UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period from __________ to __________
Commission File Number 0-19278
OSTEOTECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3357370
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
51 James Way, Eatontown, New Jersey 07724
(Address of principal executive offices) (Zip Code)
(732)542-2800
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 par value - 8,859,553 shares as of April 30, 1998
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
March 31, December 31,
1998 1997
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 15,221 $ 13,884
Short-term investments 2,945 1,473
Accounts receivable, net 7,402 7,547
Inventories 1,101 792
Deferred income taxes 1,532 457
Prepaid expenses and other current assets 2,784 3,930
----------------------
Total current assets 30,985 28,083
Property, plant and equipment, net 12,881 11,650
Excess of cost over net assets of business acquired,
Less accumulated amortization of $1,512 in 1998 and
$1,449 in 1997 2,186 2,249
Other assets 1,075 1,070
- --------------------------------------------------------------------------------
Total assets $ 47,127 $ 43,052
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 7,068 $ 6,919
Notes payable 427 608
Current maturities of long-term debt and
obligations under capital leases 566 634
----------------------
Total current liabilities 8,061 8,161
Long-term debt and obligations under capital leases 100 203
Other liabilities 395 396
- --------------------------------------------------------------------------------
Total liabilities 8,556 8,760
================================================================================
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 8,857,053
Shares in 1998 and 8,686,346 shares in 1997 89 87
Additional paid-in capital 38,311 36,130
Accumulated other comprehensive loss (85) (75)
Retained earnings(deficit) 256 (1,850)
- --------------------------------------------------------------------------------
Total stockholders' equity 38,571 34,292
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 47,127 $ 43,052
================================================================================
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except per share data)
Three Months Ended March 31, 1998 1997
- --------------------------------------------------------------------------------
Net revenues:
Service $ 13,157 $ 9,478
Product 318 606
---------------------------
13,475 10,084
Costs and expenses:
Cost of services 4,053 3,420
Cost of products 174 452
Marketing, general and administrative 4,819 3,798
Research and development 1,129 936
---------------------------
10,175 8,606
Operating income 3,300 1,478
Other income (expense):
Interest income 240 131
Interest expense (28) (48)
Other 40 9
---------------------------
252 92
---------------------------
Income before income taxes 3,552 1,570
Income tax provision 1,446 738
- --------------------------------------------------------------------------------
Net income $ 2,106 $ 832
================================================================================
Net income per share:
Basic $ .24 $ .10
Diluted $ .22 $ .10
- --------------------------------------------------------------------------------
Shares used in computing net income per share:
Basic 8,812,549 8,043,553
Diluted 9,439,261 8,374,262
================================================================================
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three Months Ended March 31, 1998 1997
- --------------------------------------------------------------------------------
Cash Flow From Operating Activities
Net income $ 2,106 $ 832
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 684 587
Deferred income taxes (1,075) (50)
Income tax benefit related to stock options 1,075
Other items, net
Changes in assets and liabilities:
Accounts receivable 131 (362)
Inventories (317) (90)
Prepaid expenses and other current assets 1,128 34
Accounts payable and other liabilities 194 361
- --------------------------------------------------------------------------------
Net cash provided by operating activities 3,926 1,312
Cash Flow From Investing Activities
Capital expenditures (1,846) (572)
Purchases of investments (1,972) (986)
Proceeds from sale of investments 500 1,986
Increase in other assets (27) (29)
- --------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (3,345) 399
Cash Flow From Financing Activities
Proceeds from issuance of common stock 1,108 418
Proceeds from issuance of notes payable 93
Principal payments on notes payable (181) (259)
Principal payments on long-term debt
and obligations under capital leases (169) (196)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 758 56
Effect of exchange rate changes on cash (2) 27
- --------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,337 1,794
Cash and cash equivalents at beginning of period 13,884 7,290
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $15,221 $9,084
================================================================================
Supplementary cash flow data:
Cash paid during the period for interest $ 28 $ 47
Cash paid during the period for taxes 231
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting only of normal recurring accruals)
considered necessary by management to present fairly the Company's
consolidated financial position as of March 31, 1998 and December 31, 1997,
and the consolidated results of operations and the consolidated cash flows
for the three-month periods ended March 31, 1998 and 1997. The results of
operations for the respective interim periods are not necessarily
indicative of the results to be expected for the full year. The condensed
consolidated financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1997 which
were included as part of the Company's Report on Form 10-K.
2. Changes in Accounting Policies
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 established standards for reporting and display of comprehensive
income and its components in financial statements.
Comprehensive income for the three-month periods ended March 31, 1998 and
1997 was $2,096,000 and $875,000, respectively. Other comprehensive income
consists solely of foreign currency translation adjustments.
3. Commitments and Contingencies
Litigation
The Company remains a defendant in two 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. Litigation is subject to many
uncertainties and management is unable to predict the outcome of the
pending suits and claims. It is possible that the results of operations or
liquidity and capital resources of the Company could be adversely affected
by the ultimate outcome of the pending litigation or as a result of the
costs of contesting such suits. The Company is unable to estimate the
potential liability, if any, that may result from the pending litigation
and, accordingly, no provision for any liability (except for accrued legal
costs) has been made in the consolidated financial statements.
The Company is involved in a patent infringement action against GenSci
Laboratories, Inc. and GenSci Regeneration Sciences, Inc. (collectively
"GenSci") alleging that GenSci has violated claims of one of the patents
involving the Company's Grafton(R) Demineralized Bone Matrix (DBM) process.
-5-
<PAGE>
3. Commitments and Contingencies (continued)
GenSci has filed a suit against the Company alleging patent infringement of
three patents assigned to GenSci in addition to tortious interference with
a business expectancy, negligent interference with a prospective economic
advantage and inducing breach of contract and seeking a declaratory
judgment of the invalidity of two of the Company's patents covering
Grafton(R) DBM.
The Company intends to vigorously pursue its claims against GenSci and also
believes that GenSci's claims against the Company are without merit.
4. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
-----------------------
(dollars in thousands except per share data) 1998 1997
---------------------------------------------------------------------------
Net income available to common
Shareholders $ 2,106 $ 832
===========================================================================
Denominator for basic earnings per share:
Weighted average Common shares and
nominal warrants outstanding * 8,812,549 8,043,553
Effect of dilutive securities:
Stock options 626,472 272,287
Warrants 240 58,422
-----------------------
Denominator for diluted earnings per share 9,439,261 8,374,262
===========================================================================
Basic earnings per share $ .24 $ .10
===========================================================================
Diluted earnings per share $ .22 $ .10
===========================================================================
* Nominal warrants are warrants with an exercise price of $.03.
5. Reclassifications
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
-6-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information contained herein contains "forward-looking statements" (as such term
is defined in the Private Securities Litigation Reform Act of 1995) which can be
identified by the use of forward-looking terminology such as "believes",
"expects", "may", "will", "should", or "anticipates" or the negative thereof or
other variations thereon or comparable terminology. Certain statements contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other sections herein, including without limitation, statements
regarding the Company's liquidity and capital resources and other statements
contained herein regarding matters that are not historical facts, are
forward-looking statements. No assurance can be given that the future results
covered by the forward-looking statements will be achieved. The matters set
forth in Exhibit 99.0 to the Company's Form 10-K for the year ended December 31,
1997, 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.
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
Results of Operations
Net Income
Net income in the first quarter of 1998 increased to $2,106,000 or $.24 basic
earnings per share and $.22 diluted earnings per share as compared to net income
of $832,000 or $.10 basic and diluted earnings per share in the first quarter of
1997.
Following is a discussion of factors which affected results of operations for
the three-month periods ended March 31, 1998 and 1997.
Revenues
Consolidated net revenues in the first quarter of 1998 increased 34% to
$13,475,000 from $10,084,000 in the first quarter of 1997. During the first
three months of 1998 and 1997, two of the Company's major customers accounted
for 54% and 40%, and 63% and 29% of revenues, respectively.
Domestic revenues increased 36% to $12,773,000 in the first quarter of 1998
compared to $9,404,000 in the first quarter of 1997. The increase in domestic
revenues resulted principally from increased demand for the Company's
proprietary Grafton(R) DBM allograft-processing services, which increased 57% in
1998 compared to the prior year.
Foreign non-allograft bone tissue revenues increased 3% to $702,000 in the first
quarter of 1998 compared to $680,000 in the first quarter of 1997. The increase
resulted principally from an increase in orthopaedic coating service revenue
partially offset by a decrease in ceramic product revenues.
-7-
<PAGE>
Cost of Services and Products
Cost of services as a percentage of service revenues was 31% in the first
quarter of 1998 compared to 36% in the first quarter of 1997. The decline in
costs as a percentage of revenues results from an increased percentage of
revenues coming from services with higher gross margins, operating efficiencies
resulting from increased volume and an increase in fees charged to the Company's
customers for certain allograft processing services.
Cost of products as a percentage of product revenues was 55% in the first
quarter of 1998, compared to 75% in 1997. The decline in costs as a percentage
of revenue in 1998 results primarily from a shift in product mix toward products
with higher gross margins.
Marketing, General and Administrative
Marketing, general and administrative expenses increased $1,021,000 or 27% in
the first quarter of 1998 compared to the same period last year. The increase
was primarily attributable to expanded marketing and promotional activities,
increased agent commissions directly related to the increase in Grafton(R) DBM
revenues and increased administrative costs, principally outside professional
services.
Research and Development
Research and development expenses increased $193,000 or 21% as compared to the
same period in 1997, principally as a result of increased spending associated
with the expansion of the Company's viral inactivation process to a broader
range of allograft bone tissue and the development of new allograft bone tissue
products, certain of which are expected to be introduced into the market before
the end of 1998.
Other Income (expense)
In the first quarter of 1998, other income increased by $160,000 compared to the
first quarter of 1997 due to higher invested cash and lower outstanding debt
balances.
Income Tax Provision
The Company's effective income tax rate declined to 41% in the first quarter of
1998 from 47% in the first quarter of 1997. The high effective income tax rate
in 1997 resulted from foreign losses for which no current tax benefits were
available.
-8-
<PAGE>
Liquidity and Capital Resources
At March 31, 1998, the Company had cash and short-term investments of
$18,166,000 compared to $15,357,000 at December 31, 1997 and working capital
increased $3,002,000 to $22,924,000 from $19,922,000.
Net cash provided by operations was $3,926,000 in the first quarter of 1998,
compared to $1,312,000 in the first quarter of 1997. The increase resulted
primarily from the Company's improved earnings in 1998 and a reduction in
prepaid income taxes. Capital expenditures increased to $1,846,000 from $572,000
in the first quarter of 1997 as the Company continues to invest in facilities
and equipment needed for current and future business requirements. Net cash
provided by financing activities increased to $758,000 from $56,000 in the first
quarter of 1997, principally from cash proceeds received from stock option
exercises.
The Company has a loan and security agreement with a US bank which provides for
borrowings of up to $3,000,000 under a revolving line of credit and $4,000,000
under an equipment line of credit. At March 31, 1998, $560,000 was outstanding
under the equipment line of credit and there were no borrowings outstanding
under the revolving line of credit. The Company also has a line of credit with a
Dutch bank which provides for borrowings of up to 5,000,000 Dutch Guilders
("dfl"), or approximately $2,400,000 at the March 31, 1998 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 and, therefore, the Company agreed with the bank to limit its
borrowings, if any, to no more than dfl 3,000,000 or approximately $1,440,000 at
the March 31, 1998 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 dfl 2,922,000, or
approximately $1,402,000 at the March 31, 1998 exchange rate. There were no
borrowings outstanding under this credit line as of March 31, 1998.
The Company believes that its cash and cash equivalents, short-term investments
and available lines of credit, together with anticipated future cash flow from
operations, will be sufficient to meet its near-term requirements. From time to
time the Company may seek additional funds through equity or debt financing.
However, there can be no assurances that such additional funds will be available
to the Company, or if available, that such funds will be available on terms
favorable to the Company.
Impact of Inflation and Foreign Currency Exchange Fluctuations
The results of the Company's operations for the periods discussed above have not
been significantly affected by inflation or foreign currency fluctuations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
-9-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Patent Litigation
The following developments have occurred in the lawsuits between the Company and
GenSci reported in Item 3 in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997. On April 8, 1998, the court in the
California action issued an order staying the California action pending a
determination by the court in the New Jersey action as to whether GenSci was
subject to the jurisdiction of the court in New Jersey. On May 4, 1998, the
court in the New Jersey action issued an order transferring the New Jersey
action to the United States District Court for the Central District of
California.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Exhibit Page
Number Description Number
27.0 Financial Data Schedule E-1
(b) Reports on Form 8-K
On January 12, 1998, the Company filed with the Commission a Current
Report on Form 8-K to announce that the U.S. Patent and Trademark
office has issued the Company U.S. Patent #5702677 entitled "Spherical
Hydroxyapatite Particles and Process for the Production Thereof" ("the
Patent").
On February 2, 1998, the Company filed with the Commission a Current
Report on Form 8-K to announce that the Company had filed a lawsuit on
January 16, 1998, in the U.S. District Court in Newark, New Jersey
against GenSci Laboratories, Inc. and GenSci Regeneration Sciences,
Inc. for patent infringement and that approximately two (2) weeks
after Osteotech's filing, GenSci had filed a suit in the U.S. District
Court for the Central District of California accusing Osteotech of
violating certain claims of two patents assigned to GenSci, by the
processing of Grafton(R) DBM Flex.
-10-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Osteotech, Inc.
-----------------------
(Registrant)
Date: May 11, 1998 By: /s/ Richard W. Bauer
-----------------------
Richard W. Bauer
President, Chief
Executive Officer
Date: May 11, 1998 By: /s/ Michael J. Jeffries
-----------------------
Michael J. Jeffries
Executive Vice President
Chief Operating Officer
Chief Financial Officer
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the Osteotech, Inc. and Subsidiaries Consolidated Balance Sheet as of
March 31, 1998 and the Condensed Consolidated Statement of Operations
for the three months ended March 31, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 15,221,000
<SECURITIES> 2,945,000
<RECEIVABLES> 7,547,000
<ALLOWANCES> 145,000
<INVENTORY> 1,101,000
<CURRENT-ASSETS> 30,985,000
<PP&E> 21,998,000
<DEPRECIATION> 9,117,000
<TOTAL-ASSETS> 47,127,000
<CURRENT-LIABILITIES> 8,061,000
<BONDS> 100,000
0
0
<COMMON> 89,000
<OTHER-SE> 38,482,000
<TOTAL-LIABILITY-AND-EQUITY> 47,127,000
<SALES> 318,000
<TOTAL-REVENUES> 13,475,000
<CGS> 174,000
<TOTAL-COSTS> 10,175,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,000
<INCOME-PRETAX> 3,552,000
<INCOME-TAX> 1,446,000
<INCOME-CONTINUING> 2,106,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,106,000
<EPS-PRIMARY> .24
<EPS-DILUTED> .22
</TABLE>
