SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[x] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended September 30, 1998
[_] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _________ to _________
Commission File Number: 0-16128
TUTOGEN MEDICAL, INC.
(formerly Biodynamics International, Inc.)
(Name of Small Business Issuer in Its Charter)
Florida 59-3100165
(State of Incorporation) (IRS Employer Identification No.)
1719 Route 10, Parsippany, New Jersey 07054
(Address of Principal Executive Offices, Zip Code)
(973) 359-8444
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of
the Exchange Act: None Securities registered
under Section 12(g) of the Exchange Act:
Common Stock
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]
The issuer's revenues for the fiscal year ended September 30, 1998 were
$8,912,000.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates (approximately 1,266,000 shares), computed by reference to the
average bid and asked prices of such common equity, was approximately $5,539,000
as of November 30, 1998.
As of November 30, 1998, there were 5,363,823 shares outstanding of the issuer's
Common Stock, par value $.01 per share.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
None.
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The discussion contained in this annual report under Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for the
issuer's fiscal year ended September 30, 1998 (this "Report"), contains
forward-looking statements that involve risks and uncertainties. The issuer's
actual results could differ significantly from those discussed herein. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in "Description of Business" and "Management's Discussion
and Analysis or Plan of Operation" as well as those discussed elsewhere in this
Report. Statements contained in this Report that are not historical facts are
forward-looking statements that are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995. A number of important factors
could cause the issuer's actual results for 1999 and beyond to differ materially
from those expressed in any forward-looking statement made by or on behalf of
the issuer.
PART I
Item 1. Description of Business.
Tutogen Medical, Inc., formerly Biodynamics International, Inc., a Florida
corporation, was formed in 1985, and with its consolidated subsidiaries
(collectively, the "Company" or "Tutogen"), is engaged in the business of tissue
processing and worldwide distribution of specialty surgical products for neuro,
orthopedic, reconstructive and general surgical applications. The Company's core
business is processing human donor tissue ("allografts"), utilizing its patented
Tutoplast(R) process of tissue preservation, for distribution to hospitals and
surgeons.
One of the Company's wholly-owned subsidiaries, Tutogen Medical GmbH,
designs, develops, processes, manufactures, markets, distributes and sells
specialty surgical products and services to over 40 countries through a
worldwide distribution network. Another subsidiary, Tutogen Medical (United
States), Inc., was formed in 1994 and processes, markets and distributes
allografts for the U.S. market.
The Company's corporate headquarters are in Parsippany, New Jersey, with
international executive offices in Erlangen, Germany and processing and
manufacturing facilities in Alachua, Florida and Neunkirchen, Germany.
The Company contracts with independent tissue banks and procurement
organizations to provide donated human tissue for processing under the Company's
patented Tutoplast(R) process. The Tutoplast(R) process utilizes solvent
dehydration and chemical inactivation which is applied to two types of preserved
allografts: soft tissue; consisting of dura mater, fascia lata, fascia
temporalis, pericardium, ligaments, tendons and cartilage, and hard tissue;
consisting of various configurations of cancellous and cortical bone material.
Processed dura mater, pericardium, and fascia lata are collagenous tissue used
to repair, replace or line native connective tissue primarily in neurosurgery,
ophthalmology, otorhinolaryngology, plastic and reconstructive surgeries, while
ligaments, tendons and cartilage are used primarily in orthopedic surgeries. In
the U.S. market, dura mater is used in neurosurgeries only. Processed bone
material is used in a wide variety of applications in neuro and orthopedic
surgeries. All processed tissues have a shelf life of several years and require
minimal time for rehydration. The Company processes both hard and soft tissues
in Germany, while in the U.S., only soft tissues are currently processed.
Management is not aware of any documented cases of disease transmission,
tissue rejection or infection attributable to Tutoplast(R) processed allografts
in over 750,000 implants performed in the past 25 years.
The Tutoplast(R) process utilizes a technique which dehydrates the tissue
and treats it with agents shown to inactivate viruses such as hepatitis and HIV,
the virus which causes AIDS, to render the allografts safe for the recipient.
Dehydrating the tissue gently is important to keep the tissue's structure
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intact. Methods used by other processors of human tissue include freeze-drying,
deep freezing or cryopreservation. Soft tissue is also treated with chemicals
shown to be effective against the organism responsible for Creutzfeldt-Jakob
Disease ("CJD") and other slow viruses. Over a period of several weeks, tissues
are soaked and washed in a series of aqueous solutions and solvents, removing
water and substances that could cause rejection or allergic reaction. Once
packaged, tissues are terminally sterilized by low dosage radiation.
Major Events Affecting 1998 Results
The Recapitalization Agreement
In the past, the Company has relied upon its available lines of credit and
institutional investors to fund operational cash flow, when needed. However, in
1997 to overcome financial difficulties, the Board of Directors of the Company
(the "Board of Directors" or "Board") initiated a significant restructuring of
the Company's capitalization, to address not only a working capital shortage,
but a long term approach to secure also the financial position of the Company
(the "Recapitalization").
The Company sought the cooperation of its institutional investors to
provide immediate capital, and to convert the Company's existing preferred stock
and debt into equity. On August 29, 1997, the Company reached such an agreement
(the "Recapitalization Agreement") with several of its institutional investors,
including Renaissance Capital Partners II, Ltd. ("Renaissance"), NatWest
Ventures (Investments) Ltd. ("NatWest"), and Kleinwort Benson European Mezzanine
Fund L.P. ("Kleinwort Benson"), (NatWest and Kleinwort Benson collectively
referred to as the "Mezzanine Lenders"), these named institutional investors are
collectively referred to herein as, the "Institutional Investors".
Pursuant to the Recapitalization Agreement, the Institutional Investors,
holding a majority of the Company's Series C Preferred Stock (the "Series C
Stock"), agreed to approve certain amendments to the terms of such stock, which
would allow the Company to immediately convert the Series C Stock into shares of
the Company's common stock at a par value of $0.01 per share (the "Common
Stock"). The operative changes to the terms of the Series C Stock were the
deletion of its anti-dilution provisions, and the authorization of the Board of
Directors to mandatorily convert all of the Series C Stock into Common Stock
(the "Amendments"). On September 16, 1997, the Amendments were duly approved at
a special meeting of the holders of the Series C Stock, and on September 22,
1997 the Board of Directors took action to convert all of the outstanding shares
of Series C Stock into (i) 18,484,200 shares of Common Stock, and (ii)
three-year warrants to purchase an additional 18,484,200 shares of Common Stock
for $4,621,050 (the "Series C Warrants"), the conversion described in this
paragraph hereinafter referred to as the "Series C Conversion".
In the Series C Conversion, Renaissance received 5,475,600 shares of Common
Stock and a Series C Warrant to purchase approximately 5,475,600 additional
shares of Common Stock for $1,368,900. The Mezzanine Lenders received, in
exchange for their Series C Stock, an aggregate of 3,436,500 shares of Common
Stock, and Series C Warrants to purchase 3,436,500 additional shares of Common
Stock for $859,125. The remaining holders of Series C Stock, in the aggregate,
received 9,572,100 shares of Common Stock, and Series C Warrants to purchase
9,572,100 additional shares of Common Stock for $2,393,000.
In addition to the Series C Conversion, the Recapitalization Agreement
contained agreements relating to the conversion of certain loans from the
Mezzanine Lenders into equity. Specifically, the Mezzanine Lenders agreed to
exchange their loans to the Company's German subsidiary, totaling approximately
$4,100,000 in principal and accrued interest as of August 1997, (the "Mezzanine
Loans") for 26,263,010 shares of Common Stock. This exchange occurred in
December 1997.
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Also pursuant to the Recapitalization Agreement, Renaissance agreed to lend
the Company additional funds, for working capital purposes. These additional
funds were provided on September 16, 1997 (the September 1997 loan, together
with a June 1997 loan to the Company from Renaissance, is hereinafter referred
to as the "Bridge Loan"). The original principal amount of the Bridge Loan
totaled $2,035,928, with interest on the principal balance at the rate of 12%
per annum and a maturity date of December 31, 1997. Renaissance further agreed
to reduce the interest on the Bridge Loan and to extend its maturity date in
exchange for (i) a five-year debenture, convertible into 44,132,309 shares of
Common Stock, and (ii) a warrant, exercisable at $2,015,991, to purchase
8,063,963 shares of Common Stock (the "Bridge Loan Warrant").
On November 11, 1997, the Bridge Loan was replaced with a Convertible
Debenture Loan Agreement between the Company and Renaissance (the "Loan
Agreement"). Pursuant to the Loan Agreement, Renaissance reduced the interest
rate of the former Bridge Loan (totaling $2,074,081 in principal and earned
interest as of November 11, 1997) to 9% per annum, and extended the maturity
date to November 11, 2002 (the "Loan"). Overdue principal and interest due under
the Loan Agreement will bear interest at a rate of 12% per annum. The Loan is
convertible, at Renaissance's option, in whole or in part, at a conversion price
of $0.47 per share (subject to adjustment) and pursuant to the terms of the Loan
Agreement and the 9% Convertible Debenture issued to Renaissance on November 11,
1997 (the "Debenture"). Under the Loan Agreement, Renaissance has certain demand
and piggyback rights for the registration of shares issued upon conversion of
the Debenture with the Securities & Exchange Commission. Under certain
conditions, the Company may redeem the Debenture, in whole, at 120% of the then
outstanding principal amount of the Loan. If the Debenture is not redeemed or
converted by July 1, 1999, the Company shall pay Renaissance mandatory monthly
principal redemption installments in the amount of ten dollars ($10) per
thousand dollars ($1,000) of the then remaining principal amount of the
Debenture Loan. The Company's obligations under the Loan Agreement and the
Debenture are secured by all of the assets of the Company pursuant to amendments
to the security agreements and a stock pledge agreement executed in connection
with the former Bridge Loan.
As a result of the Recapitalization Agreement, and assuming the exercise of
all of the Series C Warrants, the Bridge Warrant and the conversion of the
Debenture, Renaissance, NatWest, and Kleinwort Benson acquired beneficial
ownership of approximately 51.0%, 15.5% and 11.3% of the outstanding Common
Stock of the Company, respectively. Similarly, assuming the exercise of all of
the Series C Warrants, the Bridge Warrant and the conversion of the Debenture,
the Company's non-affiliated public shareholders hold, in the aggregate,
approximately 21.1% of the outstanding Common Stock of the Company.
The Reverse Stock Split
Assuming the exercise of all of the Series C Warrants, the Bridge Warrant
and the Debenture, there would have been 123,818,572 issued and outstanding
shares of the Company's Common Stock. It would have been necessary to increase
the number of shares authorized in the Company's Articles of Incorporation.
However, the Board of Directors believed that 123,818,572 outstanding shares of
Common Stock would be disproportionately large relative to the Company's present
market capitalization. If such a large volume of shares were outstanding, the
Company's earnings per share could only be affected by significant changes in
its net earnings. Given a smaller number of outstanding shares, management would
be more likely to see its efforts reflected in any future earnings per share of
the Company. In addition, the Board of Directors considered the market price for
the Common Stock, which ranged from $0.50 to $1.22 per share during the first
six months of the calendar year 1997. On October 15, 1997, the closing bid and
asked price for the shares of Common Stock was $0.28 and $0.37, respectively.
The Board concluded that current per share market prices of the
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Common Stock may be impairing its acceptability by the investment community.
Accordingly, the Board of Directors did not propose to the shareholders an
increase in the number of authorized shares of Common Stock. Instead, it
recommended that shareholders approve a one-for-ten reverse stock split (the
"Reverse Split"). At a special meeting of the Company's shareholders on November
10, 1997, the Reverse Split was duly approved.
Effects of the Recapitalization
Taking into consideration the dilutive effects of the Recapitalization
Agreement on the Company's public shareholders, the Board of Directors concluded
that the Recapitalization was necessary and in the best interests of the Company
and all of its shareholders. The Company has emerged from the Recapitalization
with a stronger balance sheet, and significantly reduced interest burden. The
Board believes that the Recapitalization has positively positioned Tutogen for
the future.
Manufacturing and Processing
All of the Company's allografts are prepared, preserved and processed
utilizing Tutogen's proprietary manufacturing process, Tutoplast(R), which is
applied to donor tissue that has been obtained from approved tissue procurement
organizations and institutions. Although several operations are automated, most
of the process is manual and relies on trained, highly skilled personnel. The
entire process, including packaging and sterilization, takes place under
controlled conditions. All incoming, untreated tissue is crosschecked with the
appropriate donor protocol and stored in special cold-storage rooms or
refrigerators until released for processing. To prevent possible
cross-contamination and ensure constant tissue identification, all tissue is
marked and strictly maintained in individual containers. Reference samples are
taken from each tissue for test purposes and are retained for seven years.
Documentation allows reverse traceability of tissue implants to the donor and
the retrieving institution. All processed implants have a batch number and a
donor number printed on each single package. Processed tissue may be safely
stored for up to five years.
Quality Assurance - All tissues are accompanied by specific medical and
donor documentation, including blood serum testing results from independent
laboratories. Tissues, which do not meet regulatory standards, are rejected and
destroyed. Tutogen's products and processed tissue are subject to a series of
biological, physical and chemical tests, from incoming raw materials to sterile,
finished goods. See "Government Regulations".
Marketing and Distribution
Tutogen's products and processing services are provided through direct
representatives in Germany, with the Company billing the hospital or end-user
directly. Elsewhere abroad, the Company distributes and bills direct to a
network of over 40 stocking distributors representing over 40 countries.
Tutogen's personnel, with distributors and their representatives, conduct
product training sessions, make joint customer calls, set objectives and
evaluate their representatives' performance. Personnel also call on selected
physicians and key hospital accounts in order to provide needed clinical and
technical information services.
Approximately 68% of the Company's revenues come from outside the United
States. As a result of its foreign sales and facilities, the Company's
operations are subject to risks of doing business abroad. However, a major
effort is underway to increase penetration in the U.S. market, which Accounts
for an approximated 55% of the world market for biomaterials. The Company's
marketing
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efforts in the U.S. in recent years have focused on creating a market for the
pericardium and fascia lata tissues, from donor tissues sourced in the U.S. In
addition, the strategic decision was made to re-open the U.S. market for tissues
obtained from abroad, because the Company's foreign donor qualification
standards have progressed to the extent of full compliance with standards of the
Food and Drug Administration ("FDA").
U.S. marketing efforts are concentrating on rebuilding the distributor
organization and re-entering the dura mater and bone markets. Presently,
allografts are provided to hospitals in the U.S. through approximately ten (10)
independent distribution companies. These distributors employ, in the aggregate,
over 80 field representatives who call on hospital and office-based medical
practitioners, primarily surgeons. Tutogen supports their activities with
various types of technical allograft literature, informational programs,
reference materials, and training sessions and programs designed to increase
distributor call volume. Plans are being made to re-establish a field
organization to support the distributor network. In addition, the Company has
entered into exclusive distribution agreements with other medical device
companies, under the Tutoplast(R) label, for specialized indications. One such
distribution agreement, which has been in effect since 1995, is for Tutoplast(R)
implants for ophthalmic use. A second project, for use of Tutoplast(R) fascia
lata in urological and gynecological indications, was concluded in January 1998.
Internationally, the Company has implemented a marketing and sales
restructuring plan, moving away from maximizing the number of countries with a
representation, to concentrating on in-depth penetration of markets with major
needs, i.e. the German speaking countries of Europe, and "focus" countries such
as France, Italy, Spain and the U.K. The additional personnel needed to complete
the implementation were brought on board in the third and fourth quarters of
fiscal 1998. Additionally, the Company has entered into a strategic alliance
with a bone and tissue implant organization to develop European tissue banking
programs.
Sources of Tissue and Products
The Company receives donor tissue from multiple sites in Europe and the
United States. This tissue is procured by independent procurement organizations
and the Company reimburses these organizations for the costs of their
procurement (recovery fees). The Company believes it currently complies with
existing laws and regulations in these countries, including regulations related
to procurement, donor screening, testing, storage and transportation. It is
anticipated that government laws and regulations involving human donor tissues
will continue to change in the countries presently serviced by the Company (see
Government Regulations). Accordingly, the Company continues to seek additional
contacts with authorized health care agencies, accredited tissue banks, organ
procurement organizations, and governments. The Company expects that, in most
markets, demand for its Tutoplast(R) processed allografts will continue to
exceed the current donor tissues available to the Company for processing.
Tissue recoveries, particularly internationally, continue to improve. The
export program from Europe to the U.S. has been given high priority, and the
levels of shipments are increasing steadily. The international tissue recovery
base will be expanded to include Tissue Services Coordinators. Domestic and
European tissue recoveries are on track to meet plan for fiscal 1999. While the
Company continues to emphasize expanding its supply base, there can be no
assurance that changing laws or donation trends, in the countries from which it
presently obtains tissues, will not have a material adverse effect on the
Company's operations.
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Back Order
While Tutogen worldwide has back orders on certain allograft tissue types
and tissue sizes, the allograft demand is the most significant in the U.S.
market. The U.S. is the largest market in the world for allografts and has
historically represented the Company's largest market. The Company currently is
unable to meet the demand for the majority of its allograft sizes. The Company
has defined its back orders as those orders which are expected to be filled
within the next six months, however, the Company cannot predict with absolute
certainty its ability to fill specific orders in this time frame. At September
30, 1998, the Company's back order was approximately $550,000. Because orders
may be canceled or rescheduled, the Company believes that backlog is not always
an accurate indicator of results of operations for specific future periods.
Other Business
The Company was involved in a joint venture with Advanced Haemotechnologies
("AHT"), a manufacturer of blood transfusion and filtration equipment. In 1998,
the joint venture was dissolved.
Competition
Tutogen is a world leader in safe bioimplants for tissue repair. Tutogen's
competitive advantage is based on its patented Tutoplast(R) process of tissue
preservation and viral inactivation. In the U.S., most allograft processing is
lyophilization/freeze-drying, and to a lesser extent, cryopreservation. The
Tutoplast(R) process, however, is based upon solvent dehydration, which
preserves the tissue's integrity, and the implants are remodeled in the course
of normal healing. The Tutoplast(R) process has an outstanding safety record,
including viral inactivation and is shown to be effective against the organism
responsible for CJD. Since its introduction more than twenty-five (25) years
ago, more than 750,000 procedures have been performed using Tutoplast(R)
processed tissues, with no known complications from disease transmission or
tissue rejection attributable to the implants. Tutoplast(R) processed implants
have been described in more than 100 published scientific papers. Tutoplast(R)
implants meet FDA requirements for marketing in the U.S. and they are recognized
for their outstanding safety.
The majority of the medical procedures suitable for allografts are
currently being performed with autografts. Autografts are tissues derived from
the patient requiring the surgical procedure. The advantages of autografts
include the absence of the possibility of tissue rejection and disease
transmission. The disadvantages are the dual surgical procedures, pain,
increased recovery time and very limited supply. Allograft advantages include
the elimination of a second surgical site resulting in lower infection rates,
shorter recovery times and lower costs, while its disadvantages include
availability, possible rejection and disease transmission. Availability and
safety are the primary factors in the ability of allografts to compete with
autografts for use by the surgical community.
The industry in which the Company operates is highly competitive. The 1996
departure of a major German competitor from the business of soft tissue
allografts left Tutogen as the largest processor in the international market.
Processors of allograft tissue for transplantation in the U.S. include
commercial processors such as Osteotech and Cryolife, companies that are well
established in the fields of bones and heart valves respectively, and which have
substantially greater financial resources than the Company. Not-for-profit
tissue banks that procure and process tissue for distribution are considered
competitors for certain applications and in certain markets. Management believes
that its Tutoplast(R) process, with its extensive record for safety in the
surgical community, gives the Company a competitive advantage over its
competitors. However, due to government regulation,
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disrupted sources of availability and increasing competition, there can be no
assurance that the Company will be able to continue to compete successfully. In
addition, there can be no assurance that in the future the Company's allografts
will be able to compete successfully with newly developed tissue substitutes,
which are being developed by other companies.
Growth Strategy
The Company estimates that the market potential for bioimplants is
approximately $1.2 billion worldwide. The broader market of biomaterials for
tissue repair is approximately $6 billion, with 55% in the United States. The
Company's strategy for growth is to leverage its Tutoplast(R) technology, its
existing allograft business, the two tissue processing facilities and the
worldwide distribution organization into a major franchise in biomaterials for
tissue repair.
Product development strategy, in the short run, will focus on maximizing
the potential of its allograft business through specialty products in soft
tissues and specialty products in hard tissues (bones), a major build-up of the
U.S. organization and the building of its own marketing organizations in
Germany, France and the U.K. In addition, the Company plans to introduce
"Service Processing" as an endeavor to process bones infected by tumors. This
process consists of receiving bones removed from a patient and sent to the
Company for Tutoplast(R) processing to remove the tumor. After processing, the
bones are returned to the surgeon for re-implantation in the patient.
In the medium term, growth is to come from the expansion of the Company's
technology to Tutoplast(R) xenografts (animal tissues), and TriAplast(TM)
engineered grafts. The Company sees an opportunity for major growth in both
areas, based on expected regulatory and efficacy advantages.
TriAplast(TM) is an allogenous bone growth factor substrate, with the
competitive advantage of having both osteoconductive and superior osteoinductive
activity. It is being developed under an exclusive worldwide license from the
University of Wurzburg in Germany and is backed by a clinical history of over
850 cases in maxillofacial surgery over more than six (6) years. A 1999 product
launch in select European countries is being pursued. The product will be
launched in two forms, a powder and pre-cut bone block. TriAplast(TM) will
compete in the bone repair and oral surgery markets, which are valued at
approximately $160 million in the U.S. and $290 million worldwide.
In xenografts, the products being pursued are bovine bone and bovine
pericardium. The competitive advantage the Company anticipates is that
Tutoplast(R) processed xenografts are equivalent to Tutoplast(R) processed
allografts, based on evidence in animal experiments. In comparison to xenografts
already on the market, the Tutoplast(R) process eliminates antigenicity, keeps
the natural mineral and collagenous structure of the tissue, and preserves its
potential for complete remodeling. The products will compete in markets valued
at $250 million in the U.S. and $450 million worldwide. Tutoplast(R) bovine
cancellous bone was launched in Europe in November 1998.
Additional specialty products in the hard tissue area will come from bone
fixation technology under development with the University of Marburg in Germany.
The products are a series of splints, nails, screws and anchors for the
treatment of complex bone fractures. They will be used in the treatment of
fractures of the extremities and will be made of bovine bone. The products
should be available by the end of 1999 for full launch in Europe in 2000. The
market in Europe is estimated to be approximately $220 million. The U.S. market
potential is approximately $300 million.
In the longer run, the Tutoplast(R) technology is expected to be suitable
for the development of tissue engineered products with major market potential,
inasmuch as Tutoplast(R) processed tissues are expected to represent ideal
biological origin carriers (as distinguished from synthetic origin carriers) for
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tissue engineered products. Major unfilled needs are in the field of cartilage
repair and vascular grafts for coronary bypass and peripheral vascular surgery.
No project has as yet been identified in the field of vascular grafts. In the
field of cartilage repair, the project has been identified with mesenchymal stem
cells. The Company is pursuing research and licensing agreements for
combinations with Tutoplast(R) processed tissue as carriers/matrices.
Research and Development
Tutogen continues to engage in research and development ("R&D"). The
Company's scientific personnel and university level consultants collaborate on
research activities related to allograft and non-allograft development. An
internal Product Development Committee plans and organizes all R&D activities.
In allograft-related areas, R&D activities focus primarily on implant
safety through viral inactivation and tissue sterilization. Continuing progress
on the application of the Company's proprietary Tutoplast(R) process to various
other tissues has met with success. The Company continues to independently
review its processing technology to improve tissue safety and efficacy.
Non-allograft activities relate to explorations into the use of xenografts, bone
substitutes and tissue-engineered grafts. Clinical studies, evaluation and
follow-up (as necessary) are conducted on these activities. The Company spent
approximately $292,000 in 1998 as compared with $314,000 in 1997. These
activities will be expanded substantially pending the availability of the
necessary financial resources.
Customers
The Company is not dependent upon one or a few principal customers. One
customer, Mentor Corporation, accounted for 13% or more of the Company's net
sales for the year ended September 30, 1998. All other customers individually
accounted for less than 10% of the Company's net sales for the fiscal year 1998.
Patents, Licenses and Trademarks
Wherever possible, Tutogen seeks to protect its proprietary information,
products, methods and technology by obtaining patents and license protection.
Tutogen holds three (3) patents and has registered trademarks covering fourteen
(14) countries worldwide. In the United States, the Company has three (3) FDA
accepted 510(k) applications for it's various products or processes. The
Company's patents relating to its Tutoplast(R) process have expiration dates of
November 1998 for the United States and 1999 and 2000 for Germany and France,
respectively. The Company believes that it has established itself through the
Tutoplast(R) trademark identity and a record of safety and quality assurance,
which will survive the life of the patents.
Government Regulation
Tutogen has contracts to receive, process and provide tissues worldwide.
Every country has it own regulatory requirements that are constantly under
review and subject to change. The Company believes it currently complies with
all appropriate governmental requirements and standards in each country where it
does business. There can be no assurance that changing governmental
administration or laws will not negatively impact the Company.
For distribution in countries outside the U.S., the Company must comply
with the laws in the respective countries. In Germany, allografts are classified
as drugs and the German government regulates Tutogen's tissue processing and
distribution under a pharmaceutical license within Germany.
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The European Commission has proposed regulating allografts as medical devices.
At present, Tutogen's German facility is licensed and in compliance with German
law.
In the United States, the FDA has determined that dura mater is subject to
all provisions of the Food, Drug and Cosmetic Act and is regulated as a medical
device. For distribution in the United States, dura mater is required to be
processed in accordance with FDA Quality Standards. All other tissues processed
currently by the Company are regulated by the FDA Title 21, code of Federal
Regulations, Part 1270 Human Tissue Intended for Transplantation. Similarly,
tissue banks and procurement organizations, which provide the tissues to the
Company for processing, also must comply with the same regulations.
Both the FDA and German regulatory agencies conduct inspections of
processing facilities. The Company believes that worldwide regulation of
allografts is likely to intensify as governments increase their focus on the
growing demand for this type of tissue and the need to ensure the health and
welfare of its citizenry. Management believes that the Company and its industry
will always be subject to changing regulations that could have a material
adverse effect on its financial condition and results of operations. Management
further believes that they can reduce this exposure by continuing to work
closely with government regulators in understanding the industry and drafting
reasonable and proper legislation. While the Company believes that it is in
compliance with all existing regulations, there can be no assurance that
changing laws or interpretations of existing laws will not have a material
adverse effect on the results of operations and cash flow.
The Company has learned that a woman in Denver, Colorado recently died
apparently from CJD. The Centers for Disease Control and Prevention ("CDC") and
the FDA are investigating the incident to determine if the death was caused by
dura mater tissue transplanted during the woman's earlier surgery in 1992. The
Company is cooperating with the CDC and the FDA to determine the facts and
ascertain if the transplanted tissue was the Company's Tutoplast(R) product. Due
to safety controls employed by the Company and with over 750,000 transplants
over a 25 year period without a reported case of disease transmission from a
Tutoplast(R) processed implant, management does not believe that if, in fact,
the tissue used was a Tutoplast(R) product, the death is related to the
transplanted tissue. However, until the investigation is complete, no
determination can be made as to whether the Company's product is in any way
related to the CJD case, nor can the impact of the incident on the Company's
future operations be determined at this time. Ongoing discussions with the FDA
and the CDC should lead to further clarification of both the involvement of the
Tutoplast(R) product and any resulting regulatory implications.
Environmental Regulations
The Company uses chemicals and radiation in its processing of allografts.
The Company must comply with country-specific, federal, state and local
regulations pertaining to the storage and discharge of hazardous waste involved
in the Tutoplast(R) process. Since 1995, the Company elected to use outside
third parties to perform all sterilization.
In view of the engagement of outside third parties to perform all
sterilization, the requirements for compliance with environmental regulations do
not, and the Company anticipates will not, have any material adverse effect upon
its capital expenditures, results of operations or financial condition. Although
the Company believes it is in compliance with all applicable environmental
regulations, the failure to fully comply with any such regulations could result
in the imposition of penalties, fines and/or sanctions which could have a
material adverse effect on the Company's business.
10
<PAGE>
Technological Change and Competition
The biomedical field continues to experience rapid and significant
technological change. Tutogen's success will depend upon its ability to
establish and maintain a competitive position in the marketplace with its
products and its ability to develop and apply its technology. There are many
well-established companies and academic institutions with greater resources that
are capable of developing products based on similar or new technology that could
effectively compete with those products offered by the Company.
Foreign Exchange Rates and Foreign Transactions
A significant portion of the Company's revenues are derived from its German
operations, all of which are denominated in Deutsche Marks. Fluctuations in the
U.S. Dollar/Deutsche Mark exchange rate will therefore have a significant effect
on the Company's dollar results. Transactions with foreign suppliers and foreign
customers could be materially adversely affected by possible import, export,
tariff and other restrictions that may be imposed by the United States or other
countries.
Employees
As of September 30, 1998, the Company employed a total of seventy-six (76)
full-time and sixteen (16) part-time employees, of whom nineteen (19) were
employed in the United States and the remaining in Germany. Management believes
its relations with its employees are good.
Item 2. Description of Property.
United States. The Company's domestic facilities are located in New Jersey
and Florida. In Parsippany, New Jersey, the Company leases approximately 4,400
square feet of office space where its administrative and sales functions are
performed. The lease expires in April 2002 and has a base rent of approximately
$6,500 per month. The Company's processing plant in Alachua, Florida has
expanded from approximately 2,500 square feet of leased space to 4,900 square
feet. The Florida lease expires in 2002 and rents for approximately $7,700 per
month. The Company believes it is adequate in space and condition for its
current needs and has made provisions for expansion if necessary.
Germany. In Erlangen, Germany, the Company leases 8,000 square feet where
its International administrative and sales functions are performed. The lease
expires in the year 2000. In addition, Tutogen has a processing plant in
Neunkirchen, Germany consisting of six buildings totaling some 26,000 square
feet on approximately two acres of land. This property is owned by the Company
and should be sufficient in size and condition to handle anticipated production
levels for international markets into the foreseeable future.
Item 3. Legal Proceedings.
There were no material legal proceedings as of September 30, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
There was no submission of matters to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
11
<PAGE>
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
Market Information
The Company's Common Stock was traded on NASDAQ under the symbol "TTGN". As
of September 26, 1997, the Company's Common Stock was delisted from NASDAQ for
failure to meet the capital, surplus and bid price requirements for continued
listing. The Company is now being traded on the OTC Bulletin Board. The
following table sets forth the range of high and low bid information for the
Company's Common Stock for each quarter within the last two fiscal years.
Fiscal 1997 High Low
------------ ---- ---
First Quarter $ 1.50 $ 0.94
Second Quarter 1.22 0.75
Third Quarter 1.88 0.50
Fourth Quarter 1.66 0.06
Fiscal 1998
------------
First Quarter $ 1.25 $ 0.88
Second Quarter 2.81 0.94
Third Quarter 3.13 1.68
Fourth Quarter 2.56 1.19
The market information above is derived from over-the-counter quotations on
the Small Cap Market(sm) System of NASDAQ through September 26, 1997 and the OTC
Bulletin Board from September 27, 1997 to present. Such market quotations
reflect inter-dealer prices, without retail mark-ups, markdowns or commissions
and may not necessarily represent actual transactions.
Holders
As of November 30, 1998, the approximate number of holders of record of the
Company's Common Stock was 382.
Dividends
The Company has not paid any cash dividends to date and does not anticipate
or contemplate paying cash dividends in the foreseeable future until earnings
would generate funds in excess of those required to provide for the growth needs
of the Company.
12
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Revenue and Cost of Revenue
Revenue for the year ended September 30, 1998 increased 3% to $8.9 million from
$8.7 million in 1997. The revenue increase was achieved despite the ban on the
use of human dura mater tissue in the Japanese market and the discontinuation of
the Company's unprofitable sutures business. The core bioimplant revenues,
exclusive of the Japanese market and the suture business, was $8.7 million or a
64% increase over $5.3 million in 1997.
Gross margins for the year ended September 30, 1998 increased to 49% from 17% in
1997. The increase is attributable to price increases, a favorable mix resulting
from the discontinuation of the unprofitable suture business and increased
throughput from the U.S. facility.
General and Administrative
General and Administrative expenses decreased 17% in 1998 to $2.0 million from
$2.4 million in 1997. As a percentage of revenues, General and Administrative
expenses decreased from 28% in 1997 to 23% in 1998. The decreased expenses are
due primarily to a reduction in personnel and legal and consulting expenses.
Distribution and Marketing
Distribution and Marketing expenses decreased 34% in 1998 to $1.5 million from
$2.2 million in 1997. As a percentage of revenues, Distribution and Marketing
expenses decreased from 26% in 1997 to 16% in 1998. The decreased expenses are
due primarily to a reduction in personnel, travelling and other cost saving
measures instituted as a result of the discontinuation of revenue from the
Japanese market.
Research and Development
Research and Development expenses for the year ending September 30, 1998 are
essentially in line with 1997. Research and Development expenses decreased 7% to
$292,000 from $314,000 in 1997.
Depreciation and Amortization
Depreciation and Amortization decreased 70% in 1998 to $644,000 from $2.2
million in 1997. The reduction in depreciation and amortization is attributed to
substantial write downs of intangible and fixed assets taken, primarily due to
the discontinued international suture business, during 1997.
Other Income/Expense
Other income for 1998 totaled $526,000 and is primarily the result of the
settlement of the Company's interest in the joint venture with AHT in the amount
of $205,000 and an up-front license fee in the amount of $200,000, for the
rights to distribute its Tutoplast(R) facia lata in urological and gynecological
applications and procedures. Other income for 1997 of $2.1 million was primarily
the result of the settlement of the claim against the previous owner of the
German operation.
Interest Expense
Interest expense declined 54% in 1998 to $362,000 from $934,000 in 1997. The
reduction is directly attributed to the capital restructuring which was
completed during the quarter ended December 31, 1997. The restructuring included
the conversion of long-term debt to common stock.
13
<PAGE>
Net Income (Loss)
As a result of the above, net income for the year ended September 30, 1998
totaled $122,000 or $0.02 basic earnings per share and $0.01 diluted earnings
per share as compared to a net loss of $5.2 million or $6.17 basic and diluted
loss per share for 1997.
Liquidity and Capital Resources
At September 30, 1998 and September 30, 1997 the Company had working capital of
$3.4 million and negative working capital of $4.2 million respectively. The
Company maintains current working capital lines totaling DM 1.9 million
(approximately $1.1 million) with several German banks. At September 30, 1998
the Company had borrowed $895,000 against these lines.
The significant improvement in the working capital position from 1997 to 1998
was due to the recapitalization of the Company that was completed during the
quarter ending December 31, 1997. The recapitalization included the securing of
additional working capital through bridge loans totaling approximately $2.0
million, the conversion of the Series C preferred stock and the conversion of
the mezzanine debt. The result of the recapitalization has been an improved
financial position and significantly reduced interest burden. In the past, the
Company has relied upon its available working capital lines and institutional
investors to fund operational cash flow, when needed. The Company is actively
negotiating with its institutional investors for additional loans/investments to
bridge its working capital needs. As a result, the Company received an
additional loan, in the amount of $500,000, in the second quarter of 1998. In
addition, the Company is continuing to seek other investors to infuse additional
capital into the Company. While management believes that it will be successful
in securing new funding, there can be no assurances that it will be able to do
so. Lack of new funding along with the inability to increase processing revenues
could result in a curtailment of operations in the future.
The Company's ability to generate positive operational cash flow is dependent
upon increasing processing revenue through increased recoveries by tissue banks
in the U.S. and Europe, and the development of additional markets and surgical
applications for its products worldwide. While the Company believes that it
continues to make progress in both these areas, there can be no assurances that
changing governmental regulations will not have a material adverse effect on
results of operations or cash flow.
Year 2000 Compliance
The Company has completed a review of its information systems and applications
and has concluded that it is year 2000 compliant. The Company believes that its
vendors and other third parties on whom it relies will be timely converted
and/or have no Year 2000 issues. However, there can be no assurance that the
systems of other companies on which the Company relies will be timely converted
or that any such failure to convert by another company would not have an adverse
effect on the Company. None of the Company's products or manufacturing systems
will be affected by the Year 2000 issue.
New Accounting Pronouncements
In June, 1997, the Financial Accounting Standards Board issued SFAS No.130,
"Reporting Comprehensive Income", which is effective beginning fiscal year
ending September 30, 1999. This standard will require the Company to add the
reporting of Comprehensive Income to its financial statements. The Company does
not expect the application of this statement to have a material effect on its
disclosures.
14
<PAGE>
Item 7. Financial Statements
The information required by this Item is found immediately following the
signature page of this Report.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The following table sets forth the names and ages of the directors and
executive officers of the Company (each, a "Director" and/or "Officer"), the
positions and offices that each Director and Officer held with the Company, and
the period during which each served in such positions and offices. Each Director
serves for a term of one year, until his successor is duly elected and
qualified. Karl H. Meister, in his capacities as President and Chief Executive
Officer, serves for an initial term of three (3) years, subject to automatic
extensions for additional one year periods.
<TABLE>
<CAPTION>
TABLE OF DIRECTORS AND EXECUTIVE OFFICERS
- -------------------------------------------------------------------------------------------------------------------
Period Served in
Name Age Positions/Offices Office/Position
---- --- ----------------- ----------------
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
G. Russell Cleveland 60 Director 1997 - present
- -------------------------------------------------------------------------------------------------------------------
Charles C. Dragone 61 Chairman of the Board 1996 - present
Director 1992 - present
Chief Executive Officer April 1995 - March 1996
October 1992 - September
Chief Financial Officer 1994
- -------------------------------------------------------------------------------------------------------------------
J. Harold Helderman, MD 53 Director 1997 - present
- -------------------------------------------------------------------------------------------------------------------
Manfred Kruger 52 Vice President, Managing 1998 - present
Director, International
Operations
- -------------------------------------------------------------------------------------------------------------------
George Lombardi 55 Chief Financial Officer, 1998 - present
Treasurer and Secretary
- -------------------------------------------------------------------------------------------------------------------
Karl H. Meister 63 Director 1996 - present
Chief Executive Officer 1996 - present
President 1996 - present
- -------------------------------------------------------------------------------------------------------------------
Elroy G. Roelke 67 Director 1995 - present
Acting Secretary January 1998 - March 1998
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
The following is a summary of the business experience of each of the Company's
Officers and Directors listed in the above-referenced table, and of certain
other significant employees of the Company, during the past five (5) years.
Officers and Directors
G. Russell Cleveland is the principal founder and the majority shareholder
of Renaissance Capital Group, Inc. ("Renaissance"). Renaissance specializes in
providing capital to growing emerging publicly owned companies. He is a
Chartered Financial Analyst with over 30 years experience in financial planning
and analysis. He has served as President of the Dallas Association of Investment
Analysts. For over 10 years he was a contributing editor of Texas Business
Magazine. Mr. Cleveland currently serves as the Managing General Partner of
Renaissance Capital Partners, Ltd., President of Renaissance Capital Growth &
Income Fund III, Inc. (NASDAQ), and Director of Renaissance U.S. Growth & Income
Trust PLC, which is traded on the London exchange. Mr. Cleveland also currently
serves as director of Global Environmental Corp. and Biopharmaceutics, Inc.
Charles C. Dragone is the current Chairman of the Board and has served at
various times during the past six years as the Company's Chief Executive Officer
and as its Chief Financial Officer. Mr. Dragone was formerly a director of KiMed
Corporation, a medical products and services company (1992 to 1997). He also was
a Partner of Financial Associates, a Sarasota, Florida, consulting firm
specializing in corporate finance (1986 to 1992), a private consultant in
corporate finance matters (1982 to 1986) and a Vice President, Chief Financial
Officer and director of K-Tron International, a manufacturer of process control
equipment used by the chemical, pharmaceutical, plastics and food industries
(1965 - 1981).
J. Harold Helderman, MD is a Professor of Medicine, Microbiology and
Immunology at Vanderbilt University, Nashville, Tennessee, and is the Medical
Director of the Vanderbilt Transplant Center. Dr. Helderman received his MD from
the State University of New York, Downstate Medical Center in 1971, Summa Cum
Laude. In addition to book and monograph writings, he has authored more than 125
publications in his field of transplant medicine. Dr. Helderman is the immediate
past President of the American Society of Transplant Physicians.
Manfred Kruger is a Corporate Vice President and is the Company's Managing
Director for International Operations. Prior to joining the Company in June
1997, Mr. Kruger was Executive Vice President of Fresenius Critical Care
International, a division of Fresenius Medical Care, AG. The division was
founded in 1991 under his leadership and grew into a substantial business with
an average annual growth of about 40%. Prior to Fresenius, Mr. Kruger held
management positions with Squibb Medical Systems and American Hospital Supply.
George Lombardi is the Company's Chief Financial Officer, Treasurer and
Secretary. He joined the Company in March 1998. Mr. Lombardi was the Vice
President, Chief Financial Officer of Sheffield Pharmaceuticals, Inc., a
publicly held (AMEX) development stage pharmaceutical/biotech Company. Before
that, he was the CFO and Director of Fidelity Medical, Inc. and a Senior
Financial Executive for the New Jersey and New England Operations of National
Health Laboratories, Inc. Prior to this, Mr. Lombardi held Senior Financial
positions at the Boehringer Ingelheim Pharmaceutical Company and the Revlon
Healthcare Group in New York. Mr. Lombardi is a CPA certified in the state of
New Jersey and has a degree in accounting from Fairleigh Dickinson University.
Karl H. Meister has more than 30 years international and U.S. management
experience in the pharmaceutical and medical device industries. Before being
appointed President and Chief Executive
16
<PAGE>
Officer of the Company in March 1996, Mr. Meister was President and Chief
Executive Officer of Carrington Laboratories, Inc., a pharmaceutical company
(1990-1995). He also held executive management positions with Schering-Plough
Corporation (1976-1988) and Pfizer, Inc. (1965-1976). Mr. Meister received a
B.A. Magna Cum Laude from Georgetown University and an M.B.A. from the
University of Chicago.
Elroy G. Roelke is a practicing attorney and for more than forty (40)
years, has specialized in corporate finance and business law. In addition, since
1985, he served as Chairman of Knollwood Mercantile Company, a family-owned
retail liquor and convenience store business. In March 1989, Mr. Roelke joined
Renaissance Capital Group, Inc. and served as Vice President, General Counsel
and director until he retired in December 1996. Mr. Roelke currently serves as
sole director of Microlytics, Inc. and as a director of Appoint Technologies,
Inc., both of which are prior Renaissance Capital investments that discontinued
business pending reorganization. In addition, Mr. Roelke serves as a director of
several privately held companies that retain his service for corporate legal
services. Mr. Roelke received B.A. and J.D. degrees from Valparaiso University.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The Company believes that the reporting requirements, under Section 16(a)
of the Exchange Act, for all its executive officers, directors, and each person
who is the beneficial owner of more than 10% of the common stock of a company
were satisfied, except for Mr. Dragone and Dr. Helderman's inadvertent late
filing of a Form 5 (Annual Statement of Changes in Beneficial Ownership),
disclosing the receipt of options in 1998.
Item 10. Executive Compensation.
Compensation of Directors
The Company's outside Directors receive a $2,000 annual retainer, $1,000
per meeting for attendance at Board meetings, $250 per telephonic meeting, plus
reimbursement of out-of-pocket expenses. Beginning January 1998, the Chairman of
the Board received $1,000 per month for his services as Chairman.
Stock Option Plans
The Company has utilized its 1992 Stock Option Plan (the "1992 Plan") and
its 1996 Incentive and Non-Statutory Stock Option Plan (the "1996 Plan"), and
wishes in the future to continue to utilize the 1996 Plan to attract, maintain
and develop management by encouraging ownership of the Company's Common Stock by
Directors, Officers and other key employees. The following is a summary of the
provisions of the 1996 Plan. This summary is qualified in its entirety by
reference to the 1996 Plan, a copy of which may be obtained from the Company.
The 1996 Plan authorizes the granting of both incentive stock options, as
defined under Section 422 of the Internal Revenue Code of 1986 ("ISO"), and
non-statutory stock options ("NSSO") to purchase Common Stock. All employees of
the Company and its affiliates are eligible to participate in the 1996 Plan. The
1996 Plan also authorizes the granting of NSSOs to non-employee Directors and
consultants of the Company. Pursuant to the 1996 Plan, an option to purchase
10,000 shares of Common Stock shall be granted automatically to each outside
Director who is newly elected to the Board. In addition, an option to purchase
2,500 shares of Common Stock shall be granted automatically, on the date of each
annual meeting of shareholders of the Company, to each outside
17
<PAGE>
Director who has served in that capacity for the past six months and continues
to serve following such meeting. Any outside Director may decline to accept any
option granted to him under the 1996 Plan.
The Board of Directors or the Compensation and Stock Option Committee is
responsible for the administration of the 1996 Plan and determines the employees
to which options will be granted, the period during which each option will be
exercisable, the exercise price, the number of shares of the Common Stock
covered by each option, and whether an option will be a non-qualified or an
incentive stock option. The exercise price, however, for the purchase of shares
subject to such an option, cannot be less than 100% of the fair market value of
the Common Stock on the date the option is granted. The Stock Option Committee
has no authority to administer or interpret the provisions of the 1996 Plan
relating to the grant of options to outside Directors. The current members of
the Compensation and Stock Option committee are G. Russell Cleveland and Dr. J.
Harold Helderman.
No option granted pursuant to the 1996 Plan is transferable otherwise than
by will or the laws of descent and distribution. The term of each option granted
to an employee under the 1996 Plan is determined by the Board of Directors or
the Compensation and Stock Option Committee, but in no event may such term
exceed ten (10) years from the date of grant. Each option granted to an outside
Director under the 1996 Plan shall be exercisable in whole or in part during the
four (4) year period commencing on the date of the grant of such option. Any
option granted to an outside Director shall remain effective during its entire
term, regardless of whether such Director continues to serve as a Director. The
purchase price per share of Common Stock under each option granted to a Director
will be the fair market value of such share on the date of grant.
The vesting period for options granted under the 1996 Plan is set forth in
an option agreement entered into with the optionee. Options granted to an
optionee terminate three years after retirement. In the event of death or
disability, all vested options expire one year from the date of death or
termination of employment due to disability. Upon the occurrence of a "change in
control" of the Company, the maturity of all options then outstanding under the
1996 Plan will be accelerated automatically, so that all such options will
become exercisable in full with respect to all shares that have not been
previously exercised or become exercisable. A "change in control" includes
certain mergers, consolidation, and reorganization, sales of assets, or
dissolution of the Company.
In the event that the Company effects a split of the outstanding shares of
Common Stock or a dividend payable in Common Stock or the outstanding Common
Stock is combined into a smaller number of shares, the maximum number of shares
subject to outstanding options and the purchase price per share of such options
will be increased or decreased proportionately. The effect of the Reverse Split
was to reduce the number of shares subject to the 1996 Plan from 2,000,000
shares to 200,000 shares. At the Special Meeting of Shareholders on November 10,
1997, the Shareholders approved an amendment to the 1996 Plan to increase the
number of shares of Common Stock subject to the 1996 Plan from 200,000 shares
after the Reverse Split, to 2,000,000 shares. Except for such amendment, the
1996 Plan remained unchanged. The 1996 Plan presently reserves 2,000,000 shares
of the Company's Common Stock for issuance thereunder. As of September 30, 1998,
options have been issued for 994,500 shares and 1,005,500 shares remain
available under the 1996 Plan. Unless sooner terminated, the 1996 Plan will
expire on February 27, 2006.
1996 Management Compensation Plan
The Company also maintains a 1996 Management Compensation Plan (the
"Compensation Plan") pursuant to which shares of Common Stock may be awarded to
management employees. The purpose of the Compensation Plan is to reward
management employees for superior results obtained by the Company and by such
employees individually. The Company wishes in the future to utilize the
18
<PAGE>
Compensation Plan to attract and retain superior executive talent and to obtain
a commitment to the long-term success of the Company. The following is a summary
of the provisions of the Compensation Plan. This summary is qualified in its
entirety by reference to the Compensation Plan, a copy of which may be obtained
from the Company.
The Compensation Plan authorizes the granting of incentive compensation to
management employees of the Company and its subsidiaries in the form of bonuses,
payable 50% in cash and 50% in Common Stock based on the fair market value of
the stock on the date of certification of the payment thereof (each such
payment, a "Bonus").
The Compensation and Stock Option Committee is responsible for the
administration of the Compensation Plan. The Compensation and Stock Option
Committee has full authority to interpret the Compensation Plan, to establish
rules and regulations relating to the operation of the Compensation Plan, to
determine the management employees eligible to receive Bonuses thereunder, to
set Bonus criteria, to determine whether and to what extent the Bonus criteria
or other results have been met and to make all other determinations and take all
other actions as the Compensation and Stock Option Committee deems necessary,
advisable or appropriate for the proper administration of the Compensation Plan.
The criteria for incentive compensation under the Compensation Plan
consists of two parts - corporate results and individual results. Corporate
results means exceeding budgeted sales and profits and meeting certain annual
Bonus criteria. Individual results are measured by whether an employee achieves
certain goals set for his or her position. The amount of potential Bonus for an
employee consists of a target Bonus multiplied by a performance component. The
target Bonus is determined as a percentage of salary and ranges from 20% to 35%
depending on the individual's position. The performance component is a
percentage rate measuring results achieved in comparison to the Company's annual
operating budget. The performance component can be adjusted upward or downward
based on individual performance, upon approval by the Compensation and Stock
Option Committee.
In the event the Company effects a split of the outstanding shares of
Common Stock or a dividend payable in Common Stock, or in the event the
outstanding Common Stock is combined into a smaller number of shares, the
maximum number of shares that may be issued under the Compensation Plan will be
decreased or increased proportionately. The effect of the Reverse Split was to
automatically reduce the number of shares subject to the Compensation Plan to
50,000. At the November 10, 1997 Special Meeting of Shareholders, the
Shareholders approved an amendment to the Compensation Plan to increase the
number of shares subject to the Compensation Plan as a result of the Reverse
Split from 50,000 to 500,000. Except for such increase in the number of shares,
the Compensation Plan remained unchanged. The Compensation Plan currently
reserves 500,000 shares of Common Stock for issuance thereunder and there are no
shares outstanding under the Compensation Plan. The Compensation Plan shall
terminate on February 27, 2001.
Employment Agreements
The Company has an employment agreement with Karl H. Meister, its President
and Chief Executive Officer. Pursuant to that agreement, the term of Mr.
Meister's employment with the Company commenced on March 1, 1996 and shall
terminate on February 28, 1999, subject to automatic extensions for additional
one-year periods, unless the Company or Mr. Meister delivers a written notice of
his or its election to terminate, or the Company terminates his employment for
cause.
19
<PAGE>
Mr. Meister's annual base salary is $160,000 per year. In addition, the
employment agreement provides for: (i) an annual cash bonus in an amount
approximately equal to 35% of his annual base salary, subject to the
satisfaction of reasonable performance goals, (ii) five-year, non-qualified,
stock options for 75,000 shares of Common Stock, granted annually under the 1996
Plan ("Annual Stock Options") and (iii) a five-year special stock option for
750,000 shares of Common Stock, at an exercise price of $0.85 per share, 40%
vested upon grant, 30% vested in twelve (12) months, and 30% vested in
twenty-four (24) months (the "Special Stock Option"). All options granted to Mr.
Meister pursuant to his employment contract were subject to the one-for-ten
Reverse Split, and were subsequently repriced. See "Repriced Options" below.
The Company has an employment agreement with Manfred Kruger, its Corporate
Vice President, Managing Director, International Operations. Pursuant to that
agreement, the term of Mr. Kruger's employment with the Company commenced on
June 16, 1997. The agreement is for an indefinite period and shall terminate
upon written notice by the Company, notice of his election to terminate, or the
Company terminates his employment for cause. Minimum notice of termination by
the Company, except for cause, is one year from the end of a calendar quarter.
Mr. Kruger's annual base salary is currently 260,000 DM or approximately
$155,000. In addition, the employment agreement provides for: (i) an annual
bonus in an amount equal to 30% of his annual base salary, subject to the
satisfaction of reasonable performance goals, and (ii) ten-year, qualified stock
options for 200,000 shares of Common Stock.
The Company has an employment agreement with George Lombardi, its Chief
Financial Officer, Treasurer and Secretary. Pursuant to that agreement, the term
of Mr. Lombardi's employment with the company commenced on March 30, 1998 and
shall terminate on March 30, 2000, subject to automatic extensions for
additional one-year periods, unless the Company or Mr. Lombardi delivers a
written notice of his or its election to terminate, or the Company terminates
his employment for cause. Mr. Lombardi's annual base salary is currently
$132,500. In addition, the employment agreement provides for: (i) an annual
bonus in an amount equal to 25% of his annual base salary, subject to the
satisfaction of reasonable performance goals and (ii) ten-year, qualified stock
options for 100,000 shares of Common Stock.
The following table sets forth the compensation awarded to, earned by, or
paid to Karl H. Meister, the Company's President and Chief Executive Officer and
Manfred Kruger, its Corporate Vice President, Managing Director, International
Operations for the period of this Report. There are no other Officers or
individuals whose compensation exceeded $100,000 for this period.
20
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- ----------------------------------------------------------------------------------------------------------------------------
Awards Payouts
- ----------------------------------------------------------------------------------------------------------------------------
Securities
Other Restricted Underlying
Name And Principal Fiscal Annual Stock Options/ LTIP All Other
Position Year Salary Bonus Compensation Award(s) SARs Payouts Compensation
($) ($) ($) ($) (#) ($) ($)
(1)
- -------------------------------------------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Karl H. Meister 1998 160,000 14,000 0 0 108,974 0 0
President & Chief 1997 160,000 0 0 0 360,000 0 0
Executive Officer 1996 93,333 0 0 0 750,000 0 0
Manfred Kruger 1998 134,691 21,894 0 0 32,485 0 24,900
Corporate Vice 1997 39,106 0 0 0 200,000 0 1,579
President
- -------------------------------------------------------------------------------- -------------------------------------------
</TABLE>
- ----------
(1) Includes 360,000 options and 200,000 options in a repricing transaction
during November 1997 for Mr. Meister and Mr. Kruger, respectively. See
Footnotes 1, 2, and 3 to the table below.
Repriced Options
On November 10, 1997, the Company canceled all of the outstanding stock
options previously issued under its stock option plans (the "Old Options") to
current employees and directors and replaced them with new options (the "New
Options") to remedy the negative effect of the Reverse Split on the exercise
prices of Old Options which had ranged from $0.44 per share to $1.10 per share
before the Reverse Split, and $4.38 per share to $11.00 per share after the
Reverse Split. Generally, New Options were issued for a new number of shares of
Common Stock, representing 40% of the former number of shares into which the Old
Options were exercisable before the Reverse Split. The exercise price of the New
Options is equivalent to the market price of the Common Stock on the date of the
grant of the New Options, $1.57.
The following table sets forth certain information regarding replacement
stock options granted to Karl H. Meister, President and Chief Executive Officer,
and Mr. Kruger, Corporate Vice President, on November 10, 1997.
21
<PAGE>
OPTION/SAR GRANTS IN FISCAL YEAR 1998
(Individual Grants)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Percent of Total Exercise or
Options/SARs Granted Options/SARs Granted Base Price Expiration
Name (#) To Employees ($/Sh) Date
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Karl H. Meister 300,000(1) 32.9% $1.57 November 9, 2002
60,000(2) 6.6% $1.57 November 9, 2002
----------------------------------------------------------------------------
Manfred Kruger 200,000(3) 22.0% $1.57 November 9, 2007
- -----------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Represents a replacement grant for Mr. Meister's Old Option (Special Stock
Option) to purchase 750,000 shares of Common Stock at $0.85 per share.
Pursuant to the provisions of Mr. Meister's employment agreement and the
terms and conditions of the Non-Statutory Stock Option Agreement dated
November 10, 1997, the Company granted Mr. Meister a Non-Statutory Stock
Option to purchase 300,000 shares of Common Stock for $1.57 per share,
which New Option shall vest as follows: (i) November 10, 1997 - 120,000
shares, (ii) November 10, 1998 - 90,000 shares, and November 10, 1999 -
90,000 shares.
(2) Represents replacement grant for Mr. Meister's Old Options (Annual Stock
Options) to purchase, in the aggregate, 150,000 shares of Common Stock.
Pursuant to the provisions of Mr. Meister's employment agreement, the 1996
Plan and the terms and conditions of the Non-Statutory Stock Option
Agreement dated November 10, 1997, the Company granted Mr. Meister a
Non-Statutory Stock Option to purchase 60,000 shares of Common Stock for
$1.57 per share. The New Option was fully vested as of the date of grant.
(3) Represents replacement grant for Mr. Kruger's Old Options (500,000) to
purchase in the aggregate, 200,000 shares of Common Stock. Pursuant to the
provisions of Mr. Kruger's employment agreement, the 1996 Plan, and the
terms and conditions of the Incentive Stock Option Agreement dated November
10, 1997, the Company granted Mr. Kruger an Incentive Stock Option to
purchase 200,000 shares of Common Stock for $1.57 per share of which ISO's
50,000 shares are vested as of the date of grant.
22
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Giving effect to the Recapitalization described in Part I of this Report,
the following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 30, 1998, by (i) each
person known to the Company to own beneficially more than 5% of its Common
Stock, (ii) each director and executive officer of the Company, and (iii) all
directors and executive officers as a group. As of November 30,1998, there were
approximately 5,363,823 shares of Common Stock issued and outstanding.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Name and Address Amount and Nature Percentage
of Beneficial Owner of Beneficial Owner (1)(2) of Class (3)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Renaissance Capital Partners II, Ltd. (4) ........................ 6,832,667 56.02%
8080 N. Central Expressway
Suite 210-LB 59
Dallas, TX 75206
Renaissance Capital Group, Inc. (5) .............................. 6,832,667 56.02%
Kleinwort Benson European Mezzanine Fund, L.P. (6) ............... 1,395,192 20.64%
Westbourne
The Grange
St. Peter Port
Guernsey, CI
GY1 3BG
NatWest Ventures (Investments) Ltd. (7) .......................... 1,918,409 26.34%
Fenchurch Exchange
8 Fenchurch Place
London, England
EC3M4TE
G. Russell Cleveland (8) ......................................... 6,832,667 56.02%
Charles Dragone (9) .............................................. 155,339 2.81%
Dr. J. Harold Helderman (10) ..................................... 22,500 *
Manfred Kruger (10) .............................................. 106,250 1.94%
George Lombardi (10) ............................................. 25,000 *
Karl H. Meister (11) ............................................. 626,354 10.46%
Elroy G. Roelke (10) ............................................. 43,000 *
All directors and officers as a group (7 persons) ................ 7,811,110 59.29%
</TABLE>
- ----------
* Less than 1%
23
<PAGE>
(1) In accordance with Rule 13d-3 promulgated pursuant to the Exchange Act, a
person is deemed to be the beneficial owner of the security for purposes of
the rule if he or she has or shares voting power or dispositive power with
respect to such security or has the right to acquire such ownership within
sixty days. As used herein, "voting power" is the power to vote or direct
the voting of shares and "dispositive power" is the power to dispose or
direct the disposition of shares, irrespective of any economic interest
therein.
(2) Except as otherwise indicated by footnote, the persons named in the table
have sole voting and investment power with respect to all of the Common
Stock beneficially owned by them.
(3) In calculating the percentage ownership for a given individual or group,
the number of shares of Common Stock outstanding includes unissued shares
subject to options, warrants, rights or conversion privileges exercisable
within sixty days after November 30, 1998 held by such individual or group.
(4) Includes 6,137,557 shares of Common Stock which Renaissance Capital
Partners II, Ltd. has the right to acquire within sixty (60) days.
(5) Represents all of the shares of Common Stock beneficially owned by
Renaissance Capital Partners II Ltd. Renaissance Capital Group, Inc. is the
Managing General Partner of Renaissance Capital Partners II, and its
business address is the same as that provided for Renaissance Capital
Partners II.
(6) Includes 322,035 shares of Common Stock issuable upon exercise of warrants
exercisable within sixty (60) days.
(7) Includes 21,615 shares of Common Stock issuable upon exercise of warrants
exercisable within sixty (60) days.
(8) Represents all of the shares of Common Stock beneficially owned by
Renaissance Capital Partners II Ltd. and Renaissance Capital Group, Inc.
Mr. Cleveland is the President and 66.6% majority shareholder of
Renaissance Capital Group, Inc. His business address is that of Renaissance
Capital Partners II Ltd.
(9) Includes 138,750 shares of Common Stock issuable upon exercise of options
and warrants exercisable within sixty (60) days and 16,589 shares for which
Mr. Dragone shares voting and investment power with his spouse.
(10) All of the shares of Common Stock beneficially owned by Messrs. Helderman,
Kruger, Lombardi, and Roelke are derivative securities issuable upon
exercise of options exercisable within sixty (60) days
(11) Includes 496,354 shares of Common Stock issuable upon exercise of options
and warrants exercisable within sixty (60) days.
Item 12. Certain Relationships and Related Transactions.
G. Russell Cleveland, a director of the Company, is also the President and
66.6% majority shareholder of Renaissance Capital Group ("Renaissance Group"),
which is the Managing General Partner of Renaissance. As described in greater
detail elsewhere in this Report, Renaissance is an Institutional Investor in the
Company. Prior to the Recapitalization, Renaissance held Series C Stock and
provided the Bridge Loan. As a result of the Recapitalization, the Series C
Stock was converted into Common Stock and the Bridge Loan was converted into the
Debenture Loan, the Debenture and the Bridge Warrant. (See, Part I, Item 1.
"Description of Business - 1997 Recapitalization.") Mr. Cleveland is a
beneficial owner of the Company's Common Stock acquired by Renaissance in the
Recapitalization and of those shares that Renaissance has the right to acquire
within sixty (60) days pursuant to the Bridge Warrant and the Debenture. (See,
"Beneficial Ownership Table" above). He is also the indirect beneficiary of
Renaissance in the Loan Agreement, the Security Agreements and the Stock Pledge
Agreement.
24
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Index to Exhibits
3.2 Articles of Incorporation of Registrant.**
3.3 Articles of Amendment to Articles of Incorporation Establishing
Series A Preferred Stock.*
3.4 Articles of Amendment to Articles of Incorporation Establishing
Series B Preferred Stock.*
3.5 Articles of Amendment to Articles of Incorporation Establishing
Series C Preferred Stock.*
3.6 Articles of Amendment to Articles of Incorporation Increasing the
Number of Authorized Shares.
3.7 Articles of Amendment to Articles of Incorporation Amending the
Terms of the Series C Preferred Stock.
3.8 Articles of Amendment to Articles of Incorporation Effecting the
Reverse Stock Split.
10.1 Convertible Debenture Loan Agreement, dated November 11, 1997, By
and between Biodynamics International, Inc., and its Wholly-Owned
Subsidiaries, and Renaissance Capital Partners II, Ltd.
10.2 Nine Percent (9%) Convertible Debenture of Biodynamics
International, Inc., Issued to Renaissance Capital Partners II,
Ltd., dated November 11, 1997.
10.3 Second Amendment to Security Agreement, dated December 31, 1997, By
Biodynamics International, Inc., for the benefit of Renaissance
Capital Partners II, Ltd.
10.4 Second Amendment to Security Agreement (Stock Pledge Agreement),
dated December 1, 1997, by Biodynamics International, Inc. for the
benefit of Renaissance Capital Partners II, Ltd.
10.5 Joint Venture Agreement between Biodynamics International, Inc. and
Texas Medical Products dated November 1, 1990.*
10.6 Employment Agreement between Biodynamics International, Inc. and
Karl H. Meister, dated June 12, 1996.
10.7 Employment Agreement between Biodynamics International, Inc. and
Manfred Kruger, dated June 9, 1997.
25
<PAGE>
10.8 Employment Agreement between Biodynamics International, Inc. and
George Lombardi, dated March 30, 1998.
21 Subsidiaries of Registrant.
27 Financial Data Schedule.
* Document incorporated by reference from previous Form 10-KSB filings.
** Document incorporated by reference from Exhibit 2 of Registration
Statement, On Form 20-F, of American Biodynamics, Inc., effective
October 2, 1987.
(b) Reports on 8-K
None
26
<PAGE>
SIGNATURES
In accordance with the Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on behalf by the undersigned,
thereunto duly authorized.
Date December 22, 1998
TUTOGEN MEDICAL, INC.
/s/ Karl H. Meister
------------------------------------------------
Karl H. Meister
President, Chief Executive and Financial Officer
/s/ George Lombardi
------------------------------------------------
George Lombardi
Chief Financial Officer, Treasurer and Secretary
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities indicated.
Signature Title Date
- --------- ----- ----
/s/ G. Russell Cleveland Director December 22,1998
- ------------------------
G. Russell Cleveland
/s/ Charles C. Dragone Director December 22, 1998
- ------------------------
Charles C. Dragone
/s/ J. Harold Helderman Director December 22, 1998
- -----------------------
Dr. J. Harold Helderman
/s/ Karl H. Meister Director December 22, 1998
- ------------------------
Karl H. Meister
/s/ Elroy G. Roelke Director December 22, 1998
- ------------------------
Elroy G. Roelke
27
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Tutogen Medical, Inc. and Subsidiaries
Parsippany, New Jersey
We have audited the accompanying consolidated balance sheets of Tutogen Medical,
Inc. and subsidiaries (the "Company") as of September 30, 1998 and 1997, and the
related consolidated statements of operations, cash flows and shareholders'
equity (deficiency) for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30, 1998
and 1997, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Deloitte and Touche LLP
- ---------------------------
DELOITTE AND TOUCHE LLP
Parsippany, New Jersey
November 30, 1998
F-1
<PAGE>
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND 1997
(In Thousands)
- --------------------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 357 $ 777
Accounts receivable 1,685 1,738
Inventories 4,435 2,391
Other current assets 173 94
------- -------
Total current assets 6,650 5,000
PROPERTY, PLANT AND EQUIPMENT - Net 2,995 2,996
INTANGIBLE AND OTHER ASSETS - Net 596 1,106
------- -------
TOTAL ASSETS $10,241 $ 9,102
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,010 $ 980
Accrued interest 189 267
Other accrued expenses 953 1,115
Revolving credit arrangements 895 719
Current portion of long-term debt 162 6,101
------- -------
Total current liabilities 3,209 9,182
------- -------
OTHER LIABILITIES:
Long-term debt 3,644 1,175
Other long-term obligations 17 10
------- -------
Total other liabilities 3,661 1,185
------- -------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY (DEFICIENCY) 3,371 (1,265)
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,241 $ 9,102
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(In Thousands, Except for Share Data)
- ---------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
OPERATING REVENUES:
Revenue $ 8,912 $ 8,691
Cost of revenue 4,545 7,232
------------ -----------
Gross margin 4,367 1,459
------------ -----------
OPERATING EXPENSES:
General and administrative 2,017 2,424
Distribution and marketing 1,456 2,218
Research and development 292 314
Depreciation and amortization 644 2,174
------------ -----------
Total operating expenses 4,409 7,130
------------ -----------
OPERATING LOSS (42) (5,671)
------------ -----------
LOSS IN EQUITY OF JOINT VENTURE -- 315
LOSS ON CONVERSION OF SENIOR B DEBT -- 353
OTHER INCOME (526) (2,051)
INTEREST EXPENSE 362 934
------------ -----------
(164) (449)
------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES 122 (5,222)
INCOME TAXES (Note 11) -- --
------------ -----------
NET INCOME (LOSS) $ 122 $ (5,222)
============ ===========
Average shares outstanding for basic earnings per share 5,017,178 845,972
============ ===========
Basic earnings (loss) per share $ 0.02 $ (6.17)
============ ===========
Average shares outstanding for diluted earnings per share 10,794,554 845,972
============ ===========
Diluted earnings (loss) per share $ 0.01 $ (6.17)
============ ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(In Thousands)
- --------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 122 $(5,222)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 867 3,020
Gain from settlement of interest in joint venture
(included in other income) (205) --
Equity in loss of joint venture -- 315
Stock issued for services -- 20
Deferred convertible interest expense -- 38
Foreign currency transaction gain -- (186)
Loss on conversion of Senior B Debt -- 353
Gain from conversion of debt related to litigation settlement
(included in other income) -- (2,160)
Changes in assets and liabilities net of effect of
contributions to joint venture:
Accounts receivable 53 635
Inventories (2,044) 1,064
Other current assets (79) 32
Accounts payable and accrued expenses 105 113
Other long-term liabilities 7 10
------- -------
Net cash used in operating activities (1,174) (1,968)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (182) (95)
------- -------
Net cash used in investing activities (182) (95)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Series C issued for stock options exercised -- 22
Bridge loan proceeds -- 2,036
Issuance of stock 4,185 --
Proceeds from revolving credit arrangements - net 176 719
Repayment of long-term debt (6,021) (1,161)
Proceeds from long term debt 2,574 --
Capital lease payments (23) (5)
------- -------
Net cash provided by financing activities 891 1,611
EFFECT OF EXCHANGE RATE CHANGES ON CASH 45 698
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (420) 246
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 777 531
------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 357 $ 777
======= =======
</TABLE>
(Continued)
F-4
<PAGE>
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(In Thousands)
- --------------------------------------------------------------------------------
Supplemental information on cash flows and noncash transactions is as follows:
1998 1997
SUPPLEMENTAL CASH FLOW DISCLOSURES -
Interest paid $ 410 $ 758
====== ======
SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Issuance of Series C Preferred Stock in exchange for:
Senior B Debt $ -- $1,609
Conversion of Series C Preferred Stock in exchange
for Common Stock -- 1
Issuance of common stock to settle interest in joint venture 110 --
------ ------
$ 110 $1,610
====== ======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
(Concluded)
F-5
<PAGE>
<TABLE>
<CAPTION>
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(In Thousands, Except for Share Data)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Common Cumulative
Stock Stock Paid-in Translation
($.01 par) ($.01 par) Capital Adjustment
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1996 $ 1 $ 83 $ 21,259 $ (53)
Stock issued for services -- -- 20 --
Series C issued for stock options exercised -- -- 22 --
Series C issued on conversion of debt -- -- 1,609 --
Common stock issued on conversion of Series C (1) 1 -- --
Net loss -- -- -- --
Foreign currency translation adjustment -- -- -- (206)
------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1997 -- 84 22,910 (259)
Reclassification -- 185 (185) --
Reverse stock split -- (242) 242 --
Conversion of mezzanine debt -- 26 4,159 --
Stock issued to settle termination of
interest in joint venture -- 1 109 --
Net income -- -- -- --
Foreign currency translation adjustment -- -- -- 219
------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998 $ -- $ 54 $ 27,235 $ (40)
============ ============ ============ ============
<CAPTION>
Common Preferred
Shares Shares
Accumulated Issued and Issued and
Deficit Total Outstanding Outstanding
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1996 $ (18,778) $ 2,512 8,338,240 110,603
Stock issued for services -- 20 -- --
Series C issued for stock options exercised -- 22 52,650 --
Series C issued on conversion of debt -- 1,609 -- 12,625
Common stock issued on conversion of Series -- -- 18,484,200 (123,228)
Net loss (5,222) (5,222) -- --
Foreign currency translation adjustment -- (206) -- --
------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1997 (24,000) (1,265) 26,875,090 --
Reclassification -- -- -- --
Reverse stock split -- -- (24,187,431) --
Conversion of mezzanine debt -- 4,185 2,626,301 --
Stock issued to settle termination of
interest in joint venture -- 110 50,000 --
Net income 122 122 -- --
Foreign currency translation adjustment -- 219 -- --
------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998 $ (23,878) $ 3,371 5,363,960 --
============ ============ ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-6
<PAGE>
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(In Thousands, Except for Share Data)
- --------------------------------------------------------------------------------
1. OPERATIONS AND ORGANIZATION
Tutogen Medical, Inc. with its consolidated subsidiaries (the "Company")
processes, manufactures and distributes worldwide, specialty surgical
products and performs tissue processing services for neuro, orthopedic,
reconstructive and general surgical applications. The Company's core
business is processing human donor tissue, utilizing its patented
Tutoplast(R) process, for distribution to hospitals and surgeons. Through
September 30, 1997, the Company also manufactured and distributed surgical
sutures internationally. That business ceased operations as of September
30, 1997. The Company processes at its two manufacturing facilities in
Germany and the United States and distributes its products and services to
over 40 countries worldwide.
At the Annual Meeting of shareholders of the Company held on March 30,
1998, the Company's shareholders approved the proposal to change the name
of the Company from "Biodynamics International, Inc." to "Tutogen Medical,
Inc."
In 1997, the ban on the use of human dura mater in two of the Company's
important markets had a material adverse affect on the Company's results of
operations and financial position. As a result of these financial
difficulties, the Company initiated a significant restructuring of its
capitalization for both short-term and long-term capital requirements. The
recapitalization consisted of:
o the securing of additional working capital financing in June and
September 1997 provided through bridge loans that totaled
approximately $2,036 (see Note 8);
o the conversion of all outstanding Series C preferred stock on
September 22, 1997 into common stock and warrants (see Note 9);
o the subsequent replacement of the bridge loans with a convertible
debenture loan on November 11, 1997 (see Note 8);
o the repayment in December 1997 of certain loans by the mezzanine
lenders to the Company's German subsidiary and the subsequent issuance
of common stock (see Note 8); and
o approval and implementation of a one-for-ten reverse stock split on
November 11, 1997 to accommodate the various recapitalization
transactions (see Note 9).
The result of the recapitalization has been an improved financial position
and significantly reduced interest burden. While the Company continues its
efforts to reverse the ban on human dura mater and further believes it can
recover from the resultant loss of business, there can be no assurances
that it will be able to do so or that bans in other countries might not be
invoked. Further, the Company has forecasted positive cash flows from
operations in 1999; however, there can be no assurances that these
forecasts will materialize. Management of the Company believes that the
changes instituted during fiscal 1997 and 1998 via the securing of
additional working capital, the conversion of the Series C
F-7
<PAGE>
preferred stock, the conversion of the mezzanine debt, and the
implementation of a one-for-ten stock split will result in increased
profitability and cash flow necessary to fund operations.
At September 30, 1997, the Company's 50% joint venture interest in Advanced
Haemotechnologies a manufacturer of blood transfusion and filtration
equipment, was reduced to zero as its share of losses in the Joint Venture
exceeded the value of its investment. The net loss from the joint venture
for the year ended September 30, 1997 was $138. In 1997, as a result of
negotiations to dissolve the joint venture, the Company provided for $315
as a loss in the Company's results. In June 1998, the Company and its joint
venture partner dissolved the joint venture by issuing to its partner
50,000 shares of the Company's common stock. The difference between the
previously recorded liability of $315 and the fair value of the shares
issued was recognized in income as a partial reversal of the charge, in the
amount of $205.
2. SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies of the Company are presented below.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All
intercompany transactions and balances are eliminated in consolidation.
Foreign Currency Translation - The functional currency of the Company's
German subsidiary is the Deutsche Mark ("DM"). Assets and liabilities of
foreign subsidiaries are translated at the period end exchange rate while
revenues and expenses are translated at the average exchange rate for the
year. The resulting translation adjustments are made directly to a separate
component of shareholders' equity. Gains and losses resulting from
transactions of the Company and its subsidiaries which are made in
currencies different from their own are included in income as they occur.
The Company recognized currency gains of $0 and $180 for 1998 and 1997,
respectively. The exchange rates at September 30, 1998 and 1997 were DM
1.67/U.S. Dollar and DM 1.76/U.S. Dollar, respectively.
Fair Value of Financial Instruments - The estimated fair value of amounts
reported in the consolidated financial statements have 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.
Cash and Cash Equivalents - The Company considers all highly liquid
investments purchased with a remaining maturity of three months or less to
be cash equivalents. For cash and cash equivalents, the carrying amount
approximates fair value due to the short maturity of those instruments.
Inventories - Inventories are valued at the lower of cost (weighted average
basis) or market. Work in process and finished goods includes costs
attributable to direct labor and overhead.
Property, Plant and Equipment - Property, plant and equipment are stated at
cost. Periodically, the Company evaluates the recoverability of the net
carrying value of its property, plant and equipment by estimating its fair
value. The fair value is compared to the carrying amount. Depreciation is
computed by using the straight-line method over the following estimated
useful lives of the assets:
Building and improvements 40 years
Machinery, equipment, furniture and fixtures 3-10 years
Intangible and Other Assets - Intangible assets consist of patents and
trademarks, which are stated at acquired cost less accumulated
amortization. Patents are amortized on a straight-line basis over a
F-8
<PAGE>
weighted average of the remaining patent protection periods of all existing
worldwide patents and do not exceed thirteen years. Trademarks and
organization costs are amortized straight line over the expected benefit
period of five years. The Company periodically reviews the carrying values
of goodwill and other intangible assets to assess recoverability, and
permanent impairments, if any, would be recognized in current year
operations.
Revenue and Cost of Revenue - Revenue reflected is gross revenue, with net
cash discounts and shipping included in cost of revenue. Cost of revenue
includes depreciation of $223 and $349 for the years ended September 30,
1998 and 1997, respectively. Revenue for the sale of goods or services is
recognized upon the shipment of the processed tissues or sutures.
Research and Development Costs - Research and development costs are charged
to operations as incurred.
Earnings Per Share - On September 30, 1998, the Company adopted Statement
of Financial -Accounting Standards ("SFAS") No. 128, "Earnings per Share."
This standard revises certain methodology for computing earnings per share
(EPS) and requires the reporting of two earnings per share figures: basic
earnings per share and diluted earnings per share. Basic earnings per share
are computed by dividing net income by the weighted-average number of
common shares outstanding. Diluted earnings per share are computed by
dividing net income by the sum of the weighted-average number of common
shares outstanding plus the dilutive effect of shares issuable through
deferred stock units and the exercise of stock options and warrants. In
1997, the computation of diluted loss per share is anti-dilutive therefore
the amounts reported for basic and diluted loss per share are the same.
Basic per share amounts have been adjusted by the one-for-ten reverse stock
split (Note 9) for all periods presented.
All prior period earnings per share figures presented herein have been
restated in accordance with the adoption of SFAS No. 128. For the Company,
basic earnings per share equal previously reported primary earnings per
common share.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
3. CONCENTRATION OF CREDIT RISK
The exposure to risk related to foreign currency exchange rate changes is
limited primarily to intercompany transactions. The Company currently does
not utilize forward exchange contracts or any other type of hedging
instruments.
The Company's principal concentration of credit risk consists of trade
receivables. Distribution of products and revenues are provided through a
broad base of independent distributors. One customer accounted for 13% and
0% in 1998 and 1997, respectively, of consolidated revenue. The Company
does not believe that this concentration of sales and credit risks
represents a material risk of loss with respect to the financial position
as of September 30, 1998.
F-9
<PAGE>
4. INVENTORIES
Major classes of inventory at September 30, 1998 and 1997 were as follows:
1998 1997
Raw materials $ 1,473 $ 1,021
Work in process 2,729 1,002
Finished goods 1,249 1,106
------- -------
5,451 3,129
Less reserves for obsolescence (1,016) (738)
------- -------
$ 4,435 $ 2,391
======= =======
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 1998 and 1997 consisted of
the following:
1998 1997
Land $ 482 $ 460
Buildings and improvements 2,313 2,187
Machinery and equipment 689 657
Office furniture and equipment 1,232 1,294
------- -------
4,716 4,598
Less accumulated depreciation (1,721) (1,602)
------- -------
$ 2,995 $ 2,996
======= =======
The Company's property held under capital leases of approximately $58 is
included in machinery and office equipment at September 30, 1998 and 1997,
respectively. The depreciation expense for the years ended September 30,
1998 and 1997 was approximately $324 and $466, respectively.
F-10
<PAGE>
6. INTANGIBLE AND OTHER ASSETS
Intangible and other assets at September 30, 1998 and 1997 consisted of the
following:
1998 1997
Patents $ 6,579 $ 6,241
Trademarks 1,283 1,478
------- -------
7,862 7,719
Less accumulated amortization (7,266) (6,613)
------- -------
$ 596 $ 1,106
======= =======
At September 30, 1998 and 1997, the Company has assessed the carrying
values of all intangible assets in accordance with SFAS No. 121 "Accounting
for Impairment of Long-lived Assets and for Long-lived Assets to Be
Disposed of." In 1997, the Company wrote off patents and trademarks
associated with the Company's sutures business and revalued patents to
coincide with their remaining lives. The amortization expense for the years
ended September 30, 1998 and 1997 was approximately $543 and $2,554,
respectively.
7. REVOLVING CREDIT ARRANGEMENTS
Under the terms of revolving credit facilities with three banks, all of
which expire within the next twelve months, the Company may borrow up to DM
1.850 million or approximately $1,100 for working capital needs. These
renewable credit lines allow the Company to borrow at interest rates
ranging from 7.75% to 8.5%. The borrowings under the revolving credit
agreements are unsecured.
8. LONG-TERM DEBT
Long-term debt at September 30, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Senior debt, 5.75% interest until March 30, 2008
when terms are renegotiable, due 2008 $ 1,208 $ 1,215
Bridge loans, 12% interest, due December 31, 1997 -- 2,036
Convertible debenture, 9% interest; due 2002 2,074 --
Mezzanine debt, LIBOR plus 4% interest; 7.3125%
at September 30, 1997; due 1999 -- 3,978
Convertible debenture, 9% interest; due 2002 500 --
Capital lease obligations, 8.5% interest, due 2000 (see Note 5) 24 47
------- -------
3,806 7,276
Less current portion (162) (6,101)
------- -------
$ 3,644 $ 1,175
======= =======
</TABLE>
F-11
<PAGE>
Aggregate maturities of long-term debt are $162 - 1999; $367 - 2000; $328 -
2001; $304 - 2002; $1,826 - 2003 and $819 thereafter.
In June 1997, the Company received a $1,000 short-term loan for working
capital purposes from an institutional investor in the Company. In
September 1997, the same lender provided an additional loan of $1,000. The
loans are collectively known as the "Bridge loans." On November 11, 1997,
the Bridge loans were replaced with a Convertible Debenture Loan, which
extended the maturity date to November 11, 2002. On March 23, 1998, the
Company received $500 from one of its institutional investors and issued a
convertible debenture, due in November 2002. These convertible debentures
are secured by all the assets of the Company.
The Senior debt and one of the revolving credit facilities are with a
German bank and are secured by a mortgage on the Company's German facility.
The Senior debt is repayable in monthly installments through 2008, and the
credit facility is repayable as working capital dictates. The debt has been
incurred by the Company's German subsidiary but is guaranteed by the parent
company.
Pursuant to a recapitalization agreement, and in addition to the mezzanine
lenders' agreement to participate in the Series C conversion as of year
end, the mezzanine lenders agreed to exchange such loans and accrued
interest into shares of common stock subject to the completion of a
1-for-10 reverse stock split occurring on November 10, 1997. On December
24, 1997, all of the Mezzanine debt and accrued interest (approximately
$4,100) was exchanged for 2,626,301 shares of the Company's common stock
(Note 9).
9. SHAREHOLDERS' EQUITY (DEFICIENCY)
Capital Stock - The authorized capital stock of the Company consists of
30,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock.
On July 31, 1997, 12,625 shares of Series C Preferred stock was exchanged
for all of the Senior B debt ($1,244) and accrued interest ($365) as
discussed in Note 8.
The Company sought the cooperation of its institutional investors to
provide immediate capital, and to convert the Company's existing preferred
stock and debt into equity. On August 29, 1997, the Company reached such an
agreement (the "Recapitalization Agreement") with several of its
institutional investors.
Pursuant to the Recapitalization Agreement, the institutional investors,
holding a majority of the Company's Series C Preferred Stock (the "Series C
Stock"), agreed to approve certain amendments to the terms of such stock,
which would allow the Company to immediately convert the Series C Stock
into shares of the Company's common stock, par value $.01 per share (the
"Common Stock"). The operative changes to the terms of the Series C Stock
were the deletion of its anti-dilution provisions, and the mandatory
conversion by the Board of Directors of all of the Series C Stock into
Common Stock (the "Amendments"). On September 16, 1997, the Amendments were
duly approved at a special meeting of the holders of the Series C Stock,
and the Board of Directors took action on September 22, 1997 to convert all
of the outstanding shares of Series C Stock, in the aggregate, into (i)
18,484,200 shares* of Common Stock, and (ii) three-year warrants to
purchase an additional 18,484,200 shares* of Common Stock for $4,621 (the
"Series C Warrants"), (the conversion described in this paragraph
hereinafter referred to as the "Series C Conversion").
In the Series C Conversion, one of the institutional investors received
5,475,600 shares* of Common Stock, and a Series C Warrant to purchase
approximately 5,475,600 additional shares* of Common Stock for $1,369. The
mezzanine lenders received, in exchange for their Series C Stock, an
aggregate of
F-12
<PAGE>
3,436,500 shares* of Common Stock, and Series C Warrants to purchase
3,436,500 additional shares* of Common Stock for $859. The remaining
holders of Series C Stock, in the aggregate, received 9,572,100 shares* of
Common Stock, and Series C Warrants to purchase 9,572,100 additional
shares* of Common Stock for $2,393.
One of the institutional investors further agreed to exchange the Bridge
Loans for (i) a five-year convertible debenture (the "Debenture"),
convertible into 44,132,309 shares* of Common Stock, and (ii) warrants,
exercisable at $2,016, for 8,063,963 shares* of Common Stock (the "Bridge
Loan Warrant"). Similarly, each of the mezzanine lenders agreed to exchange
its loans to the Company's German subsidiary, totaling, in the aggregate,
approximately $4,100 in principal and accrued interest as of August 1997,
(the "Mezzanine Loans"), for 2,626,301 shares* of Common Stock. The
Mezzanine Loans were converted in December 1997.
* Represents number of shares prior to the reverse stock split.
Reverse Stock Split - On November 10, 1997, the Board of Directors approved
a 1-for-10 reverse stock split (the "Reverse Split"). The Reverse Split
reduced the number of common shares outstanding at October 10, 1997 (herein
"effective date") from approximately 26,875,000 shares to 2,687,500 shares.
As of the effective date, there were outstanding options to purchase
aggregate 2,492,000 shares of common stock. The Reverse Split agreement
provides for an automatic adjustment of the number of shares and warrants
and the price per share of common stock shares that may be purchased under
the 1996 Stock Option Plan and 1992 Stock Option Plan (the "Plans"). The
Company subsequently canceled all of the outstanding stock options
previously issued under its stock option plans (the "Old Options") to
current employees and directors and replaced them with new options (the
"New Options") to remedy the negative effect of the Reverse Split on the
exercise prices of Old Options which had ranged from $0.4375 per share to
$1.10 per share before the Reverse Split, and $4.375 per share to $11.00
per share after the Reverse Split. Generally, the number of New Options
issued represented 40% of the former number of shares into which the Old
Options were exercisable before the Reverse Split. The exercise price of
the New Options is equivalent to the market price of the Common Stock on
the date of the grant of the New Options, $1.57.
Stock Options - The Company maintains two stock option plans, the 1996
Stock Option Plan (2,000,000 shares authorized) and the 1992 Stock Option
Plan (140,000 shares authorized), under which incentive and non-qualified
options have been granted to employees, directors and certain key
affiliates. Under the Plans, options may be granted at not less than the
fair market value on the date of grant. Options may be subject to a vesting
schedule and expire either four, five or ten years from grant. In
connection with a special meeting of shareholders held on November 10,
1997, the shareholders approved a one-for-ten reverse stock split which
reduced the shares of Common stock available under the aforementioned plans
to 200,000 and 140,000 shares, respectively. At said meeting, the
shareholders also approved an amendment to the 1996 Stock Option plan
increasing the shares covered to 2,000,000 shares.
F-13
<PAGE>
Changes in outstanding options for both Plans were as follows:
Number of
Common Price
Shares Per Share
September 30, 1996 Outstanding 1,478,000 $1.00 - $ 1.19
Granted 1,697,500 $0.44 - $ 0.78
Exercised (200,000) $1.10
Canceled (733,500) $0.78 - $ 1.19
--------- ---------------
September 30, 1997 Outstanding 2,242,000 $0.44 - $ 1.19
Reverse stock split (1,417,800) $0.44 - $ 13.13 *
Granted 559,000 $1.13 - $ 2.38 *
Canceled (388,700) $0.44 - $ 1.13 *
--------- ---------------
September 30, 1998 Outstanding 994,500 $1.13 - $ 13.13 *
* Amounts have been adjusted for the reverse split.
Of the outstanding options, a total of 628,750 are exercisable as of September
30, 1998.
At a special meeting of shareholders held on November 10, 1997, the granting of
a new Special Stock Option to purchase 300,000 shares to the Company's President
and Chief Executive Officer was approved. This grant replaces the previous grant
of 750,000 shares, which was reduced to 75,000 shares as a result of the
one-for-ten reverse stock split. 40% of these options become exercisable in
1997, 30% in 1998 and 30% in 1999. The option exercise price is $1.57 per share
and the options expire in 2002.
Under SFAS No. 123 Accounting for Stock-based Compensation, the pro forma
amounts if stock options and warrants were reported under the fair value method
are as follows:
1998 1997
Pro forma net income (loss) $ 21 $ (5,222)
Pro forma basic and diluted earnings (loss) per share $ 0.00 $ (6.17)
None of the outstanding options were "in-the-money" as of September 30, 1997
since the market price of the common stock was less than the exercise price of
the stock options.
Management Incentive Compensation Plan - At a special meeting of shareholders
held on November 10, 1997, the shareholders approved a one-for-ten reverse stock
split which reduced the shares of Common stock available under the 1996
Management Incentive Compensation Plan to 50,000 shares. At said meeting, the
shareholders also approved an amendment to the plan increasing the shares
covered to 500,000 shares. As of September 30, 1998, no shares have been issued
under this Plan.
F-14
<PAGE>
10. SEGMENT DATA
On September 30, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This standard requires
disclosure of financial and descriptive information about the Company's
reportable operating segments. Operating segments are the components of the
Company about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how
to allocate resources and in assessing performance.
The Company operates principally in one industry providing specialty
surgical products and tissue processing services. These operations are
performed in two geographically-determined segments: the United States and
Europe ("International"). The accounting policies of these segments are the
same as those described in the summary of significant accounting policies.
The company evaluates performance based on profit or loss from operations
before income taxes not including non-recurring and foreign exchange gains
or losses. The Company accounts for intersegment sales and transfers at
contractually agreed-upon prices.
The Company's reportable segments are strategic business units that offer
products and services to different geographic markets. They are managed
separately because of the differences in these markets as well as their
physical location.
A summary of the operations and assets by segment is as follows:
<TABLE>
<CAPTION>
1998 International United States Consolidated
<S> <C> <C> <C>
Gross revenue - third party $ 6,925 $ 2,868 $ 9,793
Less - intercompany (881) -- (881)
-------- -------- --------
Total revenue 6,044 2,868 8,912
-------- -------- --------
Depreciation and amortization 778 89 867
Interest expense 132 230 362
Net income 115 7 122
Capital expenditures 99 83 182
Total assets 7,629 22,772 30,401
Less intercompany advances -- (20,160) (20,160)
-------- -------- --------
7,629 2,612 10,241
-------- -------- --------
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
1997 International United States Consolidated
<S> <C> <C> <C>
Gross revenue - third party $ 7,594 $ 1,153 $ 8,747
Less - intercompany (56) -- (56)
-------- -------- --------
Total revenue 7,538 1,153 8,691
-------- -------- --------
Depreciation and amortization 2,914 106 3,020
Interest expense 844 90 934
Net loss (3,866) (1,356) (5,222)
Capital expenditures 79 16 95
Total assets 12,067 16,419 28,486
Less intercompany advances (4,264) (15,120) 19,384
-------- -------- --------
7,803 1,299 9,102
-------- -------- --------
</TABLE>
11. INCOME TAXES
The Company has recognized a deferred tax asset of $2,906 and $2,827, and a
corresponding valuation allowance of $2,906 and $2,827, at September 30,
1998 and 1997 respectively. The principal components of the deferred tax
asset for 1998 and 1997 relate to net operating loss carry forwards. Since
the Company has generated taxable losses, there is no recognition of the
benefit of the deferred tax asset on either a cumulative or current basis.
The Company has net operating loss carry forwards ("NOL's") for German
income tax purposes of approximately $12,180 [DM 21,430,000] which can be
carried forward indefinitely. A valuation allowance has been provided for
the full amount of these NOL's in the accompanying statements. Recent
rulings by German tax authorities could significantly reduce the amount of
NOL's available.
Under Section 382 of the Internal Revenue Code, as amended by the Tax
Reform Act of 1986, a corporation's ability to carry forward its net
operating loss and built-in losses following an "ownership change" is
limited on an annual basis to an amount equal to the product of the fair
market value of the corporation's outstanding stock (including preferred
stock) immediately before the ownership change and the long-term tax-exempt
interest rate, subject to certain adjustments for built-in gains of the
corporation. No determination has been made, at this time, as to whether an
ownership change under Section 382 occurred for income tax purposes since
it would have no effect on the financial statements in the current year.
12. COMMITMENTS
The Company currently has operating leases for its corporate offices in the
U.S. and Germany, as well as several leases related to office equipment and
automobiles. Total rental expense was $449 and $364 per year for the years
ending September 30, 1998 and 1997, respectively.
F-16
<PAGE>
Future minimum rental payments required under these leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
September 30, 1998 are as follows:
1999 $371
2000 281
2001 195
2002 114
Thereafter --
----
$961
====
******
F-17
Exhibit 10.7
EMPLOYMENT CONTRACT
-------------------
between
BIODYNAMICS INTERNATIONAL (DEUTSCHLAND) GMBH
Am Wetterkreuz 19 a
91058 Erlangen
- hereinafter referred to as "BID" -
and
Manfred Kruger
GartenstraBe 7
61389 Arnoldshain
- hereinafter referred to as "Managing Director" -
<PAGE>
-2-
ss. 1
Appointment
1. Manfred Kruger is appointed Managing Director ("Geschaftsfuhrer") of
Biodynamics International (Deutschland) GmbH ("BID"). He represents the
company always by himself.
2. The Managing Director is responsible for the worldwide operation of BID,
with the exception of the U.S.A. His rights and duties are specified by
BID's Articles of Association and the directives of the shareholders'
meeting.
3. As long as the employment relationship exists, the Managing Director agrees
to work exclusively for BID and guarantees not to provide his knowledge and
expertise to any other person or company other than BID.
ss. 2
Annual Base Salary and
Other Compensation
1. The Managing Director receives a gross annual base salary in the amount of
DM 220.000,00. Raises are subject to an annual performance review.
2. The annual base salary is payable in twelve equal amounts. Payments are
automatically transferred to the Managing Director's bank account at the
end of each month after deduction of all statutory taxes and expenditures.
3. The annual base salary includes possible overtime, Sunday work and work on
public holidays as well as any other additional work required by BID.
4. Business travel expenses are to be reimbursed according to the maximum
amount allowed by law.
<PAGE>
-3-
5. If the Managing Director is unable to work because of illness or any other
reason not caused by him, he is entitled to receive his salary for six
months.
6. Additional benefits are provided to the Managing Director in accordance
with the existing guidelines of the Biodynamics Group.
ss. 3
Management Bonus
1. The Managing Director, in accordance with the relevant regulations of the
Management-Incentive-Compensation plan for 1996, is eligible for a bonus of
up to 30% of the annual base salary. This bonus is payable at the end of
the fiscal year of BID, provided neither the employment agreement nor the
appointment as Managing Director has been terminated. The bonus is based to
50% on the business result of BID and to 50% on the overall business result
of all enterprises of Biodynamics.
2. In his first year of employment, the Managing Director receives a bonus
payment calculated pro rata temporis, based on the fiscal year of BID.
ss. 4
BID expects the Managing Director to relocate his domicile in the near future,
at the latest by 31.12.1997, to Erlangen or the close proximity of Erlangen.
BID pays full relocation expenses, including, but not limited to movement of
household furnishing, estate commissions upon home purchase or rent and travel
to the new location.
<PAGE>
-4-
ss. 5
Temporary Living Expenses for
Maintaining Two Households
BID pays all expenses for a furnished flat for a period of six (6) months,
whereby the rent may not exeed DM 1.000,00 per month.
ss. 6
Company Car
BID provides the Managing Director, in accordance with the guidelines of the
Biodynamics Group, with a car appropriate for his position, which shall be
available to him for private use as well. BID carries all expenses and
reimburses the Managing Director for all out-of-pocket expenses related to
maintenance and upkeep of the vehicle, including gas, oil, routine maintenance,
etc. The Managing Director bears the income tax for the benefit of the private
use of the car.
ss. 7
Medical Benefits
The Managing Director participates in the management level medical insurance
plan to be developed by BID management and approved.
ss. 8
Retirement Benefits
1. The Managing Director participates in the senior management level
retirement plan, starting 16.06.1998.
2. Starting with the commencement of this contract, BID will pay the annual
premium of DM 3.000,00 for the existing direct life insurance of the
Managing Director. This insurance has existed since 1984 and is to run
until 2007.
<PAGE>
-5-
ss. 9
Illness
The Managing Director has to immediately inform BID of any illness or any other
reason preventing him from working, indicating the foreseeable duration of his
absence. He also has inform BID of any pressing issues which cannot be postponed
and should be dealt with.
ss. 10
Vacation
The Managing Director is entitled to 30 working days of paid vacation.
ss. 11
Other Employment
1. The Managing Director is obligated to give all his expertise to BID. Any
other monetary employment or activity which interferes with such employment
has to be approved by BID beforehand.
2. The same is true for any other conflict of interest situation such as
participation in another company, membership on the board of directors of
another company, and any other professional agreement or teaching
engagement.
ss. 12
Employment Inventions
1. The Managing Director agrees to offer BID all rights he might acquire in
connection with inventions or improvements, if those rights are the result
of his work for BID and if they touch BID's interests, either directly or
indirectly.
2. The Managing Director will immediately declare to BID all inventions made
by him and offer BID the use of such inventions permissible.
<PAGE>
-6-
3. If BID uses those inventions, the statute regarding employee inventions
("Gesetz ueber Arbeitnehmererfindungen") of July 25, 1957 applies.
ss. 13
Secrecy
1. The Managing Director has a duty of secrecy which extends to everything he
learned about or what was made known to him during the course of his
employment. Such duty of secrecy stays in force even after termination of
the Employment. It does not effect any legal duty to disclosure.
2. Trade and business secrets include specifically, but not exclusively,
research and development results, information regarding supply sources of
BID, any product information such as content and production, regardless of
wether the product or production process is legally protected.
3. Any and all documents, notes and records which the Managing Director took
or kept during the course of his employment are owned by BID and have to be
surrendered to BID upon request or, at latest, upon termination of
employment. Whenever BID has an interest that the content of such notes or
records is kept secret, the notes and records can only be taken off BID's
premises upon written permission to do so.
4. The Managing Director agrees not to publish anything concerning the
interests of BID unless he has written permission to do so.
ss. 14
Duration of Employment Contract,
Termination Clause
1. The employment contract becomes effective on the 16.06.1997 and will be
in force for an indefinite period of time.
2. The employment contract may be terminated with a notice period of twelve
months to the end of each calendar quarter. This period is equally
applicable if the Managing
<PAGE>
-7-
gives notice of termination to BID. Any notice of termination has to be
given in writing.
3. Upon notice of termination, BID shall have the right to grant the Managing
Director leave of absence and relieve him of his duties. Such leave of
absence shall not effect any of the rights and duties of the parties.
ss. 15
Final Provisions
1. Any changes or amendments to this employment contract have to be in writing
in order to be legally binding for both parties.
2. If this contract contains provision which are found to be illegal or void,
the remaining provisions of this contract shall not be affected and
continue to be valid and legally binding to the extend possible.
3. Place of performance for all obligations and the forum selected for all
claims connected with this contract shall exclusively be Erlangen.
Dated Erlangen, June 9, 1997
/s/ KARL H. MEISTER /s/ MANFRED KRUGER
- ---------------------------------- ----------------------------------
Biodynamics International Manfred Kruger
(Deutschland) GmbH
represented by the shareholder
Biodynamics International Inc.
<PAGE>
Annex
To the Employment Contract
between
Biodynamics International (Deutschland) GmbH
and
Mr. Manfred Kruger
dated June 9, 1997
With respect to the employment contract concluded between Biodynamics
International (Deutschland) GmbH and Mr. Manfred Kruger, dated June 9, 1997,
Biodynamics International, Inc., New Jersey (hereinafter referred to as "BDYN")
agrees to the following:
1. BDYN grants to Mr. Kruger the option to purchase 200.000 shares of BDYN to
the stock exchange price as of the 16.06.1997. A portion of these shares of
25% each will be offered by BDYN to Mr. Kruger at the end of 16.06.1998,
16.06.1999 and 16.06.2000, provided that at the respective date neither the
employment contract between Biodynamics International (Deutschland) GmbH
and Mr. Manfred Kruger nor the appointment of Mr. Kruger as Managing
Director of this firm has been terminated.
2. BDYN furthermore grants to Mr. Kruger each year the option to purchase
about 35.000 shares, in accordance with the regulations of the
Management-Incentive-
<PAGE>
-2-
Compensation plan for 1996, provided that the business objectives annually
agreed upon have been accomplished. The shares will be offered to Mr.
Kruger in four installments of 25% each, the provisions of 1., above, shall
apply accordingly.
Dated Erlanger, 09.06.1997
/s/ KARL H. MEISTER
- -------------------------------
Biodynamics International, Inc.
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is hereby made and entered
into as of the 30th day of March 1998, by and between Biodynamics International,
Inc., a Florida corporation (the "Employer"), and George Lombardi, a resident of
the Stare of New Jersey (the "Employee").
WITNESSETH:
1. Employment. The Employer hereby employs the Employee and the Employee hereby
accepts such employment, upon the terms and subject to the conditions set forth
in this Agreement.
2. Term. The term of the employment under this Agreement shall be for an initial
two-year period beginning as of the date of this Agreement and terminating on
March 30, 2000, unless such employment is otherwise terminated as provided in
paragraphs 8, 9 and 10 of this Agreement.
3. Compensation; Reimbursement, Etc.
(a) The basic compensation to the Employee shall be payable bi-weekly
based upon a calendar-year annual base salary of $125,000 (the "Annual Base
Salary").
(b) The Employee shall be eligible for an annual bonus in an amount of up
to twenty-five (25%) of his Annual Base Salary (the "Annual Bonus"). The amount
of such Annual Bonus shall be determined by the Employer's Compensation and
Stock Option Committee, based fifty percent (50%) on "Employee Performance", and
fifty percent (50%) on "Company Performance", as determined in accordance with
the Employer's 1996 Management and Compensation Plan, a copy of which is
attached hereto.
(i) The Employee's Annual Bonus shall be pro-rated for the Employer's
fiscal year ending September 30, 1998.
(c) The Employee shall receive a non-qualified, stock option for the
purchase of 100,000 shares of the Employer's common shares, par value $.01 per
share (the "Common Shares"), (the "Employee's Option"). The Employee's Option
shall be evidenced by an option agreement containing such terms and provisions
as the Employer's Board of Directors or Compensation and Stock Option Committee
shall deem appropriate. Notwithstanding anything in said option agreement to the
contrary: (i) the per share exercise price of the Employee's Option shall be the
fair market value of the Common Shares on the date of this Agreement; (ii)
twenty-five percent (25%) of the shares subject to the Employee's Option shall
be fully-vested and immediately exercisable as of the date of grant; (iii) the
remaining 75,000 shares subject to the Employee's Option shall vest and become
exercisable on three equal annual amounts, commencing on the first anniversary
from the date of grant; (iv) the Employee's Option shall expire on the tenth
anniversary of the date on which it was granted unless earlier terminated as
provided in paragraph 10; (v) the Employee's Option shall be non-transferable,
except by will or by operation of the laws of descent and distribution and (vi)
the Employee Option shall contain such other terms and provisions as shall be
substantially similar to the terms and provisions of stock options granted to
other executive officers of the Employer. The Employer represents and warrants
that the Common Shares issuable upon exercise of the Employee Option are or will
be covered by an effective registration statement on Form S-8 or other
applicable form within 90 days. The Employer agrees to use its best efforts to
maintain the effectiveness of such registration until such
<PAGE>
time as the Employee Option has terminated in accordance with its terms or all
of the Common Shares issuable under the Employee Option have been issued.
(d) The Employee shall be entitled to such other benefits as the Board of
Directors and/or the Compensation and Stock Option Committee may from time to
time provide to him, which shall include the entitlement to participation in the
Employer's 401K Plan (available wit 50% Employer match up to established IRS
limits), participation in the Employer's group medical, and dental plans, and
life insurance. Seventy-five percent (75%) of the premiums on any such insurance
benefits shall be paid by the Employer, and the remaining twenty-five percent
(25%) shall be paid by the Employee from payroll deductions.
4. Duties. The Employee is engaged as the Chief Financial Officer, Corporate
Secretary and Treasurer of the Employer, and he shall have such duties
consistent with such offices as may from time to time be reasonably assigned to
him by the Board of Directors of the Employer and provided for in the bylaws of
the Employer. Employee's office shall be located at the Employer's executive
office (currently in Parsippany, N.J.).
5. Extent of Services. During the term of his employment under this Agreement,
the Employee shall devote such time and efforts to the business of the Employer,
as may be reasonably necessary in the normal course of business.
6. Performance Review. A review of the Employee's performance and salary shall
be held six months from the commencement date of his employment, and annually
thereafter. Such review may not result in a reduction of the Employee's salary
and/or benefits under this Agreement.
7. Vacation and Days Off. The Employee shall be entitled to such vacation time
during each fiscal year of the Employer as he may qualify for, in accordance
with any vacation policy from time to time established by the Employer's Board
of Directors. Notwithstanding the foregoing, the Employee shall be entitled to
an annual vacation period of not less than three (3) weeks, during which time
his compensation shall be paid in full.
8. Disability, Illness and Incapacity.
(a) During the term of this Agreement, for any period of disability,
illness or incapacity which renders the Employee at least temporarily unable to
perform the services required under this Agreement, the Employee shall receive
his full compensation as set forth in paragraph 1 of this Agreement, provided
however, if the Employees disability, illness or incapacity extends beyond a
period of sixty (60) consecutive days, the Employee shall not be entitled, after
the expiration of such sixty (60) day period, to any further compensation under
paragraph 3(a) until he returns to full-time service hereunder, but he shall be
entitled only to such disability payments as may be provided by a disability
insurance policy or policies, purchased by the Employer, as provided in
paragraph 3(d) of this Agreement.
(b) Successive periods of disability, illness or incapacity will be
considered separate unless the later period of disability, illness or incapacity
is due to the same or related cause and commences less than one year from the
ending of the previous period of disability.
2
<PAGE>
(c) If and when the period of disability, illness or incapacity of the
Employee totals 180 days, his employment with the Employer shall terminate.
Notwithstanding the foregoing, if the Employee and the Employer agree, the
Employee may thereafter be employed by the Employer upon such terms as may be
mutually agreeable.
(d) Any dispute regarding the existence, extent or continuance of the
disability, illness or incapacity shall be resolved by the determination of a
majority of three competent doctors who are not employees of the Employer, one
of which shall be selected by the Employer, one of which shall be selected by
the Employee and a third selected by the other two doctors. The doctors' fees
and other charges associated with such determination shall be paid by the
Employer.
9. Death.
(a) All rights of the Employee hereunder shall terminate upon his death,
except that the Employer shall pay to the estate of the Employee such
compensation and other amounts as would otherwise have been payable to the
Employee through the end of the month in which his death occurs. The Employer
shall have no additional financial obligation under this Agreement to the
Employee or his estate.
10. Other Terminations.
(a) Either the Employee or the Employer may terminate the employment of the
Employee hereunder, upon written notice given ninety (90) days prior to the end
of the term provided for in paragraph 2 of this Agreement, or any extension
thereof. The term of the Employee's employment after the initial term shall be
automatically renewed for successive one (1) year terms unless otherwise
terminated by written notice.
(i) If the Employee gives notice pursuant to paragraph 10(a) above,
the Employer shall have the right to immediately relieve the Employee, in
whole or in part, of his duties under this Agreement, provided however,
there shall be no reduction in the Employee's compensation until expiration
of the ninety-day period at which time compensation shall cease.
(b) The Employer may terminate the employment of the Employee hereunder
without the notice provided for in subparagraph (a) of this paragraph 10, for
any of the following reasons:
(i) Employee's failure to promptly and adequately perform the duties
assigned to him by the Employer pursuant to paragraph 4 above, including
but not limited to failure to folloW the direction of the Board of
Directors of the Employer, or of any supervisors or superiors of Employee;
(ii) Employee's material breach of any provision of this Agreement; or
(iii) other good cause (as defined below).
(c) The term "good cause" as used in this Agreement shall include, but
shall not necessarily be limited to, habitual absenteeism, a pattern of conduct
which tends to hold the Employer up to ridicule in the community, conviction of
any crime of moral turpitude, abuse of and substantial
3
<PAGE>
dependence on, as reasonably determined by the Board of Directors of the
Employer, on any addictive substance, including but not limited to alcohol,
amphetamines, barbiturates, methadone, cannabis, cocaine, PCP, THC, LSD or
illegal or narcotic drugs. If any determination of abuse and substantial
dependence by the Board of Directors is disputed by the Employee, the parties
hereto agree to abide by the decision of a panel of three physicians who are not
employees of the Employer, one of which shall be selected by the Employer, one
of which shall be selected by the Employee and a third selected by the other two
(2) doctors. The Employee agrees to make himself available for and submit to
examinations by such physicians as may be directed by the Employer. Failure to
submit to any such examination shall constitute a breach of a material part of
this Agreement. The doctors' fees and other charges associated with such
determination shall be shared equally by the Employer and the Employee.
(d) Employee may terminate this Agreement for "Good Reason" which shall
result from (i) a change of control of the Company, i.e. as a result of a merger
or sale of the assets so that over 50% of the outstanding shares are held by a
new investor or group of investors (ii) the Company's executive offices are
relocated more than fifty (50) miles from Parsippany, New Jersey or (iii) the
Employer's material breach of any of its obligations under this Agreement.
(e) If the Employee's employment with the Employer is terminated pursuant
to paragraph 10(b), the Employer shall pay to the Employee any compensation
earned but not paid to the Employee prior to such termination. Such payment
shall be in full and complete discharge of any and all liabilities or
obligations of the Employer to the Employee hereunder, and the Employee shall be
entitled to no further benefits under this Agreement, except as otherwise
specifically provided in paragraph 3 of this Agreement. If the Employee's
employment with Employer is terminated by Employer for a reason (other than as
set forth under paragraph 10(b)) or by Employee pursuant to paragraph (d),
Employer will compensate Employee as severance pay the lesser of (i) six month
salary or (ii) remainder of the term of this Agreement. The severance will be
payable at the Employee's current base salary at time of termination, payable in
six equal installments over a three month period.
11. Disclosure.
(a) The Employee agrees that he will fully disclose, and disclose only to
the Employer, all ideas, methods, plans, developments, improvements or
patentable inventions, of any kind, which relate directly or indirectly to the
business of the Employer, and which were known, made or discovered by the
Employee during the performance of his duties under this Agreement, at any time
during the term of his employment by the Employer, and for a period of twelve
(12) months after the termination of his employment with the Employer.
(b) All disclosures are to be made promptly after conception or discovery
of any such idea, method, plan, development, improvement or invention.
(c) Nothing in this paragraph 11 shall be construed as requiring any
communication to the Employer of any such idea, method, plan, development,
improvement or invention, if such are lawfully protected by any other lawful
prohibition against such communication.
(d) Any such idea, method, plan, development, improvement or invention,
which the Employee is obligated to disclose to the Employer under this paragraph
11, shall be the property of the Employer, and the Employee agrees that he will
provide any and all assistance to the Employer in
4
<PAGE>
making any patent applications or other applications for obtaining exclusive
rights in, and will do all other things that may be reasonably necessary to vest
in the Employer or its assigns, all such ideas, methods, plans, developments,
improvements or inventions.
12. Confidentiality. The Employee agrees to keep in strict secrecy and
confidence any and all information the Employee assimilates or to which he has
access during his employment by the Employer and which has not been publicly
disclosed and is not a matter of common knowledge in the fields of work of the
Employer. The Employee agrees that both during and after the term of his
employment by the Employer, he will not, without prior written consent of the
Employer, disclose any such confidential information to any third person,
partnership, joint venture, company, corporation or other organization.
13. Non-competition and Non-solicitation.
(a) During the term of this Agreement and for a period of one (1) year
after the termination of his employment with the Employer, pursuant to
paragraphs 10(a) or 10(b), and except as contemplated herein, the Employee
agrees to refrain from, and shall not:
(i) within the State of New Jersey or within any other state or
foreign country in which the Employer maintains a branch office, or
conducts business (the "Restricted Territory"):
A. Enter into, engage in, be employed by, or consult with any
business in competition with the business of the Employer as it is
then carried on,
B. Sell to, market to, produce for, or otherwise deal with any
customer of the Employer.
(ii) Solicit any of the employees of the Employer to terminate their
employment;
(iii) Accept employment with or seek remuneration from any of the
clients or customers of the Employer with whom the Employer did business
during the term of the Employee's employment.
(b) The solicitation or acceptance of orders outside of any Restricted
Territory, for shipment to, delivery in, or service in any Restricted Territory,
shall also constitute engaging in business within the Restricted Territories in
violation of subparagraph (a)(i) of this paragraph.
(c) The restrictions of this paragraph 13 shall extend to any and all
business activities of the Employee, whether as an independent contractor,
partner or joint venturer, or as an officer, director, stockholder, agent,
employee or salesman for any person, firm, partnership, corporation or other
entity, or otherwise.
(d) The restrictions of this paragraph 13 shall not be violated by the
ownership of not more than two percent (2%) of the outstanding securities of any
company whose stock is traded on a national securities exchange or is quoted in
the Automated Quotation System of the National of Securities Dealers (NASDAQ).
5
<PAGE>
(e) The period of time during which the Employee is prohibited from
engaging in certain business practices pursuant to paragraph 13(a) shall be
extended by any length of time during which the Employee is in breach of such
covenants.
(f) It is understood, by and between the Employer and the Employee, that
the restrictive covenants set forth in this paragraph 13 are essential elements
of this Agreement, and that, but for the agreement of the Employee to comply
with such covenants, the Employer would not have agreed to enter into this
Agreement. Such covenants by the Employee shall be construed as agreements
independent of any other provision in this Agreement. The existence of any claim
or cause of action of the Employee against the Employer, whether predicated on
this Agreement, or otherwise, shall not constitute a defense to the enforcement
by the Employer of such covenants.
(g) It is agreed by the Employer and the Employee that, if any portion of
the covenants set forth in this paragraph 13 are held to be invalid,
unreasonable, arbitrary or against public policy, such portion of such covenants
shall be considered divisible both as to time and geographical area. The
Employer and Employee agree that, if any court of competent jurisdiction
determines the specified time period or the specified geographical area
applicable to this paragraph 13 to be invalid, unreasonable, arbitrary or
against public policy, a lesser time period or geographical area which is
determined to be reasonable, nonarbitrary and not against public policy may be
enforced against the Employee. The Employer and the Employee agree that the
foregoing covenants are appropriate and reasonable when considered in light of
the nature and extent of the business conducted by the Employer.
14. Specific Performance. The Employee agrees that damages at law will be an
insufficient remedy to the Employer, and that the Employer would suffer
Irreparable damage, if the Employee violates the terms of paragraphs 11, 12
and/or 13 of this Agreement. Accordingly, it is agreed that the Employer shall
be entitled, upon application to a court of competent jurisdiction, to obtain
injunctive relief to enforce the provisions of such Paragraphs, which injunctive
relief shall be in addition to any other rights or remedies available to the
Employer.
15. Compliance with other Agreements. The Employee represents and warrants that
the execution of this Agreement and performance of his obligations hereunder
will not conflict with, result in the breach of any provisions of or the
termination of or constitute a default under any agreement to which the Employee
is a party or by which the Employee is or may be bound.
16. Waiver or Breach. The waiver by the Employer of a breach of any of the
provisions of this Agreement by the Employee shall not be construed as a waiver
of any subsequent breach by the Employee.
17. Binding Effect; Assignment. The rights and obligations of the Employer under
this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of the Employer. This Agreement is a personal employment
contract and the rights, obligations and interests of the Employee hereunder may
not be sold, assigned, transferred, pledged or hypothecated.
18. Entire Agreement. This Agreement and the option agreement containing the
terms and provisions of the Employee's Option contains the entire agreement and
supersedes all prior agreements and understandings, oral or written, with
respect to the subject matter hereof. This Agreement may
6
<PAGE>
be changed only by an agreement in writing signed by the party against whom any
waiver, change amendment, modification or discharge is sought.
19. Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect the meaning or interpretation of this
Agreement.
20. Governing Law. This Agreement shall be construed and enforced in accordance
with the laws of the Stare of New Jersey.
21. Notices. Any notice required or permitted to be given under this Agreement
shall be sufficient if in writing and if sent by certified or registered mail,
first class, return receipt requested, to the parties at the following
addresses:
To the Employer: Biodynamics International, Inc.
1719 Route 10, Suite 314
Parsippany, New Jersey 07054
To the Employee: George Lombardi
106 Byrd Avenue
Bloomfield, N.J. 07003
IN WITNESS WHEREOF, the parties hereto have executed this Agreement this
30th day of March, 1998.
EMPLOYER:
BIODYNAMICS INTERNATIONAL, INC.
ATTEST
/s/ Mathew Joseph By: /s/ Karl H. Meister
- ------------------------------ ------------------------------
Karl H. Meister, President
EMPLOYEE:
Witnesses as to Employee:
/s/ George Lombardi
- ------------------------------ -----------------------------------
George Lombardi
7
<PAGE>
AMENDMENT
TO
EMPLOYMENT AGREEMENT
This amendment to an employment agreement date March 30, 1998 by and
between Tutogen Medical, Inc. (formerly Biodynamics International, Inc.) and
George Lombardi is hereby adopted this 18th day of December 1998.
Paragraph 10(e) is hereby amended in its entirety as follows:
(e) If the Employee's employment with the Employer is terminated pursuant
to paragraph 10(b) the Employer shall pay to the Employee any compensation
earned but not paid to the Employee prior to such termination. Such payment
shall be in full and complete discharge of any and all liabilities or
obligations of the Employer to the Employee hereunder, and the Employee shall be
entitled to no further benefits under this Agreement, except as otherwise
specifically provided in paragraph 3 of this Agreement. If the Employee's
employment with Employer is terminated by Employer for a reason other than as
set forth under paragraph 10(b) or by Employee pursuant to paragraph (d)(i) or
(iii), Employer will compensate Employee as severance pay the lesser of (i) six
month salary or (ii) remainder of the term of this Agreement. The severance will
be payable at the Employee's current base salary at time of termination, payable
in six equal installments over a three month period.
Notwithstanding anything to the contrary in the agreement, if Employee's
employment is terminated by Employer following a change of control of the
Company or Employee terminates his employment as a result of paragraph (d)(ii)
brought about by the change in control, Employer will compensate Employee as
severance pay 12 months salary. The severance will be payable at the Employee's
current base salary at time of termination, payable in six equal payments over a
six month period. Employee shall be entitled to receive medical benefits during
the six month period. If Employee's employment is terminated by Employer as
aforesaid or by Employee pursuant to paragraph (d)(ii), Employee agrees to
continue in the employ of the Employer for a period of no more than thirty days,
if needed, after the change of control to assist in any corporate transition.
EMPLOYER:
TUTOGEN MEDICAL, INC.
ATTEST:
/s/ Herb Epstein By: /s/ Karl Meister
- ------------------------------ ------------------------------
Karl Meister, President
EMPLOYEE:
Witness as to Employee:
/s/ George Lombardi
- ------------------------------- -----------------------------------
George Lombardi
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE (IN THOUSANDS, EXCEPT PER SHARE DATA) CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE CONDENSED FINANCIAL STATEMENTS FOR THE YEAR ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Sep-30-1998
<PERIOD-START> Oct-01-1997
<PERIOD-END> Sep-30-1998
<CASH> 357
<SECURITIES> 0
<RECEIVABLES> 1,850
<ALLOWANCES> (165)
<INVENTORY> 4,435
<CURRENT-ASSETS> 6,650
<PP&E> 4,716
<DEPRECIATION> (1,721)
<TOTAL-ASSETS> 10,241
<CURRENT-LIABILITIES> 3,209
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 3,317
<TOTAL-LIABILITY-AND-EQUITY> 10,241
<SALES> 8,912
<TOTAL-REVENUES> 8,912
<CGS> 4,545
<TOTAL-COSTS> 4,545
<OTHER-EXPENSES> 3,883
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 362
<INCOME-PRETAX> 122
<INCOME-TAX> 0
<INCOME-CONTINUING> 122
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 122
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.01
</TABLE>
