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EX-32.2 - EXHIBIT 32.2 - OSTEOTECH INC | c97426exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - OSTEOTECH INC | c97426exv32w1.htm |
EX-21.1 - EXHIBIT 21.1 - OSTEOTECH INC | c97426exv21w1.htm |
EX-31.1 - EXHIBIT 31.1 - OSTEOTECH INC | c97426exv31w1.htm |
EX-23.1 - EXHIBIT 23.1 - OSTEOTECH INC | c97426exv23w1.htm |
EX-31.2 - EXHIBIT 31.2 - OSTEOTECH INC | c97426exv31w2.htm |
EX-10.62 - EXHIBIT 10.62 - OSTEOTECH INC | c97426exv10w62.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE
TRANSITION PERIOD FROM to
COMMISION FILE NUMBER: 001-34612
OSTEOTECH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) |
13-3357370 (I.R.S. EMPLOYER IDENTIFICATION NUMBER) |
51 James Way, Eatontown, New Jersey, 07724
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(732) 542-2800
(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(732) 542-2800
(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, par value $0.01 per share Preferred Stock Purchase Rights |
NASDAQ Global Market |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such file). Yes o
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity, held by non-affiliates
of the registrant based on the last reported sale price of the common stock on June 30, 2009 was
approximately $77,868,965.
The number of shares of the registrants common stock, $.01 par value, outstanding as of March
1, 2010 was 18,076,546.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive 2010 Proxy Statement which will be filed pursuant to
Regulation 14A, have been incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of
this Annual Report on Form 10-K.
OSTEOTECH, INC.
2009 Form 10-K Annual Report
TABLE OF CONTENTS
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Exhibit 10.62 | ||||||||
Exhibit 21.1 | ||||||||
Exhibit 23.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
i
Table of Contents
The following trademarks appear in this Annual Report: OSTEOTECH®, GRAFTON® Demineralized Bone
Matrix (DBM), Xpanse® Bone Insert, PLEXUR® Biocomposites, Plexur P® Biocomposite, Plexur M®
Biocomposite, HCT (human collagen technology), DuraTech BioRegeneration Matrix, MagniFuse Bone
Graft, FacetLinx Fusion Technology, GRAFTECH® Bio-implants, and GRAFTCAGE® Spacer, which are
trademarks of Osteotech, Inc. OSTEOPURE® Allogeneic Cancellous Tissue is a foreign registered
trademark of OST Developpement SA.
ii
Table of Contents
PART I
We may from time to time make written or oral forward-looking statements with respect to our
future goals, including statements contained in this Annual Report on Form 10-K, in our other
filings with the SEC and in our reports to shareholders. Certain information which does not relate
to historical financial information may be deemed to constitute forward-looking statements. The
words or phrases is targeting, will likely result, are expected to, will continue, is
anticipated, estimate, project, believe or similar expressions identify forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties that could cause our actual results in
the future to differ materially from our historical results and those presently anticipated or
projected. We wish to caution investors not to place undue reliance on any such forward-looking
statements. Any forward-looking statements speak only as of the date on which such statements are
made, and we undertake no obligation to update such statements to reflect events or circumstances
arising after such date. Some of the matters set forth in the Risk Factors section of this
Annual Report and elsewhere throughout this Annual Report constitute cautionary statements
identifying factors with respect to such forward-looking statements.
Item 1. | Business |
Company Overview
We are a leading technology company that develops innovative and efficacious biologic products
for regenerative medicine. We are focused on creating innovative technology platforms that will
provide a variety of procedural specific biologic products to address the changing needs of
orthopedic surgery and healthcare in general. By developing specific products for specific
surgical procedures, we believe we will be able to provide the surgeon with the right product at
the right time for the right procedure and therefore improve patient outcomes. We are currently
focused on three new technology platforms: MagniFuse, Plexur® and HCT (human collagen
technology). Each of these technologies have already generated and we expect will continue to
generate a variety of procedural specific products allowing us to pursue opportunities in existing
and new markets. Our legacy business lines, led by our proprietary
Grafton®
Technology, have provided us with a
base of business. These legacy business lines allow us to cover overhead and manufacturing
capacity as we drive the launch of new products from the MagniFuse, Plexur® and HCT technologies.
We believe our new technologies led by the MagniFuse, Plexur® and HCT technology platforms will
drive our future growth.
Our goal is to utilize our technology platforms to develop tissue forms and products
(collectively referred to herein as Products) to create procedure specific solutions to repair,
replace or heal bone and tissue loss caused by trauma, disease or surgical intervention and to
augment prosthetic implant procedures, to facilitate spinal fusion and to replace and/or repair
damaged ligaments, tendons and other tissues within the human body. We provide our biologic
solutions to orthopedic, spinal, trauma, neurosurgical and oral/maxillofacial surgeons for use in
various surgical procedures.
Leveraging our expertise in tissue technology, we have developed innovative processes and
proprietary products that are widely used today. We believe our processing knowledge and
technology are key factors supporting our safety record, having processed over 4.6 million tissue
grafts without a confirmed case of disease transmission. We believe this safety record is due to
the rigorous screening and tissue recovery techniques used by our tissue partners, extensive donor
testing, and our quality assurance and processing protocols.
Our Strategy
Our business objective is to be the leading provider of biologic solutions for regenerative
healing. Pursuing this objective, we believe that the execution of these actions will provide a
solid basis for success and allow us to:
| Create a sustainable growth oriented business model; |
||
| Drive our biologic brands through science and surgeon education; |
||
| Make innovation, quality and procedural specific application the centerpiece of our
product differentiation; |
||
| Incubate and invest in new, diverse technology platforms; and |
||
| Augment our proprietary intellectual property position. |
1
Table of Contents
To achieve these key imperatives, we are pursuing the following business strategies:
Increase Distribution Effectiveness We have been and continue to be focused on improving the
effectiveness of our world-wide distribution channel. We have made and expect to continue to make
investments in sales distribution channels to increase market penetration. In 2010, our sales
teams will focus on driving surgeon use of a new portfolio of products that includes the MagniFuse
Bone Graft, Plexur M® Innovative Grafting, FacetLinx® Fusion Technology and, when cleared by the
Food and Drug Administration (FDA), the DuraTech BioRegeneration Matrix. At the same time, we
plan to have the sales team defend the market positions of our legacy product lines to retain the
base line revenue level achieved by these legacy product lines. To be successful in our
distribution effectiveness initiatives, we need to increase unit sales growth while maintaining
average selling prices. Ultimately, our financial model is predicated on generating higher gross
margins which will be driven mainly by the margin profiles on our new Products and increasing the
level of unit volume going through our primary processing facility effectively leveraging our fixed
costs.
As of December 31, 2009, we employed a sales and marketing team consisting of 40 employees,
including sales management and direct sales representatives. In addition, we engaged approximately
40 independent sales agencies (representing approximately 750 sales representatives) in the United
States. Our sales and marketing team coordinates our efforts in the United States, Europe, Latin
America and Asia, which, along with the independent sales agencies and distributors, educate
surgeons as to the benefits and applications of our Products.
Improve Profitability and Cash Flow We intend to utilize the success of the distribution
effectiveness initiatives to drive improved profitability and to generate positive cash flow.
Increases in unit sales volume will allow us to unlock the financial model we have created,
effectively leveraging the efficiencies already implemented in manufacturing and other back office
functions. In 2010, we plan to reduce costs and expenses throughout the organizations as our
primary focus will be on the launch of new products. We will continue to try to further reduce
manufacturing lead times and obsolescence exposure and increase tissue yields. To augment cash
flow, we plan to generate cash from operations, reduce tissue inventories and limit investments in
plant and equipment and other components of working capital.
Develop and Introduce New Procedure Specific Biologics Our research and development team
has a broad breadth of knowledge and experience in the healing of the musculoskeletal system of the
human body. We plan to utilize this core competency to continue to create new innovative,
procedure specific biologic products for surgeons and their patients. We also plan to leverage
this core competency to create differentiated biologic products for other healthcare related
markets expanding the number and size of the markets in which we participate. We launched several
new products in 2009 and anticipate launching additional biologic products into the healthcare
market over the next several years.
We expect that we will focus on each of our imperatives, strategies and tactics in 2010 and
beyond. The methods we use to carry out our efforts in each period will be driven by the facts and
circumstances in effect as they exist at that time, some of which may be out of our control. As
such, we can provide no assurance that we will be successful in achieving any of our objectives.
Products
Today, we provide biologic products for use in orthopedic, spinal, trauma, neurosurgical and
oral/maxillofacial surgical procedures. Eventually, we plan to provide biologic products for
surgical and other procedures for dura mater repair and replacement, sports medicine, wound care
and other soft tissue repair areas of the human body. Our objective is to be a leader in the
emerging field of biologic products for regenerative medicine which are utilized to assist the body
with healing and restoration of function. We believe the potential markets in regenerative
medicine are and will continue to expand due to a number of factors, including:
| Technological innovation in the development of new biologic products to satisfy the
surgical needs of patients; |
||
| An increasing number of surgical procedures that incorporate biologic solutions as a
critical success factor for a better outcome; |
||
| An increasing number of patients who require the use of biologic solutions as a
result of the general aging of the population; |
||
| The desire by surgeons to avoid additional procedures that often increase operating
time and risks, such as excessive blood loss, infection and chronic pain; |
||
| The general increase in the volume of surgical procedures due to the longevity of an
aging population; and |
||
| Increased awareness by and training of the medical community with respect to the use
of grafting procedures to improve patient outcomes. |
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Table of Contents
We plan to focus our research efforts on developing innovative, proprietary biomaterials from
platform technologies, such as MagniFuse, Plexur®, Grafton® and HCT. Our efforts will focus on
developing safe, clinically efficacious and cost effective biologic products to provide surgeons
with procedural solutions that achieve superior patient outcomes. We believe that most, if not
all, of the new products we develop will follow the 510(k) pathway with the FDA. As we introduce
new products, we will need to gather human clinical information to supplement our marketing and
sales efforts. To effectuate this process, we intend to distribute these new products initially to
specific surgeons and hospitals who we believe are key opinion leaders in the related surgical
specialties. We then plan to utilize this clinical information as part of our world-wide launch of
such new products.
|
During 2009, we initiated the limited launch of three innovative products and filed an
application with the FDA for marketing clearance of a fourth new product. We continue to
distribute Grafton®
DBM (demineralized bone matrix), Xpanse®
Bone Inserts and other allograft based
products, including Graftech®
Structural Allografts, Plexur P®
Biocomposites and traditional
tissues. |
||
|
Delivered in a resorbable self-contained delivery system, MagniFuse provides an optimized biologic
scaffold that creates a highly exposed surface area comprised of 100% bone material. Based upon
proprietary processing and manufacturing technologies, MagniFuse delivers a higher concentration
of multiple natural human growth factors. Its mesh delivery system ensures a targeted and
contained delivery of the biologic; avoiding graft migration and the adverse bone healing effects
reported with other grafting materials on the market. MagniFuse is radiopaque providing
confirmation of proper intra-operative and post-operative graft placement, easily conforms to the
surgical site, has exceptional porosity and accommodates sutures or tacks.
|
||
|
Plexur M® is a moldable, settable and machinable biologic implant that fully remodels into new
bone. Its handling and radiopacity gives orthopedic surgeons the ability to mold the graft to fit
irregularly shaped defects and restore the anatomy, as well as to place adjunctive hardware without
graft fragmentation.
|
||
|
FacetLinx is an innovative way to immobilize and fuse the thoracic and lumbar facet joints. Its
cruciform shape serves to lock the two surfaces of the facet joint together in a way that decreases
motion immediately. We believe the design of the FacetLinx implant is an important evolution over
other facet fusion systems since it resists motion and ensures accurate, consistent and
reproducible surgical procedures.
|
||
|
The first biologic developed under our proprietary HCT Technology is the Duratech BioRegeneration
Matrix. Once approved by the FDA, Duratech is expected to be used to repair or replace the dura
mater during a variety of cranial procedures. Duratech has been specially designed to be highly
conformable, is safely stretchable and provides a superior tear resistance to sutures.
|
||
|
We believe GRAFTON® is the Gold Standard in demineralized bone matrix biologics with 19-years of
safety and clinical efficacy. We believe Grafton® has more clinical studies and higher levels of
evidence than any other demineralized bone matrix product on the market with over 50 published
studies in peer reviewed journals supporting its use throughout the entire skeleton. Graftons®
proprietary processing technologies provide an efficacious biologic used throughout orthopedic
surgery to help repair or replace bone loss due to surgery or trauma. Our Grafton® franchise also
includes the Xpanse® Bone Insert, which is based on our proprietary fiber technology and is
designed to expand and contour to the endplates, creating a perfect osteoconforming matrix for
cellular penetration and bone formation.
|
||
|
Plexur P® is a structural biocomposite affording surgeons the ability to customize pre-formed
shapes to maintain angled corrections, restore articular surface heights and facilitate fusions.
Its unique physical properties make Plexur P®
a resilient scaffold to facilitate reconstructions. Plexur P® can easily be cut with a scalpel, can be drilled to
accommodate hardware without shedding, crumbling or shattering and does not fracture when
compressed.
|
Osteotech also offers a comprehensive portfolio of surface demineralized bioactive structural spine
implants (Graftech® Bioimplants), traditional weight-bearing and non weight-bearing allografts and
soft tissues.
Sales and Distribution
We currently utilize several different sales models to distribute our Products depending on
the nature of the product or market, including:
| Access Based Sales In the United States we have engaged a number of non-stocking
sales agencies to distribute our Products. These sales agencies are supported by a field
management team made up of senior executives, area vice presidents, district sales managers
and sales specialists. The focus of this model is to utilize the access these sales
agencies already possess with surgeons and hospitals to increase the number of procedures
in which our Products are utilized. These sales agencies represent both large and small
organizations, and we are particularly focused on increasing the number of and
effectiveness of the larger organizations. These larger sales agents have higher revenue
growth expectations and are able to receive higher commission rates for their performance. |
||
| Direct Sales Our U.S. sales channel is dominated by independent sales agents and
sales representatives, but we have several direct sales representatives. We continue to
watch the effectiveness and productivity of our direct
representatives and, as we gain additional
experience with this sales model, may hire additional direct sales representatives in the
future. |
||
| Stocking Distributor Sales In our international markets, we have been mainly using
stocking distributors to market our Products to end users. We support the stocking
distributors through a team of international sales executives who oversee our efforts in
Europe, Latin America and Asia. We expect to continue to utilize this model
internationally as we expand our presence in existing markets and enter new countries. |
||
| Channel Partners We also utilize other companies, such as BioHorizon Medical, Inc.,
to distribute our Products. These channel partners distribute our products in specialty
areas not part of the normal call patterns of our other sales teams. We expect to continue
to utilize channel partners, as the situation warrants. |
Competition
Our Products compete against bone graft substitutes, such as bone morphogenic proteins,
human-based allograft products, xenogenic products and synthetics, which are developed,
manufactured and/or distributed by
numerous competitors. Competition is intense and our Products have faced, and we believe will
continue to face, significant competitive pressures. Many of our competitors have partnered with
large orthopedic companies to market their products. These large orthopedic companies have
marketing, distribution channel access and other resources that are significantly greater than
ours. They also offer a full line of orthopedic-related supplies and materials, which could give
them a competitive advantage over us because they can offer surgeons a more complete line of
products.
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Table of Contents
Technological change is one of the most important keys to success, especially as industry
standards and requirements evolve. Surgical, patient and procedural complexity are important
factors and we want to provide surgeons with a choice of products that meet the clinical needs. A
second key to success is educating surgeons about biologics and the art of tissue grafting.
Surgeons have traditionally had access to an array of competitive products that offer solutions
over a broad range of applications. We have focused our efforts to create safe, clinically
efficacious and cost effective biologic products that achieve superior patient outcomes. We
believe this course of action will provide us with a competitive advantage in the marketplace.
We compete with companies both large and small in all of our existing product lines.
Competition is strong without regard to the number and size of the competing companies involved.
Competition in research, involving the development and the improvement of new and existing products
and processes, is particularly significant. We compete directly with organizations such as:
Medtronic, Inc.; Synthes Inc.; Integra Life Sciences Holdings Corporation; RTI Biologics, Inc.;
LifeNet Health, Inc.; Musculoskeletal Transplant Foundation; Allosource; Orthovita, Inc.; Johnson &
Johnson Services, Inc.; Wright Medical Technology, Inc.; Apatech, Inc.; and other large and small
companies.
Research and Development
We are engaged in continuing research and development efforts to develop technological
advances in regenerative medicine. We are also aggressively pursuing efforts to improve upon and
maintain the safety, efficacy and performance of our Products, increase the amount of
transplantable tissue derived from each donor and reduce processing costs through efficiency
advances. We believe all of our technology platforms have broad patent positions to protect our
intellectual property and utilize proprietary processing methods. During 2009, 2008, and 2007 we
spent approximately $6.5 million, $7.4 million and $5.7 million, respectively, on research and
development activities.
Currently our research and development activities are focused on three technology platforms,
MagniFuse, Plexur® and HCT. In 2009:
| From the MagniFuse Technology,
we launched the MagniFuse® PL,
MagniFuse® PC and
MagniFuse® SD
to address posterolateral and posterior cervical spinal fusion and
spinal deformity procedures. |
||
| From the Plexur® Technology, we launched the Plexur
M® Innovative
Grafting for
trauma, orthopedic reconstruction and oncology related procedures. |
We also filed an
application with the FDA for marketing clearance of the Duratech BioRegeneration
Matrix, the first product developed under our proprietary HCT Technology.
MagniFuse Technology The MagniFuse Technology utilizes a highly active biologic material
derived from an allograft source material containing higher concentrations of multiple natural
human growth factors. This formulation is delivered in a unique, resorbable mesh bag
delivery-containment system that is sized for specific surgical procedures to eliminate graft
migration. Products developed from this technology are radiopaque enabling surgeons to view the
material intra- and post-operation.
Plexur® Technology
The Plexur®
Technology is a combination of cortical bone tissue with a
broad range of bioresorbable polymers. This family of biomaterials provides a porous
osteoconductive matrix with controlled remodeling, and depending on the material, substantially
differentiated handling characteristics.
HCT Technology The HCT Technology utilizes our engineered human-based collagen to develop
products for key surgical specialties, including dura mater repair or replacement, rotator cuff
repair, wound care and abdominal wall repair. We believe there are many product opportunities in
other surgical specialties as we continue to further develop this technology.
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Table of Contents
Business Segments
We develop, process and distribute biologic Products throughout the orthopedic market. The
vast majority of our Products are processed from donated allograft bone tissue at our processing
facility located in New Jersey. We group our Products into a number of business segments to be
reflective of our business strategies, technology and development activities, and distribution
efforts. Any product not falling within our business segments is included in other. We also
have a Corporate Segment, which includes the costs associated with general and administrative,
regulatory and research and development activities.
Revenue in the DBM Segment is primarily related to the marketing of Grafton® DBM and Xpanse®
Bone Inserts to end users through our sales teams and distribution partners and also includes
revenue from our processing of a private label DBM, pursuant to a relationship governed by an
agreement with DePuy Orthopaedics, Inc. and DePuy Spine, Inc. and LifeNet Health, Inc., which
expires in January 2011. DBM is utilized in a wide variety of orthopedic and dental procedures
while Xpanse® Bone Inserts are used primarily in spinal fusion procedures.
The Hybrid/Synthetic Segment primarily reflects revenue from products developed under our
proprietary MagniFuse and Plexur® Technologies, including the MagniFuse BoneGraft, Plexur M®
Innovative Grafting and Plexur P® Biocomposites. MagniFuse BoneGrafts are mainly utilized in
spinal procedures. Plexur® Biocomposites are utilized primarily in trauma, orthopedic
reconstructions, foot and ankle and oncology-related procedures.
In the Traditional Tissue Segment, we distribute mineralized weight-bearing and non-weight
bearing tissue forms, which are utilized in a wide variety of orthopedic procedures, and soft
tissue grafts. The weight-bearing tissue forms include femoral cross sections, fibula wedges and
cortical struts and the non-weight bearing tissue forms include cancellous and cortical chips.
Soft tissue grafts are utilized primarily in sports medicine procedures.
Revenue in the Spinal Allograft Segment is generated from the distribution to hospitals and
surgeons of our line of Graftech® Bio-implant spacers and ramps. Graftech® Bio-implants are
utilized primarily in spinal fusion procedures.
Revenue in the Client Services Segment is generated from the processing of donor tissue into
traditional tissue forms. Revenue generated in this segment will be insignificant in the future.
Information relating to our revenue for the years ended December 31, 2009, 2008 and 2007 by
geographic area is summarized as follows:
(in thousands) | United States | International | Consolidated | |||||||||
2009 |
$ | 76,913 | $ | 19,765 | $ | 96,678 | ||||||
2008 |
$ | 82,459 | $ | 21,355 | $ | 103,814 | ||||||
2007 |
$ | 85,682 | $ | 18,595 | $ | 104,277 |
For a discussion of (1) financial information about our segments for the years ended
December 31, 2009, 2008 and 2007 and our long-lived assets by geographic area as of December 31,
2009, 2008 and 2007, see Note 19 of Notes to Consolidated Financial Statements in Item 8 of Part
II of this Form 10-K, and (2) our deferred tax asset as of December 31, 2009 and 2008, see Note 13
of Notes to Consolidated Financial Statements in Item 8 of Part II of this Form 10-K. In 2009,
no customer accounted for more than 10% of revenue. In 2008 and 2007, MTF accounted for $14.2
million and $16.2 million, or 14% and 16%, respectively, of revenue.
Tissue Supply Strategy
Allograft bone tissue in the United States is generally procured by a network of Organ
Procurement Organizations and tissue banks. The suitability of allograft bone tissue for
transplantation is dependent on the tissue recovery techniques, the multiple screening and testing
procedures employed and the methods used in the processing of the tissue. We have developed
techniques and technologies for the processing of allograft bone tissue that preserve the natural
properties of the tissues and significantly reduces the risk of the transmission of infectious
agents. The proprietary processes that we utilize for certain of our Products have been validated
to inactivate a panel of viruses, including HIV-1, HIV-2, hepatitis B and C, cytomeglia, syphilis
and polio.
5
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To ensure that we have an adequate supply of allograft bone tissue to meet the market demand
for our Products and for any new Products that we may develop in the future, we continue to be
engaged in an effort to solidify the relationships we have with existing clients and tissue banks,
and we continue to actively search for new relationships. We intend to invest, as appropriate, in
new and/or expanding tissue recovery activities with tissue recovery organizations, organ
procurement organizations, and tissue banks. We also have established tissue recovery programs in
France and Bulgaria, both of which have been granted tissue bank status in the countries in which
they are located, to recover allograft bone tissue, and in certain circumstances other tissue
types, which we expect to utilize to support our sales and marketing activities outside the United
States. We continue to look for additional opportunities to establish additional tissue recovery
programs throughout the world. Based upon our current forecast, we believe that we have sufficient
inventories and sources of allograft bone tissue to meet our projected needs for the next several
years.
We receive and process allograft bone tissue in the form of whole donors, which includes
cortical, cancellous and soft tissues, in the form of cortical shafts or femoral heads. The
majority of our tissue-based products are processed primarily from cortical bone tissue, which is
one of the major reasons our tissue supply strategy is focused on obtaining cortical tissue. We
believe there is cortical tissue available from a number of sources as tissue banks partially
process the whole donors they receive and utilize the cancellous and soft tissues, but do not
effectively utilize the cortical tissue because the tissue banks may not have the proprietary
technology to effectively prepare the cortical tissue into desirable products. We expect to obtain
whole donors, if available, and cortical shafts to support our growth strategies.
Government Regulations
The FDA and certain state and foreign governmental agencies regulate our medical devices,
tissue-based products and tissue-banking activities. Failure to comply with these regulations may
subject us to administrative or judicial sanctions, such as the FDAs refusal to clear or approve
pending applications, withdrawal of clearances and approvals, warning letters, product recalls,
product seizures, total or partial suspension of production or distribution, civil penalties,
injunctions and/or criminal prosecution. Further, if our suppliers do not meet their regulatory
requirements, their non-compliance could adversely impact our business.
In the United States, certain of our tissue-based and other products are regulated as medical
devices under the Food, Drug, and Cosmetic Act while other tissue-based products are regulated by
the FDA as human tissue-based products under section 361 of the Public Health Service Act. Tissue
banking activities and tissue-based and other products are regulated in virtually all countries in
which we operate. The regulatory schemes and specific requirements for tissue-based products and
tissue banking activities vary from country-to-country. There are no common or harmonized
regulatory approvals or programs for these products and activities.
FDA regulations require the clearance or approval of a medical device before it may be legally
marketed in the United States. There are two processes by which medical devices receive clearance
or approval. Products may qualify for clearance under the 510(k) process, in which the
manufacturer or processor demonstrates that its product is substantially equivalent to another
lawfully marketed product (i.e., that the product has the same intended use and is as safe and
effective as a lawfully marketed product and does not raise questions of safety and effectiveness
different from those of the lawfully marketed products). 510(k) submissions usually include safety
and performance data, and in some cases, clinical data. Marketing may commence if and when the FDA
issues a 510(k) clearance letter finding substantial equivalence. Medical devices that do not
qualify for the 510(k) process may not be distributed until the FDA has approved a premarket
approval application (PMA). A PMA must demonstrate product safety and effectiveness and usually
includes the results of preclinical and clinical studies. Such clinical studies must be conducted
in compliance with FDA requirements, including international standards of good clinical practice
and be reviewed by an Institutional Review Board. Moreover, clinical studies of devices posing a
significant risk to patients must have an Investigational Device Exemption (IDE) approved by the
FDA prior to initiating such studies. A manufacturer must also pass a premarket inspection of its
compliance with the FDAs Quality Systems Regulation, which governs the methods used in, and the
facilities and controls used for, the design, manufacture, packaging, labeling, promotion,
installation, reporting, adverse events and servicing of medical devices. Marketing may commence
only when the FDA issues a PMA letter. FDA regulations do not require products regulated as
minimally manipulated human tissue-based products to be 510(k) cleared or PMA approved before they
are marketed. We are, however, required to register our establishment, list these products with
the FDA and comply with Current Good Tissue Practices for Human Cell, Tissue, and Cellular and
Tissue Based Product Establishments.
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Our facilities are periodically inspected by the FDA to ensure our quality system,
manufacturing procedures and facilities conform to the FDAs Quality System Regulations and Current
Good Tissue Practices.
Our facilities are also inspected by foreign governmental agencies to determine our compliance
with their national regulations. We believe we comply with all regulations to which we are
subject, although there can be no assurance that we will comply, or will comply on a timely basis,
in the future. Violations of the applicable regulations could adversely affect the continued
marketing of our tissue-based and other products. Our tissue recovery partners that provide us
with allograft bone tissue are responsible for performing donor recovery, donor screening and donor
testing and our compliance with those aspects of the Current Good Tissue Practices regulations that
regulate those functions are dependent upon the actions of these independent entities.
Our United States facilities have received International Standardization Organization (ISO)
13485:2003 certification for the development, manufacturing and marketing of biologic, biomaterial
and device systems for musculoskeletal surgery and the processing of human bone and connective
tissue for transplantation and is accredited by the American Association of Tissue Banks. Our
French and Bulgarian facilities received ISO 9001 certification for
their quality systems. Our French
facility has also received ISO 13485:2003 certification for the design, manufacturing and sale of
bovine-based bone substitutes. Our French subsidiary operates as a tissue bank under applicable
French regulations pursuant to an authorization that expires in 2011.
The procurement and transplantation of allograft bone tissue is subject to U.S. federal law
pursuant to the National Organ Transplant Act (NOTA), a criminal statute which prohibits the
purchase and sale of human organs used in human transplantation, including bone and related tissue,
for valuable consideration. NOTA permits reasonable payments associated with the removal,
transportation, processing, preservation, quality control, implantation and storage of human bone
tissue. In the United States, with the exception of removal and implantation, we provide services
in all of these areas. We make payments to certain of our clients and tissue banks in
consideration for the services they provide in connection with the recovery and screening of
donors. The procurement of human tissue is also subject to state anatomical gift acts and some
states have statutes similar to NOTA. In addition, some states require that tissue processors be
licensed by that state. Failure to comply with the requirements of NOTA or state laws could result
in enforcement action against us. Certain federal health care laws apply to our business if a
customer submits a claim for an item or service that is reimbursed under Medicare, Medicaid or most
other federally-funded health care programs. Healthcare providers that purchase medical devices
generally rely on third party payers, including the Medicare and Medicaid programs and private
payers, such as indemnity insurers, employer group health insurance programs and managed care
plans, to reimburse all or part of the cost of the products. Payments from Medicare, Medicaid, and
other third party payers are subject to legislative and regulatory changes and are susceptible to
budgetary pressures. Our customers revenues and ability to purchase our products are therefore
subject to the effect of those changes and to possible reductions in coverage or payment rates by
third party payers. Any changes to the healthcare regulatory, payment or enforcement landscape
relative to our customers healthcare services has the potential to significantly affect our
operations and revenues.
Of principal importance to us, federal law prohibits unlawful inducements for the referral of
business reimbursable under federally-funded health care programs (the Anti-Kickback Law), such
as remuneration provided to physicians to induce them to use products reimbursable by Medicare or
Medicaid. The Anti-Kickback Law is subject to evolving interpretations. Some states also have
anti-kickback laws which establish similar prohibitions. If a governmental authority were to
conclude that we are not in compliance with applicable laws and regulations, Osteotech and its
officers and employees, could be subject to severe criminal and civil penalties including, for
example, exclusion from participation as a supplier of product to beneficiaries covered by Medicare
or Medicaid.
The civil False Claims Act prohibits knowingly presenting (including causing the
presentation of) a false, fictitious or fraudulent claim for payment to the United States
government. Actions under the False Claims Act may be brought by the Attorney General or as a qui
tam action by a private individual in the name of the government. Violations of the False Claims
Act can result in very significant monetary penalties and treble damages. The federal government
is using the False Claims Act, and the accompanying threat of significant liability, in its
investigations of health care providers, suppliers and manufacturers throughout the country for a
wide variety of Medicare billing practices, and has obtained multi-million dollar settlements.
Given the significant size of actual and potential settlements, it is expected that the government
will continue to devote substantial resources to investigating health care providers, suppliers,
and manufacturers compliance with the health care billing, coverage and reimbursement rules and
fraud and abuse laws.
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Environmental Matters
Our activities in the United States, France and Bulgaria generate waste which is classified as
medical waste and/or hazardous waste. In the United States these regulations are promulgated by
the United States Environmental Protection Agency and the New Jersey Department of Environmental
Protection. We segregate our waste materials and dispose of them through a licensed hazardous waste
transporter in compliance with applicable regulations. At our processing facility in France, we
segregate both bovine and human tissue waste and dispose of it in a manner specified by the
appropriate regulatory authorities responsible for environmental matters in France. In Bulgaria,
we follow Bulgarian regulations regarding disposition of bio-hazard materials, including human
tissue waste, through a federally designed facility. Although we believe we are in compliance with
applicable environmental regulations, the failure to fully comply with any such regulations could
result in the imposition of penalties, fines and/or sanctions which could have a material adverse
effect on our business.
Patents and Proprietary Rights
We rely on our intellectual property positions, especially our investment in patents and
pending patent applications, to protect our proprietary technologies and products, processing
methods, trade secrets and know how. We require all of our employees and consultants to execute
confidentiality and invention agreements prior to employment or the start of any consulting
project. When appropriate, we will defend our patents or, in certain circumstance, license our
intellectual property to others. At February 17, 2010, we held an aggregate of 139 United States
patents and pending patent applications and 228 foreign patents and patent applications. There can
be no assurance any patent application will result in an issued patent.
Employees
At December 31, 2009, we had 297 employees, of whom 168 were engaged in allograft bone tissue
processing and distribution; 25 were engaged in research and development; 40 were engaged in
education, sales and marketing; and 64 were engaged in regulatory, finance and administration. Our
employees are not covered by any collective bargaining agreement. We consider relations with our
employees to be good.
Available Information
We maintain a website at www.osteotech.com to provide information to the general public and
our shareholders on our tissue forms, products, resources and services, along with general
information on Osteotech and its management, career opportunities, financial results and press
releases. Copies of our most recent Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q
and our other reports filed with the Securities and Exchange Commission, or SEC, can be obtained,
free of charge, as soon as reasonably practicable after such material is electronically filed with,
or furnished to the SEC, from our Investor Relations Department by calling 732-542-2800, through an
e-mail request from our website at www.osteotech.com/finrequest.htm, through the SECs website by
clicking the direct link from our website at www.osteotech.com/finrequest.htm or directly from the
SECs website at www.sec.gov or via the SECs Public Reference Room located at 100 F Street N.E.,
Washington, D.C 20549. Information concerning the operation of the SECs Public Reference Room can
be obtained by calling 1-800-SEC-0330. Our website and the information contained therein or
connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
Item 1A. | Risk Factors |
Risks Related to Our Company
We rely on our independent sales agents and sales representatives to educate surgeons and to
market our Products.
Our ability to grow revenue depends largely upon arrangements we have with independent sales
agents and sales representatives whereby they educate surgeons concerning our Products. We do not
control these sales agents and sales representatives and they typically have relationships with
other orthopedic companies, many of which are larger and have substantially more resources than we
do. The relationship our sales agents and sales representatives have with these other orthopedic
companies may generate more revenue for them than their relationship with us. As a result, they
may not be successful in implementing our marketing plans, may terminate their relationship with
us, or may devote insufficient efforts to the sale of our Products. Our failure to attract and
retain skilled independent sales agents and sale representatives and/or our failure to obtain
sufficient time and effort for the sales and
marketing of our Products could have a material adverse effect on our business, results of
operations or financial condition.
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The disruption in the global financial markets and the economic downturn may adversely impact
our business.
Our ability and the ability of our customers, suppliers and distributors to fund operations
and to obtain financing for general corporate and commercial purposes is subject to prevailing
economic conditions and to financial, business and other factors beyond our control. Turmoil in
global credit markets and the financial services industry may result in the bankruptcy, failure or
sale of various financial institutions, a general tightening of credit, and an unprecedented level
of market intervention by governments. These events may adversely affect the United States and
world economy, and may adversely affect the availability and cost of financing. There can be no
assurances as to the length or severity of any period of disruption and related economic downturn.
If our operations, financial performance or access to capital are adversely affected by these
conditions, or if our customers, suppliers or distributors are adversely impacted by these
conditions, it could have a material adverse affect on our business, results of operations or
financial condition.
Our ability to execute on our business plan and compete successfully is dependent on our
ability to continue to develop new and innovative products that are accepted by the market.
Our business plan requires that we continue to develop and introduce new products to the
market. We are engaged in product development and improvement programs and must continue to design
and develop new innovative products, effectively distribute and achieve market acceptance of those
products, and reduce the costs of producing our products to compete successfully with our
competitors. We cannot assure you that we will be able to successfully design and develop
innovative new products. Additionally, our competitors product development capabilities may be
more effective than ours, our competitors new or improved products may be distributed to or
accepted by the market before our products are, and our competitors may be able to produce products
at a lower cost and thus offer products for sale at a lower price. Market acceptance of our
products will depend on our ability to demonstrate the safety, clinical efficacy, perceived
benefits, cost-effectiveness and third party reimburseability of our products compared to products
or treatment options of our competitors, and to train physicians in the proper application of our
products. We may not be successful in educating the marketplace about the benefits of using our
products. Even if customers accept our products, this acceptance may not translate into sales if
our competitors have developed similar products that our customers prefer.
If there is any disruption at our primary processing facility, we may not be able to supply
our customers with Products.
The vast majority of the Products we distribute are processed in our facility located in
Eatontown, New Jersey. A natural disaster or significant mechanical failure may impact our ability
to process Products and could adversely affect our business, financial condition and results of
operations. We take safeguards to protect the processing facility, our employees and our allograft
tissue inventories and we maintain property insurance that includes business interruption coverage,
which may not be sufficient to cover our losses depending on the nature of the event and length of
time our facility was unavailable.
We face strong competitive threats from firms with greater financial resources and lower
costs.
We compete in the biologics portion of the orthopedic market against autograft bone tissue,
synthetic bone void fillers, growth factors and allograft bone tissue products. Autograft bone
tissue has historically been the primary choice for surgeons and we believe autograft bone tissue
is still considered the gold standard of care. We believe that a majority of the cadaveric bone
banks operating in the United States are engaged in processing allograft bone tissue for
transplantation. Many of these bone banks are not-for-profit organizations, and, as such, they may
be able to supply products at a lower cost than we can. Several for-profit companies, certain of
which have substantially greater resources than we do, are processing, marketing and distributing
allograft bone tissue products. We compete with such entities on the basis of our advanced
processing technology and the quality and quantity of the bone tissue our processing yields. We may
not be able to continue to compete successfully in the area of allograft bone tissue processing and
distribution.
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In recent years, our Products have faced increasing competitive pressures as more companies
have developed, or have announced they are developing, products with similar characteristics.
Certain of those competitors have, in turn, partnered with large orthopedic and spine companies to
market the competing products
they have developed. We expect that this competition will continue in the future. Many of
these competitors have research and development, marketing and other resources that are
significantly greater than ours. They also offer a full line of metal implants and other products
used in spinal surgeries. This could give them a competitive advantage over us since they can
offer surgeons a more complete line of products than we can.
Our Products face competitive threats from alternate technologies.
The primary advantage of synthetic bone graft substitutes and growth factors as compared to
allograft bone tissue is that they do not depend on the availability of donated human tissue. In
addition, members of the medical community and the general public may perceive synthetic materials
and growth factors as safer than allograft-based bone tissue products. Our products may be
incapable of competing successfully with synthetic bone graft substitutes and growth factors
developed and commercialized by others, which could have a material adverse effect on our business,
financial condition and results of operations. Companies are also developing new products and
technologies for the surgical procedures in which we compete. If these products are successfully
developed and commercialized, they could have a negative impact on our business and, therefore,
have a material adverse effect on our financial condition and results of operations.
We may need to secure additional financing to fund our long-term strategic plan.
We expect to continue to make investments in our business to support distribution
effectiveness efforts, tissue supply initiatives, research and development activities and other
future programs and initiatives, which may deplete available cash balances. We believe that our
available cash, cash equivalents, available line of credit and anticipated future cash flow from
operations will be sufficient to meet our forecasted cash needs for the near future. Our future
liquidity and capital requirements will depend upon numerous factors, including:
| the progress of our product development programs and the need for and
associated costs relating to regulatory approvals, if any, which may be needed to
commercialize some of our Products under development; |
||
| the commercialization efforts related to existing Products; and |
||
| the resources we devote to the research, development and manufacture of our current
and future services and Products. |
We may need to raise additional funds through the issuance of equity and/or debt through
private placements or public offerings to provide funds to meet the needs of our long-term
strategic plan. Additional funds may not be available, or if available, may not be available on
favorable terms. Further equity financings, if obtained, may substantially dilute the interest of
our existing shareholders. Any additional debt financings may contain restrictive terms that limit
our operating flexibility. As a result, any future financings could have a material adverse effect
on our business, financial condition or results of operations.
Our dependence upon a supply of human donors may curtail business expansion.
Our products and services depend upon the availability of allograft bone tissue and related
connective tissue from human donors recovered by our clients and tissue banks which recover
allograft bone tissue for us or from our own efforts in Bulgaria. We rely on the efforts of
not-for-profit donor procurement agencies, including our current clients, to educate the public and
foster an increased willingness to donate bone tissue. These organizations may not be able to find
a sufficient number of persons willing to donate, or may not be willing to provide sufficient
amounts of tissue to meet present or future demand for the products we distribute or any products
or materials we are developing. Although we have taken steps to address tissue supply, we cannot
assure you that these efforts will be successful in the future or that we will otherwise be able to
secure a sufficient supply of tissue. Our inability to secure enough donor tissue to meet our
demands could have a material adverse effect on our business, financial condition and results of
operations.
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Loss of key persons could limit our success.
Our success depends upon the continued contributions of our executive officers and scientific
and technical personnel. The competition for qualified personnel is intense, and the loss of
services of our key personnel, particularly members of senior management, could adversely affect
our business.
Actions of activist stockholders may adversely impact our business.
Several stockholders have filed Schedule 13D with the SEC on which they have indicated they
intend to engage in discussions with our Board of Directors and/or management regarding our
operations, the engagement of a strategic advisor, changing the composition of the Board of
Directors and/or management or that they may nominate a full slate or a number of new nominees for
election as directors at our next annual meeting. Our business may be adversely impacted by the
actions of these activist stockholders if we are compelled to respond to proxy contests or other
actions by such stockholders, which can be costly and time consuming, and which will disrupt our
operations and divert the attention of our management and employees.
We incurred a net loss and consumed a significant portion of our cash reserves in 2009.
In 2009, we incurred a net loss of $4.0 million and consumed $8.1 million of our cash
reserves. We have taken a number of actions to reduce or eliminate our losses and to rebuild our
cash reserves, including launching new tissue products, reducing our workforce, initiated tissue
inventory reduction programs and taking other cost cuttings measures. The success of these actions
depends on a number of factors and assumptions that are subject to risks and uncertainties.
Therefore, there can be no assurance that actual results may not differ materially from our
expectations or that our actions to reduce or eliminate our losses and to rebuild our cash reserves
will be successful.
Risks Related to Our Industry
Our revenues will depend upon reimbursement from public and private insurers and national
health systems.
The ability of hospitals to pay fees for allograft bone tissue products depends in part on the
extent to which reimbursement for the costs of such materials and related treatments will continue
to be available from government health administration authorities, private health coverage insurers
and other organizations. We may have difficulty gaining market acceptance for our Products if
government and third-party payors do not provide adequate coverage and reimbursement.
The medical community could choose not to use our allograft bone tissue products.
We believe the market for allograft bone tissue products will continue to be based primarily
upon the use of such products by physicians specializing in the orthopedic, spine, neurological and
oral/maxillofacial surgical areas. Our future growth depends in part upon such physicians wider
use of allograft bone tissue products as an alternative to autograft bone tissue and other
available materials and treatments. We have tried to educate physicians through our marketing
activities. Our future efforts in this regard may fail to generate additional demand for our tissue
products.
Governmental regulation could restrict the use of our Products or our procurement of tissue.
In the United States, the procurement and transplantation of allograft bone tissue is subject
to federal law pursuant to NOTA, a criminal statute which prohibits the purchase and sale of human
organs used in human transplantation, including bone and related tissue, for valuable
consideration. NOTA permits reasonable payments associated with the removal, transportation,
processing, preservation, quality control, implantation and storage of human bone tissue. We
provide services in all of these areas in the United States, with the exception of removal and
implantation, and receive payments for all such services. We make payments to certain of our
clients and tissue banks for their services related to recovering allograft bone tissue on our
behalf. If NOTA is interpreted or enforced in a manner which prevents us from receiving payment
for services we render or which prevents us from paying tissue banks or certain of our clients for
the services they render for us, our business could be materially, adversely affected.
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We are engaged through our marketing employees, independent sales agents and sales
representatives in ongoing efforts designed to educate the medical community as to the benefits of
our Products, and we intend to continue our educational activities. Although we believe that NOTA
permits payments in connection with these educational efforts as reasonable payments associated
with the processing, transportation and implantation of our Products, payments in connection with
such education efforts are not exempt from NOTAs restrictions and our inability to make such
payments in connection with our education efforts may prevent us from paying our sales
representatives for their education efforts and could adversely affect our business and prospects.
No federal agency
or court has determined whether NOTA is, or will be, applicable to every allograft bone
tissue-based material which our processing technologies may generate. Assuming that NOTA applies to
our processing of allograft bone tissue, we believe that we comply with NOTA, but there can be no
assurance that more restrictive interpretations of, or amendments to, NOTA will not be adopted in
the future which would call into question one or more aspects of our method of operations.
The United States federal health care laws apply to certain aspects of our business if a
customer submits a claim for an item or service that is reimbursed under Medicare, Medicaid or most
other federally-funded health care programs. Of principal importance to us, federal law prohibits
unlawful inducements for the referral of business reimbursable under federally-funded health care
programs (the Anti-Kickback Law), such as remuneration provided to physicians to induce them to
use certain products or medical devices reimbursable by Medicare or Medicaid. The Anti-Kickback
Law is subject to evolving interpretations. If a governmental authority were to conclude that we
are not in compliance with applicable laws and regulations, Osteotech and its officers and
employees could be subject to severe criminal and civil penalties including, for example, exclusion
from participation as a supplier of product to beneficiaries covered by Medicare or Medicaid.
Our Products are extensively regulated by federal and certain state agencies in the United
States. Failure to comply with these requirements may subject us to administrative or judicial
sanctions, such as the FDAs refusal to clear pending applications, warning letters, product
recalls, product seizures, total or partial suspension of production or distribution, civil
penalties, injunctions and/or criminal prosecution.
In the United States, the allograft bone tissues that we process are regulated by the FDA
either as human tissue-based products under section 361 of the Public Health Service Act or as a
medical device under the Food, Drug, and Cosmetic Act.
FDA regulations generally do not require minimally manipulated human tissue-based products be
cleared or approved before they are marketed. We are, however, required to register and list these
products with the FDA and to comply with regulations concerning tissue donor screening and testing,
and related procedures and record keeping. The FDA periodically inspects tissue processors to
determine compliance with these requirements. In May 2005, the FDAs Current Good Tissue
Practice regulations went into effect, which impose requirements on the manufacture of human
tissue-based products, including tissue recovery, donor screening, donor testing, processing,
storage, labeling, packaging and distribution. We believe we comply with all aspects of the
Current Good Tissue Practice regulations, although there can be no assurance that we do comply or
will comply in the future.
Allograft bone tissue and tissue banking activities, such as tissue donation and recovery and
tissue processing, are regulated in all countries in which we operate outside the United States.
The regulatory schemes and specific requirements for these products and activities vary from
country-to-country. There are no common or harmonized regulatory approvals or programs for these
products and activities, such as there are for medical devices marketed in the European Union. We
believe that we comply with the national regulations in the countries in which we currently operate
or in the countries we plan to operate in the future, although there can be no assurances that we
will be able to do so in the future.
We may incur losses from product liability lawsuits.
The testing and use of allograft bone tissue, bovine tissue products and medical devices which
we process, manufacture or distribute, entail inherent risks of medical complications for patients
and therefore may result in product liability claims against us. Further, our agreements with our
clients provide that we shall indemnify them for liabilities arising out of defects caused by our
processing. We maintain product liability insurance in the amount of $20.0 million per occurrence
and per year in the aggregate. We may be unable to maintain such insurance in the future and such
insurance may not be sufficient to cover all claims made against us or all types of liabilities,
which may be asserted against us.
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Negative publicity related to allograft bone tissue donation or tissue grafts may negatively
impact the supply of available allograft tissue and may reduce the demand for our products.
Negative publicity concerning the use and method of obtaining donated human tissue may reduce
the demand for our Products or negatively impact the willingness of families of potential donors to
agree to donate tissue, or tissue banks to provide tissue to us. In such event, we might not be
able to obtain adequate tissue to meet
the needs of our customers, which could have a material adverse effect on our business,
financial condition or results of operations.
If we are unable to enforce our patents or if it is determined that we infringe patents held
by others it could damage our business.
We consider our allograft bone tissue processing technology and procedures proprietary and
rely primarily on patents to protect our technology and innovations. Consultants employed by third
parties and persons working in conjunction with medical institutions unaffiliated with us have
conducted significant research and development for our Products. Accordingly, disputes may arise
concerning the proprietary rights to information applied to our projects, which have been
independently developed. In addition, although we have attempted to protect our technology with
patents, our existing patents may prove invalid or unenforceable as to products or services
marketed by our competitors. Our pending patent applications may not result in issued patents.
Moreover, our existing or future Products and technologies could be found to infringe the patents
of others.
Prosecuting and defending patent lawsuits is very expensive. We are committed to aggressively
asserting and defending our technology and related intellectual property, which we have spent a
significant amount of time and money to develop. In addition, the industry in which we compete is
known for having a great deal of litigation involving patents. These factors could cause us to
become involved in new patent litigation in the future. The expense of prosecuting or defending
these future lawsuits could also have a material adverse effect on our business, financial
condition and results of operations.
If we were to lose a patent lawsuit in which another party is asserting that our Products
infringe its patents, we would likely be prohibited from marketing those Products and could also be
liable for significant damages. Either or both of these results may have a material adverse effect
on our business, financial condition and results of operations. If we lose a patent lawsuit in
which we are claiming that another partys products are infringing our patents and thus, are unable
to enforce our patents, it may have a material adverse effect on our business, financial condition
and results of operations.
Our competitive position depends, in part, on unpatented trade secrets which we may be unable
to protect.
Our competitive position depends in part upon unpatented trade secrets, which are difficult to
protect. We cannot assure you that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our trade secrets, that our
trade secrets will not be disclosed or that we can effectively protect our rights to unpatented
trade secrets.
In an effort to protect our trade secrets, we require our employees, consultants and advisors
to execute proprietary information and invention assignment agreements upon commencement of
employment or consulting relationships with us. These agreements provide that, except in specified
circumstances, all confidential information developed or made known to the individual during the
course of their relationship with us must be kept confidential. We cannot assure you, however,
that these agreements will provide meaningful protection for our trade secrets or other proprietary
information in the event of the unauthorized use or disclosure of confidential information.
We may face lawsuits or governmental enforcement activities based on hazardous waste we
generate in our operations.
We are subject to federal, state, foreign, and local laws and regulations governing the use,
manufacture, storage, handling, treatment, remediation, and disposal of hazardous materials and
certain waste products (Environmental Laws). For example, our allograft bone tissue processing in
both the United States and Europe generates waste materials, which we segregate and dispose of in
compliance with applicable Environmental Laws. Although we believe that our procedures for
handling and disposing of hazardous materials comply with the Environmental Laws, the Environmental
Laws may be amended in ways that increase our cost of compliance, perhaps materially. Furthermore,
the risk of accidental contamination or injury from these materials cannot be eliminated, and there
is also a risk that such contamination previously has occurred in connection with one of our
facilities. Our failure to fully comply with any Environmental Laws could result in the imposition
of penalties, sanctions or, in some cases, private lawsuits, which could have a material adverse
effect on our business, financial condition and results of operations.
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Changes in the healthcare industry may require us to decrease the selling price for our
products, may reduce the size of the market for our products, or may eliminate a market, any of
which could have a negative impact on our financial performance.
Trends toward managed care, healthcare cost containment and other changes in government and
private sector initiatives in the United States and other countries in which we do business are
placing increased emphasis on the delivery of more cost-effective medical therapies that could
adversely affect the sale and/or the prices of our products. For example:
| major third-party payors of hospital services and hospital outpatient services,
including Medicare, Medicaid and private healthcare insurers, annually revise their
payment methodologies, which can result in stricter standards for reimbursement of
hospital charges for certain medical procedures or the elimination of reimbursement,
which could create downward price pressure on our products; |
| potential legislative proposals have been considered that would result in major
reforms in the United States healthcare system that could have an adverse effect on our
business; |
| there has been a consolidation among healthcare facilities and purchasers of medical
devices in the United States who prefer to limit the number of suppliers from whom they
purchase medical products, and these entities may decide to stop purchasing our
products or demand discounts on our prices; |
| we are party to contracts with group purchasing organizations, which negotiate
pricing for many member hospitals, that require us to discount our prices for certain
of our products and limit our ability to raise prices for certain of our products; |
| there is economic pressure to contain healthcare costs in domestic and international
markets; |
| there are proposed and existing laws, regulations and industry policies in domestic
and international markets regulating the sales and marketing practices and the pricing
and profitability of companies in the healthcare industry; |
| proposed laws or regulations that will permit hospitals to provide financial
incentives to doctors for reducing hospital costs (known as gainsharing) and to award
physician efficiency (known as physician profiling) could reduce prices; and |
| there have been initiatives by third-party payors to challenge the prices charged
for medical products that could affect our ability to sell products on a competitive
basis. |
Both the pressures to reduce prices for our products in response to these trends and the
decrease in the size of the market as a result of these trends could adversely affect our revenue.
Risks Related to Our Common Stock
The price of our common stock has been, and may continue to be, volatile.
The market price of our common stock, like that of the securities of many other companies in
our industry, has fluctuated over a wide range and it is likely that the price of our common stock
will fluctuate in the future. Over the past three years, the sale price for our common stock, as
reported by NASDAQ, has fluctuated from a low of $1.31 to a high of $8.70. The market price of our
common stock could be impacted by a variety of factors, including:
| announcements of technological innovations or new commercial products by us or
our competitors, |
| disclosure of the results of regulatory proceedings, |
| changes in government regulation, |
| developments in the patents or other proprietary rights owned or licensed by us
or our competitors, |
| public concern as to the safety and efficacy of products developed by us or
others, |
| availability of required amounts of bone and related connective tissue, |
| litigation, and |
| general market conditions overall or just in our industry. |
In addition, the stock market continues to experience extreme price and volume fluctuations.
These fluctuations have especially affected the market price of many biotechnology companies. Such
fluctuations have
often been unrelated to the operating performance of these companies. Nonetheless, these
broad market fluctuations may negatively affect the market price of our common stock.
14
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Events with respect to our share capital could cause the price of our common stock to decline.
Sales of substantial amounts of our common stock in the open market, or the availability of
such shares for sale, could adversely affect the price of our common stock. We had 18,063,510
shares of common stock outstanding as of December 31, 2009. The following securities that may be
exercised into shares of our common stock were issued and outstanding as of December 31, 2009:
| Options. Stock options to purchase 1,386,812 shares of our common stock at a
weighted average exercise price of approximately $6.04 per share. |
| Restricted stock units. 434,283 shares of our common stock may be issuable upon
the vesting of outstanding restricted stock units. |
The shares of our common stock that may be issued under currently outstanding options and
restricted stock units are currently registered with the SEC.
The issuance of preferred stock may adversely affect rights of common stockholders or
discourage a takeover.
Under our amended and restated certificate of incorporation, our Board of Directors has the
authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by our stockholders.
The rights of the holders of common stock will be subject to, and may be adversely affected by, the
rights of the holders of any shares of preferred stock that may be issued in the future.
In January 2010, our Board of Directors authorized shares of Series E Junior Participating
Preferred Stock (Series E Preferred Stock) in connection with its adoption of a stockholder rights
plan, under which we issued rights to purchase Series E Preferred Stock to holders of our common
stock. Upon certain triggering events, such rights become exercisable to purchase common stock (or,
in the discretion of our Board of Directors, Series E Preferred Stock) at a price substantially
discounted from the then current market price of the common stock. Our stockholder rights plan may
generally discourage a merger or tender offer involving our securities that is not approved by our
Board of Directors by increasing the cost of effecting any such transaction and, accordingly, could
have an adverse impact on stockholders who might want to vote in favor of such merger or
participate in such tender offer. Our stockholder rights plan expires in January 2020.
While we have no present intention to authorize any additional series of preferred stock, such
issuance, while providing desirable flexibility in connection with possible acquisitions and other
corporate purposes, could also have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock. The preferred stock may have other rights,
including economic rights senior to the common stock, and, as a result, the issuance thereof could
have a material adverse effect on the market value of the common stock.
Item 1B. | Unresolved Staff Comments |
Not applicable.
Item 2. | Properties |
Our principal executive offices are located in a 38,400 square foot building in Eatontown, New
Jersey, which is occupied pursuant to a lease which expires in December 2014 and provides for a
base annual rental of approximately $692,000 in 2010, with an automatic 3% increase in each
successive year of the lease. The lease is renewable at our option for one additional five-year
term at a rental rate to be negotiated at the time of renewal. This facility is occupied by our
corporate, financial, administrative, marketing, research and development, regulatory and clinical
affairs staff.
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Our principal processing facility is located in a 73,000 square foot building adjacent to our
principal executive offices in Eatontown, New Jersey. The facility is occupied pursuant to a lease
which began in August, 2005. The lease agreement is for an initial term of twenty years with two
five-year renewal options at our election.
Lease payments are $2,326,000 per year for the first seven years, $1,460,000 per year for
years eight through twelve, an annual rental rate to be determined at the time with a minimum rate
of $1,460,000 and a maximum rate of $1,533,000 for years thirteen through seventeen, and thereafter
at an annual rental rate to be determined at the time with a minimum rate equal to the actual
rental rate in year seventeen and a maximum rate of $1,610,000 for years eighteen through twenty.
Item 3. | Legal Proceedings |
Osteotech v. Regeneration Technologies, Inc.
In September 2006, we filed a complaint against Regeneration Technologies, Inc. (now RTI
Biologics, Inc. or RTI) in the United States District Court for the District of New Jersey,
alleging patent infringement. In December 2009, we reached a confidential settlement with RTI for
a nominal amount.
ReSource Tissue Bank v. OST Developpement SA
On August 8,
2007, ReSource Tissue Bank filed a lawsuit against OST Developpement SA (OST),
our wholly owned subsidiary, before the Commercial Court of Clermond-Ferrand, France, claiming
damages arising from OSTs allegedly unlawful termination of its exclusive distribution agreement.
The complaint requests that the Court declare that OST breached the agreement by unilaterally and
abusively terminating the agreement, and requests the Court to order OST to pay the plaintiff
damages totaling 3,329,000 euros ($4,771,000) consisting of
(i) 374,000 euros ($536,000) for reimbursement of
marketing expenses (ii) 2,398,000 euros ($3,437,000) for lost profits for the remainder of the normal term
of the agreement, (iii) 550,000 euros ($788,000) for damage to the distributors loss of commercial
reputation, and (iv) 7,000 euros ($10,000) in legal costs. Additionally, the complaint requests that the
Court order OST to repurchase the former distributors remaining inventory of products purchased
from OST for a purchase price of 90,000 euros ($129,000). At a February 4, 2010 hearing before the Court,
OST and RTB argued the merits of their respective cases and we requested a stay. We expect the
Court to render its decision on the merits, and/or our request for a
stay in April 2010.
We believe the claims made against OST in this case are without merit and intend to vigorously
defend ourself in this action.
Other than the foregoing matters, we are not a party to any material pending legal
proceedings.
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 currently unable to estimate the
ultimate liability, if any, that may result from the pending litigation and, accordingly, no
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.
Item 4. | Reserved |
This item was removed and reserved pursuant to SEC Release No. 33-9089A issued on February 23,
2009.
16
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PART II
Item 5. | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities |
Market Information
Our Common Stock is listed on the NASDAQ Global Market under the trading symbol OSTE.
The following table sets forth the high and low sale prices for the Common Stock for each of
the fiscal quarters during the years ended December 31, 2009 and 2008 based on transaction data as
reported by the NASDAQ Global Market.
Year Ended December 31, 2009 | ||||||||
High | Low | |||||||
First Quarter |
$ | 3.94 | $ | 1.74 | ||||
Second Quarter |
$ | 4.63 | $ | 3.01 | ||||
Third Quarter |
$ | 5.04 | $ | 3.87 | ||||
Fourth Quarter |
$ | 4.84 | $ | 2.55 |
Year Ended December 31, 2008 | ||||||||
High | Low | |||||||
First Quarter |
$ | 7.53 | $ | 4.12 | ||||
Second Quarter |
$ | 6.21 | $ | 3.99 | ||||
Third Quarter |
$ | 5.68 | $ | 4.11 | ||||
Fourth Quarter |
$ | 4.20 | $ | 1.31 |
Holders
As of March 1, 2010, there were 410 holders of record of Osteotech Common Stock. We believe
that there are approximately 2,800 beneficial owners of our Common Stock.
Dividends
We have never paid a cash dividend and do not anticipate the payment of cash dividends in the
foreseeable future. We expect to retain future earnings to finance our growth. In addition, our
credit facility restricts our ability to pay dividends, see Item 7 of Part II of this Form 10-K.
The declaration of dividends in the future will remain within the discretion of our Board of
Directors, which will review our dividend policy from time to time.
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Stockholder Return Performance Graph
The graph below summarizes the total cumulative return experienced by Osteotechs stockholders
during the five-year period ended December 31, 2009, compared to the NASDAQ Stock Market Index and
the Dow Jones Medical Supplies Index. The changes for the periods shown in the graph and table are
based on the assumption that $100.00 has been invested in Osteotech, Inc. common stock and in each
index below on January 1, 2005 and that all cash dividends were reinvested.
Jan. 1 | December 31, | |||||||||||||||||||||||
2005 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||
Osteotech, Inc. |
$ | 100.00 | $ | 90.36 | $ | 102.73 | $ | 142.18 | $ | 30.73 | $ | 58.18 | ||||||||||||
Nasdaq Stock Market |
$ | 100.00 | 102.28 | 112.81 | 124.70 | 59.78 | 86.87 | |||||||||||||||||
Dow Jones Medical Supplies |
$ | 100.00 | 99.58 | 118.64 | 148.11 | 113.94 | 142.07 |
Recent Sales of Unregistered Securities and Purchases of Equity Securities by the Company
Not applicable.
18
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Item 6. | Selected Financial Data |
Set forth below is selected financial data as of December 31 for each of the five years ended
December 31, 2009. The following data should be read in conjunction with our consolidated
financial statements and related notes thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations contained elsewhere herein.
Selected Financial Data
(dollars in thousands except per share data) | ||||||||||||||||||||
For the Year ended December 31, | 2009(1) | 2008(2) | 2007(3) | 2006 | 2005(4) | |||||||||||||||
Consolidated Results of Operations |
||||||||||||||||||||
Revenue |
$ | 96,678 | $ | 103,814 | $ | 104,277 | $ | 99,241 | $ | 93,307 | ||||||||||
Gross profit |
$ | 47,570 | $ | 55,044 | $ | 53,722 | $ | 47,802 | $ | 31,862 | ||||||||||
Operating expenses |
$ | 50,482 | $ | 52,467 | $ | 50,459 | $ | 45,455 | $ | 51,930 | ||||||||||
Operating income (loss) |
$ | (2,912 | ) | $ | 2,577 | $ | 3,263 | $ | 2,347 | $ | (20,068 | ) | ||||||||
Other (expense), net |
$ | (1,370 | ) | $ | (111 | ) | $ | (589 | ) | $ | (498 | ) | $ | (1,564 | ) | |||||
Income (loss) before income taxes |
$ | (4,282 | ) | $ | 2,466 | $ | 2,674 | $ | 1,849 | $ | (21,632 | ) | ||||||||
Net income (loss) |
$ | (4,017 | ) | $ | 2,203 | $ | 2,617 | $ | 1,907 | $ | (21,117 | ) | ||||||||
Earnings (loss) per share |
||||||||||||||||||||
Basic |
$ | (0.22 | ) | $ | 0.12 | $ | 0.15 | $ | 0.11 | $ | (1.23 | ) | ||||||||
Diluted |
$ | (0.22 | ) | $ | 0.12 | $ | 0.15 | $ | 0.11 | $ | (1.23 | ) | ||||||||
Dividends per share |
| | | | | |||||||||||||||
Year End Financial Position |
||||||||||||||||||||
Cash and cash equivalents |
$ | 10,708 | $ | 18,823 | $ | 22,777 | $ | 17,946 | $ | 13,484 | ||||||||||
Current assets, net of cash and
cash equivalents |
$ | 59,793 | $ | 61,265 | $ | 55,331 | $ | 51,374 | $ | 48,400 | ||||||||||
Total assets |
$ | 116,937 | $ | 127,115 | $ | 120,351 | $ | 113,033 | $ | 111,022 | ||||||||||
Current liabilities |
$ | 17,200 | $ | 24,464 | $ | 20,171 | $ | 16,588 | $ | 16,975 | ||||||||||
Long-term obligations, net of current portion |
$ | 12,181 | $ | 13,175 | $ | 14,069 | $ | 14,876 | $ | 15,603 | ||||||||||
Stockholders equity |
$ | 80,286 | $ | 82,850 | $ | 79,028 | $ | 73,853 | $ | 70,755 |
(1) | In 2009, we recorded $3.8 million in license fee revenue and $2.8 million in gross
profit from license fees. |
|
(2) | In 2008, we recorded $1.0 million in other income related to a litigation settlement
and $0.5 million in license fee revenue. |
|
(3) | In 2007, we recorded $1.0 million in operating expenses related to a litigation
settlement. |
|
(4) | In 2005, we recorded severance and retirement charges of $2.0 million related to
retirement agreements with certain employees including our former Chief Executive Officer and Chief
Financial Officer. Also in 2005, we recorded a charge of $1.9 million for professional fees
incurred as a result of an unsolicited takeover attempt. |
Item 7. | Managements Discussion And Analysis Of Financial Condition And Results Of
Operations |
Overview
We believe we are a leading technology company that develops innovative and efficacious
products for regenerative medicine. We are focused on creating innovative technology platforms
that will provide us with a variety of procedural specific biologic products to address the
changing needs of orthopedics and healthcare in general. By developing specific products for
specific procedures, we believe we will be able to provide the surgeon with the right product at
the right time for the right procedure and therefore improve patient outcomes. We are currently
focused on three technologies: MagniFuse, Plexur® and HCT. Each of these technologies have
generated and we expect will continue to generate a variety of procedural specific products
allowing us to pursue opportunities in existing and new markets. Our legacy business lines, lead
by our proprietary Grafton® Technology, have provided us with a base of business. These legacy
business lines allow us to cover overhead and manufacturing capacity as we drive the launch of new
products from the MagniFuse, Plexur® and HCT technologies. We believe the MagniFuse, Plexur®
and HCT technology platforms will drive our future growth.
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Our goal is to utilize our technology platforms to develop tissue forms and products
(collectively referred to herein as Products) to create procedure specific solutions to repair,
replace or heal bone and tissue loss caused by trauma, disease or surgical intervention and to
augment prosthetic implant procedures, to facilitate spinal fusion and to replace and/or repair
damaged ligaments, tendons and other tissues within the human body. We provide our biologic
solutions to orthopedic, spinal, trauma, neurosurgical and oral/maxillofacial surgeons for use in
various surgical procedures.
During 2009, we accomplished the following milestones furthering our efforts to transform the
Company to a biologics solutions business:
| Early in the fourth quarter, we announced the first U.S. spinal surgery using
MagnifuseTM PC (Posterior Cervical), which officially marked the start of the
controlled release for a family of products based upon the MagnifuseTM
technology platform. MagnifuseTM PC was utilized during a posterior cervical
fusion surgery and was cited as being easy-to-use and intuitive with a differentiated
self-contained delivery system. |
| In the fourth quarter, we signed a multi-year tissue supply agreement with Community
Tissue Services (CTS) with an initial term spanning 10 years. The agreement replaced a
previous contract between the two companies that would have expired in 2011. Under the
terms of the agreement, CTS will supply us
with whole donors and cortical shafts based upon periodic forecast requirements and
available tissue supply. |
| During the fourth quarter, we announced Plexur® M was had been utilized in surgeries
focused on orthopedic trauma, joint replacements and oncology-related procedures. |
| Late in the fourth quarter, we submitted a 510(k) application to the FDA to obtain
marketing clearance for the use of our Duratech BioRegeneration Matrix to repair or
replace the dura mater in various cranial surgical procedures. We expect to receive
preliminary feedback from the FDA regarding the pending application late in the first
quarter of 2010. |
In December 2009, we entered into a $10 million secured credit facility with a bank that will
serve to augment our $10.7 million cash position at December 31, 2009 should it be required.
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Results of Operations
The following table sets forth our consolidated results of operations for 2009, 2008 and 2007:
Year Ended December 31, | ||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
(in thousands) | Amount | % of Sales | Amount | % of Sales | Amount | % of Sales | ||||||||||||||||||
Revenue |
$ | 96,678 | 100.0 | % | $ | 103,814 | 100.0 | % | $ | 104,277 | 100.0 | % | ||||||||||||
Cost of revenue |
49,108 | 50.8 | % | 48,770 | 47.0 | % | 50,555 | 48.5 | % | |||||||||||||||
Gross profit |
47,570 | 49.2 | % | 55,044 | 53.0 | % | 53,722 | 51.5 | % | |||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Marketing, Selling and G&A |
43,996 | 45.5 | % | 45,032 | 43.4 | % | 44,801 | 43.0 | % | |||||||||||||||
R&D |
6,486 | 6.7 | % | 7,435 | 7.2 | % | 5,658 | 5.4 | % | |||||||||||||||
Total Operating Expenses |
50,482 | 52.2 | % | 52,467 | 50.5 | % | 50,459 | 48.4 | % | |||||||||||||||
Operating income (loss) |
(2,912 | ) | -3.0 | % | 2,577 | 2.5 | % | 3,263 | 3.1 | % | ||||||||||||||
Other expense |
(1,370 | ) | -1.4 | % | (111 | ) | -0.1 | % | (589 | ) | -0.5 | % | ||||||||||||
Income (loss) before income taxes |
(4,282 | ) | -4.4 | % | 2,466 | 2.4 | % | 2,674 | 2.6 | % | ||||||||||||||
Income tax expense (benefit) |
(265 | ) | 0.2 | % | 263 | 0.3 | % | 57 | 0.1 | % | ||||||||||||||
Net income (loss) |
$ | (4,017 | ) | -4.2 | % | $ | 2,203 | 2.1 | % | $ | 2,617 | 2.5 | % | |||||||||||
Earnings (loss) per share: |
||||||||||||||||||||||||
Basic |
$ | (.22 | ) | $ | .12 | $ | .15 | |||||||||||||||||
Diluted |
$ | (.22 | ) | $ | .12 | $ | .15 |
Net Income (loss)
Net loss for the year ended December 31, 2009 was $4.0 million or, $.22 diluted loss per
share. The net loss included gross profit of $2.8 million related to patent license fees. Compared
to 2008, results of operations declined primarily as a result of the decline in revenue and a
related decline in units processed which negatively impacted gross margins due to our inability to
efficiently absorb fixed costs.
Net income for the year ended December 31, 2008 was $2.2 million or, $0.12 diluted earnings
per share, and resulted from improved gross margins, which were partially offset by higher
operating expenses, as compared to 2007. Net income in 2008 also included a gain of $1.0 million
from a litigation settlement and $0.5 million in license fee income while 2007 included a charge of
$1.0 million related to the settlement of certain litigation.
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Revenue
For the year ended December 31, 2009, revenue declined to $96.7 million compared to revenue of
$103.8 million for the prior year due mainly to our exiting the business of processing tissue for
others. We plan to focus our strategic efforts on the introduction of the new products from our
technology platforms and the expansion of such products in the market and maintaining our market
position of our existing product lines.
The following table details the components of our revenue for the years indicated:
Percent Change | ||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||
Year Ended December 31, | vs. | vs. | ||||||||||||||||||
(in thousands) | 2009 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||
DBM Segment |
$ | 56,782 | $ | 61,961 | $ | 65,794 | -8 | % | -6 | % | ||||||||||
Hybrid/Synthetic Segment |
3,575 | 3,087 | 1,760 | 16 | % | 75 | % | |||||||||||||
Traditional Tissue Segment |
21,534 | 20,258 | 17,623 | 6 | % | 15 | % | |||||||||||||
Spinal Allograft Segment |
7,626 | 8,499 | 10,739 | -10 | % | -21 | % | |||||||||||||
Client Services Segment |
2,143 | 8,201 | 7,621 | -74 | % | 8 | % | |||||||||||||
Other |
5,018 | 1,808 | 740 | 178 | % | 144 | % | |||||||||||||
$ | 96,678 | $ | 103,814 | $ | 104,277 | -7 | % | | % | |||||||||||
2009 Compared to 2008
DBM Segment revenue, which consists of revenue from the sale of Grafton® DBM/Xpanse® Bone
Inserts and revenue from the processing of private label DBM, declined 8% in 2009 as compared to
2008, primarily as a result of the anticipated loss in revenue from the temporary suspension of
distributing tissue recovered by our Bulgarian subsidiary and a decline in domestic unit sales
volume. Revenue from Grafton® DBM/Xpanse® Bone Inserts and revenue from private label DBM
decreased 9% and 1%, respectively, in 2009 compared to the prior year.
Revenue in the Hybrid/Synthetic Segment, which consists of revenue from our Plexur®
Biocomposites, Magnifuse Technology and GraftCage® Spacers, increased 16% in 2009 as compared to
2008 as a result of the introduction of Plexur M® and the various Magnifuse tissue products.
Traditional Tissue Segment revenue generated from the worldwide distribution of allograft bone
tissue grafts increased 6% in 2009 as compared to 2008 primarily due to increased domestic unit
sales volume offsetting a decline in international revenue.
Revenue in the Spinal Allograft Segment decreased 10% primarily due to a decrease in domestic
unit sales volume. We anticipate continued competitive challenges for our spinal allografts in
2010.
Client Services Segment revenue, which is generated by the processing of allograft bone tissue
for our clients, declined as expected in 2009 as compared to 2008. The revenue generated in 2009
relates mainly to the winding down of our relationship with the Musculoskeletal Transplant
Foundation (MTF). Revenue in this segment in future years will be insignificant.
Other revenue consisted mainly of $3.8 million of patent license fees in 2009 compared to $0.5
million in 2008 and revenue from the international distribution of xenograft products and
miscellaneous other revenue.
For the year ended December 31, 2009 domestic revenue was $ 76.9 million compared to $82.5
million in 2008, or 80% and 79% of total revenue, respectively. Excluding license fee revenue, in
2009 domestic revenue declined 11% from the prior year. The reduction in domestic revenue for 2009
mainly results from reductions in DBM revenue and client service revenue as a result of the winding
down of the MTF relationship.
For the year ended December 31, 2009 international revenue was $19.8 million compared to $21.4
million in 2008 or 20% and 21% of total revenue, respectively. The reduction in international
revenue for 2009 mainly results from a decline in revenue from the Greek market, as a result of
economic and government reimbursement conditions in Greece, and a loss of revenue in a key Asian
market. We expect the Greek and Asian markets to recover slowly and therefore do not expect
meaningful revenue contribution from these markets in 2010.
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2008 Compared to 2007
DBM Segment revenue declined 6% in 2008 as compared to 2007, primarily as a result of the
decline in private label revenue. Revenue from Grafton® DBM/Xpanse® Bone Inserts and revenue from
private label DBM changed 3% and (62)%, respectively, in 2008 compared to 2007. Revenue from
Grafton® DBM was negatively impacted in 2008 as a result of a decline in average selling prices.
The decline in private label revenue was primarily due to one of our private label DBM customers
formally notifying us of their decision not to renew their current agreement with us upon the
agreements expiration in March 2009. We recognized $0.5 million of revenue from this customer in
the first quarter of 2008 and the customer did not make any purchases thereafter.
Revenue in the Hybrid/Synthetic Segment increased 75% for the year ended December 31, 2008
compared to the prior year primarily as a result of a 139% increase in Plexur P® revenue due to
increased unit volume.
Revenue in our Traditional Tissue Segment increased 15% in 2008 as compared to 2007. The
increase in 2008 traditional tissue revenue resulted from increased unit sales volume.
Revenue in the Spinal Allograft Segment declined 21% in 2008 as compared to 2007, primarily
due to a decrease in unit sales volume.
Client Services Segment revenue, which is generated by the processing of allograft bone tissue
for our clients, mainly MTF, increased 8% in 2008 as compared to 2007.
Other revenue consisted mainly of $0.5 million related to license fees, the international
distribution of xenograft products and revenue from the distribution of the Kinesis BMAC system.
Major Customers
In 2009, no customers accounted for more than 10% of revenue. In 2008 and 2007, MTF accounted
for 14% and 16%, respectively, of consolidated revenue. Our agreements with MTF expired on
December 31, 2008.
Gross Margin
Year Ended December 31, | ||||||||||||
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Gross Profit |
$ | 47,570 | $ | 55,044 | $ | 53,722 | ||||||
Gross Margin |
49.2 | % | 53.0 | % | 51.5 | % |
In 2009 gross margin declined from the prior year level primarily due to higher per unit costs
due to our inability to efficiently absorb the fixed cost base of our processing facility as a
result of the lower unit sales volume. Our patent licensing arrangements contributed $2.8 million
and $0.5 million to gross profits in 2009 and 2008, respectively. In 2008 gross margin increased
over the gross margin level in the prior year, primarily due to increased unit processing volumes,
processing efficiencies and better management of inventory risk exposures, such as obsolescence.
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Table of Contents
Operating Expenses
Percent Change | ||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||
Year Ended December 31, | vs. | vs. | ||||||||||||||||||
(in thousands) | 2009 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||
Marketing, selling
and general and
administrative |
$ | 43,996 | $ | 45,032 | $ | 44,801 | -2 | % | 1 | % | ||||||||||
Research & development |
$ | 6,486 | $ | 7,435 | $ | 5,658 | -13 | % | 31 | % | ||||||||||
Total |
$ | 50,482 | $ | 52,467 | $ | 50,459 | -4 | % | 4 | % | ||||||||||
Marketing, selling and general and administrative expenses declined 2% in 2009 compared to the
prior year. In 2009, marketing, selling and general and administrative declined primarily due to
lower consulting and professional fees. In 2009, research and development expenses decreased 13%
as compared to 2008, primarily due to several new tissue technologies and products moving from
development to commercialization.
Marketing, selling and general and administrative expenses in 2008 were relatively flat
compared to 2007. In 2008, we had higher non-cash compensation costs for equity awards and
increased marketing and selling expenses compared to the prior year, offset by lower cash-based
performance compensation expense. Compensation expense related to our equity award program was
$1.7 million in 2008 compared to $0.9 million in 2007. Also in 2007, we incurred $1.0 million in
costs associated with the settlement of and legal fees incurred in connection with certain
litigation. For 2008, research and development expenses increased 31% as compared to 2007,
primarily due to the costs incurred for basic research, product development and process development
activities to support the technologies and products we are developing for future commercialization.
Operating Income (loss)
Percent Change | ||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||
Year Ended December 31, | vs. | vs. | ||||||||||||||||||
(in thousands) | 2009 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||
DBM Segment |
$ | 15,742 | $ | 18,902 | $ | 20,105 | -17 | % | -6 | % | ||||||||||
Hybrid/Synthetic Segment |
(521 | ) | 5 | 277 | -10520 | % | -98 | % | ||||||||||||
Traditional Tissue Segment |
1,272 | 3,666 | 2,470 | -65 | % | 48 | % | |||||||||||||
Spinal Allograft Segment |
1,055 | 286 | 1,941 | 269 | % | -85 | % | |||||||||||||
Client Services Segment |
1,166 | 4,454 | 5,744 | -74 | % | -22 | % | |||||||||||||
Other |
2,461 | 1,265 | 334 | 95 | % | 279 | % | |||||||||||||
21,175 | 28,578 | 30,871 | -26 | % | -7 | % | ||||||||||||||
Corporate |
(24,087 | ) | (26,001 | ) | (27,608 | ) | -7 | % | -6 | % | ||||||||||
Operating Income (loss) |
$ | (2,912 | ) | $ | 2,577 | $ | 3,263 | -213 | % | -21 | % | |||||||||
Product segment operating income is comprised of segment revenue less material and processing
cost and selling and marketing expenses. Total product segment operating income for 2009 declined
as compared to the prior year principally due to lower gross profit after giving effect to our
patent licensing arrangements contributing $2.8 million and $0.5 million to product segment
operating income in 2009 and 2008, respectively. Marketing and selling expenses for 2009 were
relatively flat compared to 2008. As a result, in 2009 product segment operating income, as a
percent of revenue, declined to 22% compared to 28% in the prior year.
Costs and expenses associated with Corporate for the year ended December 31, 2009 declined 7%
when compared to the prior year period primarily due to lower professional fees and lower
performance compensation expense, partially offset by severance costs incurred in late 2009.
Total product segment operating income of $28.6 million for the year ended December 31, 2008
declined 7% compared to 2007. Segment operating income was negatively impacted by higher selling
and marketing expenses which were partially offset by a higher gross margins including the effect
of $0.5 million in license fee revenue. In 2008 product segment operating income as a percentage
of revenue was 28% compared to 30% in the prior year.
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Costs and expenses associated with Corporate Segment declined 6% for 2008 compared to 2007.
In 2008, higher research and development expenses were offset by lower performance compensation
expenses while in 2007, we also incurred a litigation settlement of $1.0 million.
Other Income (Expense)
For the year ended December 31, 2009, other expense of $1.4 million is primarily related to
interest expense associated with our capital lease obligation. For the year ended December 31,
2009, interest income, miscellaneous income and expenses and foreign exchange gains and losses were
not significant.
For the year ended December 31, 2008, other expenses of $0.1 million primarily represents $1.5
million in interest expense associated with our capital lease obligation offset partially by
interest income of $0.4 million and litigation settlement income of $1.0 million. For the year
ended December 31, 2008, aggregate foreign exchange gains and losses were not significant.
For the year ended December 31, 2007, other expenses of $0.6 million represents $1.6 million
of interest expense associated with our capital lease obligation, partially offset by interest
income on invested cash balances of $1.0 million.
Future foreign exchange gains and losses, including those related to intercompany debt, may
have a material impact on our results of operations in the event of significant changes in the
exchange rate between the U.S. dollar and the euro, although the impact of such gains and losses
should not have any impact on consolidated cash flows.
Income Tax Provision
In 2009, as a result of incurring a loss for Federal tax purposes we did not provide for
Federal income taxes but did provide a provision for certain state taxes on alternative methods and
for foreign taxes. In addition, as a result of settlement of various uncertain tax positions during
2009, the Company recorded an income tax benefit for Federal, state and foreign taxes of $522.
In 2008 and 2007, after the application of available net operating loss carryforwards, we
provided for Federal income taxes based on the alternative minimum tax method, as well as provided
a provision for certain state taxes on alternative methods and foreign taxes. In 2008, we also
recorded a charge related to our assessment of uncertain tax positions mainly as a result of an
ongoing Federal tax audit. The carryforwards utilized for Federal, state and foreign purposes
carried full valuation allowances. Our state income tax benefit in 2007 was primarily due to the
reversal of certain domestic state tax reserves and the filing for a state tax refund related to a
prior year, partially offset by a provision for minimum state taxes in certain jurisdictions.
At December 31, 2009, 2008 and 2007, the Company evaluated the continuing need for valuation
allowances for its domestic and foreign deferred tax assets in accordance with the provisions of
Financial Accounting Standards Board Codification Topic (Codification) ASC 740, Income Taxes,
which requires an assessment of both positive and negative evidence when determining whether it is
more likely than not that deferred tax assets are recoverable. The Company has determined, based
on its assessment, that there is not sufficient positive evidence to support the reversal of such
valuation allowances. The Company intends to maintain the valuation allowance until sufficient
positive evidence exists to support the reversal of the valuation allowances. The Company
evaluates its position with respect to the valuation allowance each quarter by taking into
consideration numerous factors, including, but not limited to: past, present and forecasted
results; the impact in each jurisdiction of operation activities; and the anticipated effects of
the Companys strategic plan.
We file U.S., state, and foreign income tax returns in jurisdictions with varying statutes of
limitations. The 2003 through 2009 tax years generally remain subject to examination by Federal,
foreign and most state authorities including, but not limited to, the United States, France,
Bulgaria and the State of New Jersey. During 2009, the U.S. Internal Revenue Service (IRS)
examination of our 2003 through 2005 Federal tax returns, the State of New Jerseys examination of
our 2003 through 2006 state income tax filings and the French tax authoritys audit of the 2006 and
2007 tax filings by our French subsidiary were concluded.
The audits resulted in the payment of a minor amount of taxes as a result of the French tax
audit. The aggregate amount of our available Federal and State of New Jersey net operating loss
carryforwards (NOLs) was not materially impacted. Certain Federal research and development credit
carryforwards were eliminated.
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The components of our unrecognized tax benefits (UTBs) are substantially comprised of
deferred tax assets which are subject to a full valuation allowance. If we prevail in matters for
which either a receivable or a liability for a UTB has been established, we are required to pay an
amount or utilize NOLs to settle a tax liability, or estimates regarding a UTB change as a result
in changes in facts and circumstances, our effective tax rate in a given financial reporting period
may be affected.
A reconciliation of the beginning and ending amount of UTBs is as follows:
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Unrecognized Tax Benefits, January 1 (excluding interest and penalties) |
$ | 3,854 | $ | 3,672 | $ | | ||||||
Additions related to current period tax positions |
| | 57 | |||||||||
Additions related to prior period tax positions |
| 853 | 3,615 | |||||||||
Reductions related to prior periods tax positions |
(751 | ) | (671 | ) | | |||||||
Reductions related to settlements with taxing authorities |
(2,378 | ) | | | ||||||||
Reductions related to expiration of statute of limitations |
(663 | ) | | | ||||||||
Unrecognized Tax Benefits, December 31 |
$ | 62 | $ | 3,854 | $ | 3,672 | ||||||
Accrued interest and penalties, January 1 |
$ | 120 | $ | | $ | | ||||||
Additions/reductions charged to expense |
| 120 | | |||||||||
Reductions related to expiration of statute of limitations |
(120 | ) | | | ||||||||
Accrued interest and penalties, December 31 |
$ | | $ | 120 | $ | | ||||||
At December 31, 2009, 2008 and 2007, the reduction in net Federal, state and foreign deferred
tax assets as a result of UTBs was offset by a similar change in the related valuation allowance.
It is expected that the amount of UTBs will change in the next twelve months; however, we do not
anticipate the change to be significant.
Liquidity and Capital Resources
December 31, | December 31, | |||||||
(in thousands) | 2009 | 2008 | ||||||
Cash and cash equivalents |
$ | 10,708 | $ | 18,823 | ||||
Working Capital |
$ | 53,301 | $ | 55,624 | ||||
Stockholders equity |
$ | 80,286 | $ | 82,850 |
Year Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Summary of cash flow: |
||||||||
Net cash provided by (used in) operating activities |
$ | (4,955 | ) | $ | 3,373 | |||
Net cash used in investing activities |
$ | (2,248 | ) | $ | (6,836 | ) | ||
Net cash used in financing activities |
$ | (948 | ) | $ | (454 | ) | ||
Effect of foreign currency exchange rates on cash |
$ | 36 | $ | (37 | ) | |||
Net decrease in cash and cash equivalents |
$ | (8,115 | ) | $ | (3,954 | ) | ||
Cash Flow From Operating Activities
Net cash used by operating activities was $5.0 million in 2009 compared to $3.4 million
provided by operating activities in 2008. The change resulted primarily from the net loss for 2009
compared to a profit in the prior year and a decrease in accounts payable and accrued expenses of
$7.5 million. During 2009, we increased our investment in tissue inventories by $.7 million. In
2008, we increased our investment in additional tissue inventories by $12.4 which was partially
offset by an increase in accounts payable.
Cash Flows From Investing Activities
Net cash used in investing activities was $2.2 million in 2009 compared to $6.8 million in the
prior year and principally relates to the funding of capital expenditures and intellectual
property. In 2008 capital expenditures included the implementation of a new enterprise software
system and expenditures for production equipment and facilities for new products. We anticipate
that for 2010, the funding of capital expenditures and patent development will be relatively
consistent with our 2009 levels.
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Cash Flows From Financing Activities
Net cash used in financing activities was $0.9 million and $0.5 million for the years ended
December 31, 2009 and 2008, respectively. Principal payments on our capital lease obligation were
$0.9 million and $0.8 million in 2009 and 2008, respectively. In 2008, cash inflows of $0.5
million were generated from the exercise of stock options and the sale of common stock pursuant to
our employee stock purchase plan.
Repurchase of Common Stock
In December 2008, our Board of Directors authorized a stock repurchase program under which up
to $5.0 million of shares of our common stock may be acquired. Stock repurchases may be executed
from time to time at current market prices through open-market and privately negotiated
transactions in such amounts as management deems appropriate. The final number of shares
repurchased will depend on a variety of factors, including the level of our cash and cash
equivalents, price, corporate and regulatory requirements and other market conditions. The
repurchase program may be terminated at any time without prior notice. During the first quarter of
2009, we repurchased 50,480 shares with an average price paid of $2.02 per share. We made no
repurchases during the balance of 2009. Through December 31, 2009, we had acquired 115,670 shares
of our common stock at an average purchase price of $1.96 per share.
Further Liquidity and Financing Needs
At December 31, 2009, cash and cash equivalents were $10.7 million, a decline of $8.1 million
from cash and cash equivalents of $18.8 million at December 31, 2008. The decline in cash during
2009 was primarily attributable to the net loss, payments to vendors, funding capital expenditures
and making required principal payments on our capital lease obligation. For 2010, we have
instituted plans to recover some of our investments in working capital, but we will still fund
additional investments in capital expenditures and make payments under the capital lease
obligation. We are instituting cost reduction programs to align our infrastructure and initiatives
with the size of our revenue base. In addition, we are currently focused on the launch of several
new tissue products from our new, proprietary technology platforms which we believe will provide
revenue growth in future periods. Revenue growth is the most important factor in achieving the
benefits of our internal financial model by leveraging our processing operation and back office
infrastructure. All of these efforts are important components of our plan to reduce the cash burn
rate. Based on our current projections and estimates, we believe that our currently available cash
and cash equivalents, credit facility, cash generated from operations and the favorable cash impact
from the actions noted above will be sufficient to meet our forecasted cash needs for the next
twelve months. We can provide no assurance our efforts will be successful to recover some of the
investments we have made in working capital, that our cost reduction programs will be effective,
that our new products will be accepted in the market or that we will realize the benefits of our
internal financial model. Our future liquidity and capital requirements will depend upon numerous
factors including:
| the progress of our product launches and product development programs and the need
and associated costs relating to regulatory approvals, if any, which may be needed to
commercialize some of our products under development; and |
| the resources we devote to the development, manufacture and marketing of our
services and products. |
Should we not attain our current projections and estimates, the pace of new product
introductions and development can be effected. We may seek additional funding to meet the needs of
our long-term strategic plans. We can provide no assurance that such additional funds will be
available or, if available, that such funds will be available on favorable terms.
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Credit Facility
On December 29, 2009, we entered into a Revolving Credit and Security Agreement (the Credit
Agreement) with PNC Bank, National Association as lender and agent (PNC). Pursuant to the terms
of the Credit Agreement and upon request, we may borrow from PNC up to $10.0 million subject to a
maximum
borrowing base that is based upon an amount equal to 85% of our eligible receivables (as that
term is defined in the Credit Agreement) less such reserves as PNC reasonably deems proper and
necessary. Under the Credit Agreement, we are permitted to use the proceeds of any such borrowings
to satisfy our working capital needs and for general corporate purposes. Borrowings under the
Credit Agreement bear interest at one of three variable rates; PNCs base commercial lending rate
plus 2%; the federal funds open rate plus 0.5% or LIBOR plus 3%. In no event will the interest
rate be less than 3%. Borrowings are secured by essentially all our assets. Under the Credit
Agreement, we are obligated to pay PNC a quarterly facility fee of 0.5% per annum on the unused
portion of the Credit Agreement.
We are also required to maintain compliance with various financial and other covenants and
conditions, including but not limited to, a prohibition on paying cash dividends, a requirement
that a fixed charge coverage ratio be maintained beginning on March 31, 2011, and certain
limitations on engaging in affiliate transactions, making acquisitions, incurring additional
indebtedness and making capital expenditures, the breach of any of which would permit PNC to
accelerate the obligations. The Credit Facility also includes subjective acceleration provisions.
Such provisions are based upon, in the reasonable opinion of PNC, the occurrence of any adverse or
material change in the condition or affairs, financial or otherwise, of us, which impairs the
interest of PNC.
As of December 31, 2009, there were no amounts outstanding under the Credit Agreement and we
are in compliance with all covenants.
Net Loss Carryforwards
At
December 31, 2009, we had aggregate federal net operating loss
carryforwards of $22.0
million and federal research and development and alternative minimum tax credits of $0.9 million
and $0.1 million, respectively, which expire in varying amounts beginning in 2025 through 2030. At
December 31, 2009, we had state net operating loss carryforwards of $30.0 million. State net
operating loss carryforwards, which primarily offset New Jersey taxable income, expire in varying
amounts beginning in 2012 through 2030. In addition, we had state research and development,
manufacturing and other credits of $1.1 primarily to offset New Jersey income taxes, which expire
in varying amounts beginning in 2010 through 2015.
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Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2009, and the
effects such obligations are expected to have on our liquidity and cash flow in future periods.
Payments Due By Period | ||||||||||||||||||||
(In thousands) | Less Than | Years | Years | More than | ||||||||||||||||
Contractual Obligations | Total | One Year | 1-3 | 3-5 | 5 Years | |||||||||||||||
Capital lease obligation |
$ | 25,111 | $ | 2,326 | $ | 4,291 | $ | 2,920 | $ | 15,574 | ||||||||||
Non-cancelable operating lease obligations |
7,208 | 1,674 | 3,216 | 2,318 | ||||||||||||||||
Retirement and severance payments |
453 | 293 | 160 | |||||||||||||||||
Asset retirement obligation Shrewsbury facility (1) |
1,014 | 1,014 | ||||||||||||||||||
Asset retirement obligation Eatontown facility (2) |
8,190 | 8,190 | ||||||||||||||||||
Reimbursement under tissue supply agreements (3) |
28,365 | 9,110 | 19,255 | |||||||||||||||||
Total |
$ | 70,341 | $ | 13,403 | $ | 26,922 | $ | 6,252 | $ | 23,764 | ||||||||||
(1) | Represents the future value of the Shrewsbury asset retirement obligation
as of December 31, 2009. This asset retirement obligation will be accreted
from its current value as of December 31, 2009 of $1.2 million to its expected
future value over the next four years. |
|
(2) | Represents the future value of the Eatontown asset retirement obligation as
of December 31, 2009. This asset retirement obligation will be accreted from
its current value as of December 31, 2009 of $2.3 million to its expected
future value over the next sixteen years. |
|
(3) | Represents the minimum reimbursement to be made under our agreement with a
supplier for their services of donor recovery and donor eligibility related to
the allograft bone tissue to be supplied to us over the current term of the
agreement. |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are materially likely to have a current
or future material effect on our financial condition or results of operations, liquidity, capital
expenditures or capital resources.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate the
estimates and may adjust them based upon the latest information available. These estimates
generally include those related to product returns, bad debts, inventories including purchase
commitments, deferred processing costs including reserves for rework, excess and obsolescence,
long-lived assets, asset retirement obligations, income taxes, stock-based compensation,
contingencies and litigation. We base the estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates.
We believe the following critical accounting policies affect the more significant judgments
and estimates used in the preparation of our consolidated financial statements.
| We record reductions to revenue for estimated returns based upon historical
experience. If future returns are less than historical experience, a reduction in
estimated reserves would increase revenue. Alternatively, should returns exceed
historical experience, additional allowances would be required, which would reduce
revenue. Historically, the amount of returns has not been material. |
||
| We maintain allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. Changes in estimates of collection
risk related to accounts receivable can result in decreases or increases in current
period operating costs. |
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| We recognize patent license fees as other revenue when our performance under the
applicable agreement is substantially complete and collectability is reasonably
assured. |
||
| We recognize revenue for nonmonetary transactions based on the fair value of the
asset received or surrendered, whichever is more clearly evident. |
||
| We write down inventory and deferred processing costs for estimated excess,
obsolescence or unmarketable tissue grafts and products equal to the lower of cost or
market value. Excess and obsolescence could occur from numerous factors, including,
but not limited to, the competitive nature of the market, technological change,
expiration and changes in surgeon preference. If actual market conditions are less
favorable than those projected by management, additional write-downs may be required,
including provisions to reduce inventory and deferred processing costs to net
realizable value. In each period, we also assess our production activity in
relationship to historical experience and normal capacity, and evaluate the need to
reflect processing costs as either period costs or as a component of deferred
processing costs. In periods where our actual process activities are less than
historical experience and deemed abnormal, we charge an appropriate portion of our
processing costs directly to cost of revenue in the consolidated statements of
operations. In addition, we provide reserves, if any, for the difference between our
contractual purchase commitments and our projected purchasing patterns based upon
maintenance of adequate inventory levels and forecasted revenues. If actual revenue is
less favorable than those forecasted by management, additional reserves may be
required; alternatively, if revenue is stronger than forecasted by management, such
reserves would be reduced. |
||
| We continually monitor events and circumstances that could indicate carrying amounts
of long-lived assets, including property, plant, equipment and intangible assets, may
not be recoverable. When such events or changes in circumstances occur, we assess
recoverability of long-lived assets, other than goodwill, by determining whether the
carrying value of such assets will be recovered through undiscounted expected future
cash flows. If the total of the undiscounted future cash flows is less than the
carrying amount of those assets, we recognize an impairment loss based on the excess of
the carrying amount over the fair value of the asset, or discounted estimated future
cash flows if fair value is not readily determinable. Goodwill is tested for
impairment, based on fair market value measurements, on an annual basis as of January
1, and between annual tests if indicators of potential impairment exist. No impairment
of goodwill has been identified during any of the periods presented. |
||
| The estimates of fair market value and future cash flows involve considerable
management judgment and are based upon assumptions about expected future operating
performance. Assumptions used in these forecasts are consistent with internal
planning. The actual fair market value and cash flows could differ from managements
estimates due to changes in business conditions, operating performance and economic
conditions. |
||
| We record an asset retirement obligation when an obligation to retire an asset is
determined. The asset retirement obligation is accrued at its estimated fair value
with a corresponding increase in the carrying amount of the related long-lived asset,
if appropriate. We determine the amount of the asset retirement obligation based upon
a number of assumptions requiring professional judgment and make adjustments to the
asset retirement obligation recorded based on the passage of time or revisions to
either the timing or the amount of the undiscounted cost estimate to retire the asset. |
||
| We record a valuation allowance to reduce deferred tax assets to the amount that is
more likely than not to be realized. While we have considered future taxable income,
in the event that we would be able to realize deferred tax assets in the future in
excess of the net recorded amount, an adjustment to the deferred tax asset would
increase income in the period such determination was made. Likewise, should we
determine that we would not be able to realize all or part of a net deferred tax asset
in the future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made. We accrue current and future tax liabilities
based upon levels of taxable
income, tax planning strategies, and assessments of the timing of taxability of the tax
attributes. We provide for uncertain tax positions and the related interest and
penalties based upon managements assessment of whether a tax benefit is more likely
than not to be sustained upon examination by tax authorities. To the extent we prevail
in matters for which a liability for an unrecognized tax benefit is established or is
required to pay amounts in excess of the liability, our effective tax rate in a given
financial statement period may be affected. |
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| We measure stock-based compensation cost at the date of grant based on the fair
value of the award, which is recognized as an expense generally on a straight-line
basis over the employees or consultants requisite service period with an equal amount
recorded as additional paid in capital, net of income tax benefit, if any, until such
time as the fair value has been fully recognized. We account for forfeitures using an
estimated rate when determining the fair value of the award. |
||
| Litigation is subject to many uncertainties and management is unable to predict the
outcome of pending litigation. When we are reasonably able to determine the probable
minimum or ultimate liability, if any, which may result from any of the pending
litigation, we will record a provision for our best estimate of such liability, and if
appropriate, will record a benefit for the amounts covered by insurance. If the
outcome or resolution of the pending litigation is for amounts greater than accrued, an
expense will be recorded in the period the determination is made. Alternatively,
should the outcome or resolution be for less than accrued, we would reduce the expense
in the period the determination is made. |
Recent Accounting Developments
From time to time, new accounting pronouncements are issued by the FASB or other standard
setting bodies that are adopted by us as of the specified effective date. Unless otherwise
discussed, we believe that the impact of recently issued standards that are not yet effective will
not have a material impact on our financial position or results of operations upon adoption.
Effective for us beginning September 15, 2009, the FASB Codification is the source of
authoritative United States generally accepted accounting principles (GAAP) to be applied to
nongovernmental entities and rules and interpretive releases of the Securities and Exchange
Commission (SEC) as authoritative GAAP for SEC registrants. The Codification superseded all the
existing non-SEC accounting and reporting standards upon its effective date and subsequently, the
FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging
Issues Task Force Abstracts but rather issues accounting standards updates. The adoption of the
Codification had no material impact on our financial statements.
Impact of Inflation and Foreign Currency Exchange Fluctuations
The results of operations for the periods discussed have not been materially affected by
inflation. We are subject to foreign currency fluctuations for material changes in exchange rates
between the U.S. dollar and other foreign currencies, primarily the euro. As our foreign source
revenue grows and represents a larger percentage of our consolidated revenues and profits, foreign
currency transaction adjustments may impact our operating results to a greater extent.
The majority of our sales to international stocking distributors are denominated in U.S.
dollars. Generally, our results of operations are directly or indirectly positively impacted by a
weakening of the U.S. dollar against the euro or a weakening of the U.S. dollar against the other
local foreign currencies in countries to which we sell. During the first half of 2009, the U.S.
dollar remained flat against the euro whereas during later half of 2009, the U.S. dollar weakened
against the euro resulting in a foreign exchange gain of $0.1 million for the year.
During 2008, the U.S. dollar fluctuated significantly versus the euro especially during the
last quarter of the year. At December 31, 2008, the U.S. dollar closed 5% above the prior
year-end level. However, the average exchange rate for the year was effectively equal to the
closing rate at December 31, 2008. As a result of the timing of our various transactions
denominated in euros, in 2008 we recognized $0.1 million in foreign exchange losses.
In 2007, we recognized foreign currency losses, primarily related to the impact of exchange
rates on intercompany indebtedness, of $0.8 million.
Litigation
We are currently involved in certain legal proceedings. For a complete discussion of these
matters, see Item 3, Legal Proceedings of Part I of this Form 10-K and Note 14 of Notes to
Consolidated Financial Statements to Item 8 of Part II of this Form 10-K. It is possible that our
results of operations or liquidity and capital resources could be adversely affected by the
ultimate outcome of the pending litigation or as a result of the costs of contesting such lawsuits.
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Government Proceedings
In December 2008, we were advised that during a November 2008 inspection of donor recovery
sites in Bulgaria by the French regulatory agency, afssaps, deficiencies were identified. As a
precautionary measure, we temporarily suspended the distribution of allograft tissue grafts
processed from tissue recovered by our subsidiary, TB OsteoCentre Bulgaria EAD (OCBG). During the
third quarter of 2009, as a result of a notice from afssaps we began the shipment of allograft
tissue grafts processed from tissue recovered by OCBG. Suspension of shipment of these products had
been self-imposed by us since December 2008 as a result of deficiencies unrelated to product
contamination. We however, need to complete additional procedures, which we expect to complete in
mid-2010, before we release a remaining $500,000 in tissue product.
Cautionary Statement Regarding Forward-Looking Statements
This document contains forward-looking statements within the meaning of federal securities
laws that may include statements regarding intent, belief or current expectations of Osteotech and
our management. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements to encourage companies to provide prospective information without fear
of litigation so long as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause actual results to
differ materially from those projected in the statement. We desire to take advantage of these safe
harbor provisions. Accordingly, we have identified in Item 1A of this Form 10-K important risk
factors which could cause our actual results to differ materially from any such results which may
be projected, forecasted, estimated or budgeted by us in forward-looking statements made by us from
time to time in reports, proxy statements, registration statements and other written
communications, or in oral forward-looking statements made from time to time by our officers and
agents. We do not intend to update any of these forward-looking statements after the date of this
Form 10-K to conform them to actual results.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rates
We are exposed to interest rate risk. Changes in interest rates affect interest income earned
on cash and cash equivalents. We do not enter into derivative transactions related to our cash or
cash equivalents. Accordingly, we are subject to changes in interest rates. Based on our December
31, 2009 cash and cash equivalents, a 1% change in interest rates would impact net income by
approximately $0.1 million.
Our Credit Agreement entered into in December 2009 is a variable rate facility and as such,
the interest cost, should we draw against the facility is, therefore, variable.
Credit Risks
We sell our products to hospitals in the United States and to stocking distributors
internationally. Stocking distributors in turn sell to hospitals or other medical establishments
and, in many instances, individual stocking distributors maintain higher individual balances with
longer payment terms. At December 31, 2009 and 2008, international stocking distributors accounted
for 41% and 30%, respectively, of our accounts receivable. Loss, termination or changes in
financial condition of a distributor, as well as a change in medical reimbursement regimens by
foreign governments where our products are sold, along with changes in the U.S. dollar/euro
exchange rate; or changes in local currency exchange rates relative to the U.S. dollar, in
international countries where our distributors operate, could have a material adverse effect on our
financial condition and results of operations.
Foreign Exchange Risks
Generally, sales to international stocking distributors are denominated in U.S. dollars.
However, in certain instances, we invoice in currencies other than U.S. dollars and also, to a
lesser extent, make purchases denominated in currencies other than U.S. dollars. We therefore are
exposed to risks of foreign currency fluctuations, which we do not hedge, and are subject to
transaction gains and losses, which are recorded as a component of other income in the
determination of net income. Additionally, the assets and liabilities of our non-U.S. operations
are translated into U.S. dollars at exchange rates in effect as of the applicable balance sheet
dates, while related revenue and expense accounts of these operations are translated at average
exchange rates during the month in which related transactions occur. Translation gains and losses
are included as an adjustment to stockholders equity and included in other comprehensive income.
32
Table of Contents
Item 8. | Financial Statements and Supplementary Data |
Our consolidated financial statements and the report of our registered public accounting firm
on such financial statements are included in this Form 10-K beginning on Page F-1. The index to
these reports and the financial statements is included in Item 15 below.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure |
Not applicable.
Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we evaluated our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act)) as of December 31, 2009 related to the recording, processing,
summarization and reporting of information in our reports that we file with the SEC. These
disclosure controls and procedures have been designed to ensure that material information relating
to us, including our subsidiaries, is made known to our management, including our principal
executive officer and principal financial officer, by others within our organization, and that this
information is recorded, processed, summarized, evaluated and reported, as applicable, within the
time periods specified in the SECs rules and forms. Due to the inherent limitations of control
systems, not all misstatements may be detected. Based upon their evaluation, our principal
executive officer and principal financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as
of December 31, 2009.
Managements Report On Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting. As defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, internal
control over financial reporting is a process designed by, or supervised by, the companys
principal executive and principal financial officers, and effected by the companys board of
directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of
America.
Our internal control over financial reporting includes policies and procedures, that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that receipts and expenditures
are being made only in accordance with authorizations of our management and directors; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
33
Table of Contents
Our management, with the participation of our principal executive officer and principal
financial officer, conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2009 based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, our management concluded that our internal control over
financial reporting was effective as of December 31, 2009.
The effectiveness of the internal control over financial reporting as of December 31, 2009 has
been audited by BDO Seidman, LLP, an independent registered public accounting firm, as stated in
their report, which is included in this Item 9A.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting, as such term is
defined in Rules 13a-15(f) and 15(d)-15(e) under the Exchange Act, during the fiscal quarter ended
December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. | Other Information |
None.
34
Table of Contents
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Osteotech, Inc. and Subsidiaries
Eatontown, New Jersey
Osteotech, Inc. and Subsidiaries
Eatontown, New Jersey
We have audited Osteotech, Inc. and Subsidiaries (the Company) internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Companys management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of the Company as of December 31, 2009 and
2008, and the related consolidated statements of operations, stockholders equity, and cash flows
for each of the three years in the period ended December 31, 2009 and our report dated March 8,
2010 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Woodbridge, New Jersey
March 8, 2010
March 8, 2010
35
Table of Contents
PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Reference is made to information contained under the headings Proposal No. 1Election of
Directors, Identification of Executive Officers, Business Experience of Executive Officers,
Section 16(a) Beneficial Ownership Reporting Compliance and Corporate Governance in our
definitive proxy statement for our 2010 Annual Meeting of Shareholders to be filed with the SEC
within 120 days of the close of the year ended December 31, 2009 (our 2010 Proxy Statement),
which information is incorporated herein.
Our Board of Directors has adopted a Code of Business Conduct and Ethics that is applicable to
all of our directors, officers and employees. Any material changes made to our Code of Business
Conduct and Ethics or any waivers granted to any of our directors and executive officers will be
publicly disclosed by filing a Current Report on Form 8-K within four business days of such
material change or waiver. There were no material changes or waivers in 2009. Copies of the Code
of Business Conduct and Ethics as well as charters for our Audit Committee, Compensation Committee,
and Nominating and Corporate Governance Committee, which comply with the corporate governance rules
of NASDAQ, are available on our website at www.osteotech.com. In addition, a copy of such
documents will also be made available to our shareholders upon request by contacting our Investor
Relations Department by calling 732-542-2800 or through an e-mail request from our website at
www.osteotech.com/finrequest.htm.
Item 11. | Executive Compensation |
Reference is made to information contained under the headings Director Compensation and
Executive Compensation in our 2010 Proxy Statement, which information is incorporated herein.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
Reference is made to information contained under the heading Security Ownership of Certain
Beneficial Owners and Management in our 2010 Proxy Statement, which information is incorporated
herein.
36
Table of Contents
We have three stock option plans, all of which have been approved by our shareholders. One of
the plans, the 1991 Independent Directors Stock Option Plan, does not have any shares available to
grant new options and all shares underlying outstanding options that expire or are forfeited prior
to exercise are not available for future option grants under this plan. See Note 15 of Notes to
Consolidated Financial Statements. The following table sets forth certain information relative to
our stock option plans as of December 31, 2009:
Number of securities | ||||||||||||
remaining available | ||||||||||||
for future issuance under | ||||||||||||
Number of securities to be | equity compensation | |||||||||||
issued upon exercise of | Weighted-average exercise | plans (excluding | ||||||||||
outstanding options, | price of outstanding options, | securities reflected in | ||||||||||
Plan Category | warrants and rights | warrants and rights | column (a)) | |||||||||
(a) | (b) | (c) | ||||||||||
Equity compensation
plans approved
by security holders |
1,821,095 | $ | 6.04 | (1) | 1,111,072 | |||||||
Equity compensation
plans not approved
by security holders
(2) |
||||||||||||
Total |
1,821,095 | $ | 6.04 | 1,111,072 | ||||||||
(1) | The weighted-average exercise price was determined based on the exercise price
related to each outstanding stock option and an exercise price of zero for each restricted stock
unit award. |
|
(2) | We do not have any equity compensation plans which have not been approved by our
security holders. |
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Reference is made to information contained under the headings Corporate Governance and
Transaction With Related Persons in our 2010 Proxy Statement, which information is incorporated
herein.
Item 14. | Principal Accountant Fees and Services |
Reference is made to information contained under the headings Principal Accountant Fees and
Services in our 2010 Proxy Statement, which information is incorporated herein.
37
Table of Contents
PART IV
Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) and (2). The response to this portion of Item 15 is submitted as a separate section of
this report commencing on page F-1.
(a)(3) and (b). 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 (incorporated by reference to Exhibit 3.1 to
Registrants Annual Report on Form 10-K, filed on
March 27, 2002)
|
* | ||||
3.2 | Fifth Amended and Restated Bylaws of Osteotech
(incorporated by reference to Exhibit 3.1 to
Registrants Current Report on Form 8-K, filed on
November 7, 2007)
|
* | ||||
3.3 | Form of Stock Certificate (incorporated by reference
to Exhibit 3.4 to Registrants Registration Statement
on Form S-1 (File No. 33-40463), filed on June 14,
1991)
|
* | ||||
3.4 | Certificate of Retirement and Prohibition or
Reissuance of Shares of Osteotech, Inc. dated April 4,
2002 (incorporated by reference to Exhibit 3.4 to
Registrants Quarterly Report on Form 10-Q, filed on
August 9, 2002)
|
* | ||||
3.5 | Certificate of Designation of Series E Junior
Participating Preferred Stock of Osteotech, Inc.
(incorporated by reference to Exhibit 3.1 to
Registrants Current Report on Form 8-K, filed on
January 22, 2010)
|
* | ||||
4.1 | Rights Agreement, dated as of January 22, 2010,
between Osteotech, Inc. and Registrar and Transfer
Company (incorporated by reference to Exhibit 4.1 to
Registrants Current Report on Form 8-K, filed on
January 22, 2010)
|
* | ||||
10.2 | 1991 Independent Directors Stock Option Plan, as
amended (incorporated by reference to Exhibit 10.1 to
Registrants Registration Statement on Form S-8 (File
No. 333-145438), filed on August 14, 2007) ^
|
* | ||||
10.3 | Form of Confidentiality Agreement and Non-Competition
Agreement with executive officers (incorporated by
reference to Exhibit 10.10 to Registrants Annual
Report on Form 10-K, filed on March 27, 2002)
|
* | ||||
10.6 | Amended and Restated 2000 Stock Plan (incorporated by
reference to Exhibit 10.41 to Registrants Quarterly
Report on Form 10-Q, filed on August 14, 2003) ^
|
* | ||||
10.7 | Second Amended and Restated Processing Agreement by
and among Musculoskeletal Transplant Foundation, Inc.,
Biocon, Inc., and Osteotech, Inc. dated as of June 1,
2002 (incorporated by reference to Exhibit 10.57 to
Registrants Quarterly Report on Form 10-Q, filed on
August 9, 2002)
|
* | ||||
10.8 | Settlement Agreement and Release by and among
Osteotech, Inc. and Osteotech Investment Corporation,
the Musculoskeletal Transplant Foundation, Inc., and
Synthes Spine Company, L.P., dated as of June 1, 2002
(incorporated by reference to Exhibit 10.56 to
Registrants Quarterly Report on Form 10-Q, filed on
August 9, 2002)
|
* |
38
Table of Contents
Exhibit | Page | |||||
Number | Description | Number | ||||
10.9 | License Agreement by and among Osteotech, Inc.,
Osteotech Investment Corporation, Musculoskeletal
Transplant Foundation, Inc., Biocon, Inc., and Synthes
Spine Company, L.P., dated as of June 1, 2002
(incorporated by reference to Exhibit 10.58 to
Registrants Quarterly Report on Form 10-Q, filed on
August 9, 2002)
|
* | ||||
10.10 | Form of Change in Control Agreement with Executive
Officers (incorporated by reference to Exhibit 10.61
to Registrants Quarterly Report on Form 10-Q, filed
on November 14, 2002) ^
|
* | ||||
10.11 | Lease for Osteotechs Eatontown administration
facility (incorporated by reference to Exhibit 10.30
to Registrants Annual Report on Form 10-K, filed on
March 30, 1995)
|
* | ||||
10.12 | First Modification to Lease for Osteotechs Eatontown
administration facility (incorporated by reference to
Exhibit 10.45 to Registrants Annual Report on Form
10-K, filed on March 15, 2004)
|
* | ||||
10.13 | Employment Agreement with Sam Owusu-Akyaw dated July
2, 2004 (incorporated by reference to Exhibit 10.48 to
Registrants Quarterly Report on Form 10-Q, filed on
November 8, 2004) ^
|
* | ||||
10.15 | Processing Agreement between Musculoskeletal
Transplant Foundation, Inc., Biocon, Inc. and
Osteotech, Inc. dated December 22, 2004 (incorporated
by reference to Exhibit 10.51 to Registrants Annual
Report on Form 10-K, filed on March 29, 2005)
|
* | ||||
10.16 | Form of Nontransferable Incentive Stock Option
Agreement for all incentive option grants, including
option grants to Members of the Board of Directors and
Executive Officers pursuant to Osteotechs 2000 Stock
Plan (incorporated by reference to Exhibit 10.52 to
Registrants Annual Report on Form 10-K, filed on
March 29, 2005) ^
|
* | ||||
10.17 | Form of Nontransferable Non-Incentive Stock Option
Agreement for all non-incentive option grants,
including option grants to Members of the Board of
Directors and Executive Officers pursuant to
Osteotechs 2000 Stock Plan (incorporated by reference
to Exhibit 10.53 to Registrants Annual Report on Form
10-K, filed on March 29, 2005) ^
|
* | ||||
10.22 | Form of Nontransferable Non-Incentive Stock Option
Agreement pursuant to the 2000 Stock Plan and Form of
Amendment thereto (incorporated by reference to
Exhibit 10.59 to Registrants Quarterly Report on Form
10-Q, filed on November 9, 2005) ^
|
* | ||||
10.26 | Agreement of Lease between 201 Industrial Way, Inc.
and Osteotech, Inc., dated August 5, 2005, regarding
the Companys principal processing facility
(incorporated by reference to Exhibit 10.63 to
Registrants Quarterly Report on Form 10-Q, filed on
November 9, 2005)
|
* | ||||
10.27 | Employment Agreement, effective as of November 1,
2000, between Osteotech, Inc. and Mark H. Burroughs
(incorporated by reference to Exhibit 10.64 to
Registrants Quarterly Report on Form 10-Q, filed on
November 9, 2005) ^
|
* | ||||
10.32 | Amendment No. 1, effective as of January 1, 2006, to
Employment Agreement, effective as of November 1,
2000, between Osteotech, Inc. and Mark H. Burroughs
(incorporated by reference to Exhibit 10.61 to
Registrants Annual Report on Form 10-K filed on March
31, 2006) ^
|
* |
39
Table of Contents
Exhibit | Page | |||||
Number | Description | Number | ||||
10.33 | Amendment No. 1, effective as of January 1, 2006, to
Employment Agreement, dated July 2, 2004, between
Osteotech, Inc. and Sam Owusu-Akyaw (incorporated by
reference to Exhibit 10.62 to Registrants Annual
Report on Form 10-K filed on March 31, 2006) ^
|
* | ||||
10.34 | Employment Agreement, effective as of September 27,
2004, between Osteotech, Inc. and Robert Wynalek
(incorporated by reference to exhibit 10.64 to
Registrants Quarterly Report on Form 10-Q filed on
May 10, 2006) ^
|
* | ||||
10.35 | Form of Indemnity Agreement executed by Officers and
Directors of Osteotech, Inc. (incorporated by
reference to Exhibit 10.54 to Registrants Current
Report on Form 8-K filed on April 9, 2002) ^
|
* | ||||
10.36 | Form of 2000 Stock Plan Restricted Stock Unit
Agreement for Employees (incorporated by reference to
Exhibit 10.66 to registrants Quarterly Report on Form
10-Q filed on August 4, 2006) ^
|
* | ||||
10.37 | Form of 2000 Stock Plan Restricted Stock Unit
Agreement for Independent Directors (incorporated by
reference to Exhibit 10.67 to Registrants Quarterly
Report on Form 10-Q filed on August 4, 2006) ^
|
* | ||||
10.38 | Form of 2000 Stock Plan Restricted Stock Unit
Agreement For Consultants (incorporated by reference
to Exhibit 10.68 to Registrants Quarterly Report on
Form 10-Q filed on August 4, 2006) ^
|
* | ||||
10.39 | The Management Performance Bonus Plan, June 2006
(incorporated by reference to Exhibit 10.69 to
Registrants Quarterly Report on Form 10-Q filed on
August 4, 2006) ^
|
* | ||||
10.40 | Form of 2000 Stock Plan Nontransferable Incentive
Stock Option Agreement as of October 26, 2006
(incorporated by reference to Exhibit 10.49 to
Registrants Annual Report on Form 10-K filed on March
14, 2007) ^
|
* | ||||
10.41 | Form of 2000 Stock Plan Nontransferable Non-Incentive
Stock Option Agreement as of October 26, 2006
(incorporated by reference to Exhibit 10.50 to
Registrants Annual Report on Form 10-K filed on March
14, 2007) ^
|
* | ||||
10.45 | Employment Agreement, dated September 27, 2004,
between the Company and Robert Honneffer (incorporated
by reference to Exhibit 10.4 to Registrants Quarterly
Report on Form 10-Q filed on May 10, 2007) ^
|
* | ||||
10.46 | Second Amendment to Tissue Recovery Agreement between
the Company and Community Blood Center dated May 14,
2007 (incorporated by reference to Exhibit 10.1 to
Registrants Quarterly Report on Form 10-Q filed on
August 6, 2007)
|
* | ||||
10.47 | Third Amendment to Tissue recovery Agreement between
the Company and Community Blood Center dated May 14,
2007 (incorporated by reference to Exhibit 10.2 to
Registrants Quarterly Report on Form 10-Q filed on
August 6, 2007)
|
* | ||||
10.48 | Fourth Amendment to Tissue Recovery Agreement between
the Company and Community Blood Center dated June 1,
2007 (incorporated by reference to Exhibit 10.3 to
Registrants Quarterly Report on Form 10-Q filed on
August 6, 2007)
|
* | ||||
10.49 | 2007 Stock Incentive Plan (incorporated by reference
to Exhibit 10.1 to Registrants Registration Statement
on Form S-8 (File No. 333-145501), filed on August 16,
2007) ^
|
* |
40
Table of Contents
Exhibit | Page | |||||
Number | Description | Number | ||||
10.50 | Form of 2007 Stock Incentive Plan Restricted Stock
Unit Agreement for Employees (incorporated by
reference to Exhibit 10.1 to Registrants Quarterly
Report on Form 10-Q filed on November 6, 2007) ^
|
* | ||||
10.51 | Form of 2007 Stock Incentive Plan Performance-Based
Restricted Stock Unit Agreement for Employees ^
|
* | ||||
10.53 | Amendment No. 2 to Employment Agreement, effective as
of December 31, 2008, between Osteotech, Inc. and Mark
H. Burroughs (incorporated by reference to Exhibit
10.1 to Registrants Current Report on Form 8-K, filed
January 7, 2009) ^
|
* | ||||
10.54 | Amendment No. 1 to Employment Agreement, effective as
of December 31, 2008, between Osteotech, Inc. and
Robert Honneffer (incorporated by reference to Exhibit
10.2 to Registrants Current Report on Form 8-K, filed
January 7, 2009) ^
|
* | ||||
10.55 | Amendment No. 2 to Employment Agreement, effective as
of December 31, 2008, between Osteotech, Inc. and Sam
Owusu-Akyaw (incorporated by reference to Exhibit 10.3
to Registrants Current Report on Form 8-K, filed
January 7, 2009) ^
|
* | ||||
10.56 | Amendment No. 1 to Employment Agreement, effective as
of December 31, 2008, between Osteotech, Inc. and
Robert Wynalek (incorporated by reference to Exhibit
10.4 to Registrants Current Report on Form 8-K, filed
January 7, 2009) ^
|
* | ||||
10.57 | Form of Amendment No. 1 to Change in Control
Agreement, effective as of December 31, 2008, between
Osteotech, Inc. and its Executive Officers
(incorporated by reference to Exhibit 10.5 to
Registrants Current Report on Form 8-K, filed January
7, 2009) ^
|
* | ||||
10.58 | Nontransferable Independent Director Stock Option
Agreement, dated July 1, 2009, between the Company and
Kenneth Fallon (incorporated by reference to Exhibit
10.1 to Registrants Quarterly Report on Form 10-Q,
filed on November 9, 2009) ^
|
* | ||||
10.59 | Amendment No. 1 to Nontransferable Independent
Director Stock Option Agreement between the Company
and Kenneth Fallon, dated September 3, 2009
(incorporated by reference to Exhibit 10.2 to
Registrants Quarterly Report on Form 10-Q, filed on
November 9, 2009) ^
|
* | ||||
10.60 | Form of Letter Agreement between the Company and
Non-Employee Directors, dated September 3, 2009
(incorporated by reference to Exhibit 10.3 to
Registrants Quarterly Report on Form 10-Q, filed on
November 9, 2009)
|
* | ||||
10.61 | Revolving Credit and Security Agreement, dated
December 29, 2009, between PNC Bank, National
Association and Osteotech, Inc. (incorporated by
reference to Exhibit 10.1 to Registrants Current
Report on Form 8-K, filed on January 5, 2010)
|
* | ||||
10.62 | Tissue Recovery Agreement between the Company and
Community Blood Center d/b/a Community Tissue Services
dated October 30, 2009.
|
+, ** | ||||
21.1 | Subsidiaries of the Registrant
|
+ | ||||
23.1 | Consent of BDO Seidman, LLP
|
+ |
41
Table of Contents
Exhibit | Page | |||||
Number | Description | Number | ||||
31.1 | Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
+ | ||||
31.2 | Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
+ | ||||
32.1 | Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
+ | ||||
32.2 | Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
+ |
* | Previously filed; incorporated herein by reference |
|
+ | Filed herewith |
|
^ | Management contracts or compensatory plans and arrangements required
to be filed pursuant to Item 10(iii) |
|
** | Pursuant to Rule 246-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of these exhibits have been deleted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment.
|
42
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 8, 2010 | OSTEOTECH, INC. |
|||
By: | /s/ SAM OWUSU-AKYAW | |||
Sam Owusu-Akyaw | ||||
Chief Executive Officer (Principal Executive Officer) and Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons in the capacities and on the dates indicated:
Signature | Title | Date | ||
/s/ KENNETH P. FALLON III
|
Chairman of the Board of Directors | March 8, 2010 | ||
/s/ SAM OWUSU-AKYAW
|
President and Chief
Executive Officer (Principal Executive Officer) and Director |
March 8, 2010 | ||
/s/ MARK H. BURROUGHS
|
Executive Vice President Chief Financial Officer (Principal Financial Officer) |
March 8, 2010 | ||
/s/ STEPHEN S. GALLIKER
|
Director | March 8, 2010 | ||
/s/ CATO T. LAURENCIN
|
Director | March 8, 2010 | ||
/s/ ROBERT J. PALMISANO
|
Director | March 8, 2010 | ||
/s/ JAMES M. SHANNON
|
Director | March 8, 2010 |
43
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
AND FINANCIAL STATEMENT SCHEDULE
Page | ||||
1. FINANCIAL STATEMENTS |
||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
2. SCHEDULE |
||||
S-1 |
All schedules, except for the one set forth above, have been omitted since the information required
is included in the financial statements or accompanying notes or have been omitted as not
applicable or not required.
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Osteotech, Inc.
Eatontown, New Jersey
Osteotech, Inc.
Eatontown, New Jersey
We have audited the accompanying consolidated balance sheets of Osteotech, Inc. and Subsidiaries as
of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended December 31, 2009. In
connection with our audits of the financial statements, we have also audited the financial
statement schedule listed in the accompanying index. These financial statements and schedule are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Osteotech, Inc. and Subsidiaries at December 31, 2009
and 2008, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2009, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, the financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Osteotech Inc.s internal control over financial reporting as of December
31, 2009, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March
8, 2010 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Woodbridge, NJ
March 8, 2010
F-2
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31, | 2009 | 2008 | ||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 10,708 | $ | 18,823 | ||||
Accounts receivable, net of allowance of $304 in 2009 and $401 in 2008 |
16,165 | 17,968 | ||||||
Deferred processing costs |
38,562 | 38,715 | ||||||
Inventories |
1,819 | 1,467 | ||||||
Prepaid expenses and other current assets |
3,247 | 3,115 | ||||||
Total current assets |
70,501 | 80,088 | ||||||
Property, plant and equipment, net |
29,575 | 34,005 | ||||||
Goodwill |
1,953 | 1,953 | ||||||
Other assets |
14,908 | 11,069 | ||||||
Total assets |
$ | 116,937 | $ | 127,115 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 16,206 | $ | 23,569 | ||||
Current maturities of capital lease obligation |
994 | 895 | ||||||
Total current liabilities |
17,200 | 24,464 | ||||||
Capital lease obligation |
12,181 | 13,175 | ||||||
Other long-term liabilities |
7,270 | 6,626 | ||||||
Total liabilities |
36,651 | 44,265 | ||||||
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 at both December 31, 2009 and 2008; 18,179,180
shares and 17,979,846 shares issued at December 31, 2009 and 2008, respectively |
182 | 180 | ||||||
Additional paid-in capital |
71,337 | 69,801 | ||||||
Treasury stock, at cost; 115,670 shares and 65,190 shares at
December 31, 2009 and 2008, respectively |
(227 | ) | (125 | ) | ||||
Accumulated other comprehensive income |
1,410 | 1,393 | ||||||
Retained earnings |
7,584 | 11,601 | ||||||
Total stockholders equity |
80,286 | 82,850 | ||||||
Total liabilities and stockholders equity |
$ | 116,937 | $ | 127,115 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
For the year ended December 31, | 2009 | 2008 | 2007 | |||||||||
Revenue |
$ | 96,678 | $ | 103,814 | $ | 104,277 | ||||||
Cost of revenue |
49,108 | 48,770 | 50,555 | |||||||||
Gross profit |
47,570 | 55,044 | 53,722 | |||||||||
Marketing, selling and general and administrative expenses |
43,996 | 45,032 | 44,801 | |||||||||
Research and development expenses |
6,486 | 7,435 | 5,658 | |||||||||
50,482 | 52,467 | 50,459 | ||||||||||
Operating income (loss) |
(2,912 | ) | 2,577 | 3,263 | ||||||||
Other income (expense): |
||||||||||||
Interest income |
31 | 454 | 1,022 | |||||||||
Interest expense |
(1,443 | ) | (1,526 | ) | (1,610 | ) | ||||||
Other |
42 | 961 | (1 | ) | ||||||||
(1,370 | ) | (111 | ) | (589 | ) | |||||||
Income (loss) before income taxes |
(4,282 | ) | 2,466 | 2,674 | ||||||||
Income tax expense (benefit) |
(265 | ) | 263 | 57 | ||||||||
Net income (loss) |
$ | (4,017 | ) | $ | 2,203 | $ | 2,617 | |||||
Earnings (loss) per share: |
||||||||||||
Basic |
$ | (.22 | ) | $ | .12 | $ | .15 | |||||
Diluted |
$ | (.22 | ) | $ | .12 | $ | .15 | |||||
Shares used in computing earnings (loss) per share: |
||||||||||||
Basic |
17,968,971 | 17,833,902 | 17,538,254 | |||||||||
Diluted |
17,968,971 | 18,083,584 | 17,926,384 |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(dollars in thousands)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Paid-In | Treasury Stock | Comprehensive | Retained | Stockholders | |||||||||||||||||||||||||||
For the years ended December 31, 2009, 2008 and 2007 | Shares | Amount | Capital | Shares | Amount | Income | Earnings | Equity | ||||||||||||||||||||||||
Stockholders Equity, January 1, 2007 |
17,396,775 | $ | 174 | $ | 65,784 | $ | 1,114 | $ | 6,781 | $ | 73,853 | |||||||||||||||||||||
Net income |
2,617 | 2,617 | ||||||||||||||||||||||||||||||
Currency translation adjustments |
317 | 317 | ||||||||||||||||||||||||||||||
Total comprehensive income |
2,934 | |||||||||||||||||||||||||||||||
Exercise of stock options |
279,336 | 3 | 1,238 | 1,241 | ||||||||||||||||||||||||||||
Common stock issued pursuant to employee stock purchase plan |
21,428 | | 162 | 162 | ||||||||||||||||||||||||||||
Stock-based compensation expense |
838 | 838 | ||||||||||||||||||||||||||||||
Stockholders Equity, December 31, 2007 |
17,697,539 | 177 | 68,022 | 1,431 | 9,398 | 79,028 | ||||||||||||||||||||||||||
Net income |
2,203 | 2,203 | ||||||||||||||||||||||||||||||
Currency translation adjustments |
(38 | ) | (38 | ) | ||||||||||||||||||||||||||||
Total comprehensive income |
2,165 | |||||||||||||||||||||||||||||||
Exercise of stock options/vested
restricted stock units |
213,247 | 2 | 237 | 239 | ||||||||||||||||||||||||||||
Common stock issued pursuant to employee stock purchase plan |
69,060 | 1 | 237 | 238 | ||||||||||||||||||||||||||||
Purchase of Treasury stock |
65,190 | $ | (125 | ) | (125 | ) | ||||||||||||||||||||||||||
Stock-based compensation expense |
1,305 | 1,305 | ||||||||||||||||||||||||||||||
Stockholders Equity, December 31, 2008 |
17,979,846 | 180 | 69,801 | 65,190 | (125 | ) | 1,393 | 11,601 | 82,850 | |||||||||||||||||||||||
Net loss |
(4,017 | ) | (4,017 | ) | ||||||||||||||||||||||||||||
Currency translation adjustments |
17 | 17 | ||||||||||||||||||||||||||||||
Total comprehensive income |
(4,000 | ) | ||||||||||||||||||||||||||||||
Exercise of stock options/vested
restricted stock units |
185,750 | 2 | | 2 | ||||||||||||||||||||||||||||
Common stock issued pursuant to employee stock purchase plan |
13,584 | | 47 | 47 | ||||||||||||||||||||||||||||
Purchase of Treasury stock |
50,480 | (102 | ) | (102 | ) | |||||||||||||||||||||||||||
Stock-based compensation expense |
1,489 | 1,489 | ||||||||||||||||||||||||||||||
Stockholders Equity, December 31, 2009 |
18,179,180 | $ | 182 | $ | 71,337 | 115,670 | $ | (227 | ) | $ | 1,410 | $ | 7,584 | $ | 80,286 | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the year ended December 31, | 2009 | 2008 | 2007 | |||||||||
Cash Flow From Operating Activities |
||||||||||||
Net income (loss) |
$ | (4,017 | ) | $ | 2,203 | $ | 2,617 | |||||
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities: |
||||||||||||
Depreciation and amortization |
5,843 | 5,706 | 5,396 | |||||||||
Stock-based compensation expense |
1,330 | 1,305 | 838 | |||||||||
Loss on disposal of assets |
146 | 398 | | |||||||||
Changes in assets and liabilities: |
||||||||||||
Accounts receivable |
1,803 | 1,385 | (846 | ) | ||||||||
Deferred processing costs |
(704 | ) | (12,375 | ) | (2,349 | ) | ||||||
Inventories |
(352 | ) | (296 | ) | (166 | ) | ||||||
Prepaid expenses and other current assets |
762 | 342 | (1,162 | ) | ||||||||
Net receivables from license agreements |
(2,294 | ) | (500 | ) | | |||||||
Note receivable from patent litigation settlement |
| 1,000 | 1,000 | |||||||||
Accounts payable and other liabilities |
(7,472 | ) | 4,205 | 2,803 | ||||||||
Net cash (used in) provided by operating activities |
(4,955 | ) | 3,373 | 8,131 | ||||||||
Cash Flow From Investing Activities |
||||||||||||
Capital expenditures |
(1,414 | ) | (5,853 | ) | (3,312 | ) | ||||||
Other, net |
(834 | ) | (983 | ) | (739 | ) | ||||||
Net cash used in investing activities |
(2,248 | ) | (6,836 | ) | (4,051 | ) | ||||||
Cash Flow From Financing Activities |
||||||||||||
Purchase of treasury stock |
(102 | ) | (125 | ) | | |||||||
Issuance of common stock |
49 | 477 | 1,403 | |||||||||
Principal payments on capital lease obligation |
(895 | ) | (806 | ) | (727 | ) | ||||||
Net cash (used in) provided by financing activities |
(948 | ) | (454 | ) | 676 | |||||||
Effect of exchange rate changes on cash |
36 | (37 | ) | 75 | ||||||||
Net (decrease) increase in cash and cash equivalents |
(8,115 | ) | (3,954 | ) | 4,831 | |||||||
Cash and cash equivalents at beginning of year |
18,823 | 22,777 | 17,946 | |||||||||
Cash and cash equivalents at end of year |
$ | 10,708 | $ | 18,823 | $ | 22,777 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
1. DESCRIPTION OF BUSINESS
Osteotech, Inc. (the Company) is a leading technology company that develops innovative and
efficacious products for regenerative medicine. The Company is focused on creating innovative
technology platforms that will provide a variety of procedural specific biologic products to
address the changing needs of orthopedics and healthcare in general. By developing specific
products for specific surgical procedures, the Company believes it will be able to provide the
surgeon with the right product at the right time for the right procedure and, therefore,
improve patient outcomes.
The Companys goal is to utilize its technology platforms to develop tissue forms and products
to create procedure specific solutions to repair, replace or heal bone and tissue loss caused by
trauma, disease or surgical intervention and to augment prosthetic implant procedures to
facilitate spinal fusion and to replace and/or repair damaged ligaments, tendons and other
tissues within the human body. The Company provides biologic solutions to orthopedic, spinal,
neurosurgical and oral/maxillofacial surgeons for use in the various surgical procedures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries,
all of which are wholly owned. All intercompany transactions and balances are eliminated. The
Company has no material interests in variable interest entities.
Use of Estimates
The preparation of the consolidated financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from
those estimates. Significant estimates include allowances for accounts receivable, the useful
lives of capital assets and intangible assets, inventory and deferred processing costs
valuation, deferred tax asset valuation, uncertain tax positions, certain accrued and contingent
liabilities and the fair value of stock-based compensation.
Revenue Recognition
The Company derives revenue principally from service fees related to the distribution of its
tissue grafts and products. Revenue, net of trade discounts and allowances, is recognized once
delivery has occurred provided that persuasive evidence of an arrangement exists, the price is
fixed or determinable, and collectability is reasonably assured. Delivery is considered to have
occurred when risk of loss has transferred to the Companys customers, usually upon shipment to
such customers, except for the Companys products maintained as consigned inventory, when
delivery is considered to have occurred at the time that the tissue graft or product is consumed
by the end user (See Note 19 for a summary of revenue by segment). Generally, customers are not
allowed to return product unless damaged or determined to be unsuitable for a specific procedure
and the Company bases its estimate for sales returns upon historical trends and records this
amount, as a reduction to revenue.
The Company recognizes patent license fees as other revenue when the Companys performance under
the applicable agreement is substantially complete and collectability is reasonably assured.
F-7
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with original maturities of three months or
less, including the Companys investment in money market funds, to be cash equivalents. As of
December 31, 2009, a significant portion of the Companys cash and cash equivalents were held in
money market accounts, which are valued using Level 1 inputs under the guidance of the Financial
Accounting Standards Board (FASB) Codification (Codification) Topic 820, Fair Value
Measurements (ASC 820). Investments with maturities in excess of three months but less than one
year, when purchased, will be classified as short-term investments and valued in accordance with
ASC 820.
Fair Value Measurements
The carrying value of cash and cash equivalents, marketable securities, accounts receivable and
accounts payable and accrued liabilities approximates the fair value of these financial
instruments at December 31, 2009 and 2008 due to their short maturities.
The Company follows the provisions of ASC 820, which defines fair value, establishes a framework
for measuring fair value of assets and liabilities, and expands disclosures about fair value
measurements. ASC 820 applies under a number of other accounting pronouncements that require or
permit fair value measurements. Certain provisions of ASC 820, as they relate to non-financial
assets and liabilities, were adopted by the Company beginning on January 1, 2009.
Fair value is defined under ASC 820 as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants on the measurement
date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of
observable inputs and minimize the use of unobservable inputs. The standard describes a fair
value hierarchy based on the following three levels of inputs that may be used to measure fair
value, of which, the first two are considered observable and the last unobservable:
| Level 1 Quoted prices in active markets for identical assets or
liabilities. |
||
| Level 2 Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term
of the assets or liabilities. |
||
| Level 3 Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities. |
The following table sets forth the Companys financial assets that were measured at fair value
as of December 31, 2009 and indicates the fair value hierarchy of the valuation techniques
utilized by the Company to determine such fair value:
Quoted Prices in | Significant | |||||||||||
Active Markets | Other | Significant | ||||||||||
for Identical | Observable | Unobservable | ||||||||||
Assets | Inputs | Inputs | ||||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
Asset: |
||||||||||||
Money market funds |
$ | 5,827 | $ | | $ | |
F-8
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Deferred Processing Costs
Deferred processing costs are stated at the lower of cost or market, with cost determined under
the first-in, first-out method. Costs related to tissue grafts and processing are deferred
until the tissue is released from final quality assurance testing and shipped to customers,
except for consigned inventory, whose costs are deferred until the tissue graft is consumed by
the end user.
Inventories
Inventories are stated at the lower of cost or market, with cost determined under the first-in,
first-out method. Inventories consist of supplies and raw materials, which principally support
the processing of allograft bone tissue, and finished goods, which principally represent
synthetic or xenograft products.
Long-Lived Assets
Impairment The Company continually monitors events and circumstances that could indicate that
carrying amounts of long-lived assets, including property, plant, equipment and intangible
assets, may not be recoverable. When such events or changes in circumstances occur, we assess
recoverability of long-lived assets, other than goodwill, by determining whether the carrying
value of such assets will be recovered through undiscounted expected future cash flows. If the
total of the undiscounted future cash flows is less than the carrying amount of those assets, we
recognize an impairment loss based on the excess of the carrying amount over the fair value of
the asset, or discounted estimated future cash flows if fair value is not readily determinable.
Goodwill is tested for impairment, based on fair market value measurements, on an annual basis
as of January 1, and between annual tests if indictors of potential impairment exist. No
impairment of goodwill has been identified during any of the periods presented.
The estimates of fair market value and future cash flows involve considerable management
judgment and are based upon, among other things, assumptions about expected future operating
performance. Assumptions used in these forecasts are consistent with internal planning. The
actual future operating performance could differ from managements estimates due to changes in
business conditions, operating performance and economic conditions.
Property, plant and equipment Property, plant and equipment, including costs for software
developed or obtained for internal use, are stated at cost. Assets under capital leases are
recorded at the lower of the fair market value of the asset or the present value of the future
minimum lease payments. Assets subject to asset retirement obligations are recorded at cost
plus the initial value, or any appropriate revisions thereof, of the asset retirement
obligation. Major renewals and betterments are capitalized while maintenance and repairs are
expensed as incurred. Interest, if any, is capitalized in connection with the construction of
major facilities. The capitalized interest is recorded as part of the underlying assets and is
amortized over each respective assets estimated useful life. The cost of assets under capital
leases and leasehold improvements are amortized on a straight-line basis over the shorter of the
lease term or the estimated useful life of the asset. Depreciation is computed on the
straight-line method over the following estimated useful lives of the assets:
Capitalized lease and leasehold improvements
|
Lesser of the useful life of the asset or the term of the respective lease | |
Machinery and equipment
|
5 to 10 years | |
Computer hardware and software
|
5 years | |
Office equipment, furniture and fixtures
|
5 years | |
Surgical instrumentation
|
3 years |
When depreciable assets are retired or sold, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recorded as a component of other
income in the consolidated statements of operations.
F-9
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Goodwill The Companys goodwill mainly relates to the Companys international activities in
the sale and distribution of allograft bone tissue products. No impairment of goodwill has been
identified during any of the periods presented.
Other intangible assets The Companys other intangible assets, which principally represent
patents and patent applications, are recorded at cost. Patents are amortized over 5 years.
Patent application costs will commence amortization upon the grant of the patent, or expensed if
the application is rejected, withdrawn or abandoned.
Asset Retirement Obligations
The Company records an asset retirement obligation (ARO) when an obligation to retire an asset
is determined and reasonably estimatable. The ARO is accrued at its estimated fair value with a
corresponding increase in the carrying amount of the related long-lived asset, or if
appropriate, a corresponding charge to the results of operations. In each subsequent period,
the ARO is accreted from its current discounted value to its expected future settlement value,
and the related capitalized cost is depreciated over the useful life of the related long-lived
asset. The valuation of an ARO is based upon a number of assumptions requiring professional
judgment, including expected future settlement values and the credit-adjusted risk free interest
rate, and future adjustments of these assumptions may have a material impact on the Companys
results of operations.
Grants
As part of the Companys efforts to foster the development of new technologies, tissue donations
and expansion of tissue supply, the Company may, from time-to-time, provide grants to
educational and other organizations. Grants are included in marketing, selling and general and
administrative expenses in the consolidated statements of operations when the Company makes a
fixed and determinable commitment to fund a specific grant. As of December 31, 2009, the
Company does not have any grant commitments.
Income Taxes
The Company records a provision for income taxes including federal, state and foreign income
taxes currently payable and those deferred because of temporary differences in the basis of
assets and liabilities between amounts recorded for financial statement and tax purposes.
Deferred taxes are calculated using the liability method. A valuation allowance is established,
as needed, to reduce the carrying value of net deferred tax assets if realization of such assets
is not considered to be more likely than not.
The Company recognizes the tax benefit from an uncertain tax position when it is more likely
than not, based on the technical merits of the position, that the position will be sustained on
examination by the taxing authorities. Additionally, the amount of the tax benefit to be
realized is the largest amount of benefit that has a greater than fifty percent likelihood of
being realized upon settlement. If the more likely than not threshold is not met in the period
for which a tax position is taken, the Company may subsequently recognize the benefit of that
tax position if the tax matter is effectively settled, the statute of limitations expires, or if
the more likely than not threshold is met in a subsequent period. The Company recognizes
interest and penalties related to unrecognized tax benefits (UTBs) in income tax expense.
Research and Development
Research and development costs include compensation related expenses of employees and
third-party development costs. Nonrefundable advance payments for goods and services that will
be used in future research and development activities are expensed when the activity has been
performed or when the goods have been received rather than when the payment is made.
F-10
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Stock-Based Compensation
The Companys compensation programs include share-based payments. All awards under share-based
payment programs are accounted for at fair value and these fair values are generally amortized
on a straight-line basis over the vesting terms into marketing, selling and general and
administrative expense in the consolidated statement of operations, as appropriate.
Nonmonetary Transactions
The Company recognizes nonmonetary transactions in accordance with Codification Topic 845-10,
Nonmonetary Transactions.
In 2009, the Company completed a nonmonetary transaction from which the Company will receive
tissue over a three year period beginning in the third quarter of 2010. Revenue recorded in
2009 of $2,787 from this transaction equals the present value of the fair market value of the
tissue to be received. Fair market value was determined based on similar monetary transactions
between the Company and unrelated third parties.
Translation of Foreign Currency
The financial position and results of the Companys foreign operations are determined using
local currency as the functional currency. Assets and liabilities of these operations are
translated at the exchange rate in effect at each year-end. Income statement amounts are
translated at the average rate of exchange prevailing during the year. Translation adjustments
arising from the use of differing exchange rates from period to period are included in
accumulated other comprehensive income in stockholders equity.
Generally, sales to international stocking distributors are denominated in U.S. dollars.
However, in certain instances, the Company invoices in other than U.S. dollars and to a lesser
extent, makes purchases denominated in other than U. S. dollars. We, therefore, are exposed to
risks of foreign currency fluctuations, which we do not hedge, and are subject to transaction
gains and losses, that are recorded as a component of other income in the consolidated
statements of operations.
Concentrations of Credit Risk
The Company provides credit, in the normal course of business, to its clients and customers. In
addition, the Company performs on-going evaluations of its clients and customers financial
condition, but generally does not require collateral in support of available credit. The
Company maintains an allowance for doubtful accounts and charges actual losses to the allowance
when incurred.
We sell our products to hospitals in the Unites States and to stocking distributors
internationally. Stocking distributors in turn sell to hospitals or other medical
establishments and, in many instances, individual stocking distributors maintain higher
individual balances with longer payment terms. Losses, termination or changes in the financial
condition of a distributor, as well as a change in medical reimbursement regimens by foreign
governments where our products are sold, along with changes in local currency exchange rates
relative to the U.S. dollar, in international countries where our distributors operate, could
have a material adverse effect on our financial condition and results of operations. At
December 31, 2009 and 2008, international stocking distributors accounted for 41% and 30%,
respectively, of the Companys accounts receivable.
At December 31, 2009 no one customer represented more than 10% of outstanding accounts
receivable. At December 31, 2008 one customer represented 12% of our outstanding accounts
receivable.
F-11
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Reclassification
Certain reclassifications have been made to the consolidated financial statements for previous
years to conform to the classifications used as of and for the year ended December 31, 2009.
3. ACCOUNTING PRONOUNCEMENTS
From time to time, new accounting pronouncements are issued by the FASB or other standard
setting bodies that are adopted by the Company as of the specified effective date. Unless
otherwise discussed, we believe that the impact of recently issued standards that are not yet
effective will not have a material impact on our financial position or results of operations
upon adoption.
Effective for the Company beginning September 15, 2009, the FASB Codification is the source of
authoritative United States generally accepted accounting principles (GAAP) to be applied to
nongovernmental entities and rules and interpretive releases of the Securities and Exchange
Commission (SEC) as authoritative GAAP for SEC registrants. The Codification superseded all
the existing non-SEC accounting and reporting standards upon its effective date and
subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff
Positions or Emerging Issues Task Force Abstracts but rather issues accounting standards
updates. The adoption of the Codification had no material impact on the Companys financial
statements.
4. DEFERRED PROCESSING COSTS
Deferred processing costs consist of the following at December 31:
2009 | 2008 | |||||||
Unprocessed tissue |
$ | 16,692 | $ | 16,922 | ||||
Tissue in process |
4,062 | 4,506 | ||||||
Implantable tissue |
17,808 | 17,287 | ||||||
$ | 38,562 | $ | 38,715 | |||||
Unprocessed tissue represents the value of such allograft bone tissue expected to be processed
by the Company during the next twelve months. Unprocessed tissue expected to be processed in
periods subsequent to one year of $8,475 and $7,618 at December 31, 2009 and 2008, respectively,
was reflected in other assets.
5. INVENTORIES
Inventories consist of the following at December 31:
2009 | 2008 | |||||||
Supplies |
$ | 428 | $ | 478 | ||||
Raw Materials |
779 | 533 | ||||||
Finished Goods |
612 | 456 | ||||||
$ | 1,819 | $ | 1,467 | |||||
F-12
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following at December 31:
2009 | 2008 | |||||||
Income tax receivable |
$ | 230 | $ | 470 | ||||
Receivable from license arrangements |
1,394 | 500 | ||||||
Other |
1,623 | 2,145 | ||||||
$ | 3,247 | $ | 3,115 | |||||
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31:
2009 | 2008 | |||||||
Property under capital lease |
$ | 18,298 | $ | 18,454 | ||||
Machinery and equipment |
40,058 | 39,029 | ||||||
Computer hardware and software |
5,177 | 6,803 | ||||||
Office equipment, furniture and fixtures |
6,049 | 6,019 | ||||||
Surgical instrumentation |
2,548 | 2,464 | ||||||
Leasehold improvements |
9,471 | 8,706 | ||||||
Equipment not placed in service |
69 | 1,394 | ||||||
81,670 | 82,869 | |||||||
Less accumulated depreciation
and amortization |
(52,095 | ) | (48,864 | ) | ||||
$ | 29,575 | $ | 34,005 | |||||
Maintenance and repairs expense for the years ended December 31, 2009, 2008 and 2007, was
$3,130, $2,690 and $2,298, respectively. Depreciation and amortization expense related to
property, plant and equipment, including property under capital lease, for the years ended
December 31, 2009, 2008 and 2007 was $5,558, $5,487 and $5,201, respectively.
8. OTHER ASSETS
Other assets consist of the following at December 31:
2009 | 2008 | |||||||
Issued patents at cost |
$ | 2,319 | $ | 1,965 | ||||
Less accumulated amortization |
(1,752 | ) | (1,579 | ) | ||||
567 | 386 | |||||||
Patent applications pending |
2,659 | 2,292 | ||||||
Unprocessed tissue expected to be processed
after one year |
8,475 | 7,618 | ||||||
Long-term portion of receivable from license
arrangement |
2,383 | | ||||||
Other |
824 | 773 | ||||||
$ | 14,908 | $ | 11,069 | |||||
F-13
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Patents or patent application costs aggregating $103 in 2009 and $67 in 2008 have been charged
to marketing, selling and general and administrative expenses in the consolidated statements of
operations since the related patent or patent applications have been abandoned or withdrawn.
Amortization expense for issued patents was $196, $160 and $155 for the years ended December 31,
2009, 2008 and 2007, respectively, and is included in marketing, selling and general and
administrative expenses in the consolidated statements of operations. Amortization expense for
issued patents for the next five years is: $199 in 2010, $151 in 2011, $121 in 2012, $77 in 2013
and $19 in 2014.
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at December 31:
2009 | 2008 | |||||||
Trade accounts payable |
$ | 9,216 | $ | 12,731 | ||||
Accrued tissue recovery fees |
1,413 | 4,522 | ||||||
Accrued compensation |
955 | 1,162 | ||||||
Accrued professional fees |
780 | 907 | ||||||
Accrued commissions payable to non-employees |
1,040 | 1,229 | ||||||
Amounts due under severance agreements |
293 | 141 | ||||||
Other accrued liabilities |
2,509 | 2,877 | ||||||
$ | 16,206 | $ | 23,569 | |||||
10. LEASING TRANSACTIONS
The Company leases office and production facilities, including the Companys principal
processing facility and executive offices, and equipment under various lease agreements, which
have non-cancelable terms expiring at various intervals through August 2025. Most of the leases
for office and production facilities include renewal provisions at the Companys option.
Future minimum capital and operating lease payments at December 31, 2009 are as follows:
Operating | ||||||||
Capital Lease | Leases | |||||||
2010 |
$ | 2,326 | $ | 1,674 | ||||
2011 |
2,326 | 1,614 | ||||||
2012 |
1,965 | 1,602 | ||||||
2013 |
1,460 | 1,469 | ||||||
2014 |
1,460 | 849 | ||||||
Thereafter |
15,574 | | ||||||
Total minimum lease payments |
25,111 | $ | 7,208 | |||||
Less interest portion of payments |
(11,936 | ) | ||||||
Present value of future minimum lease payments |
13,175 | |||||||
Less current maturities of capital lease obligation |
(994 | ) | ||||||
Capital lease obligation |
$ | 12,181 | ||||||
The capital lease obligation reported above relates to the Companys principal processing
facility located in Eatontown, New Jersey. The lease agreement expires in 2025 and has two
five-year renewal options at the Companys election.
F-14
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Rent expense was $1,702, $1,344 and $1,459 for the years ended December 31, 2009, 2008, and
2007, respectively.
11. REVOLVING CREDIT FACILITY
On December 29, 2009, the Company entered into a Revolving Credit and Security Agreement (the
Credit Agreement) with PNC Bank, National Association as lender and agent (PNC). Pursuant
to the terms of the Credit Agreement and upon request, the Company may borrow from PNC up to
$10,000 subject to a maximum borrowing base that is based upon an amount equal to 85% of the
Companys eligible receivables (as that term is defined in the Credit Agreement) less such
reserves as PNC reasonably deems proper and necessary. Under the Credit Agreement, the Company
is permitted to use the proceeds of any such borrowings to satisfy its working capital needs and
for general corporate purposes. Borrowings under the Credit Agreement bear interest at one of
three variable rates, PNCs base commercial lending rate plus 2%; the federal funds open rate
plus 0.5% or LIBOR plus 3%. In no event will the interest rate be less than 3%. Borrowings are
secured by essentially all the assets of the Company. Under the Credit Agreement, the Company
is obligated to pay PNC a quarterly facility fee of 0.5% per annum on the unused portion of the
Credit Agreement.
The Company is also required to maintain compliance with various financial and other covenants
and conditions, including but not limited to, a prohibition on paying cash dividends, a
requirement that a fixed charge coverage ratio be maintained beginning on March 31, 2011, and
certain limitations on engaging in affiliate transactions, making acquisitions, incurring
additional indebtedness and making capital expenditures, the breach of any of which would permit
PNC to accelerate the obligations. The Credit Facility also includes subjective acceleration
provisions. Such provisions are based upon, in the reasonable opinion of PNC, the occurrence of
any adverse or material change in the condition or affairs, financial or otherwise, of the
Company, which impairs the interest of PNC.
As of December 31, 2009, there were no amounts outstanding under the Credit Agreement and the
Company is in compliance with all covenants.
12. OTHER LONG-TERM LIABILITIES
AROs
The Company has AROs related to the estimated costs associated with deconstructing the Companys
processing environment and storage facility housed in two leased facilities.
The following table summarizes the changes in the Companys long-term ARO liability for the
years indicated:
2009 | 2008 | |||||||
Balance at January 1 |
$ | 3,453 | $ | 4,429 | ||||
Accretion expense |
168 | 174 | ||||||
Change in estimates |
(84 | ) | (390 | ) | ||||
Abandonment payments |
| (760 | ) | |||||
Balance at December 31 |
$ | 3,537 | $ | 3,453 | ||||
At December 31, 2009, the estimated settlement value at the termination of the leases related to
our processing facility and storage facility was $8,190 and $1,014, respectively.
F-15
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Other
Other long-term liabilities at December 31 consist of the following:
2009 | 2008 | |||||||
Deferred gain on the sale of processing facility under
capitalized lease |
$ | 2,860 | $ | 3,042 | ||||
Other |
873 | 131 | ||||||
$ | 3,733 | $ | 3,173 | |||||
In 2005, the Company sold its principal processing facility in a sale and lease back
transaction. The resulting gain of approximately $3,660 from the sale of the facility was
deferred and is being amortized in proportion to the amortization of the leased asset.
Amortization of the deferred gain, included as a component of depreciation and amortization in
the consolidated statements of operations, was $182 in each of the three years December 31,
2009.
13. INCOME TAXES
The income tax expense (benefit) for the year ended December 31 consists of the following:
2009 | 2008 | 2007 | ||||||||||
Current: |
||||||||||||
Federal |
$ | (258 | ) | $ | 156 | $ | 48 | |||||
Foreign |
34 | 45 | 86 | |||||||||
State |
(41 | ) | 62 | (77 | ) | |||||||
Income tax expense (benefit) |
$ | (265 | ) | $ | 263 | $ | 57 | |||||
Income (loss) before income taxes for the year ended December 31 is as follows:
2009 | 2008 | 2007 | ||||||||||
Income (loss) before income taxes: |
||||||||||||
United States |
$ | (4,533 | ) | $ | 1,515 | $ | 1,841 | |||||
Foreign |
251 | 951 | 833 | |||||||||
$ | (4,282 | ) | $ | 2,466 | $ | 2,674 | ||||||
The difference between the income tax expense and the expected tax that would result from the
use of the federal statutory income tax rate is as follows:
2009 | 2008 | 2007 | ||||||||||
Computed tax at statutory Federal rate |
$ | (1,456 | ) | $ | 839 | $ | 909 | |||||
State income taxes, net of Federal
benefit |
111 | 51 | (77 | ) | ||||||||
Previously reserved deferred tax assets |
1,487 | (620 | ) | (621 | ) | |||||||
Foreign income taxes |
35 | (279 | ) | (197 | ) | |||||||
Permanent items |
80 | 105 | (5 | ) | ||||||||
Other, including the effect
of uncertain tax positions |
(522 | ) | 167 | 48 | ||||||||
Income tax expense (benefit) |
$ | (265 | ) | $ | 263 | $ | 57 | |||||
F-16
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
In 2009, the Company as a result of incurring a loss for Federal tax purposes did not provide
for Federal income taxes but did provide a provision for certain state taxes on alternative
methods and for foreign taxes. In addition, as a result of settlement of various uncertain tax
positions during 2009, the Company recorded an income tax benefit for Federal, state and foreign
taxes of $522.
In 2008 and 2007, the Company after the application of available net operating loss
carryforwards provided for Federal income taxes based on the alternative minimum tax method, as
well as provided a provision for certain state taxes on alternative methods and foreign taxes.
In 2008, the Company also recorded a charge related to its assessment of uncertain tax positions
mainly as a result of an ongoing Federal tax audit. The carryforwards utilized for Federal,
state and foreign purposes carried full valuation allowances. The Companys state income tax
benefit in 2007 was primarily due to the reversal of certain domestic state tax reserves and the
filing for a state tax refund related to a prior year, partially offset by a provision for
minimum state taxes in certain jurisdictions.
The components of the deferred tax assets and deferred tax liabilities at December 31 are
as follows:
2009 | 2008 | |||||||
Deferred Tax Assets: |
||||||||
Net operating loss carry forwards: |
||||||||
Federal |
$ | 7,490 | $ | 2,740 | ||||
Foreign |
| 337 | ||||||
State |
1,798 | 1,363 | ||||||
Tax credits: |
||||||||
Federal |
1,054 | 571 | ||||||
State |
1,086 | 862 | ||||||
Inventory reserves |
688 | 632 | ||||||
Asset retirement obligation |
514 | 488 | ||||||
Deferred gain on the sale of facility |
1,143 | 1,216 | ||||||
Stock based compensation |
777 | 484 | ||||||
Other |
1,700 | 1,535 | ||||||
Deferred tax assets |
16,250 | 10,228 | ||||||
Valuation allowance |
(12,809 | ) | (7,849 | ) | ||||
Net deferred tax assets |
3,441 | 2,379 | ||||||
Deferred Tax Liabilities: |
||||||||
Depreciation |
1,564 | 2,217 | ||||||
License arrangement |
1,271 | | ||||||
Other |
606 | 162 | ||||||
Deferred tax liabilities |
3,441 | 2,379 | ||||||
Net deferred taxes |
$ | | $ | | ||||
F-17
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
At December 31, 2009, 2008 and 2007, the Company evaluated the continuing need for valuation
allowances for its domestic and foreign deferred tax assets in accordance with the provisions of
Codification Topic ASC 740, Income Taxes, which requires an assessment of both positive and
negative evidence when determining whether it is more likely than not that deferred tax assets
are recoverable. The Company has determined, based on its assessment, that there is not
sufficient positive evidence to support the reversal of such valuation allowances. The Company
intends to maintain the valuation allowance until sufficient positive evidence exists to support
the reversal of the valuation allowances. The Company evaluates its position with respect to
the valuation allowance each quarter by taking into consideration numerous factors, including,
but not limited to: past, present and forecasted results; the impact in each jurisdiction of
operation activities; and the anticipated effects of the Companys strategic plan.
At December 31, 2009, the Company had aggregate federal net operating loss carryforwards of
$22,029 and federal research and development and alternative minimum tax credits of $949 and
$107, respectively, which expire in varying amounts beginning in 2025 through 2030. At December
31, 2009, the Company had state net operating loss carryforwards of
$29,971. State net
operating loss carryforwards, which primarily offset New Jersey taxable income, expire in
varying amounts beginning 2012 through 2030. In addition, the Company had state research and
development, manufacturing and other credits of $1,086 primarily to offset New Jersey income
taxes, which expire in varying amounts beginning in 2010 through 2015.
The Company files U.S., state, and foreign income tax returns in jurisdictions with varying
statutes of limitations. The 2003 through 2009 tax years generally remain subject to
examination by Federal, foreign and most state authorities including, but not limited to, the
United States, France, Bulgaria and the State of New Jersey. During 2009, the U.S. Internal
Revenue Service (IRS) examination of the Companys 2003 through 2005 Federal tax returns, the
State of New Jerseys examination of Companys 2003 through 2006 state income
tax filings and the French tax authoritys audit of the 2006 and 2007 tax filings by the
Companys French subsidiary were concluded.
F-18
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
The audits resulted in the payment of a minor amount of taxes as a result of the French tax
audit. The aggregate amount of the Companys available Federal and State of New Jersey net
operating loss carryforwards (NOLs) was not materially impacted. Certain Federal research and
development credit carryforwards were eliminated.
The components of the Companys unrecognized tax benefits (UTBs) are substantially comprised
of deferred tax assets which are subject to a full valuation allowance. If the Company prevails
in matters for which either a receivable or a liability for a UTB has been established, is
required to pay an amount or utilize NOLs to settle a tax liability, or estimates regarding a
UTB change as a result in changes in facts and circumstances, the Companys effective tax rate
in a given financial reporting period may be affected.
A reconciliation of the beginning and ending amount of UTBs is as follows:
2009 | 2008 | 2007 | ||||||||||
Unrecognized Tax Benefits, January 1 (excluding interest and penalties) |
$ | 3,854 | $ | 3,672 | $ | | ||||||
Additions related to current period tax positions |
| | 57 | |||||||||
Additions related to prior period tax positions |
| 853 | 3,615 | |||||||||
Reductions related to prior periods tax positions |
(751 | ) | (671 | ) | | |||||||
Reductions related to settlements with taxing authorities |
(2,378 | ) | | | ||||||||
Reductions related to expiration of statute of limitations |
(663 | ) | | | ||||||||
Unrecognized Tax Benefits, December 31 |
$ | 62 | $ | 3,854 | $ | 3,672 | ||||||
Accrued interest and penalties, January 1 |
$ | 120 | $ | | $ | | ||||||
Additions/reductions charged to expense |
| 120 | | |||||||||
Reductions related to expiration of statute of limitations |
(120 | ) | | | ||||||||
Accrued interest and penalties, December 31 |
$ | | $ | 120 | $ | | ||||||
At December 31, 2009, 2008 and 2007, the reduction in net Federal, state and foreign
deferred tax assets as a result of UTBs was offset by a similar change in the related valuation
allowance. It is expected that the amount of UTBs will change in the next twelve months;
however, the Company does not anticipate the change to be significant.
14. COMMITMENTS AND CONTINGENCIES
Tissue Supply Agreements
In October 2009, the Company entered into a ten-year agreement with Community Tissue Services,
(CTS). Pursuant to the terms of the agreement, CTS will supply the Company with a specific
number of whole donors, cortical shafts and specific soft tissues. The initial term of the
agreement expires on December 31, 2019. Thereafter, the agreement will automatically renew for
one five-year term and then for successive two-year renewal terms, unless either party notifies
the other in writing of its intention not to renew no later than 180 days prior to the end of
the initial term or any renewal term. The Company expects to reimburse CTS approximately $9,000
in each of 2010 through 2012 for their donor recovery and donor eligibility services related to
the cortical shafts, whole donors and other tissues that the Company expects to receive.
Other Contingencies
In December 2008, the Company was advised that during a November 2008 inspection of donor
recovery sites in Bulgaria by the French regulatory agency, afssaps, deficiencies were
identified. As a precautionary measure, the Company temporarily suspended the distribution of
allograft tissue grafts processed from tissue recovered by its subsidiary, TB OsteoCentre
Bulgaria EAD (OCBG). During the third quarter of 2009, as a result of a notice from afssaps,
the Company began the shipment of allograft tissue grafts processed from tissue recovered
by OCBG. Suspension of shipment of these tissue products had been self-imposed by the Company
unrelated to product contamination. The Company needs to complete additional procedures, which
it expects to complete in mid-2010, before it releases a remaining $500 in tissue product.
F-19
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Litigation
Osteotech v. Regeneration Technologies, Inc.
In September 2006, the Company filed a complaint against Regeneration Technologies, Inc. (now
RTI Biologics, Inc. or RTI) in the United States District Court for the District of New
Jersey, alleging patent infringement. In December 2009, the Company reached a confidential
settlement with RTI for a nominal amount.
ReSource Tissue Bank v. OST Developpement SA
On August 8, 2007, ReSource Tissue Bank filed a lawsuit against OST Developpement SA (OST), a
wholly owned subsidiary of the Company, before the Commercial Court of Clermond-Ferrand, France,
claiming damages arising from OSTs allegedly unlawful termination of its exclusive distribution
agreement. The complaint requests that the Court declare that OST breached the agreement by
unilaterally and abusively terminating the agreement, and requests the Court to order OST to pay
the plaintiff damages totaling 3,329 euros ($4,771) consisting of (i) 374 euros ($536) for
reimbursement of marketing expenses (ii) 2,398 euros ($3,437) for lost profits for the remainder
of the normal term of the agreement, (iii) 550 euros ($788) for damage to the distributors loss
of commercial reputation, and (iv) 7 euros ($10) in legal costs. Additionally, the complaint
requests that the Court order OST to repurchase the former distributors remaining inventory of
products purchased from OST for a purchase price of 90 euros ($129). At a February 4, 2010
hearing before the Court, OST and RTB argued the merits of their respective cases and the
Company requested a stay. The Company expects the Court to render its decision on the merits,
and/or its request for a stay in April 2010.
The Company believes the claims made against OST in this case are without merit and intend to
vigorously defend itself in this action.
Other than the foregoing matters, the Company is not a party to any material pending legal
proceedings.
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 provision for any liability (except for accrued legal costs for
services previously rendered) has been made in the consolidated financial statements.
15. STOCKHOLDERS EQUITY
Stock Compensation Plans
The Company has one active stock compensation plan: the 2007 Stock Incentive Plan (the 2007
Plan). On February 8, 2010, the 2000 Stock Plan (the 2000 Plan) expired, except to the
extent that equity awards issued under the plan continue to remain outstanding. The 1991
Independent Directors Stock Options Plan has expired, except to the extent that options issued
under the plan continue to remain outstanding.
The 2007 Plan authorized the grant of up to 1,400,000 of the Companys common stock in the form
of incentive or non-qualified stock options, stock appreciation rights and stock awards,
including restricted stock, deferred stock, restricted stock units (RSUs), performance shares,
phantom stock and similar types of awards. The
vesting terms of RSUs issued in the years ended December 31, 2009, 2008 and 2007 had ratable
vesting over six months to four years and the vesting term of option issued during 2009 was one
year.
F-20
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Under both plans, incentive stock options may be granted at prices not less than 100% of the
fair market value on the date of grant. Non-qualified stock options, RSUs and other share-based
awards may be granted at the discretion of the Compensation Committee of the Board of Directors
under terms and conditions as determined by the Compensation Committee. The vesting period or
adjusted vesting period may also be determined by the Compensation Committee or Board of
Directors. Stock options have a maximum contractual term of 10 years while the contractual term
of an RSU ceases upon vesting. The Company settles all share-based compensation awards with
newly issued shares.
Since January 1, 2007, except for stock options issued in 2009 valued utilizing the Black Sholes
Model, the Company has granted RSUs as stock based compensation. The fair value of RSUs granted
to employees is determined based on the fair value of the underlying common stock on the date of
the grant. The value of the portion of the award that is ultimately expected to vest is
recognized as an expense over the requisite service period. The Company also grants performance
based RSUs to management employees. The fair value of each performance based RSU is determined
on the date of the grant based on the Companys stock price. Over the performance period, the
number of shares of stock that are expected to be issued will be adjusted based on the
probability of achievement of a performance target and final compensation expense will be
recognized based on the ultimate number of shares issued. The fair value of RSUs granted to
consultants and others will be determined upon completion of the required service period. The
incremental change in fair value of RSUs granted to consultants and others, from the date of the
grant, is included, as is all share based compensation costs, in marketing, selling and general
and administrative expenses in the Companys consolidated statements of operations.
Share based compensation expense is determined utilizing the grant date fair value on awards
ultimately expected to vest, and therefore have been reduced for estimated forfeitures.
Forfeitures are estimated at the time of the grant and revised, if necessary, in subsequent
periods if actual forfeitures differ materially from those estimates. The Company recognizes
the compensation cost of all share based payment awards on a straight-line basis over the
vesting period of the individual awards.
Share-Based Awards
For the years ended December 31, 2009, 2008 and 2007, we recognized compensation expense as
marketing, selling and general and administrative expenses in the consolidated statements of
operations of $1,728, $1,701 and $878, respectively. Upon the vesting of substantially all RSU
awards, the Company retains a portion of the shares of common stock to be issued under such RSU
award in consideration of the employment taxes due by the employee upon vesting. The shares
retained by the Company were returned as available shares in accordance with provisions of the
stock plans. As a result, the Company funded the employment taxes for employees, which totaled
$398, $396 and $40 in 2009, 2008 and 2007, respectively. Non-cash compensation expense for the
three years ended December 31, 2009 resulted in no tax benefit to the Company as a result of the
Company providing a full valuation reserve on all deferred tax assets. At December 31, 2009,
the unrecorded non-cash fair value based compensation expense with respect to nonvested
share-based awards was $1,550 and the weighted average period over which that compensation will
be charged to operations is 1.4 years.
The Company estimated the value of an additional paid-in capital pool for tax impacts related to
employee share-based compensation awards to be approximately $4,000. Although not recorded in
the financial statements, this pool (a hypothetical credit in paid-in capital) can be utilized
to charge tax expense (recorded as deferred tax assets) which are ultimately not realizable when
stock options are exercised or expire. As the Company presently has valuation allowances
related to its deferred tax assets, the use of the hypothetical pool could not occur until such
valuation reserve has been eliminated.
F-21
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
The Company issued one stock option in 2009. The Company did not issue stock options during
2008 and 2007. The fair value of a stock option at the date of the grant is determined using
the Black Scholes Model. The following assumptions were used to value the stock options:
Dividend yield |
0 | |||
Expected term (years) |
8.5 | |||
Expected volatility |
73.4 | % | ||
Risk-free interest rate |
3.38 | % | ||
Fair value of options granted |
$ | 3.58 |
The expected volatility is based on the historical volatility of the common shares of the
Company, and the risk-free interest rate is based on the United States Treasury yield in effect
at the time of the grant for the expected term of the stock option. The expected term was
developed using historical experience.
Stock option activity for the years indicated is as follows:
2009 | 2008 | 2007 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Exercise | Exercise | Exercise | ||||||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Outstanding at January 1, |
1,390,962 | $ | 7.42 | 1,764,762 | $ | 8.51 | 2,587,125 | $ | 8.35 | |||||||||||||||
Granted |
100,000 | 4.74 | | | | | ||||||||||||||||||
Exercised |
| | (53,750 | ) | 4.39 | (221,938 | ) | 5.59 | ||||||||||||||||
Cancelled or expired |
(104,150 | ) | 20.57 | (320,050 | ) | 13.94 | (600,425 | ) | 8.91 | |||||||||||||||
Outstanding at December 31, |
1,386,812 | $ | 6.04 | 1,390,962 | $ | 7.42 | 1,764,762 | $ | 8.51 | |||||||||||||||
Exercisable at December 31, |
1,280,562 | $ | 6.15 | 1,369,712 | $ | 7.47 | 1,728,512 | $ | 8.60 | |||||||||||||||
The following table summarizes information concerning nonvested option transactions for the year
ended December 31, 2009:
Weighted Average Grant | ||||||||
Date | ||||||||
Fair Value | ||||||||
Nonvested Options | Shares | Per Share | ||||||
Nonvested at January 1, 2009 |
21,250 | $ | 2.80 | |||||
Granted |
100,000 | $ | 3.58 | |||||
Vested |
(15,000 | ) | $ | 2.80 | ||||
Nonvested at December 31, 2009 |
106,250 | $ | 3.53 | |||||
At December 31, 2009, there were no in the money options outstanding and, therefore, options
exercisable had no intrinsic value. The weighted average remaining contractual term of options
outstanding and options exercisable at December 31, 2009 was 4.1 years and 3.7 years,
respectively. The intrinsic value of options exercised for the years ended December 31, 2008
and 2007, was $46 and $356, respectively. There were no options exercised in 2009. The fair
value of options vested for the years ended December 31, 2009, 2008 and 2007, was $42, $42 and
$61, respectively.
F-22
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
The following table summarizes information concerning RSU transactions for the years indicated:
2009 | 2008 | 2007 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Restricted | Grant Date | Restricted | Grant Date | Restricted | Grant Date | |||||||||||||||||||
Stock Units | Fair Value | Stock Units | Fair Value | Stock Units | Fair Value | |||||||||||||||||||
Nonvested at January 1 |
790,663 | $ | 4.88 | 775,242 | $ | 7.15 | 119,900 | $ | 4.85 | |||||||||||||||
Granted |
122,728 | 3.42 | 423,946 | 2.85 | 764,850 | 7.28 | ||||||||||||||||||
Vested |
(280,177 | ) | 6.25 | (238,487 | ) | 7.11 | (62,608 | ) | 4.68 | |||||||||||||||
Forfeited |
(198,931 | ) | 2.71 | (170,038 | ) | 7.03 | (46,900 | ) | 6.91 | |||||||||||||||
Nonvested at December 31 |
434,283 | $ | 4.58 | 790,663 | $ | 4.88 | 775,242 | $ | 7.15 | |||||||||||||||
At December 31, 2009, 1,027,183 shares of the Companys common stock are available for future
issuance under the 2007 Plan and 83,889 shares were available for future issuance under the 2000
Plan until the expiration of the plan on February 8, 2010.
Preferred Stock
The authorized capital of the Company includes 5,000,000 shares of Preferred Stock, the rights
and provisions of which will be determined by the Board of Directors at the time any such shares
are issued, if at all. No shares of Preferred Stock were issued or outstanding at any time
during 2009, 2008 or 2007.
Stock Repurchase Program
In December 2008, the Companys Board of Directors authorized a stock repurchase program under
which up to $5.0 million of the Companys common stock may be acquired. Stock repurchases may
be executed from time to time at current market prices through open-market and privately
negotiated transactions in such amounts as management deems appropriate. The final number of
shares repurchased will depend on a variety of factors including the level of the Companys cash
and cash equivalents, price, corporate and regulatory requirements and other market conditions.
The repurchase program may be terminated at any time without prior notice. At December 31,
2009, the Company had acquired 115,670 shares of its common stock at an aggregate cost of $227.
Stockholder Rights Agreement
In January 2010, the Board of Directors of the Company adopted a stockholder rights agreement (
the Rights Agreement) declaring a dividend of one preferred stock purchase right (the Right)
for each outstanding share of common stock as of February 2, 2010. The Rights will not be
exercisable or separable from the common shares until ten business days after a person or group
acquires or tenders for 15% or more of the Companys outstanding common shares (triggering
event). Upon the occurrence of a triggering event, each Right entitles the registered holder to
purchase from the Company one one-thousandth (1/1000th) of a share of a newly designated
Series E Junior Participating Preferred Stock, $0.01 par value (the Preferred Stock), of the
Company at a price of $23.00 subject to adjustment. In the event the Company is acquired in a
merger or other business combination transaction, each Right will entitle its holder to receive
upon exercise of the Right, at the Rights then current exercise price, that number of the
acquiring companys common shares having a market value of two times the exercise price of the
Right. The Company is entitled to redeem the Rights at a price of $.01 per Right at any time
prior to their becoming exercisable, and the Rights expire on January 20, 2020.
F-23
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
16. OTHER INCOME (EXPENSE)
The following table summarizes information concerning miscellaneous other income and expense for
the years indicated:
2009 | 2008 | 2007 | ||||||||||
Foreign exchange gain/(loss) |
$ | 72 | $ | (6 | ) | $ | (126 | ) | ||||
Litigation settlement |
| 1,000 | | |||||||||
Other |
(30 | ) | (33 | ) | 125 | |||||||
Other |
$ | 42 | $ | 961 | $ | (1 | ) | |||||
In May 2008, the Company reached a settlement in certain litigation in the net amount of $1,000,
which amount has been fully paid to the Company and included in the results of operations for
the year ended December 31, 2008.
17. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
2009 | 2008 | 2007 | ||||||||||
Cash paid (refunded) during the year for taxes |
$ | (358 | ) | $ | 337 | $ | 112 | |||||
Cash paid during the year for interest |
$ | 1,431 | $ | 1,517 | $ | 1,612 | ||||||
Noncash financing and investing activities: |
||||||||||||
Asset retirement obligation |
$ | (156 | ) | $ | (451 | ) | $ | (252 | ) |
F-24
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
18. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share
for the years indicated:
2009 | 2008 | 2007 | ||||||||||
Net income (loss) available to common
stockholders |
$ | (4,017 | ) | $ | 2,203 | $ | 2,617 | |||||
Denominator for basic earnings (loss)
per share, weighted average
common shares outstanding |
17,968,971 | 17,833,902 | 17,538,254 | |||||||||
Effect of dilutive securities after
application of treasury stock
method: |
||||||||||||
Restricted stock units |
| 182,684 | 41,769 | |||||||||
Stock options |
| 66,998 | 346,361 | |||||||||
Denominator for diluted earnings (loss)
per share |
17,968,971 | 18,083,584 | 17,926,384 | |||||||||
Basic earnings (loss) per share |
$ | (.22 | ) | $ | .12 | $ | .15 | |||||
Diluted earnings (loss) per share |
$ | (.22 | ) | $ | .12 | $ | .15 | |||||
For 2009, 2008 and 2007, common stock equivalent shares, consisting of stock options and RSUs of
1,682,262, 1,352,354, and 1,095,046, respectively, are excluded from the calculation of diluted
earnings (loss) per share as their effects are antidilutive.
19. OPERATING SEGMENTS
The Company has five primary product line business segments: the DBM Segment, the
Hybrid/Synthetic Segment, the Traditional Tissue Segment, Spinal Allograft Segment, and the
Client Services Segment. The DBM Segment engages in the processing and marketing of Grafton®
and private label DBMs. The Hybrid/Synthetic Segment engages in the processing and marketing of
biocomposite and synthetic material products, including the MagniFuse Bone Graft and Plexur®
Biocomposites. The Traditional Tissue Segment engages in the processing of mineralized
weight-bearing and non-weight bearing allograft bone tissue. The Spinal Allograft Segment
engages in the distribution of Graftech® Bio-implant and FacetLink Fusion products utilized
primarily in spinal fusion procedures. The Client Services Segment processes allograft bone
tissue for our clients. Any product or other revenue not falling within a primary product line
segment including patent license fee revenue are aggregated under the category Other. Product
segment operating income is comprised of segment revenues less material and production costs and
selling and marketing expenses. General and administrative and research and development expense
are not allocated to product line segments. The Company does not generate information about
assets for its operating segments, and accordingly no asset information is presented.
F-25
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Summarized financial information concerning the Companys operating segments is shown in the
following table.
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenue: |
||||||||||||
DBM |
$ | 56,782 | $ | 61,961 | $ | 65,794 | ||||||
Hybrid/Synthetic |
3,575 | 3,087 | 1,760 | |||||||||
Traditional Tissue |
21,534 | 20,258 | 17,623 | |||||||||
Spinal Allografts |
7,626 | 8,499 | 10,739 | |||||||||
Client Services |
2,143 | 8,201 | 7,621 | |||||||||
Other |
5,018 | 1,808 | 740 | |||||||||
$ | 96,678 | $ | 103,814 | $ | 104,277 | |||||||
Operating income (loss): |
||||||||||||
DBM |
$ | 15,742 | $ | 18,902 | $ | 20,105 | ||||||
Hybrid/Synthetic |
(521 | ) | 5 | 277 | ||||||||
Traditional Tissue |
1,272 | 3,666 | 2,470 | |||||||||
Spinal Allografts |
1,055 | 286 | 1,941 | |||||||||
Client Services |
1,166 | 4,454 | 5,744 | |||||||||
Other |
2,461 | 1,265 | 334 | |||||||||
Corporate |
(24,087 | ) | (26,001 | ) | (27,608 | ) | ||||||
$ | (2,912 | ) | $ | 2,577 | $ | 3,263 | ||||||
Depreciation and amortization: |
||||||||||||
DBM |
$ | 1,982 | $ | 2,574 | $ | 2,483 | ||||||
Hybrid/Synthetic |
506 | 300 | 92 | |||||||||
Traditional Tissue |
1,682 | 1,007 | 1,026 | |||||||||
Spinal Allografts |
371 | 371 | 763 | |||||||||
Client Services |
| 516 | 320 | |||||||||
Other |
18 | 50 | 10 | |||||||||
Corporate |
1,284 | 888 | 702 | |||||||||
$ | 5,843 | $ | 5,706 | $ | 5,396 | |||||||
Financial information by geographic area is summarized as follows:
United States | International | Consolidated | ||||||||||
Revenue: |
||||||||||||
2009 |
$ | 76,913 | $ | 19,765 | $ | 96,678 | ||||||
2008 |
$ | 82,459 | $ | 21,355 | $ | 103,814 | ||||||
2007 |
$ | 85,682 | $ | 18,595 | $ | 104,277 | ||||||
Long-lived Assets: |
||||||||||||
2009 |
$ | 29,194 | $ | 381 | $ | 29,575 | ||||||
2008 |
$ | 33,547 | $ | 458 | $ | 34,005 | ||||||
2007 |
$ | 33,778 | $ | 730 | $ | 34,508 |
In 2009, no customer accounted for more than 10% of the revenue of the Company. In 2008 and
2007, MTF accounted for 14% and 16%, respectively, of consolidated revenue. In each of the
three years ended December
31, 2009, no revenue from any one country, other than the United States, exceeded 10% of
consolidated revenues.
F-26
Table of Contents
OSTEOTECH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
20. RETIREMENT BENEFITS
The Company has a 401(k) plan which covers substantially all full time U.S. employees. The
Company contributes an amount equal to a percentage, determined yearly, of each participants
contribution, subject to certain limitations. A participants contribution may not exceed the
maximum allowed by the Internal Revenue Code. Provisions of the plan include graduated vesting
over five years from date of employment. Total Company contributions for the years ended
December 31, 2009, 2008, and 2007 were $330, $284 and $249, respectively, and, subject to
certain limitations, equaled 25% of the participants contribution.
The Company does not maintain any other pension or post retirement plans.
21. QUARTERLY FINANCIAL DATA (unaudited)
The following is a summary of the unaudited quarterly results for the years ended December 31,
2009 and 2008:
Quarter Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 (1) | |||||||||||||
2009 |
||||||||||||||||
Revenue |
$ | 23,931 | $ | 23,471 | $ | 22,961 | $ | 26,315 | ||||||||
Gross profit |
11,967 | 11,531 | 10,459 | 13,613 | ||||||||||||
Net income (loss) |
$ | (1,796 | ) | $ | (1,204 | ) | $ | (1,907 | ) | $ | 890 | |||||
Earnings (loss) per share: |
||||||||||||||||
Basic |
$ | (0.10 | ) | $ | (0.07 | ) | $ | (0.11 | ) | $ | 0.05 | |||||
Diluted |
$ | (0.10 | ) | $ | (0.07 | ) | $ | (0.11 | ) | $ | 0.05 |
Quarter Ended | ||||||||||||||||
March 31 | June 30(2) | September 30 | December 31 (3) | |||||||||||||
2008 |
||||||||||||||||
Revenue |
$ | 27,631 | $ | 27,553 | $ | 24,063 | $ | 24,567 | ||||||||
Gross profit |
14,242 | 14,502 | 12,881 | 13,419 | ||||||||||||
Net income (loss) |
$ | 808 | $ | 1,746 | $ | 58 | $ | (409 | ) | |||||||
Earnings (loss) per share: |
||||||||||||||||
Basic |
$ | .05 | $ | .10 | | $ | (.02 | ) | ||||||||
Diluted |
$ | .05 | $ | .10 | | $ | (.02 | ) |
(1) | Includes $3,778 in license fee revenue and $2,795 in related gross profit. |
|
(2) | Includes $1,000 in income related to a litigation settlement. |
|
(3) | Includes $500 in license fee revenue. |
F-27
Table of Contents
SCHEDULE II
OSTEOTECH, INC. and SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance At | Additions | Balance At | ||||||||||||||||||
Beginning | Charged To | Charged | End | |||||||||||||||||
Of Period | Expenses | To Other | Deductions | Of Period | ||||||||||||||||
For the year ended December 31, 2009: |
||||||||||||||||||||
Allowance for doubtful accounts current |
$ | 401 | $ | 3 | $ | (100 | ) | $ | 304 | |||||||||||
Allowance for doubtful accounts long
term |
$ | 312 | $ | (60 | ) | $ | 252 | |||||||||||||
Valuation allowance for deferred tax asset |
$ | 7,849 | $ | 4,960 | (c) | $ | 12,809 | |||||||||||||
Valuation allowance for inventory and
deferred processing costs |
$ | 1,060 | $ | 8,827 | $ | (8,183 | ) | $ | 1,704 | |||||||||||
For the year ended December 31, 2008: |
||||||||||||||||||||
Allowance for doubtful accounts current |
$ | 267 | $ | 97 | $ | 37 | (a) | $ | 401 | |||||||||||
Allowance for doubtful accounts long
term |
$ | 292 | $ | 20 | $ | 312 | ||||||||||||||
Valuation allowance for deferred tax asset |
$ | 9,786 | $ | (1,937 | )(c) | $ | 7,849 | |||||||||||||
Valuation allowance for inventory and
deferred processing costs |
$ | 1,959 | $ | (374 | ) | $ | (525 | ) | $ | 1,060 | ||||||||||
For the year ended December 31, 2007: |
||||||||||||||||||||
Allowance for doubtful accounts current |
$ | 488 | $ | 129 | $ | 6 | (a) | $ | (356 | )(b) | $ | 267 | ||||||||
Allowance for doubtful accounts long
term |
$ | 728 | $ | 126 | $ | 46 | (a) | (608 | )(b) | $ | 292 | |||||||||
Valuation allowance for deferred tax asset |
$ | 11,270 | $ | (1,484 | )(c) | $ | 9,786 | |||||||||||||
Valuation allowance for inventory and
deferred processing costs |
$ | 2,844 | $ | 1,569 | $ | (2,454 | ) | $ | 1,959 |
(a) | Represents foreign currency translation adjustments. |
|
(b) | Represents the write-off of accounts receivable. |
|
(c) | Represents the change in valuation allowances. |
S-1
Table of Contents
EXHIBIT INDEX
Exhibit | Page | |||||
Number | Description | Number | ||||
10.62 | Tissue Recovery Agreement between the Company and Community Blood
Center d/b/a Community Tissue Services dated October 30, 2009
|
*, ** | ||||
21.1 | Subsidiaries of Registrant
|
* | ||||
23.1 | Consent of Independent Registered Public Accounting Firm BDO Seidman, LLP
|
* | ||||
31.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
* | ||||
31.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
* | ||||
32.1 | Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
* | ||||
32.2 | Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
* |
* | Filed herewith. |
|
** | Pursuant to Rule 246-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of these exhibits have been deleted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment.
|