including President
of
Zimmer's U.S. operations and most recently as the Company's Chief Scientific
Officer. Prior to joining Zimmer, Inc. in 1983, he was a faculty member
at the
University of Iowa where he led many research projects evaluating the function
of total joint implants. He currently holds academic appointments as a
professor
in the Orthopedic Surgery Department at Rush Medical College in Chicago,
Illinois and as an adjunct professor in the College of Engineering of the
University of Notre Dame. He holds undergraduate and doctorate degrees
from the
University of Vermont. He has worked in the orthopedic industry for over
twenty
(20) years and has extensive experience in the research and development,
manufacture, and clinical investigation of orthopedic implants. He has
authored
more than 100 journal articles, book chapters, and published abstracts
in
orthopedics and engineering.
NEAL
B.
FREEMAN has been the Chairman of the Board and Chief Executive Officer
of The
Blackwell Corporation since 1981, an advisory firm, with clients in the
communications, defense and wealth management industries. He is also
Chairman of The Foundation Management Institute and Chairman of the Board
of
Advisors of the investment advisory firm, Train Babcock Advisors and Director
of
North American Management Corp.
J.
HAROLD
HELDERMAN, MD has been a Professor of Medicine, Microbiology and Immunology
since 1999 and the Medical Director of the Vanderbilt Transplant Center
since
1989. From, 1999 to 2007, he served as the Dean of
Admissions at Vanderbilt University, Nashville,
Tennessee. . Dr. Helderman received his medical degree from the State
University of New York, Downstate Medical Center in 1971, Summa Cum Laude.
In
addition to book and monograph writings, he has authored more than 125
publications in his field of transplant medicine. Dr. Helderman is past
President of the American Society of Transplantation.
UDO
HENSELER,, Ph.D.
,
has been the President and proprietor of Management
Services International , a private business, since 1994. MSI provides business
development services for biotechnology and life sciences firms at various
stages
of their corporate evolution. From 2002 to 2005, Dr. Henseler was the Chief
Executive Officer and Chairman of eGene, Inc., a public biotechnology company,
and further served as a Director in 2006. Dr. Henseler has over forty (40)
years
combined global public and private company leadership experience in the
biopharmaceutical and life science sectors, including positions as Director,
Board Chair, Audit Committee Chair, Chief Executive Officer, Chief Financial
Officer, and Executive Vice President. He also taught at the now Peter
F.
Drucker and Masatoshi Ito Graduate School of Management, CGU. Dr. Henseler
earned his B.A. in Germany, an MBA from Fairleigh Dickinson University
in New
Jersey, and Master's and Ph.D. degrees from the Claremont Graduate University
in
Claremont, California. Dr. Henseler is also a Certified Public and Certified
Management Accountant and currently serves as Director and Chair of the
Audit
Committee of Spire Corporation, a public company.
L.
ROBERT JOHNSTON, JR. has been the Company’s Chief Financial
Officer and Secretary since 2006. Prior to joining Tutogen, Mr.
Johnston served as Chief Financial Officer of Power Medical Interventions
, a
privately held medical device company providing surgical stapling products,
from
2004 to 2005. Prior to joining Power Medical, from 2002 to 2004, Mr. Johnston
served as an independent consultant for Pittsburgh Life Sciences Greenhouse
Executive Corps Program. For the four years prior to joining
Pittsburgh Life Sciences, Mr. Johnston was Executive Vice President and
Chief
Financial Officer for Cellomics, Inc. a Pittsburgh, Pennsylvania company
providing instrumentation, software and assays for automated cellular analysis
for drug discovery in pharmaceutical, biotechnology and academia
sectors. Prior experience also includes management positions with
Oncormed, Inc. as Chief Financial Officer, American Mobile Satellite Corporation
(now Motient Corp) as Assistant Treasurer, and Sovran Bank of Maryland
as
Assistant Vice President. Mr. Johnston is a 1986 MBA Graduate of the
Colgate Darden Graduate School of Business Administration, University of
Virginia and received his BA in History and Spanish in 1982 from the University
of Virginia.
GUY
L.
MAYER has been the Company's President and Chief Executive Officer since
2005. Prior to joining Tutogen, Mr. Mayer served as Chairman and
Chief Executive Officer of Visen Medical, a private Biotech company focused
on
Molecular Imaging technologies, from 2003 to 2004. Prior to
joining Visen, Mr. Mayer served as President and Chief Executive Officer
of ETEX
Corporation, a private biomedical company based in Cambridge, Massachusetts
from
2000 to 2003. For 13 years prior to joining ETEX, Mr. Mayer held various
senior
positions at Zimmer Inc., then a division of Bristol Myers Squibb, with
sales in
excess of $1.2 billion. Mr. Mayer's positions at Zimmer included President
Global Products Group, President Orthopedics Implant division, President
Zimmer
Japan and Sr. Vice President Zimmer International. Prior experience includes
general management positions with Picker International in diagnostic imaging,
and American Hospital Supply Corporation. Mr. Mayer is a 1974 Graduate
of the
University of Ottawa and currently serves on the Board of Directors of
Spire
Corporation , a public company, and on the Board of Directors of several
private
companies.
CLAUDE
O.
PERING has been the Company’s Vice President and Chief Operating Officer of U.S.
Operations since 2005. Prior to joining Tutogen, Mr. Pering served as
Principal of CoperTech, LLC from 2002 to 2005 providing consulting services
to
client companies in the medical device, biotechnology and pharmaceutical
industries. For the three years prior from 1999 to 2002, Mr. Pering
was President and Chief Operating Officer for Hayes Medical, Inc., a
manufacturer and worldwide marketer of orthopaedic total joint implant
products. For the three years prior to joining Hayes Medical, Inc.,
Mr. Pering was Executive Vice President and Chief Operating Officer for
Norian
Corporation, a developer, manufacturer and global marketer of biotechnology
products that was acquired by Synthes, Inc. Prior
experience also includes six years as Vice President Operation/Chief Operating
Officer for Ace Medical Company (acquired by DePuy, Inc.) and three years
as
Corporate Director of Quality Assurance/Group Manager of Quality Engineering
for
Zimmer, Inc. Mr. Pering is an MBA Graduate, Indiana Wesleyan
University, Marion, Indiana and received his BA in Chemistry, Microbiology,
and
Psychology from Drury University, Springfield, Missouri.
CLIFTON
J. SELIGA has been the Company’s Vice President of Global Sales and
Marketing since 2005. Prior to joining Tutogen, Mr. Seliga served as
Principal of C. J. Seliga, LLC from 2002 to 2005, providing consulting
services
to senior management in the areas of business planning, strategic development,
marketing, new product planning, sales and distribution. For the
three years prior from 1998 to 2001, Mr. Seliga was Senior Vice President,
General Manager for ETEX Corporation, a private biomedical company based
in
Cambridge, Massachusetts. For the six years prior to joining ETEX,
Mr. Seliga held various senior positions at Zimmer, Inc., Division of Bristol
Myers Squibb, including Vice President – Global Marketing and Director of
Product Management. Prior experience also includes marketing and
sales management positions with Richard-Allan Medical Industries and Richard
Wolf Medical Instruments Corporation. Mr. Seliga is an MBA Graduate,
Marketing and Management, Northwestern University, Kellogg Graduate School
of
Management, Evanston, Illinois. He has a Master of Science
(Research), Anatomy, St. Louis University and a BA in Biological Science,
Chemistry (minor) from Southern Illinois University.
ADRIAN
J.R. SMITH has been the Chief Executive Officer of The Woolton Group since
1997. He is also the Non-Executive Chairman of Gaming VC S.A., and a
Non-Executive Director of Byotrol plc. His business career includes
13 years in the professional services industry and 24 years with two Fortune
500
companies. He has been a Global Managing Partner, Marketing & Communication
at Deloitte Touche Tohmatsu, the Chief Executive Officer of Grant Thornton
LLP,
and a Managing Partner at Arthur Andersen in the early to mid-1990's. He
held
senior international management roles with Ecolab Inc. and also with Procter
& Gamble. He serves on the board of the Education Foundation of Indian River
County in Florida.
CARLTON
E. TURNER, PH.D., D.SC. has been the President and Chief Executive Officer
of
Carrington Laboratories, Inc. ("Carrington") (NASDAQ: CARN) since April
1995.
Carrington is a research-based pharmaceutical and medical device company
in the
field of wound care products. Dr. Turner has also served as the Chief Operating
Officer from November 1994 to April 1995 and as the Executive Vice President
of
Scientific Affairs from January 1994 to November 1994 at Carrington. Before
that, he was the President, Chief Operating Officer and Founder of Princeton
Diagnostic Laboratories of America from 1987 to 1993. From 1981 to 1987,
he was
an Assistant to President Ronald Reagan with Cabinet Rank and Director
of the
White House Drug Policy Office. Previously, he was a Research Professor
and
Director of the Research Institute of Pharmacological Science, University
of
Mississippi.
KARL
H.
KOSCHATZKY, PH.D. is the President of International Operations for the
Company’s
German subsidiary. Dr. Koschatzky has served in a variety of
capacities within the Company, beginning in 1993 as the Technical Director
of
international operations. In 1994 Dr. Koschatzky’s role expanded to
include the planning and implementation of U.S. operations. In 1999, he
was
promoted to Vice President Research and Development. In the third
quarter 2006, Dr. Koschatzky was assigned the additional role of General
Manager
of German Operations. For the 11 years prior to Tutogen, Dr.
Koschatzky served as Manager of Operations, Wound Care Unit, Pfrimmer-Viggo
GmbH
from1984 to1993 and Scientific Manager, Wound Care Business, Lyofil Pfrimmer
GmbH from 1982 to 1984. Dr. Koschatzky received his Ph.D. from the
University of Erlangen-Nurnberg in 1979 and Diplom-Chemist from 1969 to
1976.
COMPLIANCE
WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The
Company believes that the reporting
requirements, under Section 16(a) of the Exchange Act, for all its executive
officers, directors, and each person who is the beneficial owner of more
than
10% of the common stock of a company were satisfied except for the
following: Messrs. Cleveland, Crowninshield, Freeman, Helderman,
Henseler, Mayer, Pering, Seliga and Smith filed a late Form 4 Report, each
relating to one transaction involving the granting or exercise of an
option. Dr. Turner filed two late Form 4 Reports, one relating to the
grant of an option and the other relating to the exercise of options and
sale of
the shares received upon exercise.
CODE
OF ETHICS
We
have
adopted a code of business conduct and ethics that applies to all of our
employees, including our principal executive officer, principal financial
officer and directors. The text of the code of business conduct and ethics
is
posted on our website at www.tutogen.com. Disclosure regarding any amendments
to, or waivers from, provisions of the code of business conduct and ethics
that
apply to our directors, principal executive and financial officers will
be
included in a Current Report on Form 8-K within four business days following
the
date of the amendment or waiver, unless website posting of such amendments
or
waivers is then permitted by the rules of the American Stock Exchange,
Inc.
COMMITTEES
OF THE BOARD OF DIRECTORS
Compensation
Committee. The Compensation Committee is composed of Dr. Helderman, Dr.
Turner
and Mr. Freeman, and is chaired by Dr. Turner. Each member of the Committee
is a
non-management director. This Committee approves, administers and
interprets our compensation and benefit policies, including our executive
bonus
programs. It reviews and makes recommendations to our board of directors
to
ensure that our compensation and benefit policies are consistent with our
compensation philosophy and corporate governance principles. This Committee
is
also responsible for establishing our CEO's compensation.
Audit
Committee. The Audit Committee is composed of Messrs. Cleveland and Smith
and
Dr. Henseler and is chaired by Dr. Henseler. This Committee has general
responsibility for the oversight and surveillance of our accounting, reporting
and financial control practices. Among other functions, the Committee retains
our independent public accountants. Each member of the Committee is a
non-management director. All members of the Audit Committee are considered
to be
"financial experts" within the definition of that term under the regulations
of
the Securities Act. All of the members of the Audit Committee are
independent, as such term is defined by Section 121.A of the American Stock
Exchange listing standards.
Nominating
Committee. The Nominating Committee is composed of Messrs. Smith and Freeman,
Dr. Helderman and Dr. Henseler and is chaired by Dr. Helderman. Each member
of
the Committee is a non-management director. This committee nominates directors
for election by the board or by stockholders and nominates directors for
membership on the committees of the board.
ITEM
11. EXECUTIVE COMPENSATION.
COMPENSATION
DISCUSSION AND ANALYSIS
Compensation
Philosophy
The
Company’s overall compensation philosophy for our executive officers is to
provide compensation programs that are simple and flexible so that our
arrangements are understandable by our employees and shareholders and so
as to
permit us to make responsive adjustments to changing market
conditions.
Goals
The
goals
of the Company’s compensation program are to:
|
·
|
Successfully
attract and retain the key employees necessary to achieve the
long-term
success of the Company;
|
|
·
|
Provide
incentive compensation that varies in concert with both Company
performance against established goals based upon the Company’s operating
plan and the value of the individual contribution to that
performance;
|
|
·
|
Motivate
and reward executives whose knowledge, skills and performance
are critical
to our success; and
|
|
·
|
Set
compensation and incentive levels that reflect competitive market
practices.
|
Elements
of Compensation
Our
Compensation Committee has established a compensation program with four
(4)
basic elements to support and balance the goals:
|
·
|
Base
Salary
– The base salary is intended to provide a foundation to
motivate continued services to the Company and should appropriately
reflect the duties and responsibilities related to the
position. Establishing the base salary level is critical in
allowing the Company to successfully attract and retain the employees
necessary for its long-term
success.
|
|
·
|
Cash
Incentive Bonuses
– Our executives are eligible to receive annual cash
incentive bonuses primarily based upon their performance during
the year
as measured against predetermined Company and personal performance
goals
established by us, including financial measures and the achievement
of
strategic objectives. The primary objective of our annual cash
incentive bonuses is to motivate and reward our employees, including
our
named executive officers, for meeting our short-term objectives
using a
pay-for-performance program with objectively determinable performance
goals.
|
|
·
|
Equity
Incentive Awards
– The long-term component of the Company’s incentive
compensation program consists of the grant of traditional stock
options. Grants are made pursuant to the terms of the Company’s
stock option plans. These equity incentives are designed to
create a mutuality of interest with shareholders by motivating
the
executive officers to make effective decisions and manage the
Company’s
business so that the shareholders’ investment will grow in value over
time. The equity incentives also reward longevity and increase
retention, as the Company does not maintain a defined benefit
pension plan
or provide other post-retirement medical or life insurance
benefits. The equity incentives awarded are intended to provide
incentives for executive officers to enhance long-term Company
performance, as reflected in stock price appreciation over the
long term,
thereby increasing shareholder
value.
|
|
·
|
Severance
and Change-in-Control Benefits
– Each of the Company’s executive
officers have certain severance benefits in the event of involuntary
termination, resulting from a change-in-control as
defined. These severance provisions are described in the
“Employment Agreements” section included in this
Report.
|
Determination
Process
Compensation
Committee meetings typically have included preliminary discussions with
our
Chief Executive Officer prior to our Compensation Committee deliberating
without
any members of management present. Our Compensation Committee has
also involved outside counsel in its deliberations as needed. For
compensation decisions, including decisions regarding the grant of stock
options
relating to executive officers (other than our Chief Executive Officer),
the
Compensation Committee considers the recommendations of our Chief Executive
Officer and includes him in its discussions.
Compensation
Program for Fiscal Year 2007
Base
Salaries
Base
salaries are determined by evaluating an executive officer’s level of
responsibility and experience and the Company’s
performance. Increases to base salaries, if any, are driven primarily
by individual performance and comparative data from our peer
group. Individual performance is evaluated by reviewing the executive
officer’s success in achieving business results, promoting our core values and
demonstrating leadership abilities.
In
setting the base salary of the executive officers for fiscal year 2007,
the
Compensation Committee reviewed the compensation of comparable executive
officers from our peer group. The Compensation Committee also
considered the Company’s achievement of its short- and long-term
goals.
The
salaries paid to the executive officers during fiscal year 2007 are shown
in the
Summary Compensation Table on page 28.
Cash
Bonus Awards
Under
the
Bonus Plan, an executive’s potential bonus is established at a specific targeted
dollar amount and consists of non-discretionary awards that are tied to
the
financial performance of the Company. Each year, in formulating the
bonus targets, the Compensation Committee members consider the anticipated
financial achievement of the Company. The Committee evaluates the
executive officer’s responsibilities and role in the Company and such other
factors as they deem relevant to motivate such executives to achieve certain
performance levels. In addition to the financial performance measures
that the Compensation Committee uses to determine bonuses under the Bonus
Plan,
there is also a subjective management criteria based on individual
objectives.
Annual
Bonus Plan for 2007 for Executive Officers
and
Dr. Karl Koschatzky
|
|
|
Mr.
Mayer
|
|
Mr.
Johnston
|
|
Mr.
Pering
|
|
Mr.
Seliga
|
|
Mr.
Koschatzky
|
|
Target
Incentive Compensation
(%
of Base Salary)
|
|
60%
|
|
30%
|
|
30%
|
|
30%
|
|
30%
|
In
2006,
bonuses were approved as follows: Mr. Mayer ($226,113), Mr. Johnston
($65,162), Mr. Pering ($63,533), Mr. Seliga ($60,275) and Dr. Koschatzky
($52,927). These bonuses were paid in November 2007 by the
Compensation Committee based on the standards set out above.
Stock
Options
An
important objective of the long-term incentive program is to strengthen
the
relationship between the long-term value of our stock price and the potential
financial gain for employees. Stock options provide executive
officers with the opportunity to purchase our common stock at a price fixed
on
the grant date regardless of future market price. Stock options
generally vest and become exercisable over a four-year period.
A
stock
option becomes valuable only if our common stock price increases above
the
option exercise price and the holder of the option remains employed during
the
period required for the option to “vest” thus, providing an incentive for an
option holder to remain employed by the Company. In addition, stock
options link a portion of an employee’s compensation to stockholders’ interests
by providing an incentive to make decisions designed to increase the market
price of our stock.
The
exercise prices of the stock options granted to the executive officers
during
fiscal year 2007 are shown in the Grants of Plan-Based Awards Table on
page
29. Additional information on these grants, including the number of
shares subject to each grant, also is shown in the Grants of Plan-Based
Awards
Table.
Executives
who join us are awarded initial stock options. The amount of the
initial stock option award is determined based on the executive’s position with
us and an analysis of the competitive practices of the companies similar
in size
to us represented in the compensation data that we review with the goal
of
creating a total compensation package for new employees that is competitive
with
other similar companies and that will enable us to attract high quality
people.
Our
practice is to make annual stock option awards a part of our overall
compensation program. Options generally are granted annually to executive
officers in November, at the same time as grants to the general eligible
employees, after final determination of our previous year operating
results. Option grants are made at a Compensation Committee meeting
scheduled in advance to meet appropriate deadlines for compensation related
decisions. Our practice is that the exercise price for each stock
option is the market value on the date of grant.
There
is
a limited term in which the executive officers can exercise stock
options. The option term is generally ten years from the date of
grant. At the end of the option term, the right to purchase any
unexercised options expires. Option holders generally forfeit any
unvested options if their employment with us terminates.
Other
Compensation
We
maintain broad-based benefits that are provided to all employees, including
health, life and disability insurance and a 401(k) plan.
Severance/Change
of Control
Our
named
executive officers each have a severance arrangement in the event an involuntary
termination due to a change-in-control. If such were to occur, Mr.
Mayer will be entitled to 24 months salary and Messrs. Johnston, Pering
and
Seliga will be entitled to 12 months salary.
COMPENSATION
OF EXECUTIVE
OFFICERS
The
following table shows the total compensation paid or accrued during
the year ended September 30, 2007 to (1) our Chief Executive Officer, (2)
our
Chief Financial Officer, (3) our next two most highly compensated executive
officers, and (4) Dr. Koschatzky, President of International Operations,
whose
compensation exceeded $100,000 during this period.
See
Accompanying Notes to Consolidated Financial Statements
TUTOGEN
MEDICAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED SEPTEMBER 30, 2007, 2006 AND 2005
(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® process, for distribution
to hospitals and surgeons. The Company processes at its two
manufacturing facilities in Germany and the United States and distributes
its
products and services to over 20 countries worldwide. The Company
operates on a fiscal year ending September 30. References herein to
2007, 2006 and 2005 refer to years ended September 30, 2007, 2006 and 2005,
respectively.
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Significant
accounting policies of the Company are presented below.
Principles
of Consolidation
-
The consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries. All intercompany transactions and balances are
eliminated in consolidation.
Foreign
Currency Translation
-
The
functional currency of the Company’s German subsidiary is the
Euro. Assets and liabilities of foreign subsidiaries are translated
at the period end exchange rate while revenues and expenses are translated
at
the average exchange rate for the period. The resulting translation
adjustments, representing unrealized, noncash gains and losses are recorded
and
presented as a component of comprehensive income. Gains and losses
resulting from transactions of the Company and its subsidiaries, which are
made
in currencies different from their own, are included in income as they occur
and
are included in Foreign Exchange Loss in the Consolidated Statements of Income
(Loss) and Comprehensive Income (Loss). The Company recognized
transaction losses of $118, $311, and $173 in 2007, 2006 and in 2005,
respectively.
Fair
Value of Financial Instruments
-
The carrying value of all current
assets and current liabilities approximates fair value because of their
short-term nature. The estimated fair value of all other amounts has
been determined by using available market information and appropriate valuation
methodologies. The carrying value of long-term debt approximates fair
value.
Cash
and Cash Equivalents
-
The Company
considers all highly liquid investments purchased with a remaining maturity
of
three months or less to be cash equivalents. For cash and cash
equivalents, the carrying amount approximates fair value due to the short
maturity of those instruments.
Short
Term Marketable Securities
–
Short term
marketable securities consist of a certificate of deposit from a bank with
an
initial term of five-months.
Inventories
-
Inventories are stated at the
lower of cost or market, with cost determined using the first-in, first-out
method. Work in process and finished goods includes costs attributable to
direct
labor and overhead. Impairment charges for slow moving, excess and obsolete
inventories are recorded based on historical experience, current product
demand
determined in part through periodic meetings with distributors, regulatory
considerations, industry trends, changes and risks and the remaining shelf
life.
As a result of this analysis, the Company reduces the carrying value of any
impaired inventory to its fair value, which becomes its new cost
basis. If the actual product life cycles, demand or general market
conditions are less favorable than those projected by management, additional
inventory impairment charges may be required which would affect future operating
results. The adequacy of inventory impairment charges is evaluated
quarterly.
Debt
Issuance Costs
– Debt issuance costs include costs incurred to
obtain financing. Upon funding of debt offerings, deferred financing
costs are capitalized as debt issuance costs and are amortized to interest
expense using the straight-line method, which approximates the effective
interest method, over the life of the related debt. At September 30,
2007 and 2006, unamortized debt issuance costs were $0 and $154, respectively,
and are included in other assets in the accompanying consolidated balance
sheets.
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
|
|
E
quipment
,
furniture
and
fixtures
|
5
years
|
|
Computer
hardware and
software
|
3
years
|
|
|
|
Leasehold
improvements are amortized over the shorter of five-years or the remaining
life
of the lease term. Amortization expense associated with assets financed by
capital lease are included in depreciation and amortization in the accompanying
consolidated financial statements.
Impairment
of Long-Lived Assets
– Periodically, the Company evaluates the
recoverability of the net carrying amount of its property, plant and equipment
by comparing the carrying amounts to the estimated future undiscounted cash
flows generated by those assets. If the sum of the estimated future
undiscounted cash flows were less than the carrying amount of the asset,
a loss
would be recognized for the difference between the fair value and the carrying
amount.
Impairment
losses are measured as the amount by which the carrying amount of the assets
exceeds the fair value of the assets. When fair values are not
available, the Company estimates fair value using the expected future cash
flows
discounted at a rate commensurate with the risks associated with the recovery
of
the assets. Assets to be disposed of are reported at the lower of
carrying amount or fair value less costs to sell.
Deferred
Revenue
– The Company has entered into several distribution
agreements which provide for certain upfront lump sum payments in exchange
for
certain distribution rights. These payments are recorded to deferred
distribution fees in the consolidated balance sheets. These payments
are recognized as revenue over a straight-line basis, which approximates
when
services are provided under the contract. Recognition of revenue commences
over the term of the distribution agreement upon delivery of initial
products. These distribution agreements vary in amount and have terms from
three to ten years. During 2006, Davol paid the Company $3,300 in
fees for exclusive distribution rights and for the commencement of the shipment
of products. In addition, during 2006, Mentor agreed to pay the Company
$500 associated with the exclusive distribution rights and the attainment
of
certain terms and conditions. At September 30, 2006, $250 had been paid to
the Company. In July 2007, the Company met the required milestones
needed to earn the second payment of $250. During 2007, Coloplast
agreed to pay the Company $250 associated with an exclusive distribution
agreement.
Revenue
and Cost of Revenue
-
Revenue
includes amounts from surgical product sales, tissue service processing,
and
distribution fees. Cost of revenue includes depreciation of $1,541, $529,
and $686 for the years ended September 30, 2007, 2006 and 2005, respectively,
as
discussed above. Revenue on product sales and tissue processing is
recognized when persuasive evidence of an arrangement exists, the price is
fixed
and final, delivery has occurred and there is a reasonable assurance of
collection of the sales proceeds. Oral or written purchase authorizations
are generally obtained from customers for a specified amount of product at
a
specified price. Revenue from surgical products is recognized upon the
shipment of the processed tissues. The Company’s terms of sale are FOB
shipping point. Title transfers at time of shipment. Customers are
provided with a limited right of return. Reasonable and reliable estimates
of product returns are made in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 48,
“Revenue Recognition When Right of Return
Exists”
(“SFAS 48”). Revenue from distribution fees includes
nonrefundable payments received as a result of exclusive distribution agreements
between the Company and independent distributors. Distribution fees under
these arrangements are recognized as revenue to approximate services provided
under the contract. Recognition of revenue commenced over the term of the
distribution agreement upon delivery of initial products.
Research
and Development Costs
-
Research
and development costs are charged to operations as incurred.
Earnings
Per Share
- Basic earnings per share are computed by dividing net
income (loss) by the weighted-average number of common shares
outstanding. Diluted earnings per share are computed by dividing net
income (loss) by the sum of the weighted-average number of common shares
outstanding plus the potentially dilutive effect of shares issuable through
the
exercise of stock options and warrants or conversion of convertible
debentures. Certain shares are excluded from the computation of
diluted earnings per share in periods where they have an anit-dilutive
effect.
Share-Based
Compensation -
The Company estimates the value of share-based
payments on the date of grant using the Black-Scholes model, which was also
used
previously for the purpose of providing pro forma financial information as
required under SFAS No. 123,
"Accounting for Stock-Based Compensation"
(SFAS 123). The determination of the fair value of, and the timing of expense
relating to, share-based payment awards on the date of grant using the
Black-Scholes model is affected by the Company’s stock price as well
as assumptions regarding a number of variables including the expected term
of
awards, expected stock price volatility, vesting periods and expected
forfeitures.
Use
of Estimates
-
The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of
revenues and expenses during the reporting period. Estimates related
to the value of share-based compensation, inventory, accounts receivable,
and
deferred tax assets and liabilities are made by management at each reporting
period. Actual results could differ from those
estimates.
Comprehensive
Income (Loss) -
The Company follows 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
(loss)
and cumulative translation adjustments.
Income
Taxes
- Deferred taxes are provided for the expected future income
tax consequences of events that have been recognized in the Company’s financial
statements. Deferred tax assets and liabilities are determined based
on the temporary differences between the financial statement carrying amounts
and the tax bases of assets and liabilities using enacted tax rates in effect
in
the years in which the temporary differences are expected to
reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts which are more likely than not to be
realized. If we it is more-likely-than-not we would be able to
realize our deferred tax assets in the future, an adjustment to the valuation
allowance would be made and income increased in the period of such
determination. Likewise, in the event we determine we would not be able to
realize all or part of our deferred tax assets in the future, an adjustment
to
the valuation allowance would be made and charged to income in the period
of
such determination.
Employee
Savings Plan
- The Company maintains the Tutogen Medical, Inc.
401(k) Plan (the “Plan”) for which all of the United States employees are
eligible. The Plan requires the attainment of the age of 21 and a
minimum of six months of employment to become a
participant. Participants may contribute up to the maximum dollar
limit set by the Internal Revenue Service. The expenses incurred for
the Plan were $160, $95, and $57 in 2007, 2006 and 2005,
respectively.
|
3.
|
NEW
ACCOUNTING PRONOUNCEMENTS
|
In
June
of 2006, the FASB issued FASB Interpretation (“FIN”) No. 48,
“Accounting for
Uncertainty in Income Taxes”
(“FIN 48”). This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109,
“Accounting for Income
Taxes”
(“SFAS 109”). This interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
Under this interpretation, the evaluation of a tax position is a two-step
process. First, the enterprise determines whether it is more-likely-than-not
that a tax position will be sustained upon examination, based on the technical
merits of the position. The second step is measuring the benefit to be recorded
from tax positions that meet the more-likely-than-not recognition threshold,
whereby the enterprise determines the largest amount of tax benefit that
is
greater than 50 percent likely of being realized upon ultimate settlement,
and
recognizes that benefit in its financial statements. FIN 48 also provides
guidance on recognition, classification, interest and penalties, accounting
in
interim periods, disclosure and transition. FIN 48 is effective for fiscal
years
beginning after December 15, 2006. Management has not yet determined the
impact
this pronouncement will have on the Company's financial statements.
In
September 2006, the FASB issued SFAS No. 157,
“Fair Value
Measurements”
(“SFAS 157”). This standard defines fair value, establishes a
framework for measuring fair value in accounting principles generally accepted
in the United States (“GAAP”), and expands disclosures about fair value
measurements. This standard is effective for financial statements issued
for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the requirements of SFAS 157 and has not yet determined the impact
on
the Company’s financial statements.
In
February 2007, the FASB issued SFAS No. 159, "
The Fair Value Option for
Financial Assets and Financial Liabilities--Including an Amendment of FASB
Statement No. 115
" which is effective for fiscal years beginning after
November 15, 2007. This pronouncement permits an entity to choose to measure
many financial instruments and certain other items at fair value at specified
election dates. Subsequent unrealized gains and losses on items for which
the
fair value option has been elected will be reported in earnings. We are
currently evaluating the potential impact of this pronouncement on our
consolidated financial statements.
|
4.
|
SHAREHOLDERS’
EQUITY AND STOCK-BASED
COMPENSATION
|
Stock
- The authorized stock of the Company consists of 30,000,000 shares of Common
Stock and 1,000,000 shares of Preferred Stock. No shares of the Preferred
Stock
were issued or outstanding at September 30, 2007.
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
and
for any subsequent issuances of its common stock. 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 (such exercise price was $35 per right at September
30,
2007), a number of the Company's common shares having a market value of twice
such price. Subject to the terms of the Rights Agreement, the rights may
be
redeemed by the Company at a redemption price of $.001 per right or may be
exchanged in whole or in part for Preferred Shares or shares of the Company's
Common stock.
Stock
Options Plans
- The Company maintains the 1996 Stock Option Plan (the
"Plan") (4,000,000 shares authorized) under which incentive and nonqualified
options have been granted to employees, directors and certain key affiliates.
Under the Plan, options may be granted at not less than the fair market value
on
the date of grant. Options are generally subject to a three or four year
vesting
schedule and a contractual term of ten years from grant. This plan remains
in
effect for all options issued during its life. The Plan expired in
February 2006 and no further options can be granted under the Plan
The
Plan
was superseded by the Tutogen Medical Inc. Incentive and Non-Statutory Stock
Option Plan (the "New Plan") (1,000,000 shares authorized), adopted by the
Board
of Directors on December 5, 2005 and ratified by the shareholders on March
13,
2006. On December 11, 2006 an additional 500,000 shares authorized
was adopted by the Board of Directors and ratified by the shareholders on
March
19, 2007. The total shares authorized under the New Plan is
1,500,000. Under the New Plan, options may be granted at not less
than the fair market value on the date of grant. Options are generally subject
to a three or four year vesting schedule and a contractual term of ten years
from grant.
Effective
October 1, 2005, the Company adopted the provisions of SFAS No. 123R,
“Share-Based Payment”
(“SFAS 123R”) which modified the financial
accounting and reporting standards for stock-based compensation plans.
SFAS 123R requires the measurement and recognition of compensation expense
for all stock-based awards made to employees and directors. Under the provisions
of SFAS 123R, stock-based compensation cost is measured at the grant date,
based on the calculated fair value of the award, and is recognized as an
expense
over the requisite service period of the entire award (generally the vesting
period of the award). As a result of adopting SFAS 123R, the Company's net
income (loss) before income taxes and net income (loss) for the years ended
September 30, 2007 and 2006 was $762 and $451 more, respectively, than if
the
Company had continued to account for stock-based compensation under Accounting
Principles Board Opinion (“APB”) No. 25,
“Accounting for Stock Issued to
Employees”
and its related interpretations. Basic and diluted net income
(loss) per share for the years ended September 30, 2007 and 2006 was $.04
and
$.03 more, respectively, than if the Company had continued to account for
stock-based net compensation under APB 25. There is no net effect on the
statement of cash flows related to the adoption of SFAS 123R. In
2006, there was no tax effect related to the adoption since the Company had
recorded a full valuation allowance. In 2007, the valuation allowance
was reversed and the Company recorded a deferred tax asset of $110 associated
with the expense for non-qualified stock options.
The
Company elected to use the modified prospective transition method as permitted
by SFAS 123R and, therefore, financial results for prior periods have not
been restated. Under this transition method, stock-based compensation expense
for the year ended September 30, 2007 and 2006 includes expense for all equity
awards granted prior to, but not yet vested as of October 1, 2005, based
on the
grant date fair value estimated in accordance with the original provisions
of
SFAS 123,
“Accounting for Stock-Based Compensation”
as amended by
SFAS 148,
“Accounting for Stock-Based Compensation – Transition and
Disclosure”
. Since the adoption of SFAS 123R, there have
been no changes to the Company's stock compensation plans or modifications
to
outstanding stock-based awards which would increase the value of any awards
outstanding. Compensation expense for all stock-based compensation awards
granted subsequent to October 1, 2005 was based on the grant-date fair value
determined in accordance with the provisions of SFAS 123R. During the years
ended September 30, 2007 and 2006, the Company recognized compensation expense
of $762 and $451, respectively, relating to stock options granted during
the
years ended September 30, 2007 and 2006 in addition to the vesting of options
outstanding as of October 1, 2005. All such expense was recognized within
"General and administrative expense" in the Consolidated Statement of Income
(Loss) and Comprehensive Income (Loss).
Prior
to
October 1, 2005, the Company accounted for stock-based compensation in
accordance with APB 25 and also followed the disclosure requirements of
SFAS 123. Under APB 25, the Company accounted for stock-based awards to
employees and directors using the intrinsic value method as allowed under
SFAS 123. Under the intrinsic value method, no stock-based compensation
expense had been recognized in the Company's Consolidated Statement of Income
(Loss) and Comprehensive Income (Loss) because the exercise price of the
Company's stock options granted to employees and directors equaled the fair
market value of the underlying stock at the date of grant.
The
following table reconciles net loss and basic and diluted loss per share,
as
reported, to pro-forma net loss and basic and diluted net loss per share,
as if
the Company had expensed the fair value of stock options.
|
|
|
2005
|
|
|
Net
loss
|
|
$
|
(7,017
|
)
|
|
|
|
|
|
|
|
Deduct: Total
stock-based employee compensation
|
|
|
|
|
|
Expense
determined under fair value based method,
|
|
|
102
|
|
|
|
|
|
|
|
|
Pro-forma
net loss
|
|
$
|
(7,119
|
)
|
|
|
|
|
|
|
|
Basic
loss per share:
|
|
|
|
|
|
As
reported
|
|
$
|
(0.44
|
)
|
|
Pro-forma
|
|
$
|
(0.45
|
)
|
|
|
|
|
|
|
|
Diluted
loss per share:
|
|
|
|
|
|
As
reported
|
|
$
|
(0.44
|
)
|
|
Pro-forma
|
|
$
|
(0.45
|
)
|
The
fair
value of each stock option grant is estimated on the grant date using the
Black-Scholes option-pricing model with the following assumptions:
|
|
2007
|
2006
|
2005
|
|
Weighted-average
volatility
|
52.3%
|
50.2%
|
47.0%
|
|
Expected
term (in
years)
|
5
|
5
|
5
|
|
Risk-free
rate
|
4.3%-5.0%
|
4.5%-4.7%
|
2.3%-3.1%
|
Expected
Volatility
. The Company's methodology for computing the expected volatility
is based solely on the Company's historical volatility.
Expected
Term
. The expected term is based on employee exercise patterns during
the
Company's history and expectations of employee exercise behavior in the
future
giving consideration to the contractual terms of the stock-based
awards.
Risk-Free
Interest Rate
. The interest rate used in valuing awards is based on the
yield at the time of grant of a U.S. Treasury security with an equivalent
remaining term.
Dividend
Yield
. The Company has never paid cash dividends, and does not currently
intend to pay cash dividends, and thus has assumed a 0% dividend
yield.
Pre-Vesting
Forfeitures
. Estimates of pre-vesting option forfeitures of 20% are based
on Company experience and industry trends. The Company will adjust its
estimate
of forfeitures over the requisite service period based on the extent to
which
actual forfeitures differ, or are expected to differ, from such estimates.
Changes in estimated forfeitures will be recognized through a cumulative
catch-up adjustment in the period of change and will also impact the amount
of
compensation expense to be recognized in future periods.
Presented
below is a summary of the status of the Company’s stock options for the year
ended September 30, 2007:
|
|
|
Outstanding
Shares
|
|
|
Options
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding
at October 1,
2006
|
|
|
2,238,868
|
|
|
$
|
2.65
|
|
|
|
|
|
|
|
|
Granted
|
|
|
607,500
|
|
|
|
7.08
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(762,168
|
)
|
|
|
2.40
|
|
|
|
|
|
|
|
|
Forfeited
or
expired
|
|
|
(86,500
|
)
|
|
|
5.35
|
|
|
|
|
|
|
|
|
Outstanding
at September 30,
2007
|
|
|
1,997,700
|
|
|
$
|
3.97
|
|
|
|
5.91
|
|
|
$
|
15,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30,
2007
|
|
|
1,314,700
|
|
|
$
|
2.95
|
|
|
|
4.41
|
|
|
$
|
11,245
|
|
|
7.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property,
plant and equipment at September 30, 2007 and 2006 consisted of the
following:
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$
|
587
|
|
|
$
|
522
|
|
|
Buildings
and
Improvements
|
|
|
10,092
|
|
|
|
6,275
|
|
|
Machinery
and
Equipment
|
|
|
8,220
|
|
|
|
5,174
|
|
|
Office
Furniture and
Other
|
|
|
1,081
|
|
|
|
1,284
|
|
|
Construction-In-Progress
|
|
|
260
|
|
|
|
3,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,240
|
|
|
|
17,236
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
Accumulated
Depreciation
|
|
|
(5,811
|
)
|
|
|
(4,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,429
|
|
|
$
|
12,940
|
|
Depreciation
expense, which includes amortization related to capital leases, for the
years
ended September 30, 2007, 2006 and 2005 was $2,056, $778 and $984,
respectively.
During
the year ended September 30, 2006, the Company accrued compensation expense
of
$437 for severance costs upon the termination of the Managing Director
of the
Company's German subsidiary. These costs are a component of general and
administrative expenses in the Consolidated Statement of (Loss) Income
and
Comprehensive (Loss) Income for the year ended September 30, 2006, and
the
accrual for these costs is included in Accrued expenses and other current
liabilities in the Consolidated Balance Sheet as of September 30, 2006.
These
severance costs were paid in twelve monthly equal payments during the period
from July 1, 2006 through June 30, 2007.
Accrued
expenses at September 30 consisted of the following:
|
|
|
2007
|
|
|
2006
|
|
|
Accrued
compensation
|
|
$
|
2,495
|
|
|
$
|
1,828
|
|
|
Accrued
professional services
|
|
|
875
|
|
|
|
1,039
|
|
|
Accrued
purchases
|
|
|
765
|
|
|
|
562
|
|
|
Other
|
|
|
1,131
|
|
|
|
885
|
|
|
|
|
$
|
5,266
|
|
|
$
|
4,314
|
|
|
10.
|
REVOLVING
CREDIT ARRANGEMENTS AND SHORT TERM
BORROWINGS
|
Under
the
terms of revolving credit facilities with two German banks, the Company
may
borrow up to 1,500 Euros (1,000 Euros and 500 Euros, respectively)
or
approximately $2,141 for working capital needs. These renewable
credit lines allow the Company to borrow at interest rates ranging
from 7.25% to
10.25%. At September 30, 2007, the Company had no borrowings under
the revolving credit agreements. At September 30, 2006 the Company
had outstanding borrowings of 819 Euros or $1,039. The 500 Euro revolving
credit
facility is secured by accounts receivable of the German
subsidiary. The 1,000 Euro revolving credit facility is secured by a
mortgage on the Company’s German facility and a guarantee by the parent
Company.
In
November 2005, the Company entered into a revolving credit facility
in the U.S.
for up to $1,500, expiring on November 18, 2008. At September 30,
2007, the company had no outstanding borrowings on this credit facility.
At
September 30, 2006, the Company had $1,500 outstanding on this credit
facility
to fund working capital needs. The U.S. accounts receivable and
inventory assets collateralize the borrowing under the revolving credit
facility. The Company is required to maintain a maximum senior debt
to tangible net worth ratio of 2.0 to 1.0. As of September 30, 2007,
the Company was in compliance with this covenant. In addition, the
Company maintains a lock box arrangement and merchant credit card program
with
the bank.
The
Company prepays certain expenses including insurance premiums. From
time to time, the Company enters into short term notes to finance insurance
premiums. As of September 30, 2007, short term borrowings on the
consolidated balance sheet included an outstanding balance of $340
related to
such activity. The term of the outstanding borrowing at September 30,
2007 is
12-months with an interest rate of 7.5%.
On
June
30, 2006, the Company issued a $3,000 convertible debenture with detachable
warrants to purchase up to 175,000 shares of its common stock. The
debenture
bears interest at 5.0% per year, was due upon the earlier of August
1, 2007, or
upon a change of control of the Company and was convertible into common
stock at
a price of $5.15 per share at any time at the election of the holder.
The
warrants were exercisable at $5.15 per share at any time at the election
of the
shareholder until the earlier of the third anniversary of the date
of issuance
or upon a change in control of the Company. The convertible debt is
included in short-term borrowings on the Consolidated Balance Sheet
at September
30, 2006. In April and May of 2007, the $3,000 debenture had fully
converted
into common stock. In November 2007, the 175,000 warrants had been
fully exercised into common stock.
Under
the
Registration Rights Agreement, which requires common shares to be registered
for
the convertible debenture and warrants, the Company was required to
file a Form
S-1 registration statement with the United States Securities and Exchange
Commission (“S-1”) the earlier of the day following the filing of the Company’s
10-K or December 31, 2006. The Company was then required to have the shares
registered within 60 days of the filing date of the S-1. In March 2007, the
Securities and Exchange Commission approved the registration of the
shares. These shares were registered during the second quarter of
2007.
The
relative fair value of the detachable warrants at inception of the
convertible
debenture agreement was $275 and was computed using the Black-Scholes
pricing
model under the following assumptions: (1) expected life of three years;
(2)
volatility of 53.5%, (3) risk free interest of 5.13% and dividend yield
of 0%.
The proceeds of the convertible debenture were allocated to debt and
warrants
based on their relative fair values. The relative fair value of the
warrants was
recorded to additional paid-in capital and resulted in a discount on
the
convertible debenture, which was amortized to interest expense over
the term of
the debenture. The remaining unamortized balance of the warrants as
of September
30, 2007 and 2006 was $0 and $205, respectively. The convertible
debenture balance of $0 and $2,725, net of debt discount, is included
in
short-term borrowings at September 30, 2007 and 2006, respectively.
In addition,
$205 of direct costs incurred relating to the issuance of the convertible
debenture was recorded as debt issuance costs in other current assets,
and was
amortized to interest expense over the term of the debenture.
Long-term
debt at September 30, 2007 and 2006 consisted of the following:
|
|
|
2007
|
|
|
2006
|
|
|
Senior
Debt
|
|
$
|
3,934
|
|
|
$
|
3,635
|
|
|
Unsecured
Debt
|
|
|
113
|
|
|
|
-
|
|
|
Capital
Leases
|
|
|
512
|
|
|
|
1,135
|
|
|
|
|
|
4,559
|
|
|
|
4,770
|
|
|
Less
Current
Portion
|
|
|
(1,281
|
)
|
|
|
(1,097
|
)
|
|
|
|
$
|
3,278
|
|
|
$
|
3,673
|
|
Aggregate
maturities of senior debt are $728 in 2008; $728 in 2009; $728 in 2010; $684
in
2011; $359 in 2012; and $707 beyond 2012.
Senior
debt consists of four loans with a German bank. The first loan ($516
as of September 30, 2007) has an interest rate of 5.75%, payable monthly,
maturing March of 2011. The second loan ($1,606 as of September 30,
2007) has an interest rate of 5.15%, payable quarterly, maturing March of
2012. The third loan ($1,491 as of September 30, 2007) payable
semi-annually at a fixed rate of 5.6% maturing December 2016. The
fourth loan ($321 as of September 30, 2007) is payable quarterly at a fixed
rate
of 5.75% maturing September 2012.
The
Senior debt and a revolving credit facility with a German bank are secured
by a
mortgage on the Company's German facility and is guaranteed up to 4 million
Euros ($5,709 as of September 30, 2007) by the parent company. There are
no
financial covenants under this debt.
The
Capital lease debt consists of two leases. The first lease (initial
cost of $1,300, with $470 of accumulated amortization as of September 30,
2007)
is payable monthly at $55 per month and matures April of 2008. The
lease is secured by leasehold improvements and equipment located at the
Company's Florida tissue processing facility. The second lease (initial cost
of
$240, with $157 of accumulated amortization as of September 30, 2007) is
payable
at $21 per quarter and matures March of 2008. The lease is secured by equipment
located at the Company’s Florida tissue processing facility. The
leases each contain fair market value purchase options at the end of the
lease
terms that are included in the capital lease obligation balance at September
30,
2007. As of September 30, 2007, the Company is in compliance with the
terms and conditions of the Capital lease debt. Capital lease assets and
related
liabilities are included within the captions “Property, plant, and equipment,
net” and “Long-term debt” on the accompanying consolidated balance
sheet. Future minimum capital lease payments of $512 for principal
and $29 for interest are due in 2008.
For
the
year ended September 30, 2006, $987 related to a capital lease agreement
has
been presented as a non-cash investing and financing activity on the
accompanying consolidated statement of cash flows.
For
the
year ended September 30, 2006, the Company incurred interest costs of
$578. Of this amount, $285 was capitalized to property, plant and
equipment for assets constructed during the year and $293 was charged to
interest expense. During 2005 and 2007, no interest expense was
capitalized.
|
12.
|
DERIVATIVE
INSTRUMENTS
|
The
Company accounts for its hedging activities in accordance with SFAS No.
133,
“Accounting for Derivatives and Hedging Activities”
, as amended. SFAS
No. 133 requires that all hedging activities be recognized in the balance
sheet
as assets or liabilities and be measured at fair value. Gains or losses
from the
change in fair value of hedging instruments that qualify for hedge accounting
are recorded in other comprehensive income. The Company's policy is to
specifically identify the assets, liabilities or future commitments being
hedged
and monitor the hedge to determine if it continues to be effective. The
Company
does not enter into or hold derivative instruments for trading or speculative
purposes. The fair value of the Company's interest rate swap agreement
for its
second senior debt loan with a balance of $1,606 at September 30, 2007
(see Note
10) is based on dealer quotes and was not significant as of September
30, 2007.
This loan is payable in monthly installments of approximately $90 (63
Euros)
including principal and interest based on an adjustable rate as determined
by
one month EURIBOR, fixed by a swap agreement for the life of the loan
with the
lender at 3.7% as a cash flow hedge. The proceeds were used to construct
new
facilities.
The
Company operates principally in one industry providing specialty surgical
products and tissue processing services. These operations include two
geographically determined segments: the United States and Europe
(“International”). The accounting policies of these segments are the
same as those described in Note 2. The Company evaluates performance
based on the operating income of each segment. The Company accounts for
intersegment sales and transfers at contractually agreed-upon
prices.
The
Company’s reportable segments are strategic business units that offer products
and services to different geographic markets. They are managed
separately because of the differences in these markets as well as their physical
location.
A
summary
of the operations and assets by segment as of and for the years ended September
30, 2007, 2006 and 2005 are as follows:
|
2007
|
|
International
|
|
|
United
States
|
|
|
Consolidated
|
|
|
Gross
revenue
|
|
$
|
22,632
|
|
|
$
|
37,984
|
|
|
$
|
60,616
|
|
|
Less
-
intercompany
|
|
|
(6,797
|
)
|
|
|
-
|
|
|
|
(6,797
|
)
|
|
Total
revenue - third
party
|
|
|
15,835
|
|
|
|
37,984
|
|
|
|
53,819
|
|
|
Depreciation
and
amortization
|
|
|
1,011
|
|
|
|
1,045
|
|
|
|
2,056
|
|
|
Operating
income
|
|
|
2,360
|
|
|
|
1,175
|
|
|
|
3,535
|
|
|
Interest
expense
|
|
|
291
|
|
|
|
907
|
|
|
|
1,198
|
|
|
Interest
Income
|
|
|
48
|
|
|
|
319
|
|
|
|
367
|
|
|
Income
tax expense
(benefit)
|
|
|
1,198
|
|
|
|
(5,370
|
)
|
|
|
(4,172
|
)
|
|
Net
income
|
|
|
931
|
|
|
|
5,827
|
|
|
|
6,758
|
|
|
Capital
expenditures
|
|
|
1,516
|
|
|
|
780
|
|
|
|
2,296
|
|
|
Fixed
assets
|
|
|
10,790
|
|
|
|
3,639
|
|
|
|
14,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
International
|
|
|
United
States
|
|
|
Consolidated
|
|
|
Gross
revenue
|
|
$
|
16,039
|
|
|
$
|
25,430
|
|
|
$
|
41,469
|
|
|
Less
-
intercompany
|
|
|
(3,522
|
)
|
|
|
-
|
|
|
|
(3,522
|
)
|
|
Total
revenue - third
party
|
|
|
12,517
|
|
|
|
25,430
|
|
|
|
37,947
|
|
|
Depreciation
and
amortization
|
|
|
471
|
|
|
|
307
|
|
|
|
778
|
|
|
Operating
income
(loss)
|
|
|
168
|
|
|
|
(455
|
)
|
|
|
(287
|
)
|
|
Interest
expense
|
|
|
81
|
|
|
|
212
|
|
|
|
293
|
|
|
Income
tax
benefit
|
|
|
194
|
|
|
|
-
|
|
|
|
(194
|
)
|
|
Net
income
(loss)
|
|
|
332
|
|
|
|
(921
|
)
|
|
|
(589
|
)
|
|
Capital
expenditures
|
|
|
3,248
|
|
|
|
2,742
|
|
|
|
5,990
|
|
|
Fixed
assets
|
|
|
8,995
|
|
|
|
3,830
|
|
|
|
12,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
International
|
|
|
United
States
|
|
|
Consolidated
|
|
|
Gross
revenue
|
|
$
|
17,344
|
|
|
$
|
21,752
|
|
|
$
|
39,096
|
|
|
Less
-
intercompany
|
|
|
(7,236
|
)
|
|
|
-
|
|
|
|
(7,236
|
)
|
|
Total
revenue - third
party
|
|
|
10,108
|
|
|
|
21,752
|
|
|
|
31,860
|
|
|
Depreciation
and
amortization
|
|
|
615
|
|
|
|
369
|
|
|
|
984
|
|
|
Operating
loss
|
|
|
(974
|
)
|
|
|
(6,253
|
)
|
|
|
(7,227
|
)
|
|
Interest
expense
|
|
|
61
|
|
|
|
69
|
|
|
|
130
|
|
|
Income
tax
benefit
|
|
|
(436
|
)
|
|
|
-
|
|
|
|
(436
|
)
|
|
Net
loss
|
|
|
(1,037
|
)
|
|
|
(5,980
|
)
|
|
|
(7,017
|
)
|
|
Capital
expenditures
|
|
|
1,468
|
|
|
|
213
|
|
|
|
1,682
|
|
|
Fixed
assets
|
|
|
5,912
|
|
|
|
699
|
|
|
|
6,611
|
|
A
summary
of revenues by segment for the years ended September 30, 2007, 2006 and 2005
are
as follows:
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dental
|
|
$
|
24,329
|
|
|
$
|
17,616
|
|
|
$
|
13,785
|
|
|
Spine
|
|
|
5,516
|
|
|
|
2,877
|
|
|
|
3,128
|
|
|
Surgical
Specialties
|
|
|
8,139
|
|
|
|
4,937
|
|
|
|
4,839
|
|
|
Total
U.S.
|
|
|
37,984
|
|
|
|
25,430
|
|
|
|
21,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gemany
|
|
|
4,667
|
|
|
|
2,851
|
|
|
|
1,980
|
|
|
Rest
of
World
|
|
|
9,179
|
|
|
|
7,472
|
|
|
|
6,220
|
|
|
France
|
|
|
1,425
|
|
|
|
1,672
|
|
|
|
1,337
|
|
|
Other
- Distribution
Fees
|
|
|
564
|
|
|
|
522
|
|
|
|
571
|
|
|
Total
International
|
|
|
15,835
|
|
|
|
12,517
|
|
|
|
10,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Consolidated
|
|
$
|
53,819
|
|
|
$
|
37,947
|
|
|
$
|
31,860
|
|
Income
tax (benefit) expense consisted of the following components for the years
ended
September 30:
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
79
|
|
|
$
|
8
|
|
|
$
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Foreign
|
|
|
-
|
|
|
|
(953
|
)
|
|
|
-
|
|
|
Total
|
|
|
79
|
|
|
|
(945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,171
|
|
|
|
116
|
|
|
|
(2,260
|
)
|
|
State
|
|
|
(425
|
)
|
|
|
19
|
|
|
|
(194
|
)
|
|
Foreign
|
|
|
1,198
|
|
|
|
759
|
|
|
|
(571
|
)
|
|
Total
|
|
|
1,944
|
|
|
|
894
|
|
|
|
(3,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(6,194
|
)
|
|
|
(143
|
)
|
|
|
2,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income tax
benefit
|
|
$
|
(4,172
|
)
|
|
$
|
(194
|
)
|
|
$
|
(436
|
)
|
The
differences between the U.S. statutory rates and those in the consolidated
statements of income (loss) and comprehensive income (loss) are as
follows.
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
federal
rate
|
|
$
|
852
|
|
|
$
|
(250
|
)
|
|
$
|
(2,536
|
)
|
|
State
income tax - net of federal
taxes
|
|
|
38
|
|
|
|
10
|
|
|
|
(194
|
)
|
|
Foreign
tax
differential
|
|
|
99
|
|
|
|
(3
|
)
|
|
|
(303
|
)
|
|
Ineligibility
of state net
operating losses
|
|
|
387
|
|
|
|
-
|
|
|
|
-
|
|
|
Expense
due to jurisdictional rate
changes
|
|
|
334
|
|
|
|
-
|
|
|
|
-
|
|
|
Stock
options
|
|
|
189
|
|
|
|
124
|
|
|
|
-
|
|
|
Tax
return
adjustments
|
|
|
120
|
|
|
|
-
|
|
|
|
-
|
|
|
Valuation
allowance
|
|
|
(6,194
|
)
|
|
|
(143
|
)
|
|
|
2,589
|
|
|
Tax
credits
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Foreign
exchange
loss
|
|
|
-
|
|
|
|
(364
|
)
|
|
|
-
|
|
|
Foreign
dividend
income
|
|
|
-
|
|
|
|
423
|
|
|
|
-
|
|
|
Other
|
|
|
29
|
|
|
|
9
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income tax
benefit
|
|
$
|
(4,172
|
)
|
|
$
|
(194
|
)
|
|
$
|
(436
|
)
|
The
tax
effect of the temporary differences that give rise to the Company’s net deferred
taxes as of September 30, 2007, and 2006 are as follows:
|
|
|
2007
|
|
|
2006
|
|
|
Current
|
|
|
|
|
|
|
|
Deferred
Tax
Assets
|
|
|
|
|
|
|
|
Net
operating loss
carryforward
|
|
$
|
2,698
|
|
|
$
|
-
|
|
|
Inventory
write-down
|
|
|
568
|
|
|
|
545
|
|
|
Distribution
fees
|
|
|
291
|
|
|
|
19
|
|
|
Intercompany
profits
|
|
|
172
|
|
|
|
-
|
|
|
Insurance
reserve
|
|
|
113
|
|
|
|
117
|
|
|
Vacation
pay
|
|
|
57
|
|
|
|
53
|
|
|
Management
fee
|
|
|
-
|
|
|
|
576
|
|
|
Bad
debt
allowance
|
|
|
-
|
|
|
|
53
|
|
|
Stock
options
|
|
|
-
|
|
|
|
34
|
|
|
Other
|
|
|
72
|
|
|
|
2
|
|
|
Valuation
allowance
|
|
|
-
|
|
|
|
(928
|
)
|
|
Subtotal
|
|
|
3,971
|
|
|
|
471
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax
Liabilities
|
|
|
|
|
|
|
|
|
|
Bad
debt
allowance
|
|
|
(179
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Deferred Tax Asset -
Current
|
|
$
|
3,792
|
|
|
$
|
471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
Term
|
|
|
|
|
|
|
|
|
|
Deferred
Tax
Assets
|
|
|
|
|
|
|
|
|
|
Net
operating loss
carryforward
|
|
|
1,592
|
|
|
|
6,737
|
|
|
Distribution
fees
|
|
|
618
|
|
|
|
38
|
|
|
Fixed
assets
|
|
|
-
|
|
|
|
-
|
|
|
Stock
options
|
|
|
109
|
|
|
|
-
|
|
|
Other
|
|
|
65
|
|
|
|
18
|
|
|
Valuation
allowance
|
|
|
-
|
|
|
|
(5,238
|
)
|
|
Subtotal
|
|
|
2,384
|
|
|
|
1,555
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax
Liabilities
|
|
|
|
|
|
|
|
|
|
Fixed
assets
|
|
|
(8
|
)
|
|
|
(252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Deferred Tax Asset - Long
Term
|
|
$
|
2,376
|
|
|
$
|
1,303
|
|
The
Company recorded in 2007 a tax benefit of $6,194 due to the reversal of a
previously recorded valuation allowance related to our U.S. operations since
we
have determined that it is more likely than not that our existing deferred
tax
assets will be realized.
As
of
September 30, 2007, the Company has approximately $10,526 of federal net
operating loss carry forwards expiring beginning in 2011, a $79 AMT credit
carry
forward, and a $46 credit on research and development that will begin to
expire
in 2013 if unused. The Company also has state net operating loss
carry forwards of approximately $3,820 that will begin to expire in
2021. At September 30, 2007, the Company had approximately $795 ($299
tax effected) related to current year excess tax deductions from the exercise
of
non-qualified stock options. Since the Company has elected the
ordering rule as prescribed by SFAS 109, and because the Company has net
operating loss carry forwards, the Company has not yet recorded the tax
benefit
from this deduction.
As
of
September 30, 2007, the Company has a corporate net operating loss carry
forward
for German income tax purposes of approximately $5,712 (4,002 Euros), and
a
trade net operation loss carry forward for German income tax purposes of
approximately $3,387 (2,373 Euros), which can be carried forward
indefinitely. The Company continually reviews the adequacy and
necessity of the valuation allowance in accordance with the provisions of
SFAS
109. The Company does not have a valuation
allowance against deferred tax assets as of September 30, 2007, because
management believes that it is more likely than not that these tax benefits
will
be realized through the generation of future taxable income. At
September 30, 2007, the Company had approximately $1,551 (1,087 Euros) related
to current year excess tax deductions from disqualified incentive stock
options. Since the Company has elected the ordering rule as
prescribed by SFAS 109, and because the Company has net operating loss carry
forwards, the Company has not yet recorded the tax benefit from this deduction
which approximates $425K (298 Euros).
Historically,
the Company has not recorded deferred income taxes on the undistributed earnings
of its foreign subsidiaries because it is management’s intent to indefinitely
reinvest such earnings. Going forward, the Company does not intend to
record deferred income taxes on future undistributed earnings of its foreign
subsidiaries because it is management’s intent to indefinitely reinvest such
earnings. Upon distribution of these earnings, the Company may be
subject to U.S. income taxes and/or foreign withholding taxes.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings (loss) per share computations for the years ended September
30, 2007, 2006 and 2005. The Company has excluded 170,000, 1,457,000
and 419,000 shares of stock as such shares are anti-dilutive to the calculation
at September 30, 2007, 2006 and 2005, respectively:
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
Net
income
(loss)
|
|
$
|
6,758
|
|
|
$
|
(589
|
)
|
|
$
|
(7,017
|
)
|
|
Interest
on
convertible debentures
|
|
|
57
|
|
|
|
-
|
|
|
|
-
|
|
|
Net
income
(loss) used in calculation of diluted earings per
share
|
|
$
|
6,815
|
|
|
$
|
(589
|
)
|
|
$
|
(7,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares of common stock outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used
in calculation of basic earnings per share
|
|
|
17,682,750
|
|
|
|
16,027,469
|
|
|
|
15,919,286
|
|
|
Effect
of
dilutive securites - stock options, warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
convertible debentures
|
|
|
1,397,414
|
|
|
|
-
|
|
|
|
-
|
|
|
Weighted-average
shares of common
stock outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used
in calculation of diluted earnings per share
|
|
|
19,080,164
|
|
|
|
16,027,469
|
|
|
|
15,919,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per
share
|
|
$
|
0.38
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per
share
|
|
$
|
0.36
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.44
|
)
|
|
|
16.
|
COMMITMENTS
AND CONTINGENCIES
|
The
Company currently has operating leases for its corporate offices in the U.S.,
as
well as several leases related to office equipment and
automobiles. The U.S. Corporate office lease expires in January 2009,
with two one-year renewal options. Total rental expense was $1,153,
959, and $1,212 for the years ended September 30, 2007, 2006 and 2005,
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, 2007 are as follows:
|
2008
|
|
$
|
1,336
|
|
|
2009
|
|
|
691
|
|
|
2010
|
|
|
162
|
|
|
2011
|
|
|
83
|
|
|
2012
|
|
|
21
|
|
|
Thereafter
|
|
|
2
|
|
|
|
|
$
|
2,295
|
|
The
Company is party to various claims, legal actions, complaints and administrative
proceedings arising in the ordinary course of business. In
management’s opinion, the ultimate disposition of these matters will not have a
material adverse effect on its financial condition, cash flows or results
of
operations. At September 30, 2005, the Company had an accrual
recorded of $476 (approximately 395 Euros) related to a dispute with a former
international distributor. During 2006, the dispute was settled for
$360 (approximately 280 Euros) and the Company recorded a change in estimate
and
reduced the accrual by approximately $91 (approximately 71 Euros), which
also
reduced general and administrative expense. The settlement amount and
outstanding legal costs were paid in 2007.
On
October 12, 2005, the Company issued a voluntary recall of all product units,
which utilized donor tissue received from BioMedical Tissue Services/BioTissue
Recovery Services (“BioMedical”). This action was taken because the
Company was unable to satisfactorily confirm that BioMedical had properly
obtained donor consent. The Company quarantined all BioMedical
products in its inventory, having a value of $1,035 and notified all customers
and distributors of record regarding this action. In connection with
the recall, the Company wrote off $174 of inventory during 2005 and $861
for
quarantined inventory at September 30, 2006. Additionally, as of
September 30, 2005, the Company had accrued $250 of related costs in connection
with the recall. As of September 30, 2006, the accrual for these
costs was $0, due in part to actual payments made for such costs and in part
to
an adjustment made by management during the three months ended March 31,
2006 to
reduce the accrual by approximately $150 as a result of a change in management's
estimate of the total recall related costs. The effect of this adjustment
was to
reduce cost of revenue by approximately $150.
In
January 2006, the Company was named as one of several defendants in a class
action suit related to the BioMedical recall. The Company intends to
vigorously defend this matter and does not believe that the outcome of this
class action will have an adverse material effect on the Company’s operations,
cash flows, financial position, or financial statement disclosures.
As
of
September 30, 2007, Zimmer CEP (formerly Centerpulse) USA Holding Co., a
subsidiary of Zimmer Holdings, Inc. (“Zimmer”) is a 28% owner of the Company's
outstanding shares of common stock.
The
Company has an exclusive license and distribution agreement with Zimmer Spine,
Inc., a wholly owned subsidiary of Zimmer, whereby Zimmer Spine has been
granted
the right to act as the Company's exclusive distributor of bone tissue for
spinal applications in the United States. For the years ended September 30,
2007, 2006 and 2005 product sales to Zimmer Spine totaled $5,516, $2,877,
and
$3,128, respectively. Accounts receivable from Zimmer Spine were $209
and $952 at September 30, 2007 and 2006, respectively.
The
Company has also engaged Zimmer Dental, Inc. (“Zimmer Dental”) a wholly owned
subsidiary of Zimmer to act as an exclusive sales and marketing
representative for the Company's bone tissue for dental applications in the
United States and certain international markets. Under this
distribution agreement, the Company ships directly to Zimmer Dental’s customers
(see Note 5). For the years ended September 30, 2007, 2006 and 2005,
Zimmer Dental was paid commissions aggregating approximately $9,796, $7,200,
and
$6,055 respectively. Accounts payable to Zimmer Dental total $2,532
and $1,918 at September 30, 2007 and 2006, respectively.
In
August
2007, the Company entered into an exclusive distribution agreement with Zimmer
Dental, Inc., whereby Zimmer Dental will distribute dental products
internationally. For the year ended September 30, 2007, product sales
under this new relationship totaled $983. Accounts receivable from
Zimmer Dental totaled $292 at September 30, 2007.
On
November 12, 2007, the Company entered into an Agreement and Plan of Merger
among Regeneration Technologies, Inc. (“Parent”), Rockets FL Corp
.(“Merger Sub”) and the Company.
The
proposed merger
transaction is
structured
as a tax free stock-for-stock exchange
pursuant
to which the
Company’s shareholders will
receive 1.22
shares of
the Parent’s
common
stock for
each
shar
e of the Company’s common stock. As
a
result, the Company will become a wholly-owned subsidiary of the Parent.
Upon
completion of the proposed merger, Parent stockholders will own approximately
55
percent of the combined company and the
Company’s shareholders will
own
approximately 45 percent of the combined company, on a
fully diluted basis. The
proposed merger is subject to
approval
by
the respective
shareholders of the
Parent and the
Company
, as well as
customary closing conditions and regulatory approvals. If the Company terminates
the proposed Agreement and Plan of Merger, under certain limited conditions,
the
Company could owe a termination fee of $6.5 million.
The proposed merger
is estimated to be
completed during the second quarter of the Company’s 2008 fiscal
year.
In
October 2007, the Company entered into a new five year Tissue Procurement,
Processing and Supply Agreement with Allosource, Inc. whereby Allosource
will
provide the Company with various human tissues used in the Company’s dental and
spinal product lines.
|
|
19.
|
SELECTED
QUARTERLY FINANCIAL DATA
(Unaudited)
|
The
following is a summary of
unaudited quarterly financial results for the year ended September 30,
2007:
(In
Thousands, Except Per Share Data)
|
|
|
|
|
|
2007
QUARTER
ENDED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/06
|
|
|
03/31/07
|
|
|
06/30/07
|
|
|
09/30/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
11,463
|
|
|
$
|
13,017
|
|
|
$
|
14,163
|
|
|
$
|
15,176
|
|
|
Gross
Profit
|
|
|
7,042
|
|
|
|
7,745
|
|
|
|
8,426
|
|
|
|
7,597
|
|
|
Operating
Expenses
|
|
|
6,330
|
|
|
|
6,372
|
|
|
|
6,763
|
|
|
|
7,810
|
|
|
Operating
income
(loss)
|
|
|
712
|
|
|
|
1,373
|
|
|
|
1,663
|
|
|
|
(213
|
)
|
|
Income
tax expense
(benefit)
|
|
|
73
|
|
|
|
87
|
|
|
|
(4,516
|
)
|
|
|
184
|
|
|
Net
income
(loss)
|
|
|
361
|
|
|
|
930
|
|
|
|
5,907
|
|
|
|
(440
|
)
|
|
Comprehensive
income
|
|
|
763
|
|
|
|
1,039
|
|
|
|
6,015
|
|
|
|
230
|
|
|
Earnings
(loss) per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
0.32
|
|
|
$
|
(0.02
|
)
|
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
0.05
|
|
|
$
|
0.30
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
QUARTER
ENDED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/05
|
|
|
03/31/06
|
|
|
06/30/06
|
|
|
09/30/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
8,034
|
|
|
$
|
9,115
|
|
|
$
|
10,000
|
|
|
$
|
10,798
|
|
|
Gross
Profit
|
|
|
4,705
|
|
|
|
5,098
|
|
|
|
4,780
|
|
|
|
7,028
|
|
|
Operating
Expenses
|
|
|
4,948
|
|
|
|
5,236
|
|
|
|
6,026
|
|
|
|
5,688
|
|
|
Operating
(loss)
Income
|
|
|
(243
|
)
|
|
|
(138
|
)
|
|
|
(1,246
|
)
|
|
|
1,340
|
|
|
Income
tax (benefit)
expense
|
|
|
(106
|
)
|
|
|
(213
|
)
|
|
|
(413
|
)
|
|
|
538
|
|
|
Net
(loss)
income
|
|
|
(81
|
)
|
|
|
22
|
|
|
|
(1,129
|
)
|
|
|
599
|
|
|
Comprehensive
(loss)
income
|
|
|
(284
|
)
|
|
|
421
|
|
|
|
(752
|
)
|
|
|
489
|
|
|
(Loss)
earnings per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
-
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.04
|
|
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
-
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.04
|
|
|
Tutogen
Medical, Inc.
|
|
Schedule II
— Valuation and Qualifying Accounts
|
|
Years
ended September 30, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Reversals)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged
to
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
(Credited)
to
|
|
|
|
|
|
Balance
at
|
|
|
|
Beginning
|
|
Costs
and
|
|
|
|
|
|
End
of
|
|
|
|
of
Period
|
|
Expenses
|
|
Deductions
(1)
|
|
Period
|
|
|
|
|
|
Allowance
for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended September 30, 2007
|
|
$
|
483
|
|
|
$
|
295
|
|
|
$
|
(1)
|
|
|
$
|
777
|
|
|
Year
ended September 30, 2006
|
|
|
462
|
|
|
|
19
|
|
|
|
(2)
|
|
|
|
483
|
|
|
Year
ended September 30, 2005
|
|
|
192
|
|
|
|
308
|
|
|
|
38
|
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for product returns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended September 30, 2007
|
|
$
|
0
|
|
|
$
|
71
|
|
|
$
|
25
|
|
|
$
|
46
|
|
|
Year
ended September 30, 2006
|
|
|
244
|
|
|
|
0
|
|
|
|
244
|
|
|
|
0
|
|
|
Year
ended September 30, 2005
|
|
|
241
|
|
|
|
183
|
|
|
|
180
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance for net deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended September 30, 2007
|
|
$
|
6,166
|
|
|
$
|
0
|
|
|
$
|
6,166
|
|
|
$
|
0
|
|
|
Year
ended September 30, 2006
|
|
|
6,309
|
|
|
|
(143)
|
|
|
|
0
|
|
|
|
6,166
|
|
|
Year
ended September 30, 2005
|
|
|
4,523
|
|
|
|
1,786
|
|
|
|
0
|
|
|
|
6,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Net
write-offs, recoveries and
adjustments
for foreign currency
translation.
|
|
|
|
|
|
|
|
|
|
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