<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 2000
REGISTRATION NO. 333-35756
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
REGENERATION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8731 59-3466543
(State or other jurisdiction (Primary Standard (I.R.S. Employer Number)
of Industrial Identification No.)
incorporation or organization) Classification Code)
</TABLE>
ONE INNOVATION DRIVE
ALACHUA, FLORIDA 32615
(904) 418-8888
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JAMES M. GROOMS
CHIEF EXECUTIVE OFFICER
REGENERATION TECHNOLOGIES, INC.
ONE INNOVATION DRIVE
ALACHUA, FLORIDA 32615
(904) 418-8888
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
WARREN J. NIMETZ, ESQ. JOSEPH E. MULLANEY III, ESQ.
FULBRIGHT & JAWORSKI L.L.P. PETER T. BUTTERFIELD, ESQ.
666 FIFTH AVENUE MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C.
NEW YORK, NEW YORK 10103 ONE FINANCIAL CENTER
(212) 318-3000 BOSTON, MASSACHUSETTS 02111
(617) 542-6000
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Prospectus (Not Complete)
The information in this prospectus is not complete and may be changed without
notice. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities, and we are not soliciting offers to buy these
securities, in any state where the offer or sale of these securities is not
permitted.
<PAGE>
Issued May 24, 2000
Shares
[LOGO]
Common Stock
----------------
Regeneration Technologies, Inc. is offering shares of common
stock, and the selling stockholder is offering shares of our common
stock in our initial public offering. We will not receive any of the proceeds
from the sale of shares by the selling stockholder. No public market currently
exists for our common stock. We anticipate that the initial public offering
price will be between $ and $ per share.
------------------------
We will apply to have our common stock quoted on the Nasdaq National Market
under the symbol "RTIX."
------------------------
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 4.
---------------------
<TABLE>
<CAPTION>
Per Share Total
--------- --------
<S> <C> <C>
Offering Price.............................................. $ $
Discounts and Commissions to Underwriters................... $ $
Offering Proceeds to Regeneration Technologies.............. $ $
Offering Proceeds to the Selling Stockholder................ $ $
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have granted the underwriters the right to purchase up to an additional
shares of our common stock to cover any over-allotments. The underwriters
can exercise this right at any time within thirty days after this offering. Banc
of America Securities LLC expects to deliver the shares of common stock to
investors on , 2000.
Banc of America Securities LLC
Lehman Brothers
UBS Warburg LLC
Stephens Inc.
------------------------
, 2000
<PAGE>
Regeneration Technologies, Inc.
Product Families
[Photograph of spinal allografts]
Spinal allografts: MD-Dowel, Cornerstone-SR, Osteofil Injectable Bone Paste,
Osteofil ICM Moldable Paste, Tangent Wedge, Precision Wedge, allograft segments.
Surgeons have used these allografts for spinal procedures such as discectomies.
[Photograph of sports medicine allografts]
Sports medicine allografts: Interference screw, bone pins, Osteofil
Injectable Bone Paste, meniscus, Pre-shaped BTB (Soon to be released: HTO Wedge,
AlloAnchor, Interference Screw ST). These allografts have been used in a variety
of sports medicine procedures, such as ACL and other ligament repair, small bone
repair (hands/feet) and tissue reattachment.
[Photograph of oral/maxillofacial allografts]
Oral/Maxillofacial allografts: Regenafil Injectable Bone Paste, Regenaform
Moldable Bone Paste, pericardium. Surgeons have used these in oral/maxillofacial
procedures such as ridge augmentation, sinus lift, or orthognathic surgery.
[Photograph of urologic allograft]
Urologic allograft: FasLata fascia lata tissue has bee used for urinary
incontinence (sling) procedures.
[Photograph of conventional tissue]
Conventional tissue: Osteoarticular grafts (femur), milled and blended bone
implants (cancellous chips), fashioned bone implants (cancellous blocks, fibula
wedges). These have been used for oncology procedures, mass tumor resection, hip
and knee revision, trauma and ligament repair.
[Photograph of cardiovascular allograft]
Cardiovascular allograft: Heart valves, for valve replacement.
The BioCleanse-TM- Advantage
[Photograph of a cross section of a conventionally processed human femur, as
well as photograph of femur bone that has been cleansed with BioCleanse
technology.]
Untreated tissue
BioCleansed tissue
Removes blood and fat
Kills bacteria and fungi
Eliminates viruses
Retains tissue functionality/strength
Preserves biocompatibility
[Photograph of Class 100 packaging room.]
Class 100 packaging room: Cleaned, processed tissue being packaged for
distribution
BioCleanse-TM-: Advanced Allograft Processing only from RTI
Automation: Critical steps are completely automated to ensure reproducible
sterilization.
Efficient Processing: The BioCleanse sterilization process allows for
processing large groups of tissue at one time.
<PAGE>
Regulatory Compliance: This automated, validated process is designed to meet
or exceed proposed tissue regulations.
Tissue Functionality: The BioCleanse process sterilizes without altering the
strength or biocompatibility of allograft.
Sterile Tissue: The system sterilizes tissue, eliminating bacteria and
enveloped and non-enveloped viruses such as HIV and Hepatitis.
[Photograph of BioCleanse chamber]
BioCleanse-TM- chamber
[Photograph of processing room]
Processing room: cleaning tissue in preparation for the BioCleanse-TM-
process
[Photograph of chemical mix unit]
Chemical mix unit
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Use of Proceeds............................................. 13
Dividend Policy............................................. 13
Capitalization.............................................. 14
Dilution.................................................... 15
Selected Consolidated Financial Data........................ 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Business.................................................... 26
Management.................................................. 50
Related Party Transactions.................................. 58
Principal and Selling Stockholders.......................... 60
Description of Capital Stock................................ 61
Shares Eligible for Future Sale............................. 64
Underwriting................................................ 66
Legal Matters............................................... 68
Experts..................................................... 68
Where You Can Find More Information......................... 68
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We based these
forward-looking statements on our current expectations and projections about
future events. Our actual results could differ materially from those discussed
in, or implied by, these forward-looking statements. Forward-looking statements
are identified by words such as "believe," "anticipate," "expect," "intend,"
"plan," "will," "may" and other similar expressions. In addition, any statements
that refer to expectations, projections or other characterizations of future
events or circumstances are forward-looking statements. Forward-looking
statements in these documents include, but are not necessarily limited to, those
relating to:
- our ability to obtain human tissue from our current and future sources;
- our ability to maintain or obtain protection for the know-how and
proprietary technologies necessary to develop, market and distribute our
technologies and allografts;
- current and future tissue repair or replacement treatment options offered
by our competitors;
- the state of government regulation of our allografts, processes and
technologies in the United States and internationally, and our ability to
comply with these regulations;
- our plans to develop and market new allografts and technologies; and
- our ability to carry out our business strategy.
Factors that could cause actual results or conditions to differ from those
anticipated by these and other forward-looking statements include those more
fully described in the "Risk Factors" section and elsewhere in this prospectus.
We are not obligated to update or revise these forward-looking statements to
reflect new events or circumstances.
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS
PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS
ONLY. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY
HAVE CHANGED SINCE THAT DATE.
i
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS"
SECTION AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES
CONTAINED HEREIN. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
ASSUMES THAT THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION, THE
CONVERSION OF ALL SHARES OF OUR OUTSTANDING PREFERRED STOCK INTO SHARES OF OUR
COMMON STOCK UPON CLOSING OF THIS OFFERING, A FOR STOCK SPLIT OF OUR COMMON
STOCK, THE REORGANIZATION OF OUR COMPANY AS A DELAWARE CORPORATION AND THE
CLOSING OF OUR ACQUISITION OF THE TISSUE PROCESSING AND DISTRIBUTION BUSINESS OF
ALABAMA TISSUE CENTER IMMEDIATELY PRIOR TO THE CLOSING OF THIS OFFERING.
REGENERATION TECHNOLOGIES, INC.
We are a leader in the use of biologics and tissue-based innovations that
are used to repair and promote the natural healing of human bone and other human
tissues. Using core human physiology--the basic biology of natural tissues as
they function in the body--our allografts are improving surgical outcomes. Our
goal is to replace conventional implant approaches, including metals, synthetics
and autograft implants, with allograft and for our allografts to become the
implant of choice for tissue repair. Our allograft tissues are recovered from
cadaveric donors, processed for biologic safety and implant mechanical
characteristics and then transplanted into a patient's body to make the needed
repair. An autograft procedure is one in which the surgeon harvests tissue from
one part of a patient's body for transplant to another part of the body to make
the needed repair.
We are a leading worldwide provider of comprehensive healing and biologic
tissue products in a broad range of markets. In addition, we are the largest
U.S. processor and distributor of precision tooled allografts both in terms of
revenues and number of surgical procedures for the year ended December 31, 1999,
with our allografts being distributed in all 50 states and in nine countries
internationally. We also continue to be one of the leading processors of
conventional allografts in the United States. We process human musculoskeletal
and other tissues, including bone, cartilage, tendon, ligament, pericardial and
cardiovascular tissue in producing our allografts. These tissues are then used
to repair and promote the healing of a wide variety of bone and other tissue
defects, including spinal vertebrae repair, musculoskeletal reconstruction,
fracture repair, periodontal repair, urinary incontinence and heart valve
disorders. Our current grafts range from conventional allografts to precision
tooled grafting material, including bone dowels, wedges, pastes and pins,
urological allografts and heart valves. During 1999, we shipped over 90,000
processed allografts used in an estimated 60,000 procedures. Often, more than
one allograft is used in a given procedure.
The overall market in the United States for tissue repair and healing
through the use of surgical implants, including metals, synthetics, and
allografts, has grown considerably over the last several years, with revenues in
the orthopedic and cardiovascular segments of this market exceeding an estimated
$6.4 billion in 1999. In these segments, procedures using allografts, either
conventional graft, bone paste, or specialty tooled tissues, totaled over
310,000 during 1999, accounting for revenues of over $410.0 million. We believe
that the use of allografts will continue to increase and represent a growing
portion of the surgical implant market.
Processors of tissue supply allografts to hospitals and surgeons for use in
surgery. The need for tissue is increasing each year and currently is being
served by approximately 30 tissue banks in the United States that process and/or
distribute bone or cardiovascular allografts. We have one of the most extensive
tissue recovery programs in the United States, recovering bone or cardiovascular
tissue from over 4,000 human donors during 1999, up from over 2,300 in 1998 and
1,500 in 1997. We believe our network of recovery groups accounted for
approximately 34% of the human tissue recovered in the United States during
1999.
1
<PAGE>
We pursue a market-by-market approach to distribution of our allografts,
including strategic arrangements in order to increase our penetration of
selected markets. We have an alliance with Medtronic Sofamor Danek in the spinal
market, with Exactech, Inc. in portions of the non-spinal molded bone paste
market, and with C.R. Bard, Inc. in the urological market.
Using our proprietary BioCleanse system, we believe we are the only tissue
processor currently able to safely process tissue from multiple donors
simultaneously. This system, which kills or inactivates all classes of
conventional pathogens, viruses, microbes, bacteria and fungi, and which
cleanses tissue both before and after processing, allows us to safely process
tissue from up to 100 donors at the same time thereby significantly increasing
the efficiency of tissue processing. In addition, our BioCleanse system is able
to remove blood, fats, lipids and cellular debris from the tissue we process
more successfully than traditional aseptic processing. We believe the removal of
all blood, fat, lipids and cellular debris results in faster patient healing
since it eliminates the need for the patient's body to remove these substances
using natural processes following surgery. In contrast to traditional aseptic
processing, our BioCleanse system also permits us to process tissue at lower
average cost and to safely and economically process tissue from donors and age
groups that might not have been feasible without BioCleanse.
We plan to continue to develop new allografts and technologies within the
orthopedics, urological and cardiovascular markets, and to develop additional
tissue-related technologies for other markets. To accomplish this, we intend to
continue to make use of our core technologies and processes which include
precision machined cortical bone, osteoinductive allograft bone pastes, our
proprietary BioCleanse system, segmentally demineralized bone allografts,
osteoarticular grafts designed to fit specific surgical instruments, growth
factors to stimulate bone or tissue growth, cortical allografts assembled from
various smaller bone pieces, xenograft, or animal tissue, and bone treated to
reduce materials that could cause immune responses.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by:
Regeneration Technologies, Inc............................ shares
Selling stockholder....................................... shares
Total................................................. shares
Common stock to be outstanding after the offering........... shares
Use of proceeds............................................. To fund continued research and
development, to construct and equip a
new manufacturing facility, to
construct additional BioCleanse systems
and other automated processing systems,
to expand our tissue recovery and
distribution activities, and for
general corporate purposes, including
working capital. We will not receive
any proceeds from the shares sold by
the selling stockholder. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol...................... RTIX
</TABLE>
------------------------
The above information excludes:
- shares of our common stock subject to options granted under
our Omnibus Stock Option Plan and outstanding as of March 31, 2000 at a
weighted average exercise price of $
per share; and
- shares of our common stock reserved for issuance upon the
exercise of warrants outstanding as of March 31, 2000 at a weighted
average exercise price of $ per share.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
You should read the following summary consolidated financial data in
conjunction with our consolidated financial statements and accompanying notes
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus.
Set forth below are the statement of operations data for the period from
February 12, 1998 to December 31, 1998, the year ended December 31, 1999 and the
three months ended March 31, 1999 and 2000 and the balance sheet data as of
March 31, 2000 (1) on an actual basis and (2) on an as-adjusted basis to give
effect to the sale by us of shares of our common stock in this
offering at an assumed initial public offering price of $ per share, after
deducting underwriting discounts and commissions and the estimated offering
expenses payable by us, and the application of net proceeds from this offering.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 12, THREE MONTHS ENDED
1998 TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -----------------------
1998 1999 1999 2000
------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.............................. $35,257 $73,020 $14,820 $26,083
Net revenues................................ 11,128 33,026 6,203 11,804
Total costs and expenses.................... 15,304 30,587 6,447 10,785
------- ------- ------- -------
Operating (loss) income..................... (4,176) 2,439 (244) 1,019
Net (loss) income........................... $(4,142) $ 2,960 $ (234) $ 608
======= ======= ======= =======
Net (loss) income per common share--basic... $ $ $ $
Net (loss) income per common
share--diluted............................ $ $ $ $
Weighted average shares
outstanding--basic........................
Weighted average shares
outstanding--diluted......................
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
-----------------------
ACTUAL AS ADJUSTED
BALANCE SHEET DATA: --------- -----------
<S> <C> <C>
Cash and cash equivalents................................... $ 2,372
Working capital............................................. 12,636
Total assets................................................ 52,844
Long-term obligations, less current portion................. 4,027
Total stockholders' equity.................................. 16,291
</TABLE>
------------------------
We originally incorporated in Florida on August 21, 1997 and began
operations on February 12, 1998 upon our separation from the University of
Florida Tissue Bank, Inc. Prior to the closing of this offering, we intend to
reorganize as a Delaware corporation. Our principal executive offices are
located at One Innovation Drive, Alachua, Florida 32615 and our telephone number
is (904) 418-8888. Our Web site is located at www.rtitechnology.com. We do not
intend for the information contained on our Web site to be considered a part of
this prospectus.
Alloanchor-TM-, BioCleanse-TM-, Cornerstone-TM- SR, FasLata-TM- Fascia Lata
Allograft, MD-Series-TM- Threaded Bone Dowels, Opteform-TM-, Osteofil-TM-,
Precision-TM- Cortical Bone Wedge, Regenaderm-TM-, Regenafil-TM-,
Regenaform-TM-, Regeneration Technologies, Inc.-TM- and Tangent-TM- Cortical
Bone Wedge are some of our trademarks. Any other trademark, trade name or
service mark of any other company appearing in this prospectus belongs to its
holder.
3
<PAGE>
RISK FACTORS
THIS OFFERING AND AN INVESTMENT IN OUR COMMON STOCK INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CONSIDER EACH OF THE RISKS AND UNCERTAINTIES DESCRIBED IN THIS
SECTION AND ALL OF THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO
INVEST IN OUR COMMON STOCK. OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS COULD BE SEVERELY HARMED BY ANY OF THE FOLLOWING RISKS. THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE IF ANY OF THESE RISKS OR UNCERTAINTIES
DEVELOP INTO ACTUAL EVENTS. YOU MAY LOSE ALL OR PART OF THE MONEY YOU PAID TO
BUY OUR COMMON STOCK.
WE HAVE A LIMITED OPERATING HISTORY, ARE AT AN EARLY STAGE OF DEVELOPMENT
AND MAY NOT SUCCEED OR CONTINUE TO BE PROFITABLE.
We incorporated in 1997 and commenced operations as an independent entity in
1998, and are at an early stage of development. Accordingly, we have a limited
operating history on which to base an evaluation of our business and prospects.
We expect our operating expenses to increase and we will need to generate
significant revenues to maintain profitability. We may not be able to achieve
growth in our revenues at levels which will sustain or increase profitability on
a quarterly or annual basis.
Many of the risks inherent in the development of a new enterprise will
affect our business, including:
- market acceptance of our existing and future allografts;
- our ability to continue to develop markets for our technologies;
- our ability to raise sufficient capital to support the cost of
commercializing our current allografts and technologies and developing new
allografts and technologies to remain competitive; and
- our ability to attract and retain qualified management, sales, technical
and scientific staff.
Our limited operating history and the uncertain nature of the markets in
which we compete make it difficult for us to predict our future results of
operations. As we increase our operating expenses to continue our research and
development, expand manufacturing and add to our tissue recovery and
distribution programs, these expenditures may not result in increased revenues
and we may incur sizable losses.
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.
The University of Florida Tissue Bank, Inc., Tutogen Medical, Inc. and
Allograft Resources of Wisconsin collectively supplied us with approximately 58%
of the human tissue we obtained in the year ended December 31, 1999. The limited
supply of human tissue has at times limited our growth, and may not be
sufficient to meet our future needs. In addition, due to seasonal changes in
mortality rates, some scarce tissues that we use for our allografts are at times
in particularly short supply. We cannot be sure that our supply of tissue will
continue to be available at current levels or will be sufficient to meet our
needs. If we no longer are able to obtain tissue from these sources sufficient
to meet our needs, we may not be able to locate replacement sources of tissue on
commercially reasonable terms, if at all. Any interruption of our business
caused by the need to locate additional sources of tissue could adversely affect
our business and results of operations.
OUR SUCCESS WILL DEPEND ON THE CONTINUED ACCEPTANCE OF OUR ALLOGRAFTS AND
TECHNOLOGIES BY THE MEDICAL COMMUNITY.
Our new allografts, technologies or enhancements to existing allografts may
never achieve broad market acceptance, which can be affected by numerous
factors, including:
- clinical acceptance of our allografts and technologies;
4
<PAGE>
- introduction of competitive tissue repair treatment options which render
our allografts and technologies obsolete;
- lack of availability of third-party reimbursement; and
- our ability to train surgeons in the use of our allografts and
technologies.
Market acceptance also will depend on our ability to demonstrate that our
existing and new allografts and technologies are an attractive alternative to
existing tissue repair treatment options. Our ability to do so will depend on
surgeons' evaluations of the clinical safety, efficacy, ease of use, reliability
and cost-effectiveness of these tissue repair options and technologies. For
example, we believe that a small portion of the medical community has lingering
concerns over the risk of disease transmission through the use of allografts.
Furthermore, we believe that even if our allografts and technologies receive
general acceptance within the medical community, recommendations and
endorsements by influential surgeons will be important to the commercial success
of our allografts and technologies.
IF WE FAIL TO ACHIEVE AND MAINTAIN THE HIGH PROCESSING AND MANUFACTURING
STANDARDS THAT OUR ALLOGRAFTS REQUIRE OR IF WE ARE UNABLE TO DEVELOP ADDITIONAL
MANUFACTURING CAPACITY, OUR COMMERCIAL OPPORTUNITY WILL BE REDUCED OR
ELIMINATED.
Our allografts require careful calibration and precise, high-quality
processing and manufacturing. Achieving precision and quality control requires
skill and diligence by our personnel. If we fail to achieve and maintain these
high processing and manufacturing standards, including the avoidance of the
incidence of manufacturing errors, design defects or component failures, we
could experience recalls or withdrawals of our allografts, delays or failures in
allograft testing or delivery, cost overruns or other problems that would
adversely affect our business. We can never completely eliminate the risk of
errors, defects or failures. Further, to be successful, we will need to increase
our manufacturing capacity, which we intend to do using a portion of the
proceeds from this offering. We may experience difficulties in scaling-up
manufacturing of our allografts, including problems related to yields, quality
control and assurance, tissue availability, adequacy of control policies and
procedures, and lack of skilled personnel. If we are unable to process and
produce our allografts on a timely basis, at acceptable quality and costs, and
in sufficient quantities, or if we experience unanticipated technological
problems or delays in production, our business would be adversely affected.
RAPID TECHNOLOGICAL CHANGE WILL AFFECT US AND OUR CUSTOMERS, WHICH COULD
RESULT IN REDUCED DEMAND FOR OUR ALLOGRAFTS.
Our industry is characterized by rapidly changing technology and frequent
introductions of new technologies. For example, steady improvements have been
made in synthetic human tissue substitutes which compete with our allografts.
Unlike allografts, synthetic tissue technologies are not dependent on the
availability of human tissue. The successful introduction of synthetic
technologies using recombinant technologies could result in a decline in demand
for allografts. Although our growth strategy contemplates the introduction of
new allografts and technologies, including the use of recombinant technologies,
the development of these new allografts and technologies is a complex and
uncertain process, requiring a high level of innovation, as well as the ability
to accurately predict future technology and market trends. The allografts we
currently have in development will require significant additional development,
investment and testing. We may need to undertake costly and time-consuming
efforts to achieve these objectives. We may not be able to respond effectively
to technological changes and emerging industry standards, or to successfully
identify, develop or support new technologies or enhancements to existing
allografts in a timely and cost-effective manner, if at all. If we are unable to
achieve the improvements in our allografts necessary for their successful
commercialization, the demand for our allografts will suffer.
5
<PAGE>
OUR INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY NOT HAVE THE RESOURCES
REQUIRED TO COMPETE SUCCESSFULLY.
The medical technology/biotechnology industry is intensely competitive. We
compete with companies in the United States and internationally that engage in
the development and production of medical technologies and processes including:
- biotechnology, orthopedic, pharmaceutical, biomaterial, chemical and other
companies;
- academic and scientific institutions; and
- public and private research organizations.
Allograft implants compete with autograft, metals and synthetic tissues, as
well as with alternative medical procedures. For the foreseeable future, we
believe a significant number of surgeons will continue to choose to perform
autograft procedures when feasible, despite the necessity for performing a
second operation. In addition, many members of the medical community will
continue to prefer the use of metals and synthetics due in part to their
familiarity with these products and the procedures required for their use.
Many of our competitors have much greater financial, technical, research,
marketing, sales, distribution, service and other resources than we do.
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, including several development stage companies, may
develop or market technologies that are more effective or commercially
attractive than ours, or that may render our technologies obsolete. For example,
the successful development of a synthetic tissue product that permits remodeling
of bones could result in the eventual decline in the demand for allograft-based
products and technologies.
WE ARE DEPENDENT UPON THE SUCCESS OF OUR STRATEGIC RELATIONSHIPS IN
DISTRIBUTING OUR ALLOGRAFTS TO GENERATE OUR REVENUES.
While we market a portion of our current technologies directly to our
customers, we currently derive the majority of our revenues through our
relationships with a few companies. In the year ended December 31, 1999, we
derived approximately 52% of our net revenues from distribution assisted by
management services provided by one company, Medtronic Sofamor Danek. This
company provides nearly all of the instrumentation, surgeon training,
distribution assistance and marketing materials for our line of spinal
allografts. If our relationship with this distributor was terminated for any
reason, it would materially and adversely affect our ability to generate
revenues and profits.
We may need to obtain the assistance of additional distributors to market
and distribute our new allografts and technologies, as well as to market and
distribute our existing allografts and technologies to new market segments or
geographical areas. We may not be able to find additional distributors who will
agree to market and distribute our allografts and technologies on commercially
reasonable terms, if at all. If we are unable to establish new distribution
relationships or renew our current distribution arrangements on commercially
acceptable terms, our operating results will suffer.
OUR ALLOGRAFTS COULD BECOME SUBJECT TO SIGNIFICANTLY GREATER REGULATION BY
THE FDA, WHICH COULD DISRUPT OUR BUSINESS.
The U.S. Food and Drug Administration has statutory authority to regulate
allograft processing and allograft-based materials. Since 1997, the FDA has been
working to establish a more comprehensive regulatory framework for human
tissue-based allografts. The framework under FDA consideration would establish
criteria for determining whether a particular human tissue-based product will be
classified as human tissue, a medical device or biologic drug requiring
premarket clearance or
6
<PAGE>
approval. Our heart valve allografts currently are regulated as medical devices
and we cannot be sure that the FDA will not seek to regulate our other
allografts as medical devices or biologics in the future.
If the FDA decides to adopt and implement its proposed regulatory framework,
one or more of our current allografts would then be regulated to a much greater
extent. In addition to our heart valve allografts, one or more of our allografts
in development may become subject to regulation as medical devices or biologic
drugs. For allografts regulated as medical devices, we will need to obtain
premarket clearance or approval through either the 510(k) premarket notification
process, or the FDA's premarket approval process. Some of our proposed grafts
also contain tissue derived from animals, commonly referred to as xenografts.
Xenografts also are subject to premarket review by the FDA.
To obtain the necessary approvals or clearances, we would be required to
submit premarket notifications, premarket approval applications and/or biologics
license applications. The clinical testing and preparation of required
applications would be time consuming and costly. In addition, we cannot be sure
the FDA would approve our applications. The FDA could also require us to stop
marketing our current allografts pending their approval or clearance. The FDA
may require post-market testing and surveillance to monitor the effects of
approved allografts, may restrict the commercial applications of our allografts,
and may conduct periodic inspections of our facility and our suppliers'
facilities. The FDA may withdraw our product approvals or clearances if we do
not comply with its regulatory standards or if we encounter problems after the
initial marketing. If we encounter delays during the FDA approval process, the
period during which we have the exclusive right to commercialize any allografts
for which we have received patent protection may be shortened.
From time to time, allegations may be made against us or against donor
recovery groups or tissue banks, including those with which we have a
relationship, about possible non-compliance with applicable FDA regulations or
other relevant statutes and regulations. Allegations such as these could cause
regulators or other authorities to take investigative or other action, or could
cause negative publicity for us or our industry generally.
WE DEPEND ON PATENTS AND OTHER MEANS TO PROTECT OUR INTELLECTUAL PROPERTY,
WHICH MAY NOT ALWAYS BE ADEQUATE.
The law of patents and trade secrets is constantly evolving and often
involves complex legal and factual questions. The coverage we seek in our patent
applications can either be denied or significantly reduced before or after a
patent is issued. Consequently, we cannot be sure that any particular patent we
apply for will be issued, that the scope of the patent protection will exclude
our competitors, that interference proceedings regarding any of our patent
applications will not be filed, or that a patent will provide any other
competitive advantage to us. In addition, we cannot be sure that any of our
patents will be held valid if challenged or that others will not claim rights in
or ownership of the patents and other proprietary rights held by us.
Because patent applications are secret until patents are actually issued and
the publication of discoveries in the scientific or patent literature lags
behind actual discoveries, we cannot be certain if our patent application was
the first application filed covering a particular invention. If another party's
rights to an invention are superior to ours, we may not be able to obtain a
license to use that party's invention on commercially reasonable terms, if at
all. In addition, our competitors, many of which have greater resources than we
do, could seek to apply for and obtain patents that will prevent, limit or
interfere with our ability to make use of our inventions either in the United
States or in international markets. Further, the laws of some foreign countries
do not always protect our intellectual property rights to the same extent as do
the laws of the United States. Litigation or regulatory proceedings in the
United States or foreign countries also may be necessary to enforce our patent
or other intellectual property rights or to determine the scope and validity of
our competitors' proprietary rights. These proceedings can be costly, result in
product development delays, and divert our management's attention from our
business.
7
<PAGE>
We also rely upon unpatented proprietary technology, and we cannot assure
you that others will not independently develop substantially equivalent
technology or otherwise gain access to or disclose our proprietary technology.
We may not be able to meaningfully protect our rights in this proprietary
technology, which would reduce our ability to compete in the market.
In 1996, a law was passed in the United States that limits the enforcement
of patents covering the performance of surgical or medical procedures on a human
body. This law prevents medical practitioners and health care entities who
practice these procedures from being sued for patent infringement. Therefore,
depending upon how these limitations are interpreted by the courts, they could
have a material adverse effect on our ability to enforce any of our proprietary
methods or procedures deemed to be surgical or medical procedures.
ALTHOUGH WE HAVE CONFIDENTIALITY AGREEMENTS WITH OUR EMPLOYEES AND OTHERS,
THESE AGREEMENTS MAY NOT ADEQUATELY PREVENT DISCLOSURE OF TRADE SECRETS AND
OTHER PROPRIETARY INFORMATION.
Our policy is to execute confidentiality agreements with our employees and
consultants upon the commencement of their employment or consulting arrangement
with us. These agreements generally require that all confidential information
developed by an individual or to which the individual is exposed during the
course of his or her relationship with us must be kept confidential even after
the individual has left our employment. These agreements also generally provide
that inventions conceived by the individual in the course of rendering services
to us shall be our exclusive property. We cannot be sure that these agreements
will provide meaningful protection of our proprietary and other confidential
information. In addition, in some situations, these agreements may conflict
with, or be subject to, the rights of third parties with whom our employees or
consultants have prior employment or consulting relationships. We may be forced
to engage in costly and time-consuming litigation to determine the scope of and
to enforce our proprietary rights. Even if successful, any litigation could
divert our management's attention from our business.
OUR SUCCESS WILL DEPEND IN PART ON OUR ABILITY TO OPERATE WITHOUT INFRINGING
ON OR MISAPPROPRIATING THE PROPRIETARY RIGHTS OF OTHERS.
We cannot be certain that U.S. or foreign patents or patent applications of
other companies do not exist or will not be issued that would materially and
adversely affect our ability to commercialize our grafts. We may be sued for
infringing or misappropriating the patent or other intellectual property rights
of others. Intellectual property litigation is costly and, even if we prevail,
the cost of this litigation could negatively affect our business. If we do not
prevail in litigation, in addition to any damages we might have to pay, we could
be required to stop the infringing activity or obtain a license requiring us to
make royalty payments. Any license we are required to obtain may not be
available to us on commercially acceptable terms, if at all. In addition, any
license we are required to obtain may be non-exclusive, and therefore our
competitors may have access to the same technology licensed to us. If we fail to
obtain a required license or are unable to design around another company's
patent, we may be unable to make use of some of our technologies or distribute
our grafts.
WE DEPEND ON THE CONTINUED SERVICE OF A NUMBER OF OUR KEY EMPLOYEES, AND WE
FACE INTENSE COMPETITION FOR PERSONNEL.
We are highly dependent on the members of our management and scientific
staff, the loss of one or more of whom could have a material adverse effect on
us. In particular, we believe our success to be particularly dependent upon the
services of our Chief Executive Officer, James M. Grooms. In addition, we
believe that our future success will depend in large part upon our ability to
attract and retain highly skilled, scientific, managerial and manufacturing
personnel. We face significant competition for personnel from other companies,
research and academic institutions, government entities and other organizations.
We may not be successful in hiring or retaining the personnel we need and this
could adversely affect our business.
8
<PAGE>
WE MAY BE EXPOSED TO PRODUCT LIABILITY CLAIMS WHICH COULD NEGATIVELY IMPACT
OUR BUSINESS.
Our business entails an inherent risk of product liability claims, and
substantial product liability claims may be asserted against us. Although we
have not received any material product liability claims to date and have a
$20.0 million insurance policy to cover these claims should they arise, claims
could arise in the future for which our insurance will not be adequate.
Moreover, insurance covering our business may not always be available in the
future on commercially reasonable terms, if at all. 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. Any product liability claim, if successful, could have a
detrimental effect on our financial condition. 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 METHODS OF TISSUE RECOVERY AND SCREENING OF
DONOR TISSUE IN OUR INDUSTRY COULD REDUCE DEMAND FOR OUR ALLOGRAFTS AND IMPACT
THE SUPPLY OF AVAILABLE DONOR TISSUE.
Widespread market acceptance of our allografts may be limited by media
reports or other negative publicity concerning both improper methods of tissue
recovery from donors and the risk of disease transmission from donated tissue.
Unfavorable reports of illegal tissue recovery practices, both in the United
States and internationally, as well as incidents of improperly processed tissue
leading to transmission of disease, may broadly affect the rate of future tissue
donation and market acceptance of allograft technologies. Potential patients may
not distinguish between our allografts, technologies and the tissue recovery and
processing procedures we have in place, versus those of our competitors or
others engaged in tissue recovery. In addition, families of potential donors may
become reluctant to agree to donate tissue to "for profit" tissue processors.
Any adverse consequences resulting from tissue recovery or processing practices
could adversely affect patient acceptance of allografts as a tissue repair
treatment option, which could materially and adversely affect our business.
WE MAY NEED TO RAISE ADDITIONAL FUNDS TO OPERATE AND GROW OUR BUSINESS, AND
IF WE ARE UNABLE TO RAISE THESE FUNDS, OUR ABILITY TO EFFECT OUR GROWTH STRATEGY
COULD BE DISRUPTED.
We may need additional funds to operate our business and to pursue our
growth strategy. The extent of our future capital requirements and the adequacy
of available funds will depend on numerous factors, including:
- market acceptance of our existing and future allografts and tissue-based
technologies;
- progress in our efforts to develop new allografts and tissue-based
technologies;
- our success in commercializing technologies we have in development; and
- the development of strategic distribution alliances.
We may be required to obtain additional funds through equity or debt
financings, strategic alliances or other sources. The terms of any future equity
financings may be dilutive to our stockholders and the terms of any debt
financings likely will contain restrictive covenants that limit our ability to
pursue particular courses of action, including paying dividends. Our ability to
obtain financing is dependent upon the status of our future business prospects,
as well as conditions prevailing in the capital markets. Additional sources of
financing may not be available to us on commercially reasonable terms, if at
all.
WE MAY NOT BE SUCCESSFUL IN EXPANDING OUR DISTRIBUTION ACTIVITIES INTO
INTERNATIONAL MARKETS.
We are seeking to expand our operations outside the United States. To date
we have limited experience operating internationally. In the year ended
December 31, 1999, international sales
9
<PAGE>
comprised approximately 2.6% of our net revenues. Our international operations
will be subject to a number of risks which may vary from the risks we face in
the United States, including:
- the need to obtain regulatory approvals in foreign countries before we can
offer our grafts and technologies for use;
- longer distribution-to-collection cycles, as well as difficulty in
collecting amounts owed to us;
- dependence on local distributors;
- limited protection of intellectual property rights;
- fluctuations in the values of foreign currencies; and
- political and economic instability.
If we are unable to effectively expand our operations in international
markets, our business strategy would be negatively impacted.
ANY ACQUISITIONS WE MAKE WILL CAUSE US TO INCUR A VARIETY OF COSTS AND MAY
POTENTIALLY EXPOSE US TO ADDITIONAL RISKS.
We may consider acquiring other businesses or technologies that we believe
are a strategic fit with our business. If we do make acquisitions, we could:
- issue equity securities which could be dilutive to our stockholders;
- incur substantial debt; or
- assume contingent liabilities or liabilities of which we may be unaware at
the time we make the acquisition or which may be larger than we believed.
In addition, we may have difficulty integrating the personnel, operations or
technologies we acquire, which could disrupt our business, distract our
management and employees, and increase our operating expenses. Future
acquisitions also might negatively impact our strategic distribution alliances.
OUR INDUSTRY IS SUBJECT TO GOVERNMENT REGULATIONS WHICH CAN SIGNIFICANTLY
IMPACT OUR BUSINESS.
Some aspects of our business are subject to 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. In particular, 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 makes us unable to include some of these
costs in the amounts we charge our customers, it could adversely affect 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 method of operations, at a substantial cost, in order to continue
to comply with this statute.
We are also subject to a variety of local, state and federal government laws
and regulations relating to the storage, handling, generation, manufacture and
disposal of medical wastes from the production of our allografts. If we fail to
conduct our business in compliance with these laws and regulations, it could
subject us to significant liabilities, which could have a negative impact on our
financial results.
10
<PAGE>
IF THIRD PARTY PAYORS FAIL TO PROVIDE APPROPRIATE LEVELS OF REIMBURSEMENT
FOR THE USE OF OUR ALLOGRAFTS, OUR REVENUES WOULD BE ADVERSELY AFFECTED.
Our revenues depend largely on the reimbursement of patients' medical
expenses by government health care 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 payors will continue to reimburse us or provide payment
at levels which will be profitable to us.
CHANGES TO THE EXISTING HEALTHCARE INDUSTRY COULD LOWER THE AMOUNT WE ARE
PAID FOR OUR SERVICES, DECREASING OUR REVENUES.
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 and payment for healthcare services and products. It is not possible to
predict whether any significant new healthcare legislation will have a negative
impact on our business. Any significant healthcare legislation, if adopted,
could have a material adverse effect on our business, financial condition and
results of operations.
OUR STOCK PRICE MAY DECLINE AFTER THIS OFFERING AND MAY BE VOLATILE IN THE
FUTURE.
The market for shares in newly public technology companies, particularly
medical device or biotechnology-related companies, is subject to extreme price
and volume fluctuations. These broad fluctuations may materially and adversely
affect the market price of our common stock. You may not be able to resell any
shares you buy from us at or above the initial public offering price due to a
number of factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in investors' and securities analysts' expectations as to our
future financial performance or changes in financial estimates of
securities analysts;
- announcement of new allografts or product enhancements by us or our
competitors;
- technological innovations by us or our competitors;
- negative publicity concerning methods of tissue recovery and screening;
and
- the operating and stock price performance of comparable companies.
In addition, although our common stock will be quoted on the Nasdaq National
Market, an active trading market may not develop or sustain itself after this
offering.
OWNERSHIP OF OUR STOCK IS HEAVILY CONCENTRATED AND THESE STOCKHOLDERS WILL
CONTROL ALL MATTERS REQUIRING STOCKHOLDER APPROVAL.
After giving effect to this offering and assuming the full exercise of the
underwriters' over-allotment option, our directors, executive officers, and
stockholders holding greater than 5% of our common stock beneficially owned
approximately % of our outstanding common stock. As a result, these
stockholders are able to control all matters requiring stockholder approval,
including the election of directors and approval of significant transactions.
This concentration of ownership may also have the effect of delaying or
preventing a change in control of our company.
11
<PAGE>
PROVISIONS OF OUR GOVERNING DOCUMENTS AND DELAWARE LAW COULD DISCOURAGE
ACQUISITION PROPOSALS OR DELAY A CHANGE IN OUR CONTROL.
Our certificate of incorporation and by-laws contain anti-takeover
provisions, including those listed below, that could make it more difficult for
a third party to acquire control of us, even if that change in control would be
beneficial to stockholders:
- our board of directors has the authority to issue common stock and
preferred stock and to determine the price, rights and preferences of any
new series of preferred stock without stockholder approval;
- our board of directors is divided into three classes, with each class
serving staggered three-year terms;
- supermajority voting is required to amend key provisions of our
certificate of incorporation and by-laws;
- there are limitations on who can call special meetings of stockholders;
- stockholders may not take action by written consent; and
- advance notice is required for nominations of directors and for
stockholder proposals to be voted upon at stockholder meetings.
In addition, provisions of Delaware law and our stock option plans may also
discourage, delay or prevent a change of control of our company or unsolicited
acquisition proposals.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION AS TO THE USE OF PROCEEDS OF THIS
OFFERING.
Our management will have broad discretion as to how to use the net proceeds
of this offering. You will be relying on the judgment of our management
regarding the application of the proceeds of this offering. The results and
effectiveness of the use of the proceeds are uncertain.
YOU WILL INCUR IMMEDIATE DILUTION IN THIS OFFERING.
The initial public offering price of our common stock will be substantially
higher than the pro forma net tangible book value per share of our outstanding
shares of common stock immediately after this offering. Therefore, if you
purchase our common stock in this offering at the initial public offering price
of $ per share, you will incur immediate dilution of $ in
the net tangible book value per share from the price you pay for the shares you
purchase.
FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT THE MARKET PRICE OF
OUR COMMON STOCK.
Sales of our common stock in the public market following this offering could
adversely affect the market price of our common stock. Of the shares
that will be outstanding upon the closing of this offering:
- all of the shares offered under this prospectus will be freely tradable in
the public market;
- approximately additional shares may be sold after the expiration of
the 180-day lock-up agreements entered into by our officers, directors and
existing stockholders; and
- approximately additional shares may be sold upon the exercise
of stock options and warrants after the expiration of the 180-day lock-up
period.
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<PAGE>
USE OF PROCEEDS
We estimate the net proceeds to us from the sale of the shares of
common stock we are offering, after deducting underwriting discounts and
commissions and the estimated offering expenses payable by us, will be
approximately $ million, assuming an initial public offering price of
$ per share. We will not receive any proceeds from the sale of shares by
the selling stockholder. See "Underwriting."
We intend to use the net proceeds of this offering for continued research
and development, to construct and equip a new manufacturing facility, to
construct additional BioCleanse systems and other automated processing systems,
to expand our tissue recovery and distribution activities, and for general
corporate purposes, including working capital.
In addition, we may also use a portion of the net proceeds from this
offering to acquire businesses, assets, technologies or product lines that
complement our existing business if we could make these acquisitions on terms
which we deem to be favorable. Other than our acquisition of the tissue
processing and distribution business of Alabama Tissue Center immediately prior
to the closing of this offering, we do not have any commitments to make any
acquisition and have not allocated a specific amount of the net proceeds for
this purpose.
Our management will have significant flexibility in applying the net
proceeds of the offering. Pending any use as described above, we intend to
invest the net proceeds in short-term, interest-bearing investment-grade
instruments.
DIVIDEND POLICY
We have never declared nor paid any cash dividends on our capital stock. In
addition, our current credit facility restricts our ability to pay any dividends
and any future facility may contain similar restrictions. We currently
anticipate that we will retain any future earnings for the development and
operation of our business. Accordingly, we do not anticipate paying cash
dividends on our capital stock in the foreseeable future.
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<PAGE>
CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table sets forth our capitalization as of March 31, 2000:
(1) on an actual basis; and (2) on an as adjusted basis to reflect the
conversion of our outstanding preferred stock into common stock and the sale of
the shares of common stock to be sold by us (assuming an initial public offering
price of $ per share) after deducting underwriting discounts and
commissions and other estimated offering expenses and the application of the
estimated net proceeds. This table should be read along with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and accompanying notes included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
-----------------------
ACTUAL AS ADJUSTED
--------- -----------
(UNAUDITED)
<S> <C> <C>
Long-term debt, including current portion................... $ 4,983 $
Stockholders' equity:
Series A preferred stock, $.001 par value, shares
authorized, issued and outstanding, actual; , as
adjusted................................................ 2
Series B preferred stock, $.001 par value, shares
authorized, issued and outstanding, actual; , as
adjusted................................................ 6,580
Series C preferred stock, $.001 par value, shares
authorized, issued and outstanding, actual; , as
adjusted................................................ 10,000
Preferred stock, $.001 par value, shares authorized;
none issued and outstanding, actual; 5,000,000 shares
authorized and none issued and outstanding, as
adjusted................................................
Common stock, $.001 par value, shares authorized and
shares issued, actual; shares issued, as
adjusted................................................ 1
Additional paid-in capital.................................. 691
Accumulated deficit......................................... (575)
Deferred compensation....................................... (360)
Due from stockholder-net of due to stockholder.............. (34)
Less treasury stock, shares, actual, as adjusted...... (14)
------- -------
Total stockholders' equity.................................. 16,291
------- -------
Total capitalization.................................... $21,274 $
======= =======
</TABLE>
The above information excludes:
- shares of our common stock subject to options granted under our Omnibus
Stock Option Plan and outstanding as of March 31, 2000 at a weighted
average exercise price of $ per share; and
- shares of our common stock reserved for issuance upon the exercise of
warrants outstanding as of March 31, 2000, at a weighted average exercise
price of $ per share.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was approximately
$ , or $ per share of common stock, after giving effect to the
conversion of all outstanding shares of preferred stock. Pro forma net tangible
book value per share is equal to the amount of our tangible net assets, less
total liabilities, divided by the pro forma number of shares of our common stock
outstanding as of March 31, 2000. After giving effect to the sale by us of the
shares of common stock offered hereby, assuming an initial public offering price
of $ per share, and the application of the net proceeds from this offering,
our pro forma net tangible adjusted book value at March 31, 2000 would have been
approximately $ , or $ per share of our common stock. This amount
represents an immediate increase in our pro forma net tangible book value of
$ per share to existing stockholders and an immediate dilution in net
tangible book value of $ per share to new investors in the offering. To the
extent any of these options or warrants are exercised, there will be further
dilution to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at March 31,
2000.................................................... $
Increase per share attributable to new investors..........
----
Pro forma net tangible book value per share after the
offering..................................................
----
Dilution per share to new investors......................... $
====
</TABLE>
If the underwriters' over-allotment option is exercised in full, our pro
forma as adjusted net tangible book value at March 31, 2000 would have been
approximately $ per share, representing an immediate increase in
net tangible book value of $ per share to existing stockholders and an
immediate dilution in net tangible book value of $ per share to new
investors.
The following table summarizes, on a pro forma basis as of March 31, 2000,
the total number of shares of our common stock purchased from us, the total
consideration paid for these shares, and the average price per share paid by our
existing stockholders and by new investors purchasing shares in this offering:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
------------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............................. % $ % $
New investors......................................
------ ----- ------ ------
Total............................................ 100.0% $ 100.0%
====== ===== ====== ======
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares of common stock held by our existing stockholders will be reduced to
approximately % of the total number of shares of our common stock to be
outstanding after this offering, and will increase the number of shares of our
common stock held by the new investors to shares, or approximately % of
the total number of shares of our common stock to be outstanding immediately
after this offering.
The above information excludes:
- shares of our common stock subject to options granted under our
Omnibus Stock Option Plan and outstanding as of March 31, 2000 at a
weighted average exercise price of $ per share; and
- shares of our common stock reserved for issuance upon the
exercise of warrants outstanding as of March 31, 2000 at a weighted
average exercise price of $ per share.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The statement of operations data set forth below for the period from
February 12, 1998, when we began operations, to December 31, 1998 and the year
ended December 31, 1999 and selected balance sheet data as of December 31, 1998
and 1999 have been derived from our consolidated financial statements and
accompanying notes, which have been audited by Deloitte & Touche LLP,
independent auditors. The statement of operations data set forth below for the
three months ended March 31, 1999 and 2000 and selected balance sheet data as of
March 31, 2000 have been derived from our unaudited condensed consolidated
financial statements and accompanying notes included elsewhere in this
prospectus. The selected financial data in the table below should be read along
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and our consolidated financial statements and accompanying notes
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 12, THREE MONTHS ENDED
1998 TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------
1998 1999 1999 2000
------------- ------------ -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from core operations:
Fees from tissue distribution................... $31,892 $70,783 $13,901 $25,555
Other revenues from core operations............. 3,365 2,237 919 528
------- ------- ------- -------
Total revenues.................................. 35,257 73,020 14,820 26,083
Management services fees.......................... 24,129 39,994 8,617 14,279
------- ------- ------- -------
Net revenues.................................... 11,128 33,026 6,203 11,804
Cost of processing and distribution............... 9,845 19,172 4,398 6,327
------- ------- ------- -------
Gross profit.................................... 1,283 13,854 1,805 5,477
Expenses:
Marketing, general and administrative........... 3,987 9,740 1,673 3,943
Research and development........................ 1,472 1,675 376 515
------- ------- ------- -------
Total expenses.................................. 5,459 11,415 2,049 4,458
Operating (loss) income........................... (4,176) 2,439 (244) 1,019
------- ------- ------- -------
Interest (expense) income:
Interest expense................................ (153) (285) (57) (108)
Interest income................................. 187 187 67 90
------- ------- ------- -------
Total interest income (expense)--net............ 34 (98) 10 (18)
------- ------- ------- -------
(Loss) income before income tax benefit........... (4,142) 2,341 (234) 1,001
Income tax benefit (expense)...................... -- 619 -- (393)
------- ------- ------- -------
Net (loss) income................................. $(4,142) $ 2,960 $ (234) $ 608
======= ======= ======= =======
Net (loss) income per common share--basic.........
Net (loss) income per common share--diluted.......
Weighted average shares outstanding--basic........
Weighted average shares outstanding--diluted......
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------- ----------------
1998 1999 2000
-------- -------- ----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 3,926 $ 7,536 $ 2,372
Working capital............................................ (13) 14,052 12,636
Total assets............................................... 19,268 48,538 52,844
Long-term obligations, less current portion................ 1,522 2,027 4,027
Total stockholders' (deficiency) equity.................... (1,431) 15,437 16,291
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leader in the use of biologics and tissue-based innovations that
repair and promote the natural healing of human bone and other human tissues. We
are the largest U.S. processor and distributor of precision tooled allografts
both in terms of revenues and surgical procedures for the year ended
December 31, 1999. These allograft implants are used in surgical reconstruction,
bone healing and tissue repair, and are made from bone, cartilage, tendon,
ligament and other soft tissues recovered from cadaveric tissue donors primarily
through a national network of organ and tissue recovery agencies.
We were incorporated in 1997 as a wholly owned subsidiary of the University
of Florida Tissue Bank, Inc., or UFTB. We began operations on February 12, 1998
when UFTB contributed to us its allograft manufacturing and processing
operations, related equipment and technologies, distribution arrangements,
research and development activities and certain other assets in exchange for
shares of preferred stock. We also assumed various liabilities of UFTB that were
related to the transferred business. At approximately the same time, we sold
shares of preferred stock to a number of unrelated investors.
In addition, UFTB assigned to us various agreements to which it was party at
the time of the separation, including an agreement with Medtronic Sofamor Danek
under which that company was given the right to be the exclusive provider of
management services for our current line of allografts for use in spinal and
cranial medical procedures, including our bone dowels. Under this agreement, we
are required to pay Medtronic Sofamor Danek 70% of the amount charged for our
spinal allografts.
At approximately the time of our separation from UFTB, James M. Grooms, our
President and Chief Executive Officer and former officer of UFTB prior to our
separation from that entity, contributed his royalty rights in certain
intellectual property to us in exchange for shares of our preferred stock. We
recorded the assets acquired from UFTB and Mr. Grooms and the liabilities
assumed from UFTB at their historical cost basis since these were deemed to be
transactions between entities under common control.
On April 15, 1999, we entered into a Programs Transfer Agreement with UFTB
under which UFTB transferred to us its tissue recovery operations outside of
Florida and Georgia, conventional allograft distribution services, allograft
inventory, certain equipment and fixtures and its interest in agreements with
various tissue recovery programs in exchange for the offset of amounts owed to
us by UFTB. On April 15, 1999, we also entered into a Tissue Recovery Agreement
with UFTB under which UFTB functions as one of our tissue recovery agencies,
supplying to us the majority of the tissue it recovers.
On November 1, 1999, we acquired the net assets of Georgia Tissue
Bank, Inc. along with certain equipment owned by a director of Georgia Tissue
Bank. We financed this acquisition with a cash payment of $0.5 million and
promissory notes totaling $1.3 million. We recorded our acquisition of the net
assets of Georgia Tissue Bank under the purchase method of accounting.
On April 27, 2000, we entered into an agreement to acquire the tissue
processing and distribution business of Alabama Tissue Center. Under that
agreement, we are obligated to pay the seller $3.5 million in shares of our
common stock, valued at a price equal to the initial public offering price, and
$0.3 million in cash, with the possible payment of an additional $0.3 million in
cash if specified milestones are achieved by the acquired business following the
acquisition. If our initial public offering is not consummated, we are not
obligated to consummate the acquisition.
All of our operations are located in the United States, although we
distribute our allografts to customers both within and outside the United
States. In 1999, 97.4% of our net revenues were from
17
<PAGE>
domestic tissue distribution compared to 100% of our net revenues in 1998. We
expect the portion of our net revenues attributable to international operations
will increase in the future.
In general, tissue recovery rates increase during the month of March and
decrease during the month of August. Although this seasonality in tissue
recovery affects the availability of donor tissue during these periods, it
historically has not affected our ability to continue processing available donor
tissue or supply needed allografts. We attempt to manage our business so that
these short-term reductions in donor tissue recoveries do not affect the
quarterly results of our business.
RESULTS OF OPERATIONS
The following table sets forth, in both dollars and as a percentage of net
revenues, the results of our operations for the periods indicated:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 12, 1998 YEAR ENDED THREE MONTHS ENDED MARCH 31,
TO DECEMBER 31, DECEMBER 31, -------------------------------------------
1998 1999 1999 2000
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues from core operations:
Fees from tissue distribution..... $31,892 $70,783 $13,901 $25,555
Other revenues from core
operations...................... 3,365 2,237 919 528
------- ------- ------- -------
Total revenues...................... 35,257 73,020 14,820 26,083
Management services fees............ 24,129 39,994 8,617 14,279
------- ------- ------- -------
Net revenues........................ 11,128 100.0% 33,026 100.0% 6,203 100.0% 11,804 100.0%
Costs of processing and
distribution...................... 9,845 88.5 19,172 58.1 4,398 70.9 6,327 53.6
------- ----- ------- ----- ------- ----- ------- -----
Gross profit........................ 1,283 11.5 13,854 41.9 1,805 29.1 5,477 46.4
------- ----- ------- ----- ------- ----- ------- -----
Expenses:
Marketing, general and
administrative.................. 3,987 35.8 9,740 29.5 1,673 27.0 3,943 33.4
Research and development.......... 1,472 13.2 1,675 5.1 376 6.1 515 4.4
------- ----- ------- ----- ------- ----- ------- -----
Total expenses...................... 5,459 49.0 11,415 34.6 2,049 33.1 4,458 37.8
------- ----- ------- ----- ------- ----- ------- -----
Operating (loss) income............. (4,176) (37.5) 2,439 7.3 (244) (4.0) 1,019 8.6
------- ----- ------- ----- ------- ----- ------- -----
Interest (expense) income:
Interest expense.................. (153) (1.4) (285) (0.9) (57) (0.9) (108) (0.9)
Interest income................... 187 1.7 187 0.6 67 1.1 90 0.8
------- ----- ------- ----- ------- ----- ------- -----
Total interest income
(expense)--net.................... 34 0.3 (98) (0.3) 10 0.2 (18) (0.1)
------- ----- ------- ----- ------- ----- ------- -----
(Loss) income before income tax
benefit........................... (4,142) (37.2) 2,341 7.0 (234) (3.8) 1,001 8.5
Income tax benefit (expense)........ -- -- 619 1.9 -- -- (393) (3.3)
------- ----- ------- ----- ------- ----- ------- -----
Net (loss) income................... $(4,142) (37.2)% $ 2,960 8.9% $ (234) (3.8)% $ 608 5.2%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
18
<PAGE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
TOTAL REVENUES. Our total revenues increased by $11.3 million, or 76.4%, to
$26.1 million for the three months ended March 31, 2000 from $14.8 million for
the three months ended March 31, 1999.
Fees from tissue distribution increased by $11.7 million, or 84.2%, to
$25.6 million for the three months ended March 31, 2000 from $13.9 million for
the three months ended March 31, 1999. This increase in fees from tissue
distribution was due largely to an increase of $8.7 million in revenues from the
distribution of our spinal allografts, an increase of $2.2 million from the
distribution of conventional tissue and an increase of $0.8 million from the
distribution of other precision tooled allografts. The increase in our revenues
from spinal allografts was due primarily to the increase in volume from three
new spinal allografts we introduced in late 1998, plus a new allograft we
introduced in late 1999. Conventional tissue revenues increased due to our
assumption of UFTB's conventional tissue distribution business in April 1999. Of
the increase in our revenues from precision tooled allografts, $0.7 million was
related to allografts we introduced in 1998 and 1999, with $0.1 million from two
new allografts introduced in 2000. Other revenues from core operations, which
consist of tissue processing fees, biomedical laboratory fees and manufacturing
royalties, decreased by $0.4 million to $0.5 million for the three months ended
March 31, 2000 from $0.9 million for the three months ended March 31, 1999. This
decrease was due to receiving no processing fees from UFTB as a result of our
assumption of their conventional tissue distribution business in April 1999
rather than continuing to process its conventional tissue for a fee.
MANAGEMENT SERVICES FEES. Management services fees, which consist of
amounts paid to Medtronic Sofamor Danek for management services they provide to
assist in the distribution of our allografts, increased by $5.7 million, or
66.3%, to $14.3 million for the three months ended March 31, 2000 from
$8.6 million for the three months ended March 31, 1999. The increase in the
absolute amount of these fees was due to the greater revenues generated through
the management services of Medtronic Sofamor Danek. As a percentage of total
revenues, however, these fees decreased from 58.1% for the three months ended
March 31, 1999 to 54.7% for the three months ended March 31, 2000. This decrease
in management services fees as a percentage of total revenues was attributable
to the management services fees payable by us on certain of our allografts being
70% of revenues derived from distribution of allografts for which Medtronic
Sofamor Danek provides management services for the first three months of 2000
compared to 80% during a portion of the first three months of 1999. In addition,
an increase in distribution of our non-spinal allografts, for which we do not
pay a management services fee, contributed to the reduction in management
services fees as a percentage of total fees.
NET REVENUES. Our net revenues increased by $5.6 million, or 90.3%, to
$11.8 million for the three months ended March 31, 2000 from $6.2 million for
the three months ended March 31, 1999. As a percentage of total revenues, our
net revenues increased from 41.9% for the three months ended March 31, 1999 to
45.3% for the three months ended March 31, 2000. This increase was due mainly to
the impact of distribution of our non-spinal allografts, for which we do not pay
management services fees.
COSTS OF PROCESSING AND DISTRIBUTION. Costs of processing and distribution
increased by $1.9 million, or 43.2%, to $6.3 million for the three months ended
March 31, 2000 from $4.4 million for the three months ended March 31, 1999. As a
percentage of net revenues, however, these costs decreased from 70.9% for the
three months ended March 31, 1999 to 53.6% for the three months ended March 31,
2000. This reduction was attributable primarily to improvements in processing
efficiencies achieved through our introduction of automated processing
machinery, as well as efficiencies associated with increased volume. In
addition, the increase in our net revenues due to reduced management services
fees payable by us also resulted in a reduction of the percentage of our net
revenues attributable to costs of processing and distribution.
19
<PAGE>
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses increased by $2.2 million, or 129.4%, to $3.9 million
for the three months ended March 31, 2000 from $1.7 million for the three months
ended March 31, 1999. Contributing to this increase was an increase of
$0.3 million in marketing and direct distribution payroll expense, as well as an
increase of $0.3 million in administrative payroll expenses to support the
growth of our business. Also contributing to the increase was a $0.1 million
increase in facilities expense during 2000 due to additional space being leased
by us during the period. Other cost increases included an increase in
distributor commissions, primarily on conventional tissue, of $0.6 million,
increased depreciation expense of $0.1 million, increased royalties on
conventional tissue of $0.1 million and increased professional fees and travel
related expenses of $0.2 million to support our distribution and marketing
efforts. Our acquisition of Georgia Tissue Bank in November 1999 also added
$0.3 million to these expenses. As a percentage of net revenues, marketing,
general and administrative expenses increased from 27.0% for the three months
ended March 31, 1999 to 33.4% for the three months ended March 31, 2000. This
increase as a percentage of net revenues was due primarily to our hiring
additional personnel to support the expansion of our business in 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $0.1 million to $0.5 million for the three months ended March 31,
2000 from $0.4 million for the three months ended March 31, 1999. This increase
was due largely to our hiring additional personnel to develop new allografts and
technologies. We expense research and development costs as incurred. As a
percentage of net revenues, research and development expenses decreased from
6.1% for the three months ended March 31, 1999 to 4.4% for the three months
ended March 31, 2000. This decrease was due to our net revenues rising without a
commensurate increase in research and development expenses.
INTEREST INCOME AND EXPENSE--NET. Net interest expense for the three months
ended March 31, 2000 was $18,000 compared to net interest income of $10,000 for
the three months ended March 31, 1999. The increase in the amount of interest we
paid was due largely to borrowings under our line of credit facility entered
into during the second quarter of 1999, as well as interest paid on a number of
capital leases entered into after the first quarter of 1999.
INCOME TAX EXPENSE. Income tax expense for the three months ended
March 31, 2000 was $0.4 million versus no expense for the three months ended
March 31, 1999. The increase was due to a loss before taxes in the three months
ended March 31, 1999 versus income before income tax of $1.0 million. Since we
had incurred a loss in the period ended December 31, 1998, at the end of
March 1999, we did not know if we would be profitable in the near future and
therefore did not record a tax benefit related to the loss for that period.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO PERIOD ENDED DECEMBER 31, 1998
AMOUNTS STATED BELOW FOR THE PERIOD ENDED DECEMBER 31, 1998 INCLUDE ONLY
APPROXIMATELY TEN AND ONE-HALF MONTHS OF OPERATIONS, COMPARED TO A FULL
12 MONTHS FOR THE YEAR ENDED DECEMBER 31, 1999.
TOTAL REVENUES. Our total revenues increased by $37.7 million, or 106.8%,
to $73.0 million for the year ended December 31, 1999 from $35.3 million for the
period ended December 31, 1998.
Fees from tissue distribution increased by $38.9 million, or 121.9%, to
$70.8 million for the year ended December 31, 1999 from $31.9 million for the
period ended December 31, 1998. The increase in fees from tissue distribution
was due largely to an increase of $26.7 million in revenues from the
distribution of our spinal allografts, an increase of $8.0 million from the
distribution of conventional tissue and an increase of $4.2 million from the
distribution of other precision tooled allografts. The increase in our revenues
from spinal allografts was due primarily to our introduction of three new spinal
allografts in late 1998. Conventional tissue revenues increased due to our
assumption of UFTB's conventional tissue distribution business in April 1999. Of
the increase in our revenues from precision
20
<PAGE>
tooled allografts, $3.6 million was related to the introduction of five new
allografts in 1998, and $0.6 million was related to the introduction of four new
allografts in 1999.
Other revenues from core operations, which consist of tissue processing
fees, biomedical laboratory fees and manufacturing royalties, decreased by
$1.2 million, or 33.5%, to $2.2 million for the year ended December 31, 1999
from $3.4 million for the period ended December 31, 1998. This decrease was due
largely to a reduction during 1999 of processing fees from UFTB as a result of
our assumption of their conventional tissue distribution business in April 1999
rather than continuing to process its conventional tissue for a fee.
MANAGEMENT SERVICES FEES. Management services fees, which consist of
amounts paid to Medtronic Sofamor Danek for management services provided to
assist in the distribution of our allografts, increased by $15.9 million, or
66.0%, to $40.0 million for the year ended December 31, 1999 from $24.1 million
for the period ended December 31, 1998. The increase in the absolute amount of
these fees was due to the greater revenues generated through the management
services of Medtronic Sofamor Danek. As a percentage of total revenues, however,
these fees decreased from 68.4% for the period ended December 31, 1998 to 54.8%
for the year ended December 31, 1999. This decrease in management services fees
as a percentage of total revenues was attributable to a decrease in the
management services fees payable by us on certain of our allografts from 80% of
revenues derived from distribution of allografts for which Medtronic Sofamor
Danek provides management services to 70% during the first quarter of 1999. In
addition, an increase in distribution of our non-spinal allografts, for which we
do not pay a management services fee, contributed to the reduction in management
services fees as a percentage of total fees.
NET REVENUES. Our net revenues increased by $21.9 million, or 197.3%, to
$33.0 million for the year ended December 31, 1999 from $11.1 million for the
period ended December 31, 1998. As a percentage of total revenues, our net
revenues increased from 31.6% for the period ended December 31, 1998 to 45.2%
for the year ended December 31, 1999. This increase was due mainly to the impact
of distribution of our non-spinal allografts, for which we do not pay management
services fees.
COSTS OF PROCESSING AND DISTRIBUTION. Costs of processing and distribution
increased by $9.4 million, or 95.9%, to $19.2 million for the year ended
December 31, 1999 from $9.8 million for the period ended December 31, 1998. As a
percentage of net revenues, however, these costs decreased from 88.5% for the
period ended December 31, 1998 to 58.0% for the year ended December 31, 1999.
This reduction was attributable primarily to improvements in processing
efficiencies achieved through our introduction of automated processing
machinery, as well as efficiencies associated with increased volume. In
addition, the increase in our net revenues due to reduced management services
fees payable by us also resulted in a reduction of the percentage of our net
revenues attributable to costs of processing and distribution.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses increased by $5.7 million, or 142.3%, to $9.7 million
for the year ended December 31, 1999 from $4.0 million for the period ended
December 31, 1998. Contributing to this increase was an increase of
$1.1 million in marketing and direct distribution payroll expense, as well as an
increase of $0.7 million in administrative expenses to support the growth of our
business. Also contributing to the increase was a $0.7 million increase in
facilities expense during 1999 as we went from leasing one building at the
beginning of 1998 to two buildings in the last quarter of 1998. Other cost
increases included an increase in distributor commissions, primarily on
conventional tissue, of $1.2 million, increased depreciation expense of $0.4
million, increased royalties on conventional tissue of $0.3 million and
increased professional fees and travel related expenses of $0.9 million to
support our distribution and marketing efforts. As a percentage of net revenues,
marketing, general and administrative expenses decreased from 35.8% for the
period ended December 31, 1998 to 29.5% for the year ended
21
<PAGE>
December 31, 1999. This decrease was due to our net revenues rising without a
commensurate increase in marketing, general and administrative expenses.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $0.2 million, or 13.3%, to $1.7 million for the year ended
December 31, 1999 from $1.5 million for the period ended December 31, 1998. This
increase was due largely to the hiring of additional personnel to develop new
allografts and technologies. We expense research and development costs as
incurred. As a percentage of net revenues, research and development expenses
decreased from 13.2% for the period ended December 31, 1998 to 5.1% for the year
ended December 31, 1999. This decrease was due to our net revenues rising
without a commensurate increase in research and development expenses.
INTEREST INCOME AND EXPENSE--NET. Net interest expense for the year ended
December 31, 1999 was $98,000 compared to net interest income of $34,000 for the
period ended December 31, 1998. The increase in the amount of interest we paid
was due largely to borrowings under our line of credit facility entered into
during 1999, as well as interest paid on a number of capital leases entered into
during 1999.
INCOME TAX BENEFIT. In 1998 we recorded a valuation allowance with respect
to a deferred tax asset since we believed at the time that it was unlikely to be
realized. In 1999, as a result of achieving positive net income for that year,
this valuation allowance was reversed resulting in an income tax benefit of $0.6
million for 1999.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following tables present unaudited quarterly statement of operations
data in both dollars and as percentages of net revenues for each of the quarters
for the fiscal periods ended December 31, 1998, December 31, 1999 and for the
quarter March 31, 2000. This information is unaudited, but in our opinion has
been prepared substantially on the same basis as the audited consolidated
financial statements which appear elsewhere in this prospectus. All necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts to present fairly the unaudited quarterly results. You should
read the quarterly data presented below in conjunction with our consolidated
financial statements and the accompanying notes appearing elsewhere in this
prospectus. You should not view the results of operations for any quarter as an
indication of the results of operations for any future period.
22
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1999 1999 1999
-------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from core operations:
Fees from tissue
distribution............... $8,696 $ 8,794 $10,057 $13,901 $16,273 $18,938
Other revenues from core
operations................. 977 897 778 919 468 426
------ ------- ------- ------- ------- -------
Total revenues............. 9,673 9,691 10,835 14,820 16,741 19,364
Management services fees....... 6,698 6,685 7,427 8,617 8,845 10,682
------ ------- ------- ------- ------- -------
Net revenues................. 2,975 3,006 3,408 6,203 7,896 8,682
Costs of processing and
distribution................. 2,467 2,791 3,631 4,398 4,592 4,725
------ ------- ------- ------- ------- -------
Gross profit............... 508 215 (223) 1,805 3,304 3,957
------ ------- ------- ------- ------- -------
Expenses:
Marketing, general and
administrative............. 861 1,118 1,598 1,673 2,346 2,693
Research and development..... 328 484 503 376 465 580
------ ------- ------- ------- ------- -------
Total expenses............. 1,189 1,602 2,101 2,049 2,811 3,273
------ ------- ------- ------- ------- -------
Operating income (loss)........ (681) (1,387) (2,324) (244) 493 684
------ ------- ------- ------- ------- -------
Interest (expense) income:
Interest expense............. (37) (36) (60) (57) (56) (76)
Interest income.............. 64 57 66 67 23 4
------ ------- ------- ------- ------- -------
Total interest (expense)
income-net............... 27 21 6 10 (33) (72)
------ ------- ------- ------- ------- -------
Income (loss) before income tax
(expense) benefit............ (654) (1,366) (2,318) (234) 460 612
Income tax (expense) benefit... -- -- -- -- (257) (471)
------ ------- ------- ------- ------- -------
Net income (loss).............. $ (654) $(1,366) $(2,318) $ (234) $ 203 $ 141
====== ======= ======= ======= ======= =======
<CAPTION>
QUARTER ENDED
------------------------
DECEMBER 31, MARCH 31,
1999 2000
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues from core operations:
Fees from tissue
distribution............... $21,671 $25,555
Other revenues from core
operations................. 424 528
------- -------
Total revenues............. 22,095 26,083
Management services fees....... 11,850 14,279
------- -------
Net revenues................. 10,245 11,804
Costs of processing and
distribution................. 5,457 6,327
------- -------
Gross profit............... 4,788 5,477
------- -------
Expenses:
Marketing, general and
administrative............. 3,028 3,943
Research and development..... 254 515
------- -------
Total expenses............. 3,282 4,458
------- -------
Operating income (loss)........ 1,506 1,019
------- -------
Interest (expense) income:
Interest expense............. (96) (108)
Interest income.............. 93 90
------- -------
Total interest (expense)
income-net............... (3) (18)
------- -------
Income (loss) before income tax
(expense) benefit............ 1,503 1,001
Income tax (expense) benefit... 1,347 (393)
------- -------
Net income (loss).............. $ 2,850 $ 608
======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1999 1999 1999
-------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF NET REVENUES:
Net revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of processing and
distribution.................. 82.9 92.8 106.5 70.9 58.2 54.4
----- ----- ----- ----- ----- -----
Gross profit................ 17.1 7.2 (6.5) 29.1 41.8 45.6
Expenses:
Marketing, general and
administrative.............. 28.9 37.2 46.9 27.0 29.7 31.0
Research and development...... 11.1 16.1 14.8 6.1 5.9 6.7
----- ----- ----- ----- ----- -----
Total expenses.............. 40.0 53.3 61.7 33.1 35.6 37.7
----- ----- ----- ----- ----- -----
Operating income (loss)......... (22.9) (46.1) (68.2) (4.0) 6.2 7.9
----- ----- ----- ----- ----- -----
Interest (expense) income:
Interest expense.............. (1.2) (1.2) (1.7) (0.9) (0.7) (0.9)
Interest income............... 2.1 1.9 1.9 1.1 0.3 0.0
----- ----- ----- ----- ----- -----
Total interest (expense)
income-net................ 0.9 0.7 0.2 0.2 (0.4) (0.9)
----- ----- ----- ----- ----- -----
Income (loss) before income tax
(expense) benefit............. (22.0) (45.4) (68.0) (3.8) 5.8 7.0
Income tax (expense) benefit.... -- -- -- -- (3.3) (5.4)
----- ----- ----- ----- ----- -----
Net income (loss)............... (22.0)% (45.4)% (68.0)% (3.8)% 2.5% 1.6%
===== ===== ===== ===== ===== =====
<CAPTION>
QUARTER ENDED
------------------------
DECEMBER 31, MARCH 31,
1999 2000
------------ ---------
<S> <C> <C>
PERCENTAGE OF NET REVENUES:
Net revenues.................... 100.0% 100.0%
Costs of processing and
distribution.................. 53.3 53.6
----- -----
Gross profit................ 46.7 46.4
Expenses:
Marketing, general and
administrative.............. 29.6 33.4
Research and development...... 2.4 4.4
----- -----
Total expenses.............. 32.0 37.8
----- -----
Operating income (loss)......... 14.7 8.6
----- -----
Interest (expense) income:
Interest expense.............. (0.9) (0.9)
Interest income............... 0.9 0.8
----- -----
Total interest (expense)
income-net................ (0.0) (0.1)
----- -----
Income (loss) before income tax
(expense) benefit............. 14.7 8.5
Income tax (expense) benefit.... 13.1 (3.3)
----- -----
Net income (loss)............... 27.8% 5.2%
===== =====
</TABLE>
Our quarterly operating results have fluctuated significantly since we began
operations. One of the primary reasons for these fluctuations is our historical
and current dependence upon our MD-Series Threaded Bone Dowels. In an effort to
smooth these fluctuations, we have attempted to diversify the allografts we
offer, including the introduction of eight new allografts during 1998. While
these new
23
<PAGE>
allografts accounted for only $2.9 million of total revenues during 1998, they
accounted for $31.3 million of the $37.7 million increase in our 1999 total
revenues. Also accounting for a portion of the increase in our total revenues
for 1999 was an increase of $8.0 million in conventional tissue revenues when we
assumed UFTB's conventional tissue processing business in April 1999.
Our revenue diversification efforts also favorably impacted our gross profit
as a percentage of net revenues, which increased from 11.5% of our net revenues
in 1998 to 41.9% in 1999. Adding to this impact was a decrease in the first
quarter of 1999 in the management services fees we are required to pay to
Medtronic Sofamor Danek for certain of our spinal allografts from 80% to 70%.
The impact of this decrease was an effective increase in the net revenues from
each allograft distributed through that company without any change in direct
costs. Also increasing our 1999 gross margin was an increase in distribution of
our bone paste allografts for the spinal market, which bear lower management
services fees.
In order to permit the expansion of our business and increase revenues, we
incurred additional manufacturing costs and material usage in the fourth quarter
1998. The result of these activities was a negative gross margin of $0.2 million
or 6.5% of net revenues during the fourth quarter of 1998. These additional
costs included higher payroll costs of approximately $0.2 million due to the
hiring of additional personnel and approximately $0.3 million for additional lab
testing, packaging and tools and equipment. We also incurred higher material
costs of $0.4 million due to higher material usage during the early phases of
production.
In addition to the higher manufacturing costs incurred in the fourth quarter
of 1998, we also hired additional marketing, distribution and administrative
staff in the second through fourth quarters of 1998 to support the anticipated
growth in our business. These staff increases and related costs contributed to
our operating losses in the second through fourth quarters of 1998 and in the
first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since we began operations, we have financed our operations primarily through
our sale of preferred stock, totaling $6.4 million in net proceeds in 1998 and
$10.0 million in net proceeds in 1999.
Our net cash used in operating activities increased by $9.9 million to
$6.5 million for the year ended December 31, 1999 from net cash provided by
operating activities of $3.4 million for the period ended December 31, 1998.
This increase was largely due to the payment of a $4.5 million non-refundable
fee by Medtronic Sofamor Danek during 1998 related to our agreement with that
company and an increase in our working capital of approximately $5.5 million for
the year ended December 31, 1999. For accounting purposes, we deferred the
$4.5 million fee we received from Medtronic Sofamor Danek and we are recognizing
it on a straight-line basis over the 20 year life of the agreement. Our net cash
used in operating activities was $1.9 million for the three months ended
March 31, 2000, a change of $0.2 million from net cash used in operating
activities of $1.7 million for the three months ended March 31, 1999. During the
three months ended March 31, 2000, cash was provided by net income of
$0.6 million and an increase in accounts payable of $2.1 million. Uses of cash
during that period included a $2.3 million increase in accounts receivable and a
$2.5 million increase in inventory.
Our net cash used in investing activities increased by $1.0 million to
$2.9 million for the year ended December 31, 1999 from $1.9 million for the
period ended December 31, 1998. This increase was due primarily to the $0.5
million we paid for our acquisition of the net assets of Georgia Tissue Bank,
plus an increase of $0.5 million in the amount paid for the purchase of
property, plant and equipment, during 1999. During the year ended December 31,
1999, $0.8 million of cash was used in the purchase of property, plant and
equipment largely related to our BioCleanse processing facility. Our net cash
used in investing activities increased by $1.5 million to $2.1 million for the
three months ended March 31, 2000 from $0.6 million for the three months ended
March 31, 1999. This increase was due primarily to the $1.4 million we paid for
our acquisition of the buildings and land we previously leased, and the
acquisition of additional land for expansion. In order to finance these
purchases, we
24
<PAGE>
entered into a 20-year term loan in the amount of $2.8 million, collateralized
by the property. The remainder of the purchase price was financed with a portion
of the proceeds from our sale of preferred stock during 1999.
Net cash provided by financing activities increased by $10.6 million to
$13.0 million for the year ended December 31, 1999 from $2.4 million for the
period ended December 31, 1998. This increase was due primarily to the
$10.0 million in net proceeds we realized from our sale of preferred stock
during 1999, $2.8 million in net borrowings under our line of credit facility,
and $0.7 million in proceeds due from a stockholder. In 1998, we received
$6.6 million of proceeds from our sale of preferred stock and financed $3.8
million in receivables from UFTB. Net cash used in financing activities for the
three months ended March 31, 2000 was $1.2 million, compared to $1.1 million for
the three months ended March 1999. A $0.9 million payment to reduce borrowings
under our line of credit during the first quarter of 2000 was the primary use of
cash for financing activities.
Our line of credit facility permits us to borrow up to $6.0 million on a
revolving basis and is collateralized by our accounts receivable. This line of
credit facility expires in September 2000. As of March 31, 2000, we had excess
borrowing capacity of approximately $4.1 million under this facility.
On March 30, 2000, we purchased the buildings and land that we currently
occupy, plus an additional 20.8 acres of land for future expansion. The purchase
price for the two buildings and 6.2 acres on which they are situated was
$3.6 million, with the additional parcel of land costing approximately
$0.6 million. In order to finance the purchase, we entered into a 20-year term
loan in the amount of $2.8 million, collateralized by the property. The
remainder of the purchase price was financed with a portion of the proceeds from
our sale of preferred stock during 1999. We continue to lease approximately
18,000 square feet of space in buildings adjacent to those we purchased and
8,800 square feet of warehouse space.
We currently believe that the net proceeds from this offering, cash from
operations and our existing cash and cash equivalents will be sufficient to meet
our anticipated cash requirements for at least the next 12 months. The
completion of one or more acquisitions by us could affect our need for capital.
IMPACT OF INFLATION
Inflation generally affects us by increasing our cost of labor, equipment
and processing tools and supplies. We do not believe that the relatively low
rates of inflation experienced in the United States since the time we began
operations has had any material effect on our business.
INTEREST RATE RISK
We are subject to market risk from exposure to changes in interest rates
based upon our financing, investing and cash management activities. We use a
balanced mix of debt maturities along with both fixed-rate and variable-rate
debt to manage its exposure to changes in interest rates. We do not expect
changes in interest rates to have a material adverse effect on our income or our
cash flows in 2000. However, we cannot assure you that interest rates will not
significantly change in 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES--DEFERRAL OF EFFECTIVE DATE OF FASB STATEMENT NO. 133.
SFAS No. 137 defers for one year the effective date of SFAS No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The rule now will apply to
all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
No. 137 permits early adoption as of the beginning of any fiscal quarter after
its issuance. SFAS No. 133 will require us to recognize all derivatives on our
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, of firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings. We
have not completed our evaluation of the impact of SFAS No. 133, if any, on our
consolidated financial statements.
25
<PAGE>
BUSINESS
INDUSTRY OVERVIEW
Defects in bone and other human tissue can be caused by a variety of sources
including trauma, congenital defect, infectious disease, cancer and other
disease conditions. The prevalent method used by surgeons to repair and promote
the healing of defective tissue is surgery, principally through the use of
surgical implants. When considering a surgical procedure for tissue repair,
surgeons and patients face a number of treatment options including metals and
synthetics, "autograft" tissue, "allograft" tissue and "xenograft" tissue. An
autograft procedure is one in which the surgeon harvests tissue from one part of
a patient's body for transplant to another part of the body to make the needed
repair. Our allograft tissues are recovered from cadaveric donors, processed for
biologic safety and implant mechanical characteristics and then transplanted
into the patient's body to make the repair. Procedures using xenograft tissue,
while not widely used in the United States other than for heart valves, involve
recovering animal tissue, typically bovine or porcine, which is then
transplanted into the patient's body.
The overall market in the United States for tissue repair and healing
through the use of surgical implants, including metals, synthetics, and
allografts, has grown considerably over the last several years, with revenues in
the orthopedic and cardiovascular segments of this market exceeding
$6.4 billion in 1999. In these segments, procedures using allografts, either
conventional graft, bone paste, or specialty tooled tissues, totaled over
310,000 during 1999, accounting for revenues of over $410.0 million. We believe
that the use of allografts will continue to increase and represent a growing
portion of the surgical implant market.
Processors of tissue supply allografts consisting of bone tissue and various
soft tissues, including cardiovascular and connective tissues, to hospitals and
surgeons for use in surgery. The need for tissue is increasing each year and
currently is being served by approximately 30 tissue banks in the United States
that process and/or distribute bone or cardiovascular allografts. We believe
there will continue to be an increase in the use of surgical implants for repair
and healing, and in particular allograft implants. These reasons include:
- the aging of the baby boom generation will result in a greater percentage
of the population requiring tissue repair products;
- as life expectancies increase overall, the need for tissue repair products
will increase;
- as patients and their families become increasingly proactive in
determining the nature of the health care they receive and as they
increasingly use the Internet to research health care alternatives,
pressure will increase on medical providers for more natural healing
alternatives;
- continuing emphasis placed on health and fitness in our society will
continue to drive the growth of sports medicine-related tissue repair and
tissue healing;
- increasing awareness of the safety and benefits of allografts will
increase the acceptance of allografts by surgeons and patients; and
- as the federal and state governments continue to promote organ and tissue
donation, more allograft tissue will become available.
TISSUE REPAIR TREATMENT OPTIONS
METALS AND SYNTHETICS. Historically, the medical community turned to metals
and other synthetics for implant procedures, in part because they can be
precision tooled for specific uses within the body. These metal and synthetic
implants also can be designed for use with instrument sets designed specifically
for the implant procedure. This permits faster and more precise surgeries, with
the patient
26
<PAGE>
spending less time on the operating table, and allows the surgeon to use a
uniform process that can be repeated easily.
Metal and synthetic technologies, however, have several shortcomings. One of
the principal drawbacks to the use of these materials is that they do not
promote bone "remodeling." As part of normal skeletal growth and maintenance,
human bones renew themselves by a continual process of breakdown and build-up
known as "remodeling," the same process involved in the natural healing of
fractures. Metal is stiffer than bone and its use in orthopedics can cause
"stress shielding," where the bone adjoining the metal does not remodel densely
enough and becomes weak and fragile or disappears altogether. This problem can
be of particular concern to elderly patients, who are more likely to suffer from
osteoporosis. Also, a small percentage of patients display sensitivity to
certain kinds of metals, such as nickel. Additionally, a number of synthetics
tend to break down in the body and slowly drift from their initial implant
position. Finally, metal pins and screws used in sports medicine procedures and
small bone repairs have a number of significant disadvantages including a
potentially painful removal process, uncertainty over the long-term consequences
of a hard metal implant adjacent to joints, and tissue inflammation due to metal
particulate debris.
XENOGRAFT. While used in other parts of the world, including Europe, the
use of xenograft, or animal tissue, is not prevalent in the United States other
than for heart valve replacements. One of the reasons for this is a higher risk
of immune system response to implanted xenograft tissue due principally to the
greater difficulty in cleansing the tissue, prior to implant, of all the
substances that can cause an immune response. An additional reason for limited
use of xenograft tissue in the United States is the perceived risk of disease
transmission. One area, however, in which the use of xenograft tissue within the
United States is prevalent is in the cardiovascular market. This is due mainly
to its long accepted use in this market and the reduced difficulty in cleaning
this particular type of tissue due to its thinness.
AUTOGRAFT AND ALLOGRAFT. In order to overcome the drawbacks to the use of
metals, other synthetics and xenograft tissue, surgeons have increasingly turned
to autograft and allograft procedures. Autografts and allografts, in contrast to
metals and synthetics, are not only "osteoconductive," meaning they provide a
scaffold for new bone to attach itself to, but can be "osteoinductive" as well,
meaning they stimulate the growth of new bone. Historically, however, allograft
and autograft procedures were not as easy to perform as procedures using metals
and other synthetics since grafting procedures often required the surgeon to
shape the tissue by hand, using standard operating room instruments prior to
implanting the tissue. This requirement generally increases the amount of time
required to be spent in surgery.
In addition to a lack of pre-tooling, another drawback to autograft
procedures is that they require an additional and potentially dangerous surgery
to harvest the tissue from a second site on the patient's body. In approximately
20% of autograft procedures, morbidity complications arise at the harvest site,
with one out of four of these considered serious. Additional possible
complications involved with autograft procedures include infection, pain, nerve
and arterial injury, joint instability and hernia. Moreover, a patient may not
have sufficient quantities of quality autograft tissue in other parts of his or
her body available for transplant, a particular problem for elderly patients,
who are more likely to suffer from osteoporosis which can compromise the quality
of autograft tissue transplanted. Balanced against these disadvantages is the
belief among some surgeons that a patient's own bone will remodel better than
allograft, as well as the lingering concern over the safety of allograft.
Since the introduction of modern, precision tooled, processed allograft
implants, however, more surgeons are turning to allograft procedures to treat
musculo-skeletal and other tissue defects. Among the reasons for this shift are
that patients can enjoy the benefits of an implant that promotes bone growth and
better healing without having to undergo the potentially risky second surgery to
obtain autograft tissue for transplant. In addition, surgeons increasingly
prefer allograft implants since, with
27
<PAGE>
the introduction of precision tooled allografts and accompanying custom implant
instrumentation, allograft implants now share the same convenience and
ease-of-use advantages as metals and synthetics without the shortcomings. Also,
concerns within the medical community about the transmission of HIV and other
infectious diseases through the use of allograft largely have been addressed and
more surgeons now accept allograft as safe and effective. Finally, patients and
their families increasingly have become more proactive in determining the nature
of the healthcare they receive, due in part to the availability of healthcare
information on the Internet, and increasingly prefer natural healing
alternatives such as allograft.
An historical limitation within the tissue processing industry has been the
requirement that tissue processing be done using clean room technology on a
donor-by-donor basis in order to eliminate the risk of cross contamination of
other donor tissue potentially caused by the contaminated tissue from just one
donor. As a result, tissue processors are required to process donor tissue in a
labor intensive process requiring extensive use of custom machinery and tools to
create these allografts.
ALLOGRAFT MARKETS
The allograft market is limited by the supply of available cadaveric donor
tissue. Of the 3.6 million deaths that occurred during 1999 in the United
States, of which we believe 50% would have been eligible to donate, less than
0.4% actually resulted in donated tissue.
The allograft market can be broken down into a number of distinct segments,
including orthopedic, urological and cardiovascular. The following table
contains selected U.S. information for 1999 about the portions of these segments
that can be addressed through the use of allograft implants:
<TABLE>
<CAPTION>
TOTAL ALLOGRAFT ALLOGRAFT
MARKET PROCEDURES PROCEDURES REVENUES
- ------ ---------- ---------- --------------
<S> <C> <C> <C>
ORTHOPEDIC
Spinal Fusions..................................... 445,000 113,000 $226.0 million
Sports Medicine.................................... 870,000 52,000 $ 73.0 million
Oral-Maxillofacial................................. 67,900 15,000 $ 4.5 million
Conventional Tissue................................ 485,000 125,000 $ 66.0 million
UROLOGICAL(1)
Slings............................................. 250,000 37,000 $ 33.0 million
CARDIOVASCULAR(2)
Heart Valves....................................... 95,000 6,500 $ 41.0 million
</TABLE>
- ------------------------
(1) Data for 1998.
(2) Data for 1997.
ORTHOPEDIC MARKETS
The market for orthopedic tissue can be broken down into the following
distinct segments:
- Spinal Fusions. The spinal market includes approximately 6.0 million
people in the United States who seek treatment for back pain each year, of
which approximately 650,000 to 700,000 result in surgery. Of this number,
approximately 445,000 in 1999 resulted in a spinal fusion, approximately
90% of which included the use of an autograft or allograft implant.
Autograft or allograft implants are commonly used to induce fusion in
metal or bone spinal fusions. Surgeons also frequently use bone paste
allografts as part of these procedures. The U.S. market for spinal
fusions, including metals, synthetics, autograft and allograft, has grown
considerably over the last several years. Total revenues in the United
States for spinal fusions grew from approximately $484.6 million in 1997
to $735.7 million in 1999. Over the same period, the number of spinal
28
<PAGE>
fusion procedures performed in the United States grew from approximately
312,000 in 1997 to approximately 445,000 in 1999. Of these 445,000
procedures, approximately 113,000 involved the use of an allograft
implant, accounting for approximately $226.0 million in revenues.
- Sports Medicine. The sports medicine market includes a number of
segments, including arthroscopy, powered shavers, soft goods, video
imaging and "procedure-specific" surgeries. The procedure-specific segment
of this market that can be addressed through the use of allograft implants
includes repairs to the anterior cruciate ligament, or ACL, rotator cuff,
labrum, meniscus, posterior cruciate ligament, small bone repair,
osteochondral repairs and wedge osteotomies. The number of procedures
performed in the United States in the arthroscopy and procedure-specific
segments of this market has grown from approximately 2.6 million in 1997
to over 3.0 million in 1999. The U.S. market for procedure-specific
surgeries in the sports medicine market that used an implant has grown at
a 6% average annual rate between 1997 and 1999. During 1999, there were
approximately 870,000 procedure-specific surgeries in the United States
that used an implant. Of these 870,000 procedures, approximately 52,000
involved the use of an allograft implant, accounting for approximately
$73.0 million in revenues. We believe a significant number of surgical
procedures which currently are treated only by abrasion or removal of soft
tissue could benefit from allograft technologies, including a portion of
the approximately 400,000 chondroplasty procedures performed in the United
States in 1999. Worldwide, the procedure-specific segment of the sports
medicine market grew from approximately $315.0 million in 1997 to
approximately $360.0 million in 1999.
- Oral-Maxillofacial. The oral-maxillofacial market includes surgeries of
the nose, face, jaw and mouth, including surgery for periodontal disease.
These surgeries typically are either cosmetic or to treat disease or
trauma. As with the sports medicine market, the aging population is
fueling growth in this market by increasing demand for bone pastes used in
jaw reconstruction and for support of dental implants as an alternative to
dentures. Total revenues in the United States from oral-maxillofacial
implants grew from approximately $195.0 million in 1997 to $224.0 million
in 1999. During 1999, approximately 67,900 oral-maxillofacial procedures
were performed in the United States, of which approximately 15,000
involved the use of an allograft implant, accounting for approximately
$4.5 million in revenues.
- Conventional Tissue. The conventional allograft market encompasses
tissues used in orthopedic surgery that have not been precision tooled and
for which custom surgical instrumentation does not exist. Uses of
conventional allograft include osteoarticular grafts for hip and knee
reconstruction, ground bone and bone chips for trauma and bone filler,
fashioned bone for various orthopedic procedures and soft tissue for
ligament repair. During 1999, approximately 485,000 procedures were
performed in the United States, of which approximately 125,000 involved
the use of an allograft implant, accounting for approximately
$66.0 million in revenues.
UROLOGICAL MARKET
The urological allograft market includes tissue implant procedures to treat
urinary incontinence, primarily among older women. Urinary incontinence is a
problem for more than 17 million Americans, approximately 85% of them women. A
widely used procedure for treatment of this condition is re-suspension of the
bladder neck with a "sling" of fibrous material. This sling can be made from
synthetic materials or from various natural tissues. During 1998, approximately
250,000 procedures made use of this sling technique in the United States, of
which approximately 37,000 involved the use of allograft implant, accounting for
approximately $33.0 million in revenues. Although urinary incontinence can be
improved in eight out of ten cases, less than half of those afflicted seek
treatment.
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<PAGE>
CARDIOVASCULAR MARKET
The cardiovascular allograft market includes transplantation of human heart
valves as an alternative to mechanical, synthetic or xenograft substitutes. An
estimated 349,000 heart valve and vascular graft procedures for which allograft
would be appropriate were performed in the United States in 1997, of which
95,000 were heart valve replacement procedures. Of the approximately 69,000
heart valve replacements for which more detailed data are available,
approximately 6,500, or 9.4%, were performed using allograft. Total revenues in
the United States from heart valve replacement procedures using allograft during
1997 totaled approximately $41.0 million.
COMPANY OVERVIEW
We are a leader in the use of biologics and tissue-based innovations that
are used to repair and promote the natural healing of human bone and other human
tissues. Using core human physiology--the basic biology of natural tissues as
they function in the body--our allografts are improving surgical outcomes. Our
goal is to replace conventional implant approaches, including metals, synthetics
and autograft implants, with allograft and for our allografts to become the
implant of choice for tissue repair. We are a leading worldwide provider of
comprehensive healing and biologic tissue products in a broad range of markets.
In addition, we are the largest processor and distributor of precision tooled
allografts in the United States both in terms of revenues and number of surgical
procedures for the year ended December 31, 1999, with our allografts being
distributed in all 50 states and in nine countries internationally. We also
continue to be one of the leading processors of conventional allograft in the
United States.
We process human musculoskeletal and other tissue, including bone,
cartilage, tendon, ligament, pericardial and cardiovascular tissue in producing
our allografts. These tissues are then used to repair and promote the healing of
a wide variety of bone and other tissue defects, including spinal vertebrae
repair, musculoskeletal reconstruction, fracture repair, periodontal repair,
urinary incontinence and heart valve disorders. Our current grafts range from
conventional allografts to precision tooled grafting material, including bone
dowels, wedges, pastes and pins, urological allografts and heart valves. During
1999, we shipped over 90,000 processed allografts, used in an estimated 60,000
procedures. Often, more than one allograft is used in a given procedure.
We have one of the most extensive tissue recovery programs in the United
States, recovering bone or cardiovascular tissue from over 4,000 human donors
during 1999, up from over 2,300 in 1998 and 1,500 in 1997. We believe our
network of recovery groups accounted for approximately 34% of the human tissue
recovered in the United States during 1999.
The following table outlines the markets we serve and the percentage of our
revenues, net of management services fees, from core operations during 1998 and
1999 for these markets:
<TABLE>
<CAPTION>
% OF OUR NET % OF OUR NET
REVENUES FROM REVENUES FROM
CORE OPERATIONS CORE OPERATIONS
MARKET DURING 1998 DURING 1999
- ------ --------------- ---------------
<S> <C> <C>
Spinal Fusions............................ 80.4% 55.5%
Sports Medicine........................... 2.9 8.2
Oral-Maxillofacial........................ 0.0 0.6
Conventional Tissue....................... 14.3 29.3
Urological Sling.......................... 2.4 6.4
</TABLE>
In addition, we will enter the cardiovascular market through our acquisition
of the tissue processing and distribution business of Alabama Tissue Center,
which had approximately $0.5 million in revenues during 1999.
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<PAGE>
We pursue a market-by-market approach to distribution of our allografts,
including strategic arrangements in order to increase our penetration of
selected markets. We have an alliance with Medtronic Sofamor Danek in the spinal
market, with Exactech, Inc. in portions of the non-spinal molded bone paste
market, and with C.R. Bard, Inc. in the urological market.
Using our proprietary BioCleanse system, we believe we are the only tissue
processor currently able to safely process tissue from multiple donors
simultaneously. This system, which kills or inactivates all classes of
conventional pathogens, viruses, microbes, bacteria and fungi, and which
cleanses tissue both before and after processing, allows us to safely process
tissue from up to 100 donors at the same time thereby significantly increasing
the efficiency of tissue processing. In addition, our BioCleanse system is able
to remove blood, fats, lipids and cellular debris from the tissue we process
more successfully than traditional aseptic processing. We believe the removal of
all blood, fat, lipids and cellular debris results in faster patient healing
since it eliminates the need for the patient's body to remove these substances
using natural processes following surgery. In contrast to traditional aseptic
processing, our BioCleanse system also permits us to process tissue at lower
average cost and to process tissue safely and economically from donors and age
groups that might not have been feasible without BioCleanse.
OUR STRATEGY
Our strategy is to be the leading worldwide provider of biologics and
tissue-based innovations that repair and promote the natural healing of human
bone and other tissue. The following are the key elements of our strategy:
CONTINUE PRODUCT INNOVATION TO CREATE NEW ALLOGRAFTS AND PROCEDURES. We
pioneered the development of precision-tooled allograft bone tissue implants. We
plan to continue to use this expertise to strengthen and build upon our existing
platform of allografts and procedures within our core markets, and to enter or
create new markets for our current and future allografts. We do this by
fostering innovation in our research personnel and product development staff. We
also set corporate goals that stimulate product innovation, such as launching at
least one new allograft every quarter within each of our markets.
IDENTIFY ADDITIONAL SURGICAL APPLICATIONS FOR OUR TECHNOLOGIES AND
PRODUCTS. While we intend to continue to introduce new grafts into our
traditional core markets of orthopedics, urology and cardiovascular, we also
intend to leverage our expertise in the area of biologic tissue implants to
develop new technologies and to enter new markets, including the application of
dermal allografts for reconstructive and cosmetic procedures. We plan to make
use of our existing infrastructure, including our extensive research and
development capabilities and sales and marketing infrastructure in order to
establish our presence in these growing markets. In addition, we plan to make
selective acquisitions in order to develop or expand our presence within
particular markets, such as our recent acquisition of the tissue processing and
distribution business of the Alabama Tissue Center which allowed us to enter the
cardiovascular market.
CONTINUE PROCESS INNOVATION TO ESTABLISH PRODUCT DIFFERENTIATION. We intend
to continue to reevaluate and enhance the processes we use in our business to
increase efficiency and maintain our competitive advantage. Our proprietary
BioCleanse system allows us to safely process, sterilize and virally inactivate
tissue from up to 100 donors at the same time. In addition to the efficiencies
and other advantages our BioCleanse technology permits, it also provides us with
a number of significant research and development advantages, including the
opportunity to infuse allografts with growth factor agents. Additionally, we
intend to continue to introduce greater automation into the processing of our
allografts in order to further enhance efficiencies and reduce processing costs.
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<PAGE>
EXPAND OUR EXTENSIVE TISSUE RECOVERY PROGRAM AND EMPLOY NEW TECHNOLOGIES TO
MAKE BETTER USE OF EXISTING TISSUE SUPPLY. We intend to continue our strategy
of entering into alliances with tissue sources to ensure continued growth of our
tissue availability and to introduce these sources to successful tissue recovery
programs within our alliance to raise the level of tissue donation. We also
intend to make selective acquisitions, such as our recent acquisition of Georgia
Tissue Bank, to further enhance our tissue recovery efforts. Additionally, we
plan to expand our tissue recovery efforts internationally to support our
projected growth in those markets. We also seek to increase the availability of
donor tissue by further improving the efficiency of our tissue processing
procedures and by continuing our efforts to increase the level of tissue
donation. We will continue to instill in our employees and alliance partners our
philosophy of honoring the gift of tissue donation and using that gift
responsibly to help as many patients as possible. Finally, we plan to augment
the supply of human tissue through the use of alternative tissues, such as
bovine and porcine tissue.
EXPAND OUR SALES AND MARKETING CAPABILITIES. We believe a significant
opportunity exists to expand distribution of our grafts and technologies. We
intend to continue to expand our presence both domestically and internationally
by increasing the level of our sales and marketing activities, in the countries
in which we presently operate, as well as in additional countries. We plan to
continue to enter into new distribution relationships, expand existing
distribution relationships, and augment our internal sales and marketing
capabilities to enhance our penetration in the markets we serve. In addition, we
intend to continue to educate and support the medical community by creating an
Internet-based ordering and information system for surgeons. Traditional order
placement will remain in place but as e-commerce becomes increasingly important
within the medical community, we believe our on-line ordering system will
provide a fast and convenient venue for surgeon orders and information. The
level and detail of information made available through our Web site will be
adjusted based upon need thereby resulting in an on-line product which is
educational and useful to the medical community.
PRODUCTS AND PRODUCTS IN DEVELOPMENT
OVERVIEW
We process human musculoskeletal and other tissue, including bone,
cartilage, tendon, ligament, pericardial and cardiovascular tissue, in producing
our line of proprietary allografts. Our current tissues range from
conventionally processed bone and soft tissue to precision tooled bone implants,
soft tissue, urological allografts and heart valves. The service fees we charge
for our allografts vary extensively, ranging from a list fee of less than $200
to in excess of $7,000. Our most commonly used precision-tooled spinal
allografts have listed services fees ranging from approximately $1,000 to
$2,000. The following table summarizes our current allograft offerings in each
of the markets we serve, current distribution of these allografts and the
products and technologies we have in development:
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<TABLE>
<CAPTION>
PRODUCTS AND
TECHNOLOGIES IN
MARKET CURRENT ALLOGRAFTS CURRENT DISTRIBUTION DEVELOPMENT
- ------ ------------------ -------------------- ----------------------------
<S> <C> <C> <C>
ORTHOPEDICS
Spinal -MD-Series Threaded Bone -Medtronic Sofamor Danek -Demineralized and partially
Dowels demineralized cortical bone
-Cornerstone SR Wedge -Bovine versions of existing
-Tangent Cortical Bone Wedge precision tooled allografts
-Precision Cortical Bone
Wedge
Sports Medicine -Interference screws -Network of independent -Soft tissue tacks
-Pre-shaped bone-tendon-bone distributors -Non-frozen, viable
ligament osteochondral grafts
-Meniscus -Suture anchors
-Pins -Preshaped achilles and
quadricep tendons
-Ligament alternatives
-Soft threaded interference
screws
-Wedge used for knee re-
alignment
Bone Paste -Osteofil Injectable Bone -Pastes for spinal market -Bone pastes for use in
Paste through Medtronic Sofamor vertebroplasty
-Opteform Moldable Bone Paste Danek -Non-frozen injectable bone
-Osteofil ICM Bone Paste with -Other bone pastes through paste
cortical cancellous chips network of independent
distributors
-Certain pre-molded bone
forms through Exactech
Conventional Tissue -Frozen femoral heads -Network of independent -Pre-ground femoral heads
-Demineralized bone matrix distributors
-Cortical cancellous chips
and cancellous chips
-Fibular wedges
-Iliac crest wedges
-Bulk allograft segments
-Non precision tooled
ligaments and tendons
Oral-Maxillofacial -Regenafil Injectable Bone -Direct distribution -Demineralized plates for
Paste facial surgery
-Regenaform Moldable Bone -Orbital floor repair system
Paste -Regenaderm dermal membrane
-Pericardium membrane
OTHER MARKETS
Urological -FasLata Fascia Lata -C.R. Bard -Dermis-based urological
slings
-Soft tissue anchors
Cardiovascular -Heart valves -Network of independent -Pulmonic patches
distributors
</TABLE>
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ORTHOPEDIC ALLOGRAFTS
SPINAL. Our principal spinal allografts are our patented MD-Series Threaded
Bone Dowels, our patent-pending Cornerstone SR Wedge, Tangent Cortical Bone
Wedge and Precision Cortical Bone Wedge. These allografts, which are precision
machined, are eventually replaced by the patient's own bone through the
remodeling process, typically over a one- to two-year period. During 1999, we
shipped more than 43,000 spinal allografts, excluding bone pastes, which
accounted for approximately $14.1 million of our net revenues.
Our MD-Series Threaded Bone Dowels are used by surgeons to help restore the
anatomical relationships between the disc, facet joints, vertebral bodies and
foramina. As a result of trauma, abnormal wear and tear, or the aging process,
damage or degenerative changes to the vertebral disc and facet joints may occur
and progress over time. Among other things, this can result in pinched nerves,
disc injury and severe pain. Several important features of our MD-Series dowels
assist in reestablishing spinal stability and reducing pain. First, our dowels
are threaded, providing rigid interface above and below the vertebral body,
allowing the surgeon to restore normal alignment and provide greater stability.
This alignment and stability following surgery contributes to reducing pain,
greater functionality and reduced risk of reoccurrence. Second, the cylindrical
shape of our dowels, together with accompanying threads, provides greater
surface area contact at the junction between our graft and the patient's bone,
thereby enhancing healing. Third, the pre-cut precision size and shape of each
graft helps in reducing surgical time. Evolving from our early smooth cortical
dowel, our present line of dowel allografts is suitable for higher load bearing
situations, making them more useful for areas such as the lumbar spine.
Our Cornerstone SR Wedge, as with our MD-Series dowels, is used in similar
cases in the cervical area of the spine, but is tapped in place, not threaded.
Our Tangent Cortical Bone Wedge and Precision Cortical Bone Wedge allografts are
also tapped or "impacted" in place. Both grafts are specially designed and
contoured to promote stability and minimize disruption of the posterior elements
of the spine.
We currently have several spinal allografts in development, including
demineralized and partially demineralized cortical bone for ligaments for use in
fixating the vertebral bodies following a spinal fusion surgery, as well as
bovine versions of existing precision tooled allografts.
SPORTS MEDICINE. Our product focus in the sports medicine market addresses
the highest volume procedures in sports medicine, primarily in the shoulder and
knee. Our principal sports medicine allografts are our patented and
patent-pending interference screws, patent-pending pre-shaped bone-tendon-bone
ligaments, meniscus allografts and pins. These grafts, used for the repair of
sports-related injuries such as a torn anterior cruciate ligament are precision
tooled to fit surgeons' requirements, allowing the surgeon to perform the
procedure without having to custom shape the implant material. Many of our
sports medicine allografts are designed for specific instrumentation, making
them easier and/or faster to implant. These grafts can also be osteoinductive,
meaning they promote the growth of new bone. During 1999, we shipped
approximately 2,500 sports medicine allografts, excluding bone pastes, which
accounted for approximately $0.3 million of our net revenues.
We currently have several sports medicine allografts in development,
including soft tissue tacks used for reconstruction of soft tissue tears such as
rotator cuff injuries, non-frozen osteochondral allografts used for repair of
articulating surfaces and joints, bone suture anchors used for securing sutures
to bone, pre-shaped achilles tendons and quadriceps tendons. We are also
developing ligament alternatives made from under-used tissue with demineralized
tissue technology for use as ligament and tendon replacements, as well as soft
threaded interference screws and wedges used for knee re-alignment. At the same
time, we are developing the customized instrumentation to be used by surgeons
implanting our sports medicine allografts.
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BONE PASTE. Bone paste allografts, moldable and injectable, are principally
used in fracture treatment, bone and joint reconstruction and periodontal
applications. Our principal products in this market are our patent-pending
Osteofil Injectable Bone Paste and our patent-pending Opteform Moldable Bone
Paste, both of which are composed of demineralized bone matrix and biologic gel
carrier. Our Opteform Moldable Bone Paste and new patent-pending Osteofil ICM
Bone Paste also include cortical cancellous chips. Importantly, all of our bone
pastes are osteoinductive and every batch is tested for osteoinductivity before
release. In addition, our bone pastes are uniquely "sticky" and not water
soluble and therefore will not easily disperse or migrate within a patient's
body, a potential problem with other currently available bone pastes.
In addition, our Osteofil Injectable Bone Paste is dispensable through a
syringe, an advantage not shared by all bone pastes. Our bone pastes have a
gelatinous consistency which hardens at or below body temperature. Our Opteform
Moldable Bone Paste, which is pliable before hardening, is shaped in molded
forms useful for general orthopedic applications, typically hip and knee
replacements. During 1999, we shipped more than 19,000 bone paste allografts,
which accounted for approximately $5.2 million of our net revenues.
We currently have several bone paste allografts in development, including
pastes for the potential use in vertebroplasty, which is the repair of
degenerated vertebral bodies. We also are currently in the final stages of
development of bone pastes that can be stored and distributed at room
temperature and then mixed in the surgical arena, eliminating the need to keep
the material frozen prior to use.
CONVENTIONAL ALLOGRAFTS. Our conventional allograft business includes a
wide variety of allograft categories including our osteoarticular grafts, such
as our frozen femoral heads used for oncological procedures and hip and knee
reconstruction. We also produce certain types of blended and milled bone
allografts, such as our demineralized bone matrix, cortical cancellous chips and
ground cancellous chips, used in total hip and knee replacements and for various
trauma. Additionally, we produce various types of fashioned bone, such as our
fibular wedges and iliac crest wedges, used for various orthopedic procedures,
as well as various soft tissue implants used for ligament and articulating
surface repair, such as non-precision tooled ligaments and tendons.
This growing market is important to us since it allows us to make the best
possible use of the gift of tissue donation and allows us to convert a
significant portion of the conventional allografts we distribute into precision
tooled allografts. We currently have a pre-ground femoral head allograft in
development to be used in hip revision surgery. During 1999, we shipped more
than 16,000 conventional allografts, which accounted for approximately
$9.0 million of our net revenues.
ORAL-MAXILLOFACIAL ALLOGRAFTS. Our principal oral-maxillofacial products
are our patent-pending Regenafil Injectable Bone Paste, our patent-pending
Regenaform Moldable Bone Paste and our pericardium membranes. Our Regenafil and
Regenaform bone pastes are similar to our Osteofil and Opteform bone pastes. Our
allografts have a number of uses in oral-maxillofacial medicine, including use
in procedures to rebuild portions of the jaw to permit the use of dental
implants. Prior to the use of these allografts, many patients receiving dental
implants would instead be limited to dentures or bone would have to be harvested
from their hip to complete the reconstruction. Our pericardium membrane is used
to cover the site where bone paste, or autograft or allograft bone chips, have
been placed, preventing the growth of fibrous tissue from filling the space and
allowing the bone to remodel. During 1999, we shipped more than 1,500
oral-maxillofacial allografts, which accounted for approximately $0.2 million of
our net revenues.
We currently have several oral-maxillofacial allografts in development,
including demineralized plates which could be used in place of metal plating in
oral and maxillofacial surgery, an orbital floor repair system for facial
reconstruction and Regenaderm, our planned dermal membrane for use in the
oral-maxillofacial market.
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UROLOGICAL ALLOGRAFTS
Our principal allograft in the urological market is our FasLata, which is
used primarily to treat urinary incontinence through re-suspension of the
bladder neck. This graft is fashioned as a "sling," processed from fascia lata,
the fibrous tissue covering the large muscles. Prior to the use of sling
procedures, there was not an effective treatment for urinary incontinence which
is caused by a specific defect to the urethra. Demand for useable tissue in this
market far exceeds the supply. Additional applications we are developing for
tissue in this market are soft tissue "anchors" which are precision tooled from
cortical bone, and slings fashioned from alternative tissue such as dermis.
During 1999, we shipped more than 12,000 urological sling allografts, which
accounted for approximately $1.9 million of our net revenues.
CARDIOVASCULAR ALLOGRAFTS
Our principal cardiovascular allograft is our heart valve allograft, which
is used to replace a patient's own heart valve during coronary surgery.
Additional applications we are developing for tissue in this market are pulmonic
patches for faulty arteries, and veins for vascular tissue replacement. During
1999, the tissue processing and distribution business of Alabama Tissue Center
we are acquiring shipped approximately 70 cardiovascular allografts, generating
approximately $0.5 million in revenues for that year.
TISSUE RECOVERY
BACKGROUND
Tissue recovery is the actual removal of tissue from a donor. Tissue
recovery personnel recover tissue within 24 hours following a donor's death
using surgical instruments and aseptic techniques similar to those used in
hospitals for routine surgery. Techniques for recovery emphasize minimizing any
physical alteration of a donor's body. Recovered tissue is placed on wet or dry
ice and then transported by the recovery personnel to the tissue bank.
Under applicable U.S. law, human tissue cannot be sold. However, the law
permits the recovery of certain costs, such as those involved in recovery,
processing and storing tissue and for the advancement of tissue processing
technologies, the types of activities in which we are involved.
Our network of donor recovery groups recovers a variety of tissue types from
donors including tissue from the fibula, femur, tibia, humerus, ilium,
pericardium, fascia lata, and hearts for valve recovery. We screen recovered
tissue in numerous ways to guard against transmittable diseases. This screening
process includes evaluation of risk on the basis of donor lifestyle, interviews
with the donor's family and physical examination of the donor. We also perform
biomedical testing at various stages during the conversion of the tissue into
implantable tissue, using FDA licensed and other tests for known viruses and
pathogens.
In addition to screening for safety of the tissue, tissue banks develop
screening criteria to help them decide what tissue grafts may be processed from
each donor. We believe our biomechanical and tissue suitability screening
standards are unique in the industry. Unlike traditional tissue bank guidelines,
which include arbitrary criteria such as the donor's age as a determinant of
suitability, our standards and criteria are based on scientifically validated
testing and studies. Tissue from each donor is first examined, including
radiographic and physical examination. In addition, for each type of precision
tooled graft to be produced, we perform a biomechanical evaluation. Depending
upon the type of graft, our statistical validations include tests such as impact
and tensile fatigue, static compression and torque, and pull-out strength. For
our bone pastes, we test each batch in animals to ensure that the paste remodels
bone, a step we believe is not taken by any other tissue bank. Our scientific
screening standards, together with our tissue processing technology, allow us to
make use of
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this recovered tissue to the fullest extent possible. They also ensure the
suitability of the tissue to be used for the graft being processed. For example,
we routinely reject some weight-bearing grafts from donors under the age of 50
since our tests indicate those grafts would not have adequate mechanical
properties, while traditional screening protocols might accept any donor under
the age of 55. Unlike traditional screening protocols, our screening standards
allow a greater range of age among donors, and our BioCleanse system permits us
to safely and economically process tissue even from lower-yielding donors. This
provides the maximum benefit for the donor family as well as the donor
recipient.
TISSUE RECOVERY EXPANSION
We have one of the most extensive tissue recovery programs in the United
States, recovering tissue from over 4,000 donors during 1999, compared to 2,300
in 1998 and 1,500 in 1997. At present, there are approximately 30 tissue banks
in the United States that process and/or distribute bone or cardiovascular
allografts, the majority of which also function as donor recovery groups. Donor
recovery groups typically promote tissue donation, educate hospitals and other
institutions regarding tissue donations, support the family of the donor, and
physically recover and transport the donated tissue. Donor services group staff
members are trained to understand and deal with the emotional elements involved
in interacting and supporting the families of donors at their time of loss.
Of the approximately 80 donor recovery groups in the United States that
recover bone tissue, we have sourcing arrangements with more than 35 including
the University of Florida Tissue Bank, Inc., Allosource, Inc., Community Tissue
Services Dayton, Allograft Resources of Wisconsin and Tissue Banks
International. Of these 35 donor recovery groups, we have exclusive agreements
with five, non-exclusive agreements with 16, and exclusive management services
agreements with four. The remaining groups work with us on a non-contract basis
or through relationships with other recovery groups in the network. This
extensive supply alliance allowed us to ship over 90,000 processed allografts
during 1999, used by surgeons in an estimated 60,000 procedures. Often, more
than one allograft is used in a given procedure.
In particular, our exclusive relationship with the University of Florida
Tissue Bank continues to provide us with a large supply of tissue for processing
and distribution. We plan to continue to enhance our recovery programs in order
to support our future growth by adding additional donor recovery groups to our
supply alliance, particularly those presently acting as exclusive suppliers to
others in the industry. Additionally, we may from time to time consider
additional acquisitions of tissue banks to further enhance supply, such as our
recent acquisition of Georgia Tissue Bank.
During 1999, of the more than 3.6 million deaths in the United States, of
which we believe 50% would have been eligible to donate, less than 0.4% actually
resulted in donated tissue. To the extent possible, we work with management of
the tissue banks with which we have relationships to assist them in increasing
the level of tissue donation. In areas where we have had active involvement with
donor recovery groups over an extended period of time, we have increased the
recovery rate to in excess of 4.0%. This involvement may include entering into a
management services agreement with these tissue banks. While the terms of these
agreements vary, often they involve assisting with the design or improvement of
the tissue bank's donor services group to increase the level of donation.
Our strategy is to further expand our tissue recovery operations in our
targeted regions, which include Florida/Georgia, Indiana/Michigan and New York,
through increased professional and public education. We also plan to continue to
establish relationships with medical examiners, hospitals and funeral homes in
these areas. We presently have agreements with 10 donor recovery groups within
these three targeted regions, two of which are management services agreements.
We have a four member team operating in each of these regions consisting of one
representative from each of sales, marketing, donor services, and our
subsidiary, Georgia Tissue Bank. These teams are responsible for providing
services to the recovery groups presently under management services agreements
and also to seek to enter into management services agreements with other donor
recovery groups in these regions.
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Internationally, we currently are involved in expanding tissue recovery
relationships in seven countries in order to support our planned international
growth. In addition, we currently process tissue from Europe under our agreement
with Tutogen. We also have planned joint efforts with foreign partners for
tissue recovery in Spain, Portugal, France, Austria, Switzerland and Italy.
Tissue recovery internationally presents a number of different challenges than
in the United States, including different laws, societal pressures and local
customs.
We also plan to continue to recover tissue though affiliations with funeral
homes, which involves presenting families of the deceased with the option of
tissue donation and supplying them with the information necessary to make an
informed decision. While we reimburse funeral homes for use of their facilities
and materials, the principal incentive for funeral homes to participate in an
affiliation with us is their ability to offer families of deceased the chance to
help others through the gift of tissue donation. Since approximately two-thirds
of all deaths occur outside of a hospital, we believe our strategy of recovering
donor tissue from funeral homes to be important to increasing the overall level
of tissue donation. Tissue recovered from funeral homes is subject to the same
requirement as in a hospital setting, that it be recovered within 24 hours
following a potential donor's death.
We also are exploring the use of bovine tissue in the orthopedics markets
and have arrangements to procure bovine tissue from a "closed herd" of cattle.
This closed herd is one for which the source, age and lineage of each animal has
been documented for more than seven years, with health and pedigree records
reviewed and managed so that no animal of the herd has been suspected of a
disease threatening to humans, and in which each animal is kept separated from
animals not in the closed herd. We already use small amounts of gelatin derived
from porcine sources in the production of our bone pastes.
Donor recovery groups are part of relatively complex relationships. They
deal with donor families, are regulated by the FDA and are often affiliated with
hospitals, universities or Organ Procurement Groups. Our relationship with donor
recovery groups can be impacted by some of the factors that impact these donor
recovery groups and that could have an effect on the supply of tissue to us. For
example, during March 2000, we became aware of letters from an anonymous source
being circulated which made allegations against Allograft Resources of
Wisconsin, or ARW, one of the donor recovery groups with which we have a tissue
recovery agreement. One of these letters was addressed to the FDA and included
specific alleged violations of federal regulations by ARW, including claims that
tissue recipient safety had been compromised. We promptly dispatched a team to
visit ARW to review its donor records and safety procedures. We also contacted
the FDA and a team of FDA auditors conducted its own inspection of ARW. In
addition, the board of directors of ARW engaged a law firm to interview every
employee and a number of former employees of ARW about the allegations made.
The FDA's inspection resulted in the issuance of an inspection notice, and
none of the observations noted raised concerns over the safety of ARW tissue
with respect to the issues raised in the anonymous letters. Six observations
were noted, however, concerning documentation and record keeping, and corrective
actions were proposed. Neither the FDA, our own internal investigation nor the
law firm engaged by ARW found evidence to support the safety allegations made
against ARW. We plan to continue monitoring the situation with ARW, as well as
the other donor recovery groups with which we have recovery arrangements.
TISSUE PROCESSING
Following recovery of tissue using recovery techniques designed to minimize
physical alteration of the donor's body, recovered tissue is placed on wet or
dry ice and then transported by the recovery personnel to the tissue bank. After
the recovered tissue arrives at the tissue bank, we place the donor tissue in
freezer storage until we complete applicable quality assurance procedures and
protocols, including review and approval by one of our in-house medical
directors, each of whom is a medical
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doctor. We then move donor tissue into processing based upon the demand for
certain recoverable tissues.
We surgically process tissue into numerous individual types of implantable
allografts, with each graft being sized, evaluated and labeled. Some allografts
have a much higher demand than do others, and those generally are distributed as
soon as we complete processing and quality assurance. We store the remaining
implantable allografts at our facility, awaiting distribution on an as-needed
basis.
A variety of allografts can be derived from a single bone. For example, from
a femur, we are able to produce a number of allografts including bone dowels,
interference screws, wedges and bone pastes. The following illustration shows
some of the allografts that can be produced from the femur:
[Illustration of femur bone appears here, depicting the various
allografts that we process from the femur]
Other than a number of conventional grafts, bone pastes and soft tissue
which are aseptically processed through conventional means, we process donor
tissue initially through our proprietary BioCleanse system to begin the
sterilization process and to remove all blood, fat and cellular debris. We
believe the removal of all blood, fat, lipids and cellular debris results in
faster patient healing since it eliminates the need for the patient's body to
remove these substances using natural processes following surgery. Our
BioCleanse tissue processing system is a proprietary, multi-step, patent-pending
tissue cleaning process, using ultrasonic, temperature and pressure cycle
controls.
Our validation studies of the BioCleanse system show this process kills or
inactivates all classes of conventional pathogens, viruses, including HIV,
microbes, bacteria and fungi present in the tissue, while retaining the tissue's
useful properties. Specifically, the scope of the validation we performed on our
BioCleanse system included viral inactivation studies demonstrating complete
clearance of relevant enveloped and non-enveloped viruses including HIV,
hepatitis A, porcine parvovirus, bovine viral diarrhea virus and pseudorabies.
Additionally, the validation study showed that the system effectively eliminates
both endogenous and adventitious microbial contamination from within the
matrices of allograft. The validation included testing against a panel of known
microorganisms including BACILLUS STEAROTHERMOPHILUS, recognized as the most
resistant microbial species. The BioCleanse process also was shown to remove
greater than 99.99% of blood and fat from allograft material. The resulting
tissue passes the United States Pharmacopia standard test for sterility and has
been validated to attain a Sterility Assurance Level of 10(-6). Biomechanical
and biocompatability testing of the BioCleansed allografts demonstrated that the
functionality of the allograft was not impaired by the BioCleanse process. Based
on these studies, our BioCleanse technology produces sterile allografts, which
we believe
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to be the safest processed donor tissue in the industry. We believe the
effectiveness of BioCleanse in inactivating viruses such as HIV and other
harmful pathogens helps to allay the fears of disease transmission associated
with allograft procedures.
Because the BioCleanse system is completely automated, we are able to
reproduce our sterilization results in every group of tissue that we process.
Our BioCleanse technology is also cost-effective since we are able to safely
process the tissue of up to 100 donors simultaneously in our system, eliminating
the risk of cross contamination to a less than one in one million probability of
cross contamination. We believe we are the only tissue processor able to safely
process tissue from multiple donors simultaneously.
Tissue to be precision tooled for creating our line of specialized
allografts is removed from inventory after initial BioCleanse processing and
placed into production for the creation of precision machined allografts. Our
processing and manufacturing facilities include a suite of four class 10
certified clean rooms, six class 100 clean rooms and four class 1000 clean
rooms. We recently introduced the use of automated machinery in the precision
tooling of our line of proprietary allografts, a task previously performed by
our staff of tissue technicians using customized tools and equipment. This
increased use of automation allows us to produce precision tooled allografts
faster and more efficiently, while significantly reducing processing costs.
Automation also results in higher quality precision tooled allografts since our
machines are able to reduce the risk of human error by repeating accurately and
uniformly the tooling process countless times, instead of each graft being the
product of the tissue technician's skill.
Our tissue processing equipment also includes our proprietary lathes which
use hydro-infused drilling technology and custom tooling employed to thread our
cortical dowels and produce bone paste. Other custom equipment includes
clean-room milling machines, saws, grinders, dies and mills. After our operators
and technicians precision tool the donor tissue, we repeat the BioCleanse
process to complete the sterilization process. We are ISO 9001 certified, an
internationally recognized standard of quality assurance in product design,
development and production. Our biomedical laboratory is certified under the
Clinical Laboratory Improvements Act, or CLIA. CLIA is intended to ensure the
quality and reliability of clinical laboratories in the United States by
mandating specific standards in the areas of personnel qualification,
administration, participation in proficiency testing, patient test management,
quality control, quality assurance and inspections.
MARKETING AND DISTRIBUTION
In the spinal market, we plan to continue our strategic alliance with
Medtronic Sofamor Danek. We have two management services agreements with
Medtronic Sofamor Danek under which they provide management services to assist
in the distribution and marketing of our spinal allografts and Osteofil bone
paste for spinal uses. Medtronic Sofamor Danek's 350 sales representatives
interact directly with surgeons, providing the necessary instrumentation,
customer support, surgeon education and training, and marketing for our current
spinal allografts. In exchange for its management services, we pay Medtronic
Sofamor Danek services fees. Under the agreement for management services on our
bone pastes, the amount of this service fee is 60% of the amount charged to each
customer until November 1, 2000, after which time the fee increases to 65%. This
agreement expires upon the later of May 2018 or the expiration of our bone paste
patent. Under the agreement for management services on our current line of
spinal allografts, we pay Medtronic Sofamor Danek a service fee equal to 70% of
the amount charged to each customer. Under this agreement, Medtronic Sofamor
Danek has a 60-day right of first refusal to license our new allografts or
developments relating to spinal and cranial medical procedures. This agreement
expires in July 2021. Under these agreements, subject to certain exceptions,
Medtronic Sofamor Danek also has exclusive rights to provide management services
to assist in the distribution of our spinal and cranial allografts
internationally, though it has not done so to date.
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Our allografts are distributed in all 50 states and in nine countries
internationally. In the United States, we have 23 independent distributors,
which distribute our allografts through approximately 150 sales representatives,
specializing in general orthopedics, complemented by our internal sales and
marketing staff of 26 people. Internationally, we have six distributors which
distribute our allografts through approximately 320 sales representatives. We
pursue a market-by-market approach to distribution, including strategic
relationships in selected markets, in order to increase our penetration of these
markets.
In the general orthopedics market, our pre-molded bone pastes are
distributed by Exactech in the United States through its network of 50 sales
agencies using approximately 139 sales representatives. We also distribute our
sports medicine allografts through our network of 23 independent distributors
and 150 independent sales representatives who distribute directly to hospitals
and surgeons in their exclusive territory. Under the terms of our distribution
arrangements, these distributors are entitled to receive a commission for the
revenues they generate and have the right to maintain their status as the
exclusive distributor in their territory if they reach a specified annual quota.
We distribute our bone pastes not used in the spinal and portions of the
sports medicine markets through our independent network of 23 distributors
specializing in general orthopedics. We also are considering creating a direct
sales force in key U.S. markets to augment sales of our Osteofil Injectable Bone
Paste.
For conventional tissue distribution, we use our network of 23 independent
distributors with more than 150 independent sales representatives. Distributors
and sales representatives receive a commission for the revenues they generate
and have the right to maintain their status as the exclusive distributor in
their territory if they reach a specified annual quota. Our recent acquisition
of Georgia Tissue Bank significantly increased the size of our distribution
organization for conventional allografts.
We use direct distribution for the oral-maxillofacial market, with an
emphasis on the periodontal market. We have created direct mail product
information sheets, and we attend trade shows to increase the exposure of our
allografts. Our six person marketing staff supports these marketing efforts by
speaking at various clinics and universities.
In the urological market, we have an exclusive distribution agreement with
C.R. Bard providing for the marketing and distribution of our urological
allografts. Under the terms of this agreement, we ship our urological allografts
directly to C.R. Bard's customers. In return, we receive reimbursement for
shipping charges and a transfer fee which is 40% of the amount charged to the
customer. In order to remain our exclusive distributor of these allografts, C.R.
Bard is required to achieve a specific annual distribution quota. C.R. Bard has
an exclusive 90-day right to negotiate an agreement for the distribution of any
new technology, invention, process or application we may develop in the future
for the treatment of urinary voiding dysfunction or pelvic tissue defects. This
agreement expires in June 2008, subject to a provision providing for automatic
renewal.
In the cardiovascular market, we intend to distribute our heart valve
allografts through one or more distributors, initially within the southern
United States and then expanding to other regions after securing adequate supply
of tissue.
Our current and planned international distribution strategies vary by
market, as well as within each country in which we operate. For example, we
distribute only a portion of our line of allografts within each country. We also
have recently signed distribution agreements with distributors in several key
markets internationally. These include Plus Endoprothetik in Germany, Austria
and Switzerland, Korean Bone Bank in South Korea, Best Medical, Ltd. in Turkey,
Medical Development S.A., in Greece, ACORN Ltd. and UFTB Italia in Italy, and CH
Werfen in Spain and Portugal.
We intend to enter into additional markets around the world, including
France, the United Kingdom and Japan. During 1999, 2.6% of our net revenues were
derived from international markets.
41
<PAGE>
RESEARCH AND DEVELOPMENT
We plan to continue to develop new allografts and technologies within the
orthopedics, urological and cardiovascular markets, and to develop additional
tissue-related technologies for other markets. To accomplish this, we intend to
continue to make use of our core technologies and processes, which include:
- precision machined cortical bone;
- osteoinductive allograft bone pastes;
- our patent-pending proprietary BioCleanse system;
- segmentally demineralized bone allografts;
- viable osteoarticular grafts designed to fit specific surgical
instruments;
- growth factors to stimulate bone or tissue growth;
- cortical allografts assembled from various smaller bone pieces; and
- xenograft bone treated to reduce material that could cause immune
responses.
We believe that these core processes and technologies, including our
BioCleanse system, have far reaching uses in new markets including the use of
biologic tissue implants for growth factor delivery.
As of March 31, 2000, our research and development staff consisted of 22
professional and technical personnel, including three with PhDs or MD/PhDs and
six with masters of science degrees, in disciplines such as mechanical
engineering, materials sciences, biochemistry, biomedical sciences, biomaterials
and organic chemistry. Our research and development staff work closely with
surgeons in the development of new techniques and procedures related to tissue
healing.
PRODUCT DEVELOPMENT PROJECTS
We are involved in numerous development projects, including new machined
orthopedic allografts for the spine and sports medicine areas which allow us to
expand our existing line of allografts. Among our current product development
projects are:
- Interference Screw ST--This "soft" threaded interference screw would
represent an expansion to current offerings in the ACL reconstruction
market.
- Preshaped Tendons for Reconstruction--Achilles and quadriceps tendons with
pre-shaped bone blocks intended to allow for easier replacements and
reduced surgical time.
- Alloanchor RC--Targeted at the shoulder market, this allograft, similar to
a "suture anchor," could represent an allograft alternative to current
metal and resorbable suture anchors.
- Osteofil II--A version of our Osteofil bone paste that can be transported
and stored at room temperature by separating the elements of the paste and
then allowing for mixing in the surgical room.
- Osteochondral plugs--These non-frozen viable allografts could be available
in a range of plug sizes for knee repairs and will represent a new method
for transplanting fresh donor cartilage.
- Tibialis tendons--An increasing popular solution for ACL reconstruction,
this graft could simplify the current surgical procedures for repair of
this tendon.
- Suture anchor extensions--These grafts are further adaptions of the
initial Alloanchor RC, designed in smaller sizes for other procedures in
the shoulder and small joints.
- HTO wedges--This graft is designed for correction of lower extremity
misalignment, a cause of loading imbalances in the knee. This precision
tooled allograft would reduce the amount of "customization" normally
required in this procedure.
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<PAGE>
- Soft tissue tacks--These bone tacks will be used to reestablish soft
tissue to bone attachments. The allograft tack achieves surgical repairs
without the need for suture.
- Complementary instrumentation--Instruments required for use with our
allografts during the surgical procedure are being designed to ease the
demands of the surgical procedure.
- Pre-ground femoral heads--This allograft, used in hip revision surgery,
should reduce the amount of time spent in surgery by freeing surgeons from
the necessity of grinding femoral head tissue in the operating room.
- Dermis-based urological sling--Processed dermis used for "sling
procedures" are essentially decellularized dermal allografts. Our
BioCleanse process is, in addition to a tissue cleaning process, a
decellularizing process. Studies are underway to determine the
effectiveness of the BioCleanse process in producing such a decellularized
allograft which could have application for urinary slings, duraplasties,
pleuralplasties, gastric patches, burn treatment, and reconstructive
facial surgery.
RESEARCH AND TECHNOLOGY PROJECTS
We also are working on a number of long-term research and technology
projects that we believe hold potential. Each of these projects, however, is at
a very early stage and we cannot be sure that we will ever develop a working
technology from this research. Among our current long-term research and
technology projects are:
- Tendon replacement--This patent-pending technology would reconfigure hard,
cortical bone tissue into a tendon-like structure with tendon-like
strength. Until now, most natural tissue tendons used in sports medicine
are transplanted tendons, either autograft or allograft. Allograft
tendons, however, continually are in short supply. The replacement under
development has a wide range of applications, and would remodel into the
patient's own tendon over time.
- Composite allograft--This technology involves the joining of two or more
separate pieces of machined bone. This allows for a wider range of design
configurations and potentially could result in higher yields per tissue
donor since the bone's anatomy would no longer be a limiting factor in the
size and shape of a given allograft.
- Demineralized strip/plate for facial applications--We are researching
methods for processing bone into plates and strips that are somewhat
flexible, yet retain a certain degree of stiffness, using demineralization
or partial demineralization. These plates and strips, especially
advantageous in pediatric surgeries, could then be used for a variety of
oral-maxillofacial applications including orbital floor and nasal
reconstruction.
- Reduced antigenicity bovine bone--We are conducting tests and validations
on the use of our BioCleanse system to reduce antigenic materials
(materials that can cause a rejection or immune response) from bovine
tissue. A variety of grafts could potentially be processed from bovine
bone. We are pursuing CE Mark and 510(k) clearance for bovine versions of
the Cornerstone SRs, Tangents, Precision ALIFs, Interference screws,
suture anchors and CT.
MEDICAL ADVISORY BOARD
Our Medical Advisory Board is made up of doctors, surgeons and medical
experts who meet periodically as a group to provide us with advice on industry
trends in product development and surgical techniques. Our Medical Advisory
Board also works with members of our research and development staff in the
development of new allografts and tissue technologies. Currently, this board has
eight members, representing a broad range of experience in fields relevant to
our technologies and technologies under development. Members of our Medical
Advisory Board receive per-diem consulting fees, including payment for
attendance at meetings and reimbursement of expenses. Members also may
43
<PAGE>
receive royalty rights on any inventions they contribute through their service
with the board. Current members are:
DENNIS ARMSTRONG, M.D. has been a private practicing orthopedic surgeon
since 1977. Prior to entering private practice, Dr. Armstrong completed an
orthopedic residency at Henry Ford Hospital from 1974 until 1977. Dr. Armstrong
received a B.S. from Michigan State University and an M.D. from Wayne State
School of Medicine.
KELVIN G.M. BROCKBANK, PH.D. has served as President of KGB
Associates, Inc., a consulting company on research and development opportunities
relating to implantable devices, tissue engineering and tissue transplantation
since 1996. From 1994 until 1995, Dr. Brockbank served as Vice President of
Research and Development for Edward's Cardio Vascular Surgery Division of Baxter
Healthcare Corporation. From 1985 until 1994, he served as Director of Research
and Development at CryoLife, Inc. Dr. Brockbank holds a B.A. and an M.A. from
Trinity College Dublin and a Ph.D. in Experimental Pathology from the Medical
University of South Carolina.
JEFFREY HOLLINGER, D.D.S., PH.D. is a professor of Surgery, Anatomy and
Developmental Biology at the Oregon Health Sciences University School of
Medicine, a position he has held since 1993. He also serves as President and
Director of Research at the Northwest Wound Healing Center. From 1980 until
1993, Dr. Hollinger was employed by the U.S. Army Institute of Dental Research
where he served as the Director of the bone program from 1982 until 1993, Chief
of Physiology from 1980 until 1993, and Acting Chief of the Departments of Oral
and Maxillofacial Surgery, Pathology and Biochemistry from 1982 until 1985.
Dr. Hollinger received a B.A. from Hofstra University and a D.D.S. and Ph.D.
from the University of Maryland.
PAUL LAROCHELLE, M.D. has been a practicing orthopedic surgeon at the
Brevard Orthopedic Clinic since 1989. From 1988 until 1995, Dr. LaRochelle was
the recipient of six fellowships. He received a B.A. in Ecology and Marine
Sciences from Cornell University in 1977. He holds a MDCM from McGill
University.
N. RAY LEE, D.D.S. has been an Assistant Clinical Professor in the Division
of Oral and Maxillofacial Surgery at the Medical College of Virginia since 1986
and an Assistant Clinical Professor at Eastern Virginia Medical School since
1985. Dr. Lee served as the Director of the Division of Oral Medicine at the
Eastern Virginia Medical School from 1985 until 1987 and an Instructor in
Advanced Trauma Life Support from 1987 until 1995. Dr. Lee holds a B.S. in
Biology from The College of William and Mary and a D.D.S. from Baylor College of
Dentistry.
JACK MCCARTHY, M.D. has been in private practice as an orthopedic surgeon
and a clinical instructor at the University of Nebraska since 1987.
Dr. McCarthy received the Hand Fellowship from Washington University for the
1986/1987 year. Dr. McCarthy holds a B.A. in Natural Science from St. John's
University and an M.D. from the University of Iowa.
HAROLD TU, D.M.D., M.D. has been a practicing Oral and Maxillofacial surgeon
since 1982. In addition, Dr. Tu has been an Associate Professor of Surgery in
the Department of Surgery at the University of Nebraska Medical Center since
1988. Dr. Tu holds a D.M.D. from the University of Oregon Dental School and an
M.D. from the University of Nebraska School of Medicine.
JEFFREY VISOTSKY, M.D. has been an Assistant Professor of Clinical
Orthopedic Surgery at Northwestern University since 1990 and a Clinical
Associate Professor of Orthopedic Surgery and Rehabilitation Medicine at the
University of Chicago since 1992. Dr. Visotsky has been an instructor in the
Physicians Assistant Department at Finch University of Health Sciences of the
Chicago Medical School since 1997 and a Special Consultant to the Division of
Specialized Care for Children at the University of Chicago since 1999.
Dr. Visotsky holds a B.S. from Tulane University and an M.D. from Northwestern
University Medical School.
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<PAGE>
INTELLECTUAL PROPERTY
Our business depends upon the significant know-how and proprietary
technology we have developed. To protect this know-how and proprietary
technology, we rely on a combination of trade secret laws, patents, copyrights,
trademark and confidentiality agreements with our employees and others.
We presently hold three patents covering our MD-Series cortical bone dowel
and our interface screw technology and two allowed patent applications covering
our segmentally demineralized graft, stent and conduit technology in the United
States and one foreign patent covering our MD-Series cortical bone dowel
technology. We also have 18 patent applications pending in the United States, 13
patent continuations pending in the United States and 40 corresponding patents
pending in various foreign countries, including in Canada, Mexico, Japan,
Australia and the European Union. Our patents and patents pending cover 19
allografts or technologies that are important to our business. In addition, we
rely on our substantial body of know-how, including proprietary techniques and
processes in tissue recovery, research and development, tissue processing and
quality assurance. The following table shows the allografts and technologies for
which we have patents or pending applications. A number of our technologies,
such as our BioCleanse technology, are applicable to multiple markets.
<TABLE>
<CAPTION>
COMMERCIAL APPLICATION PROPRIETARY ALLOGRAFTS PROPRIETARY TECHNOLOGIES
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
General Tissue Healing and Reduced antigenicity implants BioCleanse
Processing Assembled implants Implant perfusion
Growth factor extraction
Carriers for growth factors
Spinal MD-Series cortical dowel Processes for making MD Series
SR cervical implant dowels
Segmental demineralized implants. Various methods of making,
processing,
using implants
Sports Medicine Interference screw Process of ACL reconstruction
Segmental demineralized tendons Various methods of making,
Segmental demineralized ligaments processing,
Segmental demineralized cartilage using implants
Suture anchor
Tissue tape
Cartilage derived morphogenic
protein
Bone-tendon-bone implants
Bone Paste Bone Paste
Bone paste tape
Oral-Maxillofacial Segmental demineralized plates
Urological and Cardiovascular Demineralized vessel grafts & stents
</TABLE>
COMPETITION
Competition in the bone and tissue healing industry is intense and subject
to rapid technological change and evolving industry requirements and standards.
Generally, competitors within the industry compete on the basis of design of
related instrumentation, efficacy of products, relationships with the surgical
community, depth of range of implants and pricing. Allograft implants compete
with autograft, metals and synthetic tissues, as well as with alternative
medical procedures. For the foreseeable future, we believe a significant number
of surgeons will continue to choose to perform autograft procedures when
feasible, despite the necessity of performing a second operation. In addition,
many members of the medical community will continue to prefer to use metals and
synthetics due in part to their familiarity with the products and the procedures
required for their use. While synthetics are not osteoinductive, we believe that
researchers will eventually develop methods for permitting the combination of
synthetic tissue with recombinant growth stimulating materials in order to
create an
45
<PAGE>
osteoinductive synthetic tissue. We and a number of other companies are
conducting research intended to develop this technology.
In the spinal market, we compete against other companies that produce and
distribute implants and grafts that promote spinal fusion. Spinal fusion
products can be metal-based fusion cages or allograft implants. Our principal
metals-based competitors include SpineTech, Surgical Dynamics, Medtronic Sofamor
Danek and Acromed, a division of Johnson & Johnson. Our principal allograft-
based competitors include Synthes, DePuy Orthopaedics, a division of Johnson &
Johnson, and Osteotech.
In the sports medicine market, we compete against companies in the anchor
and screw segment of the market and against companies in the allograft implant
segment of the market. In the anchor and screw segment, our principal
competitors include Mitek Products, a division of Johnson & Johnson, Arthrex,
Acufex, a division of Smith & Nephew Endoscopy and Linvatec, a division of
Conmed. In the allograft implant segment, our principal competitors include
CryoLife and the Musculoskeletal Tissue Foundation.
Our bone pastes compete against human tissue-derived and synthetic bone
fillers. In the human tissue-derived bone paste market, our principal
competitors include Osteotech, Gen-Sci Regeneration Sciences and Wright Medical
Technology. In the synthetic-derived bone filler market, we principally compete
against Interpore International and Wright Medical Technology.
In the oral-maxillofacial market, we compete principally against companies
that provide human-derived bone paste or synthetic bone fillers, and against
companies that make periodontal membranes. Among our competitors producing human
tissue derived oral-maxillofacial bone paste include Osteotech and Gen-Sci
Regeneration Sciences. Among our competitors producing synthetic bone pastes
include Geistlich Pharma AG and Interpore International. Competitors producing
periodontal membranes include Gore Medical Products, a division of W.L. Gore &
Associates, Geistlich Pharma AG and LifeCell.
Our principal competitors in the conventional allograft market include the
Musculoskeletal Tissue Foundation, the American Red Cross Tissue Services,
Allosource and LifeNet. Among the companies that market devices used for soft
tissue anchoring in bladder neck suspensions are Mentor, Ethicon, a division of
Johnson & Johnson, Boston Scientific, Smith & Nephew and C.R. Bard.
In the heart valve market we face competition from non-profit tissue banks
that cryopreserve and distribute human tissue, as well as from companies that
market mechanical, porcine and bovine heart valves for implantation. St. Jude
Medical is the leading supplier of mechanical heart valves and has a marketing
and distribution arrangement with a tissue bank that supplies them with
cryopreserved human heart valves. Edwards Lifesciences, until recently a
division of Baxter International, is the leading supplier of porcine heart
valves. CryoLife is the leading supplier of cryopreserved human heart valves and
at least two other tissue banks offer cryopreserved human heart valves,
including the American Red Cross Tissue Services.
GOVERNMENT REGULATION
Government regulation plays a significant role in the processing and
distribution of our current and proposed allografts. The production, testing,
labeling, storage, record keeping, approval, advertising and promotion of these
allografts are governed or influenced by the Food, Drug, and Cosmetic Act, the
Public Health Service Act, and other federal and state statutes and regulations.
Failure to comply with applicable requirements could result in fines,
injunctions, civil penalties, recall or seizure of products, suspension of
production, inability to market current products, criminal prosecution, and
refusal of the government to authorize the marketing of new products.
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<PAGE>
We currently market allografts that are subject to the FDA's "Human Tissue
Intended for Transplantation" regulation. Under the regulation, we are required
to perform donor screening and infectious disease testing and to document this
screening and testing for each tissue we process. The FDA has authority under
the rule to inspect human tissue processing facilities, and to detain, recall,
or destroy tissues for which appropriate documentation is not available. We are
not required to obtain premarket clearance from the FDA for products that meet
the regulation's definition of "human tissue."
Some human tissues, such as heart valve allografts, corneal lenticules, and
dura mater, are regulated by the FDA as medical devices. However, the FDA
permits entities that processed and distributed heart valve allografts before
June 26, 1991 to continue distributing heart valve allografts without obtaining
510(k) clearance or pre-market approval from the FDA. Our heart valve allografts
are covered by this "grandfather" policy. It is likely that in the future the
FDA will regulate additional allografts as medical devices. For allografts
regulated as medical devices, we will need to obtain premarket clearance or
approval through either the 510(k) premarket notification process, or the FDA's
premarket approval, or PMA, process. Under the 510(k) premarket notification
process, we would submit an application containing data which demonstrate the
"substantial equivalence" of our product to a device marketed prior to the
enactment of the Medical Device Amendments of 1976 or to a device legally
marketed after that statute's enactment. The FDA may request submission of
clinical information in support of the 510(k). The collection of data and
preparation of a 510(k) application can be costly and time consuming.
The FDA sometimes rejects 510(k) notices or sometimes the use of a 510(k)
notice may not be appropriate, requiring use of the PMA process. In addition, if
a medical device is not substantially equivalent to a pre-1976 device, use of
the PMA process is required. The PMA process is more complex, costly and time
consuming than the 501(k) clearance procedure. To obtain premarket approval, we
would be required to submit extensive preclinical and clinical data to the FDA.
Upon completion and analysis of clinical studies, we then would be required to
assemble and submit a PMA describing the preclinical, clinical, manufacturing
and other data. Typically, the FDA also inspects the manufacturing facility for
compliance with good manufacturing practice regulations. Review and approval of
a PMA can take several years and some PMAs are never approved.
If clinical trials are to be conducted, we may be required to obtain FDA
approval of an investigational device exemption application, or IDE. An IDE
typically contains data from laboratory and animal testing and a description of
the proposed study methods and clinical protocol. We must conduct our clinical
studies according to a written protocol under the oversight of an institutional
review board at each site where the study will be conducted, and our
investigators must adhere to good clinical practices.
Some human tissue-based products, such as cellular therapies, are regulated
by the FDA as biologics. While we do not at present market any allografts
regulated as biologics, we may do so in the future. Before a biologic may be
marketed, the FDA must approve a biologics license application, or BLA. An
applicant must support a BLA with extensive data, including the results of
preclinical and clinical testing which demonstrate that the product meets
prescribed safety and efficacy standards. Before conducting required clinical
testing with a biologic, we would be required to submit an investigational new
drug application to the FDA. We would be required to conduct all clinical
studies in accordance with an FDA approved protocol, subject to oversight by one
or more institutional review boards. Clinical studies such as these may take
several years and the FDA or sponsor may temporarily or permanently suspend a
clinical study at any time. Upon completion and analysis of clinical trials, we
would be required to submit a BLA containing the results of our clinical trials
and other information, including a complete description of the manufacturing and
control procedures. FDA review and approval of a BLA can take several years.
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<PAGE>
Products marketed under the approvals and clearances described above are
subject to pervasive and continuing regulation by the FDA. To the extent our
allografts are regulated by the FDA, we would be required to register as a
manufacturer and to manufacture these allografts in registered facilities and in
accordance with good manufacturing practices. We would also be subject to
post-marketing surveillance and reporting requirements. In addition, our
manufacturing facilities and processes would be subject to periodic FDA
inspection. Our labeling and promotional activities would be subject to scrutiny
by the FDA and, in certain instances, by the Federal Trade Commission. The
export of devices and biologics is also subject to regulation.
Our tissue processing generates by-products classified as medical hazardous
waste by the U.S. Environmental Protection Agency and the Florida Department of
Environmental Protection. We segregate the material and properly dispose of it
in compliance with applicable environmental regulations.
We also are licensed by the states of New York, Florida, California and
Maryland. These states are concerned primarily with ensuring proper donor
screening, including screening for HIV and viral hepatitis. The state of New
York also regulates the processing of tissue. We received a waiver from certain
New York requirements after presenting information about the use of our
BioCleanse system with pooled donor tissues.
EMPLOYEES
As of March 31, 2000, we had a total of 314 employees. The following chart
shows the number of our employees involved in the various aspects of our
business:
<TABLE>
<CAPTION>
DEPARTMENT NUMBER OF EMPLOYEES
- ---------- -------------------
<S> <C>
Tissue Processing and Manufacturing....................... 188
Tissue Recovery........................................... 11
Sales and Marketing....................................... 26
Research and Development.................................. 22
General and Administrative................................ 67
</TABLE>
FACILITIES
Our physical facilities, located in Alachua, Florida include two
company-owned buildings comprising 45,000 square feet, as well as leased space
in buildings on adjoining and nearby property. These facilities include
20 clean-rooms for tissue processing and packaging, freezers for storage of
tissue and biomedical laboratory facilities. We currently house our BioCleanse
processing and biomedical laboratory operations in approximately 15,000 square
feet of space which we currently lease for approximately $18,000 per month. This
lease expires in February 2002. We sublease 3,855 square feet of space in our
company owned buildings to the University of Florida Tissue Bank for
approximately $5,000 per month, on a month to month basis. We also lease 8,800
square feet of warehouse space at a rate of $4,500 per month under a lease
expiring in June 2002. We have the option to extend this lease for an additional
year. Our wholly-owned subsidiary, Georgia Tissue Bank, operates from a leased
building in Atlanta, Georgia comprising 9,300 square feet, with three clean-
rooms for tissue processing and packaging, and freezers for tissue storage. This
lease has a three year term, expiring in October 2002. The current base rent
under this lease is $12,365 per month.
We plan to construct and equip a new 110,000 square foot facility on
approximately 21 acres of recently acquired property adjacent to our existing
facilities. We intend for this new facility to meet the FDA's "common good
manufacturing practices" requirements. We believe the new facility will increase
our capacity for tissue processing while allowing us to process tissue more
economically. We also
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<PAGE>
believe this new facility will allow us to be designated as an FDA approved
medical device manufacturer. We expect to begin construction of this new
facility during the third quarter of 2000.
LEGAL PROCEEDINGS
EXACTECH LITIGATION
On June 22, 1999, Exactech, Inc. filed a complaint against us, the
University of Florida Tissue Bank and 19 of our medical distributors and sales
agents. The complaint alleges that we have been marketing and distributing bone
paste in violation of an agreement between the University of Florida Tissue Bank
and Exactech. This agreement was assigned to us by the University of Florida
Tissue Bank as part of our separation from that entity. The court granted our
motion to enforce an arbitration provision in the agreement, and the matter is
now in arbitration. Only we, Exactech and the University of Florida Tissue Bank
remain as parties in the arbitration. None of our distributors are involved in
the arbitration. The arbitration is presently proceeding through discovery. We
believe that, even if this arbitration results in an outcome unfavorable to us,
it would not have a material adverse effect on our business, financial condition
or results of operations.
OSTEOTECH LITIGATION
On February 25, 1999, we, the University of Florida Tissue Bank and
Medtronic Sofamor Danek filed a complaint in U.S. District Court against
Osteotech, Inc. Our complaint alleges that Osteotech is infringing upon our
patents for our Diaphysical Cortical Dowel. We are seeking injunctive relief and
monetary damages. Discovery in this matter is ongoing and a trial date has not
yet been set. Our legal expenses in this action are being reimbursed to us by
Medtronic Sofamor Danek.
From time to time, we are party to various legal proceedings incident to
operating a company of our size which we do not deem to be material to our
financial conditions or the operation of our business.
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MANAGEMENT
OUR EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
Our executive officers, key employees and directors, and each of their ages
and positions as of March 31, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
James M. Grooms........................ 40 President, Chief Executive Officer and Chairman
Richard R. Allen....................... 48 Chief Financial Officer, Secretary and Treasurer
James P. Abraham....................... 40 Vice President of Sales
Thomas E. Brewer....................... 52 Vice President of Marketing
Nancy R. Holland....................... 53 Vice President of Donor Services
Frederick C. Preiss.................... 49 Vice President of Operations
Thomas W. Sander....................... 47 Director of Research and Development
C. Randall Mills, Ph.D. ............... 28 Director of Regulatory and Technical Affairs
Herman Baer, M.D. ..................... 67 In-house Medical Director
Edward S. McIntyre, M.D. .............. 52 In-house Medical Director
David J. Selman, M.D. ................. 42 In-house Medical Director
Philip R. Chapman...................... 38 Director
Peter F. Gearen, M.D. ................. 52 Director
Michael J. Odrich...................... 36 Director
Anthony C. Phillips.................... 54 Director
E. Ronald Pickard...................... 51 Director
Daniel L. Weber........................ 69 Director
</TABLE>
JAMES M. GROOMS has been our President, Chief Executive Officer and Chairman
since we began operations in February 1998. From 1995 until joining us, he
served as President and Chief Executive Officer of University of Florida Tissue
Bank, Inc. Mr. Grooms served as the director of the University of Florida Tissue
Bank from 1992 until 1995. Prior to joining the University of Florida Tissue
Bank, Mr. Grooms was employed with CryoLife, Inc. from 1989 until 1992 where he
served as Manager of the Orthopedic Laboratory from 1989 until 1992 and Manager
of the Cardiovascular Laboratory during 1991. From 1987 until 1989, Mr. Grooms
served as Manager of Operations and Manager of Technology at Osteotech, Inc.
Mr. Grooms was the inventor of certain of our intellectual property rights to
key aspects of our allograft technology. Mr. Grooms holds a B.S. in Biology from
Old Dominion University.
RICHARD R. ALLEN has been our Chief Financial Officer, Secretary and
Treasurer since we began operations in February 1998. From 1997 until joining
us, Mr. Allen served as director of Finance and Business Development for the
University of Florida Tissue Bank. From 1990 until 1996, Mr. Allen served as
Chief Financial Officer of Sabine, Inc., a manufacturer of digital audio
equipment. In addition, from 1994 until 1996, Mr. Allen served as a principal of
Strategies 2000, Inc. and he was a principal of Fidelity Business
Consultants, Inc. from 1988 until 1997. Strategies 2000 and Fidelity Business
Consultants are consulting firms specializing in technology development and
licensing. Mr. Allen has been a partner in certified public accounting firms and
holds two bachelor degrees from the University of Florida, including a B.S. in
Accounting.
JAMES P. ABRAHAM has been our Vice President of Sales since June 1999. He
was our Director of Sales from December 1998 until June 1999. From 1994 until
joining us in December 1998, Mr. Abraham served as Vice President of Sales and
Marketing at Encore Orthapedics, Inc. Prior to 1994, he held a number of
positions including the National Sales Director for Intermedics, a division of
Sulzer Medica, Vice President of Marketing and then Executive Vice President of
Sales and Marketing for Implant Technology Inc., Director of Sales for
Orthomet, Inc., a manufacturer of orthopedic
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<PAGE>
medical devices, and a Regional Sales Trainer for Stryker Corporation.
Mr. Abraham holds a B.A. degree in business administration and finance from
Creighton University.
THOMAS E. BREWER has been our Vice President of Marketing since 1999 and our
Director of Marketing from 1998 until 1999. Mr. Brewer held several positions at
Stryker Corporation including general management from 1996 until 1998, European
Marketing Director for Stryker Europe from 1993 until 1996 and various other
management positions from 1988 until 1993. From 1980 until 1988, he held various
marketing positions with Bard Biomedical, a division of C.R. Bard, Inc.
Mr. Brewer holds a B.A. from Hobart College, an M.B.A. from Widener University
and has completed additional graduate work at Syracuse University.
NANCY R. HOLLAND has served as our Vice President of Donor Services since we
began operations in February 1998. She is also the President, Chief Executive
Officer and member of the board of directors of UFTB, where she has been
employed since 1995. Ms. Holland was a National Accounts Manager for
CryoLife, Inc. From 1986 until 1990, she served as the Executive Director of the
American Red Cross' American Council on Transplantation and Executive Director
of the Blood Commission of the American Red Cross from 1983 to 1989.
FREDERICK C. PREISS joined us in November 1998 and has been our Vice
President of Operations since May 1999. From 1996 until 1998, Mr. Preiss was a
private consultant in the medical device industry and from 1994 until 1996, he
served as Executive Vice President of Operations of Wright Medical Technologies.
From 1990 until 1994, he served as Vice President of Manufacturing and
Engineering at U.S. Surgical Corporation. Mr. Preiss holds a B.S. in engineering
and business administration from the University of New Haven.
THOMAS W. SANDER has been our Director of Research and Development since we
began operations in February 1998. From 1996 until 1997, Mr. Sander was Vice
President Research and Development with Howmedica Leibinger, Inc. and from 1991
until 1995, he was Senior Director with U.S. Surgical Corporation. Mr. Sander
holds a B.S. in engineering analysis/bio-engineering from Clemson University and
a Masters in Biomedical Engineering from Tulane University.
C. RANDALL MILLS, PH.D. has served as our Director of Regulatory and
Technical Affairs since January 2000. From 1998 until 1999, he served as our
Senior Technical Affairs Manager. Dr. Mills was with the University of Florida
Tissue Bank from 1994 until 1998, most recently as a clinical laboratory
supervisor. Dr. Mills holds a B.S. in microbiology and physiology from the
University of Florida. He completed his post-graduate training in clinical
pathology at the Shands Hospital of the University of Florida, where he also
received his Ph.D.
DR. HERMAN BAER has been one of our In-house Medical Directors since we
began operations in February 1998. Dr. Baer has been a Professor of Pathology at
the University of Florida School of Medicine since 1998, where he has also
served as Director of Autopsy Services in the Department of Pathology since
1981. Dr. Baer holds an M.D. from the University of Basle in Switzerland.
DR. EDWARD S. MCINTYRE has been one of our In-house Medical Directors since
November 1999. Dr. McIntyre has been in private practice in Gainesville, Florida
for over ten years. Dr. McIntyre holds a B.A. from Temple University and an M.D.
from the Medical School of the University of Texas.
DR. DAVID J. SELMAN has been one of our In-house Medical Directors since
February 2000. Dr. Selman has been in private practice since 1986. Dr. Selman
holds an M.S. in Bioengineering from the University of Michigan, where he also
earned his M.D.
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<PAGE>
PHILIP R. CHAPMAN has served as a member of our Board of Directors since we
began operations in February 1998. He is the President of Venad Administrative
Services, Inc. and has been a General Partner of Adler & Company since 1995.
From 1991 until 1995, he served as a Principal of Adler & Company. From 1981
until 1989, Mr. Chapman served as a Senior Consultant at Booz Allen & Hamilton
International. Mr. Chapman is also a director of Shells Seafood
Restaurants, Inc. He holds a B.S. and an M.B.A. from Columbia University.
PETER F. GEAREN, M.D. has served as a member of our Board of Directors since
we began operations in February 1998. Dr. Gearen was Chief of Staff at the
Shands Hospital at the University of Florida and served as Assistant Dean of
Clinical Affairs at the University of Florida College of Medicine, from 1992
until 1999. He also has been an Associate Professor at the University of Florida
College of Medicine since 1993. Dr. Gearen is also a director of Motion
Engineering, Inc. He holds a B.A. from Spring Hill College and an M.D. from the
Stritch Loyola Medical School.
MICHAEL J. ODRICH has served as a member of our Board of Directors since we
began operations in February 1998. Mr. Odrich has served as a director of Active
Software, Inc. since 1997 and PEMSTAR, Inc. since 1998. Since 1986, he has held
various banking positions at Lehman Brothers Inc. Currently, he is a Managing
Director, head of the venture capital business and has served as the President
of Lehman Brothers Venture Associates since 1999. Mr. Odrich holds a B.A. from
Stanford University and received an M.B.A. from Columbia University.
ANTHONY C. PHILLIPS has served as a member of our Board of Directors since
1998. Mr. Phillips has served as President, Chief Executive Officer and a
director of Raymedica, Inc. since 1995. From 1991 to 1995, he was Senior Vice
President, Worldwide Marketing for CryoLife International, Inc., and from 1989
to 1991, was Vice President, Marketing and Strategic Planning for
Organogenesis, Inc. Mr. Phillips holds a B.S. from the University of Tennessee.
E. RONALD PICKARD has served as a member of our Board of Directors since
1998. Since 1999, he has served as the President of the Medtronic Spinal and
Neurological Group of Medtronic Sofamor Danek. Prior to the merger of Sofamor
Danek Group and Medtronics, Mr. Pickard served in various executive capacities
at Sofamor Danek, including as Chairman of the Board and Chief Executive Officer
from 1994 to 1999. For 22 years prior to joining Sofamor Danek, Mr. Pickard was
employed with Richards Medical Company in various capacities including Director
of Manufacturing from 1975 until 1978, Group Director of Manufacturing from 1979
until 1981, Vice President of Manufacturing from 1982 until 1985, and President
of Orthopaedics Division from 1986 until 1990.
DANIEL L. WEBER has served as a member of our Board of Directors since 1999.
He has served as President and Chief Executive Officer of Marley Manufacturing
Corporation since 1986.
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
Our board of directors is comprised of seven directors. Upon the closing of
this offering, our board of directors will be divided into three classes, with
the members of the respective classes serving for staggered three-year terms.
The initial terms of our current directors in these classes will expire upon the
election and qualification of directors at our 2001, 2002 and 2003 annual
meetings of stockholders. At each annual meeting of stockholders, directors will
be re-elected or elected for full three-year terms. All executive officers are
elected by, and serve at the discretion of, the board of directors. There are no
family relationships among any of our executive officers or directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The audit committee of our board of directors is charged with the
responsibility of reviewing our audited financial statements and accounting
practices, and considering and recommending the
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<PAGE>
appointment of independent accountants for both audit functions and for advisory
and other consulting services. The audit committee is comprised of Messrs.
Chapman, Phillips and Gearen.
The compensation committee of our board of directors is charged with
reviewing and approving the compensation and benefits for our key executive
officers, administering our employee benefit plans and making recommendations to
the full board of directors regarding these matters. The compensation committee
is comprised of Messrs. Chapman and Phillips.
DIRECTOR COMPENSATION
Our directors who are also our employees or officers do not receive any
compensation specifically related to their activities as directors, other than
reimbursement for expenses incurred relating to their attendance at meetings of
the board of directors. Our directors who are not also our employees are
eligible to receive a stipend of $1,000 per meeting, as well as reimbursement
for their expenses incurred relating to their attendance at meetings of the
board of directors. Under our Omnibus Stock Option Plan, at the discretion of
our board of directors or compensation committee, our directors also are
eligible to receive awards of non-qualified stock options. Our directors who are
not also employees receive an annual grant of an option to purchase shares
of our common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our compensation committee has been an employee of ours. None
of our executive officers serves as a member of the board of directors or
compensation committee of any other entity that has one or more executive
officers serving as a member of our board of directors or our compensation
committee.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Mr. Grooms in February 1998.
Mr. Grooms' current annual base salary is $225,000. The agreement expires in
February 2003. The agreement provides for Mr. Grooms' reimbursement for
automobile expenses and a $1,000,000 life insurance policy for Mr. Grooms'
beneficiaries. Under the employment agreement, Mr. Grooms agreed to devote 100%
of his working time to our business and affairs. If we terminate Mr. Grooms'
employment without "cause," within the meaning of the employment agreement, he
will be entitled to severance pay in an amount equal to his then-current annual
salary and will be precluded from competing with us for a period of one year
following the termination of employment. If we terminate Mr. Grooms' employment
for "cause," he will not be entitled to any severance pay, but still will be
precluded from competing with us for the same one year period.
We entered into an employment agreement with Mr. Allen in February 1998. Mr.
Allen's current annual base salary is $150,000. The agreement expires in
February 2003. Under the employment agreement, Mr. Allen agreed to devote 100%
of his working time to our business and affairs. Under the agreement, Mr. Allen
also received shares of our common stock. If we terminate Mr. Allen's
employment without "cause," within the meaning of the employment agreement, he
will be precluded from competing with us in the southeastern United States for a
period of one year following the termination. If we terminate Mr. Allen's
employment for "cause," Mr. Allen will be precluded from competing with us for a
period of two years following the termination.
We entered into an employment agreement with Mr. Abraham in November 1998.
Mr. Abraham's current annual base salary is $150,000. Mr. Abraham is eligible to
receive an annual bonus in an amount to be determined by the board of directors
provided we achieve certain specified revenue levels. The agreement expires in
November 2003. Under the employment agreement, Mr. Abraham agreed to devote 100%
of his working time to our business and affairs. When he entered into the
employment agreement with us, Mr. Abraham received an option to purchase
shares of our
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<PAGE>
common stock. The option is subject to a stock option restriction agreement
under which one fifth of the options vest on each anniversary of the date of the
grant. If we terminate Mr. Abraham's employment without "cause," within the
meaning of the employment agreement he will be entitled to receive severance pay
in an amount equal to one-half of his then-current annual salary and will be
precluded from competing with us for a period of one year following the
termination. In the event of termination for "cause," Mr. Abraham will not be
entitled to severance pay, but will be precluded from competing with us for
three years following the termination.
We entered into an employment agreement with Mr. Brewer in June 1998. Mr.
Brewer's current annual base salary is $155,400. The agreement expires in
June 2003. Under the employment agreement, Mr. Brewer agreed to devote 100% of
his working time to our business and affairs. Mr. Brewer received an option to
purchase shares of our common stock at the time he entered into the
employment agreement. This option is subject to a stock option agreement under
which one fifth of the options vest on each anniversary of the date of the
grant. If we terminate Mr. Brewer's employment without "cause," within the
meaning of the employment agreement, he will be entitled to severance pay in an
amount equal to one-half his then-current annual salary and he will be precluded
from competing with us for a period of two years following the termination. In
the event of termination for "cause," Mr. Brewer will not be entitled to
severance pay but will be precluded from competing with us for the two years
following the termination.
We entered into an employment agreement with Mr. Preiss in November 1998.
Mr. Preiss' current annual base salary is $150,000 for serving as our Vice
President of Operations. The agreement expires in November 2003. Under the
employment agreement, Mr. Preiss agreed to devote 100% of his working time to
our business and affairs. We awarded Mr. Preiss an option to purchase
shares of our common stock at the time he entered into his employment agreement
with us. If we terminate Mr. Preiss' employment without "cause," within the
meaning of the employment agreement, he will be entitled to severance pay in an
amount equal to one-half of his then-current annual salary, to be paid out
monthly, and he will be precluded from competing with us for a period of one
year following the termination. If we terminate Mr. Preiss' employment with us
for "cause," Mr. Preiss will not be entitled to severance pay but will be
precluded from competing with us for a period of three years following the
termination.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth for the periods indicated salary and certain
other compensation paid or accrued by us for our Chief Executive Officer and the
four other most highly compensated executive officers whose total salary and
bonus exceeded $100,000 for services rendered to us during 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- --------------------
NUMBER OF SECURITIES
NAME AND PRINCIPAL POSITION YEAR(1) SALARY($) BONUS ($) UNDERLYING OPTIONS
- --------------------------- -------- --------- --------- --------------------
<S> <C> <C> <C> <C>
James M. Grooms.................................
President, Chief Executive Officer and 1999 $202,304
Chairman 1998 164,770
Richard R. Allen................................
Chief Financial Officer, Secretary and 1999 131,733
Treasurer 1998 113,114
James P. Abraham................................ 1999 150,000
Vice President of Sales 1998 18,697 $56,362
Thomas E. Brewer................................ 1999 155,400
Vice President of Marketing 1998 105,029
Frederick C. Preiss............................. 1999 131,733
Vice President of Operations 1998 --
</TABLE>
- ------------------------
(1) Compensation for 1998 is for the period from February 12, 1998, the date we
began operations, through December 31, 1998.
STOCK OPTION GRANTS
The following table sets forth information concerning the grant of options
to purchase shares of our common stock during 1999 to each of the persons named
in the summary compensation table above.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
NUMBER OF TOTAL OPTIONS PRICE APPRECIATION
SECURITIES GRANTED TO FOR OPTION TERM(3)
UNDERLYING EMPLOYEES EXERCISE PRICE EXPIRATION ---------------------
NAME OPTIONS(1) IN 1999 ($/SH)(2) DATE 5% 10%
- ---- ---------- ------------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
James M. Grooms................... -- -- -- -- -- --
Richard R. Allen.................. -- -- -- -- -- --
James P. Abraham.................. -- -- -- -- -- --
Thomas E. Brewer.................. -- -- -- -- -- --
Frederick C. Preiss............... 21% $ 9/09 $ $
</TABLE>
- ------------------------
(1) Options vest and become exercisable 20% per year over the five-year period
beginning on the date of grant.
(2) The exercise price per share of each option granted was equal to the fair
market value of our common stock on the date of grant.
(3) These amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price
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<PAGE>
appreciation of 5.0% and 10.0% compounded annually from the date the
respective options were granted to their expiration dates. These assumptions
are not intended to forecast future appreciation of our stock price. The
potential realizable value computation does not take into account federal or
state income tax consequences of option exercises or sales of appreciated
stock.
The following table sets forth at December 31, 1999 the number of options
held by each of the executive officers named in the summary compensation table.
In the year ended December 31, 1999, none of the officers named in the summary
compensation table exercised any options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR END AT YEAR END($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -------------------------
<S> <C> <C>
James M. Grooms.................................... --/-- --/--
Richard R. Allen................................... --/-- --/--
James P. Abraham................................... --/-- --/--
Thomas E. Brewer................................... --/-- --/--
Frederick C. Preiss................................ --/-- --/--
</TABLE>
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our Certificate of Incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages for breach of fiduciary
duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; and
- for any transaction from which the director derived an improper personal
benefit.
Our Certificate of Incorporation also provides that:
- we must indemnify our directors, officers, other employees and agents to
the fullest extent permitted by the Delaware General Corporation Law,
subject to certain very limited exceptions; and
- we must pay expenses of our directors, and may pay expenses of our
officers, other employees, agents or trustees, incurred in their capacity
as a directors, officer, employees, agent or trustee in connection with a
legal proceeding before the final disposition of such proceeding.
These provisions are permitted under the Delaware General Corporation Law.
In addition, our Bylaws provide that we must indemnify our directors and
officers to the fullest extent permitted by the Delaware General Corporation
Law.
We intend to enter into indemnification agreements with each of our
directors and executive officers in order to give them additional contractual
rights regarding the scope of our indemnification obligations and to provide
additional procedural protections. In addition, we maintain directors' and
officers' insurance providing indemnification for our directors, officers and
management employees for liabilities arising as a result of their employment
with us. We believe that these indemnification provisions and agreements are
necessary to attract and retain qualified directors and officers.
The limitation of liability and indemnification provisions in our
Certificate of Incorporation and Bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. They
may also reduce the likelihood of derivative litigation against directors and
officers,
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even though such an action, if successful, might otherwise benefit us and our
stockholders. Furthermore, a stockholder's investment may be adversely affected
to the extent we pay the costs of settlement and damage awards against directors
and officers under indemnification provisions.
Except as otherwise described in this prospectus, there is at present no
pending litigation or proceeding involving any of our directors, officers, or
employees regarding which indemnification is sought, nor are we aware of any
threatened litigation that may result in claims for indemnification.
OMNIBUS STOCK OPTION PLAN
In July 1998, our board of directors and stockholders adopted the
Regeneration Technologies, Inc. Omnibus Stock Option Plan. A maximum of
shares have been authorized for issuance pursuant to the plan. Through
March 31, 2000, we issued options to purchase shares of our common stock
to our directors, officers, employees and various third parties who provide
services to us. Of these options, currently are exercisable. The exercise
prices of the options granted under the Omnibus Stock Option Plan range from
$ to $ . The exercise price for each option grant was set at the fair
market value of the shares of our common stock on the date of grant, as
determined by our board of directors. The purposes of the plan are to promote
our long-term growth and profitability by providing key personal with incentives
to improve stockholder value and to enable us to attract, retain and reward
skilled employees. There are an additional shares of common stock
available for issuance under the plan.
The plan allows for the discretionary grant of restricted stock,
non-qualified stock options, incentive stock options as defined in Section 422
of the Internal Revenue Code of 1986 and other stock-based awards. Any award of
an incentive stock option is limited to our employees and the employees of our
subsidiaries. The exercise price per share may not be less than 100% of the fair
market value of such shares on the date the option is granted.
The plan is administered by our board of directors or any committee it may
designate for this purpose. The board makes the determinations with respect to
awards under the plan, including which eligible individuals are to receive
awards under the plan and the specific terms, vesting conditions, if any, and
number of shares of stock to which each award related. Additionally, the board
may grant awards with different terms and conditions and also may accelerate the
vesting of outstanding awards and options at any time. At the time the options
are granted, the board will set the price at which options can be exercised.
Option holders do not and will not have any rights as stockholders until
they have exercised their options. The number of shares of our common stock
covered by awards will be adjusted in the event of any stock split, merger,
recapitalization or similar corporate event. This plan has a term of ten years,
expiring in July 2009.
YEAR 2000 INCENTIVE COMPENSATION PLAN
In January 2000, our board of directors and stockholders adopted the
Regeneration Technologies, Inc. Year 2000 Incentive Compensation Plan. If we
achieve certain profit levels, the plan allows for the creation of an incentive
pool and eligible employees receive cash awards from the pool on the basis of
individual and departmental goals. The board reviews and approves the Incentive
Compensation Plan annually and our Chief Financial Officer administers the plan.
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RELATED PARTY TRANSACTIONS
LEGAL RELATIONSHIPS WITH THE UNIVERSITY OF FLORIDA TISSUE BANK
SEPARATION FROM UFTB
We began operations on February 12, 1998 when the University of Florida
Tissue Bank or UFTB, contributed to us its allograft manufacturing and
processing operations, related equipment and technologies, distribution
arrangements, research and development activities and certain other assets. We
also assumed certain liabilities of UFTB that were related to the transferred
business. Various agreements relating to the transferred business to which UFTB
was a party also were assigned to us at that time, including one of our two
current management services agreements with Medtronic Sofamor Danek. At
approximately the same time, we sold shares of our preferred stock to a number
of unrelated investors and issued additional shares of our preferred stock to
UFTB in exchange for the assets it contributed to us. Immediately prior to this
offering, UFTB beneficially owned approximately 16% of our outstanding voting
equity securities. Dr. Peter F. Gearen, one of our directors, presently is an
Associate Professor at the University of Florida, which controls UFTB.
At approximately the same time as our separation from UFTB, James M. Grooms,
our Chief Executive Officer, President and Chairman who served as an officer of
UFTB prior to our separation, contributed his royalty rights in certain
intellectual property to us in exchange for shares of our preferred stock. We
recorded the assets acquired from UFTB and Mr. Grooms and the liabilities
assumed from UFTB at their historical cost basis since these were deemed to be
transactions between entities under common control.
UFTB is our largest tissue supply source. The tax-exempt status of UFTB
requires our relationship with UFTB to be conducted at arm's length. For this
reason, our relationship with UFTB is pursuant to a Tissue Recovery Agreement
which is designed to provide for arm's-length charges for services between the
two companies. Under the agreement, UFTB supplies certain of its tissues
exclusively to us. Additionally, we have a right of first refusal on other
tissues which UFTB is not currently providing to us. We pay UFTB recovery fees
as reimbursement for expenses it incurs in tissue recovery procedures. The
amount of the recovery fee depends upon the type and amount of tissue recovered.
We incurred charges of approximately $2.4 million during 1998 and $5.3 million
during 1999 under this agreement. This agreement expires in April 2009.
We have an employment agreement with Nancy R. Holland, our Vice President of
Donor Services under which she is required to devote 50% of her working time to
our business. Ms. Holland also serves as the Chief Executive Officer and a
director of the University of Florida Tissue Bank, Inc. Ms. Holland recuses
herself from decisions by UFTB's board of directors with respect to UFTB's
relationship with us.
ASSUMPTION OF CONVENTIONAL ALLOGRAFT DISTRIBUTION BUSINESS OF UFTB
On April 15, 1999, we entered into a Programs Transfer Agreement with UFTB
under which UFTB transferred to us its tissue recovery operations outside of
Florida and Georgia, conventional allograft distribution services, allograft
inventory, certain equipment and fixtures and its interest in various tissue
recovery agreements. UFTB transferred its unprocessed donor tissue and
conventional allograft implants with an assumed fair value of approximately
$3.0 million, and certain equipment and fixtures with an assumed fair value of
approximately $0.1 million as an offset against amounts owed to us by UFTB at
the time we assumed this business. Additionally, UFTB agreed to repay the
remaining balance of amounts it owed to us at that time by offsetting recovery
fees from April 15, 1999 through June 30, 1999 against the outstanding balance,
which fees were approximately $0.8 million, and by making monthly payments
during the remainder of 1999 totaling approximately $1.2 million. Prior to
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<PAGE>
this transfer to us of UFTB's tissue recovery operations, we charged UFTB
approximately $3.5 million during 1998 and approximately $2.6 million during
1999 for tissue processing services.
We also share facilities, overhead and various personnel with UFTB, the
terms of which we believe are at least as favorable as those we would obtain in
an arms-length relationship.
LEGAL RELATIONSHIP WITH MEDTRONIC SOFAMOR DANEK
The two management services agreements between us and Medtronic Sofamor
Danek grant to that company exclusive worldwide rights to provide management
services to assist in the distribution of our bone pastes for spinal uses and
our current line of spinal allografts, including our MD-Series threaded and
non-threaded dowels, tapered dowels and other spinal allografts. We pay to
Medtronic Sofamor Danek management services fees as a percentage of the amount
charged to customers for the allografts we distribute into these markets. We
incurred charges under these agreements aggregating approximately $24.1 million
during 1998 and approximately $40.0 million during 1999. These agreements
terminate in May 2018 and July 2021. During 1999, Medtronic Sofamor Danek
purchased shares of our preferred stock for an aggregate purchase price of
$5.0 million. Upon the closing of this offering, these shares will represent
approximately % of our outstanding voting equity securities. E. Ronald
Pickard, one of our directors, is President of Medtronic Spinal and Neurological
Group, a division of Medtronic Sofamor Danek. Prior to the merger of Sofamor
Danek Group and Medtronics, Mr. Pickard served in various executive capacities
at Sofamor Danek Group, including as Chairman of the Board and Chief Executive
Officer.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 31, 2000, and adjusted to give to the
offering, by: (i) each person known to beneficially own more than 5% of the
outstanding shares of our common stock; (ii) each of our directors; (iii) each
executive officer named in the summary compensation table; and (iv) all
executive officers and directors as a group. Unless indicated otherwise, the
address of the beneficial owners is: c/o Regeneration Technologies, Inc., One
Innovation Drive, Alachua, Florida 32615.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER OFFERING
SHARES BENEFICIALLY IF OVER-ALLOTMENT
OWNED PRIOR TO OPTION EXERCISED
OFFERING(1) NUMBER OF IN FULL
----------------------- SHARES -----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------ -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
James M. Grooms............................... 13.6%
Richard R. Allen.............................. 3.3
James P. Abraham.............................. *
Thomas E. Brewer.............................. *
Frederick C. Preiss........................... *
Philip R. Chapman............................. *
Peter F. Gearen............................... *
Michael J. Odrich............................. *
Anthony C. Philips............................ *
E. Ronald Pickard............................. *
Daniel L. Weber............................... *
Nancy R. Holland.............................. 6.0
The University of Florida Tissue Bank, Inc.... 16.3
One Innovation Drive
Alachua, Florida 32615
The University of Florida Research 16.3
Foundation..................................
P.O. Box 100215
Gainesville, Florida 32610
LB I Group Inc................................ 8.3
Lehman Brothers Inc.
3 World Financial Center
New York, New York 10285
Euro-America-II, L.P.......................... 5.3
Venad Administrative Services, Inc.
342 Madison Avenue, Suite 807
New York, New York 10173
RTI Advisory Group LLC........................ 4.6
530 Oak Court Drive, Suite 345
Memphis, Tennessee 38117
Stephens-Regeneration LLC..................... 5.0
111 Center Street, Suite 2500
Little Rock, Arkansas 72201
Medtronic Asset Mgt., Inc..................... 5.0
7000 Central Avenue, N.E.
Minneapolis, Minnesota 55402
All executive officers and directors as a
group (11 persons)..........................
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1%.
(1) Percentage ownership is based on shares outstanding as of
March 31, 2000. Shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 31, 2000 are deemed
outstanding for the purpose of computing the percentage ownership of the
person holding such options but are not deemed outstanding for the purpose
of computing the percentage ownership of any other person.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective as of the closing of this offering, our authorized capital stock
will consist of 50,000,000 shares of common stock, $.001 par value, and
5,000,000 shares of preferred stock, $.001 par value.
COMMON STOCK
As of March 31, 2000, shares of our common stock were outstanding and
held of record by stockholders after giving effect to the conversion of
all outstanding shares of our then-outstanding shares of preferred stock upon
the closing of this offering. Following the issuance of the shares of our
common stock offered hereby, there will be shares of common stock
outstanding and no shares of preferred stock upon the closing of this offering,
assuming no exercise of the underwriter's over-allotment option.
Subject to preferences that may be applicable to any preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the board of directors from time to time may
determine. Holders of common stock are entitled to one vote for each share held
on all matters submitted to a vote of stockholders. Cumulative voting for the
election of directors is not authorized by our certificate of incorporation,
which means that the holders of a majority of the shares voted can elect all of
the directors then standing for election. Holders of our common stock are not
entitled to preemptive rights and our common stock is not subject to conversion
or redemption. Upon our liquidation, dissolution or winding-up, the assets
legally available for distribution to stockholders shall be distributed ratably
among the holders of our common stock after payment of liquidation preferences,
if any, on any outstanding shares of preferred stock and payment of other claims
of creditors.
There is currently no active trading market for our common stock. We will
file an application to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "RTIX."
PREFERRED STOCK
Upon the closing of this offering, we will not have any shares of preferred
stock outstanding. Our 5,000,000 authorized shares of preferred stock may by
issued in one or more series without further stockholder authorization, and our
board of directors is authorized to fix and determine the terms, limitations and
relative rights and preferences of the preferred stock, to establish series of
preferred stock and to fix and determine the variations between these series. If
we issue preferred stock, it would have priority over our common stock with
respect to dividends and to other distributions, including the distribution of
assets upon liquidation, and we may be obligated to repurchase or redeem our
preferred stock. Our board of directors can issue preferred stock without the
approval of our common stockholders. Any preferred stock we issue may have
voting and conversion rights which could adversely affect the rights of holders
of our common stock. In addition to having a preference with respect to
dividends or liquidation proceeds, if preferred stock is issued, it may be
entitled to the allocation of capital gains from the sale of our assets. We do
not have any present plans to issue any shares of preferred stock.
WARRANTS
As of March 31, 2000 we had outstanding warrants to purchase an aggregate of
shares of our common stock at a weighted average exercise price of
$ .
61
<PAGE>
REGISTRATION RIGHTS
Under the terms of an agreement between us and certain of our stockholders,
these stockholders are entitled to certain rights with respect to the
registration of these shares under the Securities Act of 1933 commencing
180 days after the consummation of this offering. If we receive from the
required number of holders of these shares a written request to effect a
registration with respect to all or a part of their shares, we must use our best
efforts to effect a registration, provided the offering price for these shares
in the aggregate is at least $5,000,000. We are obligated to effect only two of
these registrations.
When we are eligible to use a registration statement on Form S-3, our
stockholders may request that we file a registration statement on Form S-3
covering all or a portion of their shares, provided that the aggregate public
offering price is at least $500,000.
In addition, these and certain of our other stockholders have "piggyback"
registration rights. If we propose to register any common stock under the
Securities Act, other than pursuant to the registration rights described above,
these stockholders may require us to include all or a portion of their
securities in that registration.
We would bear all registration expenses incurred in connection with any of
the above registrations. Each of these stockholders participating in any
registration would pay their own underwriting discounts, selling commission and
stock transfer taxes applicable to the sale of their securities.
STOCKHOLDERS' AGREEMENT
We have entered into a stockholders' agreement with our current
stockholders. The stockholders have agreed to vote their shares of our voting
capital stock so as to cause the board of directors to consist of seven persons,
five of which are to be approved by holders of our preferred stock outstanding
prior to this offering. This agreement terminates upon the closing of this
offering.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Under Section 203, certain "business combinations" between a Delaware
corporation with shares that generally are publicly traded or held of record by
more than 2,000 stockholders, and an "interested stockholder" are prohibited for
a three-year period following the date that such stockholder became an
interested stockholder, unless:
- the corporation has elected in its certificate of incorporation or bylaws
not to be governed by the Delaware anti-takeover law;
- the business combination was approved by the board of directors of the
corporation before the other party to the business combination became an
interested stockholder;
- upon consummation of the transaction that made it an interested
stockholder, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the commencement of the
transaction, excluding voting stock owned by directors who are also
officers or held in employee stock plans in which the employees do not
have a right to determine confidentially whether to tender or vote stock
held by the plan; or
- the business combination was approved by the board of directors of the
corporation and ratified by 66 2/3% of the voting stock which the
interested stockholder did not own. The three-year prohibition does not
apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of certain
extraordinary transactions involving the corporation and a person who had
not been an interested stockholder during the previous three years or who
became an interested stockholder with the approval of a majority of the
corporation's directors. The term "business combination" is defined
generally to include
62
<PAGE>
mergers or consolidations between a Delaware corporation and an interested
stockholder, transactions with an interested stockholder involving the
assets or stock of the corporation or its majority-owned subsidiaries and
transactions which increase an interested stockholder's percentage
ownership of stock. The term "interested stockholder" is defined generally
as a stockholder who becomes beneficial owner of 15% or more of a Delaware
corporation's voting stock. We have not elected in our certificate of
incorporation or bylaws not to be governed by the Delaware anti-takeover
law. Section 203 could have the effect of delaying, deferring or
preventing a change in control of Regeneration Technologies.
Our certificate of incorporation provides for the division of our board of
directors into three classes, as nearly equal in size as possible, with each
class beginning its three-year term in different years. Any director may be
removed only for cause by the vote of a majority of the shares entitled to vote
for the election of directors.
In addition, provisions of our certificate of incorporation and bylaws
summarized in the following paragraphs may have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider in its best interest, including those attempts that might result
in a premium over the market price for the shares held by our stockholders.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS
Our bylaws provide that our stockholders may not take action by written
consent, but only at an annual or special meeting of stockholders. Our bylaws
further provide that special meetings of our stockholders may be called only by
the chairman of our board of directors or a majority of our board of directors.
SUPERMAJORITY VOTING PROVISIONS
Our certificate of incorporation provides that the affirmative vote of at
least 66 2/3% of our stockholders is required to amend the provisions of our
certificate of incorporation and bylaws relating to the election of our board of
directors, stockholder action by written consent and the calling of special
meetings.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of our common stock and preferred stock
are available for future issuance without stockholder approval. These additional
shares may be used for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of authorized but unissued common stock and
preferred stock could render more difficult or discourage an attempt to obtain
control of our company by means of a proxy contest, tender offer, merger or
otherwise.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
We will enter into indemnification agreements with our current directors and
executive officers. These agreements may have the practical effect in some cases
of eliminating our stockholders' ability to collect monetary damages from our
directors. We believe that these contractual agreements and the provisions in
our certificate of incorporation and bylaws are necessary to attract and retain
qualified persons as directors and officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is .
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for our common stock,
and we cannot predict the effect, if any, that market sales of shares or the
availability of any shares for sale will have on the market price of the common
stock prevailing from time to time. Sales of substantial amounts of common
stock, or the perception that such sales could occur, could adversely affect the
market price of our common stock and our ability to raise capital through a sale
of our securities.
Upon completion of this offering, we will have shares of common stock
outstanding (or shares if the underwriters over-allotment option is
exercised in full) of which will be "restricted shares." This leaves
shares eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ---------------- ----------------------------------------------------------------------------
<S> <C>
..................... After 90 days from the date of this prospectus
..................... After 180 days from the date of this prospectus (subject, in some cases, to
volume limitations)
..................... After various times after 180 days from the date of this prospectus
</TABLE>
The shares (or up to shares if the underwriters' over-allotment
option is exercised in full) of common stock sold in this offering will be
freely tradable without further restriction or further registration under the
Securities Act, except for shares purchased by an affiliate (as this term is
defined in the Securities Act) of ours, which will be subject to the limitations
of Rule 144 under the Securities Act. Subject to certain contractual
limitations, holders of restricted shares generally will be entitled to sell
these shares in the public securities market without registration either
pursuant to Rule 144 or any other applicable exemption under the Securities Act.
In general, under Rule 144 under the Securities Act, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
within the meaning of Rule 144 for at least one year, and including the holding
period of any prior owner except an affiliate, would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of
one percent of the then outstanding shares of our common stock or the average
weekly trading volume of our common stock on the Nasdaq National Market during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about Regeneration Technologies. Any
person (or persons whose shares are aggregated) who is not deemed to have been
our affiliate at any time during the three months preceding a sale, and who has
beneficially owned shares for at least two years (including any period of
ownership of preceding non-affiliated holders), would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements. An
"affiliate" is a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or under common control with, an
issuer.
Within approximately 180 days after the date of this prospectus, we intend
to file one or more registration statements on Form S-8 under the Securities Act
to register shares of common stock subject to outstanding stock options or
reserved for issuance under our equity compensation plans. Upon completion of
this offering, options to purchase approximately shares will be
outstanding under our equity compensation plans.
Our directors and officers and some of our stockholders who hold
shares in the aggregate (including options and warrants to purchase common
stock) have entered into lock-up agreements pursuant to which they have agreed
that they will not sell other than in connection with this offering, directly or
indirectly, any shares of common stock without the prior written consent of Banc
of America
64
<PAGE>
Securities LLC for a period of 180 days from the date of this prospectus;
provided, however, they may gift or transfer shares so long as the donee or
transferee agrees to be bound by the terms of the lock-up agreement.
Under the terms of an agreement between us and the holders of shares of our
preferred stock, the preferred stockholders are entitled to certain rights with
respect to the registration of these Shares under the Securities Act commencing
180 days after the consummation of this offering. If we receive from the holders
of at least 40% of any class of preferred stock a written request to effect a
registration with respect to all or a part of their shares, we must use our best
efforts to effect such a registration, provided the shares owned by the
requesting stockholders cover at least 33% of the then outstanding class of
security of the offering price in the aggregate is at least $5,000,000. We are
only obligated to effect two of these registrations.
When we are eligible to utilize a registration statement on Form S-3 to
register an offering of our securities, these stockholders may request that we
file a registration statement on Form S-3 covering all or a portion of their
shares, provided that the aggregate public offering price is at least $500,000.
In addition, certain of our stockholders have certain "piggyback"
registration rights. If we propose to register any common stock under the
Securities Act, other than pursuant to the registration rights above, these
stockholders may require us to include all or a portion of their securities in
such registration. We are obligated to use our best efforts to effect this
registration.
65
<PAGE>
UNDERWRITING
Regeneration Technologies and the selling stockholder are offering the
shares of common stock described in this prospectus through a number of
underwriters. Banc of America Securities LLC, Lehman Brothers Inc., UBS Warburg
LLC and Stephens Inc. are the representatives of the underwriters. Regeneration
Technologies and the selling stockholder have entered into a firm commitment
underwriting agreement with the representatives. Subject to the terms and
conditions of the underwriting agreement, Regeneration Technologies and the
selling stockholder have agreed to sell to the underwriters, and the
underwriters have each agreed to purchase the number of shares of common stock
listed next to its name in the following table:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Banc of America Securities LLC..............................
Lehman Brothers Inc.........................................
UBS Warburg LLC.............................................
Stephens Inc................................................
---------
Total.....................................................
=========
</TABLE>
The underwriters initially will offer shares to the public at the price
specified on the cover page of this prospectus. The underwriters may allow to
some dealers a concession of not more than $ per share. The
underwriters also may allow, and any dealers may reallow, a concession of not
more than $ per share to some other dealers. If all the shares are not sold at
the initial public offering price, the underwriters may change the offering
price and the other selling terms. The common stock is offered subject to a
number of conditions, including:
- receipt and acceptance of our common stock by the underwriters; and
- the right to reject orders in whole or in part.
The underwriters have an option to buy up to additional shares
of common stock from Regeneration Technologies to cover sales of shares by the
underwriters which exceed the number of shares specified in the table above, and
will be sold by Regeneration Technologies in the event that the option is not
exercised in full. The underwriters have 30 days to exercise this option. If the
underwriters exercise this option, they will each purchase additional shares
approximately in proportion to the amounts specified in the table above.
Regeneration Technologies will pay the expenses associated with the exercise of
the overallotment option.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
PAID BY REGENERATION
TECHNOLOGIES
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share............................................ $ $
Total................................................ $ $
</TABLE>
<TABLE>
<CAPTION>
PAID BY SELLING STOCKHOLDER
----------------------------
NO EXERCISE FULL EXERCISE
------------ -------------
<S> <C> <C>
Per share............................................ $ $ --
Total................................................ $ $ --
</TABLE>
66
<PAGE>
Regeneration Technologies and substantially all holders of its stock prior
to this offering, as well as substantially all holders of stock options and
warrants, have entered into lock-up agreements with the underwriters. Under
those agreements, Regeneration Technologies and those holders of stock, options
and warrants may not dispose of or hedge any Regeneration Technologies common
stock or securities convertible into or exchangeable for shares of Regeneration
Technologies common stock unless permitted to do so by Banc of America
Securities LLC. These restrictions will be in effect for a period of 180 days
after the date of this prospectus. At any time and without notice, Banc of
America Securities LLC may, in its sole discretion, release all or some of the
securities from these lock-up agreements.
Regeneration Technologies and the selling stockholder will indemnify the
underwriters against liabilities, including liabilities under the Securities
Act. If Regeneration Technologies and the selling stockholder are unable to
provide this indemnification, they will contribute to payments the underwriters
may be required to make in respect of those liabilities.
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include:
- short sales;
- stabilizing transactions; and
- purchases to cover positions created by short sales.
Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while this offering
is in progress.
The underwriters may also impose a penalty bid. This means that if the
representatives purchase shares in the open market in stabilizing transactions
or to cover short sales, the representatives can require the underwriters that
sold those shares as part of this offering to repay the underwriting discount
received by them.
The underwriters may engage in activities that stabilize, maintain or
otherwise affect the price of the common stock, including:
- over-allotment;
- stabilization;
- syndicate covering transactions; and
- imposition of penalty bids.
As a result of these activities, the price of the common stock may be higher
than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them at any time.
The underwriters may carry out these transactions on the Nasdaq National Market,
in the over-the-counter-market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares of common stock offered by this
prospectus.
Prior to this offering, there has been no public market for the common stock
of Regeneration Technologies. The initial public offering price will be
negotiated between Regeneration Technologies and the underwriters. Among the
factors to be considered in such negotiations are:
- the history of, and prospects for, Regeneration Technologies and the
industry in which it competes;
67
<PAGE>
- the past and present financial performance of Regeneration Technologies;
- an assessment of Regeneration Technologies' management;
- the present state of Regeneration Technologies' development;
- the prospects for future earnings of Regeneration Technologies;
- the prevailing market conditions of the applicable United States
securities market at the time of this offering;
- market valuations of publicly traded companies that Regeneration
Technologies and the representatives believe to be comparable to
Regeneration Technologies; and
- other factors deemed relevant.
An affiliate of Banc of America Securities LLC is the lender under our
$6.0 million revolving line of credit facility and our $2.8 million 20-year
mortgage, and also provides to us services related to treasury management,
derivative transactions and institutional investments. In addition, affiliates
of Lehman Brothers Inc. and Stephens Inc., representatives of the underwriters,
beneficially own approximately and shares of our common stock,
respectively.
The underwriters, at our request, have reserved for sale to our employees,
affiliates and strategic partners at the initial public offering price up to
five percent of the shares being offered by this prospectus. The sale of shares
to our employees, affiliates and strategic partners will be made by Banc of
America Securities LLC. We do not know if our employees, affiliates or strategic
partners will choose to purchase all or any portion of these reserved shares,
but any purchases they do make will reduce the number of shares available to the
general public. If all of these reserved shares are not purchased, the
underwriters will offer the remainder to the general public on the same terms as
the other shares offered by this prospectus.
LEGAL MATTERS
Fulbright & Jaworski L.L.P., New York, New York will pass on the validity of
the common stock offered by this prospectus for us. Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C., Boston, Massachusetts, will pass upon certain legal
matters in connection with this offering for the underwriters.
EXPERTS
The Consolidated Financial Statements of Regeneration Technologies, Inc. and
Subsidiary and the Statements of Revenues and Direct Costs of the Predecessor
Business of Regeneration Technologies, Inc. included in this prospectus and the
related financial statement schedule included elsewhere in the registration
statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the registration
statement, and are included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission for the common stock we are offering by this prospectus.
This prospectus does not include all of the information contained in the
registration statement. You should refer to the registration statement and its
exhibits for additional information. Whenever we make reference in this
prospectus to any of our contracts, agreements or other documents, the
references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document. When we complete this offering, we will also be
required to file annual, quarterly
68
<PAGE>
and special reports, proxy statements and other information with the Securities
and Exchange Commission.
We intend to furnish our stockholders with annual reports containing
financial statements audited by an independent accounting firm, and to make
available quarterly reports containing unaudited financial information for the
first three quarters of each fiscal year.
You can read our Securities and Exchange Commission filings, including the
registration statement, over the Internet at the Securities and Exchange
Commission's web site at http://www.sec.gov. You may also read and copy any
document we file with the Securities and Exchange Commission at its public
reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549; Seven
World Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may also
obtain copies of these documents at prescribed rates by calling the Public
Reference Section of the Securities and Exchange Commission at 1-800-SEC-0330
for further information on the operation of the public reference facilities.
69
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF REGENERATION
TECHNOLOGIES, INC. AND SUBSIDIARY
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets--December 31, 1998 and 1999..... F-3
Consolidated Statements of Operations--Period from February
12, 1998 to
December 31, 1998 and Year Ended December 31, 1999........ F-4
Consolidated Statements of Stockholders' (Deficiency)
Equity--Period from
February 12, 1998 to December 31, 1998 and Year Ended
December 31, 1999....................................... F-5
Consolidated Statements of Cash Flows--Period from February
12, 1998 to
December 31, 1998 and Year Ended December 31, 1999........ F-6
Notes to Consolidated Financial Statements.................. F-7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
Unaudited Condensed Consolidated Balance Sheet--March 31,
2000...................................................... F-22
Unaudited Condensed Consolidated Statements of
Operations--Three Months Ended March 31, 1999 and 2000.... F-23
Unaudited Condensed Consolidated Statement of Stockholders'
Equity--Three Months Ended March 31, 2000................. F-24
Unaudited Condensed Consolidated Statements of Cash
Flows--Three Months Ended March 31, 1999 and 2000......... F-25
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-26
CONSOLIDATED SUPPLEMENTAL SCHEDULE
Independent Auditors' Report................................ F-29
Supplemental Schedule....................................... F-30
STATEMENTS OF REVENUES AND DIRECT COSTS OF THE PREDECESSOR BUSINESS
OF REGENERATION TECHNOLOGIES, INC.
Independent Auditors' Report................................ F-31
Statements of Revenues and Direct Costs for the Year Ended
December 31, 1997 and the Period from January 1, 1998 to
February 11, 1998......................................... F-32
Notes to Statements of Revenues and Direct Costs............ F-33
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Regeneration Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Regeneration
Technologies, Inc. and subsidiary (the "Company") as of December 31, 1998 and
1999, and the related consolidated statements of operations, stockholders'
(deficiency) equity and cash flows for the period from February 12, 1998 (date
operations began) to December 31, 1998 and for the year ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1998
and 1999, and the results of its operations and its cash flows for the period
from February 12, 1998 (date operations began) to December 31, 1998 and for the
year ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.
/S/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Tampa, Florida
March 22, 2000
(April 27, 2000 as to Note 18)
F-2
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 3,925,880 $ 7,536,287
Accounts receivable--less allowance of $38,500 in 1998 and
$335,087 in 1999........................................ 5,901,870 15,506,750
Product inventories....................................... 4,111,432 15,639,329
Supply inventories........................................ 245,417 592,780
Prepaid and other current assets.......................... 661,237 1,174,644
Deferred tax asset........................................ 164,738 747,997
----------- -----------
Total current assets.................................. 15,010,574 41,197,787
Property, plant and equipment--net.......................... 4,125,988 5,812,783
Deferred tax asset--net of valuation allowance of $1,534,183
in
1998 and $0 in 1999....................................... 53,033 1,229,613
Other assets--net........................................... 77,935 298,131
----------- -----------
$19,267,530 $48,538,314
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current Liabilities:
Accounts payable.......................................... $13,290,436 $21,056,808
Accrued expenses.......................................... 1,122,997 2,178,191
Current portion of deferred revenue (Note 2).............. 225,000 225,000
Line of credit............................................ -- 2,787,475
Current portion of long-term debt......................... 384,647 898,735
----------- -----------
Total current liabilities............................. 15,023,080 27,146,209
Long-term debt--less current portion........................ 1,482,249 2,026,796
Deferred revenue (Note 2)................................... 4,153,000 3,928,000
Other liabilities........................................... 40,000 --
----------- -----------
Total liabilities..................................... 20,698,329 33,101,005
----------- -----------
Commitments and contingencies (Notes 13, 15 and 18)
Stockholders' (deficiency) equity:
Series A Preferred stock, $.001 par value; 1,777,348
shares
authorized, issued and outstanding...................... 1,777 1,777
Series B Preferred stock, $.001 par value; 748,152 shares
authorized, issued and outstanding; at liquidation
value................................................. 6,580,000 6,580,000
Series C Preferred stock, $.001 par value; 368,990 shares
authorized, issued and outstanding; at liquidation
value................................................. -- 10,000,000
Common stock, $.001 par value; 6,000,000 shares
authorized; 770,702 shares issued; 765,452 and
763,672 shares outstanding, respectively 770 770
Additional paid-in capital................................ 460,117 447,153
Accumulated deficit....................................... (4,141,947) (1,182,454)
Deferred compensation..................................... (531,351) (399,907)
Note receivable from stockholder.......................... (2,136,741) --
Due from stockholder--net of due to stockholder........... (1,658,961) (4,332)
Less treasury stock--5,250 and 7,030 shares,
respectively............................................ (4,463) (5,698)
----------- -----------
Total stockholders' (deficiency) equity............... (1,430,799) 15,437,309
----------- -----------
$19,267,530 $48,538,314
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
FEBRUARY 12, 1998 DECEMBER 31,
TO DECEMBER 31, 1998 1999
-------------------- ------------
<S> <C> <C>
Revenues from core operations:
Fees from tissue distribution............................. $31,892,098 $70,783,005
Other revenues from core operations....................... 3,365,387 2,237,051
----------- -----------
Total revenues.......................................... 35,257,485 73,020,056
Management services fees.................................... 24,129,406 39,994,069
----------- -----------
Net revenues............................................ 11,128,079 33,025,987
Costs of processing and distribution........................ 9,844,771 19,172,398
----------- -----------
Gross profit............................................ 1,283,308 13,853,589
----------- -----------
Expenses:
Marketing, general and administrative..................... 3,986,946 9,739,790
Research and development.................................. 1,472,410 1,675,019
----------- -----------
Total expenses.......................................... 5,459,356 11,414,809
----------- -----------
Operating (loss) income..................................... (4,176,048) 2,438,780
----------- -----------
Interest (expense) income:
Interest expense.......................................... (152,631) (285,166)
Interest income........................................... 186,732 187,017
----------- -----------
Total interest income (expense)--net.................... 34,101 (98,149)
----------- -----------
(Loss) income before income tax benefit..................... (4,141,947) 2,340,631
Income tax benefit.......................................... -- 618,862
----------- -----------
Net (loss) income........................................... $(4,141,947) $ 2,959,493
=========== ===========
Net (loss) income per common share--basic................... $ (5.37) $ 3.84
=========== ===========
Net (loss) income per common share--diluted................. $ (5.37) $ 0.84
=========== ===========
Weighted average shares outstanding--basic.................. 770,702 770,702
Weighted average shares outstanding--diluted................ 770,702 3,503,159
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK ADDITIONAL
----------------------------------- COMMON PAID-IN ACCUMULATED DEFERRED
A B C STOCK CAPITAL DEFICIT COMPENSATION
-------- ---------- ----------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 12, 1998........ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Net liabilities assumed in
separation from UFTB.......... -- -- -- -- (39,643) -- --
Issuance of Series A Preferred
stock to related parties...... 1,777 -- -- -- (1,777) -- --
Sale of Series B Preferred
stock......................... -- 6,580,000 -- -- -- -- --
Stock issuance costs............ -- -- -- -- (152,790) -- --
Issuance of common stock to
employees..................... -- -- -- 770 654,327 -- (655,097)
Forfeited treasury stock........ -- -- -- -- -- -- 4,463
Vested deferred compensation.... -- -- -- -- -- -- 119,283
Net amounts advanced to
stockholder................... -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- (4,141,947) --
------ ---------- ----------- ---- --------- ----------- ---------
Balance, December 31, 1998........ 1,777 6,580,000 -- 770 460,117 (4,141,947) (531,351)
Purchased and forfeited treasury
stock......................... -- -- -- -- (639) -- 1,620
Stock options granted in lieu of
director and consulting
fees.......................... -- -- -- -- 20,428 -- --
Settlement of amounts due from
stockholder by transfer of
assets........................ -- -- -- -- -- -- --
Cash received for amounts due
from stockholder.............. -- -- -- -- -- -- --
Sale of Series C Preferred
stock......................... -- -- 10,000,000 -- -- -- --
Stock issuance costs............ -- -- -- -- (32,753) -- --
Vested deferred compensation.... -- -- -- -- -- -- 129,824
Net income...................... -- -- -- -- -- 2,959,493 --
------ ---------- ----------- ---- --------- ----------- ---------
Balance, December 31, 1999........ $1,777 $6,580,000 $10,000,000 $770 $ 447,153 $(1,182,454) $(399,907)
====== ========== =========== ==== ========= =========== =========
<CAPTION>
NOTE
RECEIVABLE
FROM DUE FROM TREASURY
STOCKHOLDER STOCKHOLDER STOCK TOTAL
----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Balance, February 12, 1998........ $ -- $ -- $ -- $ --
Net liabilities assumed in
separation from UFTB.......... -- -- -- (39,643)
Issuance of Series A Preferred
stock to related parties...... -- -- -- --
Sale of Series B Preferred
stock......................... -- -- -- 6,580,000
Stock issuance costs............ -- -- -- (152,790)
Issuance of common stock to
employees..................... -- -- -- --
Forfeited treasury stock........ -- -- (4,463) --
Vested deferred compensation.... -- -- -- 119,283
Net amounts advanced to
stockholder................... (2,136,741) (1,658,961) -- (3,795,702)
Net loss........................ -- -- -- (4,141,947)
----------- ----------- ------- -----------
Balance, December 31, 1998........ (2,136,741) (1,658,961) (4,463) (1,430,799)
Purchased and forfeited treasury
stock......................... -- -- (1,235) (254)
Stock options granted in lieu of
director and consulting
fees.......................... -- -- -- 20,428
Settlement of amounts due from
stockholder by transfer of
assets........................ 2,136,741 983,255 -- 3,119,996
Cash received for amounts due
from stockholder.............. -- 671,374 -- 671,374
Sale of Series C Preferred
stock......................... -- -- -- 10,000,000
Stock issuance costs............ -- -- -- (32,753)
Vested deferred compensation.... -- -- -- 129,824
Net income...................... -- -- -- 2,959,493
----------- ----------- ------- -----------
Balance, December 31, 1999........ $ -- $ (4,332) $(5,698) $15,437,309
=========== =========== ======= ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
FEBRUARY 12, 1998 DECEMBER 31,
TO DECEMBER 31, 1998 1999
-------------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... $(4,141,947) $ 2,959,493
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization expense................... 360,336 801,094
Bad debt expense........................................ 38,500 171,587
Amortization of deferred revenue........................ (122,000) (225,000)
Deferred income taxes................................... (217,771) (1,759,839)
Deferred compensation and nonqualified option........... 119,283 151,872
Loss on disposal of property, plant, and equipment...... -- 4,526
Changes in assets and liabilities--cash provided by
(used in) (excluding effects of acquisition):
Accounts receivable................................... (2,404,808) (9,417,525)
Product and supply inventories........................ (3,082,972) (6,715,835)
Prepaid and other current assets...................... (555,265) (240,032)
Other assets.......................................... (40,435) (230,196)
Accounts payable...................................... 7,760,983 7,391,042
Accrued expenses...................................... 1,122,997 673,468
Deferred revenue...................................... 4,500,000 --
Other liabilities..................................... 40,000 (40,000)
----------- -----------
Net cash provided by (used in) operating
activities........................................ 3,376,901 (6,475,345)
----------- -----------
Cash flows from investing activities:
Cash paid for purchase of assets--net of cash received.... -- (484,725)
Purchase of property, plant, and equipment................ (1,870,385) (2,380,808)
----------- -----------
Net cash used in investing activities............... (1,870,385) (2,865,533)
----------- -----------
Cash flows from financing activities:
Payments on capital lease and note obligations............ (212,144) (472,936)
Stock issuance costs...................................... (152,790) (32,753)
(Increase) decrease in due from stockholder............... (1,658,961) 671,374
Increase in note receivable from stockholder.............. (2,136,741) --
Line of credit borrowings--net............................ -- 2,787,475
Purchase of treasury stock................................ -- (1,875)
Proceeds from sales of Series B Preferred stock........... 6,580,000 --
Proceeds from sales of Series C Preferred stock........... -- 10,000,000
----------- -----------
Net cash provided by financing activities........... 2,419,364 12,951,285
----------- -----------
Net increase in cash and cash equivalents................... 3,925,880 3,610,407
Cash and cash equivalents, beginning of period.............. -- 3,925,880
----------- -----------
Cash and cash equivalents, end of period.................... $ 3,925,880 $ 7,536,287
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
1. ORGANIZATION
Regeneration Technologies, Inc. ("RTI"), was incorporated in Florida on
August 22, 1997, and began operations on February 12, 1998, following a
contribution of assets to RTI by the University of Florida Tissue Bank, Inc.
("UFTB"). At the time of the separation, UFTB contributed certain assets
(including certain intellectual property) to RTI and RTI assumed certain related
liabilities in exchange for 1,200,000 shares of Series A Preferred stock (see
Note 10). In addition, an officer of UFTB contributed his royalty rights in
certain intellectual property to RTI in exchange for 577,348 shares of Series A
Preferred stock. RTI recorded the assets acquired and the liabilities assumed
from UFTB and the assets acquired from the officer of UFTB at their historical
cost basis as these were deemed to be transactions between entities under common
control. As such, the $39,643 of net liabilities assumed is accounted for as a
dividend, resulting in a charge to additional paid-in capital. The historical
costs of the individual assets acquired and liabilities assumed by RTI at the
date of the separation from UFTB are presented below:
<TABLE>
<S> <C>
Accounts receivable......................................... $ 3,535,562
Inventories and supplies.................................... 1,273,877
Prepaid expenses............................................ 105,972
Property, plant, and equipment.............................. 1,732,777
Intangible assets........................................... 50,000
Accounts payable............................................ (5,529,455)
Capital lease obligations................................... (1,208,376)
-----------
Net liabilities assumed..................................... $ (39,643)
===========
</TABLE>
Simultaneous with the separation of RTI from UFTB, certain third parties
invested approximately $6.6 million in exchange for 748,152 shares of Series B
Preferred stock.
During 1999, RTI's wholly owned subsidiary, Georgia Tissue Bank ("GTB"),
acquired the net assets of the National Tissue Bank Network, Georgia Tissue
Bank, Inc. ("NTBN") along with certain equipment owned by a director of NTBN
(see Note 6).
RTI and GTB (collectively, the "Company") process human musculoskeletal
tissue received from various tissue recovery agencies. The processing transforms
the tissue into either conventional or precision tooled allografts, some of
which are patented. These allografts are distributed domestically and
internationally, for use in spinal vertebrae repair, musculoskeletal
reconstruction and fracture repair. The processed tissue includes cortical
dowels, cervical implants, cortical bone interference screws, and bone paste
grafts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of RTI and its wholly owned subsidiary GTB (see Note 6). All
material intercompany balance and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS--The Company considers all funds in banks and
overnight sweep accounts with an original maturity of three months or less to be
cash and cash equivalents.
F-7
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRODUCT AND SUPPLY INVENTORIES--Product and supply inventories are stated at
the lower of cost or market, with cost determined by the first-in, first-out
method.
PROPERTY, PLANT, AND EQUIPMENT--Property, plant, and equipment are stated at
cost less accumulated depreciation and amortization. The cost of equipment under
capital leases and leasehold improvements is amortized on the straight-line
method over the shorter of the lease term or the estimated useful life of the
asset. Depreciation is computed on the straight-line method over the following
estimated useful lives of the assets:
<TABLE>
<S> <C>
Production equipment 8 to 10 years
Leasehold improvements 8 to 10 years
Office equipment, furniture, and fixtures 5 to 7 years
Computer hardware and software 3 years
</TABLE>
OTHER ASSETS--Other assets consist of patents and trademarks. Patents and
trademarks are amortized on the straight-line method over the shorter of the
remaining protection period or estimated useful life.
RESEARCH AND DEVELOPMENT COSTS--Research and development costs are expensed
as incurred. Research and development costs for the periods ended December 31,
1998 and 1999 were $1,472,410 and $1,675,019, respectively.
REVENUE RECOGNITION--Revenue is recognized at the time the Company ships the
processed tissue. Revenues are reported gross of any management services fees
the Company incurs related to the distribution of its products. Any other
revenues directly related to the Company's core operations are recognized when
all significant contractual obligations have been satisfied. A $4,500,000
nonrefundable, up-front fee received from Sofamor Danek Group in the period
ended December 31, 1998 is being deferred and recognized as revenue over the
20 year life of the exclusive management services agreement with Sofamor Danek
Group on a straight-line basis. This revenue is shown in the consolidated
statements of operations in other revenues from core operations.
INCOME TAXES--The Company accounts for income taxes under the asset and
liability approach specified by Statement of Financial Accounting Standards
("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's consolidated
financial statements or tax returns by applying enacted statutory rates
applicable to future years to differences between financial statement carrying
amounts and the tax basis of existing assets and liabilities.
STOCK-BASED COMPENSATION PLANS--In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
which is effective for fiscal years beginning after December 15, 1995. Under
SFAS No. 123, the Company may elect to recognize stock-based compensation
expense based on the fair value of the awards or to account for stock-based
compensation under Accounting Principles Board ("APB") Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and disclose in the consolidated
financial statements the effects of SFAS No. 123 as if the recognition
provisions were adopted. The Company has adopted the recognition provisions of
APB Opinion No. 25.
F-8
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE--Basic earnings per share ("EPS") is computed by dividing
earnings available to common shareholders by the weighted average number of
common shares outstanding for the periods. Diluted EPS reflects the potential
dilution of securities that could share in the earnings. A reconciliation of the
number of common shares used in calculation of basic and diluted EPS is
presented below:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 12, 1998 TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
-------------------- -----------------
<S> <C> <C>
Basic EPS.................................. 770,702 770,702
Effect of dilutive securities:
Stock options............................ -- 130,103
Conversion of preferred stock............ -- 2,602,354
------- ---------
Diluted EPS................................ 770,702 3,503,159
======= =========
</TABLE>
The conversion of preferred stock to common stock was not included in the
computation of diluted EPS for the period ended December 31, 1998 as the
inclusion would be antidilutive. Options to purchase approximately 65,000 shares
of common stock at $27.10 per share were outstanding as of December 31, 1999 but
were not included in the computation of diluted EPS for the year ended
December 31, 1999 because the options' exercise price was greater than the
average market price of the common shares.
USE OF ESTIMATES--The preparation of consolidated 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 disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS--Periodically, the Company evaluates the
recoverability of the net carrying value of its property, plant and equipment
and its intangible assets by comparing the carrying values to the estimated
future undiscounted cash flows. A deficiency in these cash flows relative to the
carrying amounts is an indication of the need for a write-down due to
impairment. The impairment write-down would be the difference between the
carrying amounts and the fair value of these assets. A loss on impairment would
be recognized by a charge to earnings.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The estimated fair value of amounts
reported in the consolidated financial statements has been determined by using
available market information and appropriate valuation methodologies. The
carrying value of all current assets and current liabilities approximates fair
value because of their short-term nature. The fair value of capital lease
obligations approximates the carrying value, based on current market prices.
NEW ACCOUNTING STANDARDS--The Financial Accounting Standards Board recently
issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES--DEFERRAL OF EFFECTIVE DATE OF FASB STATEMENT NO. 133 ("SFAS
No. 137"). SFAS No. 137 defers for one year the effective date of SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133").
The rule now will apply to all fiscal quarters of all fiscal years beginning
after June 15, 2000. SFAS No. 137 permits early adoption as of the beginning of
any fiscal quarter after its issuance. SFAS No. 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges
F-9
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, of firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company has not completed its evaluation of the
impact of SFAS No. 133, if any, on the financial statements.
RECLASSIFICATION--Certain 1998 amounts have been reclassified to conform to
the 1999 presentation.
3. PRODUCT INVENTORIES
Product inventories by stage of completion are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- -----------
<S> <C> <C>
Unprocessed donor tissue............................ $ 459,263 $ 2,341,998
Tissue in process................................... 2,305,805 3,453,513
Implantable donor tissue............................ 1,346,364 9,744,493
Nontissue inventory for resale...................... -- 99,325
---------- -----------
$4,111,432 $15,639,329
========== ===========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Leasehold improvements............................... $ 640,796 $1,116,467
Production equipment................................. 1,821,159 3,170,518
Office equipment, furniture, and fixtures............ 385,180 517,860
Computer hardware and software....................... 261,639 1,038,959
Equipment under capital lease........................ 1,365,050 1,107,909
---------- ----------
4,473,824 6,951,713
Less accumulated depreciation and amortization....... 347,836 1,138,930
---------- ----------
$4,125,988 $5,812,783
========== ==========
</TABLE>
5. OTHER ASSETS
Other assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Patents and trademarks................................... $50,000 $223,971
Other.................................................... 40,435 96,660
------- --------
90,435 320,631
Less accumulated amortization............................ 12,500 22,500
------- --------
$77,935 $298,131
======= ========
</TABLE>
F-10
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
6. ASSET PURCHASE
On November 1, 1999, GTB acquired the assets and existing liabilities of
NTBN and certain equipment owned by Dr. Charles Garrison, a director of NTBN.
The purpose of the transaction was to expand the Company's ability to produce
conventional tissue grafts and expand donor recovery and tissue distribution in
areas outside of the Company's existing network for donor recovery and tissue
distribution.
The acquisition was recorded under the purchase method of accounting and,
accordingly, the purchase price was allocated to the assets and liabilities on
the basis of estimated fair market value on the date of purchase. The fair value
of the assets and liabilities at the date of acquisition recorded in conjunction
with the transaction is as follows:
<TABLE>
<S> <C>
Accounts receivable......................................... $ 358,942
Inventories................................................. 2,129,429
Property, plant, and equipment.............................. 3,410
Accounts payable............................................ (375,330)
Accrued liabilities......................................... (381,726)
----------
Net assets acquired, excluding cash......................... 1,734,725
Cash........................................................ 15,275
----------
Net assets acquired......................................... $1,750,000
==========
Purchase financed by:
Cash payment................................................ $ 500,000
Notes payable--stated rate of 6.50% due November 2002
(effective rate of 9.25%)................................. 680,753
Note payable--9.25% due November 2002 convertible to common
stock (see Note 17)....................................... 500,000
Note payable--9.25% due November 2002....................... 69,247
----------
Total financing............................................. $1,750,000
==========
</TABLE>
The unaudited pro forma results assuming GTB had been acquired on
February 12, 1998 are approximately as follows:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 12, 1998 TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
-------------------- -----------------
<S> <C> <C>
Total revenues............................. $39,900,000 $77,000,000
Net (loss) income.......................... (3,700,000) 3,200,000
Net (loss) income per share--basic......... $ (4.80) $ 4.15
</TABLE>
The pro forma information does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of future results of
operations of the combined companies.
F-11
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
7. LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Notes payable, 6.5%.................................. $ -- $ 663,577
Notes payable, 9.25%................................. -- 555,467
Capital leases....................................... 1,866,896 1,706,487
---------- ----------
Total................................................ 1,866,896 2,925,531
Less current portion................................. 384,647 898,735
---------- ----------
Long-term portion.................................... $1,482,249 $2,026,796
========== ==========
</TABLE>
Contractual maturities of long-term debt are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 898,735
2001........................................................ 983,733
2002........................................................ 753,013
2003........................................................ 150,467
2004........................................................ 48,054
Thereafter.................................................. 91,529
----------
$2,925,531
==========
</TABLE>
The notes payable relate to the assets purchased from NTBN and are
collateralized by the assets purchased. All notes are due in November 2002 (see
Note 6).
The capital leases have interest rates ranging from 9.05% to 10% and are
collateralized by the related equipment and are due from 2002 through 2006 (see
Note 13).
8. LINE OF CREDIT
In March 1999, the Company entered into a revolving line of credit for an
amount not to exceed $2,000,000 expiring in March 2000. This line of credit was
subsequently replaced in September 1999 with a new line not to exceed $6,000,000
expiring in September 2000. The line of credit is to be utilized for the purpose
of supporting accounts receivable, with accounts receivable also serving as the
collateral for the line of credit. The interest rate associated with this line
of credit is the 30-day LIBOR rate plus 150 basis points. At December 31, 1999,
the interest rate of the line of credit is 7.97%.
The credit line agreement contains various restrictive covenants, which
limit among other things, indebtedness, loans, acquisitions, dividends and stock
purchases. In addition, the Company must satisfy certain financial ratios
including a fixed charge ratio of 1.10 to 1.00 or greater and funded debt to
earnings before interest, taxes, depreciation and amortization of not greater
than 4.00 to 1.00. The Company was in compliance with all covenants and
financial ratios at December 31, 1999.
The total amount outstanding on the line of credit December 31, 1999 was
$2,787,475.
F-12
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
9. INCOME TAXES
The income tax expense consisted of the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- -----------
<S> <C> <C>
Current:
Federal............................................ $ 179,055 $ 966,623
State.............................................. 38,716 174,354
--------- -----------
Total current........................................ 217,771 1,140,977
--------- -----------
Deferred:
Federal............................................ (179,055) (1,590,075)
State.............................................. (38,716) (169,764)
--------- -----------
Total deferred....................................... (217,771) (1,759,839)
--------- -----------
Total provision...................................... $ -- $ (618,862)
========= ===========
</TABLE>
The components of the deferred tax assets and liabilities consisted of the
following at December 31:
<TABLE>
<CAPTION>
1998 1999
DEFERRED INCOME TAX DEFERRED INCOME TAX
---------------------- ----------------------
ASSET LIABILITY ASSET LIABILITY
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Current:
Uniform capitalization of inventory cost...... $ 170,419 $ -- $ 611,576 $ --
Inventory reserve............................. 9,563 -- 74,738 --
Accrued reserves.............................. 74,160 -- 164,882 --
State taxes................................... -- (89,404) -- (103,199)
---------- --------- ---------- ---------
Total current................................... 254,142 (89,404) 851,196 (103,199)
========== ========= ========== =========
Noncurrent:
Depreciation.................................. -- (145,826) -- (412,108)
Amortization.................................. 3,731 -- 1,285 --
Unearned revenue.............................. 1,729,311 -- 1,640,436 --
Valuation allowance........................... (1,534,183) -- -- --
---------- --------- ---------- ---------
Total noncurrent................................ 198,859 (145,826) 1,641,721 (412,108)
---------- --------- ---------- ---------
Total........................................... $ 453,001 $(235,230) $2,492,917 $(515,307)
========== ========= ========== =========
</TABLE>
The valuation allowance for deferred tax assets was $1,534,183 and $0,
respectively, for the periods ended December 31, 1998 and 1999. The net change
in the total valuation allowance was a decrease of $1,534,183 for the year ended
December 31, 1999. The reduction was attributable to projections of future
taxable income whereby management believes it is more likely than not that the
Company will recognize the benefits of the net deductible temporary differences,
which generated the deferred tax asset.
F-13
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
9. INCOME TAXES (CONTINUED)
The Company established a valuation allowance in the period ended
December 31, 1998 of $1,534,183. Management determined that it was more likely
than not that the deferred tax asset in excess of the amount of current taxes
paid in that year would not be realized.
The effective tax rate differs from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Statutory federal rate...................................... (34.00)% 34.00 %
State income taxes--net of federal tax benefit.............. (3.57) 4.10
Meals and entertainment..................................... 0.53 1.00
Stock compensation expense.................................. 1.13 1.89
Research and experimentation credit......................... (1.14) (2.30)
Change in valuation allowance............................... 37.05 (65.55)
Miscellaneous............................................... -- 0.42
------ ------
Effective tax rate.......................................... -- % (26.44)%
====== ======
</TABLE>
10. STOCKHOLDERS' EQUITY
PREFERRED STOCK--Series A and B Preferred stocks are on parity with each
other regarding dividends and liquidation, and are senior to the Company's
common stock. Dividends, when and if declared by the Board of Directors, are
cumulative and accrue at 6% of the preferred stock face value of $13,934,408 for
the Series A Preferred stock (1,777,348 shares at $7.84 per share) and
$6,580,000 for the Series B Preferred stock (748,152 shares at $8.80 per share).
The Series A Preferred stock has been recorded at its par value rather than its
face and liquidation value because the issuance of the Series A Preferred stock
resulted from a transaction between entities under common control (see Note 1).
The aggregate amount of cumulative Preferred dividends in arrears as of
December 31, 1998 and 1999 is $1,090,453 and $2,321,317, respectively.
Liquidation cannot occur unless approved by 75% of the Series A Preferred
stockholders and 75% of the Series B Preferred stockholders, in which event, the
Series A Preferred stockholders would receive the intellectual property rights
originally contributed to the Company in exchange for the Series A Preferred
shares, and the Series B Preferred stockholders would receive the $6,580,000
originally paid to the Company (see Note 1).
Series A and B Preferred stocks have voting rights equal to the number of
whole shares of common stock into which the preferred stocks can be converted.
Series A Preferred stock is convertible at any time into common shares at a
price of $7.84 per share and Series B Preferred stock is convertible at any time
into common shares at a price of $8.80 per share.
Series C Preferred stock is senior to the Series A and B Preferred stocks
and common stock as to dividends and upon liquidation. Dividends, when and if
declared by the Board of Directors, are cumulative and accrue at 6% of the
preferred stock value of $10,000,000 (368,990 shares at $27.101 per share). The
aggregate amount of cumulative preferred dividends in arrears as of
December 31, 1999 is $135,000. Liquidation cannot occur unless approved by 75%
of the Series C Preferred stockholders, in which event, the Series C Preferred
stockholders would receive the $10,000,000 originally paid to the Company.
Series C Preferred stock has voting rights equal to the number of whole shares
of common
F-14
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
10. STOCKHOLDERS' EQUITY (CONTINUED)
stock into which the preferred stock can be converted. Series C Preferred stock
is convertible at any time into common shares at a price of $27.101 per share.
Holders of Series C Preferred stock were issued warrants to purchase up to
46,124 shares of common stock for a period of one year from the date of issuance
at a purchase price of $27.10 per share.
COMMON STOCK--The common stock's voting, dividend, and liquidation rights
are subject to and qualified by the rights of the holders of the preferred
stocks. Common stockholders are entitled to one vote for each share held at all
stockholder meetings. Common stock is not redeemable.
STOCK OPTION PLANS--In July 1998, the Company adopted a stock option plan
(the "Plan") which provides for the grant of incentive and nonqualified stock
options to key employees, including officers and directors of the Company. The
option price per share may not be less than 100% of the fair market value of
such shares on the date such option is granted. At December 31, 1999, options to
acquire up to 918,000 shares of common stock may be granted pursuant to the
Plan.
Stock option activity is summarized as follows at December 31, 1998 and
1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at February 1998............................. --
Granted................................................ 146,915 $ 6.25
-------
Outstanding at December 31, 1998......................... 146,915 6.25
Granted................................................ 128,910 13.70
Canceled............................................... (4,815) 6.25
-------
Outstanding at December 31, 1999......................... 271,010 $ 9.90
=======
</TABLE>
Outstanding options under the Plan vest over a three- to five-year period.
Options expire ten years from the date of grant. As of December 31, 1999, 32,133
options were exercisable with a weighted-average exercise price of $6.25.
The weighted average fair value of options granted during the periods ended
December 31, 1998 and 1999 was $6.25 and $13.77, respectively.
The following is a summary of stock options outstanding and exercisable as
of December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE OPTIONS REMAINING OPTIONS
PRICE OUTSTANDING CONTRACTUAL LIFE (YEARS) EXERCISABLE
- -------- ----------- ------------------------ -----------
<S> <C> <C> <C>
$ 6.25 172,250 3.67 32,133
9.00 12,525 4.32 --
15.00 30,750 4.46 --
18.25 55,485 4.78 --
------- ------
271,010 32,133
======= ======
</TABLE>
F-15
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
10. STOCKHOLDERS' EQUITY (CONTINUED)
Remaining non-exercisable options as of December 31, 1999 become exercisable
as follows:
<TABLE>
<CAPTION>
<S> <C>
2000....................................... 58,040
2001....................................... 58,040
2002....................................... 52,290
2003....................................... 48,206
2004....................................... 22,301
-------
238,877
=======
</TABLE>
Since the Company applies APB Opinion No. 25 in accounting for its stock
options, no compensation cost has been recognized for the options granted to
employees because the exercise price equaled the fair market value on the date
of the grant. Had compensation cost been determined on the basis of fair value
pursuant to SFAS No. 123, net income (loss) would have been affected as follows
for the periods ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
----------- ----------
<S> <C> <C>
Net (loss) income, as reported...................... $(4,141,947) $2,959,493
Net (loss) income, pro forma........................ (4,290,985) 2,836,759
Net (loss) income per common share--basic, as
reported.......................................... $ (5.37) $ 3.84
Net (loss) income per common share--basic, pro
forma............................................. $ (5.57) $ 3.68
Net (loss) income per common share--dilutive, as
reported.......................................... $ (5.37) $ 0.84
Net (loss) income per common share--dilutive, pro
forma............................................. $ (5.57) $ 0.81
</TABLE>
The fair value of each grant was estimated using the minimum value method
with the following weighted-average assumptions used for grants during the year
ended December 31, 1999:
<TABLE>
<S> <C>
Dividend yield.............................................. --
Risk free interest rate..................................... 4.6%-5.92%
Option term................................................. 4.77 years
</TABLE>
STOCK AWARDS--The Company awarded 770,702 shares of common stock to various
key employees at the beginning of the Company's operations. These shares of
common stock, which were valued at $0.85 per share, vest over a five-year
period. At the date of issuance, $655,097 in deferred compensation was recorded
by the Company. Compensation expense of approximately $119,000 and $131,000 was
recognized for these stock awards for the periods ended December 31, 1998 and
1999, respectively.
11. RETIREMENT BENEFITS
The Company has a qualified 401(k) plan available to all employees who meet
certain eligibility requirements. The 401(k) plan allows the employee to
contribute 20% of the employee's salary up to the maximum allowed under the
Internal Revenue Code. The Company has the discretion to make
F-16
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
11. RETIREMENT BENEFITS (CONTINUED)
matching contributions up to 6% of the employee's earnings. For the periods
ended December 31, 1998 and 1999, the Company's contributions to the plan were
$83,846 and $156,203, respectively.
12. CONCENTRATIONS OF RISK
The Company's principal concentration of risk is related to its limited
distribution channels. In 1998, nearly all of the Company's revenues are related
to the distribution efforts of four independent companies, with approximately
95% of its revenues coming from one of the distribution companies. In 1999, the
Company expanded to include more revenue from direct distribution. The amount of
revenue from direct distribution was approximately 15% with 80% of the remaining
revenue coming from one of the distribution channels.
The Company's operations are dependent on the availability of bone and
related connective tissue from human donors. The Company relies on the efforts
of independent procurement agencies to educate the public and increase the
willingness to donate bone tissue. These procurement agencies may not be able to
obtain sufficient donors to meet present or future demands.
13. COMMITMENTS AND CONTINGENCIES
MANUFACTURING RIGHTS--The Company has licensed manufacturing rights for some
of its products. Under the agreement, the Company has agreed to accept and
reimburse the processor for items that meet the Company's quality control
guidelines.
PREPAID INVENTORY--In an effort to increase the Company's supply of donor
tissue, the Company has agreed to fund several tissue recovery agencies, in
exchange for the first right of refusal for any donor tissue recovered. During
1998 and 1999, the Company had advanced $1,249,383 and $2,245,842 respectively
to the tissue recovery agencies and recouped $754,750 and $1,988,318
respectively in donor tissue. At December 31, 1998 and 1999, the Company has yet
to recover $494,633 and $733,733 respectively of its expenditures through donor
tissue recovery. Prepaid inventory is classified in prepaid and other assets in
the accompanying balance sheets. The Company has no ownership or control in
these agencies, and funding can be discontinued at any time when donor tissue is
no longer being supplied.
FOREIGN INVESTMENT--In August 1998, the Company received a 30% ownership in
UFTB-Italia for no consideration. UFTB-Italia is an entity created in late 1998,
which had no operations as of December 31, 1998. UFTB-Italia plans to recover,
process, and distribute tissue in conjunction with training and technology
supplied by the Company at UFTB-Italia's expense. Since the Company exercises no
significant control over the UFTB-Italia operation, the Company has treated this
investment on the cost basis, recognizing income only upon receipt of dividends.
As of December 31, 1998 and 1999, the Company has not recorded any income from
its interest in UFTB-Italia. As of December 31, 1999, the Company had $172,405
of outstanding accounts receivable due from UFTB-Italia. Total tissue
distributions to UFTB-Italia in 1999 were $223,704.
LEASES--The Company leases various buildings, office equipment and fixtures
under non-cancelable operating leases for various periods. The Company also
leases various equipment under capital leases that are included in property,
plant, and equipment in the accompanying balance sheets.
F-17
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease commitments under noncancelable leases as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
2000................................................. $ 660,534 $ 918,981
2001................................................. 660,534 916,464
2002................................................. 385,377 897,966
2003................................................. 172,541 762,327
2004................................................. 59,850 808,977
Thereafter........................................... 99,749 1,526,734
---------- ----------
2,038,585 $5,831,449
==========
Less amounts representing interest................... 332,098
----------
Present value of net minimum lease payments.......... $1,706,487
==========
</TABLE>
Rent expense for the periods ended December 31, 1998 and 1999 was $262,698
and $748,473, respectively.
EMPLOYMENT AGREEMENTS--As of December 31, 1999, the Company had employment
contracts with six officers of the Company, providing for total annual payments
of approximately $815,000 through fiscal year 2003.
14. RELATED PARTIES
The Company has certain related party transactions with UFTB. Through
April 15, 1999, UFTB recovered whole donor tissue and distributed conventional
tissue. The Company processed this tissue for UFTB for a fee and compensated
UFTB for the nonconventional tissue retained from the whole donor tissue. On
April 15, 1999, the Company entered into two new agreements under which UFTB
transferred to the Company all rights to conventional tissue distribution and
national recovery programs, permitting UFTB to focus primarily on tissue
recovery and UFTB settled amounts due to the Company. As of April 15, 1999, the
total due from UFTB and the note receivable from UFTB was approximately
$5,000,000. Under the terms of the agreements, UFTB transferred its unprocessed
donor tissue and conventional tissue with a fair value of approximately
$3,000,000 and equipment and fixtures with a fair value of approximately $90,000
to the Company as an offset against the existing due from stockholder and note
receivable from stockholder. Additionally, UFTB agreed to repay the remaining
balance by (a) offsetting recovery fees from April 15, 1999 through June 30,
1999 against the outstanding balance, which fees approximate $800,000, and
(b) making monthly payments through the end of 1999 to repay the remaining
balance of approximately $1,200,000.
In addition to these operating transactions, the Company shares facilities,
overhead and certain personnel with UFTB.
F-18
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
14. RELATED PARTIES (CONTINUED)
The following is a summary of transactions and balances with UFTB as of and
for the periods ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Due from stockholder, net of amounts due to stockholder..... $1,658,961 $ 4,332
Note receivable from stockholder............................ 2,136,741 --
Tissue recovery fees and support services charged by UFTB to
the Company............................................... 2,386,374 5,344,475
Processing fees, tissue fees, and support services charged
to UFTB by the Company.................................... 3,467,014 2,592,347
</TABLE>
In January 1999, a stockholder with a 50% ownership in the Series C
Preferred shares acquired Sofamor Danek Group. The following is a summary of
transactions and balances with Sofamor Danek Group as of and for the periods
ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Tissue distribution revenue under management services
Agreement (included in fees from tissue distribution)..... $30,471,573 $57,228,310
Management services fees.................................... 24,129,406 39,994,069
Deferred revenue recognized (included in other revenues from
core operations).......................................... 122,000 225,000
Administrative costs reimbursed by Sofamor Danek Group
(included in marketing, general and administrative
expense).................................................. 326,130 435,674
Management services fees payable (included in accounts
payable).................................................. 10,951,359 17,523,809
Deferred revenue............................................ 4,378,000 4,153,000
</TABLE>
In February 2000, Dr. Garrison (see Note 6) exercised his option to convert
a portion of the $500,000 9.25% note issued by the Company into common stock of
the Company (see Note 18). Dr. Garrison is providing Medical Director services
to GTB on a consulting basis under a three-year contract, which ends
November 1, 2002. Annual compensation under the contract is $100,740 in year
one, $104,340 in year two and $108,084 in year three. Dr. Garrison also owns the
building in which GTB leases space. Monthly rental in year one is $12,365,
$12,860 in year two and $13,374 in year three. The following is a summary of
transactions and balances with Dr. Garrison as of and for the year ended
December 31, 1999.
<TABLE>
<S> <C>
Payments on GTB leased premises (includes one month
deposit).................................................. $ 37,095
Payments for Medical Director fees.......................... 16,790
Principal and interest payments on notes.................... 30,957
Notes payable............................................... 1,219,043
</TABLE>
15. LEGAL ACTIONS
On June 22, 1999, Exactech, Inc. ("Exactech") filed a complaint and petition
for injunctive relief in Circuit Court against the Company, UFTB and 19 medical
distributors and sales agents of the Company. The complaint alleged the Company
was marketing and distributing bone paste allografts in
F-19
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
15. LEGAL ACTIONS (CONTINUED)
violation of an agreement between UFTB and Exactech, which agreement had been
assigned by UFTB to the Company. The Company denied the charges in the Exactech
complaint, and the court has remanded all counts listed in the lawsuit to
binding arbitration. The arbitration is ongoing; consequently, management cannot
estimate the impact on the Company's business or financial operations.
16. SUPPLEMENTAL CASH FLOW INFORMATION
Selected cash payments and noncash activities are as follows:
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
FEBRUARY 12, 1998 DECEMBER 31,
TO DECEMBER 31, 1998 1999
-------------------- ------------
<S> <C> <C>
Interest paid during the period............................. $152,631 $ 285,166
Noncash capital lease obligations........................... $870,662 $ 281,571
Net liabilities assumed upon start of operations............ $ 39,643 $ --
Issuance of founders' common shares......................... $650,634 $ --
Issuance of Preferred A stock to related parties............ $ 1,777 $ --
Noncash settlement of note receivable and amount due from
stockholder............................................... $ -- $3,119,996
Notes payable issued to acquire GTB......................... $ -- $1,250,000
</TABLE>
17. SEGMENT DATA
The Company processes human musculoskeletal tissue received from various
tissue recovery agencies and distributes the tissue through various channels.
This one line of business represents 100% of consolidated fees from tissue
distribution and is comprised of three primary product lines: spinal allografts,
other precision tooled allografts and conventional tissue. The following table
presents fees from tissue distribution by each of the Company's three primary
product lines:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 12, 1998 YEAR ENDED
TO DECEMBER 31, 1998 DECEMBER 31, 1999
--------------------- ------------------
<S> <C> <C>
Fees from tissue distribution:
Spinal allografts...................................... $30,374,959 $57,073,386
Other precision tooled allografts...................... 404,963 4,683,051
Conventional tissue.................................... 1,112,176 9,026,568
----------- -----------
Total................................................ $31,892,098 $70,783,005
=========== ===========
</TABLE>
The Company distributes their products both within and outside the United
States. During the periods ended December 31, 1998 and 1999, 100% and 97.4%,
respectively, of net revenues came from the United States. Foreign net revenues
of 2.6% during the year ended December 31, 1999 came primarily from Europe.
F-20
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
18. SUBSEQUENT EVENTS
As part of the agreement to purchase the assets of NTBN, Dr. Garrison was
given the option to convert a $500,000 note due November 2002 or any portion of
the note into Common Stock of the Company at the Series C Preferred stock price
of $27.101. On February 15, 2000 Dr. Garrison exercised his option on 9,225
shares equivalent to $250,000. The value of the shares is a reduction of the
$500,000 note payable, the balance of which at December 31, 1999 was $487,896.
The $212,236 balance of the note, after exercising the stock conversion, will be
repaid by April 2001, as the monthly payments will remain at the original amount
until the note is paid off.
On March 30, 2000, the Company purchased the buildings and land (6.19 acres)
the Company occupied under lease, plus an additional 20.82 acres of land for
future expansion. The purchase price for the two buildings and 6.19 acres was
$3,600,000 with the additional 20.82 acres priced at $624,600. The Company
received a 20 year term loan in the amount of $2,800,000 to finance the purchase
of the buildings and the 6.19 acres of land. Interest on the loan is at 30 day
LIBOR plus 150 basis points. Simultaneous with entering into the $2,800,000 term
loan, the Company entered into a swap agreement with a commercial bank which
fixes its interest rate at 8.35%. The interest rate will remain fixed until the
30-day LIBOR is determined to be greater than or equal to 8%, at which time the
interest rate will revert to the 30-day LIBOR plus 150 basis points. The
effective notional amount of the swap at March 30, 2000 was $2,800,000. The term
loan is collateralized by the land and buildings. The term loan agreement
contains various restrictive covenants, which limit among other things, leases,
indebtedness, loans, and acquisitions. In addition the Company must satisfy
certain financial ratios including fixed charge ratio at 1.25 to 1.00 or greater
and funded debt to earnings before interest, taxes, depreciation and
amortization of not greater than 4.00 to 1.00. The $1,424,600 balance of the
amounts due for the building with 6.19 acres and additional 20.82 acres is
financed from the $10,000,000 raised from the sale of Series C Preferred stock.
On April 27, 2000, the Company entered into a definitive agreement to
acquire the net assets of a division of the University of Alabama Health
Services Foundation, which has been doing business as the Alabama Tissue Center
("ATC"), in Birmingham, Alabama. The acquisition will be financed by a cash
payment of $250,000 and the issuance of $3,500,000 in shares of the Company's
common stock, valued at the Company's initial public offering price, plus an
additional cash payment of $250,000 upon the achievement of certain milestones,
with total possible consideration valued at $4,000,000. The acquisition of ATC
will be accounted for under the purchase method of accounting.
19. COMMON STOCK SPLIT AND MERGER INTO DELAWARE CORPORATION (UNAUDITED)
The Company anticipates approving a common stock split. The conversion rate
is not currently known. The Company's historical consolidated financial
statements will be retroactively restated for this common stock split. The
Company also anticipates that it will merge into a newly formed Delaware
corporation.
******
F-21
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<S> <C>
ASSETS MARCH 31, 2000
-----------
Current Assets:
Cash and cash equivalents................................. $ 2,371,938
Accounts receivable--less allowance of $403,932........... 17,764,466
Product inventories....................................... 18,045,870
Supply inventories........................................ 651,007
Prepaid and other current assets.......................... 1,604,898
Deferred tax asset........................................ 851,463
-----------
Total current assets.................................... 41,289,642
Property, plant and equipment--net.......................... 9,963,872
Deferred tax asset.......................................... 1,160,738
Other assets--net........................................... 429,994
-----------
$52,844,246
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $23,178,028
Accrued expenses.......................................... 2,404,162
Current portion of deferred revenue....................... 225,000
Line of credit............................................ 1,891,369
Current portion of long-term debt......................... 955,481
-----------
Total current liabilities............................... 28,654,040
Long-term debt--less current portion........................ 4,027,496
Deferred revenue............................................ 3,871,750
-----------
Total liabilities....................................... 36,553,286
-----------
Commitments and contingencies
Stockholders' equity:
Series A Preferred stock, $.001 par value; 1,777,348
shares authorized, issued and outstanding............... 1,777
Series B Preferred stock, $.001 par value; 748,152 shares
authorized, issued and outstanding; at liquidation
value................................................... 6,580,000
Series C Preferred stock, $.001 par value; 368,990 shares
authorized, issued and outstanding; at liquidation
value................................................... 10,000,000
Common stock, $.001 par value; 6,000,000 shares
authorized; 779,927 shares issued; 753,897 shares
outstanding............................................. 780
Additional paid-in capital................................ 691,426
Accumulated deficit....................................... (574,812)
Deferred compensation..................................... (359,669)
Due from stockholder--net of due to stockholder........... (34,457)
Less treasury stock--26,030 shares........................ (14,085)
-----------
Total stockholders' equity.............................. 16,290,960
-----------
$52,844,246
===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-22
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 2000
------------- -------------
<S> <C> <C>
Revenues from core operations:
Fees from tissue distribution............................. $13,901,209 $25,554,884
Other revenues from core operations....................... 918,649 527,881
----------- -----------
Total revenues.......................................... 14,819,858 26,082,765
Management services fees.................................... 8,616,729 14,279,020
----------- -----------
Net revenues............................................ 6,203,129 11,803,745
Costs of processing and distribution........................ 4,397,877 6,326,450
----------- -----------
Gross profit............................................ 1,805,252 5,477,295
----------- -----------
Expenses:
Marketing, general and administrative..................... 1,673,253 3,943,777
Research and development.................................. 375,711 514,891
----------- -----------
Total expenses.......................................... 2,048,964 4,458,668
----------- -----------
Operating (loss) income..................................... (243,712) 1,018,627
----------- -----------
Interest (expense) income:
Interest expense.......................................... (56,931) (107,787)
Interest income........................................... 66,923 90,368
----------- -----------
Total interest income (expense)--net.................... 9,992 (17,419)
----------- -----------
(Loss) income before income tax expense..................... (233,720) 1,001,208
Income tax expense.......................................... -- (393,566)
----------- -----------
Net (loss) income........................................... $ (233,720) $ 607,642
=========== ===========
Net (loss) income per common share--basic................... $ (0.30) $ 0.78
=========== ===========
Net (loss) income per common share--diluted................. $ (0.30) $ 0.16
=========== ===========
Weighted average shares outstanding--basic.................. 770,702 775,264
Weighted average shares outstanding--diluted................ 770,702 3,834,443
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-23
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK ADDITIONAL
----------------------------------- COMMON PAID-IN ACCUMULATED DEFERRED
A B C STOCK CAPITAL DEFICIT COMPENSATION
-------- ---------- ----------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999............ $1,777 $6,580,000 $10,000,000 $770 $447,153 $(1,182,454) $(399,907)
Purchase and forfeited treasury
stock............................. -- -- -- -- (3,400) -- 8,387
Conversion of note to Common Stock.. -- -- -- 10 249,997 --
Net amounts advanced to
stockholder....................... -- -- -- -- -- -- --
Stock issuance costs................ -- -- -- -- (2,324) -- --
Vested deferred compensation........ -- -- -- -- -- -- 31,851
Net income.......................... -- -- -- -- -- 607,642 --
------ ---------- ----------- ---- -------- ----------- ---------
Balance March 31, 2000................ $1,777 $6,580,000 $10,000,000 $780 $691,426 $ (574,812) $(359,669)
====== ========== =========== ==== ======== =========== =========
<CAPTION>
DUE FROM TREASURY
STOCKHOLDER STOCK TOTAL
----------- -------- -----------
<S> <C> <C> <C>
Balance, December 31, 1999............ $ (4,332) $ (5,698) $15,437,309
Purchase and forfeited treasury
stock............................. -- (8,387) (3,400)
Conversion of note to Common Stock.. -- -- 250,007
Net amounts advanced to
stockholder....................... (30,125) -- (30,125)
Stock issuance costs................ -- -- (2,324)
Vested deferred compensation........ -- -- 31,851
Net income.......................... -- -- 607,642
-------- -------- -----------
Balance March 31, 2000................ $(34,457) $(14,085) $16,290,960
======== ======== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-24
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... $ (233,720) $ 607,642
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization expense................... 160,405 273,898
Bad debt expense........................................ 25,638 68,845
Amortization of deferred revenue........................ (56,250) (56,250)
Deferred income taxes................................... -- (34,591)
Deferred compensation................................... 32,532 45,051
Changes in assets and liabilities--cash (used in)
provided by:
Accounts receivable................................... (1,625,737) (2,326,561)
Product and supply inventories........................ (820,339) (2,464,767)
Prepaid and other current assets...................... (85,324) (65)
Other assets.......................................... 22,530 (132,380)
Accounts payable...................................... 302,948 2,121,220
Accrued expenses...................................... 562,427 20,770
Other liabilities..................................... (22,532) --
----------- -----------
Net cash used in operating activities............... (1,737,422) (1,877,188)
----------- -----------
Cash flows from investing activities--
Purchase of property, plant, and equipment................ (552,743) (2,132,060)
----------- -----------
Cash flows from financing activities:
Payments on capital lease and note obligations............ (108,220) (209,946)
Stock issuance costs...................................... -- (2,324)
Increase in due from stockholder.......................... (995,249) (30,125)
Line of credit payments--net.............................. -- (896,106)
Purchase of treasury stock................................ (313) (16,600)
----------- -----------
Net cash used in financing activities............... (1,103,782) (1,155,101)
----------- -----------
Net decrease in cash and cash equivalents................... (3,393,947) (5,164,349)
Cash and cash equivalents, beginning of period.............. 3,925,880 7,536,287
----------- -----------
Cash and cash equivalents, end of period.................... $ 531,933 $ 2,371,938
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-25
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
1. ORGANIZATION
Regeneration Technologies, Inc. ("RTI") and its wholly owned subsidiary,
Georgia Tissue Bank ("GTB") (collectively, the "Company") process human
musculoskeletal tissue received from various tissue recovery agencies. The
processing transforms the tissue into either conventional or precision tooled
allografts, some of which are patented. These allografts are distributed
domestically and internationally, for use in spinal vertebrae repair,
musculoskeletal reconstruction and fracture repair. The processed tissue
includes cortical dowels, cervical implants, cortical bone interference screws,
and bone paste grafts.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission relating to interim financial statements. These unaudited
condensed consolidated financial statements do not include all disclosures
provided in the annual consolidated financial statements. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in the
consolidated financial statements for the year ended December 31, 1999 as
presented in this document and filed with the Securities and Exchange
Commission. All adjustments of a normal recurring nature, which, in the opinion
of management, are necessary to present a fair statement of results for the
interim periods, have been made. Results of operations are not necessarily
indicative of the results to be expected for the full year.
The consolidated financial statements include the accounts of RTI and its
wholly owned subsidiary GTB. All material intercompany balances and transactions
have been eliminated in consolidation.
3. PRODUCT INVENTORIES
Product inventories by stage of completion are as follows:
<TABLE>
<S> <C>
Unprocessed donor tissue.................................... $ 3,359,019
Tissue in process........................................... 4,598,539
Implantable donor tissue.................................... 10,004,166
Nontissue inventory for resale.............................. 84,146
-----------
$18,045,870
===========
</TABLE>
4. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing earnings available
to common shareholders by the weighted average number of common shares
outstanding for the periods. A
F-26
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
4. EARNINGS PER SHARE (CONTINUED)
reconciliation of the number of common shares used in calculation of basic and
diluted EPS is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 2000
--------- ----------
<S> <C> <C>
Basic shares.......................................... 770,702 775,264
Effect of dilutive securities:
Stock options....................................... -- 164,779
Conversion of preferred stock....................... -- 2,894,400
--------- ----------
Diluted shares........................................ 770,702 3,834,443
========= ==========
Net (loss) income..................................... $(233,720) $ 607,642
========= ==========
Basic EPS............................................. $ (0.30) $ 0.78
========= ==========
Diluted EPS........................................... $ (0.30) $ 0.16
========= ==========
</TABLE>
5. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 2000
-------- ----------
<S> <C> <C>
Interest paid during the period....................... $ 56,931 $ 107,787
Noncash capital lease obligations..................... $171,620 $ --
Conversion of note payable to common stock............ $ -- $ 250,007
Notes payable issued to acquire land and buildings.... $ -- $2,800,000
Reduction in capital lease obligation upon purchase of
building............................................ $ -- $ 282,600
Reduction in straight-line rent accrual upon purchase
of building......................................... $ -- $ 224,989
Noncash insurance financing........................... $406,859 $ 430,189
</TABLE>
6. SEGMENT DATA
The Company processes human musculoskeletal tissue received from various
tissue recovery agencies and distributes the tissue through various channels.
This one line of business represents 100% of consolidated fees from tissue
distribution and is comprised of three primary product lines: spinal
F-27
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
6. SEGMENT DATA (CONTINUED)
allografts, other precision tooled allografts and conventional tissue. The
following table presents fees from tissue distribution by each of the Company's
three primary product lines:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 2000
----------- -----------
<S> <C> <C>
Fees from tissue distribution:
Spinal allografts................................ $11,802,878 $20,497,059
Other precision tooled allografts................ 820,462 1,597,508
Conventional tissue.............................. 1,277,869 3,460,317
----------- -----------
Total.......................................... $13,901,209 $25,554,884
=========== ===========
</TABLE>
7. SIGNIFICANT EVENTS
On March 30, 2000, the Company purchased the buildings and land (6.19 acres)
the Company occupied under lease, plus an additional 20.82 acres of land for
future expansion. The purchase price for the two buildings and 6.19 acres was
$3,600,000 with the additional 20.82 acres priced at $624,600. The Company
received a 20-year term loan in the amount of $2,800,000 to finance the purchase
of the buildings and the 6.19 acres of land. Interest on the loan is at the
30-day LIBOR plus 150 basis points. Simultaneous with entering into the
$2,800,000 term loan, the Company entered into a swap agreement with a
commercial bank which fixes its interest rate at 8.35%. The interest rate will
remain fixed until the 30-day LIBOR is determined to be greater than or equal to
8%, at which time the interest rate will revert to the 30-day LIBOR plus 150
basis points. The effective notional amount of the swap at March 30, 2000 was
$2,800,000. The term loan is collateralized by the land and buildings. The term
loan agreement contains various restrictive covenants, which limit among other
things, leases, indebtedness, loans, and acquisitions. In addition the Company
must satisfy certain financial ratios including fixed charge ratio at 1.25 to
1.00 or greater and funded debt to earnings before interest, taxes, depreciation
and amortization of not greater than 4.00 to 1.00. The $1,424,600 balance of the
amount due for the building with 6.19 acres and additional 20.82 acres is
financed from the $10,000,000 raised from the sale of Series C Preferred stock
in late 1999.
8. SUBSEQUENT EVENTS
On April 27, 2000, the Company entered into a definitive agreement to
acquire the net assets of a division of the University of Alabama Health
Services Foundation, which has been doing business as the Alabama Tissue Center
("ATC"), in Birmingham, Alabama. The acquisition will be financed by a cash
payment of $250,000 and the issuance of $3,500,000 in shares of the Company's
common stock, valued at the Company's initial public offering price, plus an
additional cash payment of $250,000 upon the achievement of certain milestones,
with total possible consideration valued at $4,000,000. The acquisition of ATC
will be accounted for under the purchase method of accounting.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Regeneration Technologies, Inc.:
We have audited the consolidated financial statements of Regeneration
Technologies, Inc. and subsidiary (the "Company") as of December 31, 1998 and
1999, and for the period from February 12, 1998 (date operations began) to
December 31, 1998 and for the year ended December 31, 1999, and have issued our
report thereon dated March 22, 2000 (April 27, 2000 as to Note 18) (included
elsewhere in this Registration Statement). Our audits also included the
accompanying consolidated financial statement schedule. The consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
CERTIFIED PUBLIC ACCOUNTANTS
Tampa, Florida
March 22, 2000
(April 27, 2000 as to Note 18)
F-29
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
PERIOD FROM FEBRUARY 12, 1998 (DATE OPERATIONS BEGAN)
TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Period Ended December 31, 1998:
Allowance for doubtful accounts...... $ -- $ 38,500 $ -- $ -- $ 38,500
Year Ended December 31, 1999:
Allowance for doubtful accounts...... 38,500 171,587 125,000(a) -- 335,087
</TABLE>
- ------------------------
(a) Represents allowance for doubtful accounts on accounts receivable acquired
from National Tissue Bank Network, Georgia Tissue Bank, Inc.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Regeneration Technologies, Inc.:
We have audited the accompanying statements of revenues and direct costs of the
predecessor business of Regeneration Technologies, Inc. (the "Company"), a part
of the University of Florida Tissue Bank, Inc., for the year ended December 31,
1997 and for the period from January 1, 1998 through February 11, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the statement of
revenues and direct costs is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements of revenues and direct costs. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall statements of revenues and direct cost
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the statements of revenues and direct costs present fairly, in
all material respects, the revenues and direct costs of the Company for the year
ended December 31, 1997 and for the period from January 1, 1998 through
February 11, 1998, in conformity with accounting principles generally accepted
in the United States of America.
As more fully described in Note 2 to the statements of revenues and direct
costs, the Company was operated as a part of the University of Florida Tissue
Bank, Inc. As a result, certain expense allocations have not been made in the
accompanying statements of revenues and direct costs.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Tampa, Florida
April 17, 2000
F-31
<PAGE>
PREDECESSOR BUSINESS OF REGENERATION TECHNOLOGIES, INC.
(PART OF THE UNIVERSITY OF FLORIDA TISSUE BANK, INC.)
STATEMENTS OF REVENUES AND DIRECT COSTS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1998
DECEMBER 31, 1997 TO FEBRUARY 11, 1998
----------------- --------------------
<S> <C> <C>
Revenues from core operations:
Fees from tissue distribution............................ $11,074,265 $2,416,260
Other revenues from core operations...................... 2,434,499 410,244
----------- ----------
Total revenues......................................... 13,508,764 2,826,504
Management services fees................................... 8,875,067 1,932,056
----------- ----------
Net revenues........................................... 4,633,697 894,448
Costs of processing and distribution....................... 3,344,136 590,742
----------- ----------
Gross profit........................................... 1,289,561 303,706
----------- ----------
Expenses:
Direct marketing, general and administrative expenses.... (1,356,949) (207,438)
Research and development expenses........................ (478,473) (68,237)
----------- ----------
Total expenses......................................... (1,835,422) (275,675)
----------- ----------
Revenues (less than) in excess of direct costs............. $ (545,861) $ 28,031
=========== ==========
</TABLE>
See notes to statements of revenues and direct costs.
F-32
<PAGE>
PREDECESSOR BUSINESS OF REGENERATION TECHNOLOGIES, INC.
(PART OF THE UNIVERSITY OF FLORIDA TISSUE BANK, INC.)
NOTES TO STATEMENTS OF REVENUES AND DIRECT COSTS
YEAR ENDED DECEMBER 31, 1997
AND PERIOD FROM JANUARY 1, 1998 TO FEBRUARY 11, 1998
1. ORGANIZATION
Regeneration Technologies, Inc., was incorporated in Florida on August 22,
1997, and began operations on February 12, 1998, following a contribution of
assets by the University of Florida Tissue Bank, Inc. ("UFTB") of the
Predecessor Business of Regeneration Technologies, Inc. (the "Company"). The
Company processed human musculoskeletal tissue received from various tissue
recovery agencies. The Company's processing transformed the tissue into either
conventional or precision tooled allografts, some of which were patented. These
allografts were distributed domestically and internationally, for use in spinal
vertebrae repair, musculoskeletal reconstruction and fracture repair. The
processed tissue included cortical dowels, cervical implants, cortical bone
interference screws, and bone paste grafts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The accompanying statements of revenues and direct
costs reflect the operations of the Company, operating as a part of UFTB, and
may not necessarily be indicative of the financial results had the Company been
operating as a separate entity. Allocations for certain expenses, such as
interest, corporate overhead and income taxes by UFTB are not included in these
statements, as a reasonable methodology for allocation could not be made, and
any allocation may not be indicative of the actual costs incurred by the
Company.
INVENTORIES--Product and supply inventories were stated at the lower of cost
or market, with cost determined by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment were stated at
cost less accumulated depreciation and amortization. The cost of equipment under
capital leases and leasehold improvements was amortized on the straight-line
method over the shorter of the lease term or the estimated useful life of the
asset. Depreciation was computed on the straight-line method over the following
estimated useful lives of the assets:
<TABLE>
<S> <C>
Production equipment........................................ 8 to 10 years
Leasehold improvements...................................... 8 to 10 years
Office equipment, furniture, and fixtures................... 5 to 7 years
Computer hardware and software.............................. 3 years
</TABLE>
Depreciation and amortization expense was approximately $252,447 for the year
ended December 31, 1997 and $48,272 for the period from January 1, 1998 to
February 11, 1998.
RESEARCH AND DEVELOPMENT COSTS--Research and development costs were expensed
as incurred.
REVENUE RECOGNITION--Revenue was recognized at the time the Company shipped
the processed tissue. Revenues were reported gross of any management services
fees the Company incurred to distribute its products. Any other revenues
directly related to the Company's core operations were recognized when all
significant contractual obligations were satisfied.
USE OF ESTIMATES--The preparation of the accompanying statements of revenues
and direct costs in conformity with generally accepted accounting principles
required management to make estimates and
F-33
<PAGE>
PREDECESSOR BUSINESS OF REGENERATION TECHNOLOGIES, INC.
(PART OF THE UNIVERSITY OF FLORIDA TISSUE BANK, INC.)
NOTES TO STATEMENTS OF REVENUES AND DIRECT COSTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
AND PERIOD FROM JANUARY 1, 1998 TO FEBRUARY 11, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assumptions that affected the reported amounts of revenues and direct expenses
during the reporting period. Actual results could differ from those estimates.
3. CONCENTRATIONS OF RISK
The Company's principal concentration of risk was related to its limited
distribution channels. During 1997 and the period from January 1, 1998 to
February 11, 1998, approximately 90% of the Company's revenues came from one of
the distribution companies.
4. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASE OBLIGATIONS--Future minimum lease payments on capital lease
obligations as of December 31, 1997 were as follows:
<TABLE>
<S> <C>
1998........................................................ $ 342,942
1999........................................................ 342,942
2000........................................................ 342,942
2001........................................................ 147,214
----------
Total....................................................... 1,176,040
Less amount representing interest........................... (272,130)
----------
$ 903,910
==========
</TABLE>
Future minimum lease payments on capital lease obligations as of February 11,
1998 approximated those represented by the schedule above.
OPERATING LEASE OBLIGATIONS--The Company leased office equipment under
various operating leases expiring through 2001. On January 1, 1998, the Company
entered into an additional operating lease for office equipment.
Future minimum operating lease payments required under noncancelable
operating lease agreements as of December 31, 1997 and February 11, 1998 were
not significant. Rent expense relating to operating leases for the year ended
December 31, 1997 and for the period from January 1, 1998 through February 11,
1998 were approximately $2,900 and $375, respectively.
MANUFACTURING RIGHTS--The Company licensed manufacturing rights for some of
its products. Under the agreement, the Company agreed to accept and reimburse
the processor for items that met the Company's quality control guidelines.
* * * * * *
F-34
<PAGE>
One Donor Can Help Many Recipients
[Graphic of human body]
Humerus:
MD-TM--Dowel
Cornerstone-TM-
- -SR Reserve
Heart Valve:
Aortic
Pulmonary
Femur:
MD-TM--Dowels
Cornerstone-TM- SR
Precision Wedge
Tangent Wedge
Osteofil-TM- Bone Paste
Suture Anchors
Interference screw
Bone pins
Conventional allografts
Tibia:
Tangent Wedge
MD-TM--Dowel
Cornerstone-TM- SR
Fibula:
Cornerstone-TM--SR
Select
[Two photographs of recipients with text naming recipient and received tissue]
<PAGE>
- ------------------------------------------------------------
- ------------------------------------------------------------
Shares
[LOGO]
------------
Prospectus
, 2000
-------------------
Banc of America Securities LLC
Lehman Brothers
UBS Warburg LLC
Stephens Inc.
Until , 2000, all dealers that buy, sell or trade our common stock may
be required to deliver a prospectus, regardless of whether they are
participating in this offering. This is in addition to the obligation of dealers
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Regeneration Technologies in
connection with the sale of the common stock being registered hereby. All the
amounts shown are estimated, except the SEC registration fee, the NASD filing
fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $22,770
NASD Filing Fee............................................. $ 9,125
Nasdaq National Market Listing Fee.......................... $ *
Printing Expenses........................................... $ *
Legal Fees and Expenses..................................... $ *
Accounting Fees and Expenses................................ $ *
Blue Sky Expenses and Counsel Fees.......................... $ *
Transfer Agent and Registrar Fees........................... $ *
Miscellaneous............................................... $ *
-------
Total................................................... $ *
=======
</TABLE>
- ------------------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the General Corporation Law of the State of Delaware
("DGCL") provides that a Delaware corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation), by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Section 145(b) of the DGCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he
acted in any of the capacities set forth above, against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if he acted under similar
standards, except that no indemnification may be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the court in which such
action or suit was brought shall determine that despite the adjudication of
liability, such person is fairly and reasonably entitled to be indemnified for
such expenses which the court shall deem proper.
Section 145 of the DGCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein:
II-1
<PAGE>
- he shall be indemnified against expenses actually and reasonably incurred
by him in connection therewith;
- that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be
entitled;
- and that the corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him or incurred by him in any such
capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities
under such Section 145.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director provided that such provision shall not eliminate
or limit the liability of a director:
- for any breach of the director's duty of loyalty to the corporation or its
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the DGCL; or
- for any transaction from which the director derived an improper personal
benefit.
Article Ninth of Regeneration Technologies's Certificate of Incorporation
contains substantially the same provisions for indemnification as those
contained in Section 145 of the DGCL. Additionally, Article Ninth provides that
in any judicial proceeding in which a person seeks indemnification pursuant to
Article Ninth, the burden of proving that such person is not entitled to
indemnification shall be on Regeneration Technologies. Article Ninth further
provides that any person who successfully establishes a right to
indemnification, in whole or in part, under Article Ninth in any such proceeding
shall be indemnified by Regeneration Technologies against expenses incurred
(including attorneys' fees) in establishing such right to indemnification.
Finally, Article Ninth provides that in the event the DGCL is amended to expand
further the indemnification permitted to the persons covered by Article Ninth,
Regeneration Technologies shall indemnify such persons to the fullest extent
permitted by the DGCL, as so amended. Reference is made to the Regeneration
Technologies' Amended Certificate of Incorporation and By-Laws filed as Exhibits
3.1 and 3.2, respectively.
Article Tenth of Regeneration Technologies's Certificate of Incorporation,
states that to the fullest extent permitted by the DGCL, no director of
Regeneration Technologies shall be personally liable to Regeneration
Technologies, any of its stockholders or any other person or entity for monetary
damages for breach of fiduciary duty owed to Regeneration Technologies, its
stockholders or such other person or entity owing to such director's position as
a director of Regeneration Technologies.
Regeneration Technologies intends to enter into indemnification agreements
with its current directors and executive officers. Regeneration Technologies
intends to insure its directors and officers against losses arising from any
claim against them as such for wrongful acts or omission, subject to certain
limitations.
Under Section 8 of the Underwriting Agreement, the underwriters are
obligated, under certain circumstances, to indemnify officers, directors and
controlling persons of Regeneration Technologies against certain liabilities,
including liabilities under the Securities Act of 1933. Reference is made to the
form of Underwriting Agreement filed as Exhibit 1.1 hereto.
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since inception, Regeneration Technologies has sold unregistered securities
in the amounts, at the times, and for the aggregate amounts of consideration
listed as follows:
<TABLE>
<CAPTION>
DATE CLASS SHARES PURCHASER CONSIDERATION
- --------------------- -------------------- -------------------- -------------------- -------------
<S> <C> <C> <C> <C>
February 1998 Series A Preferred 600,000 UFTB $ (39,643)
Stock 600,000 UFRF
577,348 James M. Grooms
February 1998 Series B Preferred 748,152 16 individuals and $ 6,580,000
Stock entities
February 1998 Common stock 770,752 124 individuals 0
October 1999 Series C Preferred 368,990 and warrants Stephens- $10,000,000
Stock Warrants to purchase 46,124 Regeneration LLC
shares of common Medtronic Asset
stock Management, Inc.
February 2000 Common stock 9,225 Charles $ 250,000
Garrison, M.D.
Inception through Common stock 271,010 347 individuals 0
12/31/99 underlying options
</TABLE>
No underwriters were engaged in connection with the foregoing offers and
sales of securities. Such offers and sales of common stock and preferred stock
were made in reliance upon the exemption from registration set forth in
Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of
Regulation D promulgated thereunder for transactions not involving a public
offering, and all purchasers were accredited investors as such term is defined
in Rule 501(a) of Regulation D. Issuances of options to Regeneration
Technologies's employees, directors and consultants were made pursuant to
Rule 701 promulgated under the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NO. DESCRIPTION
- --------------------- -----------
<C> <S>
1.1 Underwriting Agreement*
3.1 Certificate of Incorporation of Regeneration Technologies,
Inc.*
3.2 Bylaws*
4.1 Amended and Restated Registration Rights Agreement dated as
of October 11, 1999, by and among Regeneration Technologies,
Inc., the investors set forth on Exhibit A to the Class C
Preferred Stock and Warrant Purchase Agreement dated as of
October 11, 1999 and the Stockholders listed on Exhibits A
and B thereto.**
4.2 Stockholder's Agreement dated as of October 11, 1999, by and
among Regeneration Technologies, Inc., the investors set
forth on Exhibit A to the Class C Preferred Stock and
Warrant Purchase Agreement dated as of October 11, 1999 and
the Stockholders listed on exhibits A, B and C thereto.**
5.1 Opinion of Fulbright & Jaworski L.L.P. regarding the
legality of the shares*
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.1 Program Transfer Agreement between Regeneration
Technologies, Inc. and the University of Florida Tissue
Bank, Inc. dated April 15, 1999.**+
10.2 Tissue Recovery Agreement between Regeneration Technologies,
Inc. and the University of Florida Tissue Bank, Inc. dated
April 15, 1999.**+
10.3 Exclusive Distributorship Agreement between Regeneration
Technologies, Inc. and C.R. Bard, Inc., dated June 6,
1998.**+
10.4 Exclusive License Agreement between Regeneration
Technologies, Inc., as successor in interest to the
University of Florida Tissue Bank, Inc. and Exactech, Inc.,
dated April 22, 1997, as amended.**+
10.5 Management Services Agreement between Regeneration
Technologies, Inc., as successor in interest to the
University of Florida Tissue Bank, Inc. and Sofamor Danek
Group, dated July 23, 1996.**+
10.6 Management Services Agreement between Regeneration
Technologies, Inc., as successor in interest to the
University of Florida Tissue Bank, Inc., and Sofamor Danek
Group, dated May 11, 1998.**+
10.7 Master Lease Agreement between Regeneration Technologies,
Inc., as successor in interest to the University of Florida
Tissue Bank, Inc., and American Equipment Leasing, dated
January 23, 1998.
10.8 Purchase Contract between Regeneration Technologies, Inc.
and Echelon International Corp., dated January 31, 2000, as
amended.**
10.9 Lease between Echelon International Corp. and Regeneration
Technologies, Inc., dated February 4, 2000.**
10.10 Sublease between Regeneration Technologies, Inc. and the
University of Florida Tissue Bank, Inc., dated February 12,
1998.*
10.11 Lease between Regeneration Technologies, Inc. and First
Street Group L.C., dated June 14, 1999.**
10.12 Lease agreement between Georgia Tissue Bank Inc. and Charles
P. Garrison, dated November 1, 1999.**
10.13 Employment Agreements between Regeneration Technologies,
Inc. and James M. Grooms, dated February 9, 1998.**
10.14 Employment Agreements between Regeneration Technologies,
Inc. and Richard R. Allen, dated February 13, 1998.**
10.15 Employment Agreements between Regeneration Technologies,
Inc. and Frederick C. Preiss, dated November 25, 1998.**
10.16 Employment Agreements between Regeneration Technologies,
Inc. and Thomas Brewer, dated June 15, 1998.**
10.17 Employment Agreements between Regeneration Technologies,
Inc. and James P. Abraham, dated November 28, 1998.**
10.18 Employment Agreements between Regeneration Technologies,
Inc. and Nancy R. Holland, dated February 13, 1998.**
10.19 Omnibus Stock Option Plan.**
10.20 Year 2000 Compensation Plan.**
10.21 Form of indemnification agreement between Regeneration
Technologies, Inc. and its directors and executive
officers.*
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.22 Line of Credit Agreement, dated September 1999.*
10.23 Mortgage between Regeneration Technologies, Inc. and Bank of
America, N.A., dated March 30, 2000.*
10.24 Promissory Note between Regeneration Technologies, Inc. and
Bank of America, N.A., dated March 30, 2000.*
23.1 Consent of Fulbright & Jaworski L.L.P. (included in Exhibit
5.1)*
23.2 Consent of Deloitte & Touche LLP to the consolidated
financial statements and supplemental schedule of
Regeneration Technologies, Inc. and subsidiary.
23.3 Consent of Deloitte & Touche LLP to the Statements of
Revenues and Direct Costs of the predecessor business of
Regeneration Technologies, Inc.
24.1 Power of attorney**
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment
** Previously filed
+ Confidentiality requested, confidential portions have been omitted and filed
separately with the Commission, as required by Rule 406(b).
(b) Consolidated Financial Statement Schedule.
SCHEDULE II--VALUATIONS AND QUALIFYING ACCOUNTS
All other schedules are omitted because they are not required or are not
applicable or the information is included in the consolidated financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to its Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Alachua, State of Florida, on May 23, 2000.
<TABLE>
<S> <C> <C>
REGENERATION TECHNOLOGIES, INC.
By: /s/ JAMES M. GROOMS
-----------------------------------------
James M. Grooms
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to its Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES M. GROOMS Chairman of the Board (principal
------------------------------------------- executive officer) and Chief May 23, 2000
James M. Grooms Executive Officer
/s/ RICHARD R. ALLEN Chief Financial Officer
------------------------------------------- (principal financial and May 23, 2000
Richard R. Allen accounting officer)
* Director
------------------------------------------- May 23, 2000
Philip R. Chapman
* Director
------------------------------------------- May 23, 2000
Peter F. Gearen
* Director
------------------------------------------- May 23, 2000
Michael J. Odrich
* Director
------------------------------------------- May 23, 2000
Anthony C. Phillips
* Director
------------------------------------------- May 23, 2000
E. Ronald Pickard
* Director
------------------------------------------- May 23, 2000
Daniel L. Weber
</TABLE>
<TABLE>
<S> <C> <C>
*By: /s/ RICHARD R. ALLEN
---------------------------------------
Richard R. Allen
as Attorney-in-Fact
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------------------- --------
<C> <S> <C>
1.1 Underwriting Agreement*
3.1 Certificate of Incorporation of Regeneration Technologies,
Inc.*
3.2 Bylaws*
4.1 Amended and Restated Registration Rights Agreement dated as
of October 11, 1999, by and among Regeneration
Technologies, Inc., the investors set forth on Exhibit A
to the Class C Preferred Stock and Warrant Purchase
Agreement dated as of October 11, 1999 and the
Stockholders listed on Exhibits A and B thereto.**
4.2 Stockholder's Agreement dated as of October 11, 1999, by and
among Regeneration Technologies, Inc., the investors set
forth on Exhibit A to the Class C Preferred Stock and
Warrant Purchase Agreement dated as of October 11, 1999
and the Stockholders listed on exhibits A, B and C
thereto.**
5.1 Opinion of Fulbright & Jaworski L.L.P. regarding the
legality of the shares*
10.1 Program Transfer Agreement between Regeneration
Technologies, Inc. and the University of Florida Tissue
Bank, Inc. dated April 15, 1999.**+
10.2 Tissue Recovery Agreement between Regeneration Technologies,
Inc. and the University of Florida Tissue Bank, Inc. dated
April 15, 1999.**+
10.3 Exclusive Distributorship Agreement between Regeneration
Technologies, Inc. and C.R. Bard, Inc., dated June 6,
1998.**+
10.4 Exclusive License Agreement between Regeneration
Technologies, Inc., as successor in interest to the
University of Florida Tissue Bank, Inc. and Exactech,
Inc., dated April 22, 1997, as amended.**+
10.5 Management Services Agreement between Regeneration
Technologies, Inc., as successor in interest to the
University of Florida Tissue Bank, Inc. and Sofamor Danek
Group, dated July 23, 1996.**+
10.6 Management Services Agreement between Regeneration
Technologies, Inc., as successor in interest to the
University of Florida Tissue Bank, Inc., and Sofamor Danek
Group, dated May 11, 1998.**+
10.7 Master Lease Agreement between Regeneration Technologies,
Inc., as successor in interest to the University of
Florida Tissue Bank, Inc., and American Equipment Leasing,
dated January 23, 1998.
10.8 Purchase Contract between Regeneration Technologies, Inc.
and Echelon International Corp., dated January 31, 2000,
as amended.**
10.9 Lease between Echelon International Corp. and Regeneration
Technologies, Inc., dated February 4, 2000.**
10.10 Sublease between Regeneration Technologies, Inc. and the
University of Florida Tissue Bank, Inc., dated February
12, 1998.*
10.11 Lease between Regeneration Technologies, Inc. and First
Street Group L.C., dated June 14, 1999.**
10.12 Lease agreement between Georgia Tissue Bank Inc. and Charles
P. Garrison, dated November 1, 1999.**
10.13 Employment Agreements between Regeneration Technologies,
Inc. and James M. Grooms, dated February 9, 1998.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------------------- --------
<C> <S> <C>
10.14 Employment Agreements between Regeneration Technologies,
Inc. and Richard R. Allen, dated February 13, 1998.**
10.15 Employment Agreements between Regeneration Technologies,
Inc. and Frederick C. Preiss, dated November 25, 1998.**
10.16 Employment Agreements between Regeneration Technologies,
Inc. and Thomas Brewer, dated June 15, 1998.**
10.17 Employment Agreements between Regeneration Technologies,
Inc. and James P. Abraham, dated November 28, 1998.**
10.18 Employment Agreements between Regeneration Technologies,
Inc. and Nancy R. Holland, dated February 13, 1998.**
10.19 Omnibus Stock Option Plan.**
10.20 Year 2000 Compensation Plan.**
10.21 Form of indemnification agreement between Regeneration
Technologies, Inc. and its directors and executive
officers.*
10.22 Line of Credit Agreement, dated September 1999.*
10.23 Mortgage between Regeneration Technologies, Inc. and Bank of
America, N.A., dated March 30, 2000.*
10.24 Promissory Note between Regeneration Technologies, Inc. and
Bank of America, N.A., dated March 30, 2000.*
23.1 Consent of Fulbright & Jaworski L.L.P. (included in Exhibit
5.1)*
23.2 Consent of Deloitte & Touche LLP to the consolidated
financial statements and supplemental schedule of
Regeneration Technologies, Inc. and subsidiary.
23.3 Consent of Deloitte & Touche LLP to the Statements of
Revenues and Direct Costs of the predecessor business of
Regeneration Technologies, Inc.
24.1 Power of attorney**
27.1 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 10.7
MASTER LEASE SCHEDULE # SCHEDULE DATE: APRIL 25, 1997
--------------------
to
Master Lease Agreement No. 72966 ("Lease") dated AUGUST 8, 1996 by and
between American Equipment Leasing, a division of AEL Leasing Co., Inc.
("Lessor"), and undersigned ("Lessee").
ORIGINAL RENTAL TERM:
Total Term: 60 Mos; Total No. of Pmts: 60; Monthly Rental Pmt: $23,878.47
(including tax, if applicable)
Commencement Date: Skip payment months: N/A
---------------- --------------------
Initial Payment: $67,554.73 Date Received:
------------------ --------------------------
Representing: FIRST & LAST MONTHLY RENTAL PAYMENTS, MARCH & APRIL DEFERRAL
SERVICE CHARGES, LATE CHARGES
Supplier: SEE ATTACHED EQUIPMENT SCHEDULE
Security Deposit: $ NA Date Received: NA
----------------- ----------------------------
Documentation Fee: $1,000.00 Date Received: AUGUST 23, 1996
----------------- ----------------------------
Commitment Fee: $ NA Date Received: NA
----------------- ----------------------------
Purchase Option: TITLE PASSES TO LESSEE UPON SATISFACTION OF ALL PAYMENTS DUE
UNDER THE LEASE
Exercisable only after payment of all monthly rentals due and to become due,
taxes, late charges, and other terms due hereunder and under the lease.
LEASE EQUIPMENT ("Equipment"): See Attached Exhibit
All of the Equipment identified herein was received by us, has been
installed, and is in every way acceptable to us. We agree to enforce in our
own name all warranties, agreements, or representations, if any, which may be
made by Supplier to us. We agree that Lessor makes no express warranties as
to any matter whatsoever, including, without limitation, the condition of the
Equipment, its merchantability, and/or fitness for any particular purpose. We
agree that the Lease relating to this Schedule may not be canceled. No defect
in or unfitness of the Equipment shall release us from the obligation to make
rental payments under the Lease or from any other obligations under the Lease
or this Schedule.
Upon Lessor's written acceptance of this Schedule, the same shall be made a
part of, and incorporated into the above-referenced Lease, and shall replace
and supersede in all respects Master Lease Letter Agreement dated AUGUST 8,
1996, from Lessee to Lessor. THIS SCHEDULE IS SUBJECT TO ALL OF THE TERMS AND
CONDITIONS SET FORTH IN LEASE. ALL REFERENCES TO ANY MASTER LEASE LETTER
AGREEMENT AND/OR SCHEDULE CONTAINED IN THE LEASE SHALL BE DEEMED TO REFER TO
THIS SCHEDULE.
LESSOR LESSEE
Accepted at Reading, Pennsylvania, UNIVERSITY OF FLORIDA TISSUE BANK, INC.
this day of , 19 ---------------------------------------
---- --------------- -- Name
1 PROGRESS BLVD BOX 31
---------------------------------------
Address
AMERICAN EQUIPMENT LEASING ALACHUA FL 32615
---------------------------------------
City State Zip
By: By: /s/ Jamie M. Grooms President/CEO
--------------------------------- ------------------------------------
Jamie M. Grooms Title
Date: April 28, 1997
----------------------------------
AMERICAN EQUIPMENT LEASING
A Division of AEL Leasing Co., Inc.
Courier Address
6 Commerce Drive
Shillington, PA 19607
Mailing Address
P.O. Box 13428
Reading, PA 19612-3428
(610) 775-3134
<PAGE>
PLEDGE AGREEMENT - LEASE
In order to induce AEL Leasing Co., Inc. ("AEL"), P. O. Box 13428, Reading,
Pennsylvania 19612-3428, to make a lease with UNIVERSITY OF FLORIDA TISSUE
BANK, INC. ("Lessee"), a Florida corporation with its principal place of
business at 1 PROGRESS BLVD., BOX 31, ALACHUA, FL 32615 , hereby agrees
as follows:
1. DEFINITIONS.
When used herein, the terms set forth below shall be defined as follows:
(a) "Obligations" means all indebtedness, obligations and liabilities of the
Lessee to AEL of every kind and description, absolute or contingent, due or
to become due, whether for payment or performance, now existing or hereafter
arising from a Master Lease Agreement ID#72966, and Master Lease Letter
Agreement executed in connection therewith, both being dated August 8, 1997,
and any Master Lease Schedules executed in connection with the Master Lease
Agreement. The Master Lease Agreement, Master Lease Letter Agreement and any
Schedule arising therefrom being collectively referred to as the "Lease
Documents." The terms of the Lease Documents are incorporated herein.
(b) "Collateral" means CD#01-0412731-1 with European American Bank,
Uniondale, NY ("Bank") in the amount of $390,000.00.
(c) "Event of Default" means a default with respect to payment or performance
of the Obligations; or an "Event of Default" or "Default" as defined in the
Lease Documents, or a default with respect to any warranty or covenant
hereunder.
2. PLEDGE OF COLLATERAL.
To secure the payment and performance of the Obligations, the Lessee hereby
pledges, assigns and transfers to AEL, and grants to AEL, a continuing
paramount security interest in and to all of the Collateral which Collateral
shall be free and clear of all liens and encumbrances, excepting in favor of
AEL.
3. REPRESENTATIONS AND WARRANTIES.
The Lessee agrees to reimburse AEL, on demand, for any amounts paid or
advanced by AEL as the transferee or holder of the Collateral. AEL shall
exercise reasonable care in the custody and preservation of the Collateral to
the extent required by the applicable statute and use its best efforts to
take such actions as the Lessee may reasonably request in writing but the
failure to do any such act shall not be deemed a failure to exercise
reasonable care. The Lessee shall execute such financing statements in favor
of AEL as AEL shall reasonably request. Lessee warrants that the Collateral
has not been otherwise pledged, assigned, encumbered, hypothecated, or been
made subject to a Security Interest.
4. GENERAL COVENANTS.
AEL shall be under no duty to: (i) collect or protect the Collateral or any
proceeds thereof or give any notice with respect thereto except as expressly
provided herein; (ii) preserve the rights of Lessee with respect to the
Collateral against prior parties; (iii) sell or otherwise realize upon the
Collateral; or (iv) seek payment from any particular source. Without limiting
the generality of the foregoing, AEL shall not be obligated to take any
action in connection with any conversion, call, redemption, retirement or any
other event relating to any of the Collateral. The Lessee agrees to reimburse
AEL, on demand, for any amounts paid or advanced by AEL for the purpose of
preserving the Collateral or any part thereof and/or any liabilities or
expenses incurred by AEL as the transferee or holder of the Collateral. AEL
shall exercise reasonable care in the custody and preservation of the
Collateral to the extent required by applicable statute and use its best
efforts to take such action as the Lessee may reasonably request in writing,
provided that the failure to do any such act shall not be deemed a failure to
exercise reasonable care. Lessee shall not otherwise pledge, assign,
encumber, hypothecate, or subject the Collateral to a security interest.
5. RIGHTS AND REMEDIES.
If an Event of Default shall occur, then or at any time thereafter, AEL may
declare all Obligations to be due and payable regardless of their terms, for
the purposes of this Agreement, without notice, protest, presentment or
demand, all of which are hereby expressly waived by the Lessee. At, or after,
such time AEL shall have, in addition to any other rights and remedies
contained in the Lease, and any other agreements, guarantees, notes,
instruments, and documents heretofore, now or at any time or times hereafter
executed by the Lessee, and delivered to AEL, all of the rights and remedies
of a pledgee, under law, including without limitation, all of the rights and
remedies of a secured party under the Uniform Commercial Code in force in the
Commonwealth of Pennsylvania as of the date hereof, all of which rights and
remedies shall be cumulative, and non-exclusive, to the extent permitted by
law, including the right to present the Certificate of Deposit to Bank for
immediate payment with proceeds to be applied to any indebtedness now or
hereafter due by Lessee to AEL. AEL shall not be responsible for any
penalties incurred by early presentment of the said Collateral, to the extent
provided thereby.
6. GENERAL.
(a) No delay on the part of AEL in exercising any rights hereunder or
failure to exercise the same shall operate as a waiver of such rights;
no notice to or demand of Lessee shall be deemed to be a waiver of any
obligations of Lessee or of the right of AEL to take other or further
action without notice or demand as provided herein. In any event, no
<PAGE>
modification or waiver of the provisions hereof shall be effective
unless in writing and signed by AEL nor shall any waiver be applicable
except in the specific instance or matter for which given.
(b) This Agreement is and shall be deemed to be a contract entered into and
made pursuant to the laws of the Commonwealth of Pennsylvania and shall
in all respects be governed, construed, and applied and enforced in
accordance with the laws of said state.
7. EARLY RELEASE OF PLEDGED COLLATERAL.
This agreement shall be in effect until all Obligations under the Lease
Documents are satisfied, PROVIDED HOWEVER, upon written request of the
Lessee, on the annual anniversary dates of the commencement of payment of the
monthly installments under the Rental Schedule to be executed in connection
with the Lease Documents, AEL will review the financial statements of the
Lessee prepared within the preceding 60 days (and certification of the CFO of
Lessee to the effect that no material adverse change has occurred in the
financial condition of Lessee since the preparation of those statements). AEL
shall release of the Pledged Collateral, if as of the date of such review of
such financial statements, the following conditions are satisfied:
1. All payments due under the Lease Documents (including but not
limited to payment of rentals, taxes and other sums due) have been made
by Lessee in a timely manner since the date of commencement of the Lease
up to the date of such review;
2. No event of default (and no event that with notice or lapse of time
or both would become an event of default) exists under the terms of the
Lease Documents as of the date of such review or shall have otherwise
occurred.
3. The following minimum economic levels shall exist as of the date of
such review:
a. Tangible net worth exceeds $2,000,000.00 ("Tangible net worth"
meaning the excess of total assets over total liabilities, total
assets and total liabilities each to be determined in accordance
with generally accepted accounting principles consistent with those
applied in the preparation of the financial statements previously
submitted to AEL, excluding, however, from the determination of
total assets all assets which would be classified as intangible
assets under generally accepted accounting principles, including,
without limitation, goodwill, licenses, patents, trademarks, trade
names, copyrights and franchises);
b. Debt/Equity ratio is 1:1 or better (to be determined in
accordance with generally accepted accounting principles consistent
with those applied in the preparation of the financial statements
previously submitted to AEL);
c. The Lessee shall have experienced positive cash flow of 1.25:1
over the past twelve month period;
d. Lessee shall not in violation of any term or condition under
any lending agreement between Lessee and any financial institution,
and no default shall otherwise exist under any material agreement to
which Lessee is a party obligor (the President and the CFO of
Lessee each to certify same to AEL, and AEL being entitled to engage
in reasonable due diligence to verify such conditions);
e. AEL shall have received audited financial statements prepared
for the prior two years of Lessee's fiscal year.
AEL Leasing Co., Inc. University of Florida Tissue Bank
By By /s/ Jamie M. Grooms
----------------------- ---------------------------
Signature Signature
----------------------- ---------------------------
Title Title
----------------------- ---------------------------
Date Date
EUROPEAN AMERICAN BANK acknowledges the terms of the within Pledge
Agreement, that AEL, as the Pledgee as defined in the Agreement, that it
shall deliver payment only to AEL unless directed otherwise in writing by
AEL, and that the lien of AEL is prior in lien to any lien the Bank has in
the subject Collateral and that Bank shall not exercise any offset in the
Collateral regarding any claims it may have against the Lessee.
By: -------------------------------------
Signature Title
<PAGE>
MASTER LEASE LETTER AGREEMENT
TO: American Equipment Leasing DATE: August 8, 1996
A Division of AEL Leasing Co., Inc.
RE: Master Lease Agreement No. 72966 ("Lease"), dated AUGUST 8, 1996
------- ----------------
Gentlemen:
Please accept this Letter Agreement as our request that you, as Lessor, lease
to us, as Lessee, pursuant to Lease:
EQUIPMENT: VARIOUS ; LEASE AVAILABILITY: $1,000,000.00
-------------------- ------------------
"Lease Availability" shall mean the aggregate amount of funds Lessor is
willing to expend for Equipment to be Leased to Lessee, pursuant to this
letter. Lessor reserves the right to suspend and/or limit lease availability
in it's solo and absolute discretion upon determining any material adverse
change in the financial condition of Lessee or any guarantor of Lessee's
obligations to Lessor.
<TABLE>
<CAPTION>
Original No. of Initial Mo. Rental Pmt.
Lease Term Rental Purchase Payment Per $1,000,000.00
in Months Payments Option Required Equipment Cost
- ----------- -------- --------- -------- -----------------
<S> <C> <C> <C> <C>
60 60 NONE/PASS OWNERSHIP UPON FIRST & LAST $20,756.00
COMPLETION
</TABLE>
ESTIMATED DOCUMENTATION FEE DUE: $1,000.00
-----------------
At the time of this offer the prime rate of interest as announced by European
American Bank is 8.25%. If during the course of this letter agreement the
prime rate as announced by European American Bank increases, the lease
pricing contained herein will be adjusted by the proportionate increase.
Above terms and conditions are subject to an expiration date of
FEBRUARY 8, 1997 .
- -------------------------
Lessee agrees that upon Lessor's acceptance of this Letter Agreement, it
shall be deemed a part of, and be incorporated into the Lease, until replaced
and superseded by a Master Lease Schedule (as defined in Lease). Lessee
further agrees that the rental term and conditions set forth herein may be
modified in any subsequent Master Lease Schedule, which will finalize certain
terms and conditions of the Lease of the Equipment from Lessor, and confirm
Lessee's receipt and acceptance of the same. Lessee further agrees that
immediately upon receipt of the Master Lease Schedule, Lessee will execute
and return it to Lessor.
During each month prior to that in which the lease payments specified herein
shall commence, Lessee agrees to pay Lessor a monthly Deferral Service Charge
equal to 1.00% of the funds for Equipment disbursed by Lessor for the benefit
of Lessee on or before the due date of such Charges.
This shall confirm that Lessor has established a discretionary line of Leasing
Availability to Lessee in the amount set forth above. Lessee further
understands that subject to definite agreements being reached on ancillary
documentation, instruments, certificates, opinions, guarantees and assurances
necessary or desirable in the form and substance satisfactory to Lessor, and
further subject to the fact that there be no material adverse change or
prospects in the financial and business condition of Lessee or any guarantor
of Lessee's obligations to Lessor, from the date of this letter, as expressed
in the financial statements of Lessee and/or any guarantor furnished to
Lessor, all as determined by Lessor.
Lessee's Leasing Availability with Lessor shall be subject to the terms and
conditions contained in this Letter. This letter supersedes any and all prior
written or oral understandings between Lessee and Lessor; provided however
that all written and oral representations made by Lessee to Lessor with
respect to the financial status of Lessee and/or any guarantor, or any other
provision hereof shall survive the issuance of this letter.
Lessee hereby authorizes AEL Leasing Co., Inc. to sign and execute on its
behalf, any and all necessary UCC forms regarding the interest of AEL Leasing
Co., Inc. in its equipment.
THIS LETTER AGREEMENT IS SUBJECT TO ALL OF THE TERMS AND CONDITIONS SET FORTH
IN LEASE.
LESSOR LESSEE
- ------ ------
Accepted at Reading, Pennsylvania, UNIVERSITY OF FLORIDA TISSUE BANK, INC.
this _____ day of ______ of 19__ ---------------------------------------
Name
1 PROGRESS BLVD BOX 31
---------------------------------------
Address
ALACHUA FL 32615
---------------------------------------
City State Zip
By: By: /s/ Jamie M. Grooms
- ------------------------------------ ---------------------------------------
Title
<TABLE>
<S> <C> <C>
AMERICAN EQUIPMENT LEASING
Courier Address A Division of AEL Leasing Co., Inc. Mailing Address
6 Commerce Drive (610) 775-3134 PO Box 13428
Shillington, PA 19607 Reading, PA 19612-3428
</TABLE>
<PAGE>
[AEL LOGO] Master Lease
Agreement #72966
MASTER LEASE AGREEMENT
This Lease Agreement ("Lease") dated this 8 day of August, 1996, by and
between American Equipment Leasing, a division of AEL Leasing Co., Inc.
("Lessor"), a Pennsylvania corporation whose address is P.O. Box 13428,
Reading, Pennsylvania 19612-3428, and UNIVERSITY OF FLORIDA TISSUE BANK, INC.
("Lessee"), a Corporation, having its chief executive offices located at 1
PROGRESS BLVD BOX 31 ALACHUA, FL 32615
WITNESSETH:
WHEREAS, Lessee desires to lease from Lessor the personal property described
in each written Schedule and/or Master Lease Letter Agreement delivered to
Lessor now and from time to time hereafter for acceptance or rejection.
NOW THEREFORE, in consideration of the mutual promises and agreements
set forth herein, Lessor and Lessee agree as follows:
1. LEASE. Lessor shall lease to Lessee and Lessee shall lease from Lessor
those items of Equipment described in each Schedule and/or Master Lease
Letter Agreement now and from time to time hereafter delivered to and
accepted by Lessee (hereinafter sometimes individually and sometimes
collectively referred to as "Equipment"). THIS LEASE AND EACH SCHEDULE AND/OR
MASTER LEASE LETTER AGREEMENT AND ANY SCHEDULE EXECUTED IN CONNECTION
THEREWITH AS ACCEPTED BY LESSOR MAY NOT BE CANCELLED BY LESSEE FOR ANY REASON
DURING THE TERM INDICATED HEREIN AND THEREIN.
2. ORIGINAL TERM. Lessor leases the Equipment to Lessee for the rental term
("Original Term") specified in each Schedule and/or Master Lease Letter
Agreement upon the terms and conditions specified herein by this reference
hereto.
3. RENEWAL. Should Lessee fail to return Equipment in accordance with
paragraph 18 hereof, at Lessor's exclusive option this Lease may be continued
on a month to month basis as to those Equipment until thirty (30) days after
Lessee returns such Equipment to Lessor. In the event this lease is continued
on a month to month basis, Lessee shall pay Lessor rental as to those
Equipment in the same periodic amounts as indicated in the "Monthly Rental
Payment" field set forth on the particular Schedule and/or Master Lease
Letter Agreement of which those Equipment were subject.
4. RENT: SECURITY DEPOSIT. (a) The aggregate rent for any Equipment during
the Original Term is the amount specified therefor in each Schedule and/or
Master Lease Letter Agreement and is payable by Lessee to Lessor in the
number and amount of payments specified therein. Notwithstanding the time of
delivery or acceptance of the Equipment by Lessee, the first payment of rent
therefor will be due and payable by Lessee to Lessor as indicated in the
"Commencement Date" field on the Schedule and/or Master Lease Letter
Agreement; all subsequent payments of rent during the Original Term will be
due and payable by Lessee to Lessor in such monthly payments due on the same
day of each month thereafter (or other calendar period indicated) in each
Schedule and/or Master Lease Letter Agreement, until the aggregate rent due
thereunder is paid in full, (b) Upon receipt of written notice from Lessor,
Lessee agrees to make all rental payments (both original and renewal) in cash
or by certified or cashiers' check. All rental payments (both original and
renewal) shall be made by Lessee to Lessor at the office of Lessor at Flying
Hills Corporate Center, 6 Commerce Drive, P.O. Box 13428, Reading, PA
19612-3428, or at such other place or places as Lessor may designate in
writing to Lessee, (c) Lessee will, concurrently with its execution and
delivery of each Schedule and/or Master Lease Letter Agreement, if required
by Lessor, deposit with Lessor, as a security deposit, the amount specified
therefor on the Schedule and/or Master Lease Letter Agreement. To secure the
payment of "Lessee's Obligations" (hereinafter defined), Lessee hereby grants
Lessor a security interest in said security deposit, and at the end of the
Original Term, if any, provided there is then no existing Event of Default
and Lessee has performed all of the terms and conditions of this Lease and
the Schedule and/or Master Lease Letter Agreement to be performed by Lessee.
Lessor shall return the security deposit to Lessee, (d) Subject to paragraph
27 hereof, Lessee's obligation to pay rent is for the full Original Term, is
unconditional and is payable without notice or demand and without any
abatement, deduction or set-off of any nature. Lessee shall have no right to
any interest from any security deposit, and waives any claim to any such
interest or profits from such security deposit.
5. LESSEE'S OBLIGATIONS. "Lessee's Obligations" shall mean all liabilities
and obligations now or at any time or times hereafter owing, arising, due
and/or payable by Lessee to Lessor under this Lease and each Schedule and/or
Master Lease Letter Agreement (including all Options set forth therein),
howsoever evidenced, and whether direct, contingent, fixed or otherwise. If
any payment of rent or other portion of Lessee's Obligations is not paid when
due, Lessee shall pay Lessor (i) a service charge equal to the greater of 5%
of such unpaid portion of Lessee's Obligations or $2.50, plus (ii) interest
which shall accrue on such unpaid portion of Lessee's Obligations at the
maximum rate permitted by law per annum from the due date until paid. It is
agreed that in no event and under no circumstances shall any amount paid by
the Lessee to Lessor exceed the highest lawful rate permissible, under
applicable Law. If in any circumstances whatsoever, it is determined that
performance under this Lease shall result in a payment of interest in excess
of that allowed by applicable law, then such excess interest collected shall
not be applied to the payment of interest and interest shall be at the
highest rate allowed by law. Such service charges and interest shall become a
part of Lessee's Obligations, payable by Lessee to Lessor upon demand.
6. LESSEE'S OBLIGATIONS FOR EQUIPMENT ORDERED. Pursuant to the terms of this
Lease, Lessee, from time to time, will make oral and written requests that
Lessor obtain Equipment and lease the same to Lessee pursuant to the terms
hereof and all Schedule and/or Master Lease Letter Agreements from time to
time executed and delivered by Lessee in favor of Lessor. Lessee hereby
acknowledges and agrees that all Equipment so ordered by Lessor at the
request of Lessor, whether pursuant to any Schedule and/or Master Lease
Letter Agreement, other written request or any oral request, shall be deemed
to be
<PAGE>
Equipment leased to Lessee pursuant to this Lease from the date of such
request, and all obligations and liabilities incurred by Lessor in connection
with all Equipment so ordered, shall be part of Lessee's Obligations
hereunder, payable by Lessee to Lessor in full. Upon Lessee's acceptance of
the Equipment so ordered, that portion of Lessee's Obligations relating
thereto shall be payable by Lessee to Lessor in accordance with the terms,
conditions and provisions of this Lease and the Schedule and/or Master Lease
Letter Agreement covering such Equipment. Lessee further agrees that it will
reimburse Lessor immediately upon Lessor's demand therefor for that portion of
Lessee's Obligations relating to such Equipment, in the event that, for any
reason whatsoever, Lessor does not accept such Equipment. Moreover, Lessee
agrees to indemnify Lessor and hold Lessor harmless from any and all claims
by any person or entity whatsoever arising out of Lessee's failure or refusal
to accept any such Equipment.
7. LESSEE'S OBLIGATIONS FOR ADVANCES. Lessee hereby acknowledges that
Lessor, from time to time hereafter, may make advances (the "Advances") to or
for the benefit of Lessee. Lessee hereby agrees that all such Advances made
by Lessor shall be part of Lessee's Obligations hereunder, payable by Lessee
to Lessor in full, upon such terms and conditions, and at such times, as
Lessor may from time to time specify. To compensate Lessor for the Advances
so made, Lessee agrees to pay Lessor a monthly Lease Deferral Service Charge,
as specified by Lessor in any Schedule and/or Master Lease Letter Agreement
executed and delivered by Lessee in favor of Lessor, or otherwise.
8. SELECTION OF EQUIPMENT, LESSEE IS SOLELY RESPONSIBLE FOR THE SELECTION OF
BOTH (I) THE EQUIPMENT, AND (II) THE SUPPLIER FROM WHOM LESSOR IS TO PURCHASE
THE EQUIPMENT, AS SPECIFIED IN EACH SCHEDULE AND/OR MASTER LEASE LETTER
AGREEMENT. LESSEE WARRANTS THAT LESSEE HAS NEGOTIATED OR WILL NEGOTIATE
DIRECTLY WITH THE SUPPLIER WITH REFERENCE TO THE EQUIPMENT. LESSEE HEREBY
ACKNOWLEDGES THAT LESSOR HAS NOT PARTICIPATED AND WILL NOT PARTICIPATE IN
SAID NEGOTIATIONS AND HAS AND WILL HAVE NO KNOWLEDGE OF THE QUALITY AND
FITNESS OF THE EQUIPMENT. LESSOR AGREES TO ORDER EQUIPMENT SPECIFIED IN EACH
PURCHASE ORDER FROM THE SPECIFIED SUPPLIER, BUT LESSOR SHALL HAVE NO
RESPONSIBILITY FOR DELAY OR FAILURE TO FILL SUCH SCHEDULE AND/OR MASTER LEASE
LETTER AGREEMENT. LESSEE HEREBY AUTHORIZED LESSOR TO INSERT IN EACH SCHEDULE
AND/OR MASTER LEASE LETTER AGREEMENT AND/OR DOCUMENTS AND FORMS, THE SERIAL
NUMBERS, AND OTHER IDENTIFICATION DATA, OF THE EQUIPMENT WHEN DETERMINED BY
LESSOR.
9. NO WARRANTIES BY LESSOR. LESSOR MAKES NO WARRANTY, GUARANTY OR
REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO ANY EQUIPMENT DESCRIBED
ON ANY SCHEDULE AND/OR MASTER LEASE LETTER AGREEMENT, INCLUDING, BUT NOT
LIMITED TO: MERCHANTABILITY, FITNESS, CONDITION, DESIGN FOR A PARTICULAR
PURPOSE, QUALITY OR CAPACITY OF THE EQUIPMENT, WORKMANSHIP, COMPLIANCE WITH
THE REQUIREMENTS OF ANY LAW, RULE, SPECIFICATION OR CONTRACT PERTAINING TO
THE EQUIPMENT OR COPY-RIGHT INFRINGEMENT, TRADE SECRET INFRINGEMENT, PATENT
INFRINGEMENT OR PATENT DEFECTS, LESSEE ACKNOWLEDGES THAT THE EQUIPMENT
SUBJECT TO THIS LEASE AND EACH SCHEDULE AND/OR MASTER LEASE LETTER AGREEMENT
ARE, AND WILL BE, "AS IS". LESSOR IS NOT, AND WILL NOT, BE RESPONSIBLE OR
LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES
OR LOSSES RESULTING FROM THE INSTALLATION, OPERATION OR USE OF ANY OF THE
EQUIPMENT OR ANY PRODUCTS MANUFACTURED THEREWITH OR THEREBY. FURTHER,
NOTWITHSTANDING LESSOR'S ACCEPTANCE OF ANY SCHEDULE AND/OR MASTER LEASE LETTER
AGREEMENT, LESSOR IS NOT RESPONSIBLE OR LIABLE FOR ANY SUCH DAMAGES OR LOSSES,
RESTITUTION, SPECIFIC PERFORMANCE OR ANY OTHER REMEDY IN THE EVENT THAT FOR
ANY REASON ANY SUPPLIER OF THE EQUIPMENT FAILS TO DELIVER THE SAME TO LESSOR
OR LESSEE OR IN ANY OTHER MANNER OR RESPECT BREACHES OR FAILS TO PERFORM ITS
CONTRACT WITH LESSOR.
THE PARTIES AGREE THAT THIS LEASE IS A "FINANCE LEASE" AS DEFINED BY
SECTION 2A-103(g) OF THE UNIFORM COMMERCIAL CODE (UCC). LEASE ACKNOWLEDGES
EITHER (a) THAT LESSEE HAS REVIEWED AND APPROVED ANY WRITTEN AND APPROVED ANY
WRITTEN SUPPLY CONTRACT (AS DEFINED BY UCC SECTION 2A-103(y)) COVERING THE
EQUIPMENT PURCHASED FROM THE "SUPPLIER" (AS DEFINED BY UCC SECTION 2A-103(x))
THEREOF FOR LEASE TO LESSEE OR (b) THAT LESSOR HAS INFORMED OR ADVISED
LESSEE, IN WRITING, EITHER PREVIOUSLY OR BY THIS LEASE OF THE FOLLOWING: (i)
THE IDENTITY OF THE SUPPLIER; (ii) THAT THE LESSEE MAY HAVE RIGHTS UNDER THE
SUPPLY CONTRACT; AND (iii) THAT THE LESSEE MAY CONTACT THE SUPPLIER FOR A
DESCRIPTION OF ANY SUCH RIGHTS LESSEE MAY HAVE UNDER THE SUPPLY CONTRACT.
LESSOR SHALL NOT BE LIABLE TO LESSEE FOR ANY LOSS, DAMAGE, OR EXPENSE OF ANY
KIND OR NATURE CAUSED, DIRECTLY OR INDIRECTLY, BY ANY EQUIPMENT LEASED
HEREUNDER OR THE USE OR MAINTENANCE THEREOF OR THE FAILURE OR OPERATION
THEREOF, OR THE REPAIR, SERVICE OR ADJUSTMENT THEREOF, OR BY ANY DELAY OR
FAILURE TO PROVIDE ANY SUCH MAINTENANCE, REPAIRS, SERVICE OR ADJUSTMENT, OR
BY ANY INTERRUPTION OF SERVICE OR LOSSES OF USE THEREOF OR FOR ANY LOSS OF
BUSINESS HOWSOEVER CAUSED, LESSOR SHALL NOT BE LIABLE FOR ANY CONSEQUENTIAL
DAMAGES AS THAT TERM IS USED IN UCC SECTION 2-719(3). NO DEFECT OR UNFITNESS
OF THE EQUIPMENT SHALL RELIEVE LESSEE OF THE OBLIGATION TO PAY ANY
INSTALLMENT OF RENT OR ANY OTHER OBLIGATION UNDER THIS LEASE. LESSOR SHALL
HAVE NO OBLIGATION UNDER THIS LEASE IN RESPECT OF THE EQUIPMENT AND SHALL HAVE
NO OBLIGATION TO INSTALL, ERECT, TEST, ADJUST OR SERVICE THE EQUIPMENT.
LESSOR AGREES, SO LONG AS THERE SHALL NOT HAVE OCCURRED OR BE CONTINUING ANY
EVENT OF DEFAULT AS DEFINED IN THIS LEASE OR EVENT WHICH WITH LAPSE OF TIME OR
NOTICE, OR BOTH, MIGHT BECOME AN EVENT OF DEFAULT HEREUNDER, THAT LESSOR WILL
PERMIT LESSEE TO ENFORCE IN LESSEE'S OWN NAME AND AT LESSEE'S SOLE EXPENSE
ANY SUPPLIER'S OR MANUFACTURER'S WARRANTY OR AGREEMENT IN RESPECT OF THE
EQUIPMENT TO THE EXTENT THAT SUCH WARRANTY OR AGREEMENT IS ASSIGNABLE, LESSEE
ACKNOWLEDGES THAT LESSEE HAS REVIEWED AND APPROVED THE PURCHASE ORDER, SUPPLY
CONTRACT OR PURCHASE AGREEMENT COVERING THE EQUIPMENT PURCHASED FROM THE
SUPPLIER OR SUPPLIER THEREOF FOR LEASE TO LESSEE.
10. CLAIMS AGAINST SUPPLIER. IF ANY ITEMS EQUIPMENT ARE NOT PROPERLY
INSTALLED, DO NOT OPERATE AS REPRESENTED OR WARRANTED BY SUPPLIER, OR ARE
UNSATISFACTORY FOR ANY REASON, LESSEE SHALL MAKE ANY CLAIM ON ACCOUNT
THEREOF SOLELY AGAINST SUPPLIER AND SHALL, NEVERTHELESS, PAY LESSOR ALL RENT
PAYABLE UNDER THIS LEASE AND EVERY SCHEDULE AND/OR MASTER LEASE LETTER
AGREEMENT RELATED HERETO. LESSOR WILL INCLUDE, AS A CONDITION OF ANY PURCHASE
ORDER DELIVERED TO ANY SUPPLIER, THAT SUPPLIER AGREE THAT ALL WARRANTIES,
AGREEMENTS AND REPRESENTATIONS, IF ANY MADE BY SUPPLIER TO LESSEE OR LESSOR
MAY BE ENFORCED BY LESSEE IN ITS OWN NAME. LESSOR HEREBY AGREES TO ASSIGN TO
LESSEE, SOLELY FOR THE PURPOSE OF MAKING AND PROSECUTING ANY SAID CLAIM, ALL
OF THE RIGHTS WHICH LESSOR HAS OR MAY HAVE AGAINST ANY SUPPLIER FOR BREACH
OF WARRANTY OR OTHER REPRESENTATION RESPECTING ANY EQUIPMENT, PROVIDED LESSEE
IS NOT IN DEFAULT HEREUNDER.
<PAGE>
Agreements relating to Equipment not so involved shall remain in full force
and effect. Upon such payment, if all Equipment leased to Lessee pursuant to
this Lease and all Schedule and/or Master Lease Letter Agreements related
hereto are so involved, this Lease and each Schedule and/or Master Lease
Letter Agreement related hereto will terminate. Further, upon such payment,
Lessee and/or Lessee's insurer shall be entitled to Lessor's interest in such
Equipment for salvage purposes, in their then condition and location, as is,
WITHOUT WARRANTY, EXPRESSED OR IMPLIED. (c) If any or all of the Equipment are
partially damaged or partially destroyed, the obligation of Lessee to pay
rent therefor will not abate, this Lease and the applicable Schedule and/or
Master Lease Letter Agreement will remain in effect, and Lessee, on demand and
at its expense, will forthwith (i) cause said Equipment to be restored to
good condition and repair, or (ii) replace said Equipment of the same make
and of the same or later model, and in good condition and repair acceptable
to Lessor.
20. INDEMNITY. Lessee assumes liability for, and hereby agrees
unconditionally, absolutely, irrevocable and continuing to indemnify,
protect, defend, save and keep harmless Lessor, its employees, officers,
directors, successors and assigns, from and against any and all liabilities,
obligations, losses, damages, penalties, claims, actions, suits, costs and
expenses, including legal expenses, of whatever kind and nature, imposed on,
incurred by or asserted against Lessor, its agents, employees, officers,
directors, successors and assigns, in any way relating to or arising out of
the ownership, possession, use, selection, delivery, leasing, operation,
maintenance, return or condition of the Equipment or any failure on the part
of Lessee to perform or comply with any of the terms or conditions of this
Lease or any Schedule and/or Master Lease Letter Agreement thereto. The
assumptions of liability and indemnities contained in this paragraph will
continue in full force and effect and survive the execution, acceptance,
delivery, expiration and or termination of this Lease and any Schedule and/or
Master Lease Letter Agreement hereto.
21. INSURANCE. (a) Lessee agrees, at its expense, to obtain and maintain
insurance on the Equipment against loss or damage by fire, theft, explosion
and all other hazards and risks ordinarily subject to extended coverage
insurance and against such other hazards and risks as Lessor may request for
the full insurable value thereof by policies in form and issued by insurance
companies satisfactory to Lessor, (b) Lessee agrees, at its expense, for the
protection of Lessor and Lessee, as their interests may appear, to obtain and
maintain, with insurance companies satisfactory to Lessor, general public
liability insurance, in amounts reasonably acceptable to Lessor, for personal
injury or death or property damage arising out of the use, ownership,
possession, operation, or condition of the Equipment. (c) If so requested by
Lessor, a certified copy of such insurance policies, or certificates
evidencing such insurance, in the aforesaid form and amounts, must be
delivered to Lessor within ten days of Lessee's execution and delivery of
this Lease to Lessor. Lessor's acceptance of policies not conforming hereto
will not constitute a waiver by Lessor of any obligation of Lessee under this
paragraph. (d) Each such insurer will agree, by endorsement upon the policy
or policies issued by it or by independent instruments furnished to Lessor,
that losses are payable to Lessor and that such insurer will give Lessor
thirty days' prior written notice before the policy or policies will be
altered, cancelled or terminated, and that no act or default of any person
other than Lessor will effect Lessor's right to recover thereunder in case of
loss. (e) Lessee hereby directs all insurers to pay all proceeds of the
aforesaid policies to Lessor, and hereby irrevocably appoints Lessor its
agent and attorney-in-fact for the purpose of making, settling and adjusting
claims under said policies, endorsing the name of Lessee on any check, draft,
instrument or other item of payment for the proceeds of said policies and for
determining whether to replace the Equipment or take cash. (f) Except as
hereinafter provided, proceeds of the aforesaid policies may be applied by
Lessor, upon receipt, in any manner determined by Lessor, provided, however,
that (i) in the event subparagraph 19(b) is relevant, the insurance proceeds
will be applied by Lessor in reduction of Lessee's Obligations; and (ii) in
the event subparagraph 19(c) is relevant, the insurance proceeds will be
paid by Lessor to Lessee, provided that Lessee has, to Lessor's satisfaction,
fulfilled obligations under this Lease and any Schedule and/or Master Lease
Letter Agreement hereto. (g) Lessee acknowledges that the terms and
provisions of this paragraph 21 shall be deemed "material" with respect to
subparagraph 29(a) (iii) hereof.
22. TAXES. Lessee shall keep Equipment free and clear of all levies, liens,
and encumbrances. Lessee shall in the manner directed by Lessor, (a) make and
[illegible] declarations and returns in connection with all charges and taxes
(local, state, and federal), which may now or hereafter be imposed upon or
measured by the ownership, leasing, sale, purchase, possession, or use of
Equipment, excluding however, all taxes on or measured lessor's net income,
and (b) pay all such charges and taxes in the event that Lessor shall elect
to make and file any or all declarations and returns in connection with such
charges and taxes, to pay the same, then the Lessee shall reimburse the
Lessor, upon demand of the Lessor, for any and all such charges and taxes
applicable to the Equipment leased by Lessor to Lessee. Lessor's good faith
acceptance of a tax exemption does not represent an assurance that the state
will also accept the certificate as valid at the time of audit review. Lessee
is responsible for any future audit adjustment if the certificate is not
accepted. Lessee agrees to reimburse Lessor for the amount of audit
adjustment and the aggregate of tax, interest, and penalty, if a certificate
is subsequently denied.
23. RIGHT TO PERFORM COVENANTS. If Lessee shall fail to make any payment or
perform any act required to be made or performed by Lessee hereunder, Lessor,
without waiving or releasing any obligation on the part of Lessee or any
Event of Default, may at any time thereafter make such payment or perform
such act for the account and at the expense of Lessee. All sums so paid by
Lessor and all expenses (including, without limitation, interest, overhead
expenses, and reasonable attorneys' fees) so incurred, which will be deemed
to be additional Rent and will become part of Lessee's Obligations, payable
with Lessee's Obligations, payable by Lessee to Lessor on demand.
24. ASSIGNMENT BY LESSOR. Lessor may, without Lessee's consent, assign this
Lease or any Schedule and/or Master Lease Letter Agreement or any interest
herein or therein, including without limitation, grant a security interest in
the Equipment. Lessor's assignee or secured creditor may reassign this Lease,
any Schedule and/or Master Lease Letter Agreement and/or such security
interest, without notice to Lessee. Each such assignee and/or secured party
shall have all of the rights but none of the obligations of Lessor under this
Lease or any Schedule and/or Master Lease Letter Agreement. Lessee shall
recognize each such assignment and/or security interest and shall not assert
against the assignee and/or secured party any defense, counterclaim, or
set-off that Lessee may have against Lessor. Nothing contained herein shall be
deemed to constitute a waiver of Lessee's right, remedies, defenses,
counterclaims or set-offs against Lessor, and all such rights are hereby
expressly reserved.
25. WITHOUT LESSOR'S PRIOR CONSENT, LESSEE SHALL NOT (A) ASSIGN, TRANSFER,
PLEDGE, HYPOTHECATE, OR OTHERWISE DISPOSE OF THIS LEASE, AND/OR THE EQUIPMENT
AND ANY SCHEDULE AND/OR MASTER LEASE LETTER AGREEMENT EXECUTED IN CONNECTION
THEREWITH, SUBJECT THEREOF, OR ANY INTEREST THEREIN, OR (B) SUBLET OR LEND
EQUIPMENT OR PERMIT IT TO BE USED BY ANYONE OTHER THAN LESSEE OR LESSEE'S
EMPLOYEES.
JMG Initials
- ------
<PAGE>
26. NOTICES. Lessee will promptly notify Lessor in writing: (a) of the amount
of any delinquent federal, state, county or municipal taxes assessed or
charged that may subject the Equipment to the hazard of seizure or lien; (b)
of any claim, demand, action or dispute known to Lessee relating to the
Equipment or the interests of Lessor or Lessee therein; and (c) of any
material accident or casualty in which the Equipment are directly or
indirectly involved or of any claim or demand arising from such accident or
casualty.
27. LESSEE'S WARRANTIES, REPRESENTATIONS AND COVENANTS. Lessee warrants,
represents and covenants to Lessor that: (a) the Equipment will [illegible]
at all times at Lessee's place of business specified above and, Lessee will
not remove the Equipment from said location without Lessor's prior written
consent and will promptly notify Lessor of any such change in location of the
Equipment; (b) Lessee immediately will advise Lessor in writing of any such
change in such location or in Lessee's place or places of business; (c)
Lessee will not dispose of the Equipment, or permit the Equipment to become
fixtures to real estate or accessions to other personal property; (d) Lessee
will not permit the Equipment at any time to become subject to any lien,
security interest, claim, charge or other encumbrance, except that which
Lessor may require to protect Lessor's rights hereunder and under any
Schedule and/or Master Lease Letter Agreement hereto; (e) Lessee will
acquire, at its expense, all permits, licenses and certificates required by
law with respect to the Equipment, their use, ownership or operation, and
Lessee will use and operate the Equipment solely in Lessee's business; (f)
Lessee is now and shall at all times hereafter be solvent and able generally
to pay its debts as the same become due and Lessee now owns and shall at all
times hereafter own property which, at a fair valuation, has a value greater
than the amount required to pay its debts; and (g) Lessee now has and shall
have at all times thereafter capital sufficient to carry on its business and
transactions and all businesses and transactions in which it is about to
engage.
28. EFFECT OF WAIVER. Lessor's failure at any time or times hereafter to
require strict performance by Lessee of any of the provisions, warranties,
covenants, terms and conditions contained in this lease, any Schedule and/or
Master Lease Letter Agreement hereto or in any other agreement, instrument or
document heretofore, now or hereafter executed by Lessee and delivered to
Lessor will not waive or diminish any right of Lessor thereafter to demand
strict compliance and performance therewith or with respect to any other
provision, warranty, covenant, term or condition contained in such other
agreements, instruments and documents. Any waiver of any Event of Default
will not waive or affect any other Event of Default, whether prior or
subsequent thereto. None of the terms, conditions or provisions of this Lease
will be deemed to have been waived by any act or knowledge of Lessor, its
agents or employees, but only by an agreement in writing signed by an officer
of Lessor and delivered to Lessee.
29. DEFAULT; REMEDIES: (a) The occurrence of any one of the following events
will constitute a default by Lessee hereunder ("Event of Default"): (i)
failure to pay when due and payable any payment of rent (original or renewal)
or any other of Lessee's Obligations; (ii) failure by Lessee to perform, keep
and observe any term, provision, warranty, condition, covenant or
representation hereunder that is required to be performed, kept or observed
by Lessee (other than those contained in (i) above); (iii) if any any time or
times hereafter any material warranty, representation, statement, report or
certificate now or hereafter made or furnished to Lessor by or on behalf of
Lessee is not true and correct; (iv) if any of the Equipment or all or a
material part of Lessee's property is attached, seized, subjected to writ or
distress warrant, or is levied upon, or comes within the possession of any
receiver, trustee, custodian or assignee for the benefit of creditors and the
same is not terminated or dismissed within twenty days thereafter; (v) the
death of Lessee; (vi) the filing or commencement of any application,
proceeding or case by Lessee for Lessee's dissolution or liquidation, the
attempt by Lessee to make an assignment for the benefit of Lessee's
creditors, or the filing by Lessee of any case under the Bankruptcy Reform
Act of 1978, or any similar law, whether state or federal, for liquidation or
rehabilitation of Lessee or of any case for the appointment of a receiver,
trustee or custodian for all or a material part of the property of Lessee;
(vii) the filing against Lessee of any application, proceeding or case for
Lessee's dissolution or liquidation, or of any case against Lessee under the
Bankruptcy Reform Act of 1978 or any similar law, whether state or federal,
or of any case against Lessee for the appointment of a receiver, trustee or
custodian for all or a material part of the property of Lessee, and any such
application, proceeding or case is not dismissed or stayed within thirty days
after the filing thereof; (viii) the filing of a notice of tax lien or the
existence of any other lien, claim or encumbrance with respect to any of the
Equipment or all [illegible] material part of Lessee's property; (ix) if
Lessee is enjoined, restrained or in any way prevented by court order or
otherwise from conducting all or a material part of its business affairs in
the ordinary course of such injunction or restraint is not dismissed or
stayed within thirty days after the entry or filing thereof; (x) the
occurrence of a default or Event of Default under any agreement, by and
between Lessee and Lessor, instrument or document heretofore, now or at any
time or times hereafter executed and delivered by Lessee to Lessor or any
affiliate thereof; (xi) if Lessee is in default in the payment of any
indebtedness to any third party and such default is declared and is not cured
within the time, if any, specified therefor in any agreement governing the
same; (xii) if Lessee fails to notify Lessor in writing and does not secure
prior written approval from Lessor of any of the following changes regarding
Lessee; legal name, entity type or structure, chief place of business or
executive offices, or opening of an additional location or locations to
conduct business and/or to store Lessor's Equipment; or (xiii) through
Lessee's actions, Lessor's interest in its Equipment is jeopardized or in any
way becomes junior to any creditor. (b) Upon an Event of Default, Lessor may,
at its election and without notice or demand, exercise any one or more of the
following remedies in order to protect the interest and reasonably expected
profits and bargains of Lessor;
(a) upon notice to Lessee terminate this Lease and all Lease Schedules
executed pursuant thereto;
(b) upon the occurrence of any Event of Default or anytime thereafter, or if
Lessor decides, in its sole discretion, not to take possession of the
Equipment, Lessor continues to be the owner of the Equipment and may, but
is not obligated to, dispose of the Equipment by sale or otherwise, all
of which determinations may be made by Lessor in its absolute discretion
and for its own account;
(c) declare immediately due and payable all sums due and to become due
hereunder for the full term of the Lease (including any renewal or
purchase options which Lessee has contracted to pay);
(d) with or without terminating this Lease, recover from Lessee damages, not
as a penalty, but herein liquidated for all purposes and in an amount
equal to the sum of: (i) any accrued and unpaid rent as of the date of
entry of judgment in favor of Lessor plus late charges and all other sums
that may accrue hereunder; (ii) the present value of all future rentals
reserved in the Lease and contracted to be paid over the unexpired term
of the Lease discounted at a rate equal to the discount rate of the
Federal Reserve Bank of Philadelphia as of the date of entry of judgment
in favor of Lessor plus one percent (1%), (iii) all commercially
reasonable costs and expenses incurred by Lessor in any repossession,
recovery, storage, repair, sale, release, or other disposition of the
Equipment including reasonable attorneys' fees and costs incurred in
connection therewith or otherwise resulting from Lessee's default
(inclusive of attorneys' fees, fees of collection agencies, and other costs
incurred in the collection of the balance due); (iv) estimated
JMG initials
- -------
<PAGE>
residual value of the Equipment as of the expiration of this Lease or
any renewal thereof (if such lease has been renewed), and (v) any
indemnity, if then determinable. For purposes hereof, in the event that
Lessee shall pay all sums due to Lessor under sections (i) through (v)
of this paragraph prior to the date of entry of judgment, the date of
payment shall be deemed to be the data of entry of judgment for purposes
of this paragraph;
(e) in its sole discretion, re-lease or sell any or all of the Equipment at
a public or private sale on such terms and with or without notice, as
Lessor shall deem reasonable, at Lessor's place of business and recover
from Lessee damages, not as a penalty, but herein liquidated for all
purposes and in an amount equal to the sum of; (i) any accrued and
unpaid rent as of the later of (A) the date of default or (B) the date
that Lessor has obtained possession of the Equipment or such other date
as Lessee has made an effective tendor of possession of the Equipment
back to Lessor ("Default Date"), plus rent (at the rate provided for in
this Lease and any Lease Schedule) for the additional period (but in no
event longer than four (4) months that it takes Lessor to resell or
remarket all of the Equipment, plus late charges and all other sums that
may accrue hereunder; (ii) the present value of all future rentals
reserved in the Lease and contracted to be paid over the unexpired term
of the Lease discounted at a rate equal to the discount rate of the
Federal Reserve Bank of Philadelphia as of the Default Date plus one
percent (1%); (iii) all commercially reasonable costs and expenses
incurred by Lessor in any repossession, recovery, storage, repair,
sale, re-lease or other disposition of the Equipment including
reasonable attorneys' fees and costs incurred in connection with or
otherwise resulting from the Lessee's default; (iv) estimated residual
value of the Equipment as of the expiration of this Lease or any renewal
thereof (if such Lease has been renewed), and (v) any indemnity, if then
determinable; LESS the amount received by Lessor upon such public or
private sale or re-lease of such items of Equipment, if any;
(f) if (i) Lessor elects not to sell, re-lease or otherwise dispose of all
or part of the Equipment or (ii) does so by a re-lease which is not made
in a manner substantially similar to the Lease or any applicable Lease
Schedule or (iii) the measure of damages under subparagraphs (c) and (d)
above are not allowable under any applicable law, Lessor may recover the
market value, if any, as of the Default Date of the rent reasonably
estimated by Lessor to be obtainable for the Equipment during the
remaining Lease term or any renewal thereof then in effect, plus any
accrued and unpaid rent as of the Default Date;
(g) exercise any other right or remedy which may be available to it under
the Uniform Commercial Code or any other applicable law;
(h) a termination hereunder shall occur only upon notice by Lessor and only
as to such items of Equipment as Lessor specifically elects to terminate
and this Lease shall continue in full force and effect as to the
remaining items, if any;
(i) If this Lease is deemed at any time to be one intended as security,
Lessee agrees that the Equipment shall secure, in addition to the
indebtedness set forth herein, indebtedness at any time owing by Lessee
to Lessor. No remedy referred to in this Paragraph is intended to be
exclusive, but shall be cumulative and in addition to any other remedy
referred to above or otherwise available to Lessor at law or in equity.
No express or implied waiver by Lessor of any default shall constitute a
waiver of any other default by Lessee or a waiver of any of Lessor's
rights.
(j) Lessor shall the right to apply Lessee's security deposit to reduce the
amount of lessee's obligations and proceed against Lessee for any
remaining sums owed.
30. COSTS, EXPENSES AND ATTORNEYS' FEES. If at any time or times after an
Event of Default Lessor employs counsel for advice with respect to this Lease
or any Schedule and/or Master Lease Letter Agreement hereto, or to intervene,
file a petition, answer, motion or other pleading in any suit or proceeding
relating to this Lessee, any Schedule and/or Master Lease Letter Agreement or
any Equipment, or to represent Lessor in any pending or threatened litigation
with respect to the affairs of Lessee, or to enforce any rights of Lessor
hereunder or under any Schedule and/or Master Lease Letter Agreement, or the
payment of Lessee's Obligations, then, in any of such events, all of Lessor's
reasonable attorney's fees arising therefrom, and any posts and expenses
relating thereto, will become part of Lessee's Obligations due hereunder,
payable by Lessee to Lessor on demand. Lessee otherwise agrees to pay all
other costs and expenses, including fees of collection agencies and other
expenses incurred in enforcing the terms and conditions thereof, such as
telephone and telegraph expenses, including phone calls by initiated by
Lessor as a result of Lessee's delinquency in rental payments.
31. GRANT OF SECURITY. As security of Lessee's Obligations, Lessee agrees
that all leases or leasehold interests, security interests, liens and
encumbrances heretofore, now and at any time or times hereafter granted or
executed by Lessee to Lessor shall secure Lessee's Obligations under this
Lease.
32. LESSEE'S WAIVERS. To the extent permitted by applicable law, Lessee
hereby waives any and all rights and remedies conferred upon a Lessee by
Sections 2A-508 through 2A-522 of the UCC, including but not limited to
Lessee's rights to; (i) cancel this Lease; (ii) repudiate this Lease; (iii)
reject the Equipment; (iv) revoke acceptance of the Equipment; (v) recover
damages from Lessor for any breaches of warranty or for any other reason;
(vi) a security interest in the Equipment in Lessee's possession or control
for any reason; (vii) deduct all or any part of any claimed damages resulting
from Lessor's default, if any, under this Lease; (viii) accept partial
delivery of the Equipment; (ix) "cover" by making any purchase or lease of or
contract to purchase or lease Equipment in substitution for those items due
from Lessor; (x) recover any general, special, incidental, or consequential
damages, for any reason whatsoever, and (xi) specific performance, replevin,
datinue, sequestration, claim, and delivery of the like for any Equipment
indemnified to this Lease. To the extent permitted by applicable law, Lessee
also hereby, waive any rights now or hereafter conferred by statute or
otherwise which may require Lessor to sell, lese or otherwise use any
Equipment in mitigation of Lessor's damages as set forth in Paragraph 29 or
which may otherwise limit or modify any of Lessor's rights or remedies under
Paragraph 29. Any action by Lessee against Lessor for any default by Lessor
under this Lease, including breach of warranty or indemnity, shall be
commenced within one (1) year after any such cause of action accrues.
JMG Initials
- -------
<PAGE>
33. APPLICABLE LAW; CONSENT TO JURISDICTION. (a) THIS LEASE, ALL SCHEDULE
AND/OR MASTER LEASE LETTER AGREEMENTS AND ALL AGREEMENTS, INSTRUMENTS AND
DOCUMENTS EXECUTED AND DELIVERED PURSUANT HERETO ARE SUBMITTED TO LESSOR AT
LESSOR'S PRINCIPAL PLACE OF BUSINESS STATED AFORESAID FOR LESSOR'S ACCEPTANCE
OR REJECTION AND SHALL BE DEEMED TO HAVE BEEN MADE THEREAT. THIS LEASE, ALL
SCHEDULE AND/OR MASTER LEASE LETTER AGREEMENTS AND ALL RELATED AGREEMENTS,
INSTRUMENTS AND DOCUMENTS SHALL BE GOVERNED AND CONTROLLED AS TO
INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT AND IN ALL
RESPECTS BY THE LAWS, [STATUTES] AND DECISIONS OF THE COMMONWEALTH OF
PENNSYLVANIA, (b) LESSEE, IN ORDER TO INDUCE LESSOR TO ACCEPT THIS LEASE AND
FOR OTHER GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND SUFFICIENCY OF
WHICH IS HEREBY ACKNOWLEDGED, AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING
DIRECTLY, INDIRECTLY OR OTHERWISE IN CONNECTION WITH, OUT OF, RELATED TO OR
FROM THE LEASE, ANY SCHEDULE AND/OR MASTER LEASE LETTER AGREEMENT OR ANY
RELATED AGREEMENT, INSTRUMENT OR DOCUMENT SHALL BE LITIGATED, AT LESSOR'S
SOLE DISCRETION AND ELECTION, ONLY IN COURTS HAVING SITUS WITHIN THE
COMMONWEALTH OF PENNSYLVANIA, LESSEE HEREBY CONSENTS AND SUBMITS TO THE
JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN THE
COMMONWEALTH OF PENNSYLVANIA. LESSEE HEREBY WAIVES ANY RIGHT LESSEE MAY HAVE
TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST LESSEE BY
LESSOR, OR ANY ASSIGNEE OF LESSOR IN ACCORDANCE WITH THIS PARAGRAPH.
34. FINANCIAL STATEMENTS. Lessee shall provide Lessor with such corporate
resolutions, opinions of counsel, annual and interim financial statements,
UCC-1 Financing Statements, and other documents as Lessor shall require from
time to time.
35. MISCELLANEOUS. (a) If any provision of this Lease or any Schedule and/or
Master Lease Letter Agreement hereto or the application thereof to any party
or circumstances is held invalid or unenforceable, the remainder of this
Lease and any applicable Schedule and/or Master Lease Letter Agreement and
the application of such provision to other parties or circumstances will not
be affected thereby, and to this and the provisions of this Lease and all
Schedule and/or Master Lease Letter Agreements are declared severable. (b)
Titles to the paragraphs in this Lease are solely for the convenience of this
Lease and are not in aid of interpretation in this Lease. (c) Time is of the
essence of this Lease, and all Schedule and/or Master Lease Letter Agreements
hereto, in each and all of their provisions. (d) This Lease, together with
the applicable Schedule and/or Master Lease Letter Agreement, contains the
full, final and exclusive statement of the agreement between Lessor and
Lessee relating to the lease of the Equipment and may not be amended, altered
or changed except by a writing signed by both Lessor and Lessee. (e) Lessee
will obtain and immediately deliver, or cause to be delivered to Lessor,
waivers of any rights in and to the Equipment from all owners and mortgages
of the real estate upon which the Equipment are or are to be located. (f) The
signature of any officer of Lessee, if Lessee is a corporation, or of any
partner or managing agent, if Lessee is a partnership, on this Lease, any
Schedule and/or Master Lease Letter Agreement or on any of the statements,
reports, waivers, agreements, instruments or documents now or from time to
time hereafter executed in the name of Lessee and delivered to Lessor will be
binding upon Lessee, (g) Lessee represents and warrants to Lessor has the
power and is duly authorized to enter into this Lease and to execute and
deliver the same to Lessor. (h) For purposes of determining the amount of
Lessee's obligations, the receipt of any check or any other item of payment
on account thereof will not be considered a payment on account thereof until
such check or other item of payment is honored when presented for payment.
Lessee irrevocably waives the right to direct application of any and all
payments at any time or times hereafter which may be received by Lessor by or
for the benefit of Lessee, and Lessee irrevocably agrees that Lessor will
have the continuing exclusive right to apply and reapply any and all such
payments received by Lessor at any time or times hereafter in such manner as
Lessor may deem advisable, notwithstanding any entry by Lessor on any of its
books and records. (i) This Lease and all Schedule and/or Master Lease Letter
Agreements and all agreements, instruments and documents executed and
delivered pursuant hereto or to consummate the transactions contemplated
hereunder, will be binding upon and inure to the benefit of their heirs,
executors, administrators, personal representatives, successors and assigns
of the parties hereto. (j) Whenever Lessor or Lessee (or [illegible] claiming
by, through or under them) desires, or for the enforcement of any of the
rights hereunder, is required, to give notice to or make demand [illegible]
the other party (or anyone claiming by, through or under it), it will be
sufficient service of such notice or demand to serve said notice or demand in
person or to place a copy thereof in an envelope addressed to said party as
its address referred to above, or such other address as each party may
designate in writing to the other, and deposit the same in the United States
mail, postage prepaid, by registered or certified mail. (k) All
representations and warranties of Lessee and all terms, provisions,
conditions agreements to be performed by Lessee contained herein will be true
and satisfied at the time of Lessee's execution of this Lease and any
Schedule and/or Master Lease Letter Agreement hereto and will survive the
same and will be and remain true and satisfied for the Original Term and any
Renewal Term hereunder and under any Schedule and/or Master Lease Letter
Agreement hereto. (l) If there is more than one signer (exclusive of Lessor)
of this Lease, whether as Lessee or a co-signer, their obligations will be
joint and several and the term "Lessee" will include each such party, jointly
and severally.
Lessee hereby authorizes AEL Leasing Co., Inc. to sign and execute on its
behalf, any and all necessary UCC forms regarding the interest of AEL
Leasing Co., Inc. in its equipment.
IN WITNESS WHEREOF, this Lease has been executed and delivered by Lessee
to Lessor as of the date and year set forth above.
UNIVERSITY OF FLORIDA TISSUE BANK, INC.
-----------------------------------------
Name of Lessee
Attest:
(Corporate Seal)
By _________________________ By /s/ Jamie M. Grooms President
Title -------------------------------------
Title
Telephone (904) 462-3097
------------------------------
Accepted at Reading, PA this _____________ day of __________________, 19____.
American Equipment Leasing
a division of AEL Leasing Co., Inc.
By _____________________________________
Title
<PAGE>
ADDENDUM "A"
WHEREAS, UNIVERSITY OF FLORIDA TISSUE BANK, INC. ("Lessee") and American
Equipment Leasing, a division of AEL Leasing Co., Inc. ("American") have
entered into a Master Lease dated AUGUST 8, 1996 ("Lease") for certain
equipment described therein ("Equipment") which at Lessee's request American
shall purchase from vendor(s) ("Vendor(s)") expressly for the purpose of
leasing said Equipment to Lessee; and
WHEREAS, at Lessee's request, American shall advance payments to
Vendor(s) for said Equipment prior to delivery and acceptance in accordance
herewith; and
WHEREAS, Lessee has agreed to reimburse American for said sums advanced
to Vendor(s) for the purchase of said Equipment in the event of cancellation
hereof and, in addition, to pay certain sums to American prior to final
acceptance of the Equipment, in accordance with the terms hereof.
1. Lessee hereby requests American to advance payment to Vendor(s) as
the purchase price or partial payment thereof, in accordance with the written
request of Lessee.
2. Lessee agrees to indemnify and hold harmless American, its
successors and assigns, from and against any and all actions, claims and
demands of any nature whatsoever, now and in the future, arising out of the
performance of the addendum A, and/or for all losses or expenses incurred as
a result of American's making said advances (including court costs and
reasonable attorney's fees incurred in the enforcement of this Addendum A by
American), and/or for any claims made by Vendor, in against American for
remaining sums due under a purchase order issued to Vendor, in the event of
termination and/or cancellation of the purchase order by American or Lease by
Lessee or for any damages resulting from the failure of Vendor to properly
complete the installation of Equipment.
3. It is expressly agreed that any funds advanced by American to Vendor
pursuant to Paragraph 1 are advanced at the sole request of the Lessee.
4. Lessee further agrees to immediately reimburse American for any
advances to Vendor(s) by American, in the event Lessee, Lessor or Vendor, for
any reason whatsoever, attempts to cancel the installation of the Equipment,
prior to final acceptance of the Equipment by Lessee.
5. Lessee hereby waives paragraph 12b of this Lease.
6. In the event that Lessee does not fully and finally accept the
Equipment subject of the Lease within 120 days after the date of the Addendum
A; American shall be entitled to retain all payments received and, Lessee
agrees to immediately reimburse American for all advances made pursuant to
Paragraph 1 hereof and further agrees to indemnify American pursuant to the
terms and conditions of Paragraph 2 hereof. Upon receipt by American of all
sums due for such reimbursement and other sums due, the Lease shall
thereafter be otherwise deemed canceled, and all rights and interest in the
Equipment shall be assigned to Lessee by American.
7. Default. In the event that Lessee shall default in any terms under
the Lease or under this Addendum A, American shall have no further obligation
to advance any sums to Vendor, and Lessee shall immediately reimburse
American for all advances to that date made pursuant to paragraph 1 hereof,
plus interest at the rate of 1 1/2 percent per month or the maximum allowed
by law, whichever is the lesser; plus any other sums due in accordance
herewith.
AMERICAN EQUIPMENT LEASING UNIVERSITY OF FLORIDA TISSUE BANK INC.
(a division of AEL Leasing Co., Inc.) --------------------------------------
By: By: /s/ Jamie M. Grooms
-------------------------------- ------------------------------
Title: Title: President
-------------------------------- --------------------------
Dated: August 8, 1996
--------------------------
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-35756 of Regeneration Technologies, Inc. on Form S-1 of our report dated
March 22, 2000 (April 27, 2000 as to Note 18) appearing in the Prospectus, which
is part of this Registration Statement, and of our report relating to the
consolidated financial statement schedule dated March 22, 2000 (April 27, 2000
as to Note 18), appearing elsewhere in this Registration Statement. We also
consent to the reference to us under the headings "Selected Financial Data" and
"Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Tampa, Florida
May 23, 2000
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-35756 of Regeneration Technologies, Inc. on Form S-1 of our report relating
to the statements of revenues and direct costs of the predecessor business of
Regeneration Technologies, Inc. dated April 17, 2000, appearing in the
Prospectus, which is part of this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Tampa, Florida
May 23, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF REGENERATION
TECHNOLIGIES, INC. AND SUBSIDIARY AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,371,938
<SECURITIES> 0
<RECEIVABLES> 18,168,378
<ALLOWANCES> (403,932)
<INVENTORY> 18,696,877
<CURRENT-ASSETS> 41,289,642
<PP&E> 11,376,606
<DEPRECIATION> 1,412,734
<TOTAL-ASSETS> 52,844,246
<CURRENT-LIABILITIES> 28,654,040
<BONDS> 4,027,496
0
16,581,777
<COMMON> 780
<OTHER-SE> (291,597)
<TOTAL-LIABILITY-AND-EQUITY> 52,844,246
<SALES> 11,803,745
<TOTAL-REVENUES> 11,803,745
<CGS> (6,326,450)
<TOTAL-COSTS> (3,943,777)
<OTHER-EXPENSES> (514,891)
<LOSS-PROVISION> (68,845)
<INTEREST-EXPENSE> (107,787)
<INCOME-PRETAX> 1,001,208
<INCOME-TAX> (393,566)
<INCOME-CONTINUING> 607,642
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 607,642
<EPS-BASIC> 0.78
<EPS-DILUTED> 0.16
</TABLE>
