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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, 2003
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 Identification No.)
incorporation or organization)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| or No |_|
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of May 7, 2003 was 17,045,629.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
March 31, December 31,
2003 2002
- --------------------------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 12,820 $ 10,040
Short-term investments 1,966 3,948
Accounts receivable, net of allowance of
$1,189 in 2003 and $943 in 2002 14,172 11,545
Deferred processing costs 17,930 15,433
Inventories 4,540 4,820
Income tax receivable 1,758 3,357
Deferred tax assets 5,784 5,784
Prepaid expenses and other current assets 1,710 1,023
--------------------------
Total current assets 60,680 55,950
Property, plant and equipment, net 51,997 53,535
Goodwill, net of accumulated amortization of $404 in 2003 and 2002 1,669 1,669
Other assets 4,078 3,931
- --------------------------------------------------------------------------------------------------
Total assets $118,424 $115,085
==================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 14,296 $ 11,370
Current maturities of long-term debt 2,661 2,661
-------- --------
Total current liabilities 16,957 14,031
Long-term debt 15,257 15,922
Other liabilities 1,407 1,637
- --------------------------------------------------------------------------------------------------
Total liabilities 33,621 31,590
- --------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued or outstanding
Common stock, $.01 par value; 70,000,000 shares
authorized; issued and outstanding 17,019,817
shares in 2003 and 17,001,372 shares in 2002 170 170
Additional paid-in capital 63,482 63,368
Accumulated other comprehensive loss 103 78
Retained earnings 21,048 19,879
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 84,803 83,495
- --------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $118,424 $115,085
==================================================================================================
See accompanying notes to condensed consolidated financial statements.
- 2 -
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except per share data)
Three Months Ended March 31, 2003 2002
- ------------------------------------------------------------------------------------------
Net revenues:
Service $ 21,322 $ 20,586
Product 1,157 1,499
------------ ------------
22,479 22,085
Cost of services 8,746 8,139
Cost of products 1,061 881
------------ ------------
9,807 9,020
------------ ------------
Gross profit 12,672 13,065
Marketing, selling, general and administrative 9,332 11,229
Research and development 990 903
------------ ------------
10,322 12,132
------------ ------------
Operating income 2,350 933
Interest expense, net (295) (258)
------------ ------------
Income from continuing operations before income taxes 2,055 675
Income tax provision 886 296
------------ ------------
Income from continuing operations 1,169 379
Income from discontinued operations 7
- ------------------------------------------------------------------------------------------
Net income $ 1,169 $ 386
==========================================================================================
Earnings per share:
Basic:
Income from continuing operations $ .07 $ .03
Discontinued operations
------------ ------------
Net income $ .07 $ .03
============ ============
Diluted:
Income from continuing operations $ .07 $ .03
Discontinued operations
------------ ------------
Net income $ .07 $ .03
============ ============
Shares used in computing earnings per share:
Basic 17,002,455 14,099,267
Diluted 17,279,283 14,447,407
See accompanying notes to condensed consolidated financial statements.
- 3 -
OSTEOTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Three Months Ended March 31, 2003 2002
- ----------------------------------------------------------------------------------------------
Cash Flow From Operating Activities
Net income $ 1,169 $ 386
Adjustments to reconcile income
to net cash provided by operating activities:
Depreciation and amortization 2,150 1,594
Changes in current assets and liabilities:
Accounts receivable (2,660) (3,849)
Deferred processing costs (2,477) 752
Inventories 291 256
Prepaid expenses and other current assets 1,012 (290)
Accounts payable and other liabilities 2,544 2,110
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,029 959
Cash Flow From Investing Activities
Capital expenditures (475) (2,512)
Proceeds from sale of investments 1,982
Other, net (275) 39
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,232 (2,473)
Cash Flow From Financing Activities
Proceeds from issuance of common stock 114 107
Principal payments on long-term debt (665) (634)
- ----------------------------------------------------------------------------------------------
Net cash used in financing activities (551) (527)
Effect of exchange rate changes on cash 70 5
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,780 (2,036)
Cash and cash equivalents at beginning of period 10,040 5,192
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 12,820 $ 3,156
==============================================================================================
Supplementary cash flow data:
Cash paid during the period for interest $ 260 $ 267
Cash paid (refunded) during the period for taxes (1,658) 80
See accompanying notes to condensed consolidated financial statements
- 4 -
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, 2003 and the consolidated results of
operations and the consolidated cash flows for the three months ended
March 31, 2003 and 2002. The results of operations and cash flows for the
respective interim periods are not necessarily indicative of the results
to be expected for the full year. The December 31, 2002 financial
information has been derived from the audited financial statements for the
year ended December 31, 2002. The condensed consolidated financial
statement should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 2002, which were
included as part of Osteotech, Inc.'s (the "Company") Annual Report on
Form 10-K.
2. Goodwill and Other Intangible Assets
In January, 2002, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets", and
accordingly, no longer amortizes goodwill. In accordance with the
provisions of SFAS No. 142, the Company completed an evaluation of the
carrying value of its goodwill as of January 1, 2003 and determined that
there was no impact on the Company's consolidated financial statements as
a result of such evaluation.
The Company's other intangibles, which principally represent patents,
patent applications and licenses, have carrying values of $2,310,000 and
$2,105,000 as of March 31, 2003 and December 31, 2002, respectively, and
are being amortized over their estimated useful lives ranging from five to
ten years.
3. Stock Options
The Company has adopted the "disclosure only" provisions of SFAS No. 123,
"Accounting for Stock Based Compensation", and accordingly, no
compensation cost has been recognized in the consolidated statements of
operations. Pro forma information regarding net income and net income per
share is required by SFAS No. 123, and has been determined as if the
Company accounted for its stock options under the Fair Value Method of
that Statement. For purposes of the pro forma disclosures, the estimated
fair value of the options is amortized on a straight-line basis to expense
over the options' vesting period.
As required by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of SFAS No. 123", the following
table shows the estimated effect on earnings and per share data as if the
Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation.
- 5 -
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
3. Stock Options (continued)
Three Months Ended
March 31,
--------------------------
(in thousands except per share data) 2003 2002
--------------------------------------------------------------------------------------------------
Net income
As reported:
Income from continuing operations $ 1,169 $ 379
Discontinued operations 7
--------------------------
Net income $ 1,169 $ 386
==========================
Impact on income from continuing
operations and net income related
to stock-based employee compensation expense, net of tax $ 192 $ 68
==========================
Pro forma:
Income from continuing operations $ 977 $ 311
Discontinued operations 7
--------------------------
Net income $ 977 $ 318
==========================
Net income per share
As reported
Basic:
Income from continuing operations $ .07 $ .03
Discontinued operations
--------------------------
Net income $ .07 $ .03
==========================
Diluted:
Income from continuing operations $ .07 $ .03
Discontinued operations
--------------------------
Net income $ .07 $ .03
==========================
Pro forma
Basic:
Income from continuing operations $ .06 $ .02
Discontinued operations
--------------------------
Net income $ .06 $ .02
==========================
Diluted:
Income from continuing operations $ .06 $ .02
Discontinued operations
--------------------------
Net income $ .06 $ .02
=================================================================================================
- 6 -
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
3. Stock Options (continued)
The fair value for the option grants was estimated at the date of grant
using the Black-Scholes Option-Pricing Model with the following
weighted-average assumptions:
Three Months Ended March 31,
----------------------------
2003 2002
-----------------------------------------------------------------
Expected life (years) 5 5
Risk free interest rate 2.96% 3.33%
Volatility factor 80.00% 80.00%
Dividend yield 0.00% 0.00%
-----------------------------------------------------------------
4. Discontinued Operations
On July 10, 2002, the Company completed the sale of the business and
substantially all of the assets, including the assumption of certain
liabilities, of its operations located in Leiden, The Netherlands for
$1,000,000 in cash and a non-interest bearing note with a face value of
$1,500,000, which the Company discounted based on the acquirer's
incremental borrowing rate of 5.75%. The note is payable in increasing
amounts on a quarterly basis beginning in March, 2003 through December,
2006. The Company received the first scheduled payment due under the note
in March, 2003. The Company has retained a security interest in all assets
transferred to the acquirer and received a second mortgage on the land and
building the acquirer will occupy to collateralize the note. For matters
arising subsequent to the date of closing, the Company has no on-going
financial or operational responsibilities with respect to the acquirer.
These operations represented the Company's ceramic and titanium plasma
spray coating services and products, which were previously reflected in
the Company's other segment. The Company recorded a loss of $291,000 on
the sale of this business in the second quarter of 2002 to reduce the
carrying value of the assets and liabilities to be sold to fair value.
Revenues and net income for these operations were $495,000 and $7,000,
respectively, in the first quarter of 2002. The financial results of these
operations prior to the sale are reflected in the statements of operations
as discontinued operations and all prior periods have been reclassified to
conform to this presentation.
5. Deferred Processing Costs
Deferred processing costs consist of the following:
(in thousands) March 31, 2003 December 31, 2002
-------------------------------------------------------------------------------------------------
Donor tissue to be processed and distributed by the
Company $ 3,182 $ 2,411
Tissue in process 6,189 5,043
Processed implantable donor tissue to be distributed
by the Company 6,966 6,234
Processed implantable donor tissue held for clients 1,593 1,745
-------------------------------------------------------------------------------------------------
$17,930 $15,433
=================================================================================================
- 7 -
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
6. Inventories
Inventories consist of the following:
(in thousands) March 31, 2003 December 31, 2002
-------------------------------------------------------------------
Supplies $ 238 $ 223
Raw materials 723 678
Finished goods 3,579 3,919
-------------------------------------------------------------------
$ 4,540 $ 4,820
===================================================================
7. Debt and Financing Arrangements
In June, 2002, the Company obtained an automatically declining irrevocable
standby letter of credit to support the $1,900,000 ($1,029,000 as of March
31, 2003) due to Medtronic Sofamor Danek, Inc. pursuant to the settlement
agreement. The commitment under the standby letter of credit is
$1,900,000, but such commitment decreases over time based on a
predetermined schedule concurrent with the Company's monthly payments
under the settlement. As of March 31, 2003, the standby letter of credit
has been reduced to $1,155,000. The amount committed under the standby
letter of credit reduces the Company's availability under its $5,000,000
revolving line of credit. As of March 31, 2003, no amounts were
outstanding under the revolving line of credit and $3,845,000 was
available.
8. Commitments and Contingencies
Purchase Commitment
In February, 2001, the Company entered into an exclusive distribution
agreement with Alphatec Manufacturing, Inc. ("Alphatec") to market and
distribute a pedicle screw system and a cervical plating system in the
United States and Canada. Pursuant to the agreement, the Company agreed to
purchase $6,000,000 of inventory and instrumentation during the two-year
period beginning April 1, 2002. In October, 2002, pursuant to a letter
agreement, Alphatec waived the purchase commitment of $3,200,000 for the
first year of the commitment period (April 1, 2002 to March 31, 2003) for
a payment of $300,000. The purchase commitment of $2,800,000 for the
second year (April 1, 2003 to March 31, 2004) of the commitment period is
still in effect.
In October, 2002, because of a higher than normal level of complaints, the
Company temporarily suspended the sale and distribution of Affirm(TM)
Anterior Cervical Plating System ("Affirm(TM)"). Due to the continuing
uncertainty surrounding the re-introduction of Affirm(TM) into the market,
the Company does not expect to purchase sufficient inventory to meet the
purchase commitment. Accordingly, the Company recorded a provision of
$1,079,000 in the fourth quarter of 2002 for the penalty that will be due
for the expected shortfall under the purchase commitment.
Litigation
The following is a description of material developments that occurred
during the three months ended March 31, 2003 and since the filing of the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
Additionally, the Company is party to other litigation incidental to its
business, none of which, individually or in the aggregate, are expected to
have a material adverse effect on the Company.
- 8 -
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
8. Commitments and Contingencies (continued)
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. and GenSci Regeneration Sciences,
Inc. (collectively, "GenSci") alleging that GenSci violated claims of one
of the patents involving the Company's Grafton(R) Demineralized Bone
Matrix (DBM) process. In December 2001, as a result of a trial commenced
in the United States District Court for the Central District of
California, the Company was awarded damages in the amount of $17,533,634
for GenSci's infringement of the Company's patents. This damage award was
reduced by the $3.0 million previously paid by DePuy in 1999 and 2000 in
settlement of the Company's claims against DePuy in this lawsuit. The
Company has not recognized any portion of the net award of $14,533,634 in
its financial statements. On December 21, 2001, GenSci filed for
bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.
On April 21, 2003, the Company announced that it has reached an agreement
in principle with GenSci to settle the Company's claim against GenSci
arising out of the patent lawsuit. The settlement, which requires approval
and confirmation of the GenSci Plan of Reorganization by the bankruptcy
court, is for an aggregate of $7.5 million. Among other things, the
settlement requires GenSci to pay the Company $1.0 million upon approval
of the settlement by the bankruptcy court and to pay the balance of $6.5
million in 20 equal quarterly payments of $325,000 plus interest at the
federal judgment rate as measured at the end of each quarter up to a
maximum of 3% per annum. The settlement is further contingent upon
GenSci's ability to provide the Company an irrevocable letter of credit,
or such other form of security acceptable to the Company, in the amount of
$5.0 million and a security interest in its assets to secure the remaining
balance of $1.5 million, which will be subordinated only to financing, if
any, that GenSci may receive from a bank or other institutional lender.
The settlement is also contingent upon the Company's verification of
GenSci's claim that its new products do not infringe any claims of the
Company's patents. If the Company is able to verify GenSci's claim, it
will issue a covenant to GenSci not to sue it for infringing any of the
Company's existing patents so long as they do not change the formulation
of their new products, in the future, in a manner that will then result in
those products, or any future new products, infringing the Company's
patents. Additionally, the Company and GenSci have agreed to dismiss all
other litigation that is currently pending between them.
Scroggins v. Zimmer Holdings, Inc.
On or about June 24, 2002, the Company received a complaint filed in the
United States District Court for the Eastern District of Louisiana against
numerous defendants, including the Company. The complaint alleges that
plaintiff received defective medical hardware in connection with a certain
hip replacement procedure in May, 1992, and that such hardware was
manufactured or distributed by certain of the defendants other than the
Company. The procedure involved the use of allograft bone tissue processed
by the Company and provided by one of our clients. Plaintiff alleges
personal injuries and $1,000,000 in damages.
- 9 -
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
8. Commitments and Contingencies (continued)
On April 8, 2003, the Company filed a Motion for Summary Judgment seeking
dismissal of plaintiff's claims with prejudice. On this same date, the
Company also moved for expedited hearing of its Motion for Summary
Judgment. On April 11, 2003, the Court granted the Company's motion for
expedited hearing and ordered that the Company's Motion for Summary
Judgment be considered on an expedited basis.
The Company maintains a general liability insurance policy and has
notified the insurance company of this action. The insurance company has
agreed to defend this action.
Regner v. Inland Eye & Tissue Bank of Redlands; Thacker v. Inland Eye &
Tissue Bank of Redlands; Savitt v. Doheny Eye and Tissue Bank; Sorrels,
Decker and Blake v. Inland Eye & Tissue Bank, et al.
The Company is a defendant with several other defendants in four actions
pending in the Superior Court for the State of California, Los Angeles
County. One of the suits seeks class action status and initially alleged
causes of action based on a violation of the California Business and
Professional Code Section 17200, as well as a number of common law causes
of action, including negligence, deceit, and intentional and negligent
infliction of emotional distress. Through dismissals, either by the Court
or voluntarily by plaintiffs, only the California Business and
Professional Code claims, which are based on the allegation that
defendants are engaging in the activity of buying or selling organs or
tissue for valuable consideration or profit, and certain negligence claims
remain with respect to the actions. It appears that plaintiffs are seeking
class action status and injunctive relief and "restitution" with respect
to their California Business and Professional Code claims. In the Regner
case, plaintiffs have now filed their motion to certify the class, and the
opposition to the motion is due on May 17, 2003. In March, 2003, the
Company was served with the complaint in the Sorrels, Decker and Blake v.
Inland Eye & Tissue Bank, et al action. This action purports to be a class
action and alleges violation of Section 17200 and negligence against the
Company.
The Company believes that the claims made against it in these actions 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
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 currently unable to estimate the ultimate liability, if any,
that may result from the pending litigation and, accordingly, no material
provision for any liability (except for accrued legal costs for services
previously rendered) has been made for such pending litigation in the
consolidated financial statements. When the Company is reasonably able to
determine the probable minimum or ultimate liability, if any, that may
result from any of the pending litigation, the Company will record a
provision for such liability to the extent not covered by insurance.
- 10 -
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
9. Comprehensive Income
Comprehensive income for the three months ended March 31, 2003 and 2002
was:
Three Months Ended
March 31,
----------------------------
(dollars in thousands) 2003 2002
--------------------------------------------------------------------------------
Net income $ 1,169 $ 386
Currency translation adjustments 25 (99)
--------------------------------------------------------------------------------
Comprehensive income $ 1,194 $ 287
================================================================================
10. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended March 31, 2003 and 2002:
Three Months Ended
March 31,
----------------------------
(dollars in thousands except per share data) 2003 2002
--------------------------------------------------------------------------------
Income from continuing operations $ 1,169 $ 379
Discontinued operations 7
----------------------------
Net income available to common stockholders $ 1,169 $ 386
============================
--------------------------------------------------------------------------------
Denominator for basic earnings per share,
weighted average common shares outstanding 17,002,455 14,099,267
Effect of dilutive securities, stock options 276,828 348,140
----------------------------
Denominator for diluted earnings per share 17,279,283 14,447,407
============================
--------------------------------------------------------------------------------
Basic earnings per share:
Income from continuing operations $ .07 $ .03
Discontinued operations
----------------------------
Net income $ .07 $ .03
============================
--------------------------------------------------------------------------------
Diluted earnings per share:
Income from continuing operations $ .07 $ .03
Discontinued operations
----------------------------
Net income $ .07 $ .03
============================
--------------------------------------------------------------------------------
Weighted average shares issuable upon the exercise of stock options which
were not included in the calculation of diluted earnings per share were
1,325,325 and 1,161,625 for the three months ended March 31, 2003 and
2002, respectively. Such shares were not included because they were
antidilutive.
- 11 -
OSTEOTECH, INC. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(unaudited)
11. Operating Segments
Summarized in the table below is financial information for our reportable
segments for the three months ended March 31, 2003 and 2002, after giving
effect to the divestiture of the Company's operations in The Netherlands:
Three Months Ended
March 31,
----------------------------
(dollars in thousands) 2003 2002
-------------------------------------------------------------------------
Revenues:
Grafton(R) DBM Segment $ 11,369 $ 12,151
Base Tissue Segment 9,953 8,435
Other 1,157 1,499
-------------------------------------------------------------------------
Consolidated $ 22,479 $ 22,085
=========================================================================
Operating income (loss):
Grafton(R) DBM Segment $ 3,265 $ 1,665
Base Tissue Segment 158 77
Other (1,073) (809)
-------------------------------------------------------------------------
Consolidated $ 2,350 $ 933
=========================================================================
Two of our clients, MTF and ARC, in the Grafton(R) DBM and Base Tissue
Segments together accounted for 56% and 64% of consolidated net revenues
during the three months ended March 31, 2003 and 2002, respectively.
12. Reclassifications
Certain prior year amounts within the financial statements have been
reclassified to conform to the 2003 presentation.
- 12 -
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, 2002
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 MONTHS ENDED MARCH 31, 2003 AND 2002
Results of Operations
Critical Accounting Policies and Estimates
Critical accounting policies are those that involve subjective or complex
judgments, often as a result of the need to make estimates. The following areas
all require the use of judgments and estimates: product returns, bad debts,
inventories including purchase commitments, deferred processing costs including
rework reserves, property, plant and equipment, intangible assets, current and
deferred income taxes, contingencies and litigation. Estimates in each of these
areas are based on historical experience and various assumptions that we believe
are appropriate. Actual results may differ from these estimates. Our accounting
practices are discussed in more detail in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 2 of "Notes to
Consolidated Financial Statements" in our Annual Report on Form 10-K for the
year ended December 31, 2002.
Income from Continuing Operations
Consolidated income from continuing operations was $1,169,000 or $.07 diluted
earnings per share for the three months ended March 31, 2003 compared to
consolidated income from continuing operations of $379,000 or $.03 diluted
earnings per share in the same period in 2002. The improvement in consolidated
income from continuing operations between 2003 and 2002 was primarily due to a
decline in operating expenses, which resulted from a decline in legal fees and
the cessation of our funding of the American Tissue Service Foundation in first
quarter 2002.
Discontinued Operations
On July 10, 2002, we completed the sale of the business and substantially all of
the assets, including the assumption of certain liabilities, of our operations
in Leiden, The Netherlands for $1,000,000 in cash and a non-interest bearing
note with a face value of $1,500,000. These operations represented our ceramic
and titanium plasma spray coating services and products. We recognized a loss on
the sale of this business of $291,000 in the second quarter of 2002. Revenues
and net income from these operations were $495,000 and $7,000, respectively, for
the three months ended March 31, 2002.
- 13 -
Net Income
Consolidated net income in the first quarter of 2003 was $1,169,000 or $.07
diluted net income per share compared to consolidated net income of $386,000 or
$.03 diluted net income per share in the first quarter of 2002.
The following is a discussion of factors affecting results of continuing
operations after giving effect to the divestiture of the operations of our
subsidiary in The Netherlands for the three months ended March 31, 2003 and
2002.
Net Revenues
Consolidated net revenues increased 2% to $22,479,000 in the first quarter of
2003 compared to consolidated revenues of $22,085,000 in the corresponding
period in 2002. Domestic net revenues of $20,691,000 in the first quarter of
2003 declined slightly from first quarter 2002 domestic net revenues of
$20,887,000. The decline in domestic revenues was due primarily to the decline
in unit sales volume in Grafton(R) DBM and lower sales of metal spinal implants,
mostly offset by increased base tissue processing fees, increased unit sales
volume in bio-implants and the impact of our January 1, 2003 price increases.
Foreign-based revenues increased 49% to $1,788,000 in the first quarter of 2003
from $1,198,000 in the same period in 2002. The increase in foreign-based
revenues was primarily a result of increased unit sales volume in Grafton(R)
DBM, increased base tissue processing fees and increased unit sales volume in
OsteoPure(TM) Femoral Head processing, partially offset by a decline in bovine
unit sales volume.
Grafton(R) Demineralized Bone Matrix ("DBM") Segment, or Grafton(R) DBM Segment,
revenues declined 6% to $11,369,000 in the first quarter of 2003 from revenues
of $12,151,000 in the same period in 2002. Domestic Grafton(R) DBM Segment
revenues declined 10% to $10,363,000 in first quarter 2003 from revenues of
$11,527,000 in first quarter 2002, primarily as a result of a decline in
Grafton(R) DBM unit sales volume due to a combination of continuing strong
competition and the need to regain sales force momentum as a result of the
fourth quarter 2002 temporary suspension of Base Tissue Segment processing
operations, partially offset by the effects of the January 1, 2003 price
increase. Foreign-based Grafton(R) DBM revenues increased 61% to $1,006,000 in
the first quarter of 2003 from revenues of $624,000 in the same period in the
prior year, primarily as a result of increased unit sales volume and the effects
of the January 1, 2003 price increases.
Base Allograft Tissue Segment, or Base Tissue Segment, revenues increased 18% to
$9,953,000 in the first quarter of 2003 from $8,435,000 in the corresponding
period in 2002. The increase is principally the result of a 27% increase in base
tissue processing fees as a result of a 12% increase in the number of donors
processed for our clients and the direct distribution of Osteotech labeled base
allograft tissue, a 10% increase in bio-implant revenues as a result of
increased unit sales volume and the impact of our January 1, 2003 price
increases. As part of the settlement of a lawsuit in second quarter 2002, we
removed our bio-d(R) Threaded Cortical Bone Dowel, or bio-d(R), from the market
in January, 2003. First quarter 2003 and 2002 revenues include revenues from the
bio-d(R) of $34,000 and $616,000, respectively.
Revenue from other product lines declined 23% in the first quarter of 2003 to
$1,157,000 from $1,499,000 in the same period in 2002. Metal spinal implant
system revenues declined 28%, principally as a result of our suspension of the
sale and distribution of Affirm(TM) Anterior Cervical Plating System in October,
2002 due to a higher than normal level of complaints. Bovine tissue product
revenues declined 19% in the three months ended March 31, 2003 compared to the
corresponding period in 2002, primarily as a result lower unit sales volume.
- 14 -
Two of our clients in the Grafton(R) DBM and Base Tissue Segments, the
Musculoskeletal Transplant Foundation, or MTF, and the American Red Cross, or
ARC, each accounted for 28% of consolidated net revenues during the three months
ended March 31, 2003, respectively. In the three months ended March 31, 2002,
MTF and ARC accounted for 33% and 31%, respectively, of consolidated net
revenues. We have processing agreements with each of these clients. The MTF
agreement expires in December, 2008 and the ARC agreement expires in December,
2006.
Gross Profit
Consolidated gross profit as a percentage of consolidated net revenues was 56%
in the first quarter of 2003 compared to 59% in the first quarter of 2002. The
decline in gross profit margin in 2003 was primarily the result of higher
operating costs, including depreciation, associated with the opening of our new
allograft tissue processing facility in June, 2002 and the underabsorption of
costs in certain product lines that do not have sufficient revenue volume to
offset its related fixed costs.
Marketing, Selling, General and Administrative Expenses
Consolidated marketing, selling, general and administrative expenses decreased
17% in first quarter 2003 to $9,332,000 from $11,229,000 in the corresponding
period in 2002. The decreases in marketing, selling, general and administrative
expenses relates mainly to decreased legal fees as a result of the settlement of
a number of our lawsuits in 2002 and the cessation of our funding of the
American Tissue Services Foundation, partially offset by increased costs for
insurance coverage as a result of the tightening of the insurance markets.
Research and Development Expenses
Consolidated research and development expenses increased 10% in the first
quarter of 2003 to $990,000 from $903,000 in the same period in 2002. The
increase is primarily related to the development of several new Grafton(R) DBM
and bio-implant tissue forms, which we expect to launch in the first half of
2003, costs associated with addressing the technical and scientific requirements
necessary to rework allograft tissue subject to our 2002 tissue quarantine,
which resulted from our temporary suspension of Base Tissue Segment processing,
and costs associated with our continued development of our Plexus(TM)
Technology.
Operating Income
Consolidated operating income increased $1,417,000 to $2,350,000 in the first
quarter of 2003 from $933,000 in the first quarter of 2002. Grafton(R) DBM
Segment operating income increased 96% to $3,265,000 in the three months ended
March 31, 2003 from $1,665,000 in the same period in 2002. The increase results
principally from improved gross profit margins in this segment, decreased legal
fees and lower marketing and selling costs. Base Tissue Segment operating income
was $158,000 in the first quarter of 2003 compared to operating income of
$77,000 in the corresponding period in 2002. The increase resulted primarily
from increased revenues in this segment and lower legal fees, substantially
offset by a decline in gross profit margins, increased costs for marketing,
selling and promotional activities and increased costs for research and
development. Operating losses associated with other revenues were $1,073,000 and
$809,000 in the first quarter of 2003 and 2002, respectively. The operating
loss, which is generated substantially from our metal spinal implant product
line, results primarily from the underabsorption of costs for which there is not
sufficient revenue volume to offset the infrastructure established to support
the product line and the increased costs associated with marketing, selling and
promotional activities.
- 15 -
Income Tax Provision
The effective income tax rate for the three months ended March 31, 2003 and 2002
was 43% and 44%, respectively, which exceeded the United States statutory rate
principally due to state income taxes and non-recognition of tax benefits
related to foreign losses.
Liquidity and Capital Resources
At March 31, 2003 we had cash, cash equivalents and short-term investments of
$14,786,000 compared to $13,988,000 at December 31, 2002. We invest excess cash
in U.S. Government-backed securities and investment grade commercial paper of
major U.S. corporations. The increase in cash, cash equivalents and short-term
investments was primarily due to the improvement in operating results and the
receipt of a Federal income tax refund, partially offset by continued
investments in our business. Working capital increased $1,804,000 to $43,723,000
at March 31, 2003 compared to $41,919,000 at December 31, 2002. The increase in
working capital resulted primarily from an increase in accounts receivables from
clients and customers as a result of the 21% increase in first quarter 2003
revenues as compared to fourth quarter 2002 revenues and additional investments
in deferred processing costs as we rebuild our allograft tissue inventories,
partially offset by an increase in accounts payable and accrued expenses.
Net cash provided by operating activities was $2,029,000 and $959,000 in the
three months ended March 31, 2003 and 2002, respectively. The increase resulted
primarily from improved profitability compared to the prior year, increased
non-cash charges, principally depreciation and amortization, an increase in
accounts payable and accrued expenses and the receipt of a Federal income tax
refund, partially offset by an increase in accounts receivables from clients and
customers as a result of the 21% increase in first quarter 2003 revenues as
compared to fourth quarter 2002 revenues and additional investments in deferred
processing costs resulting from our efforts to rebuild our allograft tissue
inventories.
Cash provided by investing activities was $1,232,000 in the three months ended
March 31, 2003 compared to cash used in investing activities of $2,473,000 in
the three months ended March 31, 2002. Cash provided by investing activities in
first quarter 2003 was primarily generated from the sale of short-term
investments of $1,932,000, partially offset by capital expenditures of $475,000.
Cash used in investing activities in first quarter 2002 was principally the
result of capital expenditures of $2,512,000.
Net cash used in financing activities was $551,000 and $527,000 in the three
months ended March 31, 2003 and 2002, respectively, and results primarily from
principal payments on long-term debt, partially offset by proceeds from the sale
of common stock under our employee stock purchase plan and from the exercise of
stock options.
We have a Credit Facility with a U.S. bank that includes: a $5,000,000 revolving
line of credit, a building mortgage loan and an equipment term loan. At March
31, 2003, there were no borrowings under the revolving line of credit,
$4,156,000 was outstanding under the building mortgage loan and $13,762,000 was
outstanding under the equipment term loan. In support of the amounts due under
the settlement of certain patent litigation, we provided an automatically
declining irrevocable standby letter of credit in an original amount of
$1,900,000. As of March 31, 2003, the standby letter of credit has been reduced
to $1,233,000. Amounts committed under this standby letter of credit decrease
over time based on a predetermined schedule concurrent with our monthly payments
under the settlement and reduce the amounts available under the revolving line
of credit. As of March 31, 2003, no amounts were outstanding under the revolving
line of credit and $3,767,000 was available.
- 16 -
As of March 31, 2003, there were no material changes in our contractual
obligations or long-term debt from that disclosed in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Liquidity and Capital Resources" in our Annual Report on Form 10-K for the year
ended December 31, 2002.
We believe that our cash and cash equivalents and available lines of credit,
together with anticipated future cash flows from operations, will be sufficient
to meet our forecasted cash needs for the next twelve months. From time to time
we may seek additional funds through equity or debt financing. However, there
can be no assurance 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 8 of "Notes to Condensed Consolidated Financial Statements" included
elsewhere herein and PART II. ITEM 1. LEGAL PROCEEDINGS, and our Annual Report
on Form 10-K for the year ended December 31, 2002. It is possible that our
results of operations or liquidity and capital resources could be adversely
affected by the ultimate outcome of pending litigation or as a result of the
costs of contesting such lawsuits.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to certain market risks, see Item 7A,
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, in our Annual Report
on Form 10-K for the year ended December 31, 2002. There have been no
significant changes in our market risk exposures from the fiscal 2002 year-end.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13(a)-14(c) under the Exchange Act) as of a date
(the "Evaluation Date") within 90 days prior to the filing date of this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in timely alerting them to the material information
relating to us required to be included in our periodic SEC filings.
- 17 -
Changes in internal controls
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their last
evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following is a description of material developments that occurred during the
quarter ended March 31, 2003 in lawsuits reported in the Company's Annual Report
on Form 10-K for the year ended December 31, 2002. Additionally, we are a party
to other litigation incidental to our business, none of which, individually or
in the aggregate, are expected to have a material adverse effect.
GenSci Regeneration Laboratories, Inc. v. Osteotech, Inc.; Osteotech, Inc. v.
GenSci Regeneration Sciences, Inc.
In January, 1998, we filed a patent infringement action against GenSci
Regeneration Laboratories, Inc. and GenSci Regeneration Sciences, Inc.
(collectively, "GenSci") alleging that GenSci violated claims of one of the
patents involving our Grafton(R) Demineralized Bone Matrix (DBM) process. In
December 2001, as a result of a trial commenced in the United States District
Court for the Central District of California, we were awarded damages in the
amount of $17,533,634 for GenSci's infringement of our patents. This damage
award was reduced by the $3.0 million previously paid by DePuy in 1999 and 2000
in settlement of our claims against DePuy in this lawsuit. We have not
recognized any portion of the net award of $14,533,634 in our financial
statements. On December 21, 2001, GenSci filed for bankruptcy protection under
Chapter 11 of the U.S. Bankruptcy Code.
On April 21, 2003, we announced that we have reached an agreement in principle
with GenSci to settle our claim against GenSci arising out of the patent
lawsuit. The settlement, which requires approval and confirmation of the GenSci
Plan of Reorganization by the bankruptcy court, is for an aggregate of $7.5
million. Among other things, the settlement requires GenSci to pay us $1.0
million upon approval of the settlement by the bankruptcy court and to pay the
balance of $6.5 million in 20 equal quarterly payments of $325,000 plus interest
at the federal judgment rate as measured at the end of each quarter up to a
maximum of 3% per annum. The settlement is further contingent upon GenSci's
ability to provide us an irrevocable letter of credit, or such other form of
security acceptable to us, in the amount of $5.0 million and a security interest
in its assets to secure the remaining balance of $1.5 million, which will be
subordinated only to financing, if any, that GenSci may receive from a bank or
other institutional lender.
The settlement is also contingent upon our verification of GenSci's claim that
its new products do not infringe any claims of our patents. If we are able to
verify GenSci's claim, we will issue a covenant to GenSci not to sue it for
infringing any of our existing patents so long as they do not change the
formulation of their new products, in the future, in a manner that will then
result in those products, or any future new products, infringing our patents.
Additionally, the parties have agreed to dismiss all other litigation that is
currently pending between them.
Scroggins v. Zimmer Holdings, Inc.
- 18 -
On or about June 24, 2002, we received a complaint filed in the United States
District Court for the Eastern District of Louisiana against numerous
defendants, including us. The complaint alleges that plaintiff received
defective medical hardware in connection with a certain hip replacement
procedure in May, 1992, and that such hardware was manufactured or distributed
by certain of the defendants other than us. The procedure involved the use of
allograft bone tissue processed by us and provided by one of our clients.
Plaintiff alleges personal injuries and $1,000,000 in damages.
On April 8, 2003, we filed a Motion for Summary Judgment seeking dismissal of
plaintiff's claims with prejudice. On this same date, we also moved for
expedited hearing of our Motion for Summary Judgment. On April 11, 2003, the
Court granted our motion for expedited hearing and ordered that our Motion for
Summary Judgment be considered on an expedited basis.
We maintain a general liability insurance policy and have notified the insurance
company of this action. The insurance company has agreed to defend this action.
Regner v. Inland Eye & Tissue Bank of Redlands; Thacker v. Inland Eye & Tissue
Bank of Redlands; Savitt v. Doheny Eye and Tissue Bank; Sorrels, Decker and
Blake v. Inland Eye & Tissue Bank, et al.
We are a defendant with several other defendants in four actions pending in the
Superior Court for the State of California, Los Angeles County. One of the suits
seeks class action status and initially alleged causes of action based on a
violation of the California Business and Professional Code Section 17200, as
well as a number of common law causes of action, including negligence, deceit,
and intentional and negligent infliction of emotional distress. Through
dismissals, either by the Court or voluntarily by plaintiffs, only the
California Business and Professional Code claims, which are based on the
allegation that defendants are engaging in the activity of buying or selling
organs or tissue for valuable consideration or profit, and certain negligence
claims remain with respect to the actions. It appears that plaintiffs are
seeking class action status and injunctive relief and "restitution" with respect
to their California Business and Professional Code claims. In the Regner case,
plaintiffs have now filed their motion to certify the class, and the opposition
to the motion is due on May 17, 2003. In March, 2003, we were served with the
complaint in the Sorrels, Decker and Blake v. Inland Eye & Tissue Bank, et al
action. This action purports to be a class action and alleges violation of
Section 17200 and negligence against us.
We believe that the claims made against us in these actions are without merit
and will continue to vigorously defend against such claims.
- 19 -
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
------ ----------- ------
3.1 Restated Certificate of Incorporation of ^
Osteotech, as amended
3.2 Third Amended and Restated Bylaws of Osteotech ^
3.4 Certificate of Retirement and Prohibition of ^^
Reissuance of Shares of Osteotech, Inc., dated
April 4, 2002
4.1 Rights Agreement dated as of February 1, 1996 ^
between Osteotech, Inc. and Registrar and
Transfer Co., as amended
10.40 Second Allonge to Agreement of Amendment to Loan
and Security Agreement, Mortgage, Assignment of
Leases and Other Documents by and among Fleet
National Bank, Osteotech, Inc., CAM Implants,
Inc., Osteotech, B.V., H.C. Implants, B.V.,
Osteotech Implants, B.V., Osteotech/CAM
Services, B.V., Osteotech, S.A. and OST
Developpement, S.A. dated March 27, 2003.
99.1 Certification Pursuant to 18 U.S.C. Section *
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section *
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Filed herewith.
^ Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2001 and incorporated herein by
reference thereto.
^^ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002 and incorporated herein by
reference thereto.
(b) Reports on Form 8-K
On March, 4, 2003, we filed with the Commission a Current Report on Form
8-K to announce that we had reported our fourth quarter and year-end
operating results.
On February 3, 2003, we filed with the Commission a Current Report on Form
8-K to announce that we had entered into a three-year agreement with
SpineVision, SA and SpineVision, Inc. (collectively, "SpineVision") to
exclusively market and distribute in the United States and Puerto Rico
SpineVision's Plus(TM) Pivot Link Universal System, C3(TM) Anterior
Cervical Plating System and Uni-Thread(TM) Universal Thread Spinal System.
- 20 -
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.
Date: May 12, 2003 Osteotech, Inc.
-----------------------------------
(Registrant)
Date: May 12, 2003 By: /S/Richard W. Bauer
-----------------------------------
Richard W. Bauer
President, Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 2003 By: /S/Michael J. Jeffries
-----------------------------------
Michael J. Jeffries
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
- 21 -
Certification Pursuant To
18 U.S.C. ss. 1350,
As Adopted Pursuant To
Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard W. Bauer, certify that:
1. I have reviewed this quarterly report of Osteotech, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which the
quarterly report is being prepared;
b) evaluated the effectiveness of the issuer's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
May 12, 2003 /S/Richard W. Bauer
-----------------------------------
Richard W. Bauer
President, Chief Executive Officer
(Principal Executive Officer)
Certification Pursuant To
18 U.S.C. ss. 1350,
As Adopted Pursuant To
Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael J. Jeffries, certify that:
1. I have reviewed this quarterly report of Osteotech, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which the
quarterly report is being prepared;
b) evaluated the effectiveness of the issuer's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
May 12, 2003 /S/Michael J. Jeffries
---------------------------------
Michael J. Jeffries
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)