<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO _____
COMMISSION FILE NUMBER 0-31271
REGENERATION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 59-3466543
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
ONE INNOVATION DRIVE
ALACHUA, FLORIDA 32615
(Address of principal executive offices)
(Zip Code)
(904) 418-8888
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES ( ) NO ( X )
Shares of common stock, $0.001 par value, outstanding on
September 30, 2000: 21,556,354.
1 of 17
<PAGE>
REGENERATION TECHNOLOGIES, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Part I Financial Information Page #
------ --------------------- ------
<S> <C> <C>
Item 1 Financial Statements 3 - 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10- 13
Item 3 Quantitative and Qualitative Disclosures About Market Risk 14
Part II Other Information
------- -----------------
Item 1 Legal Proceedings 14
Item 2 Changes in Securities and Use of Proceeds 14
Item 3 Default upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
Signature Page 16
</TABLE>
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<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................................... $ 7,536 $ 28,370
Accounts receivable - less allowance of $335 in 1999 and $446
in 2000 ........................................................... 15,507 22,921
Product inventories ................................................. 15,639 20,248
Supply inventories .................................................. 593 1,148
Prepaid and other current assets..................................... 1,175 2,031
Deferred tax asset .................................................. 748 1,045
--------- ---------
Total current assets ............................................ 41,198 75,763
Investments ........................................................... - 10,000
Property, plant and equipment - net ................................... 5,813 13,070
Intangible asset - net ................................................ - 2,726
Deferred tax asset .................................................... 1,230 1,108
Other assets - net .................................................... 298 684
--------- ---------
$ 48,539 $ 103,351
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................................... $ 21,057 $ 20,208
Accrued expenses ................................................... 2,178 3,855
Current portion of deferred revenue ................................ 225 225
Line of credit ..................................................... 2,787 -
Current portion of long-term debt .................................. 899 1,121
--------- ---------
Total current liabilities ...................................... 27,146 25,409
Long-term debt - less current portion ................................ 2,027 3,910
Deferred revenue ..................................................... 3,928 3,759
--------- ---------
Total liabilities .............................................. 33,101 33,078
--------- ---------
Commitments and contingencies
Stockholders' equity:
Series A Preferred stock ........................................... 2 -
Series B Preferred stock ........................................... 6,580 -
Series C Preferred stock ........................................... 10,000 -
Common stock ....................................................... 4 19
Additional paid-in capital ......................................... 444 71,479
Retained (deficit) earnings ........................................ (1,182) 1,107
Deferred compensation .............................................. (400) (2,400)
Due (from) to stockholder - net of due to (from) stockholder ....... (4) 82
Less treasury stock ................................................ (6) (14)
--------- ---------
Total stockholders' equity ..................................... 15,438 70,273
--------- ---------
$ 48,539 $ 103,351
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3 of 17
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ---------------------------------
1999 2000 1999 2000
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues from core operations:
Fees from tissue distribution............................. $ 18,938 $ 31,265 $ 49,112 $ 84,481
Other revenues from core operations....................... 426 435 1,813 1,298
---------- ----------- ----------- ----------
Total revenues.................................... 19,364 31,700 50,925 85,779
Management services fees.................................... 10,682 16,392 28,144 45,327
---------- ----------- ----------- ----------
Net revenues...................................... 8,682 15,308 22,781 40,452
Costs of processing and distribution........................ 4,725 7,866 13,715 20,985
---------- ----------- ----------- ----------
Gross profit...................................... 3,957 7,442 9,066 19,467
---------- ----------- ----------- ----------
Expenses:
Marketing, general and administrative..................... 2,541 5,295 6,397 13,834
Research and development.................................. 506 549 1,308 1,750
---------- ----------- ----------- ----------
Total expenses.................................... 3,047 5,844 7,705 15,584
---------- ----------- ----------- ----------
Operating income............................................ 910 1,598 1,361 3,883
---------- ----------- ----------- ----------
Equity in (loss) of unconsolidated subsidiary............... - (5) - -
Interest (expense) income:
Interest expense.......................................... (76) (95) (189) (362)
Interest income........................................... 4 383 94 514
---------- ----------- ----------- ----------
Total interest (expense) income - net............. (72) 288 (95) 152
---------- ----------- ----------- ----------
Income before income tax expense............................ 838 1,881 1,266 4,035
Income tax expense.......................................... (369) (811) (642) (1,745)
---------- ----------- ----------- ----------
Net income.................................................. $ 469 $ 1,070 $ 624 $ 2,290
========== =========== =========== ==========
Net income per common share - basic......................... $ 0.13 $ 0.08 $ 0.17 $ 0.33
========== =========== =========== ==========
Net income per common share - diluted....................... $ 0.03 $ 0.05 $ 0.04 $ 0.12
========== =========== =========== ==========
Pro forma net income per common share - basic............... $ 0.03 $ 0.05 $ 0.04 $ 0.13
========== =========== =========== ==========
Pro forma net income per common share - diluted............. $ 0.03 $ 0.05 $ 0.04 $ 0.12
========== =========== =========== ==========
Weighted average shares outstanding - basic................. 3,669,482 13,632,139 3,671,676 7,023,605
========== =========== =========== ==========
Weighted average shares outstanding - diluted............... 16,116,180 21,091,334 16,096,034 19,527,935
========== =========== =========== ==========
Pro forma weighted average shares outstanding - basic....... 15,791,882 19,745,304 15,794,076 18,277,382
========== =========== =========== ==========
Pro forma weighted average shares outstanding - diluted..... 16,116,180 21,091,334 16,096,034 19,527,935
========== =========== =========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4 of 17
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 2000
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................... $ 624 $ 2,290
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization expense............ 549 1,176
Bad debt expense................................. 112 237
Amortization of deferred revenue................. (169) (169)
Deferred income taxes............................ (69) (176)
Deferred compensation and nonqualified option.... 98 609
Changes in assets and liabilities - cash (used in)
provided by:
Accounts receivable ........................... (7,502) (7,652)
Product and supply inventories ................ (4,975) (4,530)
Prepaid and other current assets .............. 328 (426)
Other assets .................................. (82) (394)
Accounts payable .............................. 6,595 (849)
Accrued expenses .............................. 1,309 1,472
Other liabilities ............................. (40) -
-------- ---------
Net cash used in operating activities ...... (3,222) (8,412)
-------- ---------
Cash flows from investing activities:
Cash paid for Alabama Tissue Center assets........... - (250)
Purchase of long term investments.................... - (10,000)
Purchase of property, plant and equipment............ (1,509) (5,173)
-------- ---------
Net cash used in investing activities ...... (1,509) (15,423)
-------- ---------
Cash flows from financing activities:
Proceeds from stock offering, net of offering costs.. - 48,118
Payments on capital lease and note obligations....... (322) (731)
Stock issuance costs................................. (1) -
Amounts advanced to stockholder...................... (5,226) (4,311)
Payments received from stockholder................... 5,194 4,398
Line of credit borrowings (payments) - net........... 1,161 (2,787)
Purchase of treasury stock........................... (1) (18)
-------- ---------
Net cash provided by financing activities .. 805 44,669
-------- ---------
Net (decrease) increase in cash and cash equivalents... (3,926) 20,834
Cash and cash equivalents, beginning of period ........ 3,926 7,536
-------- ---------
Cash and cash equivalents, end of period............... $ - $ 28,370
======== =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5 of 17
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Three Months and Nine Months Ended September 30, 1999 and 2000
(Unaudited)
(In thousands, except share and per share data)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited
and have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission relating to interim financial statements.
These condensed consolidated financial statements do not include all disclosures
provided in the annual consolidated financial statements. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1999 contained in the Company's prospectus filed with the Securities and
Exchange Commission on August 10, 2000. All adjustments of a normal recurring
nature, which, in the opinion of management, are necessary to present a fair
statement of results for the interim periods, have been made. Results of
operations are not necessarily indicative of the results to be expected for the
full year.
The condensed consolidated financial statements include the accounts of
Regeneration Technologies, Inc. ("RTI") and its wholly owned subsidiaries,
Georgia Tissue Bank ("GTB") and Alabama Tissue Center ("ATC") (collectively, the
"Company"). All material intercompany balances and transactions have been
eliminated in consolidation.
2. PRODUCT INVENTORIES
Product inventories by stage of completion are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
<S> <C> <C>
Unprocessed donor tissue ................... $ 2,342 $ 2,584
Tissue in process .......................... 3,454 7,418
Implantable donor tissue ................... 9,744 10,075
Nontissue inventory for resale ............. 99 171
------------ -------------
$ 15,639 $ 20,248
============ =============
</TABLE>
3. EARNINGS PER SHARE
A reconciliation of the number of shares of common stock used in
calculation of basic and diluted Earnings Per Share ("EPS") is presented below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic Shares ...................... 3,669,482 13,632,139 3,671,676 7,023,605
Effect of dilutive securities:
Stock options and warrants...... 324,298 1,346,030 301,958 1,250,553
Conversion of preferred stock... 12,122,400 6,113,165 12,122,400 11,253,777
------------- ------------- ------------- -------------
Diluted Shares .................... 16,116,180 21,091,334 16,096,034 19,527,935
============= ============= ============= =============
Net income in thousands ........... $ 469 $ 1,070 $ 624 $ 2,290
Basic EPS ......................... $ 0.13 $ 0.08 $ 0.17 $ 0.33
Diluted EPS ....................... $ 0.03 $ 0.05 $ 0.04 $ 0.12
</TABLE>
6 of 17
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
For the Three Months and Nine Months Ended September 30, 1999 and 2000
(Unaudited)
(In thousands, except share and per share data)
4. PRO FORMA EARNINGS PER SHARE
Pro forma basic and diluted EPS assumes that the conversion of all
preferred stock to common stock effective upon the Company's initial public
offering (see Note 8) happened as of the beginning of each respective period is
shown below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Pro forma Basic Shares .............. 15,791,882 19,745,304 15,794,076 18,277,382
Effect of dilutive securities:
Stock options and warrants........ 324,298 1,346,030 301,958 1,250,553
------------- ------------- ------------- -------------
Pro forma Diluted Shares ............ 16,116,180 21,091,334 16,096,034 19,527,935
============= ============= ============= =============
Net income in thousands ............. $ 469 $ 1,070 $ 624 $ 2,290
============= ============= ============= =============
Pro forma Basic EPS ................. $ 0.03 $ 0.05 $ 0.04 $ 0.13
============= ============= ============= =============
Pro forma Diluted EPS ............... $ 0.03 $ 0.05 $ 0.04 $ 0.12
============= ============= ============= =============
</TABLE>
5. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------
September 30, September 30,
1999 2000
------------- -------------
<S> <C> <C>
Interest paid during the period .................................. $ 190 $ 363
Noncash capital lease obligations ................................ $ 168 $ 570
Conversion of note payable to common stock ....................... $ - $ 250
Notes payable issued to acquire land and buildings ............... $ - $ 2,800
Reduction in capital lease obligation upon purchase of building .. $ - $ 283
Reduction in straight-line rent accrual upon purchase of building. $ - $ 225
Noncash insurance financing ...................................... $ 407 $ 430
Acquistion of Alabama Tissue Center assets for stock ............. $ - $ 3,500
Issuance of stock options......................................... $ - $ 2,604
</TABLE>
6. SEGMENT DATA
The Company processes human musculoskeletal and cardiac tissue received
from various tissue recovery agencies and distributes the tissue through various
channels. This one line of business represents 100% of consolidated fees from
tissue distribution and is comprised of three primary product lines: spinal
allografts, other precision tooled allografts and other processed tissue. The
following table presents fees from tissue distribution by each of the Company's
three primary product lines:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- ------------------------------
September 30, September 30, September 30, September 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Fees from tissue distribution:
Spinal allografts ................... $ 15,358 $ 24,043 $ 39,998 $ 66,501
Other precision tooled allografts ... 1,162 2,715 3,064 6,576
Other processed tissue .............. 2,418 4,507 6,050 11,404
------------- ------------- ------------- -------------
Total ............................ $ 18,938 $ 31,265 $ 49,112 $ 84,481
============= ============= ============= =============
</TABLE>
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<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
For the Three Months and Nine Months Ended September 30, 1999 and 2000
(Unaudited)
(In thousands, except share and per share data)
7. INVESTMENTS
All investments with an original maturity of greater than three months are
accounted for under Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Management
determines the appropriate classification of securities at the time of purchase
and re-evaluates such designations as of each balance sheet date. At September
30, 2000, the Company's investment portfolio consisted of marketable debt
securities classified as held-to-maturity. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities until maturity. Held-to-maturity securities are recorded either
as short-term or long-term on the balance sheet based upon contractual maturity
date and are stated at amortized cost, which approximates fair value at
September 30, 2000. At September 30, 2000, short-term held-to-maturity
securities included in cash and cash equivalents approximated $19,670 and
long-term held-to-maturity securities included in investments approximated
$10,000 and mature in 2001.
8. SIGNIFICANT EVENTS
On June 16, 2000, the Company approved a stock split resulting in an
exchange of 1 share for 4.8 shares of common stock issued and outstanding. All
share and per share amounts have been retroactively adjusted for this split.
On August 10, 2000, the Company completed its initial public offering of
Common Stock. The net proceeds to the Company from the sale of the 3,800,000
shares of Common Stock offered by the Company were $48.1 million (after
deducting underwriting discounts and commissions and offering expenses).
On August 21, 2000, the Company completed the acquisition of the net assets
of a division of the University of Alabama Health Services Foundation, which was
doing business as the Alabama Tissue Center, in Birmingham, Alabama. The
acquisition was financed by a cash payment of $250 and the issuance of 250,000
shares of the Company's common stock, valued at the Company's $14.00 per share
initial public offering price, or $3,500. The Company may be required to make an
additional cash payment of $250 upon the achievement of certain milestones. The
results of operations of ATC are included in the Condensed Consolidated
Financial Statements for the period August 21, 2000 through September 30, 2000.
The acquisition has been accounted for under the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
on their preliminary estimated fair market values at the date of acquisition as
follows:
<TABLE>
<S> <C>
Tissue inventory ............................. $ 635
Process equipment ............................ 359
Software license.............................. 15
Goodwill ..................................... 2,741
------------
Net assets acquired .......................... $ 3,750
============
Purchase financed by:
Value of common stock issued ................. $ 3,500
Cash paid .................................... 250
------------
Total financing .............................. $ 3,750
============
</TABLE>
The acquired preliminary goodwill will be amortized over its estimated
useful life of 15 years. The Company is in the process of completing its final
purchase price allocation and determination of related goodwill and other
intangibles.
The unaudited pro forma results, assuming ATC had been acquired on January
1, 1999, including pro forma adjustments for amortization of goodwill and income
taxes, are approximately as follows:
8 of 17
<PAGE>
REGENERATION TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
For the Three Months and Nine Months Ended September 30, 1999 and 2000
(Unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
September 30, September 30, September 30, September 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Total revenues ..................... $ 19,850 $ 32,371 $ 52,319 $ 87,409
Net income ......................... 391 1,025 411 2,108
Net income per share -- basic ...... $ 0.11 $ 0.08 $ 0.11 $ 0.30
</TABLE>
The pro forma information does not necessarily reflect the actual results
that would have occurred nor is it indicative of future results of operations of
the combined companies.
9. The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133 (SFAS "133"), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 requires all derivatives to be
recognized as assets or liabilities and measured at fair value. Changes in such
fair value will impact earnings to the extent of any ineffectiveness in hedging
relationships. The provisions of SFAS 133 and related amendments and
interpretations are effective for the Company beginning January 1, 2001,
including the interim periods of that year. The Company intends to adopt SFAS
133 January 1, 2001, and does not expect there to be any significant adverse
impact on its interest rate risk management activities. In addition, based on
the market valuations of outstanding derivative contracts at September 30, 2000,
the Company does not expect there to be any material adverse impact on its
results of operations, financial position or liquidity resulting from the
adoption of SFAS 133.
9 of 17
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1999
TOTAL REVENUES. Our total revenues increased by $12.3 million, or 63.4%, to
$31.7 million for the three months ended September 30, 2000 from $19.4 million
for the three months ended September 30, 1999.
Fees from tissue distribution increased by $12.3 million, or 65.1%, to
$31.3 million for the three months ended September 30, 2000 from $18.9 million
for the three months ended September 30, 1999. The increase in fees from tissue
distribution was due largely to an increase of $8.7 million in revenues from the
distribution of our spinal allografts, an increase of $2.1 million from the
distribution of other processed tissue and an increase of $1.5 million from the
distribution of other precision-tooled allografts. The increase in our revenues
from spinal allografts was due primarily to the increase in volume from three
new spinal allografts we introduced in late 1998, plus a new allograft
introduced in late 1999. Other processed tissue revenues increased due to the
expansion of our distribution from a regional basis in 1999 to a national basis
in 2000 and an increase in our International business. Of the increase in our
revenues from precision-tooled allografts, $0.7 million was related to
allografts we introduced in 1998 and 1999, with $0.8 million from four new
allografts introduced in 2000. Other revenues from core operations, which
consist of tissue processing fees, biomedical laboratory fees and manufacturing
royalties, were unchanged at $0.4 million for the three months ended September
30, 2000 compared to $0.4 million for the three months ended September 30, 1999.
MANAGEMENT SERVICES FEES. Management services fees, which consist of
amounts paid to Medtronic Sofamor Danek for management services they provide to
assist in the distribution of our allografts, increased by $5.7 million, or
53.3%, to $16.4 million for the three months ended September 30, 2000 from $10.7
million for the three months ended September 30, 1999. The increase in the
absolute amount of these fees was due to the greater revenues generated through
the management services of Medtronic Sofamor Danek. As a percentage of total
revenues, however, these fees decreased from 55.2% for the three months ended
September 30, 1999 to 51.7% for the three months ended September 30, 2000. This
decrease is attributable to the increase in revenue from our non-spinal
allografts for which we do not pay management services fees.
NET REVENUES. Our net revenues increased by $6.6 million, or 75.9%, to
$15.3 million for the three months ended September 30, 2000 from $8.7 million
for the three months ended September 30, 1999. As a percentage of total
revenues, our net revenues increased from 44.8% for the three months ended
September 30, 1999 to 48.3% for the three months ended September 30, 2000. This
increase was due mainly to the impact of distribution of our non-spinal
allografts, for which we do not pay management services fees.
COSTS OF PROCESSING AND DISTRIBUTION. Costs of processing and distribution
increased by $3.2 million, or 68.1%, to $7.9 million for the three months ended
September 30, 2000 from $4.7 million for the three months ended September 30,
1999. As a percentage of net revenues, however, these costs decreased from 54.0
% for the three months ended September 30, 1999 to 51.6 % for the three months
ended September 30, 2000. This reduction was attributable primarily to
improvements in processing efficiencies achieved through our introduction of
automated processing machinery, as well as efficiencies associated with
increased volume. In addition, the increase in our net revenues due to reduced
management services fees payable by us also resulted in a reduction of the
percentage of our net revenues attributable to costs of processing and
distribution.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses increased by $2.7 million, or 108.0%, to $5.2 million
for the three months ended September 30, 2000 from $2.5 million for the three
months ended September 30, 1999. This increase was partially due to the addition
of additional marketing and administrative staff to support our growing
business. Other cost increases included an increase in distributor commissions,
primarily on other processed tissue, increased depreciation expense for new
equipment and the corporate buildings purchased on March 30, 2000, and increased
professional fees, marketing programs and travel related expenses to support our
distribution and marketing efforts. Georgia Tissue Bank, acquired in November
1999 and Alabama Tissue Center acquired in August 2000 contributed $0.3 million
to the above increases. As a percentage of net revenues, marketing, general and
administrative expenses increased from 28.7% for the three months ended
September 30, 1999 to 34.0% for the three months ended September 30, 2000. This
increase as a percentage of net revenues was due to adding additional personnel
to support the expansion of our business in 2000.
10 of 17
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $0.1 million, or 20.0%, to $0.6 million for the three months ended
September 30, 2000 from $0.5 million for the three months ended September 30,
1999. This increase was due largely to our hiring additional personnel to
develop new allografts and technologies combined with the cost of research
studies to test new allografts and new allograft applications. We expense all
research and development costs as incurred. As a percentage of net revenues,
research and development expenses decreased from 5.7% for the three months ended
September 30, 1999 to 3.9% for the three months ended September 30, 2000. This
decrease was due to our net revenues rising without a commensurate increase in
research and development expenses.
INTEREST INCOME AND EXPENSE - NET. Net interest income for the three months
ended September 30, 2000 was $288,000 compared to net interest expense of
$72,000 for the three months ended September 30, 1999. The interest income for
the three months ended September 30, 2000 was due to the investment of our stock
offering proceeds from August 14, 2000 to September 30, 2000. The interest
expense for the three months ended September 30, 1999 was largely due to
borrowings under our line of credit facility entered into during the second
quarter of 1999, as well as interest paid on a number of capital leases entered
into after the first quarter of 1999.
INCOME TAX EXPENSE. Income tax expense for the three months ended September
30, 2000 was $0.8 million versus $0.4 million for the three months ended
September 30, 1999. The increase was due to the increase in income before taxes
for the three months ended September 30, 2000 versus the income before income
tax for three months ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
TOTAL REVENUES. Our total revenues increased by $34.9 million, or 68.6%, to
$85.8 million for the nine months ended September 30, 2000 from $50.9 million
for the nine months ended September 30, 1999.
Fees from tissue distribution increased by $35.4 million, or 72.1%, to
$84.5 million for the nine months ended September 30, 2000 from $49.1 million
for the nine months ended September 30, 1999. The increase in fees from
tissue distribution was due largely to an increase of $26.5 million in
revenues from the distribution of our spinal allografts, an increase of $5.4
million from the distribution of other processed tissue and an increase of
$3.5 million from the distribution of other precision-tooled allografts. The
increase in our revenues from spinal allografts was due primarily to the
increase in volume from three new spinal allografts we introduced in late
1998, plus a new allograft introduced in late 1999. Other processed tissue
revenues increased due to our assumption of the University of Florida Tissue
Bank's ("UFTB") other processed tissue distribution business in April 1999
and our increased expansion of our other processed tissue business from a
regional basis in 1999 to a national basis in 2000. We also expanded our
other processed tissue business internationally, by adding new international
distributors in Europe and Asia in the first six months of 2000. Of the
increase in our revenues from precision-tooled allografts, $2.2 million was
related to allografts we introduced in 1998 and 1999, with $1.3 million from
two new allografts introduced in 2000. Other revenues from core operations,
which consist of tissue processing fees, biomedical laboratory fees and
manufacturing royalties, decreased by $0.5 million to $1.3 million for the
nine months ended September 30, 2000 from $1.8 million for the nine months
ended September 30, 1999. This decrease was due to receiving no processing
fees from UFTB as a result of our assumption of their other processed tissue
distribution business in April 1999 rather than continuing to process UFTB's
other processed tissue for a fee.
MANAGEMENT SERVICES FEES. Management services fees, which consist of
amounts paid to Medtronic Sofamor Danek for management services they provide to
assist in the distribution of our allografts, increased by $17.2 million, or
61.2%, to $45.3 million for the nine months ended September 30, 2000 from $28.1
million for the nine months ended September 30, 1999. The increase in the
absolute amount of these fees was due to the greater revenues generated through
the management services of Medtronic Sofamor Danek. As a percentage of total
revenues, however, these fees decreased from 55.2% for the nine months ended
September 30, 1999 to 52.8% for the nine months ended September 30, 2000. This
decrease in management fees as a percentage of total revenues was attributable
to the management services fees payable by us on certain of our allografts being
70% of revenues derived from distribution of allografts for which Medtronic
Sofamor Danek provides management services for the first six months of 2000
compared to 80% during a portion of the first six months of 1999. In addition,
an increase in distribution of our non-spinal allografts, for which we do not
pay a management services fee, contributed to the reduction in management
services fees as a percentage of total fees.
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<PAGE>
NET REVENUES. Our net revenues increased by $17.7 million, or 77.6 %, to
$40.5 million for the nine months ended September 30, 2000 from $22.8 million
for the nine months ended September 30, 1999. As a percentage of total revenues,
our net revenues increased from 44.8% for the nine months ended September 30,
1999 to 47.2% for the nine months ended September 30, 2000. This increase was
due mainly to the impact of distribution of our non-spinal allografts, for which
we do not pay management services fees.
COSTS OF PROCESSING AND DISTRIBUTION. Costs of processing and distribution
increased by $7.3 million, or 53.3%, to $21.0 million for the nine months ended
September 30, 2000 from $13.7 million for the nine months ended September 30,
1999. As a percentage of net revenues, however, these costs decreased from 60.1
% for the nine months ended September 30, 1999 to 51.9% for the nine months
ended September 30, 2000. This reduction was attributable primarily to
improvements in processing efficiencies achieved through our introduction of
automated processing machinery, as well as efficiencies associated with
increased volume. In addition, the increase in our net revenues due to reduced
management services fees payable by us also resulted in a reduction of the
percentage of our net revenues attributable to costs of processing and
distribution.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses increased by $7.4 million, or 115.6%, to $13.8 million
for the nine months ended September 30, 2000 from $6.4 million for the nine
months ended September 30, 1999. This increase was partially due to the addition
of additional marketing and administrative staff to support our growing
business. Also contributing to the increase was an increase in facilities
expense during 2000 due to additional leased space being leased by us during the
period and real estate and property taxes. Other cost increases included an
increase in distributor commissions, primarily on other processed tissue,
increased depreciation expense for new equipment and the corporate buildings
purchased on March 30, 2000, increased royalties and increased professional fees
and travel related expenses to support our distribution and marketing efforts.
Georgia Tissue Bank, acquired in November 1999 and Alabama Tissue Center
acquired in August 2000 contributed $0.8 million to the above increases. As a
percentage of net revenues, marketing, general and administrative expenses
increased from 28.1 % for the nine months ended September 30, 1999 to 34.1% for
the nine months ended September 30, 2000. This increase as a percentage of net
revenues was due to adding additional personnel to support the expansion of our
business in 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $0.5 million, or 38.5%, to $1.8 million for the nine months ended
September 30, 2000 from $1.3 million for the nine months ended September 30,
1999. This increase was due largely to our hiring additional personnel to
develop new allografts and technologies. We expense all research and development
costs as incurred. As a percentage of net revenues, research and development
expenses decreased from 5.7% for the nine months ended September 30, 1999 to
4.4% for the nine months ended September 30, 2000. This decrease was due to our
net revenues rising without a commensurate increase in research and development
expenses.
INTEREST INCOME AND EXPENSE - NET. Net interest income for the nine
months ended September 30, 2000 was $152,000 compared to net interest expense
of $95,000 for the nine months ended September 30, 1999. The interest income
for the nine months ended September 30, 2000 was due to the investment of our
stock offering proceeds from August 14, 2000 to September 30, 2000. The
interest expense for the nine months ended September 30, 1999 was largely due
to borrowings under our line of credit facility entered into during the
second quarter of 1999, as well as interest paid on a number of capital
leases entered into after the first quarter of 1999.
INCOME TAX EXPENSE. Income tax expense for the nine months ended September
30, 2000 was $1.7 million versus $0.6 million for the nine months ended
September 30, 1999. The increase was due to the increase in income before taxes
for the nine months ended September 30, 2000 versus the income before income tax
for nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our net cash used in operating activities was $8.4 million for the nine
months ended September 30, 2000 compared to net cash used by operating
activities of $3.2 million for the nine months ended September 30, 1999, an
increased use of $5.2 million. During the nine months ended September 30, 2000
cash was provided by operating net income of $2.3 million and an increase in
accrued liabilities of $1.5 million. We used $7.7 million for accounts
receivable and $4.5 million for inventory.
Our net cash used in investing activities increased by $13.9 million to
$15.4 million for the nine months ended September 30, 2000 from $1.5 million for
the nine months ended September 30, 1999. This increase was
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partially due to $0.9 million invested in our new manufacturing facility plus
continued equipment purchases to support our staff and support our automation
efforts. In addition, we paid $1.4 million for our acquisition of the building
and land we previously leased, and the acquisition of additional land for
expansion. In order to finance the purchase, we entered into a 20-year term loan
in the amount of $2.8 million, collateralized by the property. The remainder of
the purchase price was financed with a portion of the proceeds from our sale of
preferred stock during 1999. We also invested $10.0 million in a long-term
Federal Home Loan Bank note, which matures in December of 2001.
Net cash provided by financing activities for the nine months ended
September 30, 2000 was $44.7 million compared to $0.8 million for the same
period in 1999. The increase in cash provided by financing activities was
directly related to the receipt of the $48.1 million in net proceeds from our
initial public stock offering.
Our line of credit facility permits us to borrow up to $6.0 million on a
revolving basis and is collateralized by our accounts receivable. This line of
credit facility expires in December 2000. As of September 30, 2000, we had
available borrowing capacity of $6.0 million under this facility.
On March 30, 2000, we purchased the buildings and land that we currently
occupy, plus an additional 20.8 acres of land for future expansion. The purchase
price for the two buildings and 6.2 acres on which they are situated was $3.6
million, with the additional parcel of land costing approximately $0.6 million.
In order to finance the purchase, we entered into a 20-year term loan in the
amount of $2.8 million, collateralized by the property. The remainder of the
purchase prices was financed with a portion of the proceeds from our sale of
preferred stock during 1999. We continue to lease approximately 18,000 square
feet of space in buildings adjacent to those we purchased and 8,800 square feet
of warehouse space. On June 7, 2000 we started construction of new manufacturing
and administrative buildings on the land purchased on March 30, 2000. Total
estimated cost to construct and equip the new facilities is $25.2 million. We
intend to finance $16.2 million of the cost with additional long-term debt and
the balance of $9.0 million from the proceeds of our public stock offering.
We currently believe that the net proceeds from our public stock offering,
cash from operations and our existing cash and cash equivalents will be
sufficient to meet our anticipated cash requirements for at least the next 12
months. The completion of one or more acquisitions by us could affect our need
for capital.
IMPACT OF INFLATION
Inflation generally affects us by increasing our cost of labor, equipment
and processing tools and supplies. We have not in the past been adversely
impacted by general price inflation.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
Information contained in this filing contains "forward-looking statements"
which can be identified by the use of forward-looking terminology such as
"believes", "expects", "may", "will", "should", or "anticipates" or comparable
terminology, or by discussions of strategy. We cannot assure you that the future
results covered by these forward-looking statements will be achieved. Some of
the matters described in the "Risk Factors" section of our Registration
Statement on Form S-1 relating to our recently completed public offering,
constitute cautionary statements identifying factors with respect to these
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results indicated
in these forward-looking statements. Other factors could also cause actual
results to vary materially from the future results indicated in such
forward-looking statements.
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<PAGE>
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
We are exposed to changes in interest rates based upon financing, investing
and cash management activities. We use a balanced mix of debt maturities along
with both fixed-rate debt, variable-rate debt and derivative financial
instruments (interest rate swaps) to manage exposure to changes in interest
rates. We do not enter into derivatives or other financial instruments for
trading or speculative purposes.
We have an interest rate swap arrangement which involves the exchange of
variable interest rate payments, based on the 30-day LIBOR plus 150 basis
points, without exchanging the notional principal amount. Payments or receipts
on the agreement are recorded as adjustments to interest expense. At September
30, 2000, we had an outstanding swap agreement, maturing March 30, 2005, with a
notional amount of $2,742,667. Under the agreement, we receive a fixed interest
rate of 8.35%. The interest will remain fixed until the 30-day LIBOR is
determined to be greater than or equal to 8%, at which time the interest rate
will revert to the 30-day LIBOR plus 150 basis points. The counter party to this
swap arrangement is a major financial institution.
The fair value of this interest rate swap agreement represents the
estimated receipt of payment that would be made to terminate the agreement. At
September 30, 2000, we would have paid approximately $56,000 to terminate the
agreement. If rates were to move down 100 basis points then we would owe the
bank approximately $152,000 and if the rates were to move up 100 basis points,
then we would receive approximately $41,000 from the bank.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We refer you to our Registration Statement on Form S-1, effective August 9,
2000, for a description of legal proceedings in which we are currently engaged.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT ISSUANCES OF UNREGISTERED SECURITIES
On August 21, 2000 we issued a total of 250,000 shares of Common Stock, par
value $.001 in a private placement to the University of Alabama Health Services
Foundation PC. The securities were issued to purchase substantially all of the
assets of Alabama Tissue Center. The Securities were offered and sold to a
single accredited investor in a financing not involving a public offering and
therefore the transaction was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended.
USE OF PROCEEDS
On August 9, 2000 the Securities and Exchange Commission declared effective
our Registration Statement on Form S-1 (File No. 333-35756). The offering date
was August 10, 2000. The offering has terminated and all of the securities
registered have been sold. The managing underwriters were Bank of America
Securities, LLC, Lehman Brothers, and Stephens, Inc. Our registration was for
5,700,000 shares of Common Stock, par value $.001 per share. We sold 3,800,000
shares and the selling stockholder in the offering sold 1,900,000 shares, in
both cases for $14.00 per share, generating $53.2 million in gross proceeds for
us and $26.6 million in gross proceeds for the selling stockholder. After
deducting approximately $3.7 million in underwriting discounts and commissions
and an estimated $1.4 million in other transaction expenses, our net proceeds
were $48.1 million. None of the payments for underwriting discounts and
commissions and other transaction expenses represented direct or indirect
payment to any of our directors, officers, persons owning 10% or more of any
class of our equity securities or other affiliates.
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<PAGE>
From the effective date of the registration statement through September
30, 2000, the following table identifies the purposes and approximate amounts of
the net proceeds paid directly or indirectly to others:
<TABLE>
<CAPTION>
(thousands)
<S> <C>
Working capital .................................................. $ 7,700
Construction of a new manufacturing facility ..................... 700
Continued research and development ............................... 400
Expansion of tissue supply and distribution programs ............. 600
Purchase of additional manufacturing automation equipment ........ 300
Investments in short-term (mature by 12/00), investment grade,
interest bearing securities .................................. 19,700
Investment in long-term (matures 12/01), investment grade,
interest bearing securities .................................. 10,000
Investment in interest bearing cash and cash equivalent funds .... 8,700
---------
Total use of net proceeds $ 48,100
=========
</TABLE>
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
Regeneration Technologies, Inc.
(Registrant)
Date: November 13, 2000 /s/ Richard R. Allen
-------------------- --------------------------------
Richard R. Allen
Chief Financial Officer
Chief Accounting Officer
</TABLE>
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