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, 1999
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 - 13,841,729 shares as of April 30, 1999.
<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,
1999 1998
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ASSETS
- --------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 8,676 $ 15,119
Short-term investments 8,664 2,922
Accounts receivable, net 13,783 11,980
Inventories 2,068 1,568
Prepaid expenses and other current assets 6,459 5,533
------------------------
Total current assets 39,650 37,122
Property, plant and equipment, net 20,804 16,044
Excess of cost over net assets of business acquired,
less accumulated amortization of $1,797 in 1999
and $1,701 in 1998 3,918 1,997
Other assets 1,177 1,951
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Total assets $ 65,549 $ 57,114
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 9,692 $ 9,935
Notes payable 526 609
Current maturities of long-term debt and
obligations under capital leases 102 205
------------------------
Total current liabilities 10,320 10,749
Other liabilities 1,124 435
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Total liabilities 11,444 11,184
- --------------------------------------------------------------------------------
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 13,837,302
shares in 1999 and 13,380,291 shares in 1998 137 133
Additional paid-in capital 42,496 37,332
Accumulated other comprehensive income (loss) (140) 11
Retained earnings 11,612 8,454
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Total stockholders' equity 54,105 45,930
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 65,549 $ 57,114
================================================================================
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
OSTEOTECH, INC. AND Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except per share data)
Three Months Ended March 31, 1999 1998
- --------------------------------------------------------------------------------
Net revenues:
Service $ 17,857 $ 13,157
Product 831 318
------------------------------
18,688 13,475
Cost of services 5,454 4,053
Cost of products 403 174
------------------------------
5,857 4,227
------------------------------
Gross profit 12,831 9,248
Marketing, general and administrative expenses 6,374 4,819
Research and development expense 1,452 1,129
------------------------------
7,826 5,948
------------------------------
Operating income 5,005 3,300
Interest and other income, net 250 252
------------------------------
Income before income taxes 5,255 3,552
Income tax provision 2,097 1,446
- --------------------------------------------------------------------------------
Net income $ 3,158 $ 2,106
================================================================================
Net income per share:
Basic $ .23 $ .16
Diluted $ .22 $ .15
- --------------------------------------------------------------------------------
Shares used in computing net income per share:
Basic 13,721,763 13,218,824
Diluted 14,548,709 14,158,892
================================================================================
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
OSTEOTECH, INC. AND Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Three Months Ended March 31, 1999 1998
- --------------------------------------------------------------------------------
Cash Flow From Operating Activities
Net income $ 3,158 $ 2,106
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 766 684
Changes in assets and liabilities:
Accounts receivable (1,285) 131
Inventories (34) (317)
Prepaid expenses and other current assets (887) 1,128
Accounts payable and other liabilities (1,080) (881)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 638 2,851
Cash Flow From Investing Activities
Capital expenditures (4,261) (1,846)
Purchases of investments (7,688) (1,972)
Proceeds from sale of investments 1,946 500
Acquisition of business (1,467)
Increase in other assets (162) (27)
- --------------------------------------------------------------------------------
Net cash used in investing activities (11,632) (3,345)
Cash Flow From Financing Activities
Proceeds from issuance of common stock 2,511 1,108
Income tax benefit related to stock options 2,657 1,075
Proceeds from issuance of notes payable 116
Principal payments on notes payable (268) (181)
Principal payments on long-term debt
and obligations under capital leases (573) (169)
Increase in other liabilities 171
- --------------------------------------------------------------------------------
Net cash provided by financing activities 4,614 1,833
Effect of exchange rate changes on cash (63) (2)
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (6,443) 1,337
Cash and cash equivalents at beginning of period 15,119 13,884
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 8,676 $ 15,221
================================================================================
Supplementary cash flow data:
Cash paid during the period for interest $ 16 $ 28
Cash paid during the period for taxes 5
Acquisition of business:
Fair value of assets acquired 2,563
Liabilities assumed 2,669
See accompanying notes to condensed consolidated financial statements.
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<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, 1999 and December 31, 1998,
and the consolidated results of operations and the consolidated cash flows
for the three-month periods ended March 31, 1999 and 1998. 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, 1998 which
were included as part of the Company's Report on Form 10-K.
2. Stock Split
In February, 1999, the Board of Directors authorized a three-for-two stock
split in the form of a 50% stock dividend that was distributed in March,
1999 to stockholders of record on March 5, 1999. Stockholders' equity has
been restated to give retroactive recognition to the stock split for all
periods presented. In addition, all references in the financial statements
to shares, per share data, and stock option data have been restated.
3. Acquisition
Effective January 1, 1999, the Company completed the acquisition of a 90%
interest in OST Developpement SA ("OST"), a processor of bovine bone grafts
for orthopaedic and dental use. The aggregate purchase price paid consisted
solely of cash consideration of 9,000,000 French Francs ("FRF") or
approximately $1,594,700. In addition, the Company incurred approximately
$317,300 of transaction costs. The acquisition was accounted for as a
purchase and the consolidated financial statements include the accounts of
OST from January 1, 1999. The acquisition resulted in an excess of cost
over the fair value of net assets acquired of $2,018,000 which is being
amortized over 15 years. The Company also has the option to purchase the
remaining 10% of OST at a price to be determined at the time of purchase.
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<PAGE>
OSTEOTECH, INC. AND Subsidiaries
Notes To Condensed Consolidated Financial Statements
(unaudited)
4. Comprehensive Income
Comprehensive income for the three-month periods ended March 31, 1999 and
1998 was:
(dollars in thousands) 1999 1998
---------------------------------------------------------------------------
Net income $ 3,158 $ 2,106
Currency translation adjustments (151) (10)
---------------------------------------------------------------------------
Comprehensive Income $ 3,007 $ 2,096
===========================================================================
5. Financing Arrangements
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. In December 1998,
the Company received a commitment from the same bank for a new credit
facility, which will replace the current facilities. The new credit
facility will include a $5,000,000 revolving line of credit and a
$21,500,000 building mortgage loan and equipment line of credit which the
Company will use to fund the construction of a new processing facility.
Consummation of the new credit facility is subject to execution of a
definitive agreement.
6. Commitments and Contingencies
Product Liability Litigation
The Company is a defendant in two state court product liability actions in
which patients claim that they have suffered damages from the implantation
of orthopaedic bone screws allegedly distributed by the Company. One of the
actions is stayed. Management believes that the suits and claims are
without merit and will continue 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 written 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, willful
misconduct or unauthorized claim made by the Company in marketing the
products.
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<PAGE>
OSTEOTECH, INC. AND Subsidiaries
Notes To Condensed Consolidated Financial Statements
(unaudited)
6. Commitments and Contingencies - continued
In July, 1998, a complaint was filed against the Company in the Second
Judicial District Court, Bernallilo County, New Mexico, which alleges
negligence, strict liability, breach of warranty, negligent
misrepresentation, fraud, and violation of the New Mexico Unfair Trade
Practices Act arising from allegedly defective dental implant coating and
coating services provided to plaintiffs by a subsidiary of the Company, Cam
Implants BV. Plaintiffs have demanded unspecified monetary damages. In
August, 1998, the Company removed this action to the United States District
Court for the District of New Mexico and filed and served its answer,
denying any and all liability in this action, and moved to dismiss five of
the seven claims alleged against it. In November, 1998, the Company moved
for summary judgment in its favor on all of the claims alleged in this
action, on the ground that all of plaintiffs' claims are barred by their
applicable statutes of limitations. In March, 1999, the court dismissed
with prejudice the plaintiff's negligence and strict liability claims, and
to date the Court has limited discovery in this action to matters related
to the statue of limitations issue. The Company believes that the claims
against it are without merit and will continue to vigorously defend against
such claims.
Patent Litigation
In January, 1998, the Company filed a patent infringement action against
GenSci Regeneration Laboratories, Inc. ("GenSci Labs") and GenSci
Regeneration Sciences, Inc. ("GenSci Sciences") alleging that the GenSci
parties violated claims of one of the patents involving the Company's
Grafton(R) Demineralized Bone Matrix (DBM) process. Approximately two weeks
after Osteotech's filing, GenSci Labs filed a suit against the Company
alleging patent infringement of two patents assigned to GenSci Labs 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. In February, 1998, GenSci Labs
amended its complaint alleging essentially the same causes of action but
adding a third patent to the allegation of patent infringement. The actions
have been consolidated into one lawsuit. In September, 1998, GenSci Labs
served an amended complaint, which asserted, in addition to the previously
asserted claims, claims of false advertising under Federal law. In
September, 1998, the Company served its answer to this amended complaint,
asserted counterclaims against GenSci Labs and served a third-party
complaint against GenSci Sciences, and DePuy Motech, Inc. The Company's
counterclaims and third party complaint accused the GenSci parties of
infringing a second Company patent, in addition to the patent referred to
above, and accused the DePuy Motech, Inc. and GenSci parties of acting
jointly and severally in infringing on the claims of both patents.
Discovery has commenced and is ongoing. In April, 1999, GenSci Regeneration
Laboratories Inc. made a motion to amend its complaint to allege that in
addition to the Company's Grafton(R) DBM Flex product, the
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<PAGE>
OSTEOTECH, INC. AND Subsidiaries
Notes To Condensed Consolidated Financial Statements
(unaudited)
6. Commitments and Contingencies - continued
Company's Grafton(R) DBM Gel and Putty products infringe on GenSci's
patents at issue. GenSci also seeks an amendment to modify its false
advertising claim, alleging that in addition to the Company, individuals
acting on the Company's behalf engaged in false advertising.
In April, 1999, the Company filed and served its opposition to GenSci's
motion and in May, 1999, GenSci filed and served its reply. The motion
remains pending. The Company has and will continue to vigorously defend any
claims against it and prosecute the claims it has asserted against the
GenSci and DePuy parties.
In February, 1999, a complaint was filed against the Company in the United
States District Court for the Northern District of Florida. This action,
which has been brought by plaintiffs, University of Florida Tissue Bank,
Inc., Regeneration Technologies, Inc., Sofamor Danek Group, Inc., and
Sofamor Danek L.P. alleges that Osteotech's bio-d(TM) threaded cortical
bone dowel and Endodowel infringe on the claims of U.S. Patent No.
5,814,084, entitled "Diaphysical Cortical Dowel." In April, 1999,
plaintiffs filed an amended complaint adding a claim for patent
infringement against the Company with respect to US Patent No. 5,814,084,
entitled "Bone Grafting Units", which is owned by plaintiff University of
Florida Tissue Bank, Inc. In May, 1999, the Company filed its answer and
counter claim seeking declaratory judgment that the patents in question in
this action are invalid and otherwise not infringed by the Company.
Although monetary damages are sought, an amount has not been specified.
Based upon reviews conducted by its outside patent counsel, Osteotech
believes that its bio-d(TM) threaded cortical bone dowel and Endodowel do
not infringe the patent asserted in the action. Osteotech intends to
vigorously defend the action.
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 lawsuits. 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.
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<PAGE>
OSTEOTECH, INC. AND Subsidiaries
Notes To Condensed Consolidated Financial Statements
(unaudited)
7. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three-month periods ended March 31, 1999 and
1998:
(dollars in thousands except per share data) 1999 1998
---------------------------------------------------------------------------
Net income available to common
Shareholders $ 3,158 $ 2,106
---------------------------------------------------------------------------
Denominator for basic earnings per share:
Weighted average Common shares outstanding 13,721,763 13,218,824
Effect of dilutive securities:
Stock options 826,541 939,708
Warrants 405 360
-------------------------
Denominator for diluted earnings per share 14,548,709 14,158,892
---------------------------------------------------------------------------
Basic earnings per share $ .23 $ .16
===========================================================================
Diluted earnings per share $ .22 $ .15
===========================================================================
8. Operating Segments
Summarized in the table below is financial information for the Company's
reportable segments for the periods ending March 31,:
<TABLE>
<CAPTION>
Grafton(R) Base
DBM Tissue
(in thousands) Segment Segment Other Consolidated
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
1999 $11,575 $ 5,803 $ 1,310 $18,688
1998 8,403 4,272 800 13,475
------------------------------------------------------------------------------------------------
Operating income (loss):
1999 $ 4,438 $ 1,434 $(867) $ 5,005
1998 2,324 1,165 (189) 3,300
------------------------------------------------------------------------------------------------
</TABLE>
9. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1999
presentation.
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information contained herein 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
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 in the "Risk Factors"
section of the Company's Annual Report on Form 10-K for the year ended December
31, 1998, constitute cautionary statements identifying 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.
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
Results of Operations
All per share data have been adjusted for the three-for-two stock split in the
form of a 50% stock dividend in March, 1999.
Net Income
Consolidated net income in the first quarter of 1999 increased to $3,158,000 or
$.22 diluted net income per share as compared to net income of $2,106,000 or
$.15 diluted net income per share in the first quarter of 1998.
The following is a discussion of factors affecting results of operations for the
three-month periods ended March 31, 1999 and 1998.
Net Revenues
Consolidated net revenues in the first quarter of 1999 were $18,688,000, an
increase of $5,213,000 or 39% from the $13,475,000 reported in first quarter of
1998. The increase was principally due to higher revenues in both the Grafton(R)
Demineralized Bone Matrix (DBM) segment ("the Grafton(R) DBM segment") and the
Base Allograft Bone Tissue segment (the "Base Tissue segment"). Domestic
revenues, which consist principally of revenues from the Grafton(R) DBM and Base
Tissue segments, increased 37% and foreign revenues increased 73% compared to
the first quarter of 1998. The increase in foreign revenues resulted primarily
from the contribution to revenues made by OST Developpement SA ("OST"). In
January, 1999, the Company completed the acquisition of 90% of OST which
principally processes bovine bone tissue products for orthopaedic and dental
use.
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<PAGE>
Grafton(R) DBM segment revenues in the first quarter of 1999 were $11,575,000,
an increase of $3,172,000 or 38% compared to the first quarter of 1998. The
increase resulted from increased demand for Grafton(R) DBM and a price increase
effective January 1, 1999. By contrast, Grafton(R) DBM sales from our clients to
hospitals grew 25% in the quarter ended March 31, 1999. The lower growth rate in
end-user sales in the first quarter as compared with the growth in Grafton(R)
DBM sales, reflects the traditional hospital buy-in prior to the January 1,
price increase and the year-end selling efforts by our direct and agency sales
network. As a result, client inventories were depleted at the end of 1998 and
were replenished by our clients in the first quarter of 1999. We expect that
during the balance of 1999, the growth in Grafton(R) DBM segment revenues will
be more in line with the growth rate in end-user sales. Base Tissue segment
revenues were $5,803,000 or 36% higher in the first quarter 1999 compared to the
prior year principally as a result of a 29% increase in the number of donors
processed for our clients.
During the first three months of 1999 and 1998, two of our Grafton(R) DBM and
Base Tissue segment clients accounted for 56% and 37%, and 54% and 40% of
revenues, respectively.
Gross Profit
Gross profit as a percentage of revenues was 69% in the first quarter of 1999
and 1998. We expect that during the balance of the year, on a comparative basis,
consolidated gross profit as a percentage of consolidated revenues will decrease
by approximately two percentage points as a result of increased processing
expenses associated with the implementation of viral inactivation technology in
the Base Tissue segment and increases in capacity.
Marketing, General and Administrative
Marketing, general and administrative expenses increased $1,555,000 or 32% in
the first quarter of 1999 compared to the same period last year. The increase
was primarily attributable to: (i) incremental agent commissions resulting from
increased volume in the Grafton(R) DBM segment and (ii) expanded marketing and
promotional activities associated with the roll out of the bio-d(TM) threaded
cortical bone dowel, which is included in the Base Tissue segment, and the
Ulrich SSCS(TM) spinal fixation system. Additionally, corporate administrative
costs increased compared to 1998 principally as a result of higher outside
professional costs.
Research and Development
Research and development expenses increased $323,000 or 29% as compared to the
same period in 1998. The increase was primarily attributable to increased
spending in the Base Tissue segment associated with the continued development of
a viral inactivation process and ongoing development of new allograft tissue
products.
Operating Income
Operating income increased $1,705,000 or 52% in the first quarter of 1999
compared to the same period in 1998. The increase results primarily from
improved operating income in the Grafton(R) DBM and Base Tissue segments
resulting from the increases in revenue discussed above.
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<PAGE>
Income Tax Provision
The effective income tax rate declined to 40% in the first quarter of 1999 from
41% in the first quarter of 1998.
Liquidity and Capital Resources
At March 31, 1999, we had cash and short-term investments of $17,340,000
compared to $18,041,000 at December 31, 1998. We invest excess cash in U.S.
Government-backed securities and investment grade commercial paper of major U.S.
corporations. Working capital increased $2,957,000 to $29,330,000 at March 31,
1999 compared to $26,373,000 at December 31, 1998. Accounts receivable at March
31, 1999 increased $1,803,000 due to revenue increases.
Net cash provided by operating activities was $638,000 in the first quarter of
1999, compared to $2,851,000 in the first quarter of 1998. The decrease resulted
primarily from an increase in accounts receivable and deferred processing costs
and a decrease in accounts payable and accrued liabilities. Cash used in
investing activities increased to $11,632,000 in the first quarter of 1999 from
$3,345,000 in the first quarter of 1998. The increase results principally from;
(i) capital expenditures that increased to $4,261,000 from $1,846,000 resulting
from our continued investment in facilities and equipment needed for current and
future business requirements, (ii) a net increase in short-term investments of
$5,742,000, and (iii) cash used to purchase an additional 85% interest in OST.
During the fourth quarter of 1998, we commenced construction of a new processing
facility in Eatontown, New Jersey. The estimated aggregate cost for the
construction of the building, including furniture, fixtures and equipment is
approximately $25,000,000; $21,500,000 of which we expect will be funded by our
current bank through a building mortgage loan and equipment line of credit. The
remaining balance of $3,500,000 will be funded through available cash reserves
or anticipated cash flow from operations. Net cash provided by financing
activities increased to $4,614,000 from $1,833,000 in the first quarter of 1998,
principally from cash proceeds received from stock option exercises and tax
benefits resulting from the stock option exercises.
We have 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 March 31, 1999, $89,000 was outstanding
under the equipment line of credit and there were no borrowings outstanding
under the revolving line of credit. The existing credit facility will be
replaced with a new credit facility that will include a $5,000,000 revolving
line of credit in addition to the $21,500,000 building mortgage loan and
equipment line of credit discussed above. Consummation of the new credit
facility is subject to execution of a definitive agreement. We also have a line
of credit with a Dutch bank, which provides for borrowings of up to 5,000,000
Dutch Guilders ("dfl"), or approximately $2,440,000 at the March 31, 1999
exchange rate. Analysis of our 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, we agreed with the bank to limit borrowings,
if any, to no more than dfl 3,000,000 or approximately $1,466,000 at the March
31, 1999 exchange rate. There were no borrowings outstanding under this credit
line as of March 31, 1999. Additionally, we have a line of credit with a French
bank, which provides for borrowing of up to FRF 2,750,000, or approximately
$452,000 at the March 31, 1999 exchange rate. There were no borrowings
outstanding under this credit line as of March 31, 1999.
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<PAGE>
We believe that our 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 our near-term requirements. From time to
time we may seek additional funds through equity or debt financing. However,
there can be no assurances that such additional funds will be available, or if
available, that such funds will be available on favorable terms.
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.
Litigation
Osteotech, Inc. is involved in various legal proceedings involving product
liability and patent infringement claims. For a discussion of these matters see
PART II., ITEM 1. LEGAL PROCEEDINGS, Note 6 of "Notes to Consolidated Financial
Statements" and the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. It is possible that our results of operations or liquidity
and capital resources could be adversely affected by the ultimate outcome of the
pending litigation or as a result of the costs of contesting such lawsuits.
Year 2000
We recognize the need to ensure that Year 2000 issues will not adversely impact
our operations and have identified our potential Year 2000 risk in three
categories: internal business software and hardware; internal non-financial
systems; and noncompliance by suppliers and customers.
Internal Business Software and Hardware
Several years ago we determined that our existing business information
systems were not adequate to support the anticipated growth in our business
operations and purchased a fully integrated management information system,
which is Year 2000 compliant. Most of the new system is operational at this
time and the remainder of the system is scheduled to be operational in June
1999. The completion cost for implementation of the remaining software is
not expected to be material. All related hardware used to support internal
business software is currently Year 2000 compliant. As a result, we do not
believe that we require a contingency plan with respect to our internal
business systems, and therefore have not developed one. However, if we
subsequently identify significant risks we will develop contingency plans
as deemed necessary at that time.
Internal Non-financial Systems
We have completed our assessment of our internal non-financial systems such
as office equipment, security systems and other business equipment and
determined that minimal changes are required for Year 2000 compliance. We
expect to be in full compliance with our internal non-financial systems
before the year 2000 and the cost to achieve such compliance is not
expected to be material.
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<PAGE>
Noncompliance by Suppliers and Customers
We have initiated written communications with all of our significant
suppliers and customers to determine the extent to which we are vulnerable
to those third parties' failure to achieve Year 2000 compliance. We are
currently evaluating the responses and, if there are any affected suppliers
and/or customers, will develop contingency plans in order to minimize
disruption to our business operations. At this time we cannot estimate the
additional cost, if any, that may result from such contingency plans.
Risk of Non-Compliance
Based on the progress we have made in addressing Year 2000 issues, we do
not foresee significant risks associated with our year 2000 compliance
program at this time. Although we expect to be compliant before the year
2000, there is no guarantee that these results will be achieved. Partial or
total business systems interruption or the inability of a significant
supplier or customer to achieve Year 2000 compliance could have a material
adverse effect on our business operations, financial condition, results of
operations and business prospects.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GenSci Regeneration Laboratories, Inc. v. Osteotech, Inc.
In April, 1999, GenSci Regeneration Laboratories Inc. made a motion to amend its
complaint to allege that in addition to the Company's Grafton(R) DBM Flex
product, the Company's Grafton(R) DBM Gel and Putty products infringe on
GenSci's patents at issue. GenSci also seeks an amendment to modify its false
advertising claim, alleging that in addition to the Company, individuals acting
on the Company's behalf engaged in false advertising. In April, 1999, the
Company filed and served its opposition to GenSci's motion. In May, 1999, GenSci
filed and served its reply. The motion remains pending.
University of Florida Tissue Bank, Inc. v. Osteotech, Inc
In April, 1999, plaintiffs filed an amended complaint adding a claim for patent
infringement against the Company with respect to US Patent No. 5,814,084,
entitled "Bone Grafting Units", which is owned by plaintiff University of
Florida Tissue Bank, Inc. In May, 1999, the Company filed its answer and counter
claim seeking declaratory judgment that the patents in question in this action
are invalid and otherwise not infringed by the Company.
-14-
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 18, 1999, Osteotech filed with the Commission a Current Report on
Form 8-K to announce that its Board of Directors had approved a three-for-two
split of its common stock in the form of a 50% stock dividend. The dividend was
distributed on or about March 19, 1999 to shareholders of record on March 5,
1999. Upon completion of the distribution, Osteotech had approximately 13.5
million shares of common stock outstanding. Fractional shares were not issued
pursuant to the split, but in lieu of a fractional share, cash was paid based on
the closing price of Osteotech stock as of the close of trading on March 5,
1999, as adjusted for the stock split. The Board of Directors authorized this
distribution of common stock with the intention of benefiting shareholders by
increasing the amount of shares available for investment by a wider range of
shareholders.
On March 25, 1999, Osteotech's Board of Directors approved amendments to the
Rights Agreement dated as of February 1, 1996 which provides for Osteotech's
shareholders' right plan to (i) extend the expiration date of the plan until
March 25, 2009 and (ii) increase the purchase price for the rights to $170.00.
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 February 2, 1999, we filed with the Commission a Current Report on Form 8-K
to announce that we had completed its previously announced acquisition of a 90%
interest in OST Developpement SA of Clermont-Ferrand, France. On June 25, 1998,
Osteotech acquired a 5% interest in OST. On January 25, 1999, the remaining 85%
interest in OST was acquired with an effective date of January 1, 1999. The
aggregate cost of the transaction is FRF 9,000,000 (about 1.5 million at current
exchange rates). The acquisition is expected to contribute approximately $4
million in revenues and be accretive to net income in 1999. The agreement also
provides for the future purchase by Osteotech of the remaining 10% of OST at a
price to be determined at the time of the acquisition of the remaining shares.
-15-
<PAGE>
On February 18, 1999, Osteotech filed with the Commission a Current Report on
Form 8-K to announce that its Board of Directors has approved a three-for-two
split of its common stock in the form of a 50% stock dividend. The dividend was
distributed on or about March 19, 1999 to shareholders of record on March 5,
1999. Upon completion of the distribution, Osteotech had approximately 13.5
million shares of common stock outstanding. Fractional shares were not issued
pursuant to the split, but in lieu of a fractional share, cash was paid based on
the closing price of Osteotech stock as of the close of trading on March 5,
1999, as adjusted for the stock split. The Board of Directors authorized this
distribution of common stock with the intention of benefiting shareholders by
increasing the amount of shares available for investment by a wider range of
shareholders.
As a result of the split, the number of shares of Common Stock covered by the
following registration statements were proportionately increased as follows:
Registration Registered Shares Shares Covered
Statement Pre-Split Post-Split
- ---------------------- ---------------------- ------------------
Form S-8 818,624 1,227,936
(File No. 33-64019)
Form S-8 181,376 272,064
(File No. 33-42383)
Form S-8 1,593,885 2,390,828
(File No. 33-44547)
Form S-8 1,250,000 1,875,000
(File No. 33-82782)
On March 3, 1999, Osteotech filed with the Commission a Current Report on Form
8-K to confirm that it has been named as a defendant in a lawsuit filed in
United States District Court, Northern District of Florida, by University of
Florida Tissue Bank, Inc., Regeneration Technologies Inc. and Sofamor Danek
Group Inc. The lawsuit alleges that Osteotech's bone dowel infringes U.S. Patent
No. 5814084. Based upon reviews that had been previously conducted by its
outside patent counsel, Osteotech believes that its bone dowel does not infringe
any claim of this patent. Osteotech intends to vigorously defend this lawsuit.
-16-
<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 14, 1999 By: /s/ Richard W. Bauer
---------------------------
Richard W. Bauer
President, Chief
Executive Officer
Date: May 14, 1999 By: /s/ Michael J. Jeffries
---------------------------
Michael J. Jeffries
Executive Vice President
Chief Operating Officer
Chief Financial Officer
-17-
<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, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,676,000
<SECURITIES> 8,664,000
<RECEIVABLES> 13,924,000
<ALLOWANCES> 141,000
<INVENTORY> 2,068,000
<CURRENT-ASSETS> 39,650,000
<PP&E> 32,872,000
<DEPRECIATION> 12,068,000
<TOTAL-ASSETS> 65,549,000
<CURRENT-LIABILITIES> 10,320,000
<BONDS> 0
0
0
<COMMON> 137,000
<OTHER-SE> 53,968,000
<TOTAL-LIABILITY-AND-EQUITY> 65,549,000
<SALES> 831,000
<TOTAL-REVENUES> 18,688,000
<CGS> 403,000
<TOTAL-COSTS> 13,683,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,000
<INCOME-PRETAX> 5,255,000
<INCOME-TAX> 2,097,000
<INCOME-CONTINUING> 3,158,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,158,000
<EPS-PRIMARY> .23
<EPS-DILUTED> .22
</TABLE>
