UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended March 31, 2000
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 - 14,240,162 shares as of April 30, 2000.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------------------------
ASSETS
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,618 $ 16,770
Short-term investments 1,942 3,946
Accounts receivable, net 12,143 15,095
Prepaid expenses, inventories
and other current assets 15,713 14,502
--------------------------------
Total current assets 48,416 50,313
Property, plant and equipment, net 37,804 33,995
Excess of cost over net assets of business
acquired, less accumulated amortization
of $2,185 in 2000 and $2,089 in 1999 3,586 3,682
Other assets 1,695 1,740
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Total assets $ 91,501 $ 89,730
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 12,844 $ 13,231
---------------------------------
Total current liabilities 12,844 13,231
Long-term debt 6,359 6,359
Other liabilities 717 734
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Total liabilities 19,920 20,324
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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 14,237,912
shares in 2000 and 14,194,126 shares in 1999 141 140
Additional paid-in capital 49,093 48,837
Accumulated other comprehensive loss (427) (376)
Retained earnings 22,774 20,805
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Total stockholders' equity 71,581 69,406
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Total liabilities and stockholders' equity $ 91,501 $ 89,730
====================================================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000 1999
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<S> <C> <C>
Net revenues:
Service $ 17,743 $ 17,857
Product 903 831
------------------------------------
18,646 18,688
Cost of services 5,629 5,454
Cost of products 582 403
------------------------------------
6,211 5,857
------------------------------------
Gross profit 12,435 12,831
Marketing, general and administrative expenses 8,132 6,374
Research and development expense 1,360 1,452
------------------------------------
9,492 7,826
------------------------------------
Income from litigation settlement 250
------------------------------------
Operating income 3,193 5,005
Interest and other income, net 306 250
------------------------------------
Income before income taxes 3,499 5,255
Income tax provision 1,530 2,097
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Net income $ 1,969 $ 3,158
====================================================================================================================================
Net income per share:
Basic $ .14 $ .23
Diluted $ .13 $ .22
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Shares used in computing net income per share:
Basic 14,215,046 13,721,763
Diluted 14,620,179 14,548,709
====================================================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000 1999
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<S> <C> <C>
Cash Flow From Operating Activities
Net income $ 1,969 $ 3,158
Adjustments to reconcile net income to
Net cash provided by operating activities:
Depreciation and amortization 918 766
Provision for doubtful accounts 3
Changes in assets and liabilities:
Accounts receivable 2,956 (1,285)
Prepaid expenses, inventories and
other current assets (1,289) (921)
Accounts payable and other liabilities (291) (1,080)
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Net cash provided by operating activities 4,266 638
Cash Flow From Investing Activities
Capital expenditures (4,665) (4,261)
Purchases of investments (1,942) (7,688)
Proceeds from sale of investments 3,946 1,946
Acquisition of business (1,467)
Increase in other assets (7) (162)
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Net cash used in investing activities (2,668) (11,632)
Cash Flow From Financing Activities
Proceeds from issuance of common stock 235 2,511
Income tax benefit related to stock options 22 2,657
Proceeds from issuance of notes payable 116
Principal payments on notes payable (268)
Principal payments on long-term debt
and obligations under capital leases (573)
Increase in other liabilities 171
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Net cash provided by financing activities 257 4,614
Effect of exchange rate changes on cash (7) (63)
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Net increase (decrease) in cash and cash equivalents 1,848 (6,443)
Cash and cash equivalents at beginning of period 16,770 15,119
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Cash and cash equivalents at end of period $ 18,618 $ 8,676
===================================================================================================================================
Supplementary cash flow data:
Cash paid during the period for interest $ 171 $ 16
Cash paid during the period for taxes 2 5
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 consolidated
financial position as of March 31, 2000 and December 31, 1999, and the
consolidated results of operations and the consolidated cash flows for the
three-month periods ended March 31, 2000 and 1999. The results of
operations for the respective interim periods are not necessarily
indicative of the results to be expected for the full year. The December
31, 1999 financial information has been derived from the audited financial
statements for the year ended December 31, 1999. The condensed consolidated
financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 1999 which were
included as part of Osteotech's Report on Form 10-K.
2. Inventories
Inventories consist of the following:
March 31, December 31,
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------
Raw Materials $1,360 $ 912
Finished Goods 2,709 2,493
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$4,069 $3,405
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3. Comprehensive Income
Comprehensive income for the three-month periods ended March 31, 2000 and
1999 was:
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------
Net income $ 1,969 $ 3,158
Currency translation adjustments (51) (151)
- --------------------------------------------------------------------------
Comprehensive Income $ 1,918 $ 3,007
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<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
4. Commitments and Contingencies
Litigation
GenSci Regeneration Laboratories, Inc. v. Osteotech, Inc.; Osteotech, Inc.
v. GenSci Regeneration Sciences, Inc.
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 the Company'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 the Company's patents
U.S. Patent Nos. 5,284,655 and 5,290,558 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. In August, 1998, the actions were consolidated into one case
before the United States District Court for the Central District of
California.
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.
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. Payments of
$2,000,000 and $250,000 were received in the fourth quarter of 1999 and the
first quarter of 2000, respectively. Payments of $250,000 each will be made
at the end of each quarter in 2000 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.
-6-
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
4. Commitments and Contingencies (continued)
In April, 2000, the Company reached an agreement with GenSci Labs, and
GenSci Sciences regarding certain legal matters in this lawsuit. They
include the dismissal with prejudice of all of GenSci's patent infringement
claims against the Company's proprietary Grafton(R) DBM products and an
agreement to stay any action in GenSci's recently filed anti-trust suit
against the Company until the completion of the trial of the Company's
patent infringement claims against GenSci. GenSci has also agreed to
dismiss all of the tort claims that it had brought against the Company in
the patent lawsuit without prejudice for the purpose of allowing GenSci to
transfer these claims to the anti-trust action that GenSci filed against
the Company on March 6, 2000. As a result of these dismissals, GenSci will
no longer have any claims against the Company in the patent action. The
only remaining claims in the patent action involve the Company's
allegations that GenSci has infringed certain of the Company's patents
through the sale of the Dynagraft(TM) Gel and Dynagraft(TM) Putty products.
This agreement was subject to court approval, which approval has been
received.
The Company will continue to vigorously prosecute the claims it has
asserted in this action to protect its products and intellectual property
to the fullest extent possible under the law.
GenSci Orthobiologics, Inc. v. Osteotech, Inc.
On March 6, 2000, GenSci Orthobiologics, Inc. ("GenSci") filed a complaint
in the United States District Court for the Central District of California
against Osteotech, alleging unlawful monopolization and attempting to
monopolize the market for demineralized bone matrix and for entering
agreements in restraint of trade, in violation of sections 1 and 2 of the
Sherman Antitrust Act and Section 3 of the Clayton Act; and for unlawful
and unfair business practices in violation of section 17200 of the
California Unfair Competition Law. GenSci has alleged that Osteotech has
monopoly power in the market for demineralized bone matrix products in the
United States, and has engaged in anticompetitive conduct by improperly
asserting its patents through patent infringement actions, seeking to have
the Food and Drug Administration remove certain of GenSci's products from
the market, restricting competitors' access to raw materials, interfering
with GenSci's arrangements to manufacture demineralized bone matrix
implants, interfering with GenSci's marketing and distribution
arrangements, and disparaging GenSci's products. GenSci seeks compensatory,
incidental, consequential, and punitive damages in an unspecified amount,
and injunctive relief to stop Osteotech from restricting the tissue banks
for which it processes tissue from (a) supplying processed demineralized
bone matrix to Osteotech's competitors and (b) distributing the
demineralized bone matrix implant products of Osteotech's competitors. Many
of these allegations were previously asserted by GenSci in its ongoing
patent litigation with Osteotech in the Central District of California
federal court.
-7-
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
4. Commitments and Contingencies (continued)
In April, 2000, the Company reached an agreement with GenSci whereby tort
claims that were dismissed from the patent litigation would be transferred
to this action and this action was stayed until the completion of the trial
of the Company's patent infringement claims against GenSci.
The Company believes the claims made in this lawsuit are without merit and
intends to vigorously defend against these claims.
University of Florida Tissue Bank, Inc. v. Osteotech, Inc.
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 the 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 U.S. 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.
Discovery on all of the claims asserted in this litigation is ongoing. The
Company believes that the claims made against it in this action are without
merit and will continue to vigorously defend against such claims.
Medtronic Sofamor Danek, Inc., Sofamor Danek L.P. and Sofamor Holdings,
Inc. v. Osteotech, Inc.
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, 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 counterclaims 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.
Discovery on all of the claims asserted in this litigation is ongoing. The
Company believes that the claims made against it in this action are without
merit and will continue to vigorously defend against such claims.
-8-
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
4. Commitments and Contingencies (continued)
Orthopaedic Bone Screw Products Liability Litigation
The Company remained a defendant in one previously reported state court
products liability action involving orthopaedic bone screws: Ponder v.
Synthes. This action has been discontinued.
"O" Company, Inc. v. Osteotech, Inc.
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 March, 1999, the court dismissed
with prejudice the plaintiff's negligence and strict liability claims.
Remaining are claims for breach of warranty, negligent misrepresentation,
fraud, and violation of the New Mexico Unfair Trade Practices Act. As to
those claims, the Company has moved for summary judgment on the basis that
all of the remaining claims are barred by their applicable statutes of
limitations. At plaintiff's request, the court permitted limited discovery
on the matters related to the statute of limitations issue, which is
ongoing.
The Company believes that the claims made against it in this action are
without merit and will continue to vigorously defend against such claims.
Litigation is subject to many uncertainties and management is unable to
predict the outcome of the pending suits and claims. 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. We are unable to
estimate the potential liability, if any, that may result from the pending
litigation and, accordingly, no provision for any liability (except for
accrued legal costs) has been made in the consolidated financial
statements.
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<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three-month periods ended March 31, 2000 and
1999:
<TABLE>
<CAPTION>
(dollars in thousands except per share data) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income available to common
Shareholders $ 1,969 $ 3,158
- -----------------------------------------------------------------------------------------------------------------------------------
Denominator for basic earnings per share:
Weighted average common shares outstanding 14,215,046 13,721,763
Effect of dilutive securities:
Stock options 404,792 826,541
Warrants 341 405
- -----------------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share 14,620,179 14,548,709
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Basic earnings per share $ .14 $ .23
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Diluted earnings per share $ .13 $ .22
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6. Operating Segments
Summarized in the table below is financial information for our reportable
segments for the three-month periods ending March 31, 2000 and 1999:
(dollars in thousands) 2000 1999
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Revenues:
Grafton(R)DBM Segment $ 10,104 $ 11,575
Base Tissue Segment 7,311 5,803
Other 1,231 1,310
Consolidated 18,646 18,688
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Operating income (loss):
Grafton(R)DBM Segment $ 2,628 $ 4,438
Base Tissue Segment 1,399 1,434
Other (834) (867)
Consolidated 3,193 5,005
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</TABLE>
7. Reclassifications
Certain prior year amounts have been reclassified to conform to the 2000
presentation.
-10-
<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 our Annual Report on Form 10-K for the year ended December 31, 1999,
constitute cautionary statements identifying factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results indicated
in such forward-looking statements. Other factors could also cause actual
results to vary materially from the future results indicated in such
forward-looking statements.
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
Results of Operations
Net Income
Consolidated net income in the first quarter of 2000 decreased to $1,969,000 or
$.13 diluted net income per share as compared to net income of $3,158,000 or
$.22 diluted net income per share in the first quarter of 1999.
The following is a discussion of factors affecting results of operations for the
three-month periods ended March 31, 2000 and 1999.
Net Revenues
Consolidated net revenues in the first quarter of 2000 were $18,646,000, or
approximately the same as consolidated revenues in the first quarter of 1999 of
$18,688,000. Domestic revenues, which consist principally of revenues from the
Grafton(R) DBM and Base Tissue segments, increased less than 1% in the first
quarter to $17,531,000 from $17,471,000 in the first quarter of 1999. Foreign
revenues decreased 8% in the first quarter to $1,115,000 compared to $1,217,000
in the first quarter of 1999. The decrease in foreign revenues resulted
primarily from decreased unit volume for ceramic and bovine products.
First quarter 2000 Grafton(R) DBM Segment revenues decreased 13% to $10,104,000
from $11,575,000 in the first quarter of 1999. Despite growth of approximately
6% at the hospital/end-user level, our revenues decreased as a result of our
clients' purchasing less Grafton(R) DBM products in the first quarter of 2000
than they needed to meet hospital/end-user demand because they used $1,500,000
of excess inventory purchased in December, 1999 ahead of a 4% price increase
which became effective January 1, 2000. Additionally, in the first quarter 1999,
our clients had purchased approximately $675,000 of inventory in excess of what
was required to meet hospital/end-user demand because they anticipated stronger
hospital/end-user sales in the second quarter of 1999. Our Grafton(R) DBM
products have faced increasing competition as more companies have developed
products with characteristics similar to Grafton(R) DBM. Although we expect that
this competition will continue in the future, we expect demand for our
Grafton(R) DBM products to grow as we introduce the product line into additional
markets in both the U.S. and Europe.
-11-
<PAGE>
Base Tissue Segment revenues increased 26% in the first quarter of 2000 to
$7,311,000 from $5,803,000 in the first quarter of 1999. The increase resulted
from an 18% increase in the number of donors processed for our clients, a 3.4%
base tissue processing fee increase effective January 1, 2000, a 16% increase in
bioimplant revenues and a 338% increase in OsteoPure(R) Femoral Head processing
revenues.
During the first three months of 2000 and 1999, two of our clients in the
Grafton(R) DBM and Base Tissue Segments accounted for 49% and 42%, and 56% and
37% of revenues, respectively.
Gross Profit
Gross profit as a percentage of revenues was 67% in the first quarter of 2000
and 69% in the first quarter of 1999. The decrease results from; (i) the
absorption of costs associated with additional allograft tissue processing
capacity which was added in 1999 to meet the anticipated growth in our allograft
tissue business, and (ii) the decline in revenues in the Grafton(R) DBM Segment,
which has a higher gross profit than other services and products.
Marketing, General and Administrative
Marketing, general and administrative expenses increased 28% to $8,132,000 in
the first quarter of 2000 compared to $6,374,000 in the same period last year.
The increase was primarily attributable to: (i) increased legal fees associated
with patent infringement lawsuits in both the Grafton(R) DBM Segment and the
Base Tissue Segments, and (ii) expanded marketing and promotional activities
associated with the bio-d(TM) threaded cortical bone dowel, which is included in
the Base Tissue Segment.
Research and Development
Research and development expenses decreased 6% to $1,360,000 in the first
quarter of 2000 compared to $1,452,000 in the same period in 1999 due to
decreased spending associated with development of metal implants and
biomaterials. First quarter 2000 research and development spending in the
Grafton(R) DBM and Base Tissue Segments remained at approximately the same level
as in the first quarter of 1999.
Operating Income
Consolidated operating income decreased 36% to $3,193,000 in the first quarter
of 2000 compared to $5,005,000 in the first quarter of 1999 primarily as a
result of decreased operating income in both the Grafton(R) DBM and Base Tissue
Segments.
Grafton(R) DBM Segment operating income, which includes $250,000 of income from
the DePuy patent litigation settlement that was concluded in 1999, decreased 41%
to $2,628,000 in the first quarter of 2000 compared to $4,438,000 in the same
period in 1999. The decrease results primarily from lower Grafton(R) revenues
and increased costs associated with a patent lawsuit. Base Tissue Segment
operating income decreased 2% to $1,399,000 in the first quarter of 2000
compared to $1,434,000 in the first quarter of 1999. The decrease resulted from
legal expenses associated with two patent lawsuits and increased marketing and
promotional spending related to bio-d(TM) threaded cortical bone dowel,
partially offset by higher gross profit from the increase in revenues discussed
above.
-12-
<PAGE>
Income Tax Provision
The effective income tax rate increased to approximately 44% in the first
quarter of 2000 from 40% in the first quarter of 1999. The high effective income
tax rate in 2000 is caused by non-deductible foreign losses.
Liquidity and Capital Resources
At March 31, 2000, we had cash and short-term investments of $20,560,000
compared to $20,716,000 at December 31, 1999. We invest excess cash in U.S.
Government-backed securities and investment grade commercial paper of major U.S.
corporations. Working capital decreased $1,510,000 to $35,572,000 at March 31,
2000 compared to $37,082,000 at December 31, 1999. The decrease in working
capital results principally from a decrease in accounts receivable due to the
normal collection of December 31, 1999 trade accounts receivable.
Net cash provided by operating activities increased to $4,266,000 in the first
quarter of 2000 compared to $638,000 in the first quarter of 1999. The increase
resulted primarily from net income and a $2,956,000 decrease in accounts
receivable discussed above, partly offset by an increase in processing raw
materials and metal implant inventories in anticipation of increasing demand.
Cash used in investing activities decreased to $2,668,000 in the first quarter
of 2000 from $11,632,000 in the first quarter of 1999. The decrease results
principally from a net decrease in short-term investments of $2,004,000 in the
first quarter of 2000 compared to an increase of $5,742,000 in the first quarter
of 1999. First quarter 1999 also included $1,467,000 for the acquisition of an
additional 85% interest in OST Developpement. In the fourth quarter of 1998, we
commenced construction of a new processing facility in Eatontown, New Jersey.
The estimated aggregate cost for the construction of the building, including
furniture, fixtures and equipment is approximately $34,000,000; $21,500,000 of
which we expect will be funded through a building mortgage loan and equipment
line of credit. The remaining balance will be funded through available cash
reserves or anticipated cash flow from operations. Through March 31, 2000, we
have incurred $12,491,000 in building and equipment costs, including capitalized
interest of $171,000, of which $6,359,000 was funded through bank financing.
Net cash provided by financing activities decreased to $257,000 from $4,614,000
in the first quarter of 1999 principally due to a decrease in cash proceeds
received from stock option exercises and the related tax benefits resulting from
such stock option exercises.
We have a credit facility with a U.S. bank, that includes a $5,000,000 revolving
line of credit, a $4,500,000 building mortgage loan, and a $17,000,000 equipment
line of credit. At March 31, 2000, $4,500,000 was outstanding under the
revolving line of credit and $1,859,000 was outstanding under the equipment 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
$2,169,000 at the March 31, 2000 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 $1,302,000 at the March 31, 2000 exchange rate. There were no
borrowings outstanding under this credit line as of March 31, 2000.
Additionally, we have a line of credit with a French bank, which provides for
borrowing of up to FRF 1,500,000, or approximately $219,000 at the March 31,
2000 exchange rate. There were no borrowings outstanding under this credit line
as of March 31, 2000.
-13-
<PAGE>
We believe that our cash and cash equivalents, short-term investments and
available lines of credit, together with anticipated future cash flow from
operations, will be sufficient to meet our near-term requirements. From time to
time we may seek additional funds through equity or debt financing. However,
there can be no assurances that such additional funds will be available, or if
available, that such funds will be available on favorable terms.
Impact of Inflation and Foreign Currency Exchange Fluctuations
Results of operations for the periods discussed above have not been materially
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,
Note 4 of "Notes to Condensed Consolidated Financial Statements", PART II., ITEM
1. LEGAL PROCEEDINGS and the Company's Annual Report on Form 10-K for the year
ended December 31, 1999. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GenSci Regeneration Laboratories, Inc. v. Osteotech, Inc.; Osteotech, Inc. v.
GenSci Regeneration Sciences, Inc.
In April, 2000, we reached an agreement with GenSci Regeneration Laboratories,
Inc., and its parent, GenSci Regeneration Sciences Inc. regarding certain legal
matters in our lawsuit against the GenSci companies. They include the dismissal
with prejudice of all of GenSci's patent infringement claims against our
proprietary products Grafton(R) Demineralized Bone Matrix (DBM) Gel, Flex and
Putty and an agreement to stay any action in GenSci's recently filed anti-trust
suit against us until the completion of the trial of our patent infringement
claims against GenSci. GenSci has also agreed to dismiss all of the tort claims
that it had brought against us in the patent lawsuit without prejudice for the
purpose of allowing GenSci to transfer these claims to the anti-trust action
that GenSci filed against us on March 6, 2000. As a result of these dismissals,
GenSci will no longer have any claims against us in the patent action. The only
remaining claims in the patent action involve our allegations that GenSci has
infringed certain Osteotech patents through the sale of the Dynagraft(TM) Gel
and Dynagraft(TM) Putty products. This agreement was subject to court approval,
which approval has been received.
Orthopaedic Bone Screw Products Liability Litigation
The Company remained a defendant in one previously reported state court product
liability action involving orthopaedic bone screws: Ponder v. Synthes. This
action has been discontinued.
-14-
<PAGE>
ITEM 5. OTHER INFORMATION
On May 2, 2000, we announced that Marc Burel joined the Company in the new
position of Vice President of Sales. Marc was formerly President and owner of
ProMed, which represented Medtronic Sofamor Danek in all of New Jersey, Delaware
and eastern Pennsylvania. Additionally, joining Marc in his move to Osteotech
are eight former ProMed sales representatives and managers.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Exhibit Page
Number Description Number
- ------ ----------- ------
27.0 Financial Data Schedule E-1
(b) Reports on Form 8-K
On February 14, 2000, we filed with the Commission a Current Report on Form 8-K
to announce that we entered into an agreement with Spinal Concepts, Inc. to
co-promote Grafton(R) Demineralized Bone Matrix (DBM) with Spinal Concepts'
InFix(R) Interbody Fusion System for the treatment of degenerative disc disease
of the lumbar spine.
On April 18, 2000, we filed with the Commission a Current Report on Form 8-K to
announce that we had reached an agreement with GenSci Regeneration Laboratories,
Inc., and its parent, GenSci Regeneration Sciences Inc. regarding several legal
matters in our lawsuit against the GenSci companies.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Osteotech, Inc.
--------------------------------
(Registrant)
Date: May 12, 2000 By: /S/Richard W. Bauer
-------------------------------
Richard W. Bauer
Chief Executive Officer
Date: May 12, 2000 By: /S/Michael J. Jeffries
-------------------------------
Michael J. Jeffries
Executive Vice President
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Osteotech, Inc. and Subsidiaries Consolidated Balance Sheet as of March 31, 2000
and the Condensed Consolidated Statement of Operations for the three months
ended March 31, 2000 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<CASH> 18,618,000
<SECURITIES> 1,942,000
<RECEIVABLES> 12,270,000
<ALLOWANCES> 127,000
<INVENTORY> 4,069,000
<CURRENT-ASSETS> 48,416,000
<PP&E> 51,773,000
<DEPRECIATION> 13,969,000
<TOTAL-ASSETS> 91,501,000
<CURRENT-LIABILITIES> 12,844,000
<BONDS> 6,359,000
0
0
<COMMON> 141,000
<OTHER-SE> 71,440,000
<TOTAL-LIABILITY-AND-EQUITY> 91,501,000
<SALES> 903,000
<TOTAL-REVENUES> 18,646,000
<CGS> 582,000
<TOTAL-COSTS> 15,703,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,000
<INTEREST-EXPENSE> 6,000
<INCOME-PRETAX> 3,499,000
<INCOME-TAX> 1,530,000
<INCOME-CONTINUING> 1,969,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,969,000
<EPS-BASIC> .14
<EPS-DILUTED> .13
</TABLE>
