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 June 30, 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
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(Address of principal executive offices) (Zip Code)
(732)542-2800
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 par value - 13,951,827 shares as of July 31, 2000.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------
<S> <C> <C>
ASSETS
-------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 11,806 $ 16,770
Short-term investments 1,942 3,946
Accounts receivable, net 12,613 15,095
Inventories 4,301 3,405
Prepaid expenses and other current assets 8,800 11,097
--------------------------------
Total current assets 39,462 50,313
Property, plant and equipment, net 47,083 33,995
Excess of cost over net assets of business
acquired, less accumulated amortization
of $2,282 in 2000 and $2,089 in 1999 3,489 3,682
Other assets 1,819 1,740
-------------------------------------------------------------------------------------------------------
Total assets $ 91,853 $ 89,730
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 11,220 $ 13,231
--------------------------------
Total current liabilities 11,220 13,231
Long-term debt 8,741 6,359
Other liabilities 748 734
-------------------------------------------------------------------------------------------------------
Total liabilities 20,709 20,324
-------------------------------------------------------------------------------------------------------
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 13,942,077
shares in 2000 and 14,194,126 shares in 1999 138 140
Additional paid-in capital 46,210 48,837
Accumulated other comprehensive loss (502) (376)
Retained earnings 25,298 20,805
-------------------------------------------------------------------------------------------------------
Total stockholders' equity 71,144 69,406
-------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 91,853 $ 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 Six Months
Ended June 30, Ended June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues:
Service $ 19,788 $ 18,969 $ 37,531 $ 36,826
Product 831 633 1,734 1,464
License fee 118 118
----------- ----------- ----------- -----------
20,619 19,720 39,265 38,408
Cost of services 6,173 5,672 11,802 11,126
Cost of products 569 443 1,151 846
----------- ----------- ----------- -----------
6,742 6,115 12,953 11,972
----------- ----------- ----------- -----------
Gross Profit 13,877 13,605 26,312 26,436
Marketing, general and administrative 8,600 6,689 16,732 13,063
Research and development 1,687 1,486 3,047 2,938
----------- ----------- ----------- -----------
10,287 8,175 19,779 16,001
----------- ----------- ----------- -----------
Income from litigation settlement 250 500
----------- ----------- ----------- -----------
Operating income 3,840 5,430 7,033 10,435
Interest and other income, net 279 178 585 428
----------- ----------- ----------- -----------
Income before income taxes 4,119 5,608 7,618 10,863
Income tax provision 1,595 2,264 3,125 4,361
------------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,524 $ 3,344 $ 4,493 $ 6,502
====================================================================================================================================
Net income per share:
Basic $ .18 $ .24 $ .32 $ .47
Diluted $ .18 $ .23 $ .31 $ .44
------------------------------------------------------------------------------------------------------------------------------------
Shares used in computing net income per share:
Basic 14,089,366 14,013,539 14,148,189 13,867,413
Diluted 14,327,732 14,727,581 14,477,928 14,637,907
</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>
Six Months Ended June 30, 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flow From Operating Activities
Net income $ 4,493 $ 6,502
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,902 1,473
Loss on disposal of fixed assets 9
Provision for doubtful accounts 3
Changes in assets and liabilities:
Accounts receivable 2,482 (2,295)
Inventories (926) (1,389)
Prepaid expenses and other current assets 2,239 (1,522)
Accounts payable and other liabilities (1,895) (3,522)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 8,307 (753)
Cash Flow From Investing Activities
Capital expenditures (14,790) (9,208)
Purchases of investments (1,942) (7,688)
Proceeds from sale of investments 3,946 6,850
Acquisition of business (1,467)
Increase in other assets (182) (824)
------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,968) (12,337)
Cash Flow From Financing Activities
Proceeds from issuance of common stock 460 4,710
Income tax benefit related to stock options 32 6,389
Repurchase of common stock (3,121)
Proceeds from issuance of notes payable 116
Principal payments on notes payable (572)
Proceeds from issuance of long-term debt 2,382
Principal payments on long-term debt
and obligations under capital leases (758)
(Decrease) increase in other liabilities (100) 171
------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (347) 10,056
Effect of exchange rate changes on cash 44 (76)
------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (4,964) (3,110)
Cash and cash equivalents at beginning of period 16,770 15,119
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 11,806 $ 12,009
====================================================================================================================================
Supplementary cash flow data:
Cash paid during the period for interest $ 305 $ 27
Cash paid during the period for taxes 678 2,061
Acquisition of business:
Fair value of assets acquired 2,563
Liabilities assumed 2,669
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting only of normal recurring accruals)
considered necessary by management to present fairly the Company's
consolidated financial position as of June 30, 2000 and December 31, 1999,
and the consolidated results of operations for the three-month and
six-month periods ended June 30, 2000 and 1999, and the consolidated cash
flows for the six-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, 1999 which were
included as part of the Company's Report on Form 10-K.
2. Inventories
Inventories consist of the following:
June 30, December 31,
(dollars in thousands) 2000 1999
---------------------------------------------------------------------------
Raw Materials $ 890 $ 912
Finished Goods 3,411 2,493
---------------------------------------------------------------------------
$4,301 $3,405
---------------------------------------------------------------------------
3. Comprehensive Income
Comprehensive income for the three-month and six-month periods ended June
30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------------------
(dollars in thousands) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 2,524 $ 3,344 $ 4,493 $ 6,502
Currency translation adjustments (75) (131) (126) (282)
----------------------------------------------------------------------------------------------------------
Comprehensive Income $ 2,449 $ 3,213 $ 4,367 $ 6,220
==========================================================================================================
</TABLE>
4. Stock Repurchase Program
In May, 2000, the Board of Directors of the Company authorized the
repurchase and retirement of up to 1,000,000 shares of the Company's common
stock through open market purchases, or block purchases. As of June 30,
2000, the Company had repurchased and retired 330,500 shares of common
stock at a cost of approximately $3,121,000.
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<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
5. Commitments and Contingencies
Service Contracts
In June, 2000, the Company entered into an exclusive five-year processing
agreement with Bone Bank Allografts ("BBA") of San Antonio, Texas. BBA,
which is a tissue bank accredited by the American Association of Tissue
Banks, coordinates the procurement and distribution of allograft bone
tissue nationally, with a focus in the Southern region of the United
States.
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 GenSci and
DePuy 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.
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<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
5. Commitments and Contingencies (continued)
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 were received in the fourth quarter of 1999 and $250,000 in the
first and second quarters of 2000. 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.
In April, 2000, the Company, GenSci Labs, and GenSci Sciences reached an
agreement to dismiss with prejudice all of GenSci's patent infringement
claims against the Company's proprietary Grafton(R) DBM products and to
stay any action in GenSci's anti-trust suit, which it had filed against the
Company on March 6, 2000, until the completion of the trial of the
Company's patent infringement claims against GenSci. GenSci also agreed to
dismiss all of the tort claims that it had brought against the Company in
its patent lawsuit without prejudice and to transfer the claims to the
anti-trust action. 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.
In July, 2000, the Company filed a motion seeking summary judgment in its
favor on GenSci Labs' and GenSci Sciences' reverse doctrine of equivalents
defense on the bases that the GenSci parties failed to assert that defense
in a timely manner and that the defense is otherwise meritless. The Company
also filed a motion seeking judgment that the portion of the case that
GenSci dismissed with prejudice be ruled as exceptional based on GenSci
Labs having asserted and maintained baseless allegations that Osteotech
infringed GenSci Labs' patents, thus warranting an award of attorneys' fees
and costs to Osteotech.
Also, in July, 2000, GenSci filed various motions for summary judgment
seeking orders that GenSci does not infringe on Osteotech's patents and/or
that such patents are invalid.
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.
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<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
5. Commitments and Contingencies (continued)
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 the Company, alleging that the Company engaged in unlawful
monopolization, attempted to monopolize the market for demineralized bone
matrix and entered into 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 that the Company engaged in unlawful and unfair business practices
in violation of section 17200 of the California Unfair Competition Law.
GenSci has alleged that the Company 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 the Company 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. Certain of these allegations
had previously been asserted by GenSci in its patent litigation with
Osteotech in the Central District of California federal court.
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.
-8-
<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
5. Commitments and Contingencies (continued)
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.
Condos v. Musculoskeletal Transplant Foundation
In June, 2000, the Company was served with an action brought in the United
States District Court for the District of Utah against the Company and
Musculoskeletal Transplant Foundation ("MTF"). The suit alleges causes of
action for strict liability, breach of implied warranty and negligence
arising from allegedly defective allograft bone tissue processed and/or
provided by the Company and MTF which was allegedly implanted into the
plaintiff, Chris Condos, during two spinal surgeries. Plaintiffs, which
include Mr. Condos's family members, demand monetary damages in an
unspecified amount. On July 25, 2000, the Company answered the complaint,
denying any and all liability.
The Company maintains a general liability insurance policy and has notified
the insurance company of this action and the insurance company has agreed
to defend the action.
Regner v. Inland Eye & Tissue Bank of Redlands
In May, 2000, Regner brought suit against the Company and fifteen or more
other defendants in the Superior Court for the State of California, San
Bernardino County. The suit seeks class action status and alleges a cause
of action based on a violation of the California Business and Professional
Code, as well as a number of common law causes of action, including
negligence, deceit, and intentional and negligent infliction of emotional
distress. With respect to the Company, plaintiff claims that the Company is
violating California law by engaging in the activity of buying or selling
organs or tissue for valuable consideration or profit. It appears that the
plaintiff is seeking only injunctive relief with respect to its California
Business and Professional Code claim. To the extent any of the other causes
of action exist against Osteotech,
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<PAGE>
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
5. Commitments and Contingencies (continued)
the plaintiffs are seeking damages in an unspecified amount in addition to
class certification.
In June, 2000, Regner filed a motion for a preliminary injunction and a
hearing was held on June 28, 2000. The Court denied the motion. The Company
has filed a demurrer to the complaint requesting that the complaint be
dismissed. That motion is scheduled to be heard on August 9, 2000.
Otherwise, the Company denies that it is engaged in the activity complained
of and asserts that it is licensed by the State of California to do
precisely what it is doing, and that its activities are fully in accord
with all state and federal laws. Therefore, the Company believes this suit
to be without merit and will vigorously defend against the claims.
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)
6. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three-month and six-month periods ended June 30,
2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------------------------------------
(dollars in thousands
except per share data) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income available to common $2,524 $3,344 $4,493 $6,502
Shareholders
-------------------------------------------------------------------------------------------------------------------------
Denominator for basic earnings per share:
Weighted average common
shares 14,089,366 14,013,539 14,148,189 13,867,413
Effect of dilutive securities:
Stock options 238,272 713,631 329,521 770,086
Warrants 94 411 218 408
------------------------------------------------------------------
Denominator for diluted earnings per
share 14,327,732 14,727,581 14,477,928 14,637,907
-------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $.18 $.24 $.32 $.47
-------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $.18 $.23 $.31 $.44
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
7. Operating Segments
Summarized in the table below is financial information for the Company's
reportable segments for the three-month and six-month periods ended June
30, 2000 and 1999:
<TABLE>
<CAPTION>
(dollars in thousands) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Grafton(R)DBM Segment $ 12,190 $ 10,866 $ 22,294 $ 22,441
Base Tissue Segment 7,288 7,715 14,599 13,518
Other 1,141 1,139 2,372 2,449
---------------------------------------------------------------------------------------------------
Consolidated $ 20,619 $ 19,720 $ 39,265 $ 38,408
---------------------------------------------------------------------------------------------------
Operating income (loss):
Grafton(R)DBM Segment $ 3,324 $ 3,642 $ 5,952 $ 8,080
Base Tissue Segment 1,563 2,651 2,962 4,085
Other (1,047) (863) (1,881) (1,730)
---------------------------------------------------------------------------------------------------
Consolidated $ 3,840 $ 5,430 $ 7,033 $ 10,435
---------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information contained herein contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes",
"expects", "may", "will", "should", or "anticipates" or the negative thereof or
variations thereon or comparable terminology, or by discussions of strategy. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. Some of the matters set forth in the "Risk Factors"
section of the Company's Annual Report on Form 10-K for the year ended December
31, 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 AND SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Results of Operations
Net Income
Consolidated net income in the second quarter of 2000 decreased to $2,524,000 or
$.18 diluted net income per share as compared to net income of $3,344,000 or
$.23 diluted net income per share in the second quarter of 1999. Consolidated
net income in the six months ended June 30, 2000 decreased to $4,493,000 or $.31
diluted net income per share as compared to net income of $6,502,000 or $.44
diluted net income per share in the six months ended June 30, 1999.
The following is a discussion of factors affecting results of operations for the
three-month and six-month periods ended June 30, 2000 and 1999.
Net Revenues
Consolidated net revenues increased 5% to $20,619,000 from $19,720,000 in second
quarter of 1999 and increased 2% to $39,265,000 from $38,408,000 in the six
months ended June 30, 1999. Domestic revenues, which consist principally of
revenues from the Grafton(R) DBM and Base Tissue Segments, increased 3% to
$19,187,000 from $18,667,000 in second quarter of 1999 and increased 2% to
$36,718,000 from $36,138,000 in the six months ended June 30, 1999. Foreign
revenues, increased 36% to $1,432,000 from $1,053,000 in second quarter of 1999
and increased 12% to $2,547,000 from $2,270,000 in the six months ended June 30,
1999. The increase in foreign revenues resulted primarily from the initial
distribution of Grafton(R) DBM in Europe.
Grafton(R) DBM Segment revenues increased 12% to $12,190,000 from $10,866,000 in
the second quarter of 1999 and decreased 1% to $22,294,000 from $22,441,000 in
the six months ended June 30, 1999. The increase in the second quarter is a
result of an
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<PAGE>
increase in unit volume and the distribution of Grafton(R) DBM in Europe.
Grafton(R) DBM was not distributed in Europe during the six months ended June
30, 1999. Despite a 7% growth at the hospital/end-user level, our revenues
during the first six months 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 take steps to compete more effectively and
introduce the product line into additional markets in both the U.S. and Europe.
Base Tissue Segment revenues decreased 6% to $7,288,000 from $7,715,000 in
second quarter of 1999 and increased 8% to $14,599,000 from $13,518,000 in the
six months ended June 30, 1999. The decrease in the quarter results principally
from a 16% decrease in the number of donors processed for our clients, partially
offset by a 24% increase in bio-implant revenues and a 275% increase in
OsteoPure(TM) Femoral Head processing revenues. The increase in the six months
resulted primarily from increases in base allograft, bio-implant, and
OsteoPure(TM) Femoral Head processing revenues and price increases effective
January 1, 2000.
During the second quarter and six months ended June 30, 2000, two of our clients
in the Grafton(R) DBM and Base Tissue Segment accounted for 50% and 39%, and 50%
and 40% of consolidated revenues.
Gross Profit
Gross profit as a percentage of revenues was 67% in the second quarter and six
months ended June 30, 2000, respectively, as compared to 69% in the same periods
of 1999. The decreases in both periods result from costs associated with
additional allograft tissue processing capacity which was added in the second
half of 1999 to meet the expected growth of our allograft tissue business and,
in the second quarter of 2000, the underabsorption of fixed costs in the Base
Tissue Segment as a result of the decline in donors processed for our clients.
Marketing, General and Administrative
Marketing, general and administrative expenses increased 29% to $8,600,000 in
the second quarter and 28% to $16,732,000 in the six months ended June 30, 2000
compared to the same periods last year. The increase was primarily attributable
to: (i) increased legal fees associated with patent infringement lawsuits in
both the Grafton(R) DBM and the Base Tissue Segments, and (ii) expanded
marketing and promotional activities associated with the limited launch, in the
second quarter of 2000, of three new bio-implant products.
Research and Development
Research and development expenses increased 14% to $1,687,000 in the second
quarter and 4% to $3,047,000 in the six months ended June 30, 2000 compared to
the same periods in 1999. The increase was primarily attributable to increased
spending in the Base Tissue Segment associated with the continued development of
several new processing technologies and ongoing development of new allograft
tissue products.
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Operating Income
Consolidated operating income decreased 29% to $3,840,000 in the second quarter
and 33% to $7,033,000 in the six months ended June 30, 2000 compared to
$5,430,000 and $10,435,000 in the same periods last year primarily as a result
of decreased operating income in both the Grafton(R) DBM and Base Tissue
Segments.
Grafton(R) DBM Segment operating income, decreased 9% to $3,324,000 in the
second quarter and 26% to $5,952,000 in the six months ended June 30, 2000
compared to $3,642,000 and $8,080,000 in the same periods in 1999. Second
quarter and six month operating income of 2000 includes income from the DePuy
patent litigation settlement of $250,000 and $500,000, respectively. The
decrease results primarily from lower gross profit margin resulting from
increased capacity and increased costs associated with a patent lawsuit. Base
Tissue Segment operating income decreased 41% to $1,563,000 in the second
quarter and 27% to $2,962,000 in the six months ended June 30, 2000 compared to
$2,651,000 and $4,085,000 in the same periods last year. The decrease resulted
from legal expenses associated with two patent lawsuits and increased marketing
and promotional spending associated with the limited launch of three new
bio-implants.
Income Tax Provision
The effective income tax rate decreased to approximately 39% in the second
quarter and increased to 41% in the six months ended June 30, 2000 from 40% in
the same periods last year. The net change in the effective income tax rate in
2000 is caused by non-deductible foreign losses partly offset by recognition of
tax benefits.
Liquidity and Capital Resources
At June 30, 2000, we had cash and short-term investments of $13,748,000 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 $8,840,000 to $28,242,000 at June 30,
2000 compared to $37,082,000 at December 31, 1999. The decrease in working
capital results principally from a decrease in cash, accounts receivable,
prepaid expenses and accounts payable and accrued liabilities.
Net cash provided by operating activities increased to $8,307,000 in the six
months ended June 30, 2000, compared to net cash used of $753,000 in the same
period of 1999. The increase resulted primarily from decreases in accounts
receivable, prepaid expenses and accounts payable and accrued liabilities.
Cash used in investing activities increased to $12,968,000 in the six months
ended June 30, 2000 from $12,337,000 in the same period of 1999. The increase
results principally from; (i) an increase in capital expenditures to $14,790,000
from $9,208,000 resulting from our continued investment in facilities and
equipment needed for current and future business requirements. 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 June 30, 2000, we have incurred $21,712,000 in building and equipment
costs, including capitalized interest of $352,000, of which $8,741,000 was
funded through bank financing.
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<PAGE>
Net cash used in financing activities was $347,000 in the six months ended June
30, 2000, compared to net cash provided of $10,056,000 in the same period of
1999, principally as a result of cash used to repurchase and retire 330,500
shares of common stock at a cost of $3,121,000 and a decrease in cash proceeds
received from stock option exercises and a decrease in the related income tax
benefits.
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 June 30, 2000, $4,500,000 was outstanding under the revolving
line of credit and $4,241,000 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
$2,166,000 at the June 30, 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 $1,300,000 at the June 30, 2000 exchange rate. There were no
borrowings outstanding under this credit line as of June 30, 2000. Additionally,
we have a line of credit with a French bank, which provides for borrowing of up
to FRF 1,250,000, or approximately $182,000 at the June 30, 2000 exchange rate.
There were no borrowings outstanding under this credit line as of June 30, 2000.
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 5 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
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Update of Previously Reported Legal Proceedings
In July, 2000, the Company filed a motion seeking summary judgment in its
favor on GenSci Labs' and GenSci Sciences' reverse doctrine of equivalents
defense on the bases that the GenSci parties failed to assert that defense
in a timely manner and that the defense is otherwise meritless. The Company
also filed a motion seeking judgment that the portion of the case that
GenSci dismissed with prejudice be ruled as exceptional based on GenSci
Labs having asserted and maintained baseless allegations that Osteotech
infringed GenSci Labs' patents, thus warranting an award of attorneys' fees
and costs to Osteotech.
Also, in July, 2000, GenSci filed various motions for summary judgment
seeking orders that GenSci does not infringe on Osteotech's patents and/or
that such patents are invalid.
New Legal Proceedings
In June, 2000, the Company was served with an action brought in the United
States District Court for the District of Utah against the Company and
Musculoskeletal Transplant Foundation ("MTF"). The suit alleges causes of
action for strict liability, breach of implied warranty and negligence
arising from allegedly defective allograft bone tissue processed and/or
provided by the Company and MTF which was allegedly implanted into the
plaintiff, Chris Condos, during two spinal surgeries. Plaintiffs, which
include Mr. Condos's family members, demand monetary damages in an
unspecified amount. On July 25, 2000, the Company answered the complaint,
denying any and all liability.
The Company maintains a general liability insurance policy and has notified
the insurance company of this action and the insurance company has agreed
to defend the action.
In May, 2000, Regner brought suit against the Company and fifteen or more
other defendants in the Superior Court for the State of California, San
Bernardino County. The suit seeks class action status and alleges a cause
of action based on a violation of the California Business and Professional
Code, as well as a number of common law causes of action, including
negligence, deceit, and intentional and negligent infliction of emotional
distress. With respect to the Company, plaintiff claims that the Company is
violating California law by engaging in the activity of buying or selling
organs or tissue for valuable consideration or profit. It appears that the
plaintiff is seeking only injunctive relief with respect to its California
Business and Professional Code claim. To the extent any of the other causes
of action exist against Osteotech, the plaintiffs are seeking damages in an
unspecified amount in addition to class certification.
In June, 2000, Regner filed a motion for a preliminary injunction and a
hearing was held on June 28, 2000. The Court denied the motion. The Company
has filed a demurrer to the complaint requesting that the complaint be
dismissed. That motion is scheduled to be heard on August 9, 2000.
Otherwise, the Company denies that it is engaged in the activity complained
of and asserts that it is licensed by the State of California to do
precisely what it is doing, and that its activities are fully in accord
with all state and federal laws. Therefore,
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the Company believes this suit to be without merit and will vigorously
defend against the claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of stockholders was held on June 8, 2000.
(b) The directors elected at the annual meeting to serve a term of one
year or until the next annual meeting of stockholders were: Arthur A.
Alfaro, Richard W. Bauer, Kenneth P. Fallon, III, Michael J. Jeffries,
Donald D. Johnston, John Phillip Kostuik, M.D., FRCS(C), and Stephen
J. Sogin, Ph.D. They constitute the entire board of directors of the
Company.
(c) The matters voted upon at the annual meeting and the results of the
voting are set forth below:
i) With respect to the election of Directors of Osteotech, the
persons named below received the following number of votes:
Director For Withheld
-------------------------------------------------------
Arthur A. Alfaro 11,908,354 920,058
Richard W. Bauer 11,910,428 917,984
Kenneth P. Fallon, III 11,911,584 916,828
Michael J. Jeffries 11,910,099 918,313
Donald D. Johnston 11,898,441 929,971
John Phillip Kostuik, M.D. 11,912,726 915,686
Stephen J. Sogin, Ph.D. 11,910,526 917,886
ii) With respect to a proposal to approve the 2000 Stock Plan the
stockholders voted 5,532,840 shares in favor, 3,832,337 against
and 36,979 abstained. Broker non-votes were 3,426,256. This
proposal received the vote required by the Delaware General
Corporation Law ("DGCL") and the Company's by-laws for approval
(i.e. affirmative vote of a majority of the shares of common
stock present at the meeting and entitled to vote on the
proposal). Broker non-votes were not counted in determining the
number of shares necessary for the approval of this proposal.
iii) With respect to a proposal to ratify the appointment of
PricewaterhouseCoopers LLP as Osteotech's independent auditors
for the fiscal year ending December 31, 2000, the stockholders
voted 12,787,731 shares in favor, 22,062 against and 18,619
abstained. Broker non-votes were not applicable. This proposal
received the vote required by DGCL and the Company's by-laws for
approval (i.e. affirmative vote of a majority of the shares of
common stock present at the meeting and entitled to vote on the
proposal).
ITEM 5. OTHER INFORMATION
On May 30, 2000, we announced that Steven Annunziato joined the Company in the
new position of Vice President of Marketing. Mr. Annunziato was formerly of
Codman, a Johnson & Johnson Company where he had worldwide marketing and
distribution sales management responsibilities.
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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
------ ----------- ------
27.0 Financial Data Schedule E-1
(b) Reports on Form 8-K
On May 17, 2000, we filed with the Commission a current report on Form 8-K
to announce the repurchase and retirement of up to 1 million shares of the
Company's common stock through open market purchases, or block purchases,
which will be made from time to time as market conditions allow. As of
April 30, 2000, there were 14,240,162 shares of common stock outstanding.
On June 7, 2000, we filed with the Commission a current report on Form 8-K
to announce that we had entered into an exclusive five-year processing
agreement with Bone Bank Allografts ("BBA") of San Antonio, Texas. BBA,
which is a tissue bank accredited by the American Association of Tissue
Banks, coordinates the procurement and distribution of allograft bone
tissue nationally, with a focus in the Southern region of the United
States. BBA was organized in 1991 by Joe and D'Lynn Mims.
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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: August 11, 2000 By: /s/Richard W. Bauer
--------------------------
Richard W. Bauer
Chief Executive Officer
Date: August 11, 2000 By: /s/Michael J. Jeffries
--------------------------
Michael J. Jeffries
Executive Vice President
Chief Financial Officer
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