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 September 30, 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 -
7,812,011 shares as of October 31, 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 Nine Months
Ended September 30, Ended September 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Net Revenues:
<S> <C> <C> <C> <C>
Service $8,340 $6,148 $23,441 $17,991
Product 512 649 1,877 2,056
Grant 158 180 476 538
--------------- --------------- --------------- ---------------
9,010 6,977 25,794 20,585
Costs and expenses:
Cost of services 3,188 2,628 9,315 7,645
Cost of products 661 523 1,746 1,620
Marketing, general and administrative 3,206 2,511 9,346 7,924
Research and development 1,099 938 3,282 2,801
Provision for termination of
distribution agreement 980
--------------- --------------- --------------- ---------------
8,154 6,600 23,689 20,970
Other income (expense):
Recovery of principal on note from
a significant customer 4,078 4,147
Interest income 112 135 321 489
Interest expense (52) (74) (181) (172)
Other 9 15 34 13
--------------- --------------- --------------- ---------------
69 4,154 174 4,477
--------------- --------------- --------------- ---------------
Income before income taxes 925 4,531 2,279 4,092
Income tax provision (benefit), net 674 (178) 1,655 92
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 251 $4,709 $ 624 $ 4,000
======================================================================================================================
Net income per share
Primary $ .03 $ .58 $ .08 $ .50
Assuming full dilution $ .03 $ .57 $ .08 $ .48
- ----------------------------------------------------------------------------------------------------------------------
Shares used in computing net income per share
Primary 8,242,823 8,143,315 8,304,495 8,017,862
Assuming full dilution 8,242,823 8,270,101 8,304,495 8,247,574
======================================================================================================================
</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>
September 30, December 31,
1996 1995
- ----------------------------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 5,615 $ 2,788
Short-term investments 2,973 4,919
Accounts receivable, net 6,167 4,561
Deferred income taxes 643 1,429
Prepaid expenses and other current assets 3,064 3,963
--------------------------------------------
Total current assets 18,462 17,660
Equipment and leasehold improvements, net 8,636 8,624
Excess of cost over net assets of business acquired,
less accumulated amortization of $1,134 in 1996
and $945 in 1995 2,564 2,753
Intangible assets, net of accumulated amortization of
$183 in 1996 and $113 in 1995 591 610
Other assets 546 523
================================================================================================================
Total assets $30,799 $30,170
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 5,006 $ 4,078
Notes payable 92 647
Current maturities of long-term debt and
obligations under capital leases 785 800
--------------------------------------------
Total current liabilities 5,883 5,525
Long-term debt and obligations under capital leases 1,008 1,598
Other liabilities 322 453
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 7,213 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 7,810,674
shares in 1996 and 7,198,179 shares in 1995 78 72
Additional paid-in capital 30,197 29,782
Currency translation adjustments (101) (48)
Accumulated deficit (6,588) (7,212)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 23,586 22,594
--------------------------------------------
====================================================================
Total liabilities and stockholders' equity $30,799 $30,170
================================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1996 1995
- --------------------------------------------------------------------------------------------------------
Cash Flow From Operating Activities
<S> <C> <C>
Net income $ 624 $ 4,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for termination of distribution agreement 980
Depreciation and amortization 1,942 1,238
Deferred income taxes 786 (730)
Other items, net (11) 13
Changes in assets and liabilities:
Accounts receivable (1,617) (526)
Prepaid expenses and other current assets 827 (307)
Accounts payable and other liabilities 817 73
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 3,368 4,741
Cash Flow From Investing Activities
Capital expenditures (1,328) (2,995)
Purchases of investments (5,947) (7,860)
Proceeds from sale of investments 7,894 3,928
Increase in other assets (495) (559)
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 124 (7,486)
Cash Flow From Financing Activities
Proceeds from issuance of common stock 421 782
Proceeds from issuance of notes payable 94 110
Proceeds from issuance of long-term debt 1,227
Principal payments on notes payable (649) (365)
Principal payments on long-term debt
and obligations under capital leases (590) (395)
Proceeds from other long-term obligations 150
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (724) 1,509
Effect of exchange rate changes on cash 59 (59)
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,827 (1,295)
Cash and cash equivalents at beginning of period 2,788 3,785
========================================================================================================
Cash and cash equivalents at end of period $5,615 $ 2,490
========================================================================================================
Supplementary cash flow data:
Cash paid during the period for interest $ 189 $ 168
Cash paid during the period for taxes 782 84
Capital lease obligations entered into during the period 282
</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 September 30, 1996 and December
31, 1995, and the consolidated results of operations for the
three-month and nine-month periods ended September 30, 1996 and 1995,
and the consolidated cash flows for the nine-month periods then ended.
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. Financing Arrangements
Effective as of March 1996, the Company amended its loan and security
agreement with a Dutch bank which provides for borrowings up to
5,000,000 Dutch Guilders ("dfl"), or approximately $2,924,000 at the
September 30, 1996 exchange rate. The amendment extends the term of the
agreement through June 1997 and reduces the annual rate of interest on
borrowings from the bank's prime rate plus a margin of 2.5% to the
bank's prime rate plus a margin of 2.0%. Additionally, the Company has
voluntarily agreed to limit its borrowings in 1996, if any, to no more
than 3,000,000 dfl, or approximately $1,755,000 at the September 30,
1996 exchange rate.
Effective as of May 1996, the Company amended its loan and security
agreement with a U.S. bank which provides for borrowings under a
revolving line of credit and an equipment line of credit. The amendment
extends the term of the agreement through May 1997 and reduces the
annual rate of interest on equipment advances from the bank's prime
rate plus a margin of .75% to the bank's prime rate plus a margin of
.25%.
3. Reclassifications Certain of the 1996 and 1995 amounts have been
reclassified for comparative purposes.
-5-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information contained herein contains "forward-looking statements" (as such term
is defined in the Private Securities Litigation Reform Act of 1995) which can be
identified by the use of forward-looking terminology such as "believes",
"expects", "may", "will", "should", or "anticipates" or the negative thereof or
other variations thereon or comparable terminology. Certain statements contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other sections herein, including without limitation, statements
regarding the Company's liquidity and capital resources, and restructuring of
the Netherlands operations and other statements contained herein regarding
matters that are not historical facts, are forward-looking statements. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. The matters set forth in Exhibit 99.0 hereto
constitute cautionary statements identifying important factors with respect to
such forward-looking statements, including risks and uncertainties, that could
cause actual results to vary materially from the future results indicated,
expressed or implied, in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results indicated
in such forward-looking statements.
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
Results of Operations
Net Income
Net income in the third quarter of 1996 was $251,000 or $.03 per share compared
to $4,709,000 or $.58 per share in the third quarter of 1995. Net income in the
first nine months of 1996 was $624,000 or $.08 per share compared to $4,000,000
or $.50 per share in the first nine months of 1995. Results of operations in
1995 were affected by $4,147,000 of principal payments received on a fully
reserved note from a significant customer and a pre-tax charge of $980,000
resulting from the Company's decision to terminate its distribution agreement
for trauma implant products. Additionally, in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes", the
Company recognized a deferred tax asset of $2,232,000 in the third quarter of
1995 resulting in a net tax benefit of $178,000 in the third quarter and a net
tax provision of $92,000 in the nine months ended September 30, 1995.
Following is a discussion of factors which affected results of operations for
the three-month and nine-month periods ended September 30, 1996 and 1995.
Revenues
Revenues in the third quarter of 1996 increased 29% to $9,010,000 from
$6,977,000 in the third quarter of 1995. Revenues in the first nine months of
1996 increased 25% to $25,794,000 as compared to $20,585,000 in the nine months
ended September 30, 1995. During the third quarter and first nine months of
1996, two of the Company's major customers accounted for 65% and 25% and 65% and
24%, respectively, of revenues.
-6-
<PAGE>
The increase in revenues in the third quarter and first nine months of 1996
resulted principally from increased demand for the Company's allograft processed
tissue including Grafton(R) Demineralized Bone Matrix (DBM) Gel and Grafton DBM
Flex which was introduced in January 1996.
Cost of Services and Products
Cost of services as a percentage of service revenues was 38% and 40% in the
third quarter and first nine months of 1996, respectively, compared to 43% and
42% in the same periods last year. The decrease in costs as a percentage of
revenues results primarily from a shift in revenue mix toward services with
higher gross margins.
Cost of products as a percentage of product revenues was 129% and 93% in the
third quarter and first nine months of 1996, respectively, compared to 81% and
79% in the same periods last year. Although product revenues have declined,
costs have increased primarily as a result of higher product liability insurance
premiums.
Marketing, General and Administrative
Marketing, general and administrative expenses increased $695,000 or 28% in the
third quarter and $1,422,000 or 18% in the first nine months of 1996, compared
to the same periods last year. The increases were primarily attributable to an
increase in facilities and expanded marketing activities associated with the
development of a national network of independent agents.
Research and Development
Research and development expenses increased $161,000 and $481,000 in the third
quarter and first nine months of 1996, respectively, or 17% in both periods
compared to the same periods last year. The increases were primarily
attributable to increased spending associated with the development of additional
allograft tissue forms which have been or are expected to be introduced into the
market during 1996, expansion of the Company's viral inactivation process to a
broader range of allograft tissue and the development of PolyActive products
(See Subsequent Events - Restructuring).
Provision for Termination of Distribution Agreement
In June 1995, the Company terminated its distribution agreement for trauma
implant products with its supplier, aap, GmbH, of Berlin, Germany, due to aap's
inability to meet certain material covenants of the agreement. As a result of
this termination the Company recorded a charge of $980,000 consisting
principally of inventory write-offs, employee termination costs and legal fees.
Other Income, net
Other income, net decreased $4,085,000 and $4,303,000 in the third quarter and
first nine months of 1996. During the third quarter of 1995 $4,078,000 of
principal payments were received on a fully reserved note from a significant
customer, reducing the outstanding balance on the note to $0 at September
30, 1995.
-7-
<PAGE>
Provision for Income Taxes
The provision for income taxes increased by $852,000 and $1,563,000 in the third
quarter and first nine months 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.
The tax benefit of $178,000 in the third quarter of 1995 is due to U.S. losses
resulting primarily from the $980,000 charge associated with the termination of
the distribution agreement for trauma implant products.
Liquidity and Capital Resources
At September 30, 1996, the Company had cash and cash equivalents and short-term
investments of $8,588,000 compared to $7,707,000 at December 31, 1995. Working
capital increased by $444,000 to $12,579,000.
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 September 30, 1996, $1,552,000 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 dfl, or approximately $2,924,000 at the September
30, 1996 exchange rate. An analysis of the Company's cash position and
anticipated cash flow indicated that it most likely would not be necessary to
utilize a significant portion of the line of credit during 1996 and, therefore,
the Company has voluntarily agreed to limit its borrowings, if any, to no more
than 3,000,000 dfl, or approximately $1,755,000 in 1996. Additionally, one of
the Company's facility leases requires it to maintain a declining bank guarantee
which reduced the amount available for borrowings to 2,314,000 dfl, or
approximately $1,353,000 at the September 30, 1996 exchange rate. There were no
borrowings under this credit line as of September 30, 1996.
The Company is involved in lawsuits principally involving allegations of spinal
fixation device products liability (See Part II - Item 1. LEGAL PROCEEDINGS).
The Company believes the claims to be without merit and all such cases have been
and will continue to be vigorously defended. Pursuant to its distribution
agreement with Heinrich C. Ulrich, KG ("Ulrich"),the manufacturer of the spinal
system distributed by the Company which is the subject of these lawsuits, 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-insured 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
-8-
<PAGE>
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
ultimateoutcome 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 such 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 possible future
liability 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.
Subsequent Event - Restructuring of The Netherlands Operations
In October, the Company announced a plan to restructure its operations in
Leiden, The Netherlands to focus the Company's efforts on building its current
revenue producing ceramic and titanium plasma spray coating services and ceramic
powders and products. As a result of this restructuring, the Company will
immediately discontinue investing in its long-term PolyActive(TM) polymer
research and development program, which includes the development of an adhesion
barrier product and an artificial skin product. OsteoActive(TM) Bone Void
Filler, the lead product from the polymer research and development program, will
also be discontinued. This determination has resulted in cessation of all
marketing efforts as well as clinical trials which were initiated to pursue a
Council of Europe designation. Since its market introduction, the only revenue
derived from OsteoActive has been from stocking orders to distributors in the
third quarter of 1996 totaling approximately $48,500.
Other than OsteoActive stocking orders and annual polymer research and
development grant revenues estimated at approximately $600,000, the
restructuring of The Netherlands operations will have no impact on the Company's
revenue base but is expected to result in the reduction of operating expenses of
approximately $1 million annually.
As a result of the restructuring of The Netherlands operations, the Company
expects to record a pre-tax restructuring charge in the fourth quarter of 1996
of approximately $1,350,000 consisting primarily of employee termination costs,
write-offs of equipment, intangible assets and inventories and costs associated
with the planned sub-leasing of office space on which the company has a
long-term lease.
-9-
<PAGE>
Since the Company's acquisition of The Netherlands operations in May, 1992,
these operations have incurred pretax losses each year, including a loss of
$1,384,000 in the year ended December 31, 1995 and a pretax loss of $1,256,000
in the nine- month period ended September 30, 1996. Since the Company cannot
take these losses into account when determining its consolidated tax provisions
until such time as The Netherlands operations report a pretax profit, the
Company has been reporting unusually high effective tax rates, which in the nine
months ended September 30, 1996 was 72.6%. As these operations move toward
profitability due to the restructuring, the Company's effective tax rate will
decrease toward a more expected level. Additionally, when these operations
become profitable, the Company will recognize the benefit of net operating
losses accumulated since the acquisition and will begin to utilize these losses
to offset future tax liabilities when it files its tax returns.
-10-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. Orthopaedic Bone Screw Products Liability Litigation
- -------------------------------------------------------
As previously reported, the Company had been named as a defendant in
approximately 95 lawsuits involving approximately 4,000 plaintiffs brought
against spinal implant manufacturers, distributors (including the Company) and
promoters. The majority of these actions, all of which are individual lawsuits
and not class actions, are pending in federal court and 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: Orthopaedic Bone Screw Products Liability Litigation, MDL Dkt 1014 (E.D.
Pa.) (the "MDL Litigation"). On August 22, 1996, the district judge presiding
over the MDL Litigation, Honorable Louis C. Bechtle, entered an order granting
an omnibus motion to dismiss 81 of these actions. The remaining 14 lawsuits
against the Company were not a part of the MDL Litigation, and thus not subject
to the August 22, 1996 Order. The Company believes that the claims in these
remaining actions are without merit, and all such cases are, and will continue
to be, vigorously defended.
2. Osteotech, Inc. v. Biosystems of New England, Inc., C.A. No.
96-11908 (MRW) (D. Mass.)
--------------------------
On September 24, 1996, The Company commenced an action in the District Court for
the District of Massachusetts, against Biosystems of New England, Inc.
("Biosystems"), for breach of contract and unfair trade practices. On or about
October 15, 1996, Biosystems served its answers and counterclaims on the
Company, which alleges violations of federal antitrust statutes, unfair trade
practices, and interference with contractual relations.
The Company believes that the counterclaims are without merit and will move for
an order dismissing the counterclaims. In addition, the Company believes it has
affirmative defenses, including but not limited to failure to state a claim upon
which relief can be granted, lack of standing, the doctrine of unclean hands,
laches, and waiver and estoppel.
-11-
<PAGE>
ITEM 4. 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
99.0 Certain Factors to Consider in Connection
with Forward-Looking Statements E-4
(b) Reports on Form 8K
None
-12-
<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: November 12, 1996 By: /s/ Richard W. Bauer
- ----- -------- -------- ------------------------
Richard W. Bauer
President, Chief
Executive Officer
Date: November 12, 1996 By: /s/ Michael J. Jeffries
- ----- ----------------- ---------------------------
Michael J. Jeffries
Executive Vice President
Chief Operating Officer
Chief Financial Officer
-13-
<PAGE>
EXHIBIT 11.1
OSTEOTECH, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------------- --- ---------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $251,000 $4,709,000 $624,000 $4,000,000
-------- ---------- -------- ----------
Shares used in computing net
income per share:
Weighted average Common shares
outstanding 7,799,014 7,121,409 7,708,261 7,108,070
Weighted average Common shares
issuable upon the exercise of
outstanding stock options and
warrants 1,336,573 1,628,628 1,430,849 1,594,199
Application of assumed
proceeds towards repurchase
of outstanding Common shares
using the Treasury Stock
method (892,764)(a) (606,722)(a) (834,615)(b) (684,407)(b)
------------ ------------ ------------ ------------
Shares used in computation 8,242,823 8,143,315 8,304,495 8,017,862
--------- --------- --------- ---------
Primary net income per share $.03 $.58 $.08 $.50
---- ---- ---- ----
</TABLE>
a) Computed using assumed proceeds of $5,679,766 and average market value
of $6.36 in 1996 and proceeds of $3,959,000 and an average market value of $6.53
in 1995.
b) Computed using assumed proceeds of $5,833,961 and an average market
value of $6.99 in 1996 and proceeds of $3,751,000 and an average market value of
$5.48 in 1995.
E-1
EXHIBIT 11.2
OSTEOTECH, INC. AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------------- --- -----------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $251,000 $4,709,000 $624,000 $4,000,000
-------- ---------- -------- ----------
Shares used in computing net
income per share:
Weighted average Common shares
outstanding 7,799,014 7,121,409 7,708,261 7,108,070
--------- --------- --------- ---------
Weighted average Common shares
issuable upon the exercise of
outstanding stock options and
warrants 1,336,573 1,628,628 1,430,849 1,594,199
--------- --------- --------- ---------
Application of assumed
proceeds towards repurchase
of outstanding Common shares
using the Treasury Stock
method (892,764)(a) (479,936)(a) (834,615) (b) (454,695)(b)
------------ ------------ --------- ------------
Shares used in computation 8,242,823 8,270,101 8,304,495 8,247,574
--------- --------- --------- ---------
Net income per share
assuming full dilution $.03 $.57 $.08 $.48
---- ---- ---- ----
</TABLE>
a) Computed using assumed proceeds of $5,679,766 and an average market
value of $6.36 in 1996 and proceeds of $3,959,000 and a closing market value of
$8.25 in 1995.
b) Computed using assumed proceeds of $5,833,961 and an average market
value of $6.99 in 1996 and proceeds of $3,751,000 and a closing market value of
$8.25 in 1995.
E-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Osteotech, Inc. and Subsidiaries Consolidated Balance Sheet as of September 30,
1996 and the Condensed Consolidated Statement of Operations for the nine months
ended September 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000874734
<NAME> Osteotech, Inc.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,615,000
<SECURITIES> 2,973,000
<RECEIVABLES> 6,330,000
<ALLOWANCES> 163,000
<INVENTORY> 944,000
<CURRENT-ASSETS> 18,462,000
<PP&E> 15,093,000
<DEPRECIATION> 6,457,000
<TOTAL-ASSETS> 30,799,000
<CURRENT-LIABILITIES> 5,883,000
<BONDS> 1,008,000
0
0
<COMMON> 78,000
<OTHER-SE> 30,096,000
<TOTAL-LIABILITY-AND-EQUITY> 30,799,000
<SALES> 1,877,000
<TOTAL-REVENUES> 25,794,000
<CGS> 1,746,000
<TOTAL-COSTS> 11,061,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13,000
<INTEREST-EXPENSE> 321,000
<INCOME-PRETAX> 2,279,000
<INCOME-TAX> 1,655,000
<INCOME-CONTINUING> 624,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 624,000
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
Exhibit 99.0
CERTAIN FACTORS TO CONSIDER IN CONNECTION WITH FORWARD LOOKING
STATEMENTS
Dependence Upon Supply of Human Donors. The Company's
allograft business is dependent on the availability of bone and related
connective tissue from human donors recovered by its customers. The Company
relies on the efforts of not-for-profit donor procurement agencies, including
its current customers, to educate the public and foster an increased willingness
to donate bone tissue. These organizations may not be able to obtain sufficient
donors to meet present or future demand for either allograft bone tissue or any
allograft-based osteogenic materials under development by the Company.
Dependence on Customers; Dependence on Third Party
Reimbursement. Osteotech is the exclusive processor of allograft bone tissue for
large national and international not-for-profit organizations. The Company
charges its customers fees for processing and for finishing and packaging each
unit of bone tissue produced. Osteotech's agreements with its customers
generally provide for the Company to indemnify its customers against liability
arising out of defects in allograft bone tissue caused as a result of processing
by the Company. During 1995, the Musculoskeletal Transplant Foundation ("MTF")
and the American Red Cross ("ARC") accounted for approximately 65% and 20%,
respectively, of the Company's revenues. The processing agreements with ARC and
MTF expire in December 1996 and March 1997, respectively. The Company has
entered into discussions with both organizations to renew their agreements on a
long-term basis. There can be no assurance that these agreements will be renewed
on terms favorable to the Company, if at all. The loss of either MTF or ARC as a
customer or a substantial reduction in the amount of allograft bone tissue used
by each customer would have a material adverse effect on the Company.
The continued ability of the Company's customers to pay the
Company's processing charges is dependent on their ability to distribute
processed bone tissue and collect fees from their customers, which are typically
health care institutions. The ability of the health care institutions to pay
fees to Osteotech's customers depends in part on the extent to which
reimbursement for the costs of such materials and related treatments will
continue to be available from government health administration authorities,
private health coverage insurers and other organizations. Market acceptance of
the Company's products and services may be adversely affected if adequate
coverage and reimbursement levels are not provided by government and third-party
payors.
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Dependence on Acceptance by Medical Community; Limited
Marketing Capability. Osteotech believes the market for processed allograft bone
tissue will continue to be orthopaedic, neurological, plastic and
oral/maxillofacial surgical specialties. The Company's future growth in this
area depends in part upon a wider use by these specialties of allograft bone
tissue as an alternative to autograft bone tissue and other available materials
and treatments. There are currently 19 persons employed by the Company to engage
in efforts to educate surgeons as to the benefits and applications of processed
allograft bone tissue. To complement the Company's education and marketing
strategy, the Company commenced, in the fourth quarter of 1994, to develop a
national network of independent sales agents who assist in the Company's
marketing of products and services as well as further educate the medical
community about processed allograft bone tissue. Currently these sales agents
are focusing their efforts primarily on Grafton and spinal instruments. Although
the Company's education and marketing efforts to date have enabled the Company
to expand its business, there can be no assurance that the Company's future
efforts in this regard will be successful.
Government Regulation. The procurement and transplantation of
allograft bone tissue is subject to federal regulation pursuant to the National
Organ Transplant Act ("NOTA"), a criminal statute which prohibits the purchase
and sale of human organs, including bone and related tissue, for "valuable
consideration." NOTA permits the payment of reasonable expenses associated with
the removal, transportation, processing, preservation, quality control,
implantation and storage of human bone tissue. The Company provides services in
all of these areas, with the exception of removal and implantation. Osteotech
and other bone processors are engaged in ongoing efforts aimed at educating the
medical community as to the benefits of processed allograft bone tissue and the
Company will continue to expand its activities with respect to Grafton. Although
the Company believes that NOTA permits reimbursement of these costs as costs
associated with the processing, transportation and implantation of bone tissue
products, the inability to be reimbursed for its education efforts in the future
could adversely affect the Company's business and prospects. No federal agency
or court has determined whether NOTA is, or will be, applicable to every
allograft-based material which may derive from the Company's processing
technologies. Assuming that NOTA applies to Osteotech's processing of allograft
bone tissue, the Company believes it is in compliance with NOTA, but there can
be no assurance that more restrictive interpretations of, or amendments to, NOTA
will not be adopted in the future which would call into question one or more
aspects of the Company's method of operations.
In December 1993, the Food and Drug Administration (the
"FDA"), pursuant to Section 361 of the Public Health Service Act, imposed
interim rules regulating the recovery, processing, storage
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and distribution of human tissues intended for transplantation, including
allograft bone tissues and musculoskeletal soft tissues. These rules, which are
designed to reduce the risk of transmission of infectious diseases, require,
among other things, that a medical history be obtained and documented for all
tissue donors, blood serum from tissue donors be tested by appropriate
laboratories and methods, written procedures be in place and followed,
appropriate records be maintained, and tissue bank facilities be subject to FDA
inspection. In addition, the interim rule provides that the FDA may require the
recall and destruction of tissues. The Company's operations are dependent on
both the Company and its client tissue banks complying with these rules. The
Company believes that its procedures and those of its clients are in substantial
compliance with these rules. It is anticipated that the FDA will issue revised
regulations in the near future to both clarify and expand the regulations
already in effect. There can be no assurance that the Company will be able to
comply with these revised regulations.
The Company maintains a master file for its HA plasma spray
coating processes with the FDA. The Company's customers are required to obtain
FDA clearance for the marketing in the United States of their implants which are
coated by the Company. These customers refer to the Company's master file in
their application for clearance by the FDA of their implants as medical devices.
The Company's European HA plasma spray coating services meet existing regulatory
requirements in the specific countries where they are marketed.
Ceramic (HA) products which are produced by the Company are
currently distributed only in Europe. These products meet existing regulatory
requirements in the specific countries where they are produced and marketed. The
Company does not intend currently to market these products in the United States;
however, if it does decide to do so, these products would require premarketing
clearance by the FDA as medical devices.
HA powder produced and sold in bulk by the Company in the
United States and Europe is considered to be a component product and, as such,
is not currently subject to regulation by the FDA and similar agencies in
Europe.
Dependence on Key Personnel. The Company's success depends
upon the continued contributions of its executive officers and scientific and
technical personnel. The competition for qualified personnel is intense, and the
loss of services of certain key personnel could adversely affect the business of
the Company.
Patents and Proprietary Rights. Osteotech considers its
allograft processing technology and procedures proprietary and relies primarily
on trade secrets and patents to protect its technology and innovations.
Significant research and development activities have been conducted by
consultants employed by third parties or in
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conjunction with unaffiliated medical institutions. Accordingly, disputes may
arise concerning the proprietary rights to information applied to Company
projects which have been independently developed by the consultants or
researchers at the medical institutions. There can be no assurance that any
pending patent applications will result in issued patents or that any currently
issued patents, or patents which may be issued, will provide Osteotech with
sufficient protection in the case of an infringement of its technology or that
others will not independently develop technology comparable or superior to the
Company's.
Competition. Allograft bone tissue competes with autograft
bone tissue which has traditionally been utilized for human bone transplants.
The Company believes that where the use of autograft is feasible, surgeons and
their patients will generally continue, at least over the near term, to choose
this option in view of the perceived risk of transmission of infectious agents
associated with the transplant of allograft bone tissue. For numerous
circumstances and procedures for which autograft transplantation is either not
feasible or not desirable, there are a number of competing alternatives
available, including allograft bone tissue processed by others.
The Company believes that a majority of the cadaveric bone
banks operating in the United States are engaged in processing allograft bone
tissue for transplantation. Substantially all of these bone tissue banks are
not-for-profit organizations, and, as such, they may be able to supply
processing services at a lower cost than the Company. Osteotech believes it
competes with such entities on the basis of its advanced processing technology
and the quality and quantity of the bone tissue its processing yields. Since the
Company introduced its allograft tissue processing technology in 1987, certain
competing processors have responded with claims of having developed technology
similar to that used by the Company. Although the Company believes, based upon
its knowledge of the industry (but in the absence of reliable industry
statistics), that it processes bone tissue from more donors than any other
processor in the world, there can be no assurance that the Company can continue
to compete successfully in the area of allograft processing.
Allograft bone tissue also competes in certain bone grafting
procedures with synthetic bone void filler products. To date, these medical
devices may be legally promoted in the United States for only a minority of the
types of applications and procedures in which allograft bone tissues are used.
Bone grafting procedures in which allograft bone tissue might be used also
sometimes compete indirectly with non-invasive bone growth stimulator devices in
those cases in which bone graft surgery is not the preferred course of
treatment.
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With respect to allograft bone tissue, the Company expects
increased competition from synthetic bone substitutes and recombinant bone
growth stimulating materials. Synthetic substitutes now being marketed include
HA, a ceramic substance with an open weave which allows for partial penetration
of bone and fibrous tissue, and combinations of HA and other substances, which
have been approved by the FDA for some oral surgical applications. The primary
advantage of synthetic bone substitutes is the absence of dependence on the
availability of human donors. In addition, synthetic materials may be perceived
by members of the medical community and the general public as safer than
allograft-based bone tissue. Osteotech believes, however, that the bone tissue
it processes will be able to compete with synthetic bone substitutes on the
basis of the biologic and physical properties, their multiple applications for
various surgical procedures, their successful use over an extended period of
time without confirmed instances of infectious disease transmission, and the
fact that independent researchers have reported that the Company's proprietary
process can virtually inactivate and eliminate the HIV virus and other viruses
in demineralized tissue, should they be present. These proprietary,
tissue-specific technologies are expected to further enhance graft safety while
maintaining the tissue's biologic and physical properties. The Company is also
aware of entities seeking to develop bone growth factors using recombinant
technology. The Company is aware of two such companies which have announced that
human clinical trials are in progress on their recombinant bone growth factors.
There can be no assurance that the allograft bone tissues processed by the
Company will be able to compete successfully with synthetic bone substitutes and
recombinant bone growth factors which are developed and commercialized by
others.
The Company's plasma spray coating and HA product operations
face competition in Europe from divisions and subsidiaries of several large
corporations engaged in providing such services and products to others and from
several smaller independent companies. In addition, the Company also faces
competition from medical implant companies which have in-house plasma spray
coating operations. The Company competes primarily on the quality of its
coatings and price. Osteotech believes that the spraying technology it uses,
which is computer controlled and utilizes robotics, enables it to provide high
quality coatings at competitive prices. It should be noted, however, that the
ceramic coating industry is highly competitive, certain of the Company's
competitors have greater resources than the Company and there can be no
assurance the Company will be able to compete successfully.
Potential Product Liability. The testing and use of human
allograft bone tissue and the implantation of medical devices coated with the
Company's HA powder, medical devices developed with the Company's PolyActive
material and medical devices manufactured by others and distributed by the
Company entail inherent risks of
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medical complications for patients and therefore, may result in product
liability claims against the Company. Further, Osteotech's agreements with its
bone tissue processing customers provide for indemnification by the Company for
liabilities arising out of defects in allograft bone tissue caused as a result
of processing by the Company.
As a distributor of implants and instruments for spinal surgery, including
bone screws, manufactured by Ulrich, the Company has been named as a defendant
in a number of lawsuits in which patients claim that they have suffered damages
from the implantation of allegedly defective spinal fixation devices. See "Legal
Proceedings."
The Company presently maintains product liability insurance in
the amount of $20 million per occurrence and per year in the aggregate. There
can be no assurance that the Company will be able to maintain such insurance in
the future or that such insurance will be sufficient to cover all liabilities.
In addition, the Company's current insurance policy will not cover any claims
made against the Company which are based upon a surgeon's use of a device in a
manner other than the use approved by the FDA for such device, regardless of
whether the Company advised the surgeon and/or healthcare provider of the FDA
approved use and provided adequate warnings against any unapproved use by the
surgeon and/or healthcare provider. The Company's former insurance policy, which
had the same coverage amount as the current policy, did not contain this
exclusion, but did exclude coverage for liability caused by the Company's
intentional acts, including conspiracy.
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 suits
if the ultimate liability exceeds the amount that the Company recovers from
Ulrich and/or such 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 possible future liability has been made in the
consolidated financial statements.
Environmental Matters. The Company's bone tissue processing
generates waste which is classified as medical hazardous waste by the United
States Environmental Protection Agency and the New Jersey Department of
Environmental Protection. Such waste is segregated by the Company and disposed
of through a licensed hazardous waste transporter in compliance with applicable
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regulations. The production of HA powder at the Company's facility in The
Netherlands generates small amounts of hazardous waste, which is segregated by
the Company and disposed of through a licensed hazardous waste transporter. The
Company has been issued a Nuisance Permit from the local government for its
facility in The Netherlands.
Although the Company believes it is in compliance with
applicable environmental regulations, the failure by the Company 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.
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