UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended MARCH 31, 1996
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 0-19278
OSTEOTECH, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3357370
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
51 JAMES WAY, EATONTOWN, NEW JERSEY 07724
(Address of principal executive offices) (Zip Code)
(908) 542-2800
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since
last report)
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 X No
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 par value - 7,749,121 shares as of April 30, 1996
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996 1995
<S> <C> <C> <C>
Net Revenues:
Service $7,523 $6,245
Product 724 563
Grant 162 174
8,409
Costs and expenses:
Cost of services 3,081 2,558
Cost of products 516 525
Marketing, general and administrative 3,337 2,948
Research and development 880 796
{Other income (expense):
Interest income 104 206
Interest expense (68) (46)
Other 20 46
56 206
Income before income taxes 651 361
Income tax provision, net 480 325
Net income $ 171 $ 36
Net income per share $ .02 $ .01
Shares used in computing net income per share 8,396,677 7,900,210
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
<S> <C> <C> <C>
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 5,637 $ 2,788
Short-term investments 1,987 4,919
Accounts receivable, net 5,653 4,561
Inventories 1,034 1,081
Deferred income taxes 1,208 1,429
Prepaid expenses and other current assets 2,538 2,882
Total current assets 18,057
Equipment and leasehold improvements, net 8,494 8,624
Excess of cost over net assets of business acquired,
less accumulated amortization of $1,008 in 1996 and
$945 in 1995 2,690 2,753
Other assets 1,140 1,133
Total assets $30,381 $30,170
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 4,305 $ 4,078
Notes payable 534 647
Current maturities of long-term debt and
obligations under capital leases 785 800
Total current liabilities 5,624 5,525
Long-term debt and obligations under capital leases 1,401 1,598
Other liabilities 501 453
Total liabilities 7,526 7,576
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,676,595 shares
authorized; no shares issued or outstanding
Common stock, $.01 par value; 20,000,000 shares
authorized; issued and outstanding 7,748,475
shares in 1996 and 7,198,179 shares in 1995 77 72
Additional paid-in capital 29,892 29,782
Currency translation adjustments (74) (48)
Accumulated deficit (7,040) (7,212)
Total stockholders' equity 22,855 22,594
Total liabilities and stockholders' equity $30,381 $30,170
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996 1995
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES}
Net income $ 171 $ 36
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 631 365
Deferred income taxes 221 286
Other items, net 5 4
Changes in assets and liabilities:
Accounts receivable (1,104) (874)
Inventories 37 (276)
Prepaid expenses and other current assets 322 (441)
Accounts payable and other liabilities 213 760
Net cash provided by (used in) operating activities 496 (140)
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (349) (761)
Purchases of investments (1,987) (985)
Proceeds from sale of investments 4,919
Increase in other assets (85)
(8)
Net cash provided by (used in) investing activities 2,498 (1,754)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 116 35
Proceeds from issuance of notes payable 94 110
Proceeds from issuance of long-term debt 215
Principal payments on notes payable (207) (80)
Principal payments on long-term debt
and obligations under capital leases (196)
(105)
Net cash provided by (used in) financing activities (193)
175
Effect of exchange rate changes on cash 48 (38)
Net increase (decrease) in cash and cash equivalents 2,849 (1,757)
Cash and cash equivalents at beginning of period 2,788
3,785
Cash and cash equivalents at end of period $5,637
$2,028
Supplementary cash flow data:
Cash paid during the period for interest $ 67 $ 48
Cash paid during the period for taxes 6 7
Capital lease obligations entered into during the period 84
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting only of normal recurring accruals)
considered necessary by management to present fairly the Company's
consolidated financial position as of March 31, 1996 and December 31,
1995, and the consolidated results of operations and the consolidated
cash flows for the three-month periods ended March 31, 1996 and 1995.
The results of operations for the respective interim periods are not
necessarily indicative of the results to be expected for the full year.
The condensed consolidated financial statements should be read in
conjunction with the audited financial statements for the year ended
December 31, 1995 which were included as part of the Company's Report on
Form 10-K.
2. RECLASSIFICATIONS
Certain of the 1995 amounts have been reclassified for comparative
purposes.
-5-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
RESULTS OF OPERATIONS
NET INCOME
Net income in the first quarter of 1996 increased to $171,000 or $.02 per share
compared to net income of $36,000 or $.01 per share in the first quarter of
1995.
Following is a discussion of factors which affected results of operations for
the three-month periods ended March 31, 1996 and 1995.
REVENUES
Revenues in the first quarter of 1996 increased 20% to $8,409,000 from
$6,982,000 in the first quarter of 1995. During the first three months of 1996
and 1995, two of the Company's major customers accounted for 65% and 23% and
64% and 21%, respectively, of revenues.
The increase in revenues in the first quarter of 1996 resulted principally from
increased demand for the Company's Grafton (trademark) Demineralized Bone
Matrix (DBM) Gel and ceramic hydroxyapatite powders and the introduction of
Grafton DBM Flex in January 1996.
COST OF SERVICES AND PRODUCTS
Cost of services as a percentage of service revenues remained unchanged at 41%
in the first quarter 1996 and 1995.
Cost of products as a percentage of product revenues was 71% in the first
quarter of 1996 compared to 93% in the same period in 1995. The decrease in
costs as a percentage of revenues results primarily from a shift in revenue mix
towards products with higher gross margins.
Marketing, General and Administrative
Marketing, general and administrative expenses increased $389,000 or 13% in the
first quarter of 1996 compared to the same period last year. The increase was
primarily attributable to increases in facilities costs and administrative
costs associated with the continued expansion of the business.
-6-
<PAGE>
Research and Development
Research and development expenses increased $84,000 or 11% in the first quarter
of 1996. The increase was primarily attributable to increased spending
associated with the development of additional allograft tissue forms which are
expected to be introduced into the market in 1996, expansion of the Company's
viral inactivation process to a broader range of allograft tissue and continued
development of Polyactive products.
OTHER INCOME, NET
Interest income decreased $102,000 in the first quarter of 1996 due to the
repayment of a fully reserved note receivable from a significant customer which
had a higher interest rate than current investments. The note had an
outstanding balance of $4.1 million at March 31,1995 and was fully repaid
during 1995.
Interest expense increased $22,000 in the first quarter of 1996 as a result of
higher outstanding borrowings related to capital expenditures.
PROVISION FOR INCOME TAXES
The provision for income taxes increased by $155,000 in the first quarter of
1996 as a result of higher US taxable income. The provision for income taxes
in each period reflects a rate in excess of the Federal statutory income tax
rate due to state income taxes and foreign losses for which no current tax
benefits were available.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had cash and cash equivalents and short-term
investments of $7,624,000 compared to $7,707,000 at December 31, 1995. Working
capital increased by $298,000 to $12,433,000. The increase in working capital
resulted principally from an increase in accounts receivable resulting from
higher revenues partially offset by decreases in deferred income taxes, prepaid
expenses and other current assets.
The Company has a loan and security agreement with a US bank which provides for
borrowings of up to $3,000,000 under a revolving line of credit and $4,000,000
under an equipment line of credit. At March 31, 1996, $1,904,000 was
outstanding under the equipment line of credit and there were no borrowings
outstanding under the revolving line of credit.
The Company also has a line of credit with a Dutch bank which provides for
borrowings of up to 5,000,000 Dutch Guilders ("dfl"), or approximately
$3,024,000 at the March 31, 1996 exchange rate. One of the Company's facility
leases requires it to maintain a declining bank guarantee which reduced the
amount available for borrowings to 4,165,000 dfl, or approximately $2,519,000
at the March 31, 1996 exchange rate. Additionally, based upon the Company's
cash
-7-
position and anticipated cash flow, the Company and the bank agreed that the
Company would limit its use of the credit line to more than 2,165,000 dfl, or
approximately $1,309,000 in 1996. There were no borrowings under this credit
line as of March 31, 1996.
The Company is involved in lawsuits principally involving allegations of spinal
fixation device products liability. See Item 1. LEGAL PROCEEDINGS. The
Company believes the claims to be without merit and all such cases are and will
continue to be vigorously defended. Pursuant to its distribution agreement with
Ulrich, KG ("Ulrich"),the manufacturer of the spinal system distributed by the
Company, Ulrich has agreed to indemnify the Company for liabilities incurred in
connection with the distribution of Ulrich's products. Additionally, the
Company maintains products liability insurance coverage and is also named as a
co-insurerd on Ulrich's products liability insurance policy. Although the
Company believes that it will ultimately prevail in these cases, litigation is
subject to many uncertainties and it is possible that some of the pending cases
could be decided against the Company. It is possible that the results of
operations or liquidity and capital resources of the Company could be
materially adversely affected by the ultimate outcome of the pending litigation
or as a result of the costs of contesting such suits if the ultimate liability
exceeds the amount that the company recovers from Ulrich and/or insurance
policies. The Company is unable to estimate the potential liability, if any,
that may result from the pending litigation and, accordingly, no provision for
any liability (except for accrued legal costs) has been made in the
consolidated financial statements.
The Company believes that its cash and cash equivalents, short-term investments
and available lines of credit, together with anticipated cash flow from
operations, will be sufficient to meet its near-term requirements, but may not
be adequate to fully develop and commercialize all products currently under
development by the Company. From time to time the Company may seek additional
funds through equity or debt financing. However, there can be no assurances
that such additional funds will be available to the Company, or if available,
that such funds will be available on terms favorable to the Company.
-8-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. ORTHOPEDIC BONE SCREW PRODUCTS LIABILITY LITIGATION
As of May 7,1996, the Company had been served with 177 lawsuits (145 of which
were filed during 1996) involving approximately 3,400 plaintiffs which name
spinal implant manufacturers, distributors (including the Company) and/or
promoters as defendants. The lawsuits against the Company involve allegations
of, either alone or in combination, negligence, products liability and
conspiracy or other concerted action between the Company and other
distributors, manufacturers and promoters of similar products. The Company
believes the claims to be without merit and all such cases are and will
continue to be vigorously defended. These lawsuits have been filed in various
federal and state courts throughout the country and are in preliminary stages.
Of these lawsuits, 174 which were commenced in federal court have been, or are
being, consolidated with other similar actions for coordinated proceedings in
the District Court for the Eastern District of Pennsylvania in an action
entitled IN RE: ORTHOPEDIC BONE SCREW PRODUCTS LIABILITY LITIGATION, MDL Dkt
1014 (E.D. Pa.) (the "MDL Litigation"). These individual lawsuits are not
class action lawsuits, however they will remain coordinated for further
pretrial purposes. Since the lawsuits are not class action lawsuits additional
plaintiffs may file additional lawsuits in the future alleging similar claims.
The Company believes that it has affirmative defenses, including, without
limitation, defenses based on federal preemption of claims based on state law,
the expiration of the applicable statute of limitations, the learned
intermediary defense, the failure of a cause of action to exist where no
malfunction of a Company-distributed spinal implant has occurred, the fact that
the product distributed by the Company was not the product at issue, the fact
that the Company has not engaged in a conspiracy with other manufacturers or
distributors and the fact that these individual lawsuits otherwise are without
merit. On April 8, 1996, the presiding judge in the MDL Litigation entered an
order rejecting the following claims alleged in these lawsuits: failure to
warn; manufacturing, design and testing defect and implied warranty. This
ruling, however, is subject to the United States Supreme Court's decision in a
case with facts somewhat similar to these cases which is scheduled to be
decided during the next year. With respect to the conspiracy and concerted
action claims, the Company has joined in an "omnibus" motion to dismiss these
claims which was filed in April 1996. Although the Company believes that it
will ultimately prevail in these cases, litigation is subject to many
uncertainties and it is possible that some of the pending cases could be
decided against the Company.
All of the actions seek monetary damages of no less than $50,000 per plaintiff.
The aggregate monetary damages eventually sought by all of the plaintiffs and
the related costs to defend such actions may be substantial. Pursuant to the
Company's distribution agreement with Ulrich, KG ("Ulrich"),the manufacturer of
the spinal system distributed by the Company, Ulrich has agreed to indemnify
the Company for liabilities incurred in connection with the distribution of
Ulrich's products. However, there can be no assurance that Ulrich will have the
financial resources necessary to comply with its indemnification obligation to
the Company.
-9-
Additionally, the Company maintains its own products liability insurance
coverage and has also been named as a co-insurerd on Ulrich's product liability
insurance policy. The Company's insurance company has denied, and Ulrich's
insurance company has indicated that it may deny, coverage with respect to
certain of these cases.
2. KEHR ET AL. V. MUSCULOSKELETAL TRANSPLANT FOUNDATION AND
OSTEOTECH, INC. (W.D. MICH.)
On March 26, 1996, the Company was served with a lawsuit that was filed in Kent
County Circuit Court in Grand Rapids, Michigan. The action is based on
products liability alleging that the Company and co-defendant Musculoskeletal
Transplant Foundation ("MTF"), mislabeled and mispackaged processed human bone
tissue. On April 24, 1996, co-defendant MTF, with the Company's consent,
removed this action to the United States District Court for the Western
District of Michigan.
The Company believes that this lawsuit is without merit and the case is
currently being defended by the Company's insurance carrier, with the general
reservation of rights.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Exhibit Page
NUMBER DESCRIPTION NUMBER
11.1 Computation of Primary Net Income
Per Share E-1
11.2 Computation of Fully Diluted Net Income
Per Share E-2
27.0 Financial Data Schedule E-3
(b) Reports on Form 8-K
On February 2, 1996, the Company filed with the Commission a Current
Report on Form 8-K dated January 31, 1996, to announce that it introduced
a new proprietary form of human demineralized bone matrix. The new graft
form, Grafton{ } Demineralized Bone Matrix (DBM) Flex, is the result of
patented technology developed by the Company that utilizes specially
milled allograft bone fibers which are capable of being processed into
multiple shapes and sizes.
-10-
<PAGE>
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.
OSTEOTECH, INC.
(Registrant)
Date: May 9, 1996 By: /S/ RICHARD W. BAUER
Richard W. Bauer
President, Chief
Executive Officer
Date: May 9, 1996 By: /S/ MICHAEL J. JEFFRIES
Michael J. Jeffries
Executive Vice President
Chief Operating Officer
Chief Financial Officer
-11-
EXHIBIT 11.1
OSTEOTECH, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996 1995
<S> <C> <C> <C>
Net income $171,000 $ 36,000
Shares used in computing net income per share:
Weighted average Common shares outstanding 7,564,830 7,096,349
Weighted average Common shares issuable
upon the exercise of outstanding stock
options and warrants 1,923,213 874,197
Application of assumed proceeds towards
repurchase of outstanding Common shares
using the Treasury Stock method (a) (1,091,366) (70,336)
Shares used in computation 8,396,677 7,900,210
Primary net income per share $0.02 $ 0.01
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
</TABLE>
(a) Computed using assumed proceeds of $8,267,000 and $381,000 and,
with respect to the repurchase of outstanding common shares, an
average market
value of $7.58 and $5.42 in 1996 and 1995,
respectively.
E-1
EXHIBIT 11.2
OSTEOTECH, INC. AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996 1995
<S> <C> <C> <C>
Net income $171,000 $ 36,000
Shares used in computing net income per share:
Weighted average Common shares outstanding 7,564,830 7,096,349
Weighted average Common shares issuable
upon the exercise of outstanding stock
options and warrants 1,923,213 874,197
Application of assumed proceeds towards
repurchase of outstanding common shares
using the Treasury Stock method (a) (1,091,366) (70,336)
Shares used in computation 8,396,677 7,900,210
Net income per share assuming full dilution $ 0.02 $ 0.01
</TABLE>
(a) Computed using assumed proceeds of $8,267,000 and $381,000 and,
with respect to the repurchase of outstanding common shares, an
average market value of $7.58 and $5.42 in 1996 and 1995,
respectively.
E-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Osteotech, Inc. and Subsidiaries Condensed Consolidated Balance Sheet as of
March 31, 1996 and the Condensed Consolidated Statement of Operations for the
three months ended March 31, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 5,637,000
<SECURITIES> 1,987,000
<RECEIVABLES> 5,834,000
<ALLOWANCES> 181,000
<INVENTORY> 1,034,000
<CURRENT-ASSETS> 18,057,000
<PP&E> 13,756,000
<DEPRECIATION> 5,262,000
<TOTAL-ASSETS> 30,381,000
<CURRENT-LIABILITIES> 5,624,000
<BONDS> 1,401,000
0
0
<COMMON> 77,000
<OTHER-SE> 22,778,000
<TOTAL-LIABILITY-AND-EQUITY> 30,381,000
<SALES> 724,000
<TOTAL-REVENUES> 8,409,000
<CGS> 516,000
<TOTAL-COSTS> 7,814,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,000
<INTEREST-EXPENSE> 68,000
<INCOME-PRETAX> 651,000
<INCOME-TAX> 480,000
<INCOME-CONTINUING> 171,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 171,000
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
