UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended September 30, 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 - 14,184,684 shares as of October 31, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ---------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 17,258 $ 15,119
Short-term investments 3,946 2,922
Accounts receivable, net 10,920 11,980
Inventories 3,547 1,568
Deferred processing cost 4,724 2,620
Prepaid expenses and other current assets 2,748 2,913
Litigation settlement receivable 2,000
------------------------
Total current assets 45,143 37,122
Property, plant and equipment, net 29,014 16,044
Excess of cost over net assets of business acquired,
less accumulated amortization of $1,991 in 1999 and
$1,701 in 1998 3,780 1,997
Other assets 1,833 1,951
- ---------------------------------------------------------------------------------------
Total assets $ 79,770 $ 57,114
=======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 11,804 $ 9,935
Notes payable 101 609
Current maturities of long-term debt and
obligations under capital leases 205
------------------------
Total current liabilities 11,905 10,749
Long-term debt 3,624
Other liabilities 435 435
- ---------------------------------------------------------------------------------------
Total liabilities 15,964 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; 70,000,000 shares
authorized; issued and outstanding 14,184,609
shares in 1999 and 13,380,291 shares in 1998 140 133
Additional paid-in capital 45,544 37,332
Accumulated other comprehensive income (loss) (82) 11
Retained earnings 18,204 8,454
- ---------------------------------------------------------------------------------------
Total stockholders' equity 63,806 45,930
- ---------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 79,770 $ 57,114
=======================================================================================
</TABLE>
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)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues:
Service $ 16,770 $ 14,001 $ 53,596 $ 42,085
Product 699 282 2,163 803
License fee 118 124
----------- ----------- ----------- -----------
17,469 14,283 55,877 43,012
Cost of services 5,204 3,910 16,330 12,424
Cost of products 439 232 1,285 584
----------- ----------- ----------- -----------
5,643 4,142 17,615 13,008
----------- ----------- ----------- -----------
Gross Profit 11,826 10,141 38,262 30,004
Marketing, general and administrative 6,956 4,851 20,019 15,432
Research and development 1,310 1,079 4,248 3,285
----------- ----------- ----------- -----------
8,266 5,930 24,267 18,717
Income from litigation settlement 1,750 1,750
----------- ----------- ----------- -----------
Operating income 5,310 4,211 15,745 11,287
Interest and other income, net 208 285 636 886
----------- ----------- ----------- -----------
Income before income taxes 5,518 4,496 16,381 12,173
Income tax provision 2,270 1,878 6,631 5,020
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 3,248 $ 2,618 $ 9,750 $ 7,153
======================================================================================================================
Net income per share:
Basic $ .23 $ .20 $ .70 $ .54
Diluted $ .22 $ .19 $ .67 $ .51
- ----------------------------------------------------------------------------------------------------------------------
Shares used in computing net income per share:
Basic 14,174,402 13,168,880 13,969,901 13,225,814
Diluted 14,641,259 13,958,635 14,639,183 14,067,937
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flow From Operating Activities
Net income $ 9,750 $ 7,153
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 2,201 2,042
Changes in assets and liabilities:
Accounts receivable 1,403 (624)
Inventories (1,451) (467)
Deferred processing costs (2,104) (865)
Prepaid expenses and other current assets 396 2,083
Litigation settlement receivable (2,000)
Accounts payable and other liabilities 913 68
- ---------------------------------------------------------------------------------------
Net cash provided by operating activities 9,108 9,390
Cash Flow From Investing Activities
Capital expenditures (13,537) (4,326)
Purchases of investments (11,634) (7,387)
Proceeds from sale of investments 10,610 5,941
Acquisition of business (1,526)
Increase in other assets (859) (746)
- ---------------------------------------------------------------------------------------
Net cash used in investing activities (16,946) (6,518)
Cash Flow From Financing Activities
Proceeds from issuance of common stock 4,854 2,756
Income tax benefit related to stock options 3,365 2,870
Repurchase of common stock (4,958)
Proceeds from issuance of notes payable 116
Principal payments on notes payable (693) (582)
Proceeds from long-term debt 3,000
Principal payments on long-term debt
And obligations under capital leases (758) (482)
Increase in other liabilities 171
- ---------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities 10,055 (396)
Effect of exchange rate changes on cash (78) 74
- ---------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,139 2,550
Cash and cash equivalents at beginning of period 15,119 13,884
- ---------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 17,258 $ 16,434
=======================================================================================
Supplementary cash flow data:
Cash paid during the period for interest $ 29 $ 63
Cash paid during the period for taxes 2,114 1,065
Acquisition of business:
Fair value of assets acquired 2,563
Liabilities assumed 2,669
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting only of normal recurring accruals)
considered necessary by management to present fairly the Company's
consolidated financial position as of September 30, 1999 and December 31,
1998, and the consolidated results of operations for the three-month and
nine-month periods ended September 30, 1999 and 1998, and the consolidated
cash flows for the nine-month periods then ended. The results of operations
for the respective interim periods are not necessarily indicative of the
results to be expected for the full year. The condensed consolidated
financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 1998 which were
included as part of the Company's Report on Form 10-K.
2. Stockholders' Equity
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 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.
In June, 1999, the Stockholders of the Company approved an amendment to the
Company's certificate of incorporation to increase the number of authorized
shares of common stock to 70,000,000 shares.
3. Acquisition of OST Developpement SA
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
$372,600 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 $2,073,000 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.
4. Acquisition of Spinal Fixation System
In June, 1999, the Company acquired the Versalok(R) Low Back Fixation
System (the "Versalok(R) System"), including all patents, from Wright
Medical Technology, Inc. for $600,000. Pursuant to the terms of the
purchase agreement, the Company also agreed to purchase approximately
$1,120,000 of
5
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
4. Acquisition of Spinal Fixation System - continued
inventory, consisting primarily of finished goods. The $600,000 payment to
acquire the product rights and patents will be amortized using the
straight-line basis over five years.
5. Comprehensive Income
Comprehensive income for the three-month and nine-month periods ended
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
(dollars in thousands) 1999 1998 1999 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $3,248 $2,618 $9,750 $7,153
Currency translation adjustments 189 83 (93) 84
---------------------------------------------------------------------------------------------
Comprehensive Income $3,437 $2,701 $9,657 $7,237
=============================================================================================
</TABLE>
6. Financing Arrangements
In June, 1999, the Company replaced its domestic lines of credit with a new
credit facility which includes a $5,000,000 unsecured revolving line of
credit, a $4,500,000 building mortgage loan and a $17,000,000 equipment
line of credit. The revolving line of credit is committed through May 31,
2001. In the absence of default, the Company has the option to convert the
revolving line of credit to a term-loan and the outstanding unpaid balance
as of May 31, 2001 will be repayable in forty-eight equal monthly
installments of principal together with accrued interest. An unused
facility fee of .25% is payable on the unused portion of the revolving
loan. The mortgage loan will be drawn down upon completion of the Company's
new allograft tissue processing facility currently under construction and
will be secured by the building which will house the new processing
facility and the land on which the building is located. The mortgage loan
will be repayable in 120 equal monthly installments of principal and
interest based on a twenty-year mortgage amortization schedule. Upon the
120th payment, the full amount of the unpaid principal will be due and
payable. The equipment line of credit is secured by equipment and other
capital expenditures purchased using the proceeds of such line, with
advances of up to 80% of the cost thereof. Upon expiration of an initial
drawdown period, which expires December, 2000, the equipment line of credit
will be repayable in equal monthly installments of principal and interest
based on a seven-year amortization schedule. During the drawdown period
interest only will be payable under the equipment line of credit.
6
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
6. Financing Arrangements - continued
Pursuant to the terms of the loan and security agreement (the "Agreement"),
the Company is required to meet certain financial covenants regarding
minimum working capital, tangible net worth and interest coverage. In
addition, the Agreement contains limitations on sales of assets other than
in the ordinary course of business and additional indebtedness. At
September 30, 1999, there was $3,000,000 outstanding under the revolving
line of credit.
7. 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. In September, 1999, plaintiffs in one of the actions
voluntarily dismissed the Company without prejudice. Management believes
that the remaining lawsuit and claims are without merit and will continue
to defend such action 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.
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 statute of limitations issue. The Company believes that the claims
against it are without merit and will continue to vigorously defend against
such claims.
7
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
7. Commitments and Contingencies - continued
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 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 AcroMed, Inc.("DePuy"). 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 and GenSci parties of acting jointly and
severally in infringing on the claims of both patents. Discovery has
commenced and is ongoing. In May, 1999, GenSci Labs amended 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
Lab's patents at issue. GenSci Labs also amended its complaint to modify
its false advertising claim, alleging that in addition to the Company,
individuals acting on the Company's behalf engaged in false advertising.
The Company filed and served its answer and counterclaims to the amended
complaint in May, 1999. In November, 1999, the Company settled all claims
which it had filed against DePuy. As part of the settlement, DePuy has
agreed to stop selling the GenSci products accused of infringing the
Company's patents, no later than February 4, 2001 and to pay the Company
$3,000,000 as follows: $2,000,000 in the fourth quarter of 1999 and
$250,000 at the end of each quarter in 2000. Payments in the year 2000 will
be made unless DePuy discontinues selling the GenSci products during the
year, at which time DePuy would not be obligated for payments beyond the
quarter in which it stopped selling the GenSci products (See Note 11). The
Company believes that the claims made against it by the GenSci parties are
without merit and will continue to vigorously defend against such claims
and prosecute the claims it has asserted against the GenSci parties.
8
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
7. Commitments and Contingencies - continued
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 Company'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 counterclaim seeking
declaratory judgment that the patents in question in this action are
invalid and otherwise not infringed by the Company. Although the plaintiffs
seek monetary damages, an amount has not been specified. In May, 1999,
plaintiffs filed their reply to the Company's counterclaims. The Company
believes the claims asserted in this action to be without merit and intends
to vigorously defend against such claims.
In July, 1999, Medtronic Sofamor Danek Inc., Sofamor Danek L.P. and Sofamor
Danek Holdings, Inc. ("Danek") sued Osteotech in the United States District
Court for the Western District of Tennessee alleging that instruments,
instrument sets and cortical bone dowel products, including but not limited
to the bio-d(TM) threaded cortical bone dowel and Endodowel, manufactured,
sold and/or otherwise distributed by the Company infringe on certain claims
of U.S. Patent Nos. 5,741,253, entitled "Method for Inserting Spinal
Implants", and 5,484,437, entitled "Apparatus and Method of Inserting
Spinal Implants", which are owned by Danek. In September, 1999, the Company
filed its answer and counter claims seeking a declaratory judgement that
the patents in question in this action are invalid and otherwise not
infringed by the Company. Plaintiffs filed their reply to the counterclaims
in October, 1999. The Company believes that the claims asserted in this
action are without merit and intends to vigorously defend against such
claims.
In September, 1999, Medtronic Sofamor Danek, Inc. ("Medtronic"), sued
Arthur A. Alfaro, a former Division President of Medtronic and currently
the Company's President and Chief Operating Officer, in the Chancery Court
of Tennessee for the Thirtieth Judicial District at Memphis, seeking to
enjoin Mr. Alfaro from divulging alleged confidential information or trade
secrets of Medtronic to third parties, including the Company, and from
working for the Company for a period of twelve months. In September, 1999,
the Court issued a temporary restraining order prohibiting Mr. Alfaro from
issuing or divulging any confidential information or trade secrets of
Medtronic to any third party. In October, 1999, Mr. Alfaro filed and served
his answer, denying any and all liability. Pursuant to an employment
agreement between Mr. Alfaro and the Company, the Company is paying Mr.
Alfaro's legal fees and costs for defending this action.
9
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
7. Commitments and Contingencies - continued
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.
8. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three-month and nine-month periods ended
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------------
(dollars in thousands
except per share data) 1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income available to Common $3,248 $2,618 $9,750 $7,153
Shareholders
-----------------------------------------------------------------------------------------------------------------------
Weighted average common shares 14,174,402 13,168,880 13,969,901 13,225,814
-----------------------------------------------------------------------
Denominator for basic earnings per share 14,174,402 13,168,880 13,969,901 13,225,814
Effect of dilutive securities:
Stock options 466,479 789,405 669,156 842,006
Warrants 378 350 126 117
-----------------------------------------------------------------------
Denominator for diluted earnings per
share 14,641,259 13,958,635 14,639,183 14,067,937
-----------------------------------------------------------------------------------------------------------------------
Basic earnings per share $.23 $.20 $.70 $.54
-----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $.22 $.19 $.67 $.51
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
9. Operating Segments
Summarized in the table below is financial information for the Company's
reportable segments for the three-month and nine-month periods ended
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------- -----------------------------------------
(dollars in thousands) 1999 1998 1999 1998
--------------------------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Revenues:
Grafton(R)DBM Segment $ 9,905 $ 9,802 $ 32,346 $ 28,349
Base Tissue Segment 6,525 3,816 20,043 12,523
Other 1,039 665 3,488 2,140
Consolidated 17,469 14,283 55,877 43,012
--------------------------------------- -------------------- -------------------- -------------------- --------------------
Operating income (loss):
Grafton(R)DBM Segment $ 4,429 $ 3,712 $ 12,509 $ 9,206
Base Tissue Segment 1,884 829 5,969 2,901
Other (1,003) (330) (2,733) (820)
Consolidated 5,310 4,211 15,745 11,287
--------------------------------------- -------------------- -------------------- -------------------- --------------------
</TABLE>
10. Inventories
Inventories consist of the following:
(dollars in thousands) September 30, 1999 December 31, 1998
---------------------------------------------------------------------------
Raw Materials $ 872 $ 646
Finished Goods 2,675 922
---------------------------------------------------------------------------
$ 3,547 $ 1,568
---------------------------------------------------------------------------
11. Litigation Settlement
In November 1999, the Company settled all claims which it had filed against
DePuy in the patent infringement suit against GenSci Labs and GenSci
Sciences and DePuy (See Note 7). As part of the settlement, DePuy has
agreed to stop selling the GenSci products accused of infringing the
Company's patents, no later than February 4, 2001 and to pay the Company
$3,000,000 as follows: $2,000,000 in the fourth quarter of 1999 and
$250,000 at the end of each quarter in 2000. Payments in the year 2000 will
be made unless DePuy discontinues selling the GenSci products during the
year, at which time DePuy would not be obligated for payments beyond the
quarter in which it stopped selling the GenSci products. The Company
included $1,750,000 of the $2,000,000 payment in income in the third
quarter of 1999 and will recognize the remaining $250,000 in the fourth
quarter of 1999. The quarterly payments in 2000 will be recognized in
income as earned.
12. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1999
presentation.
11
<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 AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
Results of Operations
Litigation Settlement
In November 1999, we settled all claims which we had filed against DePuy in the
patent infringement suit against GenSci Labs and GenSci Sciences (See Notes 7
and 11 of "Notes to Consolidated Financial Statements"). As part of the
settlement, DePuy has agreed to stop selling the GenSci products accused of
infringing our patents, no later than February 4, 2001 and to pay the company
$3,000,000 as follows: $2,000,000 in the fourth quarter of 1999 and $250,000 at
the end of each quarter in 2000. Payments in the year 2000 will be made unless
DePuy discontinues selling the GenSci products during the year, at which time
DePuy would not be obligated for payments beyond the quarter in which it stopped
selling the GenSci products. The Company included $1,750,000 of the $2,000,000
payment in operating income in the third quarter of 1999 and will recognize the
remaining $250,000 in the fourth quarter of 1999. The quarterly payments in 2000
will be recognized in income as earned.
Net Income
Consolidated net income in the third quarter of 1999 increased to $3,248,000 or
$.22 diluted net income per share as compared to net income of $2,618,000 or
$.19 diluted net income per share in the third quarter of 1998. Consolidated net
income in the first nine months of 1999 increased to $9,750,000 or $.67 diluted
net income per share as compared to net income of $7,153,000 or $.51 diluted net
income per share in the first nine months of 1998. Net income in the quarter and
the nine months ended September 30, 1999 were positively impacted by the
settlement of the patent infringement claim against DePuy, which added
$1,043,000, after income taxes, or $.07 diluted net income per share. All per
share data have been adjusted for the three-for-two stock split in the form of a
50% stock dividend effected in March, 1999.
The following is a discussion of factors affecting results of operations for the
three-month and nine-month periods ended September 30, 1999 and 1998.
12
<PAGE>
Net Revenues
Consolidated net revenues increased 22% to $17,469,000 from $14,283,000 in third
quarter of 1998 and increased 30% to $55,877,000 from $43,012,000 in the first
nine months 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 21% to $16,672,000 from
$13,738,000 in third quarter of 1998 and increased 28% to $52,810,000 from
$41,177,000 in the first nine months of 1998. Foreign revenues increased 46% to
$797,000 from $545,000 in third quarter of 1998 and increased 67% to $3,067,000
from $1,835,000 in the first nine months 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.
Grafton(R) DBM segment revenues increased 1% to $9,905,000 from $9,802,000 in
third quarter of 1998 and increased 14% to $32,346,000 from $28,349,000 in the
first nine months of 1998. The increase resulted from increased demand for
Grafton(R) DBM and a price increase effective January 1, 1999. Grafton(R) DBM
segment revenues growth slowed in the third quarter of 1999 as compared with the
prior year same quarter primarily due to effects of competition and a summer
slowdown in surgical procedures. We believe the slow down in growth will be a
short-term issue as surgeons try the competitive product and determine for
themselves the superiority of Grafton(R) DBM.
Base Tissue segment revenues increased 71% to $6,525,000 from $3,816,000 in
third quarter of 1998 and increased 60% to $20,043,000 from $12,523,000 in the
first nine months of 1998. The increases are associated with an increase in the
number of donors processed for our clients, 55% in the quarter and 43% in the
nine months, and revenues from the bio-d(TM) threaded cortical bone dowel
launched at the end of 1998.
In the third quarter and first nine months of 1999, two of our Grafton(R)DBM and
Base Tissue segment clients accounted for 57% and 36% of consolidated revenues,
respectively.
Gross Profit
Gross profit as a percentage of revenues was 68% in the third quarter and 69% in
the first nine months of 1999. Gross profit as a percentage of revenues in the
prior year was 71% in the third quarter and 70% in the first nine months. The
decrease results from; (i) the absorption of costs associated with additional
allograft tissue processing capacity which was added to meet the continuing
growth in our allograft tissue business, and (ii) a decline in the percentage of
consolidated revenues coming from the Grafton(R) DBM Segment, which has a higher
gross profit margin than other services and products.
Marketing, General and Administrative
Marketing, general and administrative expenses increased $2,105,000 or 43% in
the third quarter and $4,587,000 or 30% in the first nine months of 1999
compared to the same periods in 1998. 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 two new products, the bio-d(TM) system which is
included in the Base Tissue segment
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and the Segmental Spinal Correction System(TM) ("SSCS"). Additionally, corporate
administrative costs increased compared to 1998 principally as a result of
higher costs associated with patent infringement lawsuits and the inclusion of
OST's operating expenses.
Research and Development
Research and development expenses increased $231,000 or 21% in the third quarter
and $963,000 or 29% in the first nine months of 1999 compared to the same
periods 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 $1,099,000 or 26% in the third quarter and increased
$4,458,000 or 39% in the first nine months of 1999 compared to the same periods
in 1998. Grafton(R) DBM segment operating income increased $717,000 or 19% in
the third quarter and increased $3,303,000 or 36% in the first nine months of
1999 compared to the same periods in 1998. Grafton(R) DBM segment operating
income in the quarter and nine months includes $1,750,000 of income resulting
from the patent litigation settlement (See Note 11 of "Notes to Consolidated
Financial Statements"). In the quarter, the impact of the settlement was partly
offset by the absorption of costs associated with additional allograft tissue
processing capacity, higher costs associated with the patent lawsuit and
relatively flat revenue growth as compared with 1998. The segment's operating
income in the nine months was also positively impacted by the increase in
revenues. Base Tissue segment operating income increased $1,055,000 or 127% in
the third quarter and $3,068,000 or 106% in the first nine months of 1999
compared to the same periods in 1998. The increases result principally from
increases in revenue. Other segment operating income decreased $673,000 or 204%
in the third quarter and $1,913,000 or 233% in the first nine months of 1999
compared to the same periods in 1998. The decreases result principally from
increased marketing expenses associated with the launch of the SSCS(TM) system.
Income Tax Provision
The effective income tax rate declined to approximately 41% in the third quarter
and 40% in the first nine months of 1999 from 42% and 41% in the same periods
last year.
Liquidity and Capital Resources
At September 30, 1999, we had cash and short-term investments of $21,204,000
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 $6,865,000 to $33,238,000 at September
30, 1999 compared to $26,373,000 at December 31, 1998. The increase in working
capital results principally from an increase in cash and investments,
inventories, deferred processing costs and the litigation settlement receivable,
net of a decrease in accounts receivable and an increase in accounts payable and
accrued liabilities. The increase in inventories of $1,979,000 is associated
with the acquisition of the Versalok(R) System and the launch of the SSCS(TM)
system. The increase in deferred processing costs is associated with the growth
in our Grafton(R) DBM and Base Tissue segments.
Net cash provided by operating activities was $9,108,000 in the first nine
months of 1999, compared to cash provided by operating activities of $9,390,000
in the first nine months of 1998. The decrease resulted primarily from increases
in inventories
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and deferred processing costs. Cash used in investing activities increased to
$16,946,000 in the first nine months of 1999 from $6,518,000 in the first nine
months of 1998. The increase results principally from; (i) an increase in
capital expenditures to $13,537,000 from $4,326,000 resulting from our continued
investment in facilities and equipment needed for current and future business
requirements, (ii) the purchase of an additional 85% interest in OST, and (iii)
the acquisition of the Versalok(R) System. In the fourth quarter of 1998, we
commenced construction of a new allograft tissue processing facility in
Eatontown, New Jersey. The estimated aggregate cost for the construction of the
building, including furniture, fixtures and equipment is approximately
$32,000,000; $21,500,000 of which will be funded through the building mortgage
loan and equipment line of credit included in the credit facility concluded with
our bank in June, 1999. The remaining balance of $10,500,000 will be funded
through available cash reserves or anticipated cash flow from operations. Net
cash provided by financing activities increased to $10,055,000 from net cash
used of $396,000 in the first nine months of 1998. The increase resulted
principally from cash proceeds received and related income tax benefits
associated with stock option exercises and borrowings under the revolving line
of credit.
In June, 1999, we replaced our domestic lines of credit with a credit facility
that includes a $5,000,000 revolving line of credit, a $4,500,000 mortgage loan
and $17,000,000 equipment line of credit. At September 30, 1999, $3,000,000 was
outstanding under the revolving line of credit. 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 $2,426,000 at the September 30, 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 $1,455,000 at the September 30,
1999 exchange rate. Additionally, we have a line of credit with a French bank,
which provides for borrowing of up to FRF 2,000,000, or approximately $360,000
at the September 30, 1999 exchange rate. 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 our 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
Notes 7 and 11 of "Notes to Condensed Consolidated Financial Statements", PART
II., ITEM 1. LEGAL PROCEEDINGS and our 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.
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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 the fourth quarter
1999. The portion of the existing system being replaced has been modified and
tested for Year 2000 compliance and accordingly, if the new system is not fully
operational by January 1, 2000, we do not expect disruption to our business. The
completion cost for implementation of the remaining software is not expected to
be material. All related hardware supporting our internal business software is
currently Year 2000 compliant.
Internal Non-financial Systems
We have completed our assessment and testing of our internal non-financial
systems such as office equipment, security systems and other business equipment
and determined that all critical systems are Year 2000 compliant.
Noncompliance by Suppliers and Customers
We have completed our assessment of 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. The majority of our critical
vendors have communicated that they are Year 2000 compliant. We are monitoring
the progress of those vendors who are not currently Year 2000 compliant but
expect to be compliant before December 31, 1999 and have developed contingency
plans with respect to such vendors to prevent disruption to our business
operations. At this time we do not anticipate incurring additional cost as a
result of 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Abercrombie v. AcroMed et al.
In September, 1999, plaintiffs voluntarily dismissed the Company from this
action without prejudice.
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GenSci Regeneration Laboratories, Inc. v. Osteotech, Inc.
In November, 1999, the Company settled all claims which it had filed against
DePuy. As part of the settlement, DePuy has agreed to stop selling the GenSci
products accused of infringing the Company's patents, no later than February 4,
2001 and to pay the Company $3,000,000 as follows: $2,000,000 in the fourth
quarter of 1999 and $250,000 at the end of each quarter in 2000. Payments in the
year 2000 will be made unless DePuy discontinues selling the GenSci products
during the year, at which time DePuy would not be obligated for payments beyond
the quarter in which it stopped selling the GenSci products.
Medtronic Sofamor Danek, Inc., Sofamor Danek L.P. and Sofamor Danek Holdings,
Inc. v. Osteotech
In September, 1999 the Company filed its answer and counter claims seeking a
declaratory judgement that the patents in question in this action are invalid
and otherwise not infringed by the Company. Plaintiffs filed their reply to the
counterclaims in October, 1999. The Company believes that the claims asserted in
this action are without merit and intends to vigorously defend against such
claims.
Medtronic Sofamor Danek, Inc. v. Arthur Alfaro
In September, 1999, Medtronic Sofamor Danek, Inc. ("Medtronic"), sued Arthur A.
Alfaro, a former Division President of Medtronic and currently the Company's
President and Chief Operating Officer, in the Chancery Court of Tennessee for
the Thirtieth Judicial District at Memphis, seeking to enjoin Mr. Alfaro from
divulging alleged confidential information or trade secrets of Medtronic to
third parties, including the Company, and from working for the Company for a
period of twelve months. In September, 1999, the Court issued a temporary
restraining order prohibiting Mr. Alfaro from issuing or divulging any
confidential information or trade secrets of Medtronic to any third party. In
October, 1999, Mr. Alfaro filed and served his answer, denying any and all
liability. Pursuant to an employment agreement between Mr. Alfaro and the
Company, the Company is paying Mr. Alfaro's legal fees and costs for defending
this action.
ITEM 5. OTHER INFORMATION
On November 8, 1999, we announced that Roger C. Stikeleather, Executive Vice
President, Sales & Marketing, left the Company effective November 4, 1999.
Personnel who had been reporting to Mr. Stikeleather now report directly to Mr.
Arthur A. Alfaro, Osteotech's President and Chief Operating Officer.
On November 10, 1999, we announced that we settled all claims which had been
filed against DePuy in the patent infringement suit against GenSci Labs and
GenSci Sciences and DePuy. As part of the settlement, DePuy has agreed to stop
selling DynaGraft(TM) Gel and Putty, the GenSci products accused of infringing
the Company's patents, no later than February 4, 2001 and to pay the Company
$3,000,000 as follows: $2,000,000 in the fourth quarter of 1999 and $250,000 at
the end of each quarter in 2000. Payments in the year 2000 will be made unless
DePuy discontinues selling the GenSci products during the year, at which time
DePuy would not be obligated for payments beyond the quarter in which it stopped
selling the GenSci products.
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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
------ ----------- ------
10.34 Employment Agreement with Arthur A. Alfaro
Dated September 13, 1999 E-1
10.35 Change in Control Agreement by and between
Osteotech and Arthur A. Alfaro E-12
10.36 Settlement Agreement and General Release
Between DePuy AcroMed, Inc. and DePuy, Inc.
and Osteotech, Inc. E-22
27.0 Financial Data Schedule E-32
(b) Reports on Form 8-K
On September 13, 1999, we filed with the Commission a current report on
Form 8-K to announce that Arthur A. Alfaro had joined us in the newly
created new position of President and Chief Operating Officer. Mr. Alfaro
was also elected to the Company's Board of Directors. He was formerly
President of the Thoracolumbar Division for Medtronic Sofamor Danek, Inc.
On September 24, 1999, we filed with the Commission a current report on
Form 8-K to announce that we did not expect third quarter 1999 revenue and
earnings results to meet analysts' consensus estimates for the quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Osteotech, Inc
------------------------------
(Registrant)
Date: November 12, 1999 By: /s/ Richard W. Bauer
------------------------------
Richard W Bauer
Chief Executive Officer
Date: November 12, 1999 By: /s/ Michael J. Jeffries
------------------------------
Michael J Jeffries
Executive Vice President
Chief Financial Officer
19
EXHIBIT 10.34
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into the 13th day of September 1999 between
OSTEOTECH, INC., a Delaware corporation (the "Corporation") and Arthur A. Alfaro
(the "Employee").
WITNESSETH:
WHEREAS, the Corporation desires to employ the Employee as its President
and Chief Operating 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
Operating Officer of the Corporation upon the terms and conditions set forth
herein.
2. Term. Unless sooner terminated in accordance with this Agreement, the
term of this Agreement and the term of employment of the Employee shall be for
two (2) years commencing on the Effective Date hereof and shall be automatically
renewable for successive additional two (2) year terms unless at least three (3)
months prior to the expiration of the initial two-year period or any subsequent
two-year term the Corporation terminates this Agreement by written notice to the
Employee, whereupon this Agreement shall be terminated at the end of the
applicable two-year period (with such initial two year term and any two year
renewal thereof, unless sooner terminated in accordance with this Agreement
being the "Term of Employment").
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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 Chief Executive Officer and the Board 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.
4(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.
4(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.
5.1(a) 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 Seventy-Five
Thousand Dollars ($275,000) 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.
5.1(b) During the Term of Employment, on an annual basis, Employee may be
entitled to a bonus and stock option grants as determined by the Board of
Directors of the Corporation based on Employee's performance. In calendar year
1999, the employee shall receive a Twenty Thousand Dollar ($20,000) signing
bonus and a performance bonus of Fifty Thousand Dollars ($50,000)
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100% payable in December 1999. Thereafter, there will be no further guaranteed
or minimum bonus and the award, if any, will be within the sole discretion of
the Board of Directors.
5.1(c). During the Term of Employment, the Employee shall be entitled to
family medical and dental insurance coverage, short and long term disability
coverage, eligibility for participation in the Corporation's 401K plan and to
such other fringe benefits such as life insurance as are made available from
time to time to the executives of the Corporation, including four (4) weeks
vacation per calendar year.
5.1(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.
5.1(e). The Corporation shall reimburse Employee for other reasonable
expenses during the Term of Employment as follows:
(i) Reasonable travel and lodging expenses to locate suitable housing
accommodations in the State of New Jersey.
(ii) Reasonable expenses for packing, shipping, storage and unpacking
of personal household goods in connection with Employee's relocation to New
Jersey.
(iii) Twice a month weekend travel for Employee between New Jersey and
Memphis during the relocation period. Normal and customary expenses for
house hunting trips for his family to find and purchase a house in New
Jersey.
(iv) Allowance for incidental moving expenses of Five Thousand
($5,000) dollars.
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5.1(f). The Corporation shall provide Employee with suitable housing,
within reasonable commuting distance of the Corporation's offices, until
permanent housing accommodations are acquired and inhabited or for up to twelve
(12) months, whichever period is shorter.
5.1(g). In the event that legal action is brought against Employee for
breach of the non-compete provisions of the Employment Agreement by and between
Medtronic Sofamor Danek, Inc. and Employee, the Corporation (Osteotech) agrees
to pay the reasonable legal fees and incidental expenses for defending such
legal action. In the event that any verdict or settlement is awarded against
Employee for any breach, the Corporation agrees to pay that portion for which
the Employee is liable.
5.2 Corporation agrees to grant to Employee effective October 1, 1999 a
stock option agreement to purchase two hundred thousand (200,000) shares of
common stock with the per share price based on the closing price of the stock on
October 1, 1999. One-fourth (1/4) of the option shall vest one year from the
effective date and one-fourth (1/4) shall vest thereafter on each anniversary of
the effective date of this Agreement 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 called a "Termination
For Cause") by giving the Employee notice
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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 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 twelve (12) months from date of termination and his Base Salary for an
additional twelve (12) months or in the latter case until Employee obtains
comparable employment, whichever occurs sooner, plus all bonus payouts made
prior to 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 as long as you are actively seeking
employment) provided in Section 5.1(c) for twenty-four (24) months following
such termination or until Employee obtains comparable employment, whichever
occurs sooner.
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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.
10. Effect of Termination of Employment.
10(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;
(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.
10(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.
11. General Provisions
11(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.
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11(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.
11(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 as 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.
11(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 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
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<PAGE>
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.
13. Protection of Information.
13(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
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purpose of any person, firm, corporation or entity, other than the Corporation.
13(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 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
the period of time Employee is paid salary and benefits as outlined in Section
8, 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
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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 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: Arthur A. Alfaro
10201 Shrewsbury Run West
Collierville, TN 38017
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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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
Corporation: OSTEOTECH, INC.
/s/ Richard W. Bauer
-------------------------------
By: Richard W. Bauer
Title: Chief Executive Officer
Employee: /s/ Arthur A. Alfaro
-------------------------------
Arthur A. Alfaro
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EXHIBIT 10.35
CHANGE IN CONTROL AGREEMENT
AGREEMENT by and between Osteotech, Inc., a Delaware corporation (the
"Company"), and Arthur A. Alfaro (the "Executive"), dated as of the 13th day of
September, 1999.
The Board of Directors of the Company (the "Board") has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change in Control (as defined in Section
1(e)) of the Company. The Board believes it is imperative to diminish the
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change in Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change in Control, and to provide the
Executive with compensation and benefits arrangements upon a Change in Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and that such compensation and benefits are competitive with
those of other corporations. Therefore, in order to accomplish these objectives,
the Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions.
For purposes of this Agreement:
(a) An "Affiliate" means any member of the same affiliated group (within
the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended
(the "Code"), determined without regard to Section 1504(b) of the Code), that
includes the Company.
(b) The Executive's "Base Period Compensation" is (i) the average annual
"compensation" (as defined below) which was includible in his gross income for
his base period (i.e., his most recent five taxable years or such lesser number
of taxable years or portions thereof during which the Executive performed
services for the Company ending before the date of the Change in Control); and
(ii) if Executive's base period includes a short taxable year or less than all
of a taxable year, compensation for such short or incomplete taxable year shall
be annualized for the base period. (In annualizing compensation, the frequency
with which payments are expected to be made over an annual period shall be taken
into account. Thus, any amount of compensation for such a short or incomplete
taxable year that represents a payment that would not be made more than once per
year shall not be annualized). For purposes of this definition, Executive's
"compensation" is the compensation which was payable to him by the Company or an
Affiliate, determined without regard to the following Sections of the Code: 125
(cafeteria plans), 402(a)(8) (cash or deferred arrangements), 402(h)(1)(B)
(elective contributions to simplified employee pensions), and, in the case of
employer contributions made pursuant to a salary reduction agreement, 403(b)
(tax sheltered annuities).
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(c) The "Commencement Date" shall mean the first date during the Change in
Control Period (as defined in Section 1(d)) that a Change in Control (as defined
in Section 1(e)) occurs.
(d) The "Change in Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the first anniversary of the date hereof, and on
each successive annual anniversary of the date hereof (such date and each annual
anniversary thereof shall be hereinafter referred to as the "Renewal Date"), the
Change in Control Period shall be automatically extended so as to terminate
three years from such Renewal Date, unless at least sixty (60) days prior to the
Renewal Date the Company shall give notice to the Executive that the Change in
Control Period shall not be so extended.
(e) "Change in Control" shall mean:
(i) A "Board Change" which, for purposes of this Agreement, shall have
occurred if a majority of the seats (not counting vacant seats) on the
Company's Board were to be occupied by individuals who were neither (A)
nominated by a majority of the Incumbent Directors nor (B) appointed by
directors so nominated. An "Incumbent Director" is a member of the Board
who has been either (A) nominated by a majority of the directors of the
Company then in office or (B) appointed by directors so nominated, but
excluding, for this purpose, any such individual whose initial assumption
of office occurs as a result of either an actual or threatened election
contest (as such term is used in Rule 14a-11 of Regulation 14A promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
or other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board; or
(ii) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person")
of beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of a majority of the then outstanding voting securities
of the Company (the "Outstanding Company Voting Securities"); provided,
however, that the following acquisitions shall not constitute a Change in
Control: (A) any acquisition by the Company, or (B) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company, or (C) any public
offering, private placement or other issuance by the Company of its voting
securities; or
(iii) A merger or consolidation of the Company with another entity in
which neither the Company nor a corporation that, prior to the merger or
consolidation, was a subsidiary of the Company, shall be the surviving
entity; or
(iv) A merger or consolidation of the Company following which (A) the
Company or a corporation that, prior to the merger or consolidation, was a
subsidiary of the Company shall be the surviving entity and (B) a majority
of the Outstanding Company Voting Securities is owned by a Person or
Persons who were not beneficial owners (within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act) of a majority of the Outstanding
Company Voting Securities immediately prior to such merger or
consolidation; or
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(v) A voluntary or involuntary liquidation of the Company; or
(vi) A sale or disposition by the Company of at least 80% of its
assets in a single transaction or a series of transactions (other than a
sale or disposition of assets to a subsidiary of the Company in a
transaction not involving a Change in Control or a change in control of
such subsidiary).
2. Employment Period.
(a) Term of Employment. Commencing on the Commencement Date and ending on
the first anniversary of such date (the "Employment Period"), the Executive
hereby agrees to remain in the employ of the Company, and the Company hereby
agrees to continue the Executive in its employ, in accordance with, and subject
to, the terms and provisions of this Agreement, in the capacity of President and
Chief Operating Officer responsible for, among other things, directing
Operations, Sales, Marketing, Research and Development functions of the Company
and, subject to the general supervision of the Chief Executive Officer, and such
other duties and responsibilities as are not inconsistent with the express terms
of this Agreement.
(b) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities shall be in accordance with Section 2(a) hereof
and (B) the Executive's services shall be performed at the location where
the Executive was employed immediately preceding the Commencement Date or
any office which is the headquarters of the Company and is less than
fifteen (15) miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive
agrees to devote reasonable attention and time during normal business hours
to the business and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive hereunder, to use
the Executive's reasonable best efforts to perform faithfully and
efficiently such responsibilities. During the Employment Period it shall
not be a violation of this Agreement for the Executive to (A) serve on
corporate, civic or charitable boards or committees, (B) deliver lectures,
fulfill speaking engagements or teach at educational institutions, and (C)
manage personal investments, so long as such activities do not interfere
with the performance of the Executive's responsibilities as an employee of
the Company in accordance with this Agreement.
(c) Compensation.
(i) Base Salary. During the Employment Period, the Executive shall
receive an annual base salary ("Annual Base Salary") in an amount at least
equal to that which he was receiving immediately prior to the Change in
Control.
(ii) Incentive, Savings Retirement and Stock Option Plans. During the
Employment Period, the Executive shall be entitled to participate in all
incentive, savings, retirement and stock option plans, practices, policies
and programs applicable generally to other peer executives of the
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<PAGE>
Company, but in no event shall such plans, practices, policies and programs
provide the Executive with opportunities and benefits less favorable than
those in effect and applicable to the Executive immediately preceding the
Change in Control.
(iii) Benefit Plans. During the Employment Period, the Executive
and/or the Executive's family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit
plans, practices, policies and programs provided by the Company (including,
without limitation, medical, prescription, dental, disability, salary
continuance, employee life, group life, accidental death and travel
accident insurance plans and programs) to the extent applicable generally
to other peer executives of the Company, but in no event shall such plans,
practices, policies and programs provide the Executive with benefits which
are less favorable than such plans, practices, policies and programs in
effect and applicable to the Executive immediately preceding the Change in
Control.
(iv) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable employment
related expenses incurred by the Executive in accordance with the policies,
practices and procedures of the Company which shall not be less favorable
than those in effect immediately preceding the Change in Control.
(v) Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings, and to exclusive personal secretarial and other assistance,
which shall be at least equal to that provided to the Executive by the
Company immediately preceding the Change in Control.
(vi) Vacation. During the Employment Period Executive shall be
entitled to paid vacations at least equal to that to which the Executive
was entitled immediately preceding the Change in Control.
(vii) Options. Upon a Change in Control all options to purchase shares
of the Company's Common Stock held by Executive (the "Options"), whether or
not vested, shall vest and become exercisable in accordance with their
terms immediately prior to the effective date of such Change in Control
(and Executive will be provided a reasonable opportunity to exercise such
Options prior to such effective date), notwithstanding anything to the
contrary contained in the option certificates or any plan covering the
Options collectively, the ("Plan"). Upon a Change in Control all Options
held by Executive shall be exercisable in accordance with their terms for
such securities or property to which Executive would have been entitled had
Executive exercised such Options prior to such Change in Control,
notwithstanding anything to the contrary contained in any Plan covering
such Options. Upon a Change in Control pursuant to Section 1(e)(iii) or
1(e)(v), all Options held by Executive, whether or not vested, shall
terminate as of the effective date of such Change in Control to the extent
not previously exercised, provided that Executive shall have been provided
with a reasonable opportunity to exercise such options prior to such
effective date, notwithstanding anything to the contrary contained in the
Plan covering such Options.
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<PAGE>
3. Termination of Employment.
(a) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 3(d) of its intention to terminate the Executive's employment. In such
event, the Executive's employment with the Company shall terminate effective on
the 30th day after receipt of such notice by the Executive (the "Disability
Effective Date"), provided that, within the thirty (30) days after such receipt,
the Executive shall not have returned to full-time performance of the
Executive's duties. For purposes of this Agreement, "Disability" shall mean a
physical or mental condition which prohibits Executive from performing his
duties hereunder for a continuous six (6) month period or for a total of six (6)
months during any eighteen (18) month period.
(b) Just Cause. Executive's employment may be terminated by the Company for
Just Cause. For purposes hereof, "Just Cause" shall mean:
(i) The commission by Executive of a willful act of material fraud in
the performance of his duties on behalf of the Company; or
(ii) The conviction of Executive for commission of a felony in
connection with the performance of his duties on behalf of the Company.
Prior to termination for Just Cause, the Board shall by a majority vote
have declared that Executive's termination is for Just Cause specifically
stating the basis for such determination.
(c) Good Reason. Executive's employment during the Employment Period may be
terminated by Executive with Good Reason. For purposes hereof, "Good Reason"
shall mean:
(i) The assignment to Executive of any duties of lesser status,
dignity and character than his duties immediately prior to the Change in
Control or a substantial reduction in the nature or status of his
responsibilities from those in effect immediately prior to the Change in
Control;
(ii) Any failure by the Company to comply with the provisions of
Section 2(c);
(iii) Relocation of Executive's office to a location which is more
than fifteen (15) miles from the location in which Executive principally
worked for the Company immediately prior to the Change in Control; or his
being required by the Company in order to perform duties of substantially
equal status, dignity and character to those duties he performed
immediately prior to the Change in Control to travel on the Company's
business to a substantially greater extent than is consistent with his
business travel obligations immediately prior to a Change in Control;
(iv) The failure by the Company to comply with Section 6(a), provided
that the successor has received at least twenty (20) days' prior written
notice from the Company or the Executive of the requirements of Section
6(a); or,
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(v) The voluntary termination by the Executive for any reason at any
time after the 180th day immediately following a Change in Control.
For purposes of this Sections 3(c) any good faith determination of "Good
Reason" made by the Executive shall in all cases be conclusive; provided,
however, that for purposes of Sections 3(c)(i), (ii), (iii) and (iv), Executive
shall have given the Company prior written notice thereof and not less than
twenty (20) days to cure such "Good Reason".
(d) Notice of Termination. Any termination by the Company for Just Cause or
by the Executive for Good Reason shall be communicated by Notice of Termination
to the other party hereby given in accordance with Section 7. For purposes of
this Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon, (ii)
to the extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) specifies the Date of
Termination (as defined below) (which date shall be not more than thirty (30)
days after the giving of such notice). The failure by the Executive or the
Company to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Just Cause shall not waive any right
of the Executive or the Company hereunder or preclude the Executive or the
Company from asserting such fact or circumstance in enforcing the Executive's or
the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means the date the Company
or the Executive specifies as the date of termination in the Notice of
Termination or if the Executive's employment is terminated by reason of death or
Disability, the Date of Termination shall be the date of death of the Executive
or the Disability Effective Date, as the case may be.
4. Obligations of Company upon Termination.
(a) Termination by Company for Just Cause. If at any time on or prior to
the 180th day following the Commencement Date, the Executive's employment shall
be terminated by the Company for Just Cause, then, Executive shall receive all
then accrued pay, benefits, executive compensation and fringe benefits,
including (but not limited to), pro rata bonus and incentive plan earnings
through the Date of Termination, plus the amount of any compensation previously
deferred by the Executive, in each case to the extent theretofore unpaid. The
foregoing payments and benefits shall be deemed compensation payable for the
duties to be performed by Executive pursuant to Section 2. If at any time after
the 180th day following the Commencement Date, the Executive's employment shall
be terminated by the Company for Just Cause, then the Executive shall be
entitled to the payment and benefits described in Section 4(b), below.
(b) Termination by Executive for Good Reason; Termination by the Company at
Any Time Other Than For Just Cause; Termination by the Company For Just Cause
After the 180th Day Following the Commencement Date; Termination Upon Expiration
of the Employment Period. If (i) the Company shall terminate the Executive's
employment at any time other than for Just Cause; or, (ii) the Company shall
terminate Executive's employment for Just Cause after the 180th day following
the Commencement Date; or, (iii) the Executive shall terminate his employment at
any time for Good Reason; or (iv) the Executive's employment
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with the Company shall terminate upon the expiration of the Employment Period,
in addition to any other sums, benefits or compensation otherwise payable to him
by the Company:
(i) Executive shall receive, no later than the next pay period
following the Date of Termination, all then accrued pay, benefits,
executive compensation and fringe benefits, including (but not limited to),
his pro rata bonus and incentive plan earnings accrued through the Date of
Termination, plus the amount of any compensation previously deferred by the
Executive, in each case to the extent theretofore unpaid;
(ii) Executive shall receive, at the Company's expense, medical,
health and disability benefits which are substantially similar to the
benefits the Company is providing him immediately preceding the Change in
Control for a period of thirty-six (36) months immediately following the
Date of Termination;
(iii) Executive shall receive an amount equal to one dollar less than
the sum of (A) 300% of his Base Period Compensation, plus (B) interest
thereon for the period beginning on the Commencement Date through the date
or dates of payment, at a rate equal to 120% of the applicable Federal
rate, determined under Section 1274(d) of the Code, compounded
semiannually.
(iv) Except in the case of a termination by the Company for Just Cause
or a voluntary termination by the Executive in accordance with Section
3(c)(v), Executive shall receive the balance of all pay, benefits,
compensation and fringe benefits, including (but not limited to), pro rata
salary, bonus and incentive plan earnings payable through the remainder of
the Employment Period; and,
(v) Except in the case of a termination by the Company for Just Cause
or a voluntary termination by the Executive in accordance with Section
3(c)(v), Executive shall be entitled to a private office with furnishings
and secretarial and other reasonable services for the period beginning with
the Date of Termination and ending on the first anniversary thereof.
The foregoing payments and benefits shall be deemed compensation payable
for duties to be performed by Executive pursuant to Section 2. Except for the
payments and benefits described in Sections 4(b)(i), 4(b)(ii), and 4(b)(v) the
sums due pursuant to this Section 4(b) shall be paid in one lump-sum payable no
later than sixty (60) days after the Date of Termination. All sums of money due
hereunder shall be subject to appropriate withholding and statutory
requirements. Executive shall not be required to mitigate the amount of any
payment provided for in this Section 4(b) by seeking other employment or
otherwise. Notwithstanding anything stated in this Section 4(b) to the contrary,
Company shall not be required to provide medical, health and/or disability
benefits to the extent such benefits would duplicate benefits received by
Executive in connection with his employment with any new employer.
The determination of the amounts and benefits payable to the Executive
pursuant to Sections 4(b)(i), 4(b)(iii) and 4(b)(iv) (the "Combined Amount")
shall first be made by the Company in good faith, and the Company shall notify
the Executive of the Combined Amount as soon as possible after the Date of
Termination, but in no event later than forty-five (45) days prior to the
payment date of the sums due under Section 4(b)(iii) and 4(b)(iv). If
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the Executive disagrees with the Company's determination of the Combined Amount,
then within ten (10) days after the date of such notification to the Executive,
the Executive shall notify the Company of such disagreement, the extent of such
disagreement (the "Disputed Amount") and the amount that is undisputed (the
"Undisputed Amount"). The Undisputed Amount shall be paid in one lump-sum
payable sixty (60) days after the Date of Termination, subject to appropriate
withholding and statutory requirements. If the Company disagrees with the
Executive's determination of the Combined Amount, then within ten (10) days
after the date of such notification to the Company, it shall furnish Executive
with a written appraisal of the Combined Amounts (the "First Appraisal")
prepared by an independent certified public accountant regularly employed by the
Company (the "First Appraiser"). If Executive disagrees with the amounts
determined pursuant to the First Appraisal, then within ten (10) days after
notice of the First Appraisal, he shall furnish the Company with a written
appraisal of the Combined Amount (the "Second Appraisal") prepared by an
independent certified public accountant (the "Second Appraiser"). Within ten
(10) days after notice of the Second Appraisal, the First Appraiser and the
Second Appraiser shall meet and shall endeavor, within ten (10) days of such
meeting, to agree upon the Combined Amount and notify the Company and the
Executive thereof; provided, however, that if they are unable to agree upon the
Combined Amount, then, within (10) days of such meeting, they shall engage an
independent certified public accountant (the "Third Appraiser") and notify the
Company and the Executive of their engagement of the Third Appraiser, whose
determination of the Combined Amount, if any, shall be final and conclusive and
binding on the Company and the Executive. Within ten (10) days after notice of
such engagement, the Third Appraiser shall determine the Combined Amount and
notify the Company and the Executive of his determination (the "Final Amount").
Except for the benefits described in Sections 4(b)(ii) and 4(b)(v), the Final
Amount, as adjusted by any prior payment of the Undisputed Amount or any payment
made pursuant to Section 4(b)(i), shall be paid in one lump-sum payable on the
later of (i) sixty (60) days after the Date of Termination, or (ii) twenty (20)
days after notification of the Final Amount, in either case subject to
appropriate withholding and statutory requirements; provided, however, that
notwithstanding the foregoing, the Executive shall have the option to decline
the benefits described in Section 4(b)(ii) no later than ten (10) days prior to
such payment date.
(c) Disability or Death. If the Executive's employment during the
Employment Period is terminated at any time by reason of the Executive's
Disability or death, this Agreement shall terminate without further obligations
to the Executive, his estate or legal representative, as the case may be, except
that the Company shall (i) pay to Executive within sixty (60) days after the
Date of Termination (A) amounts due and owing under Sections 4(b)(i) and
4(b)(iii) and (B) Executive's Annual Base Salary for the lesser of the six (6)
month period following the Date of Termination or the remaining portion of the
Employment Period, reduced in the case of Disability by amounts received by
Executive under any employee disability policy maintained by the Company for the
benefit of Executive and (ii) provide Executive, his estate or legal
representative, as the case may be, with the benefits provided by Section
4(b)(ii).
5. Nonexclusivity of Rights.
Nothing in this Agreement shall prevent or limit the Executive's continuing
or future participation in any plan, program, policy or practice provided by the
Company and for which the Executive may qualify, nor shall anything herein limit
or otherwise affect such rights as the Executive may
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have under any contract or agreement with the Company. Amounts which are vested
benefits or which the Executive is otherwise entitled to receive under any plan,
policy, practice or program of or any contract or agreement with the Company at
or subsequent to the Date of Termination shall be payable in accordance with
such plan, policy, practice or program or contract or agreement, except as
explicitly modified by this Agreement.
6. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or indirect by
purchase, merger, consolidation or otherwise, to all or substantially all of the
business and/or assets of the Company) to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place.
(b) This Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
7. Notices. All notices, requests, demands and other communications
provided for by this Agreement shall be in writing and shall be deemed to have
been given when delivered by hand and acknowledged by receipt or when mailed at
any general or branch United States Post Office enclosed in a registered or
certified postpaid envelope and addressed to the address of the respective party
stated below or to such changed address as the party may have provided to the
other party by notice in accordance herewith.
If to the Company:
Osteotech, Inc.
51 James Way
Eatontown, New Jersey 07724
Attention: Corporate Secretary
With a copy to:
Dorsey & Whitney LLP
250 Park Avenue
New York, NY 10177
Attn: Kevin T. Collins, Esq.
If to the Executive:
Arthur A. Alfaro
10201 Shrewsbury Run West
Collierville, TN 38017
8. Miscellaneous. This Agreement may not be waived, modified or discharged
unless such waiver, modification or discharge is agreed to in writing and signed
by Executive and such officers of the Company as may be specifically designated
by its Board. The failure of either party to this Agreement to object to any
breach by the other party or the non-breaching party's conduct or conduct
forbearance shall not constitute a waiver of that party's rights to enforce this
Agreement. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any
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condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of any subsequent breach by such other party or any
similar or dissimilar provisions or conditions at the same or any prior or
subsequent time. Except for that certain employment agreement dated as of the
13th day of September, 1999 and entered into by and between the Company and the
Executive (the "Employment Agreement"), no agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
The Company and Executive agree that to the extent any of the terms of the
Employment Agreement and this Agreement conflict, it is their intention that
Executive in each case receive the benefits under that agreement which is most
favorable to the Executive. In this regard, it is expressly agreed that the
terms of this Agreement that relate to a Change in Control (as defined in this
Agreement) shall be controlling over the terms of the Employment Agreement that
relate to a Change in Control. The validity, interpretation, construction and
performance of this Agreement shall be governed by the internal laws of the
State of New Jersey, without giving any effect to any conflict of laws.
9. Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
10. Survival. The obligations of the parties under this Agreement shall
survive the term of this Agreement.
11. EMPLOYMENT PRIOR TO CHANGE IN CONTROL. THE EXECUTIVE AND THE COMPANY
ACKNOWLEDGE THAT, EXCEPT AS OTHERWISE PROVIDED IN THE EMPLOYMENT AGREEMENT, OR
ANY RENEWAL, EXTENSION OR REPLACEMENT THEREOF, THE EMPLOYMENT OF THE EXECUTIVE
BY THE COMPANY IS, AND PRIOR TO THE COMMENCEMENT DATE WILL CONTINUE TO BE, "AT
WILL" AND, PRIOR TO THE COMMENCEMENT DATE, MAY BE TERMINATED BY EITHER THE
EXECUTIVE OR THE COMPANY AT ANY TIME UPON SIXTY (60) DAYS' PRIOR TO WRITTEN
NOTICE. MOREOVER, IF PRIOR TO THE COMMENCEMENT DATE, THE EXECUTIVE'S EMPLOYMENT
WITH THE COMPANY TERMINATES, THEN THE EXECUTIVE SHALL HAVE NO FURTHER RIGHTS
UNDER THIS AGREEMENT.
OSTEOTECH, INC.
By: /s/ Richard W. Bauer
---------------------------
Name: Richard W. Bauer
Title: Chief Executive Officer
and
By: /s/Arthur A. Alfaro
---------------------------
Name: Arthur A. Alfaro
Title: President and Chief
Operating Officer
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EXHIBIT 10.36
CONFIDENTIAL
SETTLEMENT AGREEMENT AND GENERAL RELEASE
WHEREAS, the parties hereto, DePuy AcroMed, Inc., and DePuy, Inc.
(collectively "DePuy") and Osteotech, Inc. ("Osteotech"), desire to resolve by
settlement the litigation styled Osteotech Inc., Defendant, Counterclaim
Plaintiff and Third-Party Plaintiff v. DePuy Motech, Inc. and DePuy, Inc.,
pending as third-party claims in civil action No. CV99-10111-MRP(CTX) (formerly
CV9868 AHS(EEX)) in the United States District Court for the Central District of
California (the "Litigation"); and
WHEREAS, the parties desire to resolve by settlement of the Litigation all
disputes known or posited currently to exist between them, and those that may be
reasonably contemplated, relating to DePuy's sale of the Dynagraft products
which are alleged in the Litigation to infringe United States Patent Nos.
5,290,558 and 5,284,655, Dynagraft Gel and Dynagraft Putty (the "accused
products" or the "accused Dynagraft products"). The "accused products" do not
include Dynagraft DBM Granules, Dynagraft Matrix 45 or Dynagraft Matrix 30.
NOW, THEREFORE, IN CONSIDERATION OF the mutual covenants and agreements set
forth herein and other good and valuable consideration, DePuy and Osteotech
MUTUALLY SPECIFY AND AGREE THAT:
1. Osteotech agrees to execute and file in the form of attached Exhibit A a
stipulated dismissal with prejudice of all claims and related requests for
compensatory and exemplary damages, attorneys' fees, costs and interest expenses
Osteotech has asserted, could have asserted or sought leave to assert against
DePuy in the Litigation arising from or related to DePuy's
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<PAGE>
alleged infringement of United States Patent Nos. 5,290,558 and 5,284,655 caused
by or related to DePuy's sale of the accused Dynagraft products. Upon such
dismissal DePuy will no longer participate in the Litigation, except as required
by law. That dismissal shall not be filed with the Court until the time of any
public disclosure by Osteotech pursuant to paragraph 13 below or 4:00 p.m. in
New York on November 11, 1999, whichever is earlier.
2. Osteotech hereby releases, acquits, discharges and covenants not to sue
DePuy AcroMed, Inc., DePuy, Inc., DePuy Orthopaedics, Inc., Johnson & Johnson
and their affiliates, parents, subsidiaries, officers, directors, shareholders,
employees, agents and attorneys (collectively the "DePuy Parties") and any
physicians and hospitals from any and all claims, causes of action, rights,
allegations, liabilities or damages whatsoever arising out of the alleged
infringement by DePuy or any such physicians or hospitals of the United States
Patent Nos. 5,290,558 and 5,284,655 patents and any other applicable United
States patents owned by Osteotech caused by or related to DePuy's sale or
promotion of the accused Dynagraft products for the time period through February
4, 2000.
3. Osteotech hereby releases, acquits, discharges and covenants not to sue
the DePuy Parties and any physicians and hospitals from any and all claims,
causes of action, rights, allegations, liabilities or damages whatsoever
relating to or arising from DePuy's sale or promotion of the accused Dynagraft
products for the time period through February 4, 2001 based upon heretofore
undisclosed existing Osteotech inventions for which patent protection has been
or may be obtained ("current patent applications"). The release contained in
this paragraph 3 and in the previous paragraph 2 shall not apply to or be
effective with respect to any sale or promotion of the accused Dynagraft
products by any of the DePuy Parties after February 4, 2001 or the sale or
promotion of any other products by any of the DePuy Parties at any time.
E-23
<PAGE>
4. The DePuy Parties hereby release, acquit, discharge and covenant not to
sue Osteotech, its affiliates, subsidiaries, officers, directors, shareholders,
employees, agents and attorneys (collectively, the "Osteotech Parties") from any
and all claims, causes of action, rights, allegations, liabilities or damages
whatsoever which any of the DePuy Parties has asserted, could have asserted or
sought leave to assert against any of the Osteotech Parties in the Litigation
arising out of or related to any sale or promotion of the accused Dynagraft
products by any of the DePuy Parties.
5. This Agreement is entered into solely for the purpose of avoiding the
burden and expense of further litigation and neither it, nor any statements or
recitations in it, nor any negotiations leading up to it, is intended to be, or
should be construed as, an admission of fact or liability on the part of any
party.
6. In connection with any legal or administrative proceeding related to the
accused Dynagraft products, the DePuy Parties will not contest Osteotech's
claims that United States Patent Nos. 5,290,558 and 5,284,655 are valid and
infringed by the accused Dynagraft products.
7. Except as specifically provided herein, the parties expressly agree and
understand that this Settlement Agreement does not extend to any other person or
entity (whether a party to the present litigation or not, or that person's or
entity's agents, servants, or attorneys), and that it does not affect
Osteotech's rights against any other person or entity (whether a party to the
present litigation or not, or that person's or entity's agents, servants, or
attorneys), that Osteotech may charge with infringement of United States Patent
Nos. 5,290,558 and/or 5,284,655. Specifically, by releasing the DePuy Parties
and physicians and hospitals in this agreement, Osteotech is not releasing
GenSci Regeneration Laboratories, Inc. or its parents, subsidiaries or
E-24
<PAGE>
affiliated companies ("GenSci") or waiving any of its claims against GenSci, or
any other person or entity.
8. The terms of this Confidential Settlement Agreement shall be governed,
construed and enforced in accordance with the laws of the State of New Jersey,
without regard to contrary New Jersey conflict of laws provisions.
9. This Confidential Settlement Agreement shall be binding upon, and inure
to the benefit of, the parties hereto and their respective successors,
administrators and assigns.
10. Within ten (10) days of execution of this Confidential Settlement
Agreement by both parties, DePuy shall pay Osteotech the sum of Two Million
Dollars ($2,000,000.00) by delivery to Osteotech of a certified or cashier's
check or the wire transfer of such funds to an account designated by Osteotech.
11. In addition, DePuy shall pay Osteotech a further sum of One Million
Dollars ($1,000,000.00) as follows:
$250,000.00 on March 31, 2000;
$250,000.00 on June 30, 2000;
$250,000.00 on September 30, 2000; and
$250,000.00 on December 31, 2000.
However, with respect to the payments outlined in this paragraph, each of the
quarterly payments shall be payable only if DePuy sells some accused product
during the quarter ending on the date on which the payment is due. If DePuy
sells no accused product during a quarter, that quarterly payment is forgiven.
E-25
<PAGE>
12. The DePuy Parties agree to stop selling the accused products and any
other flowable product that contains demineralized osteogenic bone powder in a
polyhydroxy (e.g., Pluronic F127) carrier on the earlier of (a) February 4, 2001
or (b) the end of any quarter in which DePuy owes no payments under Paragraph
11. However, if Osteotech settles with GenSci and permits GenSci to continue to
manufacture and sell the accused products, then DePuy shall not be bound to stop
selling the accused products after February 4, 2001, but shall be free to sell
said products without further payment to Osteotech.
13. The parties understand and agree that the terms and conditions of this
Confidential Settlement Agreement and Release shall be kept strictly
confidential and shall not be disclosed, or caused to be disclosed, by Osteotech
or DePuy or by any of their officers, directors, employees, agents, attorneys,
or by any affiliates, or officers, directors, employees, agents, attorneys of
affiliates, except as set forth in this paragraph 13 and except as required by
court order or law or regulation. Osteotech shall make no disclosure until
either (a) 4:00 p.m. in New York on the day that DePuy has advised Osteotech
that DePuy will disclose the existence of this agreement to GenSci (DePuy agrees
to give Osteotech 24 hours advance notice of its intent to so disclose to GenSci
and Osteotech agrees DePuy may so disclose any terms of this agreement to
GenSci), (b) 4:00 p.m. in New York on November 11 or (c) the public disclosure
of the existence or terms of this agreement without the fault of the Osteotech
Parties, whichever is the earliest. At that time, Osteotech may make a public
disclosure consistent with the terms of this agreement. After a public
disclosure by Osteotech, DePuy may make public disclosures about this agreement
consistent with the terms of this agreement.
14. The persons executing this Settlement Agreement on behalf of Osteotech
and DePuy each represent and warrant that they have full and complete authority
to do so.
E-26
<PAGE>
15. DePuy agrees that the breach of this Settlement Agreement by any of the
Depuy parties resulting or arising from any such party continuing to sell
accused products or any other flowable product that contains demineralized
osteogenic bone powder in a polyhydroxy (e.g., Pluronic F127) carrier after
February 4, 2001, will result in irreparable harm to Osteotech and that
Osteotech shall have the right to seek immediate injunctive relief in the event
of such actual or threatened breach, in addition to any other legal remedies
that may be available to Osteotech, and without the need to post a bond.
Notwithstanding the foregoing, in any action for injunctive relief the DePuy
Parties do not waive or Limit their rights to assert defenses concerning the
unenforceability of paragraph 12 in the event the United States Patent Nos.
5,290,558 and 5,284,655 are declared non-infringed by the accused Dynagraft
products, invalid or unenforceable by a court of competent jurisdiction in a
final, non-appealable judgment.
16. The parties declare and represent: (1) No promise, representation,
inducement or agreement not expressed in this Confidential Settlement Agreement
has been made to either of them; (2) They are not relying on any promise,
representation, inducement or agreement in entering into this Confidential
Settlement Agreement except as expressly set forth in this Settlement Agreement;
(3) This Confidential Settlement Agreement (and its attached Exhibit A) contain
the entire agreement between the parties relating to its subject matter; (4) The
parties have consulted with counsel of their own choosing prior to entering into
this Confidential Settlement Agreement; and (5) The terms of this Confidential
Settlement Agreement are contractual and not mere recitals.
17. The parties agree to jurisdiction and venue in the United States
District Court for the District of New Jersey for all disputes arising out of
this Agreement.
E-27
<PAGE>
IN WITNESS HEREOF, this Settlement Agreement is executed by the
parties:
DATED: November 2, 1999 Dated: November 2, 1999
OSTEOTECH, INC. DEPUY ACROMED, INC.
By: /s/Richard W. Bauer By: /s/Earl R. Fender, Jr.
------------------------------ --------------------------------
Its: Chief Executive Officer Its: President
Dated: November 2, 1999
DEPUY, INC.
By: /s/Donald E. Knebel
--------------------------------
Its: Attorney
APPROVED AS TO SUBSTANCE AND FORM:
DORSEY & WHITNEY, LLP BARNES & THORNBURG
By: /s/Kevin T. Collins By: /s/Donald E. Knebel
------------------------------- --------------------------------
One of the Attorneys on One of the Attorneys on
behalf of Osteotech, Inc. behalf of DePuy AcroMed, Inc.
and DePuy, Inc.
E-28
<PAGE>
EXHIBIT A
ALAN H. BOON
BERGER, KAHN, SHAFTON, MOSS,
FIGLER SIMON & GLADSTONE
2 Park Place, Suite 650
Irvine, California 92614-8516
Telephone: (949) 474-1880
Facsimile: (949) 474-7265
Daniel P. Albers
Melissa A. Vallone
BARNES & THORNBURG
200 West Madison - Suite 2610
Chicago, IL 60606
Telephone: (312) 357-1313
Facsimile: (312) 214-8831
Attorneys for Third Party Defendants
DEPUY, INC. and DEPUY ACROMED, INC.
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
- ------------------------------------------
OSTEOTECH, INC., )
)
Defendant, Counterclaim )
Plaintiff and Third )
Party Plaintiff )
)
v. ) Case No.: CV-99-10111-MRP(CTX)
)
GENSCI REGENERATION SCIENCES, INC., )
)
DePuy MOTECH, INC. and DEPUY, INC., )
)
Third Party Defendants. )
- ------------------------------------------)
AGREED FINAL ORDER OF DISMISSAL
Defendant, Counterplaintiff and Third Party Plaintiff, Osteotech, Inc.
("Osteotech") and Third Party Defendants DePuy AcroMed, Inc., incorrectly sued
as DePuy Motech, Inc. and DePuy, Inc. (collectively, "DePuy"), through
settlement negotiations, having compromised and
E-29
<PAGE>
resolved their disputes, and the Court having been advised that a Settlement has
been reached by said parties;
IT IS HEREBY ORDERED THAT:
1. Osteotech's Third-Party Complaint against DePuy AcroMed, Inc. and DePuy,
Inc. is dismissed with prejudice;
2. In approving this Agreed Order, neither party admits any liability,
culpability nor fault with respect to the allegations in any pleading filed or
sought to be filed in this Action;
3. Each party shall bear its own costs, attorneys' fees and other expenses
relative to this Action; and
4. The Court finds pursuant to Federal Rule of Civil Procedure 54(b) that
there is no just reason to delay enforcement of or appeal from this Order and
the Court directs the clerk to enter judgment on this Order.
E-30
<PAGE>
IT IS SO ORDERED:
Dated:____________,1999 Entered: /s/ Mariana P. Pfaelzer
-----------------------------------
The Honorable Mariana P. Pfaelzer
United States District Court Judge
AGREED AS TO FORM:
/s/Mark Sullivan /s/Donald E. Knebel and /s/Daniel P. Albers
Attorneys for Defendant Attorneys for Third-Party Defendants
Third-Party Plaintiff DEPUY ACROMED, INC. (incorrectly sued as
OSTEOTECH, INC. DEPUY MOTECH, INC.) and DEPUY, INC.
Mark Sullivan Donald E. Knebel
Dorsey & Whitney LLP Daniel P. Albers
650 Town Center Drive Barnes & Thornburg
Suite 1850 2600 Chase Plaza
Costa Mesa, CA 92626 10 South LaSalle Street
(714) 662-7300 Chicago, Illinois 60603
(312) 357-1313
E-31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Osteotech, Inc. and Subsidiaries Consolidated Balance Sheet as of September 30,
1999 and the Condensed Consolidated Statement of Operations for the nine months
ended September 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 17,258,000
<SECURITIES> 3,946,000
<RECEIVABLES> 11,054,000
<ALLOWANCES> 134,000
<INVENTORY> 3,547,000
<CURRENT-ASSETS> 45,143,000
<PP&E> 42,191,000
<DEPRECIATION> 13,177,000
<TOTAL-ASSETS> 79,770,000
<CURRENT-LIABILITIES> 11,905,000
<BONDS> 3,624,000
0
0
<COMMON> 140,000
<OTHER-SE> 63,666,000
<TOTAL-LIABILITY-AND-EQUITY> 79,770,000
<SALES> 2,163,000
<TOTAL-REVENUES> 55,877,000
<CGS> 1,285,000
<TOTAL-COSTS> 41,882,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,000
<INCOME-PRETAX> 16,381,000
<INCOME-TAX> 6,631,000
<INCOME-CONTINUING> 9,750,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,750,000
<EPS-BASIC> .70
<EPS-DILUTED> .67
</TABLE>
