UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
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For the fiscal year ended December 31, 1996 Commission File number 0-19278
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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
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(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 542-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of class)
Preferred Stock Purchase Rights
(Title of class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of the Common Stock, par value $.01 per
share, held by non-affiliates based upon the reported last sale price of the
Common Stock on March 3, 1997 was approximately $60,079,950.
As of March 3, 1997, there were 7,909,787 shares of Common Stock, par
value $.01 per share, outstanding.
The Index to Exhibits appears on page E-1.
Documents Incorporated by Reference
The registrant's definitive 1997 Proxy Statement which will be filed
pursuant to Regulation 14A is incorporated by reference into Part III of this
Annual Report on Form 10-K.
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OSTEOTECH, INC.
1996 Form 10-K Annual Report
TABLE OF CONTENTS
Page
PART I
Item 1. Business......................................... 1
Item 2. Properties....................................... 21
Item 3. Legal Proceedings................................ 21
Item 4. Submission of Matters to a Vote of
Security Holders.............................. 23
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters.......................... 24
Item 6. Selected Financial Data................................. 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 26
Item 8. Financial Statements and Supplementary Data............. 30
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure............... 30
PART III
Item 10. Directors and Executive Officers of the
Registrant.................................... 31
Item 11. Executive Compensation........................... 31
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................... 31
Item 13. Certain Relationships and Related Transactions... 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K........................... 32
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The following trademarks and service marks appear in this Annual
Report: PolyActive(TM) and OsteoActive Bone Substitute(TM) are trademarks and
Osteotech(R), Alloprep System(R) Allograft Tissue Reconstitution Solution, and
Grafton(R) Demineralized Bone Matrix are registered trademarks of Osteotech,
Inc.; D-Min(R) Aseptic Tissue Demineralization is a registered service mark of
Osteotech, Inc.; and USIS(R) is a registered trademark of Heinrich C. Ulrich,
KG.
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PART I
Item 1. Business
Introduction
Osteotech, Inc. (the "Company" or "Osteotech"), formed in 1986,
provides services and develops and markets products to the orthopaedic,
neurological, oral/maxillofacial, dental and general surgical markets in the
United States and Europe. The Company's current technology, products and
services, and those under development, are focused primarily on the repair and
healing of the musculoskeletal system. Osteotech is engaged in processing human
allograft bone, ligaments and tendons (collectively, "bone tissue") for
transplantation, ceramic (hydroxyapatite) and titanium plasma spray coating
services and producing and marketing ceramic based products to the orthopaedic,
dental and ear, nose and throat ("ENT") implant markets. The Company is the
exclusive United States distributor of all spinal instruments and implants
manufactured by Heinrich C. Ulrich, KG ("Ulrich"), a medical device company
based in Ulm, Germany.
Overview
Bone and related tissue transplants are often necessary to correct
deformities and repair and reconstruct defects caused by congenital
malformations, trauma, infections, cancer and other diseases. For such
procedures the surgeon may use autograft bone tissue, allograft bone tissue or a
combination of both. Autograft bone tissue is acquired from another part of the
patient's skeleton, most often by an additional operative procedure. Allograft
bone tissue is bone tissue previously obtained from cadavers or surgical patient
donors. The Company estimates that the current total U.S. bone graft market is
approximately $406 million annually, of which allograft bone grafting procedures
constitute approximately $122 million.
Allograft tissue is procured by a network of bone banks, substantially
all of which are not-for-profit organizations. Management believes, based upon
its knowledge of the industry, that the Company processes more allograft bone
tissue than any other processor in the world. Certain of the Company's
competitors, particularly those involved with synthetic bone substitute
materials, attempt to compete by fostering a perception that utilization of
processed allograft human bone tissue poses a significant threat of infectious
disease transmission. To the Company's knowledge, none of the approximately
1,200,000 transplanted grafts it has processed since it commenced processing
bone tissue in 1987 have resulted in a confirmed transmission of infectious
disease. This record is due to the rigorous donor
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screening and tissue recovery techniques employed by the Company's clients,
extensive donor testing, as well as Osteotech's demanding quality assurance and
processing protocols.
Osteotech processes allograft bone tissue for its customers which pay
the Company fees, on a per donor basis, for processing, finishing and packaging
their tissue. Once processed, the bone tissue is returned to these customers for
distribution to surgeons and medical institutions. The surgeons and medical
institutions pay the Company's customers' fees established by such customers.
The surgeons and medical institutions in turn charge their patients for the
various aspects of transplant surgery performed by them, including standard
charges established by the surgeon or institution for each unit of processed
bone tissue used. The cost to the patient for the processed bone tissue is
generally reimbursable by medical insurance carriers as part of the overall cost
of the procedure.
Processing by the Company yields a wide array of freeze-dried, frozen
and demineralized bone tissue that is used by orthopaedic, neurological,
plastic, dental, periodontal and oral/maxillofacial surgeons to repair and
replace bone loss caused by trauma or certain disease states, augment prosthetic
implant procedures, replace damaged ligaments and tendons and in connection with
spinal fusion procedures. Osteotech believes its processing methods, its
customers' tissue recovery techniques and the multiple screening and testing
procedures employed, reduce the risk of transmissions of infectious agents and
the potential toxicity of the allografts. Studies completed by an independent
testing laboratory specializing in viral inactivation studies demonstrated that
a proprietary demineralization process of the Company can virtually inactivate
and eliminate the HIV virus (the process reduces the probability of transmission
of the HIV virus to one in 2.8 billion), as well as the hepatitis B, hepatitis
C, cytomeglia and polio viruses. In addition to its proprietary demineralization
process, Osteotech expects to begin to implement additional processing
technologies in 1997 that once fully implemented will enable the Company to
expand its viral inactivation claims to include virtually all of the bone tissue
it processes. These proprietary, tissue-specific technologies are expected to
further enhance graft safety while maintaining the tissue's biologic and
physical properties. There can be no assurance, however, that despite the
quality control measures employed by the Company and its customers and the
processing methods utilized by the Company, processed bone tissue will be free
of infectious agents, including the HIV virus and hepatitis. See "Services and
Products - Allograft Processing Technology" and "Product Liability and
Insurance."
Osteotech processes allograft bone tissue pursuant to contracts with
several large national and international not-for-profit organizations which are
responsible for donor procurement and distribution of the processed bone tissue.
The Company is the
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exclusive processor for two of the largest tissue procurement organizations in
the United States - the Musculoskeletal Transplant Foundation ("MTF"), an
organization comprised of medical teaching institutions and independent
procurement agencies and American Red Cross Tissue Services ("ARC"). The Company
is also the exclusive processor for BioImplant Services, The Netherlands.
Industry data indicates that utilization of allograft bone tissue in
musculoskeletal surgical procedures is continuing to increase. The Company
estimates that the current total U.S. bone graft market is approximately $406
million annually, of which the allograft segment, which grew approximately 20%
in 1996, is approximately $122 million. Some of the factors contributing to the
increased utilization of allograft bone tissue include:
. increasing frequency of surgical procedures that
incorporate bone grafting techniques;
. the desire by surgeons to avoid the additional procedure
needed to acquire autograft bone tissue, which often
increases operating time and risks such as excessive
blood loss, infection, chronic pain and deformity;
. increased awareness by, and training of, the medical
community with respect to the use and safety of processed
allograft tissue;
. an increase in the number of patients who do not possess
the quality of bone tissue required for autograft
procedures as a result of the general aging of the
population; and
. an increase in the availability of allograft bone tissue
due to improved recovery and processing techniques and an
increase in bone tissue donations.
Allograft bone tissue is utilized in surgical procedures because of its
biomechanical and biologic properties. Bone from various locations in the body
can be processed to yield either dense cortical bone, porous cancellous bone or
units comprised of both cortical and cancellous bone. Cortical bone, the thick
outer portion of bone, provides biomechanical strength which gives the bone
weight-bearing properties, and therefore, is commonly used in surgery on the
extremities and the spine and in other procedures requiring strong transplant
material. Cancellous bone, the spongy internal tissue, is preferable for
surgical procedures, or aspects thereof, in which rapid penetration of new bone
into the pores of the transplant (a process known as osteoconduction) is
desirable but where the weight-bearing strength of the graft is not paramount.
Therefore, cancellous bone is often used to fill smaller areas of bone loss and
to augment more extensive
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reconstructive procedures, including knee and hip replacements. Most procedures
using allograft bone tissue, however, employ a combination of cortical and
cancellous bone in a variety of forms, shapes and sizes.
Through its subsidiary, HC Implants BV ("HC Implants"), based in
Leiden, The Netherlands, the Company was involved in manufacturing, marketing
and developing products utilizing its PolyActive polymer. In October 1996, the
Company discontinued development activities related to its PolyActive polymer.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations". HC Implants' subsidiary, CAM Implants BV ("CAM"), is providing
ceramic hydroxyapatite ("HA") plasma spray coating services to the European
orthopaedic and dental implant markets and also produces and markets ceramic
products for use in orthopaedic, dental and ENT surgical implant procedures in
Europe. Through a joint venture with APS-Materials, Inc. ("APS"), CAM has
expanded its operations in Europe to include titanium and combination
titanium-HA plasma spray coating services. HC Implants' subsidiary, CAM
Implants, Inc., has licensed its ceramic plasma spray coating operations in the
United States and Canada to APS. See "Services and Products - Ceramic Plasma
Spray Coating Services and Products."
In 1993, the Company entered into an agreement for the exclusive United
States marketing and distribution rights for the Universal Spine Instrumentation
System (USIS(R)) and all other implants and instruments for spine surgery
developed by Ulrich. Included in the USIS product group is the Zielke VDS spinal
implant system, which is comprised of instruments and implants used by
orthopaedic and neurological surgeons to correct curvatures of the spine caused
by disease, trauma and degeneration, and is currently in use worldwide.
Information contained throughout this Annual Report 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 the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy. No assurance can be
given that the future results covered by the forward-looking statements will be
achieved. Some of the matters set forth herein constitute cautionary statements
identifying important factors with respect to such forward-looking statements,
including certain risks and uncertainties, that could cause actual results to
vary materially from the future results indicated 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.
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Company Strategy
Since its formation in 1986, Osteotech has become the world's largest
processor of allograft bone tissue. The Company's strategy is to use its
position as a leader in this field to continue to educate the medical community
and the general public as to the benefits of allograft bone grafting procedures,
thereby increasing surgeon and patient demand for allograft bone tissue which
has been processed by Osteotech. The Company will also seek to use its expertise
in the allograft processing area to develop new forms of bone tissue and
products with a broader range of applications in musculoskeletal surgery, as
well as to increase the potential tissue yield from a single donor. In
furtherance of this goal, the Company has developed and is utilizing an advanced
proprietary demineralization process which, when applied to cortical bone,
results in allograft bone tissue which the Company believes retains osteogenic
capabilities greater than those of most currently available forms of allograft
bone tissue. As a result, the Company has been able to successfully introduce
the use of demineralized bone tissue in a broad spectrum of orthopaedic
procedures. See "Services and Products - Allograft Processing Technology."
Osteotech's leadership in allograft tissue processing continues to
strengthen through Grafton(R) Demineralized Bone Matrix ("Grafton DBM"), the
Company's innovative and proprietary demineralized bone grafts.
Grafton DBM Gel, the Company's first Grafton form, introduced in 1991,
offers surgeons unique handling characteristics when performing bone graft
procedures as part of spinal fusions, joint replacements and the repair of
osseous defects. With the introductions of two new innovative forms of Grafton
in 1996, Grafton DBM Flex and Grafton DBM Putty, plus wider distribution and
deeper market penetration achieved through a combination of effort by a national
network of independent agents and the Company's direct marketing force, the
Company anticipates further growth for Grafton processed allograft tissue. The
Company's Grafton DBM forms have been utilized in over 120,000 procedures.
In January 1996, Osteotech introduced Grafton DBM Flex. Grafton DBM
Flex is a flexible "pressed fiber" form of demineralized bone which for the
first time gives surgeons a pliable form of bone graft. Initially available in
5cm by 5cm square and 2.5cm by 10cm strips, Grafton DBM Flex conforms to the
body's natural anatomy and can be easily cut for precise adaptation to host
bone.
Additionally, in November 1996, Osteotech introduced Grafton DBM Putty,
a moldable, putty-like graft of entangled fibers of demineralized bone, which is
easily mixed with marrow and other grafts.
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Supporting the Company's Grafton DBM expansion is Osteotech's national
network of independent sales agencies. Specializing in orthopaedic products,
these agents develop and manage surgeon relationships in partnership with the
Company's direct field marketing organization. This two-pronged strategy affords
Osteotech the best opportunity to gain maximum coverage and market penetration
for its Grafton DBM processed allograft tissue. At the end of 1996, the network
totaled 47 agents and 216 representatives.
The Company believes that the product development and marketing
conducted by its subsidiaries in The Netherlands furthers the Company's strategy
of positioning itself as a provider of services and products in the areas of
musculoskeletal and general surgery, and that the Company's European operations
complement Osteotech's position in the United States orthopaedic and dental
markets. See "Services and Products - Ceramic Plasma Spray Coating Services and
Products" and "Research and Development."
In furtherance of its goal to become a leading provider of services and
products for musculoskeletal repair and to further leverage its marketing
force's contacts with orthopaedic and neurological surgeons, during 1993 the
Company obtained the exclusive United States' marketing rights to the USIS
spinal implant products and all other devices and instruments for spinal surgery
developed by Ulrich. Osteotech plans to continue expanding its line of spinal
implant devices and instrumentation through its relationship with Ulrich.
Subject to appropriate regulatory approvals and Osteotech obtaining appropriate
product liability insurance coverage, a spinal implant system currently in use
in several European countries and South Africa -- the SSCS System -- is being
readied for introduction in the U.S. The SSCS System offers surgeons a
proprietary hinge screw design that allows for load sharing and improves the
potential fusion rate in posterior thoracic and lumbar fusion procedures.
Services and Products
Allograft Processing Technology
Unlike organs which require transplantation within hours of recovery,
allograft bone tissue generally goes through a processing phase in which it is
cleaned, cut into different sizes and forms for specific surgical procedures,
preserved, packaged and labelled. Osteotech processes its customers' tissue
utilizing technology which yields a wide array of freeze-dried, frozen and
demineralized bone tissues. Frozen tissues include whole bones and major
sections thereof, bone segments, tendons and ligaments. Freeze-dried bone
tissues include various wedges, strips, struts, dowels, cancellous cortical
chips, blocks, strips and ribs. Demineralized bone tissue includes cortical
powders, segments and struts.
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The suitability of an allograft is partly dependent on the methods and
conditions used in the processing of the tissue. Processing includes the removal
of certain portions of the bone tissue in a manner which enables the tissue to
maintain as much of the native biological characteristics relating to the use of
such tissue in bone grafting procedures as possible. To provide suitable
allografts, techniques have been developed that minimize the use of chemicals
and procedures that might render the allograft less suitable for use as a graft.
The Company processes allograft tissue in a microbially-controlled environment,
substantially cleaner than that of a typical hospital operating room, created
through the use of advanced air filtration, water distillation and mineral
control systems and other "clean room" techniques. The Company believes that its
use of such clean room techniques, a controlled environment, in-line
disinfection and other technologies preserves the properties of the tissues that
make them suitable as grafts and address the medical community's and the general
public's perceptions and concerns regarding the possible transmission of
infectious disease and toxicity. Once processed using Osteotech's current
methods, freeze-dried bone tissues may be stored for up to three years and
frozen bone tissues may be stored for up to five years before they must be used
or discarded.
The Company has developed a proprietary demineralization process for
cortical bone which it believes yields a form of allograft bone tissue which can
be used to aid in the formation of new bone through the processes of
osteoconduction and osteoinduction. Osteoconduction is the process of providing
the matrix into which bone will grow and osteoinduction is the process by which
bone is induced to grow. Cortical bone is believed to be the principal reservoir
for various factors which are instrumental in osteoinduction. These biological
properties of cortical bone, however, are inhibited by the bone's structure and
various minerals, lipids and other substances comprising the bone. The Company's
process removes these inhibiting factors.
Grafton DBM Gel, the Company's first Grafton DBM form, was introduced
in 1991. Grafton DBM Gel utilizes the Company's proprietary demineralization
process and offers surgeons unique handling characteristics when performing bone
graft procedures as part of spinal fusions, joint replacements and repairs of
osseous defects. With the introductions of the two new innovative forms of
Grafton DBM in 1996, Grafton DBM Flex and Grafton DBM Putty, plus wider
distribution and deeper market penetration utilizing the national network of
independent agents in combination with the Company's direct marketing force, the
Company anticipates further growth in the use of Grafton DBM processed allograft
tissue. To date, the Company's Grafton DBM forms have been utilized in over
120,000 procedures.
In January, 1996, Osteotech introduced Grafton DBM Flex.
Grafton DBM Flex is a flexible "pressed fiber" form of
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demineralized bone which for the first time gives surgeons a pliable form of
bone graft. Initially available in 5cm by 5cm squares and 2.5cm by 10cm strips,
Grafton DBM Flex conforms to the body's natural anatomy and can be easily cut
for precise adaptation to host bone.
Additionally, in November 1996, Osteotech introduced Grafton DBM Putty,
a moldable, putty-like graft of entangled fibers of demineralized bone, which is
easily mixed with marrow and other grafts.
The FDA has the statutory authority to regulate allograft processing
and allograft-based bone tissue. On December 14, 1993, the FDA issued interim
rules regulating the recovery, processing, storage and distribution of banked
human tissue, including allograft bone tissue. In August 1995, the FDA
designated Grafton DBM as within the scope of the definition of banked human
tissue under the interim rules. See "Government Regulations."
Ceramic Plasma Spray Coating Services and Products
The Company is providing ceramic HA plasma spray coating services
generally to large orthopaedic and dental implant companies in Europe. The
primary advantage of coating orthopaedic and dental prosthetic devices with HA
is that it enables bone to grow into the implanted device, thus enhancing the
stability of the device. Increased stability for implanted medical devices
should lower the amount of bone loss incurred over time and result in a
significant reduction in pain caused by micro motion of the device. The Company
manufactures the HA powder which it uses in its plasma spray coating operations
from raw materials which are readily available from several sources. The Company
also supplies HA powder to various companies for use in their in-house plasma
spray coating operations. Additionally, the Company produces HA products which
are used to replace middle ear bones and for the repair of bone defects in
dental applications. Further, the Company is pursuing opportunities to utilize
its ceramic powders and technology as key components of products being developed
by other companies for the orthopaedic and incontinent care markets as well in
non-medical uses.
To enhance its plasma spray coating services to the orthopaedic and
dental implant markets and to reduce plasma spray coating operating costs, in
September 1993 the Company entered into a joint venture agreement with APS.
Pursuant to this agreement, in addition to its HA plasma spray coating services,
the Company began offering titanium and combination titanium-HA plasma spray
coating services in Europe. Titanium, like HA coating, is applied to prosthetic
devices to facilitate attachment of bone to the prothesis. Under the agreement,
the Company makes all decisions regarding the joint venture business and manages
its daily
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operations, and the Company's personnel perform the spray coating services, all
in return for a fee. The parties share equally in the joint venture's income and
losses. The joint venture absorbs certain of the Company's facility and
personnel costs because it utilizes the Company's facility and personnel in The
Netherlands.
The Company granted an exclusive license, with no right to sublicense,
to its HA plasma spray coating technology, to APS for the United States and
Canada. APS provides HA, titanium and combination HA-titanium plasma spray
coating services. The Company transferred to APS at its Dayton, Ohio facility,
the equipment and technology used in connection with the Company's HA plasma
spray coating services for APS' use during the term of the agreement. Under the
agreement, APS is required to pay the Company a royalty equal to 15% of net
sales of HA plasma spray coating services which utilize the Company's
technology, for customers or prospective customers contacted by the Company
prior to the date of the agreement, and 10% for all new customers obtained by
APS; provided, that the parties will review the reasonableness of the 10%
royalty on an annual basis and may adjust it downward if mutually agreed. Such
adjustment, if any, will be based on, among other things, competitive factors.
To date, no such adjustments have been made.
Transplant Support Products
The Company provides a line of transplant support products for use by
donor recovery teams and/or surgeons, including recovery kits containing sterile
drapes and supplies and items for collecting and transporting cadaveric
microbiologic cultures and blood samples for later analysis. The Company also
markets Alloprep System(R) Allograft Tissue Reconstitution Solution, a solution
for the reconstitution of freeze-dried allograft bone prior to transplantation.
Implants and Instruments
In the U.S., Osteotech markets implants and instrumentation for spinal
surgery through an exclusive distribution agreement with Ulrich.
Osteotech markets Ulrich's VDS Zielke System, an implant system used by
orthopaedic, spinal and neurological surgeons worldwide -- often in combination
with banked bone grafts -- for the anterior correction of spinal deformities
caused by disease, trauma and degeneration. The Company also markets an
extensive line of more than 250 high quality, specialty surgical instruments
manufactured by Ulrich.
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Like allograft tissue, the market for spinal implants continues to
grow. It is estimated that the spinal implant market in the U.S. increased 23%
to $252 million in 1996.
Osteotech plans to continue expanding its line of spinal implant
devices and instrumentation through its relationship with Ulrich. Subject to
appropriate regulatory approvals and Osteotech obtaining appropriate product
liability insurance coverage, a spinal implant system currently in use in
several European countries and South Africa -- the SSCS System -- is being
readied for introduction in the U.S. The SSCS System offers surgeons a
proprietary hinge screw design that allows for load sharing and improves the
potential fusion rate in posterior thoracic and lumbar fusion procedures.
Quality Assurance
All bone tissue processed by Osteotech is obtained from customers which
are required by their agreements with the Company to employ technicians and/or
surgeons trained in aseptic tissue recovery using sterile surgical techniques.
The Company's customers recover tissue primarily in hospitals and, to a lesser
extent, coroners' facilities which have been prepared for recovery. Bone tissue
is also required to be sterilely wrapped and shipped in special containers. Upon
receipt of this tissue, a quarantine period is imposed to permit serologic and
microbiologic testing prior to release of bone tissue for processing. Following
quarantine, the bone tissue is processed in a microbially-controlled
environment. Under constant monitoring, the tissue is cleaned, soaked in
antibiotics and then cut and shaped in accordance with customer specifications.
Before being released to customers, all processed bone tissue is inspected and
again tested for microbiological contaminants by the Company's quality assurance
team. Quality control is supported through the use of proprietary software
programs which provide traceability of bone tissue from donor to customer and
track each step of the processing operation.
The Company believes that the serologic screening of donors, the
extensive screening of donor profiles and medical histories performed by its
customers and its processing technologies reduce the likelihood of the presence
of infectious agents, including the HIV and hepatitis viruses, in processed bone
tissue. Studies completed by an independent testing laboratory specializing in
viral inactivation studies demonstrated that the Company's proprietary
demineralization process can virtually inactivate and eliminate the HIV virus
(the process reduces the probability of transmission of the HIV virus to one in
2.8 billion) as well as the hepatitis B, hepatitis C, cytomeglia and polio
viruses. To the Company's knowledge, none of the approximately 1,200,000
transplanted grafts it has processed since it commenced processing bone tissue
in 1987 have resulted in a confirmed transmission of
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infectious diseases. This record is due to the rigorous donor screening and
tissue recovery techniques used by the Company's clients, extensive donor
testing, as well as Osteotech's demanding quality assurance and processing
protocols. In addition to its proprietary demineralization process, Osteotech
expects to begin to implement additional processing technologies in 1997 that
once fully implemented will enable the Company to expand its viral inactivation
claims to include virtually all of the bone tissue it processes. These
proprietary, tissue-specific technologies are expected to further enhance graft
safety while maintaining the tissue's biologic and physical properties. However,
despite the Company's quality control measures, there can be no assurance that
processed bone tissue will be free of infectious agents. The Company believes
that its processing procedures and quality control measures comply with the
interim rules for banked human tissue instituted by the FDA on December 14,
1993. See "Government Regulations."
In December 1994, the Company's facility in The Netherlands received
International Standardization Organization ("ISO") certification for its quality
systems used in the development and manufacture of ceramic products and ceramic
and titanium spray coatings. ISO certification for production facilities will be
mandatory by 1998 for companies within the European Union ("EU"). The
certification was awarded by Tuv Product Service, GmbH of Munich, Germany, a
leading Notified Body in medical devices, following a series of audits. Notified
Bodies are independent organizations authorized by the EU member countries to
administer the ISO certification process.
Research and Development
During 1996, 1995 and 1994, the Company spent approximately $4.4
million, $3.7 million and $3.3 million, respectively, on research and
development activities. The Company is engaged in continuing research and
development efforts with respect to its processing technology, ceramic HA plasma
spray coating services and ceramic products. Research and development efforts in
the allograft processing field include the Company's continuing efforts to
improve upon and maintain the safety and performance of the processed bone
tissue, increase the amount of transplantable bone tissue derived from each
donor, reduce processing costs through efficiency advances and develop new forms
of allograft bone tissue.
Customers
Osteotech is the exclusive processor of allograft bone tissue for large
national and international not-for-profit organizations. The Company generally
charges its customers on a per donor basis, or for proprietary products, on a
per unit basis, for fees for
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direct and indirect processing costs 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 and for the Company to provide such other services as may be requested
by the customer on such terms as the customers and the Company may agree from
time to time. During 1996, MTF and the ARC accounted for approximately 64% and
25%, respectively, of the Company's revenues. The Company has a new processing
agreement with ARC which runs through December 31, 2006. The Company's current
agreement with MTF expires on March 31, 1997 and the Company is engaged in
negotiations with MTF for a new agreement. There can be no assurance that a new
agreement with MTF will be completed 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.
Osteotech does not engage in donor procurement or tissue
distribution and therefore relies on its not-for-profit customers
to obtain donor bone tissue for processing by the Company, and to
distribute the processed bone tissue to hospitals and physicians
for transplantation. See "Education and Marketing."
Customers of the Company's plasma spray coating services generally
purchase such services pursuant to purchase orders or non-exclusive supply
agreements which are cancelable at any time by either party.
Relationship with Musculoskeletal Transplant Foundation
In 1987, the Company assisted in the formation of MTF, an organization
comprised of medical teaching institutions and independent procurement agencies,
for the purpose of expanding the science of musculoskeletal transplantation. MTF
is now one of the largest bone tissue procurement organizations in the United
States, responsible for the procurement of allograft bone tissue for
distribution to its members as well as unaffiliated hospitals. MTF is governed
by a board of directors and a management team, all of whom are unaffiliated with
the Company.
In March 1987, Osteotech entered into a ten-year service agreement (the
"Service Agreement") with MTF whereby the Company serves as the exclusive
processor of all musculoskeletal allograft bone tissue procured by MTF. Pursuant
to the Service Agreement, the Company agreed to increase its capacity, if
necessary, to meet MTF's requirements for bone tissue processing. Osteotech has
agreed that the pre-tax profit earned from services which it performs for MTF
will not exceed the average pre-tax profit of the 15 largest pharmaceutical
concerns in the United States. MTF
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assigned to the Company certain rights to license technology developed by its
members pursuant to research grants made by MTF.
Relationship with American Red Cross
In December 1996, the Company entered into an agreement (the "ARC
Agreement") with ARC whereby the Company serves as the exclusive processor of
all musculoskeletal allograft bone tissue donors procured by ARC. The Company
believes it can respond in a timely manner to any increase in demand by ARC or
other customers through the maximum utilization of its existing facilities or
the establishment of additional temporary or permanent processing facilities.
The ARC Agreement expires on December 31, 2006. Either party may terminate the
ARC Agreement at any time upon: (i) a material breach by the other party which
is unremedied for ninety days and (ii) the insolvency of the other party or any
bankruptcy or insolvency proceedings or the levy of any writ or judgment against
the other party. In addition, ARC may terminate the Processing Agreement in the
following circumstances: (i) upon ninety days written notice to the Company of
its determination to end its program of procuring or distributing tissue,
provided that, if ARC resumes such program, it shall provide prompt written
notice to the Company of such resumption and the ARC Agreement shall become
effective again on the same terms as prior to the termination, (ii) if a third
party develops a commercially feasible processing technology that a third party
review board determines to be safer or more effective than the Company's and the
Company is unable or unwilling to provide such product or service, and (iii) if
the FDA implements new regulations and the Company fails to implement changes to
its tissue processing to conform to such changes. If ARC enters an arrangement
with a third party whereby tissue processed by the Company is used in a third
party's technology or product, ARC shall inform the Company of this arrangement
and the Company shall have the right to terminate with 90 days prior written
notice or to renegotiate the terms of the agreement.
Other Customers
In September 1988, the Company entered into a ten-year agreement with
BioImplant Services ("BioImplant"), a tissue donor procurement and distribution
organization in Europe, whereby the Company has agreed, subject to certain
exceptions, to be the exclusive provider of allograft bone tissue processing
services for BioImplant. The Company has also agreed that it will not process
bone tissue for other procurement organizations in certain designated European
territories. The Company has agreed to meet the annual volume requirements of
BioImplant.
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<PAGE>
The Company also has an agreement with the University of California at
Irvine, a medical teaching institution, to provide allograft bone tissue
processing services which is renewable annually. To date, revenues to the
Company pursuant to this agreement have not been material.
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.
With respect to allograft bone tissue, the Company expects
increased competition from synthetic bone substitutes and
recombinant bone growth stimulating materials. Synthetic
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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 FDA has approved two of these HA synthetic
bone substitutes for certain orthopaedic procedures. 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, its multiple applications for various surgical procedures,
its 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.
In addition to its proprietary demineralization process, Osteotech
expects to begin to implement additional processing technologies in 1997 that
once fully implemented will enable the Company to expand its viral inactivation
claims to include virtually all of the bone tissue it processes. 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. Two such companies 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. Lastly, other companies engaged in the manufacture of medicine implant
devices for the orthopaedic field may enter the allograft market in competition
with the Company. Such companies may have substantially greater resources and
expertise than the Company. Accordingly, there can be no assurance that the
Company would be able to compete successfully with any such companies.
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
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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.
Education and Marketing
Osteotech believes the markets for processed allograft bone tissue will
continue to be orthopaedic, neurological, plastic and oral/maxillofacial
surgical specialties. The Company's future growth in these areas will depend
upon a wider acceptance by these specialties of the use 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. Notwithstanding its internal marketing capability, the
Company is still dependent to a degree on the success of the education and
marketing activities conducted by its customers and their representatives. 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 and further educate the medical community about processed allograft
bone tissue. Currently these sales agents are focusing their efforts primarily
on Grafton DBM and spinal instruments. At December 31, 1996, the Company had
appointed 47 agencies with 216 sales representatives.
The Company is pursuing a strategy of licensing or acquiring additional
products which are ready to be commercialized in order to take advantage of the
Company's expertise and relationships within the orthopaedic community.
A small in-house marketing staff located at the Company's Leiden
facility markets the plasma spray coating services of the Company and the
Company's joint venture with APS. These marketing activities consist primarily
of attendance at trade shows, placement of advertisements in trade journals and
direct mailings to orthopaedic and dental implant companies. The Company markets
its HA powders and ceramic products through independent contract representatives
in Europe.
Government Regulations
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
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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 DBM. 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. See "Education and Marketing."
In December 1993, the FDA introduced interim regulations applicable to
human tissue intended for transplantation, including the types of allograft
tissues processed by the Company. The FDA had not previously treated the field
of tissue banking and tissue products as medical specialties and allowed the
organizations in the field to regulate themselves. However, the growth of the
field and other factors prompted the FDA to introduce universal basic standards
to reduce the risk of transmission of infectious diseases through the
inadvertent use of infected tissue. The Company's operations are dependent on
adequate compliance with these rules by both the Company and its clients. The
Company believes that its operations and those of its clients are in substantial
compliance with those rules. The FDA is moving to finalize the current interim
regulations. Additionally, on February 28, 1997, the FDA proposed a framework
for more comprehensive regulations of cellular and tissue-based products
including Allograft tissues such as those processed by the Company. There can be
no assurance that the Company or its clients will be in compliance with these
more comprehensive rules if and when they are promulgated by the FDA.
In August 1995, the FDA designated Grafton DBM as within the scope of
the definition of banked human tissue under the interim rule on human tissue
intended for transplantation. Banked human tissues such as demineralized bone
matrix have been considered, and still are considered, exempt from FDA
premarketing clearance requirements imposed upon medical products such as drugs,
devices and biologics. Grafton DBM is a demineralized bone matrix that is mixed
with glycerol, a basically inactive substance, to provide
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desirable physical handling characteristics to the demineralized
bone matrix.
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.
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 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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<PAGE>
Patents and Proprietary Rights
Osteotech considers its processing technology and procedures
proprietary and relies primarily on trade secrets to protect its technology and
innovations. Significant research and development activities have been conducted
by consultants employed by third parties or in conjunction with unaffiliated
medical institutions. Accordingly, disputes could arise in the future concerning
the proprietary rights to information applied to Company projects which have
been independently developed by the consultants or researchers at the medical
institutions.
At March 3, 1997, the Company held a total of 24 patents in the United
States and foreign countries relating to its aseptic processing technology and
its transplant support products, two United States and three foreign patents
relating to its biomaterial technology, eight United States and four foreign
patent applications relating to aspects of its processing technology and its
osteogenic and other products under development and three United States and
three foreign patent applications relating to its biomaterial technology. 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.
Product Liability and Insurance
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 biomaterial technology and medical devices
manufactured by others and distributed by the Company entail inherent risks of
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
plaintiffs 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
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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.
Of the twenty-nine lawsuits discussed in "Legal Proceedings,"
four such lawsuits would be covered by the Company's insurance
policies. Twenty-five of the current lawsuits, and any lawsuits
filed in the future which contain claims similar to those contained
in such current lawsuits, may not be covered by the Company's
current insurance policy. See "Legal Proceedings."
Pursuant to its distribution agreement with the Company, Ulrich has
agreed to indemnify the Company for all costs, and damages incurred by the
Company in connection with its distribution of products manufactured by Ulrich,
except such costs and damages which are caused by the Company's gross negligence
or willful misconduct or unauthorized claims made by the Company in marketing
the products. In accordance with such indemnification obligation, the Company is
entitled to be named as a co-insured on the product liability insurance policy
maintained by Ulrich. Vericherunges-Aktiengesellchaft ("Allianz"), Ulrich's
insurance carrier, has presented the Company with a certificate which indicates
that the Company is co-insured on such insurance policy, however, Allianz has
indicated that it does not believe the Company is a co-insured. This policy
provides coverage of 4,000,000 Deutsche Mark (DM) (approximately $2.6 million at
current exchange rates) per person and 16,000,000 DM (approximately $10.4
million at current exchange rates) in the aggregate. The Company and Allianz are
engaged in discussions concerning the Company's coverage under the insurance
policy maintained by Ulrich with Allianz. There can be no assurance that the
Company will in fact be indemnified by Ulrich or be provided coverage under
Ulrich's insurance policy or that such coverage, if provided, will be adequate.
Employees
At December 31, 1996, Osteotech had 210 employees, of whom 119 were
engaged in allograft processing, ceramic plasma spray coating and the
manufacture of products; 25 in research and development; 31 in education and
marketing and 35 in regulatory, finance and administration. The Company's
employees are not covered by any collective bargaining agreement. The Company
considers relations with its employees to be good.
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Item 2. Properties
The Company's principal executive offices are located in approximately
38,000 square feet in Eatontown, New Jersey which is occupied pursuant to a
lease which expires in December 2004 and provides for a base annual rental of
approximately $264,000. This facility is occupied by the Company's corporate,
financial, administration, marketing, research and development, regulatory and
clinical affairs staff.
The Company's processing facility is located in approximately 30,000
square feet of space in Shrewsbury, New Jersey which is occupied pursuant to a
lease which expires in February 2007 and provides for a base annual rental of
approximately $239,000 for the first five years of the lease and $261,000 for
the remaining term of the lease. The lease is renewable at the Company's option
for an additional five year term.
The Company's European subsidiaries occupy a 21,000 square foot
facility in Leiden, The Netherlands. The lease for this facility expires in May
2008 and the annual rent is 626,000 dfl (approximately US $360,000 at the
December 31, 1996 exchange rates).
The Company believes that these facilities are adequate and suitable
for its current needs.
Item 3. Legal Proceedings
Orthopedic Bone Screw Products Liability Litigation
The Company has been named and served in approximately 28 lawsuits,
involving approximately 4000 plaintiffs, brought against spinal implant
manufacturers, distributors and promoters in various state and federal courts
throughout the country. 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 in the process of 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.). These actions sound in products
liability and involve allegations of, either alone or in combination, negligence
and conspiracy or other concerted action.
The vast majority of the complaints in these cases have been amended or
refiled due to defective pleading as indicated by various court orders. Thus,
for these cases, responsive pleadings have not yet been filed by defendants,
including the Company. As to the remaining cases, they are still in the
preliminary discovery stages. Further, on a daily basis, the number of cases
naming the Company may increase or decrease. Generally, the Company will not
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be aware that it has been named as a defendant in an action until it has been
served with the underlying complaint.
As to all of these actions, the Company believes that it has
affirmative defenses, including without limitation, defenses based on the
learned intermediary defense, the failure of a cause of action to exist where no
malfunction of a Company-distributed device occurred, the fact that the product
at issue was substantially modified in an unforeseeable manner, 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 the claims in all of these actions are without
merit. Accordingly, all such cases are and will continue to be vigorously
defended.
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 action may be substantial.
Pursuant to the Company's distribution agreement with 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 obligations to
the Company.
Additionally, the Company maintains its own products liability
insurance coverage from Lexington Insurance Company ("Lexington") and Lexington
has been notified of these actions. Lexington has denied coverage with respect
to certain of these cases. Further, Ulrich maintains its own products liability
coverage from Allianz. Allianz has indicated that it is reviewing the
possibility of extending insurance coverage to the Company with respect to
certain of these cases.
Kehr et al. v. Musculoskeletal Transplant Foundation and
Osteotech, Inc., Case No. 96-CV-334 (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 and negligence, alleging that the Company and co-defendant
MTF mislabeled and mispackaged processed human bone tissue. On April 24, 1996,
codefendant MTF, with the Company's consent, removed this action to the United
States District Court for the Western District of Michigan.
On May 29, 1996, the Company filed its answer, denying any and all
liability, and setting forth affirmative defenses, including, without
limitation, defenses based on substantial modification of the product and that
plaintiffs' injuries were caused by a superseding, intervening cause. On
November 4, 1996, the Company filed a motion for summary judgment requesting
that the Court
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dismiss the plaintiffs' complaint. By order dated February 27, 1997, the Court
denied this motion. In doing so, however, the Court ruled that plaintiffs could
not proceed with this action under strict liability or implied warranty
theories. Rather, the plaintiffs' case could only proceed under a common law
negligence theory.
Pursuant to a service agreement between MTF and the Company regarding
the Company's tissue processing services, the Company has agreed to defend,
indemnify and hold MTF harmless with respect to this action.
The Company believes that this lawsuit is without merit and the case is
currently being defended, including the defense of MTF, by the Company's product
liability insurance carrier with a general reservation of rights.
Item 4. Submissions of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock has been traded in the over-the-counter
market and quoted on the NASDAQ National Market System under the trading symbol
"OSTE" since the Company's initial public offering in July 1991.
The following table sets forth the high and low sale prices for the
Common Stock for each of the fiscal quarters during the years ended December 31,
1995 and 1996 based on transaction data as reported by the NASDAQ National
Market System.
Year Ended December 31, 1995 High Low
First Quarter 6-1/4 3-3/4
Second Quarter 5-3/4 4-3/8
Third Quarter 9-1/4 4-7/8
Fourth Quarter 8-5/8 6
Year Ended December 31, 1996
First Quarter 8 6-13/16
Second Quarter 8-3/8 6
Third Quarter 7-7/8 5-1/2
Fourth Quarter 7-1/8 5-29/64
As of March 3, 1997 there were 219 holders of record of the Company's
Common Stock. The Company believes that there are approximately 2,300 beneficial
owners of its Common Stock.
The Company has never paid a cash dividend and does not anticipate the
payment of cash dividends in the foreseeable future as earnings are expected to
be retained to finance the Company's growth. Declaration of dividends in the
future will remain within the discretion of the Company's Board of Directors,
which will review the Company's dividend policy from time to time.
Item 6. Selected Financial Data
Set forth below is the selected financial data for the Company for the
five fiscal years ended December 31, 1996. The following
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data should be read in conjunction with the Company's consolidated financial
statements and related notes thereto contained elsewhere herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Selected Financial Data
(dollars in thousands
except per share data) 1996 1995 1994 1993 1992(a)
- ---------------------------------------------------------------------------------------------------------------------------------
For the Year
<S> <C> <C> <C> <C> <C>
Net revenues $34,895 $27,934 $24,570 $19,124 $14,651
Costs and expenses (b) 33,146 27,696 23,935 20,817 16,440
Other income, net (c) 271 4,582 577 2,926 2,231
Income (loss) before income
taxes and unusual items (d) 3,370 1,653 1,212 (1,242) (803)
Income before income taxes 2,020 4,820 1,212 1,233 442
Net income (loss) (324) 4,582 1,747 1,107 414
Net income (loss) per share (.04) .57 .22 .14 .05
(e)
Dividends per share 0 0 0 0 0
- ---------------------------------------------------------------------------------------------------------------------------------
Year End Financial Position
Working capital $12,273 $12,135 $9,010 $7,239 $6,133
Total assets 31,483 30,170 22,594 19,706 18,420
Long-term obligations 840 1,598 1,027 375 309
Stockholders' equity 22,717 22,594 17,096 15,362 14,171
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the results of operations of HC Implants BV since April 1, 1992.
(b) Costs and expenses include: (i) a charge to earnings in 1996 of
$1,350,000 related to the restructuring of the Company's non-allograft
operations located in Leiden, The Netherlands; and (ii) a charge to
earnings in 1995 of $980,000 resulting from the termination of a
distribution agreement.
(c) Other income includes: (i) principal payments on a fully reserved note
from a major customer of $4,147,000 in 1995, $2,475,000 in 1993 and
$575,000 in 1992; and (ii) $670,000 gain on termination of a joint
development agreement in 1992.
(d) Excludes items of income and expense discussed in (b) and (c).
(e) Reflects primary earnings (loss) per share.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Three Years Ended December 31, 1996, 1995 and 1994
Results of Operations
Net Income (Loss)
In 1996 the Company incurred a net loss of $324,000 compared to net
income of $4,582,000 in 1995 and $1,747,000 in 1994.
Income before income taxes and unusual items increased to $3,370,000 in
1996 compared to $1,653,000 in 1995 and $1,212,000 in 1994. Income, including
unusual items and before income taxes was $2,020,000 in 1996 compared to
$4,820,000 in 1995 and $1,212,000 in 1994. Income before income taxes in 1996
includes a charge to earnings of $1,350,000 related to the restructuring of the
Company's non-allograft operations located in Leiden, The Netherlands. Income
before income taxes in 1995 includes the receipt of note repayments on a fully
reserved note from a major customer of $4,147,000 and a charge to earnings of
$980,000 resulting from the termination of a distribution agreement for trauma
implant products. See "Provision for Restructuring" and "Provision for
Termination of a Distribution Agreement" included elsewhere herein.
Income tax expense in 1995 and 1994 was reduced by the
recognition of net deferred tax assets resulting primarily from the
realization of tax benefits associated with Federal and state tax
net operating loss carryforwards. See "Income Tax Provision
(Benefit), net" included elsewhere herein.
The table below shows the impact of these items:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes and unusual items $ 3,370,000 $ 1,653,000 $ 1,212,000
Unusual items:
Provision for restructuring (1,350,000)
Note repayments from major customer 4,147,000
Provision for termination of distribution (980,000)
agreement
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,020,000 4,820,000 1,212,000
Recognition of net deferred tax assets 2,551,000 2,079,000
Income tax provision (2,344,000) (2,789,000) (1,544,000)
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (324,000) $ 4,582,00 $ 1,747,000
=========================================================================================================================
</TABLE>
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<PAGE>
The following is a discussion of factors which affected results of
operations for the years ended December 31, 1996, 1995 and 1994.
Net Revenues
Revenues in 1996 increased 25% to $34,895,000 from $27,934,000 in 1995.
Revenues in 1995 were 14% higher than 1994 revenues of $24,570,000.
The increase in revenues in 1996 resulted principally from increased
demand for the Company's Grafton DBM Gel and the introduction of Grafton DBM
Flex in January 1996 and Grafton DBM Putty in November 1996. The increase in
revenues in 1995 resulted principally from increased demand for Grafton DBM Gel
and ceramic hydroxyapatite powders distributed by the Company.
Supporting the Company's Grafton DBM expansion is a national network of
independent agencies that manage surgeon relationships in partnership with the
Company's direct field marketing organization. At December 31, 1996, the network
consisted of 47 agencies with 216 representatives compared to 27 agencies with
126 representatives at December 31, 1995.
During 1996, 1995 and 1994, two of the Company's major customers, MTF
and ARC, accounted for 64% and 25%, 65% and 20%; and 63% and 22%, respectively,
of revenues. In December 1996, the Company entered into a new ten-year agreement
with ARC. The Company is currently in negotiations with MTF for a new agreement
to replace the existing agreement which expires on March 31, 1997. There can be
no assurance that the Company and MTF will enter into a new agreement or that
such agreement will contain terms favorable to the Company. The loss of either
MTF or ARC as a customer would have a material adverse effect on the Company.
Costs of Services and Products
Costs of services as a percentage of service revenues was 39% in 1996,
43% in 1995 and 44% in 1994. These declines in costs as a percentage of revenues
result from a shift in revenue mix toward services with higher gross margins and
fixed processing costs being distributed over a higher volume of donors
processed.
Costs of products as a percentage of product revenues was 97% in 1996,
77% in 1995 and 67% in 1994. The increase in costs as a percentage of revenues
resulted principally from an increase in product liability insurance premiums
associated with spinal implant products distributed by the Company pursuant to
an agreement with Ulrich, the manufacturer.
-27-
<PAGE>
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses increased $2,211,000 or
21% in 1996 and $817,000 or 9% in 1995. These increases are primarily
attributable to expanded marketing activities associated with the increased
allograft services provided by the Company, principally those related to Grafton
DBM, and increased facilities' costs resulting from an expansion of the
Company's facilities to support growth.
Marketing, general and administrative expenses declined as a percentage
of revenues in each year from 39% in 1994 to 37% in 1995 and 36% in 1996.
Research and Development Expenses
Research and development expenses in 1996 increased $608,000 or 16% to
$4,357,000 from $3,749,000 in 1995. Research and development expenses in 1995
increased $400,000 or 12% compared to $3,349,000 in 1994. The increases in both
years were primarily attributable to increased spending associated with the
development of additional allograft tissue forms which were 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(R) products.
See "Provision for Restructuring."
Provision for Restructuring
In October 1996, the Company announced a plan to restructure its
non-allograft operations located in Leiden, The Netherlands in order to focus
those operations on: (i) the revenue and profit generating activities of
providing ceramic and titanium spray coating services and ceramic products to
the orthopaedic and dental markets and (ii) to pursue OEM business opportunities
for those technologies. In connection with the restructuring, the Company
discontinued its PolyActive polymer research and development program. As a
result of the restructuring, the Company recorded a pre-tax restructuring charge
of $1,350,000, consisting primarily of employee termination costs, write-off of
equipment, intangible assets, supplies and costs associated with the planned
sub-leasing of office space in Leiden on which the Company has a long-term
lease. See Note 3 of "Notes to Consolidated Financial Statements."
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. As a
result of this termination the Company recorded a pre-tax charge to earnings of
$980,000, consisting principally of inventory write-offs, employee termination
costs and legal fees. The Company has commenced legal proceedings to recover
these costs. Revenues from marketing trauma products were not
-28-
<PAGE>
material in 1995. See Note 4 of "Notes to Consolidated Financial
Statements."
Other Income (Expense)
In 1996, other income decreased by $4,311,000 compared to
1995. Other income in 1995 included the receipt of $4,147,000 of
note repayments on a fully reserved note from a major customer.
See Note 5 of "Notes to Consolidated Financial Statements."
Income Tax Provision (Benefit), Net
The income tax provision in each of the years 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 would be available. In 1995 and 1994,
the Company recognized net deferred tax assets of $2,551,000 and $2,079,000,
respectively, resulting from: (i) the realization of tax benefits of temporary
differences which reversed during each year ($1,335,000 in 1995 and $1,479,000
in 1994); and (ii) the Company's assessment that it would generate sufficient
future U.S. taxable income to realize a portion of the deferred tax benefits
associated with certain Federal and state net operating loss carryforwards and
tax credits ($1,216,000 in 1995 and $600,000 in 1994). See Note 13 of "Notes to
Consolidated Financial Statements."
Liquidity and Capital Resources
At December 31, 1996, the Company had cash and short-term investments
of $9,277,000 compared to $7,707,000 at December 31, 1995. Working capital
increased $138,000 to $12,273,000 at December 31, 1996 compared to $12,135,000
at December 31, 1995.
The Company has a loan and security agreement with a U.S. 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 December 31, 1996, $1,377,000
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 $2,872,000 at the December 31, 1996 exchange rate. 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 this line of
credit in 1996 and, therefore, the Company agreed with the bank to limit its
borrowings in 1996, if any, to no more than 3,000,000 dfl, or approximately
$1,723,000 at the December 31, 1996 exchange rate. Additionally, in connection
with the Leiden facility lease, the Company is required to maintain a declining
bank guarantee which reduced the current amount available for borrowings to
2,424,000 dfl, or approximately $1,392,000 at the December 31, 1996 exchange
rate. At December 31, 1996, there were no borrowings outstanding
-29-
<PAGE>
under this credit line. See Note 11 of "Notes to Consolidated
Financial Statements."
At December 31, 1996, the Company had U.S. net operating loss
carryforwards which approximate $1,099,000 for Federal income tax purposes and
$216,000 for state income tax purposes. The Federal and state net operating loss
carryforwards, if unused, will expire from 2006 through 2011. The Company also
has research and development tax credits for Federal income tax purposes of
$11,000 which expire in 2009. The timing and manner in which the tax loss
carryforwards and credits are utilized in the future may be limited by Internal
Revenue Code Section 382. In addition, certain of the Company's subsidiaries
have foreign net operating loss carryforwards aggregating $10,041,000 ($350,000
with no expiration date; $9,691,000 expiring 1999 through 2004). See Note 13 of
"Notes to Consolidated Financial Statements."
During 1996 the Company incurred capital expenditures of $2,152,000 to
support the expansion of the Company's operations. Although the Company had no
significant commitments for capital expenditures as of December 31, 1996, it
expects 1997 capital expenditures to be approximately 50% higher than those of
1996. It is expected that these expenditures will be funded from cash reserves,
cash provided by operations or bank financing.
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. Further, from time to time, the Company may seek
additional funds through equity or debt financing. However, there can be no
assurance 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.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this
Annual Report commencing on page F-1.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
-30-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The section of the Company's 1997 Proxy Statement entitled "Election of
Directors" is incorporated herein by reference.
Item 11. Executive Compensation
The section of the 1997 Proxy Statement entitled "Executive
Compensation" is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The section of the 1997 Proxy Statement entitled "Security
Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The section of the 1997 Proxy Statement entitled "Certain Relationships
and Related Transactions" is incorporated herein by reference.
-31-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a)(1) and (2). The response to this portion of Item 14 is submitted as
a separate section of this report commencing on page F-1.
(a)(3) and (c). Exhibits (numbered in accordance with Item
601 of Regulation S-K).
Exhibit Page
Number Description Number
3.1 Restated Certificate of Incorporation of *
the Company
3.2 Amended and Restated Bylaws of the Company #
3.3 Form of Stock Certificate **
4.1 Stock and Warrants Purchase Agreement, as **
amended
4.2 Amended Security Holders Agreement **
4.3 Rights Agreement dated as of February 1, #
1996 between Osteotech, Inc. and Registrar
and Transfer Co.
10.1 1991 Stock Option Plan, as amended *****
10.2 1991 Independent Directors Stock Option *****
Plan, as amended^
10.3 Various Written Option Agreements between ***
the Company and certain employees,
officers, directors and consultants or
advisors of the Company^
10.4 Senior Management Bonus Program^ ****
-32-
<PAGE>
10.5 Senior Management Loan Program^ ****
10.6 Lease for the Company's Leiden, The *****
Netherlands facility dated December 4, 1991
10.7 Lease for the Company's Leiden, The +
Netherlands facility dated May 28, 1993
10.8 Service Agreement between the Company and **
the Musculoskeletal Transplant Foundation,
dated March 1, 1987~
10.9 Start-up Processing Fee Agreement between **
the Company and the Musculoskeletal
Transplant Foundation, dated June 29, 1990
10.10 Processing Agreement between the Company **
and Stichting Eurotransplant Nederland,
dated September 26, 1988~
10.11 Stock Purchase Agreement by and among ++
Osteotech, Inc., Osteotech BV and C.A. van
Blitterswijk, C.A. van Blitterswijk Holding
BV, K. de Groot, K. de Groot Holding BV,
R.G. van der Scheer and HOM Consultancy BV
10.12 License Agreement between the Company and ****
Abtox, Inc. dated April 1, 1992~
10.13 Line of Credit Agreement between Interna- ****
tionale Nederlanden Bank NV and Osteotech
BV dated October 6, 1992
10.14 Guaranty Agreement between the Company and ****
Internationale Nederlanden Bank NV dated
October 22, 1992 pursuant to which the
Company guarantees the payment of amounts
which may be loaned to the Company's
subsidiary, Osteotech BV
10.15 Loan and Security Agreement between the +
Company and United Jersey Bank/Central,
N.A. dated May 27, 1993
-33-
<PAGE>
10.16 First Amendment to Loan and Security +++
Agreement between the Company and United
Jersey Bank/Central, N.A. dated July 14,
1994
10.17 Sublicense Agreement by and between CAM *****
Implants, Inc. and APS-Materials, Inc.
dated September 20, 1993
10.18 Partnership Agreement by and between *****
Osteotech/CAM Services BV and APS-
Materials, Inc. dated September 20, 1993
10.19 Employment Agreement with Michael J. *******
Jeffries dated January 1, 1996^
10.20 Employment Agreement with Roger C. *******
Stikeleather dated January 1, 1996^
10.21 Lease for the Company's Eatontown facility ******
dated October 20, 1994
*******
10.22 Employment Agreement with James L. Russell,
Ph.D. dated December 18, 1995^
Confidentiality Agreement and Non-
10.23 Competition Agreement with James L. *******
Russell, Ph.D. dated November 15, 1995
10.24 Second Amendment to Loan and Security ++++
Agreement between the Company and United
Jersey Bank/Central, N.A. dated June 30,
1995
10.25 Amendment to the lease for the Company's ++++
Leiden, the Netherlands facility dated
June 27, 1995
10.26 Agreement dated December 20, 1996 between E-2
American Red Cross and the Company~
10.27 Lease for the Company's Shrewsbury, New E-39
Jersey processing facility
10.28 Employment Agreement between the Company E-52
and Richard W. Bauer dated December 5, 1996
-34-
<PAGE>
11.1 Computation of Primary Net Income (Loss) E-64
Per Share
11.2 Computation of Fully Diluted Net Income E-65
(Loss) Per Share
21.1 Subsidiaries of the Registrant E-66
23.1 Consent of Coopers & Lybrand E-67
* Previously filed as exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991 and
incorporated herein by reference thereto.
** Previously filed as exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-40463) and incorporated
herein by reference thereto.
*** Previously filed as exhibits to the Company's Registration
Statement on Form S-8 (File No. 33-44547) and incorporated
herein by reference thereto.
**** Previously filed as exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992 and
incorporated herein by reference thereto.
***** Previously filed as exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993 and
incorporated herein by reference thereto.
****** Previously filed as exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 and
incorporated herein by reference thereto.
******* Previously filed as exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995 and
incorporated herein by reference thereto.
+ Previously filed as exhibits to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993 and incorporated
herein by reference thereto.
++ Previously filed as exhibits to the Company's Current Report on
Form 8-K filed with the Commission on May 26, 1992.
-35-
<PAGE>
+++ Previously filed as exhibits to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994 and incorporated
herein by reference thereto.
++++ Previously filed as exhibits to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994 and incorporated
herein by reference thereto.
+++++ Previously filed as exhibits to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995 and incorporated
herein by reference thereto.
# Previously filed as exhibits to the Company's Report on Form 8-A
dated February 2, 1996 and incorporated herein by reference
thereto.
~ Copy omits information which is subject to confidential
treatment.
^ Management contracts or compensatory plans and arrangements
required to be filed pursuant to Item 14(c).
(b) Reports on Form 8-K
Current Report on Form 8-K dated October 30, 1996. Current
Report on Form 8-K dated November 14, 1996. Current Report on
Form 8-K dated December 20, 1996.
-36-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 25, 1997
OSTEOTECH, INC.
By: /s/Richard W. Bauer
Richard W. Bauer
President, Chief Executive
Officer (Principal Executive
Officer) and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated:
Signature Title Date
/s/DONALD D. JOHNSTON Chairman of the Board March 25, 1997
Donald D. Johnston of Directors
/s/RICHARD W. BAUER President, Chief March 25, 1997
Richard W. Bauer Executive Officer
(Principal Executive
Officer) and Director
/s/MICHAEL J. JEFFRIES Executive Vice March 25, 1997
Michael J. Jeffries President, Chief
Operating Officer,
Chief Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer),
Secretary and Director
/s/STEPHEN J. SOGIN Director March 25, 1997
Stephen J. Sogin
/s/KENNETH P. FALLON III Director March 25, 1997
Kenneth P. Fallon III
Director
Walter J. McNerney
-37-
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
-------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
1. FINANCIAL STATEMENTS
Report of Independent Accountants.....................................F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995..........F-3
Consolidated Statements of Operations
for the years ended December 31, 1996, 1995 and 1994.................F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994.................F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994.................F-6
Notes to Consolidated Financial Statements............................F-7
2. SCHEDULES
II. Valuation and Qualifying Accounts
for the years ended December 31, 1996, 1995 and 1994..............S-1
Report of Independent Accountants............................S-2
All schedules, except for those set forth above, have been omitted since the
information required is included in the financial statements or accompanying
notes or have been omitted as not applicable or not required.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and
Stockholders of Osteotech, Inc.:
We have audited the accompanying consolidated balance sheets of Osteotech, Inc.
and Subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Osteotech, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Princeton, New Jersey
February 21, 1997
F-2
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1996 1995
ASSETS
- ---------------------------------------------------------------------------- -- ------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,290 $ 2,788
Short-term investments 1,987 4,919
Accounts receivable, less allowance of
$163 in 1996 and $179 in 1995 6,280 4,561
Deferred processing costs 1,222 977
Inventories 729 1,081
Deferred income taxes 590 1,429
Prepaid expenses and other current assets 1,833 1,905
Total current assets 19,931 17,660
Equipment and leasehold improvements, net 8,170 8,624
Excess of cost over net assets of business acquired, less
accumulated amortization of $1,197 in 1996 and $945 in 1995 2,501 2,753
Other assets 881 1,133
Total assets $ 31,483 $ 30,170
============================================================================ == ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------- -- ------------- -------------
Current liabilities:
Accounts payable and accrued liabilities $ 6,247 $ 4,078
Notes payable 655 647
Current maturities of long-term debt and
obligations under capital leases 756 800
Total current liabilities 7,658 5,525
Long-term debt and obligations under capital leases 840 1,598
Other liabilities 268 453
Total liabilities 8,766 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 7,826,779
shares in 1996 and 7,198,179 shares in 1995 78 72
Additional paid-in capital 30,288 29,782
Currency translation adjustments (113) (48)
Accumulated deficit (7,536) (7,212)
Total stockholders' equity 22,717 22,594
-----------------------------
Total liabilities and stockholders' equity $ 31,483 $ 30,170
============================================================================ =============================
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
F-3
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ------------------------------------------------------------------ ---- -------------- --------------- --------------
<S> <C> <C> <C>
Net Revenues:
Service $ 31,717 $ 24,451 $ 22,076
Product 2,481 2,682 1,975
Grant 697 801 519
34,895 27,934 24,570
Costs and expenses:
Cost of services 12,406 10,481 9,673
Cost of products 2,414 2,078 1,322
Marketing, general and administrative 12,619 10,408 9,591
Research and development 4,357 3,749 3,349
Provision for restructuring 1,350
Provision for termination of distribution agreement 980
33,146 27,696 23,935
Other income (expense):
Recovery of principal on note
from a major customer 4,147
Interest income 448 605 509
Interest expense (232) (252) (111)
Other 55 82 179
271 4,582 577
Income before income taxes 2,020 4,820 1,212
Income tax provision (benefit), net 2,344 238 (535)
Net income (loss) $ (324) $ 4,582 $ 1,747
================================================================== ==== ============== =============== ==============
Net income (loss) per share:
Primary $(.04) $ .57 $ .22
Assuming full dilution $(.04) $ .55 $ .22
- ------------------------------------------------------------------ ---- -------------- --------------- --------------
Shares used in computing net income (loss) per share:
Primary 7,920,234 8,091,381 7,889,891
Assuming full dilution 7,920,234 8,263,764 7,894,759
- ---------------------------------------------------------------- -- ----------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995 and 1994
- ---------------------------------------------------- --- --------------- ---- -------------- ---- ------------------ --------------
Additional Currency Total
Common Stock Paid-In Translation Accumulated Stockholders'
Shares Amount Capital Adjustment Deficit Equity
- ------------------------------------------------------ --- -------------- --- -------------- --- -------------- --- ------------ -
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 6,932,985 $ 69 $ 28,926 $ (92) $ (13,541) $ 15,362
Exercise of stock options 194,975 3 121 124
Common stock issued pursuant to
employee stock purchase plan 11,916 51 51
Repurchase of stock (50,000) (1) (180) (181)
Currency translation adjustments (7) (7)
Net income 1,747 1,747
------------ -------- -- --------------- --- -------------- --- ------------------------
Balance at December 31, 1994 7,089,876 71 28,918 (99) (11,794) 17,096
Exercise of stock options 30,571 111 111
Exercise of stock warrants 55,616 1 (1)
Common stock issued pursuant to
employee stock purchase plan 22,116 136 136
Tax benefits related to stock options 618 618
51 51
Net income 4,582 4,582
Balance at December 31, 1995 7,198,179 72 29,782 (48) (7,212) 22,594
Exercise of stock options 85,866 1 317 318
Exercise of stock warrants 525,204 5 (5)
Common stock issued pursuant to
employee stock purchase plan 17,530 120 120
Tax benefits related to stock options 74 74
Currency translation adjustments (65) (65)
Net loss (324) (324)
Balance at December 31, 1996 7,826,779 $ 78 $ 30,288 $ (113) $ (7,536) $ 22,717
======================================================= ======== == =============== === ============== === ======== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ------------------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Cash Flow From Operating Activities
Net income (loss) $ (324) $ 4,582 $ 1,747
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,679 1,718 1,383
Provision for restructuring 1,350
Provision for termination of distribution agreement 980
Deferred income taxes 804 (582) (600)
Provision for doubtful accounts 17 15 (7)
Changes in assets and liabilities:
Accounts receivable (1,738) 30 (1,310)
Inventories 197 (594) (827)
Deferred processing costs (245) (207) (265)
Prepaid expenses and other current assets 7 (452) (535)
Accounts payable and other liabilities 1,301 62 254
- ------------------------------------------------------------------- -------------- -------------- --------------
Net cash provided by (used in) operating activities 4,048 5,552 (160)
Cash Flow From Investing Activities
Capital expenditures (2,152) (4,071) (1,777)
Proceeds from sale of investments 10,867 5,913 3,927
Purchases of investments (7,935) (9,860) (2,930)
Increase in other assets (300) (484) (104)
Net cash provided by (used in) investing activities 480 (8,502) (884)
Cash Flow From Financing Activities
Proceeds from issuance of common stock 512 831 175
Repurchase of common stock (181)
Proceeds from issuance of notes payable 829 820 706
Proceeds from issuance of long-term debt 1,227 959
Principal payments on notes payable (821) (495) (501)
Principal payments on long-term debt
and obligations under capital leases (800) (596) (403)
Increase in other liabilities 150
Net cash provided by (used in) financing activities (280) 1,937 755
Effect of exchange rate changes on cash 254 16 (70)
- ------------------------------------------------------------------- -------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 4,502 (997) (359)
Cash and cash equivalents at beginning of year 2,788 3,785 4,144
Cash and cash equivalents at end of year $ 7,290 $ 2,788 $ 3,785
=================================================================== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Osteotech, Inc. (the "Company"), formed in 1986, provides services and
develops and markets products to the orthopaedic, neurological,
oral/maxillofacial, dental and general surgery markets in the United States
and Europe. The Company's current technology, products and services, and
those under development, are focused primarily on the repair and healing of
the musculoskeletal system. Osteotech is engaged in: (i) the processing of
human bone, ligaments and tendons (collectively, "bone tissue") for
transplantation; (ii) providing ceramic (hydroxyapatite) and titanium
plasma spray coating services and ceramic based products to the
orthopaedic, dental and ear, nose and throat implant markets; and (iii)
distributing implant devices and specialized instruments for spinal
surgery.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial Statements
The consolidated financial statements include the accounts of Osteotech,
Inc. and its majority-owned subsidiaries. All intercompany transactions and
balances are eliminated in consolidation.
Revenue Recognition
Revenue is recognized at the time the Company provides services or ships
products to its customers.
Grant revenues are recognized when earned. Grant revenues are considered to
be earned in the period that qualifying research and development
expenditures are incurred and reflected in the Consolidated Statements of
Operations.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Investments with
maturities in excess of three months but less than one year are classified
as short-term investments and are stated at cost, net of any unamortized
premiums or discounts, which approximates fair value.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out method.
Deferred Processing Costs
Costs related to bone tissue processing in progress are deferred until
processed bone tissue is released from final quality assurance testing.
F-7
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets which
range from three to ten years. The cost of leasehold improvements is
amortized on the straight-line method over the shorter of the lease term or
the estimated useful life of the asset. Major renewals and betterments are
capitalized. Maintenance and repairs are expensed as incurred. When
depreciable assets are retired or sold, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss
is reflected in operations.
Excess of Cost Over Net Assets of Business Acquired
The excess of cost over the net assets of business acquired ("goodwill") is
being amortized on a straight-line basis over 15 years. It is the Company's
policy to periodically review and evaluate whether there has been a
permanent impairment in the value of goodwill. Factors considered in the
valuation include current operating results, trends, prospects and
anticipated undiscounted future cash flows.
Translation of Foreign Currency
Assets and liabilities of foreign subsidiaries are translated at rates of
exchange in effect at the close of the year. Revenues and expenses are
translated at the weighted average exchange rates during the year.
Translation gains and losses are accumulated as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are
included in other income.
Net Income (Loss) Per Share
The computation of net income (loss) per share is based on the weighted
average number of common shares and nominal warrants (warrants with an
exercise price of $.03) outstanding adjusted to reflect the assumed
exercise of outstanding stock options and other warrants using the treasury
stock method to the extent these items had a dilutive effect on the
computations.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS 109") which requires recognition of
deferred tax assets and liabilities based on differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, measured using the enacted tax rates in effect
for the years in which the differences are expected to be recovered or
settled.
Concentrations of Credit Risk
The Company provides credit, in the normal course of business, to tissue
banks, hospitals and Company agents. The Company maintains an allowance for
doubtful accounts and charges actual losses to the allowance when incurred.
The Company invests the majority of its excess cash in U.S.
Government-backed securities and investment grade commercial paper of major
U.S. corporations. The Company does not believe it is exposed to any
significant credit risk on its cash equivalents and short-term investments.
F-8
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results may differ from such estimates.
3. RESTRUCTURING OF THE NETHERLANDS OPERATIONS
In October 1996, the Company announced a plan to restructure its
non-allograft operations located in Leiden, The Netherlands. In connection
with the restructuring, the Company discontinued its PolyActive(TM) polymer
research and development program. As a result of the restructuring, the
Company recorded a pre-tax restructuring charge of $1,350,000, consisting
primarily of employee termination costs, write-off of equipment, intangible
assets, supplies and costs associated with the planned sub-leasing of
office space in Leiden on which the Company has a long-term lease.
4. 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. As a
result of this termination, the Company recorded a pre-tax charge to
earnings of $980,000 consisting principally of inventory write-offs,
employee termination costs and legal fees.
5. NOTE RECEIVABLE FROM A MAJOR CUSTOMER
The Company is the exclusive processor of allograft bone tissue procured
and distributed by the Musculoskeletal Transplant Foundation ("MTF"). (See
Note 8 and Note 16.) From MTF's inception in February 1987 through May
1989, the Company supplemented MTF's working capital requirements through
a series of cash advances and unpaid processing and service fees. In June
1990, the principal and interest on these advances at December 31, 1989
were converted into two notes which were fully reserved by the Company.
The first note had an original face value of $7,216,000. During 1995 the
Company received $4,147,000 of principal payments on this note reducing
the outstanding balance to $0. During 1994 the Company received no
principal payments on this note. During 1995 and 1994 the Company also
received interest payments from MTF on this note of $330,000 and $285,000,
respectively.
F-9
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NOTE RECEIVABLE FROM A MAJOR CUSTOMER (continued)
The second note, with an original face value of $2,621,000, was
non-interest bearing and was subject to cancellation by the Company at the
rate of $524,000 per year on the anniversary of the note (June 30th),
provided MTF met certain annual requirements as defined in the note. During
1995, the Company canceled $524,000 of the note thereby reducing the
remaining amount outstanding to $0. The Company also canceled $524,000 of
the note on June 30, 1994. The cancellation of the note had no impact on
the Company's results of operations since the note was fully reserved.
6. INVENTORIES
Inventories consist of the following at December 31:
(in thousands) 1996 1995
----------------------------------- -------------- ---- --------------
Raw materials $ 379 $ 247
Finished goods 350 834
$ 729 $ 1,081
=================================== ============== ==== ==============
7. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following at December 31:
(in thousands) 1996 1995
-------------------------------------------------------------------------
Production and laboratory equipment $ 8,273 $ 7,116
Computer hardware and software 1,328 1,096
Office equipment, furniture and fixtures 1,450 1,183
Vehicles 74 32
Equipment under capital lease 391 402
Leasehold improvements 3,870 3,648
---------- ----------
15,386 13,477
Less accumulated depreciation
and amortization 7,216 4,853
$ 8,170 $ 8,624
========================================= ================ ==============
Accumulated depreciation and amortization above includes amortization on
equipment under capital lease of $152,000 and $56,000 in 1996 and 1995,
respectively.
8. COMMITMENTS AND CONTINGENCIES
Service Agreements
Osteotech is the exclusive processor of allograft bone tissue for large
national and international not-for-profit organizations. The Company
provides these processing services pursuant to long-term service
agreements. Customers are charged fees on a per donor basis, or for
proprietary
F-10
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (continued)
products on a per unit basis, for direct and indirect 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. In
December 1996, the Company entered into a new ten year agreement with one
of its major customers, the American Red Cross ("ARC"). The Company is
currently in discussions with its other major customer, MTF, to enter into
a new long-term agreement to replace the existing agreement which expires
on March 31, 1997. There can be no assurance that the Company and MTF will
enter into a new agreement or that such agreement will contain terms
favorable to the Company. (See Note 16.)
Customers of the Company's plasma spray coating services generally purchase
such services pursuant to purchase orders or non-exclusive supply
agreements which are cancelable at any time by either party.
Litigation
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 allegedly distributed by the
Company. Management believes that the suits and claims are without merit
and intends to defend such actions vigorously. It is the Company's position
that either a device distributed by the Company was not implanted in the
patient, or that if the allegations in the complaints regarding the use of
the device are assumed to be true, the device was used in a manner which
was contrary to the use approved by the FDA and the Company's warnings
concerning use. Pursuant to its distribution agreement with the Company,
the manufacturer of the spinal fixation devices, Heinrich C. Ulrich, KG
("Ulrich") has agreed to indemnify the Company for all costs, and damages
incurred by the Company in connection with its distribution of products
manufactured by Ulrich, except such costs and damages which are caused by
the Company's gross negligence or willful misconduct or unauthorized claim
made by the Company in marketing the products. In connection with this
indemnification, the Company received $59,000 from Ulrich in 1996 as
reimbursement for legal costs incurred by the Company.
The Company has also been named as a defendant in a lawsuit which alleges
that the Company and co-defendant MTF mislabeled and mispackaged processed
human bone tissue. Pursuant to a service agreement between MTF and the
Company regarding the Company's tissue processing services, the Company has
agreed to defend, indemnify and hold harmless MTF with respect to this
action. Management believes that this lawsuit is without merit and the case
is currently being defended, including the defense of MTF, by the Company's
products liability insurance carrier.
The Company maintains products liability insurance coverage in the amount
of $20 million per occurrence and per year in the aggregate, however, there
can be no assurance that these claims will be covered by the Company's
insurance policy. Management is unable to predict the outcome of the
pending suits and claims or whether or not their ultimate disposition will
have a material effect upon the consolidated financial position, results of
operations and liquidity of the Company.
F-11
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LEASING TRANSACTIONS
The Company leases office and production facilities and equipment under
various capital and operating lease agreements which have non-cancelable
terms through May 2008. The leases for office and production facilities
include renewal provisions at the Company's option. Additionally, certain
of the leases contain purchase options.
Future minimum lease commitments as of December 31, 1996 are as follows:
Capital Operating
Year Leases Leases
----------------------------------------------------- ----------------
(in thousands)
1997 $ 108 $ 974
1998 108 928
1999 36 879
2000 861
2001 and thereafter 5,320
Total minimum lease payments 252 $ 8,962
=========
Less amount representing interest 32
----------------------------------------------------
Present value of minimum lease payments $ 220
==================================================== ======
Rental expense was $1,045,000, $956,000 and $653,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
10. STOCKHOLDERS' EQUITY
Preferred Stock
In July 1991, upon completion of the Company's initial public offering, the
authorized capital of the Company was amended to reflect 5,675,595 shares
of Preferred Stock, the rights and provisions of which will be determined
by the Board of Directors at the time any such shares are issued, if at
all. No shares of Preferred Stock were issued or outstanding at December
31, 1996 and 1995.
Stock Options
The Company has two stock option plans currently in effect under which
future grants may be issued: the 1991 Stock Option Plan (the "1991 Plan")
and the 1991 Independent Directors Stock Option Plan (the "Directors
Plan"). These plans, as amended, provide for the issuance of up to
1,813,765 and 500,000 shares respectively, of the Company's Common Stock.
The 1991 Plan provides for option grants to officers, employees and
consultants designated as either non-qualified or incentive stock options.
The Directors Plan provides for option grants to members of the Board of
Directors who are not officers or employees of the Company. The Directors
Plan is a non-statutory stock option plan covering the issuance of options
that will not qualify as incentive stock options. Options generally become
exercisable in ratable installments over a four-year period.
F-12
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY (continued)
Prior to the adoption of the 1991 Plan, the Company issued options to
officers, employees and consultants pursuant to written option agreements
which were not subject to a formal plan. The option price was periodically
set by the Board of Directors based upon an evaluation of the fair market
value of the Company's Common Stock. Options issued pursuant to written
option agreements generally became exercisable in ratable installments over
a four-year period. The Company no longer issues options not covered by a
formal plan. At December 31, 1996, the Company reserved an aggregate of
42,391 shares of its Common Stock for issuance upon exercise of options
granted pursuant to written option agreements.
Stock option activity for the years 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------------------------------- -------------------------- --------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price Shares
---------------------------------------------------------- ------------ ---------------- ------------ - --------------
<S> <C> <C> <C> <C> <C>
Outstanding at January 1, 1,582,162 $ 5.41 1,710,292 $ 6.07 1,831,250
Granted 303,500 7.44 533,177 5.97 550,150
Exercised 85,866 3.71 30,571 3.64 194,975
Canceled or expired 47,253 6.33 630,736 7.75 476,133
Outstanding at December 31, 1,752,543 $ 5.82 1,582,162 $ 5.41 1,710,292
Exercisable at December 31, 1,009,545 $ 5.55 841,318 $ 5.36 738,203
---------------------------------------------------------- ------------ -------------- ------------ --------------
Available for grant at
December 31, 507,745 514,904 417,563
---------------------------------------------------------- ------------ -------------- ------------ --------------
Weighted average fair value of
options granted during the period $ 3.52 $ 2.95
---------------------------------------------------------- ------------ ---------------- ------------ - --------------
</TABLE>
In April 1995, the Company instituted a stock option exchange program
whereby optionees with options having an exercise price of $6.00 or more
were offered repriced options on the basis of a 65% exchange ratio. The
exercise price of the new options was the then current fair market value of
the Common Stock which was $5.25 per share. As a result of the exchange
program, options for 327,458 shares were canceled and options for 213,477
shares were issued.
F-13
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY (continued)
The following table summarizes the information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ----------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1996 Life (Years) Price 1996 Price
--------------------- -- ----------------- -- -------------- --------------- -- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ .56 to $ 3.94 73,391 3 $ 1.88 55,291 $ 1.33
4.00 to 6.94 1,322,900 5 5.32 762,502 5.25
7.00 to 10.00 350,627 6 8.40 186,127 7.74
12.25 to 17.00 5,625 3 14.91 5,625 14.91
--------- ---- ------------------------ - ---------------- ------------- -- ----------------- -- -------------
$ .56 to $ 17.00 1,752,543 5 $ 5.82 1,009,545 $ 5.55
========================================== ============================= ====================== =============
</TABLE>
The Company has adopted the "disclosure only" provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation ("SFAS 123") and, accordingly, no compensation cost has been
recognized in the Statements of Operations. Pro forma information regarding
net income and net income per share is required by SFAS 123, and has been
determined as if the Company accounted for its stock options under the Fair
Value Method of that Statement. For purposes of the pro forma disclosures,
the estimated fair value of the options is amortized to expense over the
options' vesting period. The Company's pro forma information follows (in
thousands except for per share information):
1996 1995
---------------------------------------------------------- ------------
Net income (loss), as reported $ (324) $ 4,582
Net income (loss), pro forma (865) 4,054
Net income (loss) per share, as reported
Primary $ (.04) $ .57
Assuming full dilution (.04) .55
Net income (loss) per share, pro forma
Primary $ (.11) $ .52
Assuming full dilution (.11) .50
---------------------------------------------------------- ------------
The pro forma effect on net income for 1995 and 1996 is not representative
of the pro forma effect on net income in future years because it does not
take into consideration pro forma compensation expense related to grants
made prior to 1995.
F-14
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY (continued)
The fair value for the option grants was estimated at the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1996 1995
----------------------------------------------- ------ -----------------
Expected life (years) 6 5
Risk free interest rate 6.6% 6.9%
Volatility factor 50.0% 50.0%
Dividend yield 0.0% 0.0%
---------------------------------------------- ------ ------------------
Stock Warrants
As part of financing and contract arrangements, the Company has, at certain
times, issued warrants to purchase the Company's Convertible Preferred
Stock and Common Stock. Warrant activity for the years ended December 31,
1994, 1995 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
Convertible Preferred
Stock Warrants Common
Series Series Stock
A D Warrants
- -------------------------------------------- -------------- ---- --- --------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1993 96,343 248,061 620,326
- -------------------------------------------- -------------- --- ---- --------------- ---- --------------
Outstanding at December 31, 1994 96,343 248,061 620,326
Exercised 16,637 52,488
Outstanding at December 31, 1995 96,343 231,424 567,838
Exercised 85,190 15,709 437,474
Outstanding at December 31, 1996 11,153 215,715 130,364
- -------------------------------------------- -------------- ---- --- -------------- --- ---------------
Exercise price $ 0.03 $ 5.58 $ 0.03
Expiration date 1997 1997-2001 2001
- -------------------------------------------- -------------- ---- --- --------------- -- -------------
</TABLE>
Convertible Preferred Stock warrants are immediately convertible into
Common Stock upon exercise on a share for share basis. In January 1994, the
Board of Directors approved amending all outstanding warrants to allow for
cashless exercise of such warrants. Under the cashless exercise method, the
number of shares issued upon exercise of such warrant is determined by
calculating the aggregate number of shares represented by the warrants
using the closing price of the Company's Common Stock on the exercise date,
deducting the aggregate exercise cost and dividing the net remaining amount
by the market value per share on the exercise date.
F-15
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY (continued)
Stock Purchase Plan
The 1994 Employee Stock Purchase Plan provides for the issuance of up to
250,000 shares of Common Stock. Eligible employees may purchase shares of
the Company's Common Stock through payroll deductions of 1% to 7 1/2% of
annual compensation. The purchase price for the stock is 85% of the fair
market value of the stock on the last day of each calendar quarter. At
December 31,1996, 198,438 shares were available for future offerings under
this plan.
Stockholder Rights Agreement
In January 1996, the Board of Directors of the Company unanimously adopted
a stockholder rights agreement (the "Rights Agreement") declaring a
dividend of one preferred stock purchase right (the "Right") for each
outstanding share of common stock as of February 12, 1996. Each Right
entitles the stockholder to purchase from the Company one one-hundredth of
a preferred share at a price of $35.00 per share, subject to adjustment.
The Rights will not be exercisable or separable from the common shares
until ten business days after a person or group acquires or tenders for 20%
or more of the Company's outstanding common shares ("triggering event").
The Rights Agreement also provides that, after a triggering event occurs,
the Rights convert into a Right to buy common stock and entitle its holder
to receive upon exercise that number of common shares having a market value
of two times the exercise price of the Right. In the event the Company is
acquired in a merger or other business combination transaction, each Right
will entitle its holder to receive upon exercise of the Right, at the
Right's then current exercise price, that number of the acquiring company's
common shares having a market value of two times the exercise price of the
Right. The Company is entitled to redeem the Rights at a price of $.01 per
Right at any time prior to their becoming exercisable, and the Rights
expire on February 12, 2006. The Rights Agreement was adopted to maximize
the value of all stockholders' ownership interest in the Company by
establishing a deterrent to abusive takeover tactics sometimes used in
challenges for corporate control.
11. DEBT AND FINANCING ARRANGEMENTS
The Company has a loan and security agreement with a U.S. bank which
provides for borrowing up to $3,000,000 under a revolving line of credit
and $4,000,000 under an equipment line of credit. The annual interest rate
on revolving loan advances is based upon the bank's prime rate whereas the
annual rate of interest on equipment advances is based upon the bank's
prime rate plus a margin of .25%. Borrowings under the equipment line of
credit are repayable over a 48 month term and are collateralized by
equipment purchased with such borrowings. The Company is required under the
agreement to maintain certain financial ratios and meet certain net worth
and indebtedness tests. An annual commitment fee of .25% is payable on the
unused portion of the revolving line of credit. At December 31, 1996 and
1995, $1,377,000 and $2,080,000, respectively, was outstanding under the
equipment line of credit and there were no borrowings under the revolving
line of credit.
F-16
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. DEBT AND FINANCING ARRANGEMENTS (continued)
The Company has a line of credit with a Dutch bank which provides for
borrowing up to 5,000,000 dfl, or approximately $2,872,000 at the December
31, 1996 exchange rate. Borrowings under this credit line bear interest at
the Dutch Central Bank discount rate for promissory notes plus a margin of
2.5%. Under certain circumstances the Company may elect to utilize a rate
based on the Amsterdam Interbank Offered Rate (AIBOR) plus a margin of 1%.
Analysis of the Company's financial position and anticipated cash flow
indicated that it most likely would not be necessary to utilize a
significant portion of this line of credit in 1996 and, therefore, the
Company agreed with the bank to limit its borrowings in 1996, if any, to be
no more than 3,000,000 dfl, or approximately $1,723,000 at the December 31,
1996 exchange rate. Additionally, in connection with the Leiden facility
lease, the Company is required to maintain a declining bank guarantee which
reduced the current amount available for borrowings to 2,424,000 dfl or
approximately $1,392,000 at the December 31, 1996 exchange rate. At
December 31, 1996 and 1995, there were no borrowings under this line of
credit.
The weighted average interest rate on short-term notes payable outstanding
was 5.87% in 1996 and 5.73% in 1995.
<TABLE>
<CAPTION>
Long-term debt consists of the following at December 31:
(in thousands) 1996 1995
---------------------------------------------------------------------------------------- ------------- --- -------------
<S> <C> <C>
Term loan payable to a bank, collateralized by equipment and repayable
in monthly installments of $59,000 plus accrued
interest at the bank prime rate plus .25% (8.75% at December 31, 1996). $ 1,377 $ 2,080
Term note payable to a bank, collateralized by accounts receivable
and equipment of a subsidiary and repayable in quarterly installments
of $15,000 plus accrued interest at 11%. 15
1,377 2,095
Less current portion 668 719
$ 709 $ 1,376
</TABLE>
Aggregate long-term debt maturities are $668,000 in 1997, $537,000 in
1998 and $172,000 in 1999.
F-17
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at
December 31:
(in thousands) 1996 1995
-------------------------------------------- ---- ----------------
Trade accounts payable $ 1,391 $ 1,826
Accrued compensation 1,051 470
Accrued research and development 1,264 598
Other accrued liabilities 2,541 1,184
$ 6,247 $ 4,078
============================================== ==== ===============
13. INCOME TAXES
<TABLE>
<CAPTION>
The income tax provision (benefit) is summarized as follows at December 31:
(in thousands) 1996 1995 1994
---------------------------------------------------- --- ---------------- --- ----------------
<S> <C> <C> <C>
Current:
Federal $ 1,338 $ 294 $ 65
State 470 152
1,808 446 65
------------ --- ---------------- --- ----------------
Deferred:
Federal 508 (124) (600)
State 28 (84)
536 (208) (600)
------------ --- ---------------- --- ----------------
Income tax provision (benefit), net $ 2,344 $ 238 $ (535)
===================================================== === ================ === ================
</TABLE>
The difference between income tax expense (benefit) and the expected tax
which would result from the use of the Federal statutory income tax rate is
as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
------------------------------------------------------------ ----- -------------- ----- --------------
<S> <C> <C> <C>
Computed tax at statutory Federal rate $ 687 $ 1,639 $ 412
State income taxes 352 416 311
Amortization of excess of cost over
fair value of assets acquired 86 86 86
Net operating losses for which no tax
benefit is currently available 1,184 601 644
Change in valuation allowance allocated to
income tax expense (2,551) (2,079)
Alternative minimum tax 65
Other 35 47 26
----------------------------------------------------------- ----- -------------- ----- --------------
Income tax provision (benefit), net $ 2,344 $ 238 $ (535)
=========================================================== ===== ============== ===== ==============
</TABLE>
F-18
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES (continued)
Loss before income taxes from foreign operations was $3,652,000 in 1996,
$1,910,000 in 1995 and $1,839,000 in 1994, respectively. The components of
the deferred tax assets and deferred tax liabilities are as follows at
December 31:
(in thousands) 1996 1995
----------------------------------------------------------- -----------
Deferred Tax Assets:
Net operating loss carryforwards
Federal $ 374 $ 714
Foreign 4,016 2,751
State 57 55
Tax credits 11 654
Other 637 496
Total gross deferred tax assets 5,095 4,670
Less valuation allowance 4,530 3,134
----------------------------------------------------------- ----------
Deferred tax assets 565 1,536
----------------------------------------------------------- ----------
Deferred Tax Liabilities:
Other 153 320
Total gross deferred tax 153 320
----------------------------------------------------------- ----------
Net deferred tax asset $ 412 $ 1,216
=========================================================== ==========
In 1996, the Company increased its valuation allowance as a result of
foreign losses for which the realization of future tax benefits is
uncertain. In 1995 and 1994 the Company reduced its valuation allowance
resulting in the recognition of net deferred tax assets of $2,551,000 and
$2,079,000, respectively, resulting from (i) the realization of tax
benefits of temporary differences which reversed during each year
($1,335,000 in 1995 and $1,479,000 in 1994); and (ii) the Company's
assessment that it would generate sufficient future U.S. taxable income to
realize a portion of the deferred tax benefits associated with certain
Federal and state net operating loss carryforwards and tax credits
($1,216,000 in 1995 and $600,000 in 1994).
At December 31, 1996, the Company had U.S. net operating loss carryforwards
which approximate $1,099,000 for Federal income tax purposes and $216,000
for state income tax purposes. The Federal and state net operating loss
carryforwards, if unused, expire from 2006 through 2011. The Company also
has research and development tax credit carryforwards for Federal income
tax purposes of approximately $11,000 which expire 2009. The timing and
manner in which the U.S. net operating loss carryforwards and credits are
utilized in the future may be limited by Internal Revenue Code Section 382.
In addition, certain of the Company's subsidiaries have foreign net
operating loss carryforwards aggregating $10,041,000 ($350,000 with no
expiration date; $9,691,000 expiring 1999 through 2004).
Approximately $214,000 of the net operating loss carryforwards were
acquired in connection with the acquisition of HC Implants BV in May 1992.
Subsequently recognized tax benefits which result from the utilization of
these acquired net operating loss carryforwards will be applied to reduce
the excess of cost over net assets of business acquired.
F-19
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
------------------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Cash paid during the year for interest $ 188 $ 240 $ 105
Cash paid during the year for taxes 1,120 101 61
Capital lease obligations entered into during the year 309
------------------------------------------------------------------- -------------- -------------- --------------
</TABLE>
15. SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
Maintenance and repairs expense for the years ended December 31, 1996, 1995
and 1994 was $981,000, $773,000 and $610,000, respectively. Depreciation
and amortization expense related to equipment and leasehold improvements
for the years ended December 31, 1996, 1995 and 1994 was $2,020,000,
$1,374,000 and $1,119,000, respectively.
16. SEGMENT AND MAJOR CUSTOMER DATA
The Company operates principally in one business segment - the repair and
healing of the musculoskeletal system. Financial information by geographic
area is summarized as follows:
<TABLE>
<CAPTION>
(in thousands) United States Europe Consolidated
------------------------------------------------- -------------------- ---- -------------- ----- ---------------------
Revenues
<S> <C> <C> <C> <C>
1996 $ 31,582 $ 3,313 $ 34,895
1995 24,293 3,641 27,934
1994 21,938 2,632 24,570
Net income (loss)
1996 $ 2,628 $ (2,952) $ (324)
1995 5,904 (1,322) 4,582
1994 2,883 (1,136) 1,747
Identifiable Assets
1996 $ 26,768 $ 4,715 $ 31,483
1995 24,929 5,241 30,170
1994 17,246 5,348 22,594
- ------ -------------------------------------------------- ---------------- ------- ---------------- ------- ----------------
</TABLE>
Customers comprising 10% or greater of the Company's consolidated net
revenues are summarized as follows:
Revenues
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
--------------------------------------------------- -------------- ------ -------------- ------- --------------
<S> <C> <C> <C>
MTF $22,224 $18,009 $15,529
ARC 8,735 5,544 5,495
$30,959 $23,553 $21,024
=================================================== ============== ======= ============== ====== ==============
</TABLE>
F-20
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. RETIREMENT BENEFITS
The Company has a 401(k) plan which covers substantially all full time U.S.
employees. The Company has agreed to contribute an amount equal to 25% of
each participant's contribution. A participant's contribution may not
exceed 15% of annual compensation, or the maximum allowed by the Internal
Revenue Code, if less than 15% of compensation. Provisions of the plan
include graduated vesting over five years of service. Total Company
contributions for the years ended December 31, 1996, 1995 and 1994 were
$133,000, $105,000 and $87,000, respectively.
Certain of the Company's foreign subsidiaries provide retirement benefits
to their employees through the purchase of non-participating annuity
contracts. The expenses for these contracts were $31,000, $44,000 and
$14,000 for the years ended December 31, 1996, 1995 and 1994.
The Company does not maintain any other pension or post retirement plans.
18. RECLASSIFICATIONS
Certain of the 1995 and 1994 amounts have been reclassified for comparative
purposes.
19. QUARTERLY FINANCIAL DATA (unaudited)
The following is a summary of the unaudited quarterly results for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Quarter Ended
(dollars in thousands except per share data) March 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------- --------------- ---- ------------- ---- ------------- ---- -------------
1996
<S> <C> <C> <C> <C>
Net revenues $ 8,409 $ 8,375 $ 9,010 $ 9,101
Cost of services
and products 3,597 3,615 3,849 3,759
Net income (loss) 171 202 251 (948)
Net income (loss) per share $ .02 $ .02 $ .03 $ (.12)
1995
Net revenues $ 6,982 $ 6,626 $ 6,977 $ 7,349
Cost of services
and products 3,083 3,031 3,151 3,294
Net income (loss) 36 (745) 4,709 582
Net income (loss) per share $ .01 $ (.10) $ .58 $ .07
- ---------------------------------------------- -------------- ---- ------------- ----- ------------- ----- -------------
</TABLE>
The quarter ended December 31, 1996 includes a pre-tax charge of $1,350,000
related to the restructuring of the Company's non-allograft operations in
Leiden, The Netherlands (See Note 3). The quarter ended June 30, 1995
includes principal payments on a fully reserved note from a significant
customer of $69,000 (See Note 5) and a pre-tax charge to earnings of
$980,000 resulting from the termination of a distribution agreement (See
Note 4). The quarter ended September 30, 1995 includes principal payments
on a fully reserved note from a significant customer of $4,078,000 and a
tax benefit of $2,232,000 resulting from the recognition of a net deferred
tax asset (See Note 5 and Note 13).
F-21
<PAGE>
SCHEDULE II
OSTEOTECH, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance At Additions Balance At
-------------------------------
Beginning Charged To Charged End
Of Period Expenses To Other Deductions Of Period
--------------- --------------- --------------- --------------- ---------------
For the year ended December 31, 1996:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 179 $ 17 $ (10)(a) $ (23)(b) $ 163
Valuation allowance for deferred
tax asset 3,134 1,396(d) 4,530
For the year ended December 31, 1995:
Allowance for doubtful accounts 158 18 3(a) 179
Allowance for loss on notes receivable
from a significant customer 4,672 (1) (4,671)(c) 0
Valuation allowance for deferred
tax asset 5,665 604(d) (3,135)(e) 3,134
For the year ended December 31, 1994:
Allowance for doubtful accounts 139 13 6(a) 158
Allowance for loss on notes receivable
from a significant customer 5,196 (524)(c) 4,672
Valuation allowance for deferred
tax asset 5,722 2,022(d) (2,079)(e) 5,665
</TABLE>
a. Represents foreign currency translation adjustments.
b. Represents the write-off of accounts receivable.
c. Represents forgiveness of $524,000 in 1995 and 1994 on a
non-interest bearing note which was fully reserved and loan principal
repayments of $4,147,000 received during 1995, on a note which was
fully reserved.
d. Represents the tax effect of temporary differences.
e. Represents recognition of a deferred tax asset.
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and
Stockholders of Osteotech, Inc.:
Our report on the consolidated financial statements of Osteotech,
Inc. and Subsidiaries is included on page F-2 of this 1996 Form 10-K. In
connection with our audits of such consolidated financial statements, we
have also audited the related financial statement schedule listed in the
index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Princeton, New Jersey
February 21, 1997
S-2
<PAGE>
EXHIBIT INDEX
Location of
Exhibit in
Sequential
Exhibit Number Description Numbering System
- --------------------------------------------------------------------------------
10.26 Agreement dated December 20, 1996 between E-2
American Red Cross and the Company(*)
10.27 Lease for the Company's Shrewsbury, New Jersey E-39
processing facility
10.28 Employment Agreement between the Company E-52
and Richard W. Bauer
11.1 Computation of Primary Net Income (Loss) E-64
Per Share
11.2 Computation of Fully Diluted Net Income E-65
Per Share
21.1 Subsidiaries of the Registrant E-66
23.1 Consent of Coopers & Lybrand E-67
(*) Document for which the Company is representing confidential treatment
pursuant to Rule 24b-2.
<PAGE>
EXHIBIT 10.26
AGREEMENT
This Agreement is made on December 10, 1996 by American Red
Cross Tissue Services, ("ARC"), a division of Biomedical Services of The
American National Red Cross, a United States corporation chartered by Congress
and Osteotech, Inc. ("Osteotech"), a Delaware corporation having its
headquarters in Eatontown, New Jersey, as follows:
WHEREAS, Osteotech provides high-quality tissue processing
services ("Processing") and other related services to entities engaged in
procuring and distributing bone and related connective soft tissue for
transplantation (collectively, "Tissue"); and
WHEREAS, ARC procures and distributes Tissue from various
sources, and wishes to contract with Osteotech to process such Tissue; and
WHEREAS, ARC wishes to ensure its ability to obtain processing
services as well as distribution, education and marketing and, from time to
time, other services and Osteotech desires to perform such services and to
process Tissue for ARC, provided that ARC agrees to exclusively provide Tissue
to Osteotech for Processing, regardless of where it is recovered, under the
following agreed terms and conditions;
NOW, THEREFORE, the parties agree as follows:
XXXXX Indicates the omission of confidential material pursuant to a request
for confidential treatment made in accordance with Rule 24b-2 under
the Securities Exchange Act of 1934, as amended. The confidential
material is being filed separately with the Secretary to the
Securities Exchange Commission.
E-2
<PAGE>
1. PROCESSING
1.1 Bone and Related Tissues Supplied by ARC
1.1.1 General Undertaking. ARC shall supply all Tissue that it
procures exclusively to Osteotech for Processing. Tissue
utilized in ARC research and development activities, if
any, shall be excluded from this requirement. At Osteotech's
request, each month ARC shall use its best efforts to provide
to Osteotech for Processing sufficient cortical bone tissue to
be processed into Grafton(R)products in order to meet
hospital/end user market demand for such products. The Tissue
shall be delivered to Osteotech, at ARC's expense, and shall
conform to all standards, guidelines, rules, regulations and
laws of (i) the United States Food and Drug administration
(FDA); (ii) the American Association of Tissue Banks (AATB);
(iii) other applicable U.S. federal, state and local
government agencies; (iv) any non-U.S. jurisdiction where
Tissue may be procured or distributed by or on behalf of ARC;
(v) ARC's standard operating procedures ("SOPs") as may be
amended from time to time by ARC; and (vi) Osteotech's
processing standards as specified in Osteotech's SOPs as may
be amended from time to time by Osteotech. All of such
standards, guidelines, rules, regulations, laws, procedures
and standards are hereinafter referred to as the "Processing
Standards." If interpretation of the Processing Standards is
required or if there is a disagreement about the
interpretation of the Processing Standards, ARC and Osteotech
will negotiate in good faith a resolution within thirty (30)
days. If there is a conflict between ARC's SOPs and
Osteotech's SOPs, ARC and Osteotech will negotiate in good
faith a resolution within thirty (30) days. If the issues
covered by the preceding two sentences are not resolved within
such thirty (30) day period, the parties will mutually agree
to a third party who will assist the parties in arriving at a
resolution. Recovery Standards shall mean all laws,
standards, rules, regulations, procedures and guidelines
E-3
<PAGE>
related to the donation, recovery and suitability
determination of Tissue, including donor referral, informed
consent, tissue recovery, pre-processing storage, packaging
and shipping and all records, activities and standards related
to obtaining, testing, documenting and evaluating serological
test results; obtaining, documenting and evaluating medical
history and lifestyle data; and related organizational,
management and quality assurance activities.
ARC and Osteotech shall provide each other a copy of its SOPs and
copies of any amendments to its SOPs promptly after such amendments are
adopted; provided, however, that doing so will not require such party
to disclose any trade secrets, technical know how or unpublished
scientific data or technical art. Upon reasonable notice and at its own
expense, each of Osteotech and ARC shall have the right to conduct an
annual audit of the other party's facilities and records related to
regulatory compliance. Upon reasonable notice and at its own expense,
each of Osteotech and ARC shall have the right to conduct additional
audits of the other party's facilities and records related to
regulatory compliance in the event there are repeated significant
defects in such other party's SOPs, or in such other party's compliance
with its SOPs or any applicable Processing Standards.
1.1.2 Volume
(a) ARC shall procure, store and distribute all Tissue in a manner
that assures that such Tissue will conform to the Recovery
Standards and the Processing Standards, and shall deliver all
such Tissue to Osteotech.
(b) ARC may increase the volume of donors delivered to Osteotech
above the volume set forth in the applicable forecast prepared
and agreed to in accordance with subsection (c), provided that
it gives Osteotech 90 days
E-4
<PAGE>
prior written notice for every planned incremental increase of
50 donors, unless Osteotech agrees in writing to a shorter
notice period for any of these increases.
(c) Subject to subsection (b), during the term of this
Agreement, ARC and Osteotech shall jointly agree upon
written forecasts for the Processing of Tissue for the
succeeding six months, broken out by month. The first
such forecast shall be provided 30 days after the
effective date of this Agreement; each such forecast
shall be a rolling six month forecast provided each
January 1, April 1, July 1 and October 1. If the parties
cannot agree upon a forecast for any month, the forecast
for such month shall be the average of the forecasts of
the parties for the immediately preceding three months.
(d) Osteotech will arrange with ARC to hold regular production
meetings to discuss the forecasts and other processing issues.
1.1.3 Donor Records
ARC will obtain and maintain all necessary books, records, and data
base with respect to the Recovery Standards of ARC (including without
limitation donor medical history, donor life style information,
serology and blood culture testing), inventory of procured Tissue
shipped to Osteotech, inventory of processed Tissue received from
Osteotech, and the receipt and processing of all end user orders
received from ARC's customers who utilize the Tissue. ARC shall provide
to Osteotech, within 15 days of the end of each calendar quarter, data
on the Tissue procurement activity of ARC occurring during that
quarter. Osteotech shall have the right to audit ARC Tissue donor data
upon reasonable prior written notice to ARC.
ARC shall also obtain and forward to the requesting governmental
regulatory agency, in English, such records,
E-5
<PAGE>
within the requisite time period, as may be necessary to satisfy all of
the Processing Standards, including, but not limited to, donor medical
history, donor life style information and all donor testing
information.
1.2 Processing
1.2.1 General Undertaking
(a) Processing and packaging of Tissue received by Osteotech
pursuant to Section 1.1.2 into currently available finished
units of Tissue shall be conducted by Osteotech pursuant to
the Processing Standards in accordance with Section 1.2.2. For
purposes hereof, Processing shall include all operations
necessary to prepare procured Tissue for transplantation.
(b) Osteotech shall, upon reasonable prior written notice from
ARC, permit ARC to change the production plan for a donor
determined pursuant to Section 1.2.3(a).
1.2.2 Processes and Methods
(a) Processing of Tissue will be performed by Osteotech under
applicable Processing Standards.
(b) In the event the FDA implements new or additional regulations
applicable to Tissue, Osteotech and ARC shall each implement
such changes to its SOPs as are necessary to comply with such
FDA regulations. In the event Osteotech is unable or unwilling
to implement such changes, ARC shall have the remedy set forth
in Section 6.5.
(c) Osteotech will grant designated ARC personnel access to its
facilities to observe all steps of Processing for the purpose
of conducting a standard ARC inspection of the Processing
Standards. As part of this inspection, all Processing
Standards will be made available to the inspectors. If such
personnel require access to Osteotech's cleanrooms, the
personnel must have on file
E-6
<PAGE>
with Osteotech appropriate blood serum test results and such
other tests as Osteotech may require prior to such personnel
being granted access to Osteotech's cleanrooms. Osteotech may,
at its sole discretion, refuse any individual access to
Osteotech cleanrooms for cause. Such denial of access will not
be a violation of this Agreement.
1.2.3 Processing Considerations:
(a) ARC will pre-plan, which will include a written primary
and secondary donor plan, the expected production from
each donor prior to the scheduled day of processing. If
Tissue cannot be processed according to either the
primary or secondary donor plan, verbal approval will
first be obtained from the procuring ARC Area for changes
to the primary or secondary donor plan prior to
processing by Osteotech and ARC will confirm by faxed
written approval. Osteotech will use its best efforts to
maximize the planned yield from each donor.
(b) Osteotech may present valid evidence to ARC if Osteotech
determines that FDA, AATB or other applicable government
agency mandated changes in processing techniques or the
quality and condition of ARC donor Tissue prevents the
achievement of the planned yield provided for in
Subsection (a). The parties agree to discuss the
implications of such parameters and to determine a
reasonable yield based on such new requirements.
(c) ARC shall undertake reasonable efforts to present a consistent
flow of donors to Osteotech with the goal of minimizing
end-of-month bunching of donors. Subject to the foregoing
sentence, donors received at Osteotech for Processing will be
processed within a reasonable period of time from the time
(which shall be reviewed at the regular production meetings
provided for in Section
E-7
<PAGE>
1.1.2(d)) (i) all related required donor documentation is
received at Osteotech, (ii) such documentation has been
reviewed by Osteotech's Quality Assurance Department and/or
Regulatory Affairs Department and (iii) such documentation has
been found by such department or departments, as the case may
be, to be complete in every respect and to otherwise meet the
requirements of the Processing Standards. Once Processing of
the donor is complete, subject to the provisions of Sections
2.1.1 and 2.1.3(a), all Tissue will be shipped to ARC upon
final inspection and release thereof by Osteotech's Quality
Assurance Department.
(d) If the release of processed Tissue back to ARC is delayed due
to: (i) Tissue histology of unknown etiology or (ii) microbial
contamination of final product, Osteotech will immediately
notify the procuring ARC area of the reason for the hold and
the approximate time period expected for the hold (in weeks).
(e) XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX.
2.1 TITLE, STORAGE, SHIPPING, REGULATORY COMPLIANCE AND LABELING
2.1.1 Title
Tissue delivered to Osteotech for Processing, the finished units
derived from such Tissue and any other materials or by-products derived
from such Tissue shall remain the property of ARC at all times, except
that ARC may grant Osteotech written permission to use excess Tissue
for research purposes. Osteotech shall not sell, trade or otherwise
dispose of ARC Tissue, Allograft units derived from such Tissue or any
other materials or by-products derived from such Tissue without the
prior written approval of ARC.
XXXXX Indicates the omission of confidential material pursuant to a request
for confidential treatment made in accordance with Rule 24b-2 under
the Securities Exchange Act of 1934, as amended. The confidential
material is being filed separately with the Secretary to the
Securities Exchange Commission.
E-8
<PAGE>
2.1.2 Storage
(a) Osteotech shall, at ARC's election, store ARC Allograft units
released by Osteotech awaiting shipment. Such storage shall be
in compliance with all applicable portions of the Processing
Standards.
(b) In the event that Tissue which is being processed by
Osteotech or held by Osteotech in "quarantine storage",
"pre-processing storage", or "post-processing storage"
(as such terms are defined or described in the applicable
portions of the Processing Standards) is destroyed or
rendered unusable while in the possession of Osteotech
due to the negligence of Osteotech, Osteotech shall pay
to ARC any costs incurred by ARC in procuring and
transporting such Tissue to Osteotech.
2.1.3 Shipping
(a) Except as otherwise provided in a written document signed
by both Osteotech and ARC, Osteotech shall ship all
finished units of Tissue, other than demineralized bone
and items being reworked, derived from a donor received
for Processing from a Red Cross Area back to that Area in
one shipment by a carrier designated by ARC. Osteotech
shall ship finished units of demineralized bone to either
the Red Cross Area from which the donor was received or
as directed by ARC. All items being reworked will be
shipped back to the Red Cross Area from which the donor
was received as soon as it is completed and released by
Osteotech's Quality Assurance Department. ARC shall be
responsible for payment of all shipping costs.
E-9
<PAGE>
(b) Osteotech shall ship all finished units of Tissue in shipping
containers which meet the requirements specified in the
Processing Standards. All packaging and shipping containers
must be validated and the validation studies shall be
available for review by ARC's Quality Assurance and Regulatory
Affairs Departments.
(c) Osteotech shall clearly label each shipping container as
containing transplantable tissue and with the addresses of
both the shipping and receiving facility. Such labeling shall
meet the specifications included in the Processing Standards.
(d) Each shipment from Osteotech shall include a packaging slip
listing the contents and corresponding donor lot and batch
numbers, if applicable. All tissue containers in each shipment
shall be packed with sufficient materials between containers
so that breakage will be minimized.
(e) ARC will promptly notify Osteotech of any damage to the
finished units of Tissue during shipment thereof.
Osteotech will file a claim against the shipping carrier
for the amount of damage up to ARC's property insurance
deductible, currently $25,000. ARC will notify Osteotech
of any changes to this property insurance deductible
amount during the term of this agreement. Osteotech will
be responsible to request that coverage of this amount be
provided by the shipping carrier at ARC's cost. The
amount recovered from the shipping carrier for claims
will be passed on to ARC within 10 days of receipt by
Osteotech. Osteotech shall have no liability for any
damage to finished Tissue incurred during shipping,
except to the extent Osteotech fails to ensure that the
shipping carrier has the aforementioned insurance.
E-10
<PAGE>
(f) Osteotech shall pay for shipping, and related costs arising
from the return of finished units of Tissue to Osteotech due
to complaints except for Tissue damaged during shipment as
specified in (e) above.
2.1.4 Regulatory Compliance and Labeling
(a) Osteotech and ARC shall each be responsible for
regulatory compliance, including without limitation where
applicable, for marketing clearance, for determining the
regulatory status of all Tissue and Tissue products and
obtaining any facility or establishment regulatory
registration. Osteotech and ARC shall each be responsible for
regulatory compliance related to Processing and labeling, to
include without limitation, product inserts, label content,
sales sheets, advertising and product brochure wording. If
interpretation of the Processing Standards is required or if
there is a disagreement about the interpretation of the
Processing Standards, ARC and Osteotech will negotiate a
consensus agreement within thirty (30) days.
(b) Containers of finished units of Tissue must bear a standard
ARC bone product Tissue Services label, approved by Osteotech
and ARC, that contains the product name and identity code,
donor number and expiration date.
(c) Osteotech shall bear the costs of producing labels in
conformance with Section 2.1.4(a). If the labels and/or
package inserts are changed by request of ARC, ARC will bear
the costs of these changes, including label inventory
replacements. Osteotech shall maintain no more than six (6)
months of label and package insert inventory by tissue type.
E-11
<PAGE>
(d) All labeling will be in accordance with Sections
2.1.3(b), 2.1.3(c) and 2.1.4(a), and the Processing
Standards.
(e) Specifications for all Tissue products to be processed
from ARC donors will be developed and approved according
to ARC and Osteotech SOPs. Requests to Osteotech about
its ability to accomplish special specifications will be
made in writing by ARC and will receive a written
response from Osteotech within a reasonable period of
time. Requests by ARC for labeling changes, including
package inserts, will be responded to by Osteotech in
writing within 10 working days indicating its ability to
accomplish the changes.
2.2 Liability
(a) Osteotech agrees to defend, hold harmless, and indemnify
ARC against any liability in respect of bodily injury,
death, and property damage arising from the negligence or
willful misconduct of Osteotech or its directors,
officers, employees and agents in the performance of
Osteotech's obligations under this Agreement. Such
indemnification shall include but not be limited to
damages, losses, liabilities, claims, actions, or causes
of action sustained or suffered by ARC arising from a
breach of Osteotech's obligations hereunder or a defect
in any finished unit of Tissue processed by Osteotech
under this agreement, to the extent such defect results
from an error or omission, or from a failure of
workmanship, by Osteotech.
(b) ARC agrees to defend, hold harmless, and indemnify Osteotech
against any liability in respect of bodily injury, death, and
property damage arising from the negligence or willful
misconduct of ARC or its directors,
E-12
<PAGE>
officers, employees and agents in the performance of ARC's
obligations under this Agreement. Such indemnification shall
include but not be limited to damages, losses, liabilities,
claims, actions, or causes of action sustained or suffered by
Osteotech arising from a breach of ARC's obligations
hereunder.
(c) For purposes of subsection (a) above, Osteotech shall be
the "indemnifying party" and ARC shall be the
"indemnified party" and for the purposes of subsection
(b) above, ARC shall be the "indemnifying party" and
Osteotech shall be the "indemnified party". The
obligations and liabilities of the indemnifying party
hereunder with respect to claims resulting from the
assertion of liability by third parties shall be subject
to the following terms and conditions:
(i) The indemnified party shall give written notice to
the indemnifying party of any assertion of
liability by a third party which might give rise to
a claim by the indemnified party against the
indemnifying party based on the indemnity contained
in Section 2.2(a) hereof, or Section 2.2(b) hereof,
as the case may be, stating the nature and basis of
said assertion and the amount thereof, to the
extent known, immediately upon hearing of the claim
or receiving notice thereof.
(ii) In the event any action, suit or proceeding is
brought against the indemnified party, with respect
to which the indemnifying party may have liability
under the indemnity agreement contained in subsection
(a) hereof, the action, suit or proceeding shall,
upon the written agreement of the indemnifying party
that it is obligated to
E-13
<PAGE>
indemnify under the indemnity agreement contained
in subsection (a) or (b) hereof, as the case may
be, be defended (including all proceedings on
appeal or for review which counsel for the defendant
shall deem appropriate) by the indemnifying party.
The indemnified party shall have the right to be
represented by advisory counsel and accountants, at
its own expense, and shall be kept fully informed of
such action, suit or proceeding at all stages
thereof, whether or not it is so represented. The
indemnifying party shall make available to the
indemnified party and its attorneys and accountants
all books and records of the indemnifying party
relating to such proceedings or litigation. The
parties will render to each other such assistance as
they may reasonably require in order to ensure the
proper and adequate defense of any such action, suit
or proceeding.
(iii) The indemnifying party shall not make any
settlement of any claims without the written
consent of the indemnified party, which consent
shall not be unreasonably withheld or delayed.
(iv) The indemnified party shall not make any settlement
of any claims without the written consent of the
indemnifying party.
(d) The provisions of Section 2.2 shall survive termination
of this Agreement.
2.3 Records and Reports
(a) Osteotech shall maintain on a daily basis, accurate records
concerning Tissue received, Tissue processed and in storage at
Osteotech and finished units of Tissue
E-14
<PAGE>
stored and shipped. Such records shall be available to ARC
during normal business hours upon reasonable advance notice at
ARC's expense. Osteotech shall not be required to produce any
data other than data which it is required to obtain and
maintain by the Processing Standards.
(b) In addition to the information provided in (a), Osteotech
shall provide timely reports on each donor showing Tissue
processed and shipped. Reports at the time of shipping should
include total disposition of all Tissue, including cortical
storage, pending reworks and discards.
(c) Osteotech shall ensure that all information pertaining to ARC
will be disclosed only to those Osteotech personnel with a
need-to-know who have signed Osteotech's standard
confidentiality agreement.
(d) Osteotech shall notify ARC prior to the release of any ARC
donor identifying information, such as donor identifying
number, whether pursuant to request of a regulatory or
governmental agency or court or administrative order or
subpoena. The provisions of this subsection shall survive
termination of this Agreement.
(e) Osteotech shall provide ARC monthly written reports to
include:
Rework status, cause, projected release date and trend
analysis;
Complete donor status report for all donors at Osteotech
including those in processing;
Yield per donor and trend analysis;
Value per donor and trend analysis;
Sales for all products distributed from Osteotech for
ARC;
E-15
<PAGE>
Complaints (including packaging complaints), and trend
analysis; Turnaround times on donors and reworks and trend
analysis; Microbiologic contamination rates and trend
analysis; Reject reports including amounts, explanations and
trend analysis.
2.4 New Product Development
It is the understanding of ARC and Osteotech that each of them
may independently develop new products and/or processes or
improve upon existing products and/or processes. Therefore,
(a) Subject to subsection (c), Osteotech shall own all rights,
title and interest in and to all information, technology,
data, inventions, products, and processes, conceived, made or
developed by employees of Osteotech as well as the
intellectual property rights based thereon, including but not
limited to copyrights and patent rights.
(b) Subject to subsection (c), ARC shall own all rights, title and
interest in and to all information, technology, data,
inventions, products, and processes, conceived, made or
developed by employees of ARC as well as the intellectual
property rights based thereon, including but not limited to
copyrights and patent rights.
(c) Any joint development of information, technology, data,
inventions, products, and processes, shall be conducted
pursuant to a formal written development agreement signed by
Osteotech and ARC and a development budget for the project
agreed to in writing by Osteotech and ARC.
E-16
<PAGE>
(d) The provisions of this Section 2.4 shall survive
termination of this Agreement.
2.5 Non-Proprietary New Products
It is understood and agreed that Osteotech may develop new information,
technology, data, inventions, products, and processes (collectively,
"new products") jointly with its other customers and that certain of
such new products may not be subject to patent or copyright protection
("non-proprietary new products"). ARC agrees that it shall not have
access to, or utilize, such non-proprietary new products and shall not
be able to cause Osteotech to utilize such non-proprietary new products
on ARC's behalf unless and until ARC shall reimburse Osteotech and such
other client for one-third (in the aggregate) of the development costs
(including without limitation internal direct costs, but excluding
internal overhead costs) for such non-proprietary new product as
reasonably determined by Osteotech and such client. The methods and
bases for determining such development costs shall be disclosed to ARC
on a confidential basis. Osteotech shall include a provision identical
in substance to the foregoing provision in its agreements with its
other significant customers to cover any non-proprietary new products
which may be developed jointly hereunder by Osteotech and ARC.
2.6 Shipment of Finished Units and Marketing and Education
Services
(a) At the request of ARC, Osteotech will ship finished units
of Tissue to end user customers of ARC in accordance with
procedures and protocols established between ARC and
Osteotech. Fees for such services will be established at the
time such services are requested and are separate from the
fees listed in Exhibits 3.1 and 3.2. Fees for these services
may be changed from time to time to
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<PAGE>
reflect changes in services being performed or in the
cost of performing these services.
(b) Osteotech shall provide marketing and education services
in accordance with protocols and procedures established
between ARC and Osteotech and outlined in Exhibit 2.6.
It is anticipated that the level of such services shall
be at least equal to those provided by Osteotech during
the year ended December 31, 1996. It is anticipated that
Osteotech will not charge ARC a fee for such services,
provided that Osteotech reserves the right to charge a
fee, to be agreed upon by Osteotech and ARC, if the scope
or level of such marketing and education services are
materially changed or if Osteotech otherwise determines
that it cannot provide such services on a cost effective
basis. If fees are charged for such services such fees
will be separate from the fees listed in Exhibits 3.1 and
3.2.
(c) Osteotech may provide such other services as are
requested by ARC in accordance with protocols and
procedures established between ARC and Osteotech. Fees
for such services will be established at the time such
services are requested and will be separate from the fees
listed in Exhibits 3.1 and 3.2. Fees for these services
may be changed from time to time to reflect changes in
services being performed or in the cost of performing
these services.
2.7 Publication and Public Disclosure
(a) ARC shall have the right to publish or otherwise publicly
disclose scientific information or data developed by ARC at
its own expense which utilizes or relates to Osteotech's
Processing technology, provided, however, that notwithstanding
any other provision in this
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<PAGE>
Agreement to the contrary, no such publication or disclosure
shall be made by ARC if such publication or disclosure would
result in the disclosure of information defined as
confidential in Section 4 or would otherwise violate or
jeopardize any proprietary rights Osteotech may have with
respect to such technology. Publication of jointly developed
information will be covered in a separate agreement.
(b) At least ninety (90) days prior to publication or other
public disclosure of any information or data, ARC shall
submit to Osteotech for review a draft of the publication
or, if oral disclosure, a written copy of the remarks.
Osteotech shall then have 60 days to notify ARC of (i)
any reasonable changes to the publication or disclosure
it deems appropriate, which changes ARC will make so long
as they do not change materially the meaning of the
information or data being disclosed or published; (ii)
any error in the information or data being disclosed,
which ARC shall correct upon verification of the error;
or (iii) the necessity to delay publication or disclosure
to enable the filing of any patent application or
regulatory filing if applicable, in which event ARC will
delay such publication or disclosure as reasonably
requested by Osteotech.
(c) If there has been no mutual agreement to publish or
disclose within ninety (90) days after Osteotech has
received the notice and draft of the publication or oral
disclosure from ARC, ARC shall again notify, in writing,
Osteotech of its intention to publish or disclose and may
proceed to do so fifteen (15) days after Osteotech's
receipt of such second notice, subject to the provisions
of subsection (a).
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<PAGE>
(d) Authorship of any publication shall be determined in
accordance with normal scientific practice.
(e) The provisions of this Section 2.6 shall survive
termination of this Agreement.
3. FINANCIAL TERMS
3.1
(a) ARC will pay Osteotech Processing fees as set forth in
Exhibits 3.1 and 3.2. Subject to the terms set forth in
Exhibits 3.1 and 3.2, such fees may be adjusted from time
to time, but no more frequently than annually, as set
forth in Exhibits 3.1 and 3.2. Osteotech shall provide
ARC with suggested list prices for Osteotech's
proprietary products. The initial suggested list prices
are set forth in Exhibit 3.2.
(b) In the event ARC has requested Osteotech to ship finished
units of Tissue to end user customers of ARC in
accordance with Section 2.6(a) or to perform additional
services in accordance with Section 2.6 (c), ARC will pay
Osteotech fees for such services which are to be
negotiated prior to institution of such services and
which are separate and apart from any fees established in
Exhibits 3.1 and 3.2 for Processing services. In the
event fees become payable to Osteotech for its
performance of marketing and education services in
accordance with Section 2.6(b), ARC will pay Osteotech
fees for such services which are agreed to by Osteotech
and ARC and which are separate and apart from any fees
established in Exhibits 3.1 and 3.2 for Processing
services. Fees for services performed by Osteotech
pursuant to Section 2.6 may be adjusted from time to time
to adjust for changes in Osteotech's costs associated
with providing such services, or to make adjustment for
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<PAGE>
the addition, deletion or change in services being
provided.
(c) Unless otherwise agreed to in writing by Osteotech, in
the event ARC does not deliver all Tissue recovered from
a donor to Osteotech, then ARC shall be invoiced by
Osteotech for each such donor or part thereof not
delivered at the average charge per donor invoiced by
Osteotech to ARC during the immediately preceding
calendar quarter. Tissue utilized in ARC research and
development activities, if any, shall be excluded from
this requirement.
3.2 Invoicing and Payment
(a) Osteotech shall submit invoices in U.S. dollars to ARC
for all Processing services rendered in accordance with
the then existing fee schedule. The invoice date shall
be the date that Osteotech's Quality Assurance Department
releases the finished units of Tissue for shipment to ARC
or the date that other services being performed for ARC
(such as serology testing, shipment of Grafton or
shipment of other products to end users on behalf of ARC,
etc.), if any, are completed. ARC shall be separately
invoiced for services performed in accordance with
Section 2.6.
(b) ARC will pay all invoices within forty-five (45) days of
the invoice date. All such payments shall be in U.S.
dollars.
(c) Any balance of any invoice which is not paid within the time
specified above, at the option of Osteotech, shall accrue
interest at the rate of one percent (1%) per month.
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<PAGE>
4. CONFIDENTIALITY
(a) For purposes of this Agreement, "Confidential
Information" means all general and specific knowledge,
experience and information that is confidential and of
value to ARC or to Osteotech, including without
limitation, formulations, designs, products, processes,
supplies, methods of manufacture or processing, SOPs,
cost data, master files, the nature of research and/or
development projects, as well as data relating to them,
marketing or business plans, donor data and financial
data. It shall also mean any information disclosed to
either party by any third party which either ARC or
Osteotech is obligated to treat as confidential or
proprietary.
(b) Both parties agree that neither party will, at any time,
without the express agreement of the other party, or
except as expressly permitted by this Agreement, disclose
to any other person or use any Confidential Information
of the other party, except for the purposes of performing
this Agreement or any successor Agreement or as may be
required by law, governmental regulation or court order.
Information shall not be considered to be Confidential
Information of a party if it can be established that (i)
such information was in the possession of the other party
prior to disclosure to such other party by the party
claiming that it is Confidential Information (the
"claiming party") and such information is not otherwise
subject to a confidentiality agreement, (ii) such
information is then part of the public domain and became
so without the breach of this or any other
confidentiality agreement by such other party or any of
its affiliates, (iii) or such information is developed
independently by such other party or becomes known to or
acquired by such other party by means other than as a
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<PAGE>
result of a breach of a confidentiality agreement or any
fiduciary obligation.
(c) ARC and Osteotech each agree to require employees, consultants
or others granted access to such Confidential Information to
execute appropriate Confidentiality Agreements; provided that
each organization's agreements are approved by such
organization's counsel.
(d) ARC and Osteotech recognize that violation in any
material respect of any provision of subsection (b) may
cause irreparable injuries to Osteotech or ARC and agree
that ARC or Osteotech shall be entitled to preliminary
and final injunctive relief against such violation. Such
injunctive relief shall be in addition to, and in no way
in limitation of, any and all remedies or rights which
ARC or Osteotech shall have at law or in equity for the
enforcement of the provisions of this Section. In
addition, ARC and Osteotech agree that the party
responsible for the breach of confidentiality shall be
responsible for all legal fees and other costs and
expenses incurred in the successful enforcement of the
non-breaching party's rights and remedies under this
Section.
(e) The provision of this Section 4 shall survive the
termination of this Agreement.
5. TERM OF AGREEMENT
This Agreement shall become effective on January 1, 1997 and shall
terminate December 31, 2006. This Agreement shall automatically renew for an
additional ten year period unless ARC or Osteotech shall, at least six months
prior to the termination date of this Agreement, communicate in writing to the
other party, as the case may be, its intention not to renew the Agreement. A
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<PAGE>
Contract Administration Group ("CAG") shall be formed within 30 days after the
effective date of this Agreement. The CAG shall consist of a minimum of four
members, two of whom shall be appointed by each of ARC and Osteotech. The CAG
shall meet as necessary, but no less than quarterly, to discuss any technical or
administrative matters related to this Agreement. The CAG shall conduct a formal
review of this Agreement at the end of every three years and the parties will
negotiate in good faith modifications of any portion of this Agreement,
including financial terms, deemed by either party to be outdated or
inappropriate. Such negotiations will be completed within thirty (30) days after
the end of each three year period. Modification of the Agreement will be made
only by the mutual written agreement of both parties.
6. TERMINATION
6.1 Either party may terminate this Agreement at any time upon:
(a) The material breach by the other party of any of its
obligations under this Agreement if such breach shall not be
cured within ninety (90) days after written notice thereof is
given by the non-breaching party to the breaching party; or
(b) An adjudication of the other party as bankrupt or
insolvent; or the admission in writing by such other
party of its inability to pay its debts as they mature;
or an assignment by such other party for the benefit of
its creditors; or such other party applying for or
consenting to the appointment of a receiver, trustee or
similar officer for its assets; or the appointment of a
receiver, trustee or similar officer for such other
party's assets without the application or consent of such
other party, if such appointment shall continue
undischarged for a period of ninety (90) days; or such
other party instituting (by petition, application,
answer, consent or otherwise) any bankruptcy, insolvency
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<PAGE>
arrangement or similar proceeding relating to it under the
laws of any jurisdiction; or the institution of any
bankruptcy, insolvency arrangement or similar proceeding
relating to such other party, if such proceeding shall remain
undismissed for a period of ninety (90) days; or the issuance
or levy of any judgment, writ, warrant of attachment or
execution or similar process against a substantial part of the
property or assets of such other party, if such judgment,
writ, warrant of attachment or execution or similar process
shall not be released, vacated or fully bonded within ninety
(90) days after its issue or levy.
6.2 ARC may terminate this Agreement at any time upon ninety (90) days'
prior written notice to Osteotech if ARC makes a determination to end
its program of procuring and distributing Tissue; provided that if ARC
resumes such program at any time during the initial ten year term of
this Agreement it shall provide prompt written notice of such
resumption to Osteotech and this Agreement shall become effective again
in accordance with its terms as soon as is practicable, but in no event
later than ninety (90) days after such notice is received by Osteotech.
6.3 ARC may terminate this Agreement in whole or in part if and to the
extent a third party develops a commercially feasible technology for
processing that yields a product with greater safety and efficacy than
the product produced by exclusive use of Osteotech's Processing
technology and methods as demonstrated and agreed to by a panel of six
mutually agreed upon experts using data collected in two
well-controlled, scientifically-accepted in-vivo models and Osteotech
is unable or unwilling to achieve comparable safety and/or efficacy of
that technology within a reasonable time period, not to exceed six
months, unless otherwise agreed to by the parties in
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<PAGE>
writing; provided that if six such experts are not available, the
parties will use their best efforts to cause such panel to have as many
experts (up to six) as are reasonably available. This paragraph may
apply to all or a portion of the Tissue products processed by Osteotech
for ARC.
6.4 In the event ARC enters into an agreement or arrangement whereby
finished units of Tissue processed by Osteotech for ARC are used as
part of such third party's technology or product, ARC shall promptly
inform Osteotech of its intent to enter into such agreement or
arrangement and Osteotech shall have the right to (i) terminate this
Agreement at any time upon 90 days prior written notice to ARC without
any further obligation to ARC or (ii) renegotiate the terms of this
Agreement.
6.5 ARC may terminate this Agreement at any time upon 30 days' prior
written notice to Osteotech if Osteotech is unwilling or unable to
comply with the provisions of Section 1.2.2(b).
7. INSURANCE
(a) Osteotech agrees to secure and maintain in force
reasonable and adequate insurance coverage for
Osteotech's Tissue Processing activities, provided such
coverage is available at reasonable prices and on
reasonable terms, if at all. If such coverage is not
available to Osteotech, Osteotech shall inform ARC of the
reasons why such coverage is unavailable and shall
operate on a self-insured basis to the extent such
coverage is not available until such time as such
coverage does become available to Osteotech. Subject to
the foregoing, Osteotech will use its best efforts to
obtain insurance which will include: (a) a commercial
general liability policy in an amount not less than
$10,000,000 combined single limit for each occurrence
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<PAGE>
including professional liability insurance in an amount not
less than $10,000,000, each claim specifically insuring claims
arising from processing of products or services as described
in this Agreement; (b) products liability coverage as
applicable to the processing or manufacture of any product or
solution of Osteotech under this contact in an amount not less
than $10,000,000; (c) an auto liability policy including
owned, non-owned, uninsured and under-insured motorists with
at least $1,000,000 in coverage; (d) workers' compensation
coverage with statutory limits for each jurisdiction where the
work required under this contract and an employers' liability
policy with at least the following limits, $250,000 per
accident, $500,000 per disease in the aggregate, and $250,000
per disease (each employee); (e) property insurance at full
replacement value protecting Tissue of ARC in process and
storage from the perils of fire, lightning, extended coverage,
vandalism, flood, earthquake, theft, and all other perils
commonly included in the term "All Risk" form, and in
addition, coverage of not less than the insurable value of the
property insured by such policy for consequential loss covered
by failure of power, either off premises or on, that creates
an interruption in service to heating, refrigeration, air
conditioning or other electrical equipment and business
interruption coverage in the amount of $8 million. Such
coverage will include Force Majeure perils.
(b) Osteotech shall, at its sole expense, keep in force policies
of insurance as required (i) by the provisions of Section 7(a)
(subject to the conditions set forth in Section 7(a)) and (ii)
by statute which will be written as primary policy coverage
and not contributing with, or in excess of any coverage which
ARC shall carry.
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<PAGE>
Osteotech shall provide ARC with a certificate of insurance or
other documentation as proof of insurance required herein
prior to commencement of services and renewal certificates
within 10 days of expiration or non-renewal of the policies
required herein, as long as this Agreement is in effect.
Osteotech shall use its best efforts to cause ARC, its
directors, officers, employees and agents to be listed as
additional insureds with respect to Osteotech's commercial
general liability, products liability, auto liability, and
property insurance as described herein.
(c) Osteotech shall require each subcontractor or assignee
(if any are permitted by ARC) to procure and maintain
insurance of the types and amounts required of Osteotech.
In addition, once approved by ARC, the subcontractor or
assignees shall sign the hold harmless agreement as it
appears in Section 2.2(a) in favor of ARC. If there is
any assignment to a majority-owned subsidiary of
Osteotech as provided in Section 9 of this agreement,
that subsidiary shall meet each requirement of this
Section 7.
(d) ARC shall secure and maintain in force reasonable and adequate
insurance coverage for ARC's Tissue procurement and
distribution activities. ARC shall deliver to Osteotech
certificates of insurance within fifteen (15) days after
execution of this Agreement.
(e) Osteotech shall be liable at all times for damages to or
destruction of Osteotech's equipment and material, including
the loss of use thereof, regardless of how such damage or
destruction occurs, except to the extent otherwise provided in
Section 2.2(b). Except to the extent otherwise provided in
Section 2.2(b), ARC shall be
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<PAGE>
under no liability to reimburse Osteotech for any such loss or
damage thereto, and Osteotech waives any right of subrogation
against ARC.
8. FORCE MAJEURE
Neither party shall be responsible to the other for nonperformance or
delayed performance of the terms and conditions hereof due to acts of God, acts
of government, wars, riots, accidents and transportation, fuel or material
shortages, or other causes (except strikes), in the nature of force majeure
which is beyond its control. To the extent Osteotech is unable to perform
Processing of ARC's Tissue due to such events, Osteotech shall arrange to have
ARC's Tissue processed under Osteotech's oversight within 30 days of the
occurrence of such event. Notwithstanding the above, in the event of total or
partial destruction of any processing facility of Osteotech utilized in the
Processing of ARC Tissues, Osteotech shall agree to rebuild such plant or part
thereof within a reasonable period of time and agrees to arrange for the
Processing, under Osteotech oversight, of ARC Tissue during such period.
9. ASSIGNMENT
Except as otherwise expressly herein provided, this Agreement may not
be assigned in whole or in part without the prior written consent of the other
party, provided that Osteotech may assign its rights under the Agreement to any
majority-owned subsidiary of Osteotech without the consent of ARC.
10. NAME, EMBLEM, PACKAGING, TECHNOLOGY AND TRADEMARK
(a) Without the prior written consent of ARC, Osteotech shall
have no right to use the trademark or emblem of ARC in
connection with its Processing activities or to use the name
of ARC for commercial purposes. However, Osteotech may
disclose ARC's name as may be required by law or government
regulation.
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<PAGE>
(b) Except as required by law or government regulations, ARC shall
not have the right to use any trademark or emblem of
Osteotech, including the name Osteotech, without the prior
written consent of Osteotech.
(c) (i) Nothing in this Agreement shall be interpreted to convey
to ARC any trademark, patent or proprietary technology owned
by Osteotech; (ii) Nothing in this Agreement shall be
interpreted to convey to Osteotech any trademark, patent, or
proprietary technology owned by ARC.
(d) ARC recognizes that Osteotech performs processing services for
other clients in addition to ARC, and therefore, agrees that
unless specifically developed or customized for ARC or as
otherwise provided herein, all packaging and technology used
by Osteotech to perform processing services will also be used
to perform such services for Osteotech's other clients.
(e) ARC recognizes that Osteotech processes proprietary forms of
tissue and agrees that if it were to distribute these tissues
it will do so only under the trademark, packaging, labels and
emblems developed and provided by Osteotech.
(f) ARC shall not advertise or otherwise promote Osteotech
proprietary products or processes (including without
limitation, Grafton) without Osteotech's prior review and
written approval of all such programs and related material.
11. NOTICES
All notices and other communications provided for hereunder shall be in
writing and shall be mailed by certified mail, return
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<PAGE>
receipt requested, telecopied, with a copy sent promptly thereafter
by U.S. mail, or delivered by hand or overnight delivery, as
follows.
If to ARC: Chief Operating Officer
ARCTS
2025 E Street, N.W.
Washington, D.C. 20006
Telephone No. (202) 728-6503
Telecopy No. (202) 659-2439
If to Osteotech: Chief Executive Officer
Osteotech, Inc.
51 James Way
Eatontown, New Jersey 07724
Telephone No. (908) 542-2800
Telecopy No. (908) 935-0626
or such other person or address as either party may designate by written notice
to the other party complying as to delivery with the terms of this Section 11.
All such notices and other communications shall be effective (i) if mailed by
certified or registered mail, when received as indicated by the return receipt,
(ii) if telecopied, when transmitted, as indicated by the facsimile transmission
report, provided same is on a business day in the U.S. (excludes weekends and
federal holidays) and, if not, on the next business day, or (iii) if delivered,
upon delivery, provided same is on a business day and, if not, on the next
business day.
12. ENTIRE AGREEMENT
This Agreement sets forth the entire Agreement between the parties. Any
prior agreements, promises, negotiations, or representations, either oral or
written, relating to the subject
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<PAGE>
matter of this Agreement not expressly set forth in this Agreement
are of no force or effect.
13. MODIFICATION
This Agreement, or any part of section of it, may not be amended or
modified except by the written consent of both parties of the Agreement.
14. APPLICABLE LAW
This Agreement shall be construed in accordance with the laws of the
State of New Jersey.
15. WAIVER
Waiver or breach of any provision of this Agreement shall not be deemed
a waiver of any other breach of the same or a different provision of this
Agreement.
16. INDEPENDENT CONTRACTOR
Osteotech is providing its services hereunder as an independent
contractor. Nothing herein shall create any affiliation, partnership or joint
venture between the parties hereto, or any employer/employee relationship.
17. SEVERABILITY
The provisions of this Agreement shall be severable, and if a court of
competent jurisdiction holds any provisions of this
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<PAGE>
Agreement to be in violation of any applicable law, the remaining provisions
shall nevertheless remain in full force and effect.
18. SUCCESSORS
This Agreement shall be binding upon and inure to the benefit of the
parties and their successors and assigns.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed by their duly authorized officers as of the date first written
above.
AMERICAN RED CROSS
Dated: December 18, 1996 BY:/s/ Philip C. Yenrick
Philip C. Yenrick, Director
Contracting Office
OSTEOTECH, INC.
Dated: December 18, 1996 BY:/s/ Richard W. Bauer
Richard W. Bauer, President
and Chief Executive Officer
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<PAGE>
EXHIBIT 2.6
MARKETING AND EDUCATION SERVICES ARRANGEMENT
Osteotech shall provide American Red Cross marketing and education services as
shall be mutually agreed to between the parties from time to time. Such services
shall be aimed at expanding the demand for Osteotech processed allograft tissue
distributed by American Red Cross. However, Osteotech will not provide such
services in a manner that adversely impacts customer relationships of other
Osteotech clients.
Services provided by Osteotech may include, but are not limited to:
o Providing support by Osteotech's direct field organization to market
and provide medical education for Grafton, other proprietary products
and base tissue products.
o Provide support by Osteotech's agency network to market and provide
medical education for Grafton and other proprietary products.
o Provide training support for American Red Cross field sales
and area personnel.
o Support in development of sales and marketing materials.
o Telemarketing support.
o Participate in sales and marketing planning meetings.
All mutually agreed to marketing and education services of the nature described
above shall be provided to American Red Cross by Osteotech without charge. Such
services shall be determined, in part, based upon annual business plans provided
to Osteotech at least three (3) months prior to the commencement of each
American Red Cross fiscal year. To measure the effectiveness of Osteotech
provided marketing and education services, American Red Cross shall provide to
Osteotech such accurate data as Osteotech may require in such intervals as
Osteotech may require.
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<PAGE>
<TABLE>
<CAPTION>
American Red Cross
Schedule of Processing Fees
(Subject to Conditions Below)
Effective January 1, 1997
- -------------------------------------------------------------------------------------------------------------------
BASE ALLOGRAFT PROCESSING FEES
FEE
<S> <C>
Base Donor Charge (6 or less tissues) $ XXXXX
Base Donor Charge (7 or greater tissues) XXXXX
Exception Donor Charge XXXXX
Soft Tissue Charge (per set-up) XXXXX
Irradiation Charge (per donor) XXXXX
Demineralized Bone Charge (per set-up) XXXXX
Mandible Charge XXXXX
Finishing & Packaging Charge (per unit):
Freeze-Dried XXXXX
Fresh-Frozen XXXXX
Soft Tissue XXXXX
Demin Shape/Chip/Powder greater than 5cc XXXXX
Demin Dental Powder XXXXX
Surgical & Cadaveric Bone (per unit):
Irradiated XXXXX
Non-Irradiated XXXXX
Age Restrictive Donors:
Finishing & Packaging Charge (per unit) XXXXX
Irradiation Charge (per donor) XXXXX
</TABLE>
1. Base processing fees itemized on Exhibit 3.1 shall remain in
place from January 1, 1997 through December 31, 1999, provided
the number of ARC donors processed by Osteotech in each year,
commencing January 1 and ending December 31 of each year, is
equal to or greater than the ARC donors processed by Osteotech
in the preceding year.
2. Notwithstanding the above, if ARC fails to provide Osteotech
donors for processing equal to or greater than the number of
donors provided in the preceding year, then Osteotech shall
have the right to increase the processing fees itemized above
in an amount not to exceed the Medical Cost Component of the
XXXXX Indicates the omission of confidential material pursuant to a request
for confidential treatment made in accordance with Rule 24b-2 under
the Securities Exchange Act of 1934, as amended. The confidential
material is being filed separately with the Secretary to the
Securities Exchange Commission.
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<PAGE>
Consumer Price Index as is published by the U.S. Department of
Labor. The twelve (12) month period to be used to determine
the maximum amount of any such increase in fees shall be
October 1, through September 30 of the year immediately
preceding the year the increase is to be effective.
3. Subject to 1 above, commencing on January 1, 2000, Osteotech
may increase the base processing fees itemized above and on
January 1 every second year thereafter (2002, 2004, 2006) in
an amount not to exceed the Medical Cost component of the
Consumer Price Index as published by the U.S. Department of
Labor. The twelve (12) month period to be used to determine
the maximum amount of any such increase in fees shall be
October 1 through September 30 of the year immediately
preceding the year the increase is to be effective (i.e.,
period ending September 30, 2001, September 30, 2003 and
September 30, 2005).
4. At any time during a year, the base allograft processing fees
itemized above may be changed for deletion of services or
addition of services not previously provided and included in
the fee schedule above.
5. Notwithstanding 1, 2 or 3 above, if Osteotech's cost to
provide base allograft processing services shall increase by
more than 5% in any year ending December 31, during the term
of this Agreement due to event(s) not directly controlled by
Osteotech, such as, but not limited to, changes in federal,
state or local government rules, regulations or law, changes
in industry standards as published by AATB or the
requirements of ARC; Osteotech shall have the right to
increase its base allograft processing fees commencing the
next January 1 immediately following the event(s) in an
amount equal to the total increase in Osteotech's cost to
provide such services plus a reasonable profit margin
thereon; provided that ARC shall have the right in such
event to have a nationally recognized auditing firm,
agreeable to Osteotech, review and verify whether such event
resulted in any increase of more than 5% in Osteotech's
costs.
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<PAGE>
Exhibit 3.2
American Red Cross
Schedule of Processing Fees
(Subject to Conditions Below)
Effective January 1, 1997
GRAFTON PROCESSING FEES
<TABLE>
<CAPTION>
SUGGESTED PROCESSING
LIST PRICE FEE
GEL
<S> <C> <C> <C>
0.5cc $ XXXXX *
1.0cc XXXXX *
5.0cc XXXXX *
10.0cc XXXXX *
25.0cc XXXXX *
FLEX
10cm x 2.5cm XXXXX *
5cm x 5cm XXXXX *
PUTTY
5.0cc XXXXX *
10.0cc XXXXX *
</TABLE>
*See Below
1. Each November 1 during the term of this Agreement, Osteotech shall
establish and provide to ARC a schedule of the Suggested List Price for
all Grafton products and sizes to be effective on January 1.
XXXXX Indicates the omission of confidential material pursuant to a
request for confidential treatment made in accordance with
Rule 24b-2 under the Securities Exchange Act of 1934, as
amended. The confidential material is being filed separately
with the Secretary to the Securities Exchange Commission.
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<PAGE>
2. Osteotech's processing fee for each product and product size shall be as
follows:
Jan. 1, 1997 - Mar. 31, 1997: XXXXX of the Suggested List Price
Apr. 1, 1997 - Jun. 30, 1997: XXXXX of the Suggested List Price
Jul. 1, 1997 - Sept. 30, 1997: XXXXX of the Suggested List Price
Commencing Oct. 1, 1997: XXXXX of the Suggested List Price
XXXXX Indicates the omission of confidential material pursuant to a
request for confidential treatment made in accordance with
Rule 24b-2 under the Securities Exchange Act of 1934, as
amended. The confidential material is being filed separately
with the Secretary to the Securities Exchange Commission.
E-38
<PAGE>
FIFTH MODIFICATION OF LEASE
AGREEMENT, made this 16th day of October, 1996, by and between ROBERT
C. BAKER, GERALD H. BAKER, ALAN M. OSHINS, AS TRUSTEE UNDER TRUST ESTABLISHED
PURSUANT TO ARTICLE IV OF THE LAST WILL AND TESTAMENT OF HARVEY B. OSHINS (as
successor-in-interest to Harvey B. Oshins), BAKER 1985 FAMILY PARTNERSHIP, and
JOHN G. ORRICO, having their office and Post Office Address c/o National Realty
& Development Corp., 3 Manhattanville Road, Purchase, New York 10577
(hereinafter referred to as "Landlord") and OSTEOTECH INC., a Delaware
corporation, having an office at 51 James Way, Eatontown, New Jersey 07724
(hereinafter referred to as "Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and Tenant are parties to that certain Lease dated
August 18, 1986 as modified by First Modification of Lease dated May 31, 1989,
Second Modification of Lease dated December 22, 1989, Third Modification of
Lease dated June 21, 1991 and Fourth Modification of Lease dated January 30,
1992 between Landlord and Tenant (said lease as modified is hereinafter referred
to as the "Lease") respecting certain premises (hereinafter referred to as the
"DEMISED PREMISES") within the buildings commonly known as 1151 Shrewsbury
Avenue and 1163 Shrewsbury Avenue (the "Buildings") in the BOROUGH OF
SHREWSBURY, COUNTY OF MONMOUTH and STATE OF NEW JERSEY which premises are more
particularly described in the Lease; and
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<PAGE>
WHEREAS, the parties hereto desire to extend and further modify the
Lease in certain respects as hereafter provided.
NOW, THEREFORE, in consideration of ONE AND 00/100 ($1.00) DOLLAR and
other good and valuable consideration, each to the other in hand duly paid, the
receipt and sufficiency whereof is hereby acknowledged, it is mutually agreed as
follows:
1. The term of the Lease is hereby extended to February 28, 2007
("Expiration Date"), upon the same terms, covenants, conditions and provisions
set forth in the Lease, except as hereinafter set forth.
2. From and after March 1, 1997 and continuing through the Expiration
Date, the annual minimum rental payable pursuant to Article 3 of the Lease, and
in accordance with and subject to the provisions of the Lease, shall be as
follows (except as otherwise provided in Paragraph 3 hereof):
(A) From March 1, 1997 through February 28, 2002: TWO HUNDRED
THIRTY EIGHT THOUSAND NINE HUNDRED TWENTY AND 00/100
($238,920.00) DOLLARS per annum - NINETEEN THOUSAND NINE
HUNDRED TEN AND 00/100 ($19,910.00) DOLLARS per month; and (B)
From March 1, 2002 through the Expiration Date: TWO HUNDRED
SIXTY THOUSAND SIX HUNDRED FORTY AND 00/100 ($260,640.00) per
annum - TWENTY ONE THOUSAND SEVEN HUNDRED TWENTY AND 00/100
($21,720.00).
3.(a) If at any time Landlord shall enter into discussions
with any person or entity for the leasing of the premises
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<PAGE>
consisting of approximately 7,040 square feet situated at 1151 Shrewsbury Avenue
presently occupied by Asbury Park Press (such premises being cross-hatched on
the plan annexed hereto as Exhibit A and hereinafter referred to as the
"Additional Premises"), then, (i) provided that this Lease is then in full force
and effect, (ii) Tenant shall not be in default hereunder, (iii) there has been
no act or omission by Tenant which, with the passage of time or the giving of
notice or both, would constitute a default hereunder and (iv) Landlord has not
at any prior time given a Landlord's Notice (as hereinafter defined), Landlord
shall give Tenant notice that Landlord has entered into discussions for the
leasing of the Additional Premises (herein referred to as "Landlord's Notice").
Thereupon, Tenant shall have the option, exercisable within, but in no event
later than, thirty (30) days after the date on which Landlord shall first give
Landlord's Notice to Tenant, time of the essence, to elect by written notice
given to Landlord within said period (hereinafter referred to as "Tenant's
Notice"), to lease the Additional Premises upon and subject to the terms,
provisions, covenants and conditions hereinafter set forth. In the event that
Tenant shall fail to send Tenant's Notice within said thirty (30) days period,
Landlord shall thereafter be free to enter into a lease with such other person
or entity for the leasing of the Additional Premises and Tenant shall have no
further rights under this provision.
3(b). In the event Tenant shall duly and timely exercise
the option specified in Paragraph 3(a) above, then Tenant's lease
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<PAGE>
and occupancy of the Additional Premises shall be deemed to be upon and subject
to all of the following terms, provisions, covenants and conditions:
i. The Additional Premises Commencement date shall be the date upon
which possession of the Additional Premises is delivered to Tenant in "as-is"
broom-clean condition.
ii. From and after the Additional Premises Commencement Date, the
annual minimum rental payable under this Lease shall be as follows:
(A) From the Additional Premises Commencement Date
through February 28, 2002: TWO HUNDRED NINETY SEVEN
THOUSAND AND 00/100 ($297,000.00) DOLLARS per annum
- TWENTY FOUR THOUSAND SEVEN HUNDRED FIFTY AND
00/100 ($24,750.00) per month; and
(B) From March 1, 2002 through the Expiration Date: THREE
HUNDRED TWENTY FOUR THOUSAND AND 00/100 ($324,000.00)
DOLLARS per annum - TWENTY SEVEN THOUSAND AND 00/100
($27,000.00) per month.
iii. The Additional Premises shall be included in determining and
calculating Tenant's obligations for the payment and/or reimbursement to
Landlord or otherwise of all additional rent, charges or other monies due or
payable by Tenant under the Lease.
iv. Upon the Additional Premises Commencement Date the
Additional Premises shall be deemed to be added to and then and
thereafter to form a part of the Demised Premises.
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<PAGE>
v. The extension option provided for in Paragraph 4 below shall be
deemed to apply to the entire Demised Premises, inclusive of the Additional
Premises, and any exercise of such extension option shall be deemed to mean that
Tenant shall have elected to continue the Lease as to the entire Demised
Premises, inclusive of the Additional Premises.
vi. Exhibit A presently annexed to the Lease shall be deleted
therefrom, and the Exhibit A annexed hereto shall be substituted in
lieu thereof.
3(c). The parties shall execute, acknowledge and deliver to each other
all such documents as may be necessary to modify the Lease as contemplated by
the provisions of this Paragraph within ten (10) days following request by
either party.
3(d). Landlord acknowledges that the exercise by Tenant of its rights
under this Paragraph shall not increase the amount of the security deposit
required under the Lease. Landlord further acknowledges that the amount of the
security deposit presently held by the Landlord is in accordance with the
requirements of the Lease, as modified to date.
4.(a) Tenant shall have the option, provided it is not in
default hereunder, to extend the term of this Lease for ONE (1)
successive additional term of FIVE (5) years, upon the same terms
and conditions as provided herein, except that the annual minimum
rental during said extension period shall be as provided below, and
except that Tenant shall have no further extension options. Tenant
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<PAGE>
shall give written notice to Landlord ("Tenant's Extension Notice") on or prior
to that date which is twelve (12) months prior to the Expiration Date of its
election to extend the term hereof or such option shall be deemed waived. If
Tenant shall exercise such extension option, the parties will, at the request of
either, execute an agreement in form for recording, evidencing such extension.
If Tenant shall exercise such extension option, all references in this Lease to
the term hereof shall be deemed to mean the term as so extended, except where
expressly otherwise provided.
(b) If Tenant shall duly and timely elect to extend the term of this
Lease, the annual minimum rental payable by Tenant for the extension term of
this Lease shall be that amount which is the then fair market rental value for
the Demised Premises which would be payable over the entire extension term of
this Lease (hereinafter referred to as the "fair rental value"). Within
forty-five (45) days following receipt of Tenant's Extension Notice that has
been duly and timely given in accordance with the terms hereof, Landlord shall
serve upon Tenant Landlord's determination of the annual minimum rental which
would be payable over the entire extension term ("Landlord's Determination").
Tenant shall have the right, within thirty (30) days after receipt of Landlord's
Determination, time of the essence, to dispute Landlord's Determination by
giving written notice to Landlord specifying the basis of Tenant's dispute
("Tenant's Dispute Notice"). In the event Tenant shall not give Tenant's Dispute
Notice within the time period provided, Tenant shall be deemed to have waived
its right to
E-44
<PAGE>
dispute Landlord's Determination and the annual minimum rental payable during
said extension term shall be as set forth in Landlord's Determination. In the
event of such dispute, Landlord and Tenant agree to cooperate with each other
and may use all information and means reasonably available in order to agree
upon the said fair rental value. In the event that for any reason whatsoever the
annual minimum rental payable during the extension term shall not have been
determined prior to the commencement of said extension term, Tenant shall
thereafter pay to Landlord (as annual minimum rental prior to such
determination) the minimum extension rental (as hereinafter defined) in equal
monthly installments, with a proper apportionment to be made after final
determination of the fair rental value to be paid during the extension term.
Notwithstanding anything contained in this Paragraph 4 to the contrary, in no
event shall the annual minimum rental payable by Tenant during the extension
term be less than the annual minimum rental payable by Tenant during the last
year prior to the Expiration Date (hereinafter referred to as the "minimum
extension rental").
(c) At any time following Landlord's receipt of Tenant's Dispute
Notice, either party may, without prejudice to any rights or ongoing
negotiations between the parties, request by notice to the other party (the
"Arbitration Notice") informal arbitration to determine the fair rental value
for said extension term. Said Arbitration Notice shall state the name and
address of the arbitrator picked by the party serving same, it being understood
E-45
<PAGE>
and agreed that any arbitrator picked pursuant to this Paragraph shall be a fair
and impartial MAI member real estate appraiser having not less than ten (10)
years experience with similar office/distribution buildings within Monmouth
County, New Jersey similar in nature to the Buildings. Upon receipt of said
Arbitration Notice, the party receiving same shall have ten (10) days in which
to appoint a second arbitrator and to give notice to the other party of the
same, said notice to set forth the name and address of the second arbitrator. In
the event said other party fails to appoint a second arbitrator within the
specified time period, said other party shall be deemed to have waived its right
to appoint a second arbitrator and the first arbitrator shall act as hereinafter
set forth (and in such event all references hereafter to "arbitrators" or
"second arbitrator" shall be deemed to mean the first arbitrator acting alone).
Thereafter, the arbitrators shall meet together and determine, within ten (10)
days after the second arbitrator is appointed, the fair rental value for said
extension term. If said arbitrators are unable to agree within said ten (10) day
period on the fair rental value, then said arbitrators shall, within ten (10)
days thereafter, mutually agree upon a third arbitrator. Within ten (10) days
after appointment of the third arbitrator, the arbitrators shall meet together
and agree upon the fair rental value for said extension term. If the arbitrators
appointed by the parties are unable to agree on a third arbitrator, the third
arbitrator shall be appointed by application to the Superior Court, Monmouth
County, New Jersey. In the event
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<PAGE>
of the failure, refusal or inability of any arbitrator to act, an arbitrator
shall be appointed in his stead, which appointment shall be made in the same
manner as hereinbefore provided for the appointment of such arbitrator so
failing, refusing or unable to act. The decision of the arbitrators appointed
and acting hereunder shall in all cases be final, binding and conclusive upon
the parties. Each party shall pay the expenses of the arbitrator appointed by it
and the parties shall share equally the expenses of the third arbitrator.
5. Except as expressly modified herein, all of the provisions,
covenants, conditions and agreements set forth in the Lease shall continue in
full force and effect.
IN WITNESS WHEREOF, the parties have caused this Fifth Modification of
Lease to be executed as of the day and year first above written.
/s/ Ava Saltus /s/ Robert C. Baker
ROBERT C. BAKER Individually and as
Managing General Partner of Baker
1985 Family Partnership
/s/ Barbara Hacker /s/ Alan M. Oshins
ALAN M. OSHINS as Trustee under Trust
established pursuant to Article IV
of the Last Will and Testament of
Harvey B. Oshins
/s/ Geraldine DePascale /s/ Gerald H. Baker
GERALD H. BAKER
/s/ Ava Saltus /s/ John G. Orrico
JOHN G. ORRICO
E-47
<PAGE>
ATTEST: OSTEOTECH INC.
By: Michael J. Jeffries
/s/ Michael J. Jeffries
E-48
<PAGE>
STATE OF NEW YORK)
SS:
COUNTY OF WESTCHESTER)
BE IT REMEMBERED, that on this 25th day of October, 1996, before me,
the subscriber personally appeared ROBERT C. BAKER, Individually, and as
Managing General Partner for Baker 1985 Family Partnership, and as
Attorney-in-fact for John G. Orrico, who I am satisfied is the person named in
and who signed the within instrument, and, thereupon he acknowledged that he
signed, sealed and delivered the same as his act and deed, for the uses and
purposes therein expressed.
/s/ Richard A. Kaufman
NOTARY PUBLIC
STATE OF FLORIDA)
SS:
COUNTY OF BROWARD)
BE IT REMEMBERED, that on this 22nd day of October, 1996, before me,
the subscriber personally appeared ALAN M. OSHINS, AS TRUSTEE UNDER TRUST
ESTABLISHED PURSUANT TO ARTICLE IV OF THE LAST WILL AND TESTAMENT OF HARVEY B.
OSHINS, who I am satisfied is the person named in and who signed the within
instrument, and, thereupon he acknowledged that he signed, sealed and delivered
the same as his act and deed, for the uses and purposes therein expressed.
/s/ Gary E. Pike
NOTARY PUBLIC
STATE OF NEW JERSEY)
SS:
COUNTY OF HUDSON)
BE IT REMEMBERED, that on this 23rd day of October, 1996, before me,
the subscriber personally appeared GERALD H. BAKER, who I am satisfied is the
person named in and who signed the within instrument, and, thereupon he
acknowledged that he signed, sealed and delivered the same as his act and deed,
for the uses and purposes therein expressed.
/s/ Geraldine DePascale
NOTARY PUBLIC
E-49
<PAGE>
STATE OF NEW JERSEY)
SS:
COUNTY OF MONMOUTH )
BE IT REMEMBERED, that on this 16th day of October, 1996, before me, the
subscriber, A Notary Public of the State of New Jersey, personally appeared
Michael J. Jeffries of OSTEOTECH INC. who, I am satisfied, is the person who
signed the within instrument; and I having first made known to him the contents
thereof, he thereupon acknowledged that he signed, sealed with the corporate
seal, and delivered the said instrument as such officer aforesaid, and that the
within instrument is the voluntary act and deed of said corporation, made by
virtue of the authority of its board of directors.
/s/ Linda Manning Savoca
NOTARY PUBLIC
E-50
<PAGE>
EXHIBIT A
Map of 1151 Shrewsbury Avenue facility indicating 22,960 square feet of the
existing premises and 7,040 square feet for the additional premises contained in
one-story office and distribution building.
E-51
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into the 5th day of December, 1996
between OSTEOTECH, INC., a Delaware corporation (the "Corporation") and Richard
W. Bauer (the "Employee").
WITNESSETH:
WHEREAS, the Corporation desires to continue to employ
the Employee as its President and Chief Executive officer; and
WHEREAS, the Employee desires to accept such employment upon
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, the parties hereto agree as follows:
1. Employment. The Corporation hereby employs the
Employee, and the Employee hereby accepts employment by the
Corporation as President and Chief Executive Officer of the
Corporation upon the terms and conditions set forth herein.
2. Term. The term of this Agreement shall commence on
December 5, 1996 (the "Effective Date") and end on the day prior to
the second anniversary of the Effective Date of this Agreement (the
"Term of Employment").
3. Duties. The Employee shall perform such duties and
services and shall be allocated such resources, consistent with his
position, as may be assigned to him from time to time by the Board
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<PAGE>
of Directors of the Corporation. In furtherance of the foregoing, the Employee
hereby agrees to perform well and faithfully such duties and responsibilities.
4. Time to be Devoted to Employment.
a. The Employee shall devote his full time and
energy to the business of the Corporation except for vacations, holidays and
personal days and absences due to temporary illness, during the Term of
Employment and except as approved by the Board of Directors.
b. During the Term of Employment, the Employee
shall not be engaged in any other business activity. Employee hereby represents
that he is not a party to any agreement which would be an impediment to entering
into this Agreement and that he is permitted to enter into this Agreement and
perform the obligations hereunder.
5. Compensation; Reimbursement.
5.1a. During the Term of Employment, the
Corporation (or at the Corporation's option, any subsidiary or affiliate
thereof) shall pay to the Employee an annual base salary ("Base Salary") of Two
Hundred Sixty-Five Thousand Dollars ($265,000), payable in bi-monthly
installments. The Base Salary shall be reviewed annually and be subject to
increase at the option and in the sole discretion of the Board of Directors of
the Corporation.
b. During the Term of Employment, on an annual
basis, Employee may be entitled to a bonus and stock option grants
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<PAGE>
as determined by the Board of Directors of the Corporation based on Employee's
performance. There will be no guaranteed or minimum bonus or a stock option
grant and the bonus and stock option grant, if any, will be within the sole
discretion of the Board of Directors.
c. During the Term of Employment, the Employee
shall be entitled to family medical and dental insurance coverage (the cost of
which shall be paid by the Corporation) short and long term disability coverage,
eligibility for participation in the Corporation's 401K plan and to such other
fringe benefits as are made available from time to time to the executives of the
Corporation, including four (4) weeks vacation.
d. The Corporation shall reimburse Employee, in
accordance with its practice from time to time for other employees of the
Corporation, for all reasonable and necessary travel expenses, disbursements and
other reasonable and necessary incidental expenses incurred by him for or on
behalf of the Corporation in the performance of his duties hereunder upon
presentation by the Employee to the Corporation of appropriate vouchers.
5.2 Corporation agrees to grant to Employee on December 5,
1996 an option to purchase one hundred thousand (100,000) shares of common stock
at ten dollars ($10.00) per share. The option shall be exercisable over a four
(4) year period. One fourth (1/4) of the option shall vest on the day prior to
the anniversary of the Effective Date ("Vesting Date") and one-fourth (1/4)
shall vest
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<PAGE>
thereafter on each anniversary of the Vesting Date, so long as the Employee
remains in the employ of the Corporation on that date. The option shall
terminate ninety (90) days after termination of the Employee's employment with
the Corporation and shall be granted in accordance with the Corporation's
Incentive Stock Option Plan as amended from time to time.
6. Involuntary Termination. If the Employee dies
during the Term of Employment, his employment hereunder and the
Term of Employment shall be deemed to cease as of the date of his
death.
7. Termination for Cause. The Corporation may terminate the
employment of the Employee hereunder and the Term of Employment at any time
during the Term of Employment for "cause" (such termination being hereinafter
call a "Termination For Cause") by giving the Employee notice of such
termination, upon the giving of which such termination shall take effect
immediately. For the purposes of this Section 7, "cause" shall mean (i) the
Employee's willful misconduct with respect to the business and affairs of the
Corporation or any subsidiary or affiliate thereof, which action materially and
adversely affects the business or affairs of the Corporation or any subsidiary
or affiliate thereof, (ii) the Employee fails in any material respect to observe
and perform his obligations and duties hereunder, (iii) the commission by the
Employee of an act involving embezzlement or fraud against the Corporation or
commission or conviction of a felony, or (iv) failure to abide in some material
respect by the Corporation's
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<PAGE>
rules of conduct, terms and conditions set forth in the Corporation's handbook,
as amended from time to time.
8. Termination Without Cause. The Corporation may terminate
the employment of the Employee hereunder and the Term of Employment at any time
without "cause" upon thirty (30) days prior written notice (such termination
being hereinafter called a "Termination Without Cause"). Upon a Termination
without Cause during the Term of Employment, Employee shall be entitled to
receive his Base Salary for twenty-four (24) months or until Employee obtains
comparable employment, whichever occurs sooner plus all earned but unpaid bonus
at the time of termination. In addition, upon a Termination Without Cause at any
time, the Corporation shall continue to pay the Employee's family medical
insurance premiums under the Corporation's medical insurance plan and other
benefits (including outplacement benefits) provided in Section 5.1(c) for
twenty-four (24) months following such termination or until Employee obtains
comparable employment, whichever occurs sooner.
9. Voluntary Termination. Any termination of the
employment of the Employee hereunder otherwise then as a result of
an Involuntary Termination, a Termination For Cause or a
Termination Without Cause shall be deemed to be a "Voluntary
Termination". A Voluntary Termination shall be deemed to be
effective immediately upon such termination.
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<PAGE>
10. Effect of Termination of Employment.
a. Upon the termination of the Employee's
employment hereunder pursuant to a Voluntary Termination, Involuntary
Termination or a Termination for Cause, neither the Employee nor his beneficiary
or estate shall have any further rights or claims against the Corporation under
this Agreement except to receive:
(i) the unpaid portion of the Base Salary provided
for in Section 5.1(a), computed on a pro rata basis to the
date of termination, plus any earned but unpaid bonus with
respect to the prior year;
(ii) reimbursement for any expenses for which the
Employee shall not have theretofore been reimbursed as
provided in Section 5.1(d);
(iii) payment of all accrued and unused vacation time.
b. Upon the termination of the Employee's
employment hereunder pursuant to a Termination Without Cause, neither the
Employee nor his beneficiary or estate shall have any further rights or claims
against the Corporation under this Agreement except to receive a termination
payment equal to that provided for in Section 10(a) hereof, plus the amounts set
forth in Section 8, if any.
E-57
<PAGE>
11. General Provisions.
a. This Agreement and any or all terms hereof may
not be changed, waived, discharged, or terminated orally, but only by way of an
instrument in writing signed by the parties.
b. This Agreement shall be governed by and
construed in accordance with the laws of the State of New Jersey, without
reference to the conflicts of laws of the State of New Jersey or any other
jurisdiction.
c. If any portion of this Agreement shall be found
to be invalid or contrary to public policy, the same may be modified or stricken
by a Court of competent jurisdiction, to the extent necessary to allow the Court
to enforce such provision in a manner which is an consistent with the original
intent of the provision as possible. The striking or modification by the Court
of any provision shall not have the effect of invalidating the Agreement as a
whole.
d. The obligations of Sections 8, 10, 11, 12, 13
and 14 shall survive termination of this Agreement.
12. Corporation Rights to Intellectual Property. The
Employee shall promptly disclose, grant and assign ownership to the
Corporation for its sole use and benefit any and all inventions,
improvements, information, copyrights and suggestions (whether
patentable or not), which he may develop, acquire, conceive or
reduce to practice while employed by the Corporation (whether or
not during usual working hours), together with all patent
applications, letters patent, copyrights and reissues thereof that
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<PAGE>
may at any time be granted for or upon any such invention,
improvement or information. In connection therewith:
(i) The Employee shall without charge, but at the
expense of the Corporation, promptly at all times hereafter
execute and deliver such applications, assignments,
descriptions and other instruments as may be reasonably
necessary or proper in the opinion of the Corporation to vest
title to any such inventions, improvements, technical
information, patent applications, patents, copyrights or
reissues thereof in the Corporation and to enable it to obtain
and maintain the entire right and title thereto throughout the
world; and
(ii) The Employee shall render to the Corporation at
its expense (including reimbursement to the Employee of
reasonable out-of-pocket expenses incurred by the Employee and
a reasonable payment for the Employee's time involved in case
he is not then in its employ) all such assistance as it may
reasonably require in the prosecution of applications for said
patents, copyrights or reissues thereof, in the prosecution or
defense of interferences which may be declared involving any
said applications, patents or copyrights and in any litigation
in which the Corporation may be involved relating to any such
patents, inventions, improvements or technical information.
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<PAGE>
13. Protection of Information.
a. Employee hereby covenants with Corporation
that, throughout the term of his employment by Corporation, Employee will serve
Corporation's best interests loyally and diligently. Throughout the course of
employment by Corporation and thereafter, Employee will not disclose or provide
to any person, firm, corporation or entity (except when authorized by
Corporation) any information, materials, biologics or animals which are owned by
the Corporation or which come into the possession of the Corporation from a
third party under an obligation of confidentiality, including without
limitation, information relating to trade secrets, business methods, products,
processes, procedures, development or experimental projects, suppliers, customer
lists or the needs of customers or prospective customers, clients, etc.
(collectively "Confidential Information"), which Confidential Information, comes
into his possession or knowledge during the Term of Employment, and he will not
use such Confidential Information for his own purpose or for the purpose of any
person, firm, corporation or entity, other than the Corporation.
b. The provisions of Section 13(a) shall not apply
to the following Confidential Information:
(i) Confidential Information which at the time
of disclosure is already in the public domain;
(ii) Confidential Information which the
Employee can demonstrate was in his possession or known to him
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<PAGE>
prior to the effective date of his employment by the Corporation;
(iii) Confidential Information which
subsequently becomes part of the public domain through no fault of
the Employee;
(iv) Confidential Information which becomes
known to the Employee through a third party who is under no
obligation of confidentiality to the Corporation; and
(v) Confidential Information which is required
to be disclosed by law or by judicial or administrative
proceedings.
14. Non-Compete. Employee agrees that during the Term of
Employment and for two years after termination or expiration of his Term of
Employment he shall not directly or indirectly be engaged in or assist others in
engaging in any business or activity which is involved in selling products,
processes or services which compete with any significant product, process or
service which Corporation is developing, marketing or selling at the time of
such termination whether his involvement shall be as an owner (except for
passive ownership of up to five percent (5%) of the securities of a company),
officer, director, employee, consultant, partner or agent. For purposes of this
provision, products, processes or services which Corporation is marketing or
selling shall be deemed "significant" if sales of such products, processes or
services exceed ten percent (10%) of the Corporation's total sales.
15. Notices. Notices and other communications hereunder
shall be in writing and shall be delivered personally or sent by
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air courier or first class certified or registered mail, return
receipt requested and postage prepaid, addressed as follows unless
the party specifies a new address in writing:
If to the Employee: Richard W. Bauer
1357 Tamarack Road
Manasquan, NJ 08736
If to the Corporation: Osteotech, Inc.
51 James Way
Eatontown, NJ 07724
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given to the
date of delivery if personally delivered; on the business day after the date
when sent if sent by air courier; and on the third business day after the date
when sent if sent by mail, in each case addressed to such party as provided in
this Section or in accordance with the latest unrevoked direction from such
party.
16. Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement.
17. Assignment. This Agreement is personal in its nature and
the parties hereto shall not, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder; provided,
however, that the provisions hereof shall inure to the benefit of, and be
binding upon each successor of the Corporation, whether by merger,
consolidation, transfer of all or substantially all assets, or otherwise and the
heirs and legal representatives of the employee.
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
Corporation: OSTEOTECH, INC.
By:/S/ Donald D. Johnston
Title:Chairman of the Board of Directors
Employee: /S/ Richard W. Bauer 12/17/96
Richard W. Bauer
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<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ---------------------------------------------------------------- ----------------- ----------------- ---- ----------------- ---
<S> <C> <C> <C>
Net income (loss) $(324,000) $4,582,000 $1,747,000
================= ================= ==== ================= ===
Shares used in computing net income (loss) per share:
Weighted average Common shares outstanding 7,736,086 7,120,269 7,062,378
Weighted average Common shares issuable
upon the exercise of outstanding stock
options and warrants (a) 184,148 2,095,697 894,070
Application of assumed proceeds towards
repurchase of outstanding Common shares
using the Treasury Stock method (b) (1,124,585) (66,557)
----------------- ----------------- ---- ----------------- ---
Shares used in computation 7,920,234 8,091,381 7,889,891
================= ================= ==== ================= ===
Primary net income (loss) per share $ (.04) $ .57 $ .22
================================================================ ================= ================== === ================= ===
</TABLE>
a. Includes all nominal warrants and only those other shares where the
average market price exceeds the exercise price for the last three
months of the year. b. Computed using assumed proceeds of $6,665,000
and $270,000 and, with respect to the repurchase of outstanding common
shares, an average market value of $5.93 and $4.06 in 1995 and 1994,
respectively.
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<PAGE>
OSTEOTECH, INC.
COMPUTATION OF FULLY DILUTED NET INCOME PER SHARE
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ----------------------------------------------------------------- ------------------ ------------------ --- ------------------
<S> <C> <C> <C>
Net income (loss) $ (324,000) $ 4,582,000 $ 1,747,000
================== ================== === ==================
Shares used in computing net income (loss) per share:
Weighted average Common shares outstanding 7,736,086 7,120,269 7,062,378
Weighted average Common shares issuable
upon the exercise of outstanding stock
options and warrants (a) 184,148 2,095,697 894,070
Application of assumed proceeds towards
repurchase of outstanding common shares
using the Treasury Stock method (b) (952,202) (61,689)
------------------ ------------------ --- ------------------
Shares used in computation 7,920,234 8,263,764 7,894,759
================== ================== === ==================
Net income (loss) per share assuming full dilution $ (.04) $ .55 $ .22
================================================================= ================== ================== === ==================
</TABLE>
a. Includes all nominal warrants and only those other shares where
the average market price exceeds the exercise price for the last
three months of the year. b. Computed using assumed proceeds of
$6,665,000 and $270,000 and, with respect to the repurchase of
outstanding common shares, an average market value of $7.00 and $4.38
in 1995 and 1994, respectively.
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<PAGE>
SUBSIDIARIES OF REGISTRANT
Osteotech Investment Corporation is a wholly-owned subsidiary of the Registrant
organized under the laws of New Jersey. Osteotech Investment Corporation does
business under its own name.
Osteotech BV is a wholly-owned subsidiary of the Registrant organized under the
laws The Netherlands. Osteotech BV does business under its own name.
Osteotech/CAM Services BV ("OCS BV") is a wholly-owned subsidiary of Osteotech
BV organized under the laws of The Netherlands. OCS BV does business under its
own name.
HC Implants, BV ("HC Implants") is a wholly-owned subsidiary of Osteotech BV
organized under the laws of The Netherlands. HC Implants does business under its
own name.
CAM Implants, BV ("CAM BV") is a wholly-owned subsidiary of HC Implants
organized under the laws of The Netherlands. CAM BV does business under its own
name.
CAM Implants, Inc. ("CAM, Inc.") is a wholly-owned subsidiary of HC Implants
organized under the laws of Colorado. CAM,Inc. does business under its own name.
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (File No. 33- 44547 and No. 33-82782) of Osteotech, Inc. of our
report dated February 21, 1997 appearing on F-2 of this Form 10-K. We also
consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page S-2 of this Form 10-K.
COOPERS & LYBRAND L.L.P.
Princeton, New Jersey
March 26, 1997
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