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, 1999
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the transition period from _________ to _________
Commission File Number: 0-16128
TUTOGEN MEDICAL, INC.
(Name of Small Business Issuer in Its Charter)
Florida 59-3100165
(State of Incorporation) (IRS Employer Identification No.)
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, 1999 were
$11,464,000.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates (approximately 1,700,000 shares), computed by reference to the
average bid and asked prices of such common equity, was approximately
$20,320,000 as of November 30, 1999.
As of November 30, 1999, there were 11,211,246 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., 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, and distributes specialty
surgical products and services to over 40 countries through a worldwide
distribution network. Another subsidiary, Tutogen Medical (United States), Inc.,
was formed in 1994 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 five 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.
The Tutoplast(R) processed allografts have been used successfully in over
900,000 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
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
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that could cause rejection or allergic reaction. Once packaged, tissues are
terminally sterilized by low dosage radiation.
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 carefully screened 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 15
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 tissues 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 55% 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. A major effort is
underway to increase penetration in the U.S. market, which accounts for 55% of
the world market for biomaterials. The Company's marketing efforts in the U.S.
in recent years have focused on creating a market for the pericardium and fascia
lata tissues from donor tissues sourced in the U.S. In addition, the strategic
decision was made to re-open the U.S. market for 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 bone markets. Presently, allografts are
provided to hospitals in the U.S. through 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
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exclusive distribution agreements with other medical device companies, under the
Tutoplast(R) label, for specialized indications. One such distribution agreement
with IOP, Inc., which has been in effect since 1995, is for Tutoplast(R)
implants for opthalmic use. A second project, for use of Tutoplast(R) fascia
lata in urological and gynecological indications, was concluded in January 1998
with Mentor Corporation ("Mentor"). In July 1999, a third project was concluded
with Mentor for use of Tutoplast(R) Pericardium in urological and gynecological
indications. In 1999, Mentor has accounted for 18% and 40%, respectively, of the
Company's total and U.S. revenues.
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 fiscal 1998.
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 2000. The
Company has an arrangement with Regeneration Technologies, Inc. ("RTI") in the
U.S., whereby RTI will supply soft tissue to the Company's domestic operation
and the Company's international division will supply cortical bone shafts to
RTI. 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.
Back Order
While Tutogen worldwide has back orders on certain allograft tissue types
and tissue sizes, the allograft demand is most significant in the U.S. market.
The U.S. is the largest market in the world for allografts and has historically
represented the Company's largest market. The Company currently has back orders
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, 1999, the Company's back order was
approximately $3,500,000. Because orders may be canceled or rescheduled, the
Company believes that backlog is not always an accurate indicator of results of
operations for specific future periods.
Competition
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Tutogen is a world leader in safe bioimplants for tissue repair. Tutogen's
competitive advantage is based on its 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 25 years ago, more than
900,000 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 impressive record for safety in the
surgical community, gives the Company a competitive advantage over its
competitors. However, due to government regulation, disrupted sources of
availability and increasing competition, there can be no assurance that the
Company will be able to continue to compete successfully. In addition, there can
be no assurance that in the future the Company's allografts will be able to
compete successfully with newly developed tissue substitutes, which are being
developed by other companies.
Growth Strategy
The Company estimates the worldwide market for its present products to be
about $1 billion. The Company's existing tissue supply network, established
processing facilities and proven Tutoplast(R) technology will provide the
foundation for continuation of current growth into fiscal 2000 aided by new
sources of tissue, new applications and products and expansion into new markets.
Tissue Supply and Processing
The Company has an established network in the United States and Europe for
tissue supply that meets or exceeds the high standards set by the U.S. Food and
Drug Administration ("FDA"), the German Health Authority ("BfArM") and other
European regulatory agencies. This network incorporates a reliable logistic
system that provides for a continuous supply of tissue with complete
traceability.
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Individual reference samples are stored for at least 12 years. These high
standards of recovery permit such tissue to be imported into the U.S. The
Company is engaged in an aggressive program to expand its network of tissues.
Tutogen operates two processing facilities, one in Neunkirchen, Germany
and a second in Alachua, Florida. The German facility is registered as a
pharmaceutical and medical device manufacturer and has ISO 9001 certification.
The Alachua facility is an accredited member of The American Association of
Tissue Banks ("AATB"). The recent expansion of the Alachua facility and a major
expansion and modernization now underway at the Neunkirchen facility should
enable the Company to keep pace with growing demands for the next several years.
Xenografts
The world-wide demand for allografts, tissue derived from human sources,
are anticipated to represent a significant challenge. Faced with this
constraint, the Company embarked on a program in 1998 to develop xenografts,
tissue derived from animals, as an allograft substitute. Xenografts processed
using the Company's proprietary Tutoplast(R) process, have their biomechanical
properties and remodeling capacity preserved with complete removal of
antigenicity and infection risk. Studies have shown, that Tutoplast(R) processed
xenografts are equivalent to allografts. To date, the Company has received
CE-Marks, the European equivalent to an FDA medical device approval, for bovine
pericardium, bovine cancellous bone and bovine compact (cortical) bone which
permits distribution, throughout Europe, of products derived from such tissues.
First shipments were made during the third quarter of fiscal 1999. Introduction
of xenograft products into the U.S. market is expected to take place during
2000, once FDA 510(k) applications have been accepted.
The superior biomechanical properties of these bovine tissues combined
with the absence of those supply constraints associated with allografts, permits
the use of such tissues, and products derived therefrom, in areas that cannot be
optimally addressed with human tissue.
New Applications and Products
A major component to Tutogen's growth strategy will continue to focus on
the introduction of new products and applications for Tutoplast(R) processed
tissues. In November, 1999 the Company introduced its Tutofix(R) pins produced
from bovine compact bone processed using the Company's proprietary Tutoplast(R)
process. The Company estimates the worldwide market for fixation pins to be $1.3
billion. Compact bone is extremely strong, able to withstand high compression
and shear forces and can be machined with precision. The Company believes that
Tutofix(R) pins will be a desirable alternative to metal pins. Pins are
typically used for the fixation of bone, forearm fractures and small fractures
of the hand and foot. Unlike metal pins which generally subject a patient to a
second surgery for pin removal, or synthetic absorbable pins that resorb
independently of the fracture healing process, Tutofix(R) pins are
osteoconductive and are absorbed and replaced by new bone in the normal course
of healing. Tutofix(R) pins have been used successfully in a number of cases for
treatment of Collee's fracture, the most common type of forearm fracture.
The high and predictable stability of bovine bone permits the manufacture
of devices that can be substituted for metallic or synthetic implants. Examples
are spinal implants for cervical and lumbar interbody fusion and other bone
fixation devices like screws and plates.
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Several patents and trademarks have been submitted in 1999 in order to
assist and accomplish the goals for expansion and growth.
Expansion into New Markets
Tutoplast(R) processed tissues and products have application in numerous
surgical indications making it very difficult, if not impossible, to fully serve
all market niches. The Company continues to enjoy high degrees of success in two
such niches, opthamology and urological/gynocological with its strategic
partners IOP and Mentor Corporation respectively and will likely establish
similar relationships to address additional markets.
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 $418,000 in 1999 as compared with $292,000 in 1998. 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, accounted for 18% or more of the Company's net sales for the
year ended September 30, 1999. All other customers individually accounted for
less than 10% of the Company's net sales for the fiscal year 1999. The Company
has Exclusive Distribution Agreements with Mentor granting a license to
exclusively distribute the Tutoplast(R) Processed Fascia Lata and Pericardium in
their field of use, which is defined as all urological and gynecological
applications and procedures in the United States and certain foreign markets.
Patents, Licenses and Trademarks
Wherever possible, Tutogen seeks to protect its proprietary information,
products, methods and technology by obtaining patent and trademark protection.
Tutogen holds three patents and has registered trademarks covering 14 countries
worldwide. In the United States, the Company has three FDA accepted 510(k)
applications for its various products or processes. The Company's patent in
France relating to its Tutoplast(R) process expire in February 2000. The United
States and UK patents expired in 1999. 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
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Tutogen has contracts to receive, process and provide tissues worldwide.
Every country has its own regulatory requirements that are constantly under
review and subject to change. The Company believes it currently complies with
all appropriate governmental requirements and standards in each country where it
does business. There can be no assurance that changing governmental
administration or laws will not negatively impact the Company.
In Germany, allografts are classified as drugs and the German government
regulates Tutogen's tissue processing and distribution within Germany under a
pharmaceutical license. 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.
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 has used outside third
parties to perform all sterilization.
In view of the engagement of 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.
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.
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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 may therefore have a significant
effect on the Company's dollar results. Transactions with foreign suppliers and
foreign customers could be materially adversely affected by possible import,
export, tariff and other restrictions that may be imposed by the United States
or other countries.
Conversion of Debt
On January 28, 1999, one of the Company's institutional investors
converted its Convertible Debenture and accrued interest and expenses
(approximately $2,162,000) into 4,600,507 shares of the Company's common stock.
In consideration of the agreement to convert in advance of maturity, the Company
issued to the investor 149,334 common shares as prepayment for one year's
interest on the Debenture and agreed to amend its outstanding Stock Purchase
Warrants, totaling 1,353,957, by reducing the exercise price from $2.50 per
share to $1.25 per share if such warrants are exercised prior to June 30, 2000,
after which date such warrants shall revert to their initial terms. A loss on
the conversion of $187,000 has been included in net income for the year.
Employees
As of September 30, 1999, the Company employed a total of 96 full-time and
17 part-time employees, of whom 23 were employed in the United States and the
remainder in Germany. Management believes its relations with its employees are
good.
Item 2. Description of Property.
United States. The Company's domestic facilities are located in New Jersey
and Florida. In Parsippany, New Jersey, the Company leases approximately 4,400
square feet of office space in which its administrative and sales functions are
performed. The lease expires in April 2002 and has a base rent of approximately
$6,800 per month. The Company's processing plant in Alachua, Florida has
expanded from approximately 4,900 square feet to 6,200 square feet of leased
space. The Florida lease expires in 2002 and rents for approximately $7,400 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 of
office space in which its international administrative and sales functions are
performed. The Erlangen lease expires in the year 2000 and rents for
approximately $19,900 per month. The Company will consolidate the administrative
and sales functions into the Company's processing plant in Neunkirchen, Germany
at the expiration of the lease. The Company's processing plant in Neunkirchen
consists 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, 1999.
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Item 4. Submission of Matters to a Vote of Security Holders
There was no submission of matters to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
Market Information
The Company's Common Stock is 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 1998 High Low
----------- ---- ---
First Quarter $ 1.25 $ 0.88
Second Quarter 2.81 0.94
Third Quarter 3.13 1.68
Fourth Quarter 2.56 1.19
Fiscal 1999
-----------
First Quarter $ 1.94 $ 0.94
Second Quarter 3.81 1.13
Third Quarter 1.43 1.00
Fourth Quarter 1.50 0.88
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, 1999, the approximate number of holders of record of
the Company's Common Stock was 378. The Company estimates that there are
approximately 2,400 beneficial holders.
Dividends
The Company has not paid any cash dividends to date and does not
anticipate or contemplate paying cash dividends in the foreseeable future until
earnings would generate funds in excess of those required to provide for the
growth needs of the Company.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Revenue and Cost of Revenue
Revenue for the year ended September 30, 1999 increased 29% to $11.5 million
from $8.9 million in 1998. The US operation revenues were $5.2 million or 80%
higher than 1998. This achievement was a direct result of its strategic
alliances with the Mentor Corporation and IOP, Inc. The International operation
had revenues of $6.3 million or an increase of 4% from 1998.
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Gross margins for the year ended September 30, 1999 decreased to 48% from 49% in
1998. The decrease was primarily due to an unfavorable mix of products sold at
both the US and International operations.
General and Administrative
General and Administrative expenses increased 10% in 1999 to $2.2 million from
$2.0 million in 1998. As a percentage of revenues, General and Administrative
expenses decreased from 23% in 1998 to 19% in 1999. The increased expenses were
due primarily to an increase legal, consulting and traveling expenses.
Distribution and Marketing
Distribution and Marketing expenses increased 45% in 1999 to $2.1 million from
$1.5 million in 1998. As a percentage of revenues, Distribution and Marketing
expenses increased from 16% in 1998 to 18% in 1999. The increase was primarily
associated with the expansion of the direct sales force in Germany and the costs
associated with the introduction of a new product line, Tutoplast(R) bovine
pericardium.
Research and Development
Research and Development expenses increased 43% in 1999 to $0.4 million from
$0.3 million in 1998. The increase was due to the expansion of the R & D effort
in Germany and travelling and personnel costs to expand the tissue recovery
sites in Europe. As a percentage of revenues, research and development expenses
in 1999 were essentially in line with 1998.
Depreciation and Amortization
Depreciation and Amortization decreased 27% in 1999 to $0.5 million from $0.6
million in 1998. The reduction in depreciation and amortization was attributed
to an increase in fully depreciated property, plant and equipment.
Other Income/Expense
Other income for 1999 totaled $0.5 million and is the result of a license fee in
the amount of $0.3 million, primarily for the rights to distribute its
Tutoplast(R) Processed Pericardium in urological and gynecological applications
and procedures. Other income in 1998 of $0.5 million was primarily the result of
the settlement of the Company's interest in the joint venture with AHT in the
amount of $0.2 million and a license fee in the amount of $0.2 million, for the
rights to distribute its Tutoplast(R) fascia lata in urological and
gynecological applications and procedures.
Interest Expense
Interest expense declined 33% in 1999 to $0.2 million from $0.4 million in 1998.
The reduction is directly attributed to the conversion of $2.1 million of
long-term debt to common stock at the end of January 1999.
Net Income
As a result of the above, net income for the year ended September 30, 1999
totaled $414,000 or $0.04 basic earnings per share and $0.04 diluted earnings
per share as compared to a net income of $122,000 or $0.02 basic and $0.01
diluted earnings per share for 1998.
Liquidity and Capital Resources
At September 30, 1999 and 1998 the Company had working capital of $5.2 million
and $3.4 million, respectively. The Company maintains current working capital
lines totaling DM 2.4 million (approximately $1.3 million) with several German
banks. At September 30, 1999 the Company had borrowed $1.0 million against these
lines.
11
<PAGE>
The improvement in the working capital position from 1998 to 1999 was due to the
29% increase in revenues, the infusion of additional capital into the Company by
investors and the conversion of $2.1 million of long-term debt into common
shares of the Company which significantly reduced the 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'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.
Item 7. Financial Statements
The information required by this Item is found immediately following the
signature page of this Report.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
The following table sets forth the names and ages of the directors and
executive officers of the Company (each, a "Director" and/or "Officer"), the
positions and offices that each Director and Officer held with the Company, and
the period during which each served in such positions and offices. Each Director
serves for a term of one year, until his successor is duly elected and
qualified.
TABLE OF DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Name Age Positions/Offices Period Served in
---- --- ----------------- Office/Position
---------------
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
G. Russell Cleveland 61 Director 1997 - present
- -----------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charles C. Dragone 62 Interim Chief Executive July 1999 - November
Officer 1999
Chairman of the Board 1996 - present
Director 1992 - present
Chief Executive Officer April 1995 - March
1996
Chief Financial Officer October 1992 -
September 1994
- -----------------------------------------------------------------------------------------------
Robert C. Farone 57 Director May 1999 - present
- -----------------------------------------------------------------------------------------------
J. Harold Helderman, MD 54 Director 1997 - present
- -----------------------------------------------------------------------------------------------
Manfred Kruger 53 Chief Executive Officer December 1999 -
present
President July 1999 - present
Chief Operating Officer January 1999 - present
Vice President, Managing 1998 - present
Director, International
Operations
- -----------------------------------------------------------------------------------------------
George Lombardi 56 Chief Financial Officer, 1998 - present
Treasurer and Secretary
- -----------------------------------------------------------------------------------------------
Thomas W. Pauken 55 Director January 1999 -
present
- -----------------------------------------------------------------------------------------------
Elroy G. Roelke 69 Director 1995 - present
Acting Secretary January 1998 - March
1998
- -----------------------------------------------------------------------------------------------
</TABLE>
The following is a summary of the business experience of each of the Company's
Officers and Directors listed in the above-referenced table, and of certain
other significant employees of the Company, during the past five years.
Officers and Directors
G. Russell Cleveland is the 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 and Director 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 Danzer Corp.
(formerly Global Environmental Corp.), Feminique, Inc. (formerly
Biopharmaceutics, Inc.), Bentley Pharmaceuticals, Inc., Technology Research,
Inc., and Benz Energy, Ltd.
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
13
<PAGE>
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, Inc.
(NASDAQ:KTII), a manufacturer of process control equipment used by the chemical,
pharmaceutical, plastics and food industries (1965 - 1981).
Robert C. Farone has been the President of Bag'n Baggage, Ltd. since June
1985. Bag'n Baggage is an 80-store retailer of luggage and leather goods
operating in eight (8) states under the trade names Bag'n Baggage, Biagio,
Houston Trunk Factory, Malm and Roberto's. Mr. Farone has also served as a
director on the board of Caribbean Marine, Inc. since June 1985. From September
1985 to July 1986 he served as a director on the board of 50 Off Stores, and
from August 1988 to September 1991 he served as Chairman of the Board. 50 Off
Stores were a regional chain of deep discount stores specializing in ready to
wear having 72 locations in five states.
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 the President, Chief Executive Officer Chief Operating
Officer and 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.
Thomas W. Pauken is an attorney and mediator. He currently serves as the
Trustee for Renaissance Capital Partners II, Ltd. For six years, Mr. Pauken
served as Vice President and Corporate Counsel of Garvon, Inc., a Dallas-based
venture capital company. From 1981 to 1985, Mr. Pauken served as Director of
ACTION, an independent federal agency. He also served on the White House legal
Counsel's staff during the Reagan Administration. Mr. Pauken's military service
included a tour of duty in Vietnam as a Military Intelligence Officer. Mr.
Pauken received a B.A. from Georgetown University and J.D. degree from Southern
Methodist University Law School.
Elroy G. Roelke is a practicing attorney and for more than 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
14
<PAGE>
in December 1996. Mr. Roelke serves as a director of several privately held
companies that retain his service for corporate legal services and as a director
of EarthCare Company (NASDAQ: ECCO). 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.
Item 10. Executive Compensation.
Compensation of Directors
The Company's outside Directors each receive a $6,000 annual retainer,
$1,000 per meeting for attendance at Board meetings, $250 per telephonic
meeting, plus reimbursement of out-of-pocket expenses. The Chairman of the Board
receives $1,000 per month for his services as Chairman.
Stock Option Plans
The Company has a 1996 Incentive and Non-Statutory Stock Option Plan (the
"1996 Plan") to attract, maintain and develop management by encouraging
ownership of the Company's Common Stock by Directors, Officers and other key
employees. The following is a summary of the provisions of the 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 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, Thomas W.
Pauken and Robert C. Farone.
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
15
<PAGE>
may such term exceed 10 years from the date of grant. Each option granted to an
outside Director under the 1996 Plan shall be exercisable in whole or in part
during the four year period commencing on the date of the grant of such option.
Any option granted to an outside Director 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.
The 1996 Plan presently reserves 2,000,000 shares of the Company's Common
Stock for issuance thereunder. As of September 30, 1999, options have been
issued for 1,705,172 shares and 294,828 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
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
16
<PAGE>
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.
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 Manfred Kruger, its
President, Chief Executive Officer, Chief Operating Officer and Managing
Director, International Operations. Pursuant to that agreement, the term of Mr.
Kruger's employment with the Company commenced on June 16, 1997. The agreement
is for an indefinite period and shall terminate upon written notice by the
Company, notice of his election to terminate, or the Company terminates his
employment for cause. Minimum notice of termination by the Company, except for
cause, is one year from the end of a calendar quarter. Mr. Kruger's annual base
salary is currently 300,000 DM or approximately $165,000. 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
$143,500. 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, or paid to all
persons who have served as Chief Executive Officer and other officers or
individuals whose compensation exceeded $100,000 for this period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
- ------------------------------------------------------------------------------------------------------------------------------------
Awards Payouts
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities
Other Restricted Underlying
Name And Principal Fiscal Annual Stock Options/ LTIP All Other
Position Year Salary Bonus Compensation Award(s) SARs Payouts Compensation
($) ($) ($) ($) (#) ($) ($)
(1)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Karl H. Meister 1999 129,183 0 0 43,750 149,000 0 0
President, Chief 1998 160,000 14,000 0 0 108,974 0 0
Executive Officer 1997 160,000 0 0 0 360,000 0 0
Charles C. Dragone 1999 18,000 0 0 0 0 0 0
Interim Chief
Executive Officer
Manfred Kruger 1999 150,000 23,400 0 0 42,500 0 10,900
President , Chief 1998 134,691 21,894 0 0 25,000 0 24,900
Executive Officer & 1997 39,106 0 0 0 200,000 0 1,579
Chief Operating Officer
George Lombardi
Chief Financial Officer, 1999 132,500 16,600 0 0 33,000 0 0
Treasurer and Secretary 1998 63,462 6,400 0 0 100,000 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Meister retired on June 30, 1999. Mr. Meister received 100,000
shares of common stock for being retained as a consultant for the
Company through February 2000. Mr. Dragone was appointed as Interim
Chief Executive Officer and he served in this capacity from July 1,
1999 to November 30, 1999. On December 1, 1999, Mr. Kruger was
appointed Chief Executive Officer.
OPTION/SAR GRANTS IN FISCAL YEAR 1999
(Individual Grants)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Options/SARs Percent of Total Exercise or
Granted Options/SARs Granted To Base Price Expiration
Name (#) Employees ($/Sh) Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Karl H. Meister 40,000 5.3% $1.38 February 28, 2003
9,000 1.2% $1.56 February 28, 2003
100,000(1) 13.2% $1.50 December 31, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Charles C. Dragone 20,000 2.6% $1.19 May 12, 2004
3,789 0.5% $1.19 May 12, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Manfred Kruger 42,500 5.6% $1.56 December 9, 2008
- ------------------------------------------------------------------------------------------------------------------------------------
George Lombardi 33,000 4.4% $1.56 December 9, 2008
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As part of part of Mr. Meister's retirement agreement, the Company granted
an option to purchase 100,000 shares of the Company's common stock at an
exercise price of $1.50 per share, exercisable at any time prior to
December 31, 2000.
The following table sets forth the value of the unexercised options at
September 30, 1999. No options were exercised during this fiscal year. The
market price of the Company's common stock at September 30, 1999 was $0.93.
Aggregated Option/SAR Exercises in Last Fiscal Year
And FY-End Option/SAR Values
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
Name September 30, 1999 September 30, 1999
- -----------------------------------------------------------------------------------------------------------------
Excercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Karl H. Meister 609,000 -0- $439,870 $-0-
- -----------------------------------------------------------------------------------------------------------------
Charles C. Dragone 148,289 -0- $87,431 $-0-
- -----------------------------------------------------------------------------------------------------------------
Manfred Kruger 187,500 80,000 $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------
George Lombardi 68,000 65,000 $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of November 30, 1999, 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 30,1999, there
were approximately 11,211,246 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).............................................. 8,169,278 61.58%
5646 Milton Street
Suite 900
Dallas, TX 75206
Kleinwort Benson European Mezzanine Fund, L.P. (5)..................................... 1,395,192 12.10%
Westbourne
The Grange
St. Peter Port
Guernsey, CI
GY1 3BG
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C>
NatWest Ventures (Investments) Ltd. (6)................................................ 1,918,409 17.08%
Fenchurch Exchange
8 Fenchurch Place
London, England
EC3M4TE
Karl H. Meister (7).................................................................... 966,769 7.94%
G. Russell Cleveland (8)............................................................... 57,300 *
Charles Dragone (9).................................................................... 182,917 1.61%
Robert C. Farone (10).................................................................. 95,814 *
Dr. J. Harold Helderman (11)........................................................... 74,488 *
Manfred Kruger (11).................................................................... 227,500 1.99%
George Lombardi (11)................................................................... 80,500 *
Thomas W. Pauken (12).................................................................. 8,393,460 62.65%
Elroy G. Roelke (13)................................................................... 282,682 2.48%
All directors and officers as a group (7 persons)...................................... 9,380,411 45.55%
</TABLE>
- -------------------
* Less than 1%
1 In accordance with Rule 13d-3 promulgated pursuant to the Exchange Act, a
person is deemed to be the beneficial owner of the security for purposes
of the rule if he or she has or shares voting power or dispositive power
with respect to such security or has the right to acquire such ownership
within sixty days. As used herein, "voting power" is the power to vote or
direct the voting of shares and "dispositive power" is the power to
dispose or direct the disposition of shares, irrespective of any economic
interest therein.
2 Except as otherwise indicated by footnote, the persons named in the table
have sole voting and investment power with respect to all of the common
stock beneficially owned by them.
3 In calculating the percentage ownership for a given individual or group,
the number of shares of common stock outstanding includes unissued shares
subject to options, warrants, rights or conversion privileges exercisable
within sixty days after November 30, 1999 held by such individual or
group.
4 Includes 2,424,327 shares of common stock which Renaissance Capital
Partners II, Ltd. has the right to acquire within sixty (60) days.
5 Includes 322,035 shares of common stock issuable upon exercise of warrants
exercisable within sixty (60) days. 6 Includes 21,615 shares of common
stock issuable upon exercise of warrants exercisable within sixty (60)
days.
20
<PAGE>
7 Includes 726,651 shares of common stock issuable upon exercise of options
and warrants exercisable within sixty (60) days.
8 Includes 48,650 shares of common stock issuable upon exercise of options
and warrants exercisable within sixty (60) days. Mr. Cleveland is the
President and majority shareholder of Renaissance Capital Group, Inc. His
business address is 8080 N. Central Expressway, Suite 210-LB 59, Dallas,
TX 75206. See notes 4 and 12.
9 Includes 162,539 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 Includes 67,907 shares of common stock issuable upon exercise of options
and warrants exercisable within sixty (60) days.
11 All of the shares of common stock beneficially owned by Messrs. Helderman,
Kruger, and Lombardi, are derivative securities issuable upon exercise of
options exercisable within sixty (60) days
12 Includes all of the shares of common stock beneficially owned by
Renaissance Capital Partners II, Ltd (see Notes 4 and 7). Mr. Pauken is
the Liquidation Trustee of Renaissance Capital Partners II, Ltd. It also
includes 132,091 shares of common stock issuable upon exercise of options
and warrants exercisable within sixty (60) days.
13 Includes 173,091 shares of common stock issuable upon exercise of options
and warrants exercisable within sixty (60) days.
Item 12. Certain Relationships and Related Transactions.
On January 28, 1999, Renaissance converted a Convertible Debenture and
accrued interest and expenses (approximately $2,162,000) into 4,600,507 shares
of the Company's common stock. In consideration of the agreement to convert, the
Company issued to the investor 149,334 common shares as prepayment for one
year's interest on the Debenture and agreed to amend its outstanding Stock
Purchase Warrants, totaling 1,353,957, by reducing the exercise price from $2.50
per share to $1.50 per share if such warrants are exercised by June 30, 2000,
after which date such warrants shall revert to their initial terms. A loss of
$187,000 on the conversion of the debenture has been recognized in net income in
1999.
On January 29, 1999, Renaissance purchased 300,000 Units at $1.00 per
Unit, each Unit consisting of one common share of the Company and one Common
Stock Purchase Warrant, expiring December 31, 2000, at an exercise price of
$1.50 per share.
On February 1, 1999, Mr. Roelke, Director of the Company purchased 100,000
Units at $1.00 per Unit, each Unit consisting of one common share of the Company
and one Common Stock Purchase Warrant, expiring December 31, 2000, at an
exercise price of $1.50 per share.
On October 26 and November 12, 1999, Mr. Pauken, Director of the Company
purchased 40,000 and 35,000 Units, respectively, at $1.00 per Unit, each Unit
consisting of one common share of the Company and one Common Stock Purchase
Warrant, expiring December 31, 2000, at an exercise price of $1.50 per share.
Item 13. Exhibits and Reports on Form 8-K.
(a) Index to Exhibits
21
<PAGE>
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.*
10.8 Employment Agreement between Biodynamics International, Inc. and
George Lombardi, dated March 30, 1998.*
21 Subsidiaries of Registrant.*
22
<PAGE>
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
23
<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 16, 1999
TUTOGEN MEDICAL, INC.
/s/ Manfred Kruger
--------------------------------------
Manfred Kruger
President, Chief Executive Officer and
Chief Operating Officer
/s/ George Lombardi
-------------------------------------
George Lombardi
Chief Financial Officer, Treasurer and Secretary
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities indicated.
Signature Title Date
/s/ G. Russell Cleveland Director December 16, 1999
- --------------------------
G. Russell Cleveland
/s/ Charles C. Dragone Director December 16, 1999
- --------------------------
Charles C. Dragone
/s/ Robert C. Farone Director December 16, 1999
- --------------------------
Robert C. Farone
/s/ J. Harold Helderman Director December 16, 1999
- --------------------------
Dr. J. Harold Helderman
/s/ Manfred Kruger Director December 16, 1999
- --------------------------
Manfred Kruger
<PAGE>
/s/ Thomas W. Pauken Director December 16, 1999
- --------------------------
Thomas W. Pauken
/s/ Elroy G. Roelke Director December 16, 1999
- --------------------------
Elroy G. Roelke
<PAGE>
-----------------------------------------------
Tutogen Medical, Inc. and
Subsidiaries
Consolidated Financial Statements for the Years
Ended September 30, 1999 and 1998, and
Independent Auditors' Report
-----------------------------------------------
<PAGE>
INDEPENDENT AUDITORS' REPORT
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, 1999 and 1998, and the
related consolidated statements of operations, cash flows and shareholders'
equity for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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, 1999
and 1998, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
November 23, 1999
<PAGE>
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND 1998
(In Thousands)
- --------------------------------------------------------------------------------
ASSETS 1999 1998
CURRENT ASSETS:
Cash and cash equivalents $ 376 $ 357
Accounts receivable, net 2,020 1,685
Inventories, net 5,354 4,435
Other current assets 533 173
------- -------
Total current assets 8,283 6,650
PROPERTY, PLANT AND EQUIPMENT - Net 2,655 2,995
INTANGIBLE AND OTHER ASSETS - Net 182 596
------- -------
TOTAL ASSETS $11,120 $10,241
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 874 $ 1,010
Accrued interest -- 189
Other accrued expenses 897 953
Revolving credit arrangements 1,149 895
Current portion of long-term debt 136 162
------- -------
Total current liabilities 3,056 3,209
------- -------
OTHER LIABILITIES:
Long-term debt 1,404 3,644
Other long-term obligations 46 17
------- -------
Total other liabilities 1,450 3,661
------- -------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY 6,614 3,371
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,120 $10,241
======= =======
See notes to financial statements.
-2-
<PAGE>
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
(In Thousands, Except for Share Data)
- --------------------------------------------------------------------------------
1999 1998
REVENUE $ 11,464 $ 8,912
COST OF REVENUE 6,009 4,545
------------ ------------
Gross margin 5,455 4,367
------------ ------------
OPERATING EXPENSES:
General and administrative 2,210 2,017
Distribution and marketing 2,114 1,456
Research and development 418 292
Depreciation and amortization 473 644
------------ ------------
Total operating expenses 5,215 4,409
------------ ------------
OPERATING INCOME (LOSS) 240 (42)
OTHER INCOME (455) (526)
LOSS ON CONVERSION OF DEBT 187 --
INTEREST EXPENSE 241 362
------------ ------------
INCOME BEFORE INCOME TAXES 267 122
INCOME TAX BENEFIT (147) --
------------ ------------
NET INCOME 414 122
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments (338) 219
------------ ------------
COMPREHENSIVE INCOME $ 76 $ 341
============ ============
AVERAGE SHARES OUTSTANDING FOR BASIC
EARNINGS PER SHARE 9,418,384 5,017,178
============ ============
BASIC EARNINGS PER SHARE $ 0.04 $ 0.02
============ ============
AVERAGE SHARES OUTSTANDING FOR DILUTED
EARNINGS PER SHARE 9,508,607 10,794,554
============ ============
DILUTED EARNINGS PER SHARE $ 0.04 $ 0.01
============ ============
See notes to financial statements.
-3-
<PAGE>
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 414 $ 122
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 725 867
Loss on conversion of debt 187 --
Gain from settlement of interest in joint venture (included in other income) -- (205)
Changes in assets and liabilities:
Accounts receivable (427) 98
Inventories (1,148) (1,916)
Other current assets (228) (73)
Accounts payable and accrued expenses (274) 105
Other long-term liabilities 32 6
------- -------
Net cash used in operating activities (719) (996)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (258) (182)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock 575 4,185
Proceeds from revolving credit arrangements - net 254 176
Repayment of long-term debt (173) (6,021)
Proceeds from long-term debt -- 2,574
Capital lease payments (20) (23)
------- -------
Net cash provided by financing activities 636 891
EFFECT OF EXCHANGE RATE CHANGES ON CASH 360 (133)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19 (420)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 357 777
------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 376 $ 357
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 430 $ 410
======= =======
SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Issuance of common stock in exchange for
convertible long-term debt and accrued interest $ 2,349 $ --
Issuance of common stock for interest 376 --
Issuance of common stock for services 171 --
Issuance of common stock to settle interest in joint venture -- 110
------- -------
$ 2,896 $ 110
======= =======
</TABLE>
See notes to financial statements.
-4-
<PAGE>
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
(In Thousands, Except for Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Common Additional Cumulative
Stock Stock Paid-in Translation Accumulated
($.01 par) ($.01 par) Capital Adjustment Deficit Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1997 $ -- $ 84 $ 22,910 $ (259) $ (24,000) $ (1,265)
Reclassification -- 185 (185) -- -- --
Reverse stock split -- (242) 242 -- -- --
Conversion of mezzanine debt -- 26 4,159 -- -- 4,185
Stock issued to settle termination of
interest in joint venture -- 1 109 -- -- 110
Net income -- -- -- -- 122 122
Foreign currency translation adjustment -- -- -- 219 -- 219
------ -------- --------- -------- ---------- ---------
BALANCE, SEPTEMBER 30, 1998 -- 54 27,235 (40) (23,878) 3,371
Conversion of convertible debentures -- 47 2,302 -- -- 2,349
Stock issued for private placement -- 5 453 -- -- 458
Stock issued for interest on debentures -- 2 187 -- -- 189
Stock issued for services -- 1 170 -- -- 171
Net income -- -- -- -- 414 414
Foreign currency translation adjustment -- -- -- (338) -- (338)
------ -------- --------- -------- ---------- ---------
BALANCE, SEPTEMBER 30, 1999 $ -- $ 109 $ 30,347 $ (378) $ (23,464) $ 6,614
====== ======== ========= ======== ========== =========
</TABLE>
Common Preferred
Shares Shares
Issued and Issued and
Outstanding Outstanding
BALANCE, SEPTEMBER 30, 1997 26,875,090 --
Reclassification -- --
Reverse stock split (24,187,431) --
Conversion of mezzanine debt 2,626,301 --
Stock issued to settle termination of
interest in joint venture 50,000 --
Net income -- --
Foreign currency translation adjustment -- --
----------- ------
BALANCE, SEPTEMBER 30, 1998 5,363,960 --
Conversion of convertible debentures 4,749,841 --
Stock issued for private placement 457,500 --
Stock issued for interest on debentures 144,550 --
Stock issued for services 145,385 --
Net income -- --
Foreign currency translation adjustment -- --
----------- ------
BALANCE, SEPTEMBER 30, 1999 10,861,236 --
=========== ======
See notes to financial statements.
-5-
<PAGE>
TUTOGEN MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
(In Thousands, Except for Share Data)
- --------------------------------------------------------------------------------
1. OPERATIONS AND ORGANIZATION
Tutogen Medical, Inc. with its consolidated subsidiaries (the "Company")
processes, manufactures and distributes worldwide, specialty surgical
products and performs tissue processing services for neuro, orthopedic,
reconstructive and general surgical applications. The Company's core
business is processing human donor tissue, utilizing its patented
Tutoplast(R) process, for distribution to hospitals and surgeons. The
Company processes at its two manufacturing facilities in Germany and the
United States and distributes its products and services to over 40
countries worldwide.
2. SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies of the Company are presented below.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
intercompany transactions and balances are eliminated in consolidation.
Foreign Currency Translation - The functional currency of the Company's
German subsidiary is the 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
comprehensive income. Gains and losses resulting from transactions of the
Company and its subsidiaries which are made in currencies different from
their own are included in income as they occur. The Company recognized
currency gains of $10 in 1999. The exchange rates at September 30, 1999
and 1998 were DM 1.83/U.S. Dollar and DM 1.67/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.
-6-
<PAGE>
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
weighted average of the remaining patent protection periods of all
existing worldwide patents and do not exceed thirteen years. Trademarks
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 $252 and $223 for the years ended September 30,
1999 and 1998, 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 - Basic earnings per share are computed by dividing net
income by the weighted-average number of common shares outstanding.
Diluted earnings per share are computed by dividing net income by the sum
of the weighted-average number of common shares outstanding plus the
dilutive effect of shares issuable through deferred stock units and the
exercise of stock options and warrants.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Total Comprehensive Income - During 1999, the Company adopted Statement of
Financial Accounting Standard ("SFAS") No. 130, Reporting Comprehensive
Income. Comprehensive income is defined as the total change in
shareholders' equity during the period other than from transactions with
shareholders, and for the Company, includes net income and cumulative
translation adjustment.
3. CONCENTRATION OF CREDIT RISK
The exposure to risk related to foreign currency exchange rate changes is
limited primarily to intercompany transactions. The Company currently does
not utilize forward exchange contracts or any other type of hedging
instruments.
The Company's principal concentration of credit risk consists of trade
receivables. Distribution of products and revenues is provided through a
broad base of independent distributors. One customer accounted for 18% and
13% of consolidated revenue in 1999 and 1998, respectively. The Company
does
-7-
<PAGE>
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, 1999.
4. INVENTORIES
Major classes of inventory at September 30, 1999 and 1998 were as follows:
1999 1998
Raw materials $ 1,519 $ 1,473
Work in process 2,983 2,729
Finished goods 1,375 1,249
------- -------
5,877 5,451
Less reserves for obsolescence 523 (1,016)
------- -------
$ 5,354 $ 4,435
======= =======
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 1999 and 1998 consisted of
the following:
1999 1998
Land $ 440 $ 482
Buildings and improvements 2,222 2,313
Machinery and equipment 674 689
Office furniture and equipment 1,072 1,232
------- -------
4,408 4,716
Less accumulated depreciation (1,753) (1,721)
------- -------
$ 2,655 $ 2,995
======= =======
The Company's property held under capital leases of approximately $58 is
included in machinery and office equipment at September 30, 1999 and 1998,
respectively. The depreciation expense for the years ended September 30,
1999 and 1998 was approximately $354 and $324, respectively.
-8-
<PAGE>
6. INTANGIBLE AND OTHER ASSETS
Intangible and other assets at September 30, 1999 and 1998 consisted of
the following:
1999 1998
Patents $ 6,003 $ 6,579
Trademarks 1,171 1,283
------- -------
7,174 7,862
Less accumulated amortization (6,992) (7,266)
------- -------
$ 182 $ 596
======= =======
At September 30, 1999 and 1998, 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. The amortization expense for the years ended September
30, 1999 and 1998 was approximately $371 and $543, 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 2.4 million or approximately $1,300 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, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Senior debt, 5.75% interest until March 30, 2008
when terms are renegotiable, due 2008 $ 1,040 $ 1,208
Convertible debenture, 9% interest; due 2002 500 2,574
Capital lease obligations, 8.5% interest; due 2000 (see Note 5) -- 24
------- -------
1,540 3,806
Less current portion (136) (162)
------- -------
$ 1,404 $ 3,644
======= =======
</TABLE>
Aggregate maturities of long-term debt are $136 in 2000; $119 in 2001;
$117 in 2002; $417 in 2003; $751 in 2004.
The convertible debenture is secured by all the assets of the Company.
-9-
<PAGE>
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.
9. SHAREHOLDERS' EQUITY
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.
Stock Options - The Company maintains a 1996 Stock Option Plan (2,000,000
shares authorized) under which incentive and non-qualified options have
been granted to employees, directors and certain key affiliates. Under the
Plan, options may be granted at not less than the fair market value on the
date of grant. Options may be subject to a vesting schedule and expire
four, five or ten years from grant.
Changes in outstanding options for the Plan were as follows:
Weighted
Number of Average
Common Price
Shares Per Share
September 30, 1997 Outstanding 2,242,000 $ 0.83
Reverse stock split (1,417,800) $ 2.44
Granted 559,000 $ 2.16
Canceled (388,700) $ 0.80
---------- --------
September 30, 1998 Outstanding 994,500 $ 2.08
Granted 912,922 $ 1.35
Canceled (202,250) $ 1.22
---------- --------
September 30, 1999 Outstanding 1,705,172 $ 1.79
========== ========
Of the outstanding options, a total of 966,172 are exercisable as of
September 30, 1999, at a weighted average exercise price of $2.03.
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:
1999 1998
Pro forma net income $ 235 $ 21
Pro forma basic earnings per share 0.02 0.00
Pro forma diluted earnings per share 0.02 0.00
-10-
<PAGE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: expected volatility of 10%, a risk-free interest rate of
4.69% and an expected life of three years. A dividend yield of zero has
been assumed.
10. SEGMENT DATA
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:
1999 International United States Consolidated
Gross revenue - third party $ 7,582 $ 5,175 $ 12,757
Less - intercompany (1,293) -- (1,293)
-------- -------- --------
Total revenue $ 6,289 $ 5,175 $ 11,464
======== ======== ========
Depreciation and amortization $ 647 $ 78 $ 725
Interest expense $ 129 $ 112 $ 241
Net income $ (298) $ 691 $ 393
Capital expenditures $ 238 $ 20 $ 258
Total assets $ 6,987 $ 22,380 $ 29,367
Less intercompany advances -- (18,419) (18,419)
-------- -------- --------
$ 6,987 $ 3,961 $ 10,948
======== ======== ========
-11-
<PAGE>
1998 International United States Consolidated
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
======== ======== ========
11. INCOME TAXES
The Company has recognized a deferred tax asset of $2,932 and $2,906, and
a corresponding valuation allowance of $2,785 and $2,906, at September 30,
1999 and 1998, respectively. The principal components of the deferred tax
asset for 1999 and 1998 relate to net operating loss carry forwards. As
the Company is expecting to generate taxable income in 2000, a benefit of
$147 has been recognized in the current year.
The Company has net operating loss carry forwards ("NOLs") for German
income tax purposes of approximately $11,573 (DM 21,173,000) which can be
carried forward indefinitely. A valuation allowance has been provided for
the full amount of these NOLs in the accompanying statements. Recent
rulings by German tax authorities could significantly reduce the amount of
NOLs available.
In January 1999, the Company experienced a change in ownership under
Section 382 of the Internal Revenue Code. A preliminary calculation
indicates that the restriction on the existing NOL will have no effect on
the financial statements in the current year. 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.
12. COMMITMENTS AND CONTINGENCIES
The Company currently has operating leases for its corporate offices in
the U.S. and Germany, as well as several leases related to office
equipment and automobiles. Total rental expense was $ 417 and $460 per
year for the years ending September 30, 1999 and 1998, respectively.
-12-
<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, 1999 are as follows:
2000 $ 432
2001 374
2002 247
2003 114
Thereafter 25
------
$1,192
======
The Company and its subsidiaries are party to various claims, legal
actions, complaints and administrative proceedings arising in the ordinary
course of business. In management's opinion, the ultimate disposition of
these matters will not have a material adverse effect on its financial
condition or results of operations.
13. SUBSEQUENT EVENT
Subsequent to September 30, 1999, two Directors of the Company and various
private investors purchased a total of 350,000 Units at $1.00 per Unit,
each Unit consisting of one common share of the Company and one Common
Stock Purchase Warrant, expiring December 31, 2000, at an exercise price
of $1.50 per share.
******
-13-
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 376
<SECURITIES> 0
<RECEIVABLES> 2,102
<ALLOWANCES> (82)
<INVENTORY> 5,354
<CURRENT-ASSETS> 8,282
<PP&E> 4,408
<DEPRECIATION> (1,753)
<TOTAL-ASSETS> 11,119
<CURRENT-LIABILITIES> 3,055
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 6,505
<TOTAL-LIABILITY-AND-EQUITY> 11,119
<SALES> 11,464
<TOTAL-REVENUES> 11,464
<CGS> 6,008
<TOTAL-COSTS> 6,008
<OTHER-EXPENSES> 4,948
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 241
<INCOME-PRETAX> 267
<INCOME-TAX> (147)
<INCOME-CONTINUING> 414
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 414
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
