UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant
þ
Filed by a Party other than the Registrant
o
Check the appropriate box:
o
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Preliminary Proxy Statement
|
o
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2)
)
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o
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Definitive Proxy Statement
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þ
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Definitive Additional Materials
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o
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Soliciting Material Pursuant to §240.14a-12
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Osteotech, Inc.
(Name of Registrant as Specified In Its Charter)
N/A
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
þ
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No fee required.
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o
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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(1)
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Title of each class of securities to which transaction applies:
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(2)
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Aggregate number of securities to which transaction applies:
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(3)
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Per unit price or other underlying value of transaction computed pursuant to Exchange Act
Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was
determined):
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(4)
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Proposed maximum aggregate value of transaction:
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(5)
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Total fee paid:
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o
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Fee paid previously with preliminary materials.
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o
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the Form or Schedule and the date of its
filing.
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(1)
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Amount Previously Paid:
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(2)
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Form, Schedule or Registration Statement No.:
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(3)
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Filing Party:
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(4)
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Date Filed:
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On November 8, 2010, Osteotech, Inc. filed with the Securities and Exchange Commission the following quarterly report on Form 10-Q for the period ended September 30, 2010.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
FOR THE TRANSITION PERIOD FROM
to
COMMISSION FILE NUMBER: 001-34612
OSTEOTECH, INC.
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE
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13-3357370
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(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
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(I.R.S. EMPLOYER
IDENTIFICATION NO.)
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51 James Way, Eatontown, New Jersey, 07724
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(732) 542-2800
(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)
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 Web site, 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 files). Yes
o
No
o
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.
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
þ
The number of shares of the registrants common stock, $.01 par value, outstanding as of
November 3, 2010 was 18,272,625.
OSTEOTECH, INC.
FORM 10-Q
Table of Contents
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Page No.
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2
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3
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4
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5
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13
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21
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22
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23
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23
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25
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- 1 -
Part I. FINANCIAL INFORMATION
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Item 1.
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FINANCIAL STATEMENTS
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OSTEOTECH,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(
dollars in thousands
)
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September 30,
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December 31,
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2010
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2009
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(Unaudited)
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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13,777
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$
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10,708
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Accounts receivable, net of allowance
of $125 in 2010 and $304 in
2009
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15,815
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16,165
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Deferred processing costs
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31,715
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38,562
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Inventories
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1,602
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1,819
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Prepaid expenses and other current assets
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2,998
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3,247
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Total current assets
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65,907
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70,501
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Property, plant and equipment, net
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25,637
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29,575
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Other assets
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17,752
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16,861
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Total assets
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109,296
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$
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116,937
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current Liabilities:
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Accounts payable and accrued liabilities
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$
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12,454
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$
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16,206
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Current maturities of capital lease obligation
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1,074
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994
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Total current liabilities
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13,528
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17,200
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Capital lease obligation
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11,365
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12,181
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Other liabilities
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7,006
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7,270
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Total liabilities
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31,899
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36,651
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Commitments and Contingencies
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Stockholders Equity
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Preferred stock, $0.01 par value; 5,000,000 shares authorized; no
shares
issued or outstanding
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Common stock, $0.01 par value; 70,000,000 shares authorized; issued
18,361,033 shares in 2010 and 18,179,180 shares in 2009
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184
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182
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Additional paid-in capital
|
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72,507
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71,337
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Treasury stock, at cost, 115,670 shares in 2010 and 2009
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(227
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)
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(227
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)
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Accumulated other comprehensive income
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1,274
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1,410
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Retained earnings
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3,659
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7,584
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Total stockholders equity
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77,397
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80,286
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Total liabilities and stockholders equity
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$
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109,296
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$
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116,937
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See
accompanying notes to condensed financial statements.
- 2 -
OSTEOTECH,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except per share data
)
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Three Months Ended
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Nine Months Ended
|
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September 30,
|
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September 30,
|
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2010
|
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2009
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2010
|
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2009
|
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Revenue
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$
|
23,104
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$
|
22,961
|
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$
|
69,628
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|
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$
|
70,363
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Cost of revenue
|
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11,521
|
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12,502
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35,000
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36,406
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Gross profit
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11,583
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10,459
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34,628
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33,957
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Marketing, selling, and general and
administrative expenses
|
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13,096
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10,648
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34,189
|
|
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33,034
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Research and development expenses
|
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920
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1,544
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3,179
|
|
|
|
5,195
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|
|
|
|
|
|
|
|
|
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|
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|
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|
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14,016
|
|
|
|
12,192
|
|
|
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37,368
|
|
|
|
38,229
|
|
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|
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|
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Operating loss
|
|
|
(2,433
|
)
|
|
|
(1,733
|
)
|
|
|
(2,740
|
)
|
|
|
(4,272
|
)
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|
|
|
|
|
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|
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|
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|
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|
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Other expense:
|
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|
|
|
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|
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|
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|
|
|
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Interest expense, net
|
|
|
(310
|
)
|
|
|
(354
|
)
|
|
|
(965
|
)
|
|
|
(1,063
|
)
|
Other
|
|
|
136
|
|
|
|
58
|
|
|
|
(198
|
)
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(174
|
)
|
|
|
(296
|
)
|
|
|
(1,163
|
)
|
|
|
(957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(2,607
|
)
|
|
|
(2,029
|
)
|
|
|
(3,903
|
)
|
|
|
(5,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
|
(150
|
)
|
|
|
(122
|
)
|
|
|
22
|
|
|
|
(322
|
)
|
|
|
|
|
|
|
|
|
|
|
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|
|
Net loss
|
|
$
|
(2,457
|
)
|
|
$
|
(1,907
|
)
|
|
$
|
(3,925
|
)
|
|
$
|
(4,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
|
$
|
(0.14
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.27
|
)
|
Diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.27
|
)
|
Shares used in computing loss per
share:
|
|
|
|
|
|
|
|
|
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|
|
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Basic
|
|
|
18,182,443
|
|
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18,120,350
|
|
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18,134,819
|
|
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17,925,718
|
|
Diluted
|
|
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18,182,443
|
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18,120,350
|
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18,134,819
|
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|
17,925,718
|
|
|
|
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- 3 -
OSTEOTECH,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(
dollars in thousands
)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Cash Flow From Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,925
|
)
|
|
$
|
(4,907
|
)
|
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,270
|
|
|
|
4,619
|
|
Stock-based compensation expense, net
|
|
|
985
|
|
|
|
996
|
|
Changes in current assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
350
|
|
|
|
(1,425
|
)
|
Deferred processing costs
|
|
|
5,879
|
|
|
|
(2,112
|
)
|
Inventories
|
|
|
217
|
|
|
|
(216
|
)
|
Receivable from license agreements
|
|
|
900
|
|
|
|
500
|
|
Prepaid expenses and other current assets
|
|
|
(126
|
)
|
|
|
312
|
|
Accounts payable and other current liabilities
|
|
|
(3,961
|
)
|
|
|
(3,596
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
4,589
|
|
|
|
(5,829
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flow From Investing Activities
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(292
|
)
|
|
|
(1,267
|
)
|
Other, net
|
|
|
(639
|
)
|
|
|
(465
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(931
|
)
|
|
|
(1,732
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flow From Financing Activities
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
(102
|
)
|
Proceeds from issuance of common stock
|
|
|
187
|
|
|
|
48
|
|
Principal payments on capital lease obligation
|
|
|
(736
|
)
|
|
|
(663
|
)
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(549
|
)
|
|
|
(717
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(40
|
)
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
3,069
|
|
|
|
(8,216
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
10,708
|
|
|
|
18,823
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
13,777
|
|
|
$
|
10,607
|
|
|
|
|
|
|
|
|
Supplementary cash flow data
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
1,009
|
|
|
$
|
1,137
|
|
Cash paid during the period for taxes
|
|
$
|
43
|
|
|
$
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed financial statements
- 4 -
OSTEOTECH,
INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(
dollars in thousands, except per share data
)
1. Basis of Presentation
General
The accompanying condensed consolidated financial statements included herein, other than the
condensed consolidated balance sheet at December 31, 2009, which has been derived from the audited
balance sheet, are unaudited and reflect all adjustments (consisting only of normal recurring
accruals) considered necessary by management for a fair statement of financial position as of
September 30, 2010 and the results of operations for each of the three and nine months ended
September 30, 2010 and 2009 and cash flows for the nine months ended September 30, 2010 and 2009.
The results of operations and cash flows for the respective interim periods are not necessarily
indicative of the results to be expected for the full year. Certain prior year amounts within the
condensed consolidated financial statements have been reclassified to conform to the 2010
presentation. The condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements, which were included as part of Osteotech, Inc.s
(the Company) Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the
Securities and Exchange Commission.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards
Board (FASB), as updates to the Accounting Standards Codification (Codification), and 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 the Companys financial position or results of
operations upon adoption.
2. Merger
On August 16, 2010, the Company entered into a definitive Agreement and Plan of Merger (the Merger
Agreement) with Medtronic, Inc., a Minnesota corporation (Medtronic), Medtronic Sofamor Danek,
Inc., an Indiana corporation and wholly owned direct subsidiary of Medtronic (MSD), and England
Merger Corporation, a Delaware corporation and wholly owned subsidiary of Medtronic (Merger Sub),
pursuant to which at the effective time of the Merger (the Effective Time), Medtronic will
acquire all of the outstanding shares of the Companys common stock, $0.01 par value (Common
Stock) for $6.50 per share in cash (Merger Consideration) and pursuant to which Merger Sub will
be merged with and into the Company, with the Company continuing as the surviving corporation and
becoming a wholly owned indirect subsidiary of Medtronic (the Merger).
On the terms and subject to the conditions set forth in the Merger Agreement, which has been
unanimously approved by the Board of Directors of Osteotech, at the Effective Time, and as a result
thereof, each share of Common Stock that is issued and outstanding immediately prior to the
Effective Time (other than Common Stock held by Osteotech, Medtronic, Merger Sub or their
subsidiaries, which will be canceled without payment of any consideration, and Common Stock for
which appraisal rights have been validly exercised and not withdrawn) will be converted into the
right to receive the Merger Consideration, without interest and less any applicable withholding
taxes, which amount is subject to decrease under certain conditions as described in the Merger
Agreement. Each option to purchase Common Stock that is outstanding as of the Effective Time will
be canceled in exchange for the right to receive in cash the amount by which the Merger
Consideration exceeds the exercise price, multiplied by the number of shares subject to such
option, less applicable withholding taxes, if any, required to be withheld with respect to such
payment. Each restricted stock unit (RSU) that is outstanding immediately prior to the Effective
Time will, at the Effective Time, be accelerated and canceled in exchange for the right to receive
in cash the amount equal to the total number of shares of Common Stock represented by the RSU
multiplied by the Merger Consideration, less applicable withholding taxes, if any, required to be
withheld with respect to such payment.
The Company and Medtronic have made customary representations, warranties and covenants in the
Merger Agreement, including, among others, covenants that: (i) the Company will conduct its
business in the ordinary course consistent with past practice during the interim period between the
execution of the Merger Agreement and the Effective Time, (ii) the Company will not engage in
certain kinds of transactions during such period, and (iii) the
Company will cause a meeting of the Company stockholders to be held to consider approval of the
Merger Agreement, which is scheduled for November 9, 2010. The Company has also made certain
additional customary covenants, including, among others, covenants not to: (i) solicit proposals
relating to alternative business combination transactions or (ii) subject to certain exceptions,
enter into discussions concerning or provide confidential information in connection with any
proposals for alternative business combination transactions.
- 5 -
OSTEOTECH,
INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(
dollars in thousands, except per share data
)
Consummation of the Merger is subject to customary conditions, including (i) approval of the
holders of a majority of the outstanding shares of Common Stock, (ii) the absence of any law or
order prohibiting the consummation of the Merger, (iii) the expiration or termination of any
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (for which early termination of the waiting period was granted effective October 12, 2010),
and the receipt of approvals under applicable foreign antitrust laws
(all of which have been received), (iv) not more than 10% of the
outstanding shares of Common Stock being the subject of validly exercised appraisal rights and (v)
the absence of a material adverse effect with respect to the Company.
The Merger Agreement contains certain termination rights for both the Company and Medtronic, and
further provides that, upon termination of the Merger Agreement under certain specified
circumstances, the Company would be required to reimburse Medtronic for its transaction-related
expenses up to $3,000 or pay a termination fee of $5,000.
As described above, the Merger Agreement contains representations and warranties by the Company and
Medtronic. These representations and warranties have been made solely for the benefit of the other
parties to the Merger Agreement and (i) may be intended not as statements of fact, but rather as a
way of allocating the risk to the Company or Medtronic if those statements prove to be inaccurate,
(ii) have been qualified by disclosures that were made to the other party in connection with the
negotiation of the Merger Agreement, (iii) may apply materiality standards different from what may
be viewed as material to investors, and (iv) were made only as of the date of the Merger Agreement
or such other dates as may be specified in the Merger Agreement and are subject to more recent
developments. Accordingly, these representations and warranties should not be relied on as
characterizations of the actual state of facts or for any other purpose either at the time they
were made or at any other time.
3. Deferred Processing Costs
Deferred processing costs consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Unprocessed donor tissue
|
|
$
|
13,065
|
|
|
$
|
16,692
|
|
Tissue in process
|
|
|
4,431
|
|
|
|
4,062
|
|
Implantable donor tissue
|
|
|
14,219
|
|
|
|
17,808
|
|
|
|
|
|
|
|
|
|
|
$
|
31,715
|
|
|
$
|
38,562
|
|
|
|
|
|
|
|
|
Unprocessed donor tissue represents the value of such allograft bone tissue expected to be
processed by the Company during the next twelve months. Unprocessed donor tissue expected to be
processed in periods subsequent to one year of $9,693 and $8,475 at September 30, 2010 and December
31, 2009, respectively, are reflected in other assets.
- 6 -
OSTEOTECH,
INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(
dollars in thousands, except per share data
)
4. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Supplies
|
|
$
|
409
|
|
|
$
|
428
|
|
Raw materials
|
|
|
581
|
|
|
|
779
|
|
Finished goods
|
|
|
612
|
|
|
|
612
|
|
|
|
|
|
|
|
|
|
|
$
|
1,602
|
|
|
$
|
1,819
|
|
|
|
|
|
|
|
|
5. Revolving Credit Facility
The Company has 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 for the quarter ending 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 Agreement 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 September 30, 2010 and December 31, 2009, there were no amounts outstanding under the Credit
Agreement and the Company was in compliance with all covenants. The Credit Agreement expires on
December 28, 2012.
PNC, at its option, can declare the Credit Agreement in default, if and when, the proposed Merger
is consummated and exercise any remedies to such default as defined in the Credit Agreement. As
noted above, no amounts were outstanding under the Credit Agreement as of September 30, 2010 and we
currently do not expect any amounts to be outstanding upon the closing of the Merger.
6. Stockholders Equity
Stock Compensation Plans
The Companys stock compensation plan authorizes the grant of incentive and non-qualified share
based equity awards to eligible employees, directors, consultants and others with a business
relationship with the Company. Incentive stock options may be granted at prices not less than 100%
of the fair market value on the date of the grant. Other share-based equity 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.
- 7 -
OSTEOTECH,
INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(
dollars in thousands, except per share data
)
The following table details certain information concerning the Companys RSUs and stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Number of
|
|
|
Exercise
|
|
|
Term
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Price
|
|
|
(Years)
|
|
Outstanding, January 1, 2010
|
|
|
434,283
|
|
|
$
|
4.58
|
|
|
|
1,386,812
|
|
|
$
|
6.04
|
|
|
|
|
|
Granted
|
|
|
291,830
|
|
|
$
|
4.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested RSUs or exercised options
|
|
|
(178,354
|
)
|
|
$
|
5.64
|
|
|
|
(36,437
|
)
|
|
$
|
5.10
|
|
|
|
|
|
Forfeited, cancelled or expired
|
|
|
(63,872
|
)
|
|
$
|
3.23
|
|
|
|
(92,900
|
)
|
|
$
|
9.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2010
|
|
|
483,887
|
|
|
$
|
4.47
|
|
|
|
1,257,475
|
|
|
$
|
5.79
|
|
|
|
3.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
|
|
|
|
|
|
|
|
|
|
|
1,257,475
|
|
|
$
|
5.79
|
|
|
|
3.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation, included in selling, marketing and general and administrative expenses,
of $296 and $1,118 for the three and nine months ended September 30, 2010, respectively, and $446
and $1,320 for the three and nine months ended September 30, 2009, respectively, resulted in no tax
benefit to the Company as a result of the Company providing a full valuation reserve on all
deferred tax assets. For vesting RSUs, the Company at its option, in accordance with the current
operation of its equity award programs, withholds shares equal to the employees tax liability and,
as a result, the Company effectively pays appropriate withholding taxes on its employees behalf.
The Company funded employment taxes for the three and nine months ended September 30, 2010 of $27
and $133, respectively, and $292 and $324 for the comparable prior year periods. Any such shares
withheld by the Company are returned to the pool of available shares and are eligible for
re-issuance. Shares of common stock available for future issuance under the stock compensation
plan were 783,258 at September 30, 2010. Under the terms of the Merger, no additional equity
awards can be issued without the approval of Medtronic.
At September 30, 2010, the unrecorded non-cash fair value based compensation expense with respect
to nonvested share-based awards was $1,577 and the weighted average period over which that
compensation will be charged to operations is 1.8 years. Immediately prior to the Effective Time,
all unvested equity awards will fully vest and the Company will recognize all of that unrecorded
compensation expense associated with the vesting of such equity awards at that time.
7. Income Taxes
At September 30, 2010, based on internal projections including the impact of timing differences
mainly related to depreciation and amortization, the Company estimates it will not generate taxable
income in 2010 and therefore only provided for certain state and foreign taxes for the three and
nine months ended September 30, 2010. In 2009, as a result of the effects of timing differences,
the Company estimated it would generate taxable income, and therefore provided for Federal
alternative minimum taxes in addition to certain state and foreign taxes.
During the three and nine months ended September 30, 2010, the Company recognized a tax benefit of
$152 as the result of a change in certain Federal tax regulations allowing the Company to carry
back additional operating losses to prior years to recover previously paid Federal alternative
minimum taxes and, the reversal of previously recorded provisions for 2010 Federal alternative
minimum taxes. During the three and nine months ended September 30, 2009, certain unrecognized tax
positions were effectively settled resulting in the recognition of tax benefits of $152 and $482,
respectively. The Company continues not to recognize any Federal, state or certain foreign tax
benefits, which are subject to full valuation allowances in accordance with FASB Codification Topic
(ASC) 740,
Income Taxes.
The Company intends to maintain the valuation allowances until
sufficient positive evidence exists to support the reversal of a valuation allowance that the
Company has established. The Company evaluates its position with respect to the valuation
allowances each quarter by taking into consideration numerous factors, including, but not limited
to: past, present and forecasted results; the impact in each jurisdiction of operating activities;
and the anticipated effects of the Companys strategic plan.
- 8 -
OSTEOTECH,
INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(
dollars in thousands, except per share data
)
The Company files U.S., state, and foreign income tax returns in jurisdictions with varying
statutes of limitations. Tax years subsequent to 2006 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.
The Companys unrecognized tax benefits (UTBs) at September 30, 2010 and December 31, 2009 were
not material. 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 of changes in facts and circumstances, the
Companys effective tax rate in a given financial reporting period may be affected. It is expected
that the amount of UTBs will change in the next twelve months; however, the Company does not
anticipate such change to be significant.
8. Commitments and Contingencies
Litigation
minSURG International, Inc. v. Nuvasive, Inc., et al.
On July 19, 2010, minSURG International, Inc. (minSURG) sued several entities, including the
Company, in the United States District Court for the Middle District of Florida. MinSURGs
complaint alleges that the Companys FacetLinx
TM
Fusion Technology infringes minSURGs
U.S. Patent Nos. 7,708,761, D590,943, and D574,495. The complaint also makes business torts
allegations against the Company, specifically, Lanham Act false advertising, Florida law unfair
competition, defamation, and tortious interference with business and contractual relationship
allegations. The Company was served with the complaint on July 28, 2010. On August 3, 2010
minSURG filed a motion for a preliminary injunction, seeking an injunction only with respect to its
claims that the Company (and other defendants) was and continues to induce and contribute to the
infringement of the 761 Patent. The Company filed its response to the preliminary injunction
motion on September 1, 2010. The Court held an evidentiary hearing on the preliminary injunction
motion on October 5, 2010. The Company also filed a motion to dismiss all of minSURGs claims, for
failure to effectively state a claim, on August 31, 2010. We await decisions on minSURGs motion
for a preliminary injunction, and on our motion to dismiss.
The Company believes the claims made against it in this case are without merit and intendeds to
vigorously defend itself in this action.
Medtronic Merger Litigation
In August 2010, four class action complaints were filed in the Superior Court of New Jersey,
Monmouth County, concerning the Merger. The first class action was instituted by certain
individual stockholders, individually and on behalf of all public stockholders of the Company,
against the Company, its board of directors, president, and chief executive officer, as well as
Medtronic, MSD, and Merger Sub. The complaint alleges breach of fiduciary duty by the members of
the board of directors arising out of the attempt to sell the Company by means of an allegedly
unfair process with preclusive deal protection devices and at an unfair price of $6.50 in cash for
each share of Common Stock. The complaint also alleges that Medtronic aided and abetted the
alleged breaches of fiduciary duties by the other defendants. The other three class action
complaints filed with respect to the proposed Merger are substantially the same as the first action
filed. The lawsuits have all been transferred to Chancery Court of
New Jersey, Monmouth County and consolidated. An
amended complaint was filed and has been designated as the operative complaint in this consolidated action.
In addition to the allegations summarized above, the amended complaint makes additional allegations
that the Companys proxy statement relative to the special meeting of stockholders to be held on
November 9, 2010 was deficient because it did not disclose certain information about the proposed
Merger and the financial analysis performed by Deutsche Bank
Securities, Inc., the Companys
financial advisor in connection with the proposed merger. The plaintiff also alleges that the
Company violated the corporate law of Delaware when it canceled its annual stockholder meeting
scheduled for August 23, 2010. The parties have conducted limited discovery and the plaintiff has
filed a motion with the court for a temporary restraining order to,
among other things, delay the stockholder vote. On November 8,
2010, the Chancery Court of New Jersey denied the plaintiffs
motion for a temporary restraining order.
- 9 -
OSTEOTECH,
INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(
dollars in thousands, except per share data
)
The Company believes the claims made against it in these cases are without merit and intends to
vigorously defend itself in these actions.
9. Comprehensive Loss
Comprehensive loss for the periods indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,457
|
)
|
|
$
|
(1,907
|
)
|
|
$
|
(3,925
|
)
|
|
$
|
(4,907
|
)
|
Currency translation adjustments
|
|
|
236
|
|
|
|
78
|
|
|
|
(136
|
)
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(2,221
|
)
|
|
$
|
(1,829
|
)
|
|
$
|
(4,061
|
)
|
|
$
|
(4,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Loss Per Share
The following table sets forth the computation of basic and diluted loss per share for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net loss attributable to common
stockholders
|
|
$
|
(2,457
|
)
|
|
$
|
(1,907
|
)
|
|
$
|
(3,925
|
)
|
|
$
|
(4,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic loss per share,
weighted average common shares
outstanding
|
|
|
18,182,443
|
|
|
|
18,120,350
|
|
|
|
18,134,819
|
|
|
|
17,925,718
|
|
Effect of dilutive securities after application
of the treasury stock method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted loss per share
|
|
|
18,182,443
|
|
|
|
18,120,350
|
|
|
|
18,134,819
|
|
|
|
17,925,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock equivalent shares at September 30, 2010 and 2009 of 1,741,362 and 2,121,795,
respectively, consisting of all outstanding stock options and RSUs, were not included in the
calculation of diluted loss per share as their effect is antidilutive.
11. Fair Value Measurements
In accordance with FASB Codification Topic ASC 820,
Fair Value Measurements and Disclosures
(ASC
820) the Company values its financial assets and liabilities at fair value but, unless required by
other provisions of the Codification, does not value non-financial assets and liabilities at fair
value. ASC 820 provides a framework for measuring fair value, expands disclosures about fair value
measurements and establishes a fair value hierarchy which prioritizes the inputs used in measuring
fair value, summarized as follows:
Level 1: Observable inputs such as quoted prices in active markets for identical assets or
liabilities;
Level 2: Observable market-based inputs or observable inputs that are corroborated by market
data; and
Level 3: Unobservable inputs reflecting the Companys own assumptions.
- 10 -
OSTEOTECH,
INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(
dollars in thousands, except per share data
)
The following table sets forth the Companys financial assets that were measured at fair value as
of September 30, 2010 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
|
|
$
|
5,842
|
|
|
$
|
|
|
|
$
|
|
|
Money market funds are classified as cash and cash equivalents in the Companys condensed
consolidated balance sheets.
12. Operating Segments
Summarized financial information concerning the Companys segments is shown in the following
tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenue
|
|
|
|
|
restated
|
|
|
|
|
|
restated
|
|
DBM
|
|
$
|
13,241
|
|
|
$
|
14,611
|
|
|
$
|
40,502
|
|
|
$
|
43,445
|
|
Hybrid/Synthetic
|
|
|
3,353
|
|
|
|
894
|
|
|
|
8,588
|
|
|
|
2,289
|
|
Traditional Tissue
|
|
|
4,972
|
|
|
|
5,101
|
|
|
|
14,975
|
|
|
|
15,821
|
|
Spinal Allograft
|
|
|
1,384
|
|
|
|
1,966
|
|
|
|
4,969
|
|
|
|
5,708
|
|
Other
|
|
|
154
|
|
|
|
389
|
|
|
|
594
|
|
|
|
3,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,104
|
|
|
$
|
22,961
|
|
|
$
|
69,628
|
|
|
$
|
70,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Operating income (loss):
|
|
|
|
|
restated
|
|
|
|
|
|
restated
|
|
DBM
|
|
$
|
5,052
|
|
|
$
|
4,462
|
|
|
$
|
13,608
|
|
|
$
|
12,162
|
|
Hybrid/Synthetic
|
|
|
832
|
|
|
|
(261
|
)
|
|
|
1,759
|
|
|
|
(393
|
)
|
Traditional Tissue
|
|
|
(569
|
)
|
|
|
(220
|
)
|
|
|
214
|
|
|
|
848
|
|
Spinal Allograft
|
|
|
33
|
|
|
|
320
|
|
|
|
(67
|
)
|
|
|
871
|
|
Other
|
|
|
(12
|
)
|
|
|
(410
|
)
|
|
|
4
|
|
|
|
795
|
|
Corporate
|
|
|
(7,769
|
)
|
|
|
(5,624
|
)
|
|
|
(18,258
|
)
|
|
|
(18,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,433
|
)
|
|
$
|
(1,733
|
)
|
|
$
|
(2,740
|
)
|
|
$
|
(4,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective April 1, 2010 the Company eliminated client services as a separately reported segment
because the Company exited that business. Client service revenue and related operating income have
been reclassified to other and prior year segment information has been restated to reflect the
segment realignment.
In each of the three and nine months ended September 30, 2010 and 2009, no customer accounted for
more than 10% of revenue.
- 11 -
OSTEOTECH,
INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(
dollars in thousands, except per share data
)
13. Other Expense
Certain components of Other expense for the periods indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Other
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Foreign exchange gain (loss)
|
|
$
|
154
|
|
|
$
|
74
|
|
|
$
|
(155
|
)
|
|
$
|
116
|
|
Other
|
|
|
(18
|
)
|
|
|
(16
|
)
|
|
|
(43
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
136
|
|
|
$
|
58
|
|
|
$
|
(198
|
)
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 12 -
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussions should be read in conjunction with the condensed consolidated financial
statements and notes thereto appearing elsewhere in this Quarterly Report on
Form 10-Q
and our
Annual Report on
Form 10-K
for the year ended December 31, 2009.
Information included herein contains forward-looking statements which can be identified by the
use of forward-looking terminology such as believes, expects, may, will, should, or
anticipates or the negative thereof or variations thereon or comparable terminology, or by
discussions of strategy. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. Some of the matters set forth in Item 1A, Risk
Factors, in Part II of this Quarterly Report on
Form 10-Q
and Item 1A, Risk Factors, of our
Annual Report on
Form 10-K
for the year ended December 31, 2009 constitute cautionary statements
identifying factors with respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the future results indicated
in such forward-looking statements. Other factors could also cause actual results to vary
materially from the future results indicated in such forward-looking statements. Except as may be
required by law, we undertake no obligation to update any forward-looking statement to reflect
events after the date of this report.
On August 16, 2010, we entered into a definitive Agreement and Plan of Merger (the Merger
Agreement) with Medtronic, Inc., a Minnesota corporation (Medtronic), Medtronic Sofamor Danek,
Inc., an Indiana corporation and wholly owned direct subsidiary of Medtronic (MSD), and England
Merger Corporation, a Delaware corporation and wholly owned subsidiary of Medtronic (Merger Sub),
pursuant to which at the effective time of the Merger (the Effective Time), Medtronic will
acquire all of our outstanding shares of common stock, par value $0.01 (Common Stock) for $6.50
per share in cash (Merger Consideration) and pursuant to which Merger Sub will be merged with and
into us, with us continuing as the surviving corporation and becoming a wholly owned indirect
subsidiary of Medtronic (the Merger).
On the terms and subject to the conditions set forth in the Merger Agreement, which has been
unanimously approved by our Board of Directors, at the Effective Time, and as a result thereof,
each share of Common Stock that is issued and outstanding immediately prior to the Effective Time
(other than Common Stock held by us, Medtronic, Merger Sub or their subsidiaries, which will be
canceled without payment of any consideration, and Common Stock for which appraisal rights have
been validly exercised and not withdrawn) will be converted into the right to receive the Merger
Consideration, without interest and less any applicable withholding taxes, which amount is subject
to decrease under certain conditions as described in the Merger Agreement. Each option to purchase
Common Stock that is outstanding as of the Effective Time will be canceled in exchange for the
right to receive in cash the amount by which the Merger Consideration exceeds the exercise price,
multiplied by the number of shares subject to such option, less applicable withholding taxes, if
any, required to be withheld with respect to such payment. Each restricted stock unit (RSU) that
is outstanding immediately prior to the Effective Time will, at the Effective Time, be accelerated
and canceled in exchange for the right to receive in cash the amount equal to the total number of
shares of Common Stock represented by the RSU multiplied by the Merger Consideration, less
applicable withholding taxes, if any, required to be withheld with respect to such payment.
We and Medtronic have made customary representations, warranties and covenants in the Merger
Agreement, including, among others, covenants that: (i) we will conduct our business in the
ordinary course consistent with past practice during the interim period between the execution of
the Merger Agreement and the Effective Time, (ii) we will not engage in certain kinds of
transactions during such period, and (iii) we will cause a meeting of our stockholders to be held
to consider approval of the Merger Agreement, which is scheduled for November 9, 2010. We have
also made certain additional customary covenants, including, among others, covenants not to: (i)
solicit proposals relating to alternative business combination transactions or (ii) subject to
certain exceptions, enter into discussions concerning or provide confidential information in
connection with any proposals for alternative business combination transactions.
- 13 -
Consummation of the Merger is subject to customary conditions, including (i) approval of the
holders of a majority of the outstanding shares of Common Stock, (ii) the absence of any law or
order prohibiting the consummation of
the Merger, (iii) the expiration or termination of any applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (for which early termination of
the waiting period was granted effective October 12, 2010), and the receipt of approvals under
applicable foreign antitrust laws (all of which have been received), (iv) not more than 10% of the outstanding shares of Common Stock
being the subject of validly exercised appraisal rights and (v) the absence of a material adverse
effect with respect to us.
The Merger Agreement contains certain termination rights for both us and Medtronic, and further
provides that, upon termination of the Merger Agreement under certain specified circumstances, we
would be required to reimburse Medtronic for its transaction-related expenses up to $3.0 million or
pay a termination fee of $5.0 million.
As described above, the Merger Agreement contains representations and warranties by us and
Medtronic. These representations and warranties have been made solely for the benefit of the other
parties to the Merger Agreement and (i) may be intended not as statements of fact, but rather as a
way of allocating the risk to us or Medtronic if those statements prove to be inaccurate, (ii) have
been qualified by disclosures that were made to the other party in connection with the negotiation
of the Merger Agreement, (iii) may apply materiality standards different from what may be viewed as
material to investors, and (iv) were made only as of the date of the Merger Agreement or such other
dates as may be specified in the Merger Agreement and are subject to more recent developments.
Accordingly, these representations and warranties should not be relied on as characterizations of
the actual state of facts or for any other purpose either at the time they were made or at any
other time.
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
Results of Operations
Critical Accounting Policies and Estimates
The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing 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. Our accounting practices are discussed in more
detail in Managements Discussion and Analysis of Financial Condition and Results of Operations
in our Annual Report on Form 10-K for the year ended December 31, 2009 as well as in Recent
Accounting Developments included elsewhere herein. There have been no significant modifications in
our critical accounting policies or estimates since December 31, 2009.
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(dollars in thousands, except
|
|
September 30,
|
|
|
September 30,
|
|
per share amounts)
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
Net loss
|
|
$
|
(2,457
|
)
|
|
$
|
(1,907
|
)
|
|
$
|
(550
|
)
|
|
$
|
(3,925
|
)
|
|
$
|
(4,907
|
)
|
|
$
|
982
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.14
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
$
|
(0.22
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
Diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
$
|
(0.22
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
We incurred a net loss for the three and nine months ended September 30, 2010 primarily as a result
of the direct and indirect out-of-pocket costs associated with the pursuit of strategic
alternatives and the proposed Merger. Although we
have been successful in improving gross margins and reducing
operating expenses (exclusive of the costs and expenses noted directly above), we did not generate
sufficient revenue to effectively leverage our internal costs base, which also contributed to the
loss in both periods in 2010.
- 14 -
In both the three and nine months ended September 30, 2009, we incurred a net loss because our unit
sales volume was insufficient to effectively leverage the fixed cost base of our processing
facilities and to cover our operating expenses.
Revenue
For the three months ended September 30, 2010, revenue was $23.1 million as compared to $23.0
million for the three months ended September 30, 2009. For the nine months ended September 30,
2010, revenue was $69.6 million as compared to $70.4 million in the comparable prior year period. We
plan to continue to focus our strategic efforts on the expansion of our new products and to
maintain the market position of our existing products lines.
The following table details the components of our revenue for the three and nine months ended
September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
DBM
|
|
$
|
13,241
|
|
|
$
|
14,611
|
|
|
$
|
(1,370
|
)
|
|
|
-9
|
%
|
|
$
|
40,502
|
|
|
$
|
43,445
|
|
|
$
|
(2,943
|
)
|
|
|
-7
|
%
|
Hybrid/Synthetic
|
|
|
3,353
|
|
|
|
894
|
|
|
|
2,459
|
|
|
|
275
|
%
|
|
|
8,588
|
|
|
|
2,289
|
|
|
|
6,299
|
|
|
|
275
|
%
|
Traditional Tissue
|
|
|
4,972
|
|
|
|
5,101
|
|
|
|
(129
|
)
|
|
|
-3
|
%
|
|
|
14,975
|
|
|
|
15,821
|
|
|
|
(846
|
)
|
|
|
-5
|
%
|
Spinal Allograft
|
|
|
1,384
|
|
|
|
1,966
|
|
|
|
(582
|
)
|
|
|
-30
|
%
|
|
|
4,969
|
|
|
|
5,708
|
|
|
|
(739
|
)
|
|
|
-13
|
%
|
Other
|
|
|
154
|
|
|
|
389
|
|
|
|
(235
|
)
|
|
|
-60
|
%
|
|
|
594
|
|
|
|
3,100
|
|
|
|
(2,506
|
)
|
|
|
-81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,104
|
|
|
$
|
22,961
|
|
|
$
|
143
|
|
|
|
1
|
%
|
|
$
|
69,628
|
|
|
$
|
70,363
|
|
|
$
|
(735
|
)
|
|
|
-1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBM Segment revenue, which consists of revenue from the sale of Grafton
®
DBM and Xpanse
®
Bone
Inserts and revenue from the processing of a private label DBM, declined 9% and 7%, respectively,
for the three and nine months ended September 30, 2010 as compared to the same period in 2009,
primarily as a result of the decline in domestic unit sales volume.
Revenue in the Hybrid/Synthetic Segment, which consists of revenue from our Magnifuse Technology,
Plexur
®
Biocomposites, and GraftCage
®
Spacers, increased 275% for both the three and nine months
ended September 30, 2010, as compared to the same periods in 2009 as a result of the continued
expansion of our Magnifuse Bone Graft and Plexur M
®
Innovative Grafting products.
Traditional Tissue Segment revenue generated from the worldwide distribution of allograft bone
tissue grafts declined 3% and 5%, respectively, for three and nine months ended September 30, 2010
as compared to the comparable periods in 2009 primarily due to a decline in international unit
sales volume.
Revenue in the Spinal Allograft Segment in the third quarter of 2010 declined 30%, compared to the
prior year period, as a result of a decline in domestic unit sales volume of Graftech
®
Spacers.
For the nine months ended September 30, 2010, Spinal Allograft Segment revenue declined by 13%
compared to the prior year period as a result of the decline in the domestic unit sales volume of
Graftech
®
Spacers.
In both the third quarter and nine months end September 30, 2010, other revenue consisted mainly of
revenue from the international distribution of Xenograft products and miscellaneous other revenue.
In the three and nine months ended September 30, 2009, revenue from the processing of allograft
bone tissue for clients, a business we have exited, was $125 and $2,013, respectively.
- 15 -
For the three and nine months ended September 30, 2010, domestic revenue was $19.0 million and
$55.9 million, respectively, compared to $18.4 million and $55.4 million in the comparable prior
year periods. The increase in domestic revenue in the third quarter of 2010, compared to the
comparable 2009 quarter, mainly results from revenue from new products of $3.4 million partially
offset by reductions in DBM and spinal allograft revenue and revenue from client services. During
the nine months ended September 30, 2010 domestic revenue from new products of $7.3 million only
partially offset declines in DBM, spinal allograft, and client services revenue from that reported
in 2009.
For the three and nine months ended September 30, 2010, international revenue was $4.1 million and
$13.7 million, respectively, compared to $4.6 million and $15.0 million in the same comparable
prior year periods. The reduction in international revenue in 2010 mainly results from a decline in
revenue in certain European and Asian markets which was partially offset by improvements in certain
Latin American markets.
For each of the three and nine months ended September 30, 2010 and 2009, no customer accounted for
more than 10% of revenue.
Gross Profit Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Gross Profit
|
|
$
|
11,583
|
|
|
$
|
10,459
|
|
|
$
|
34,628
|
|
|
$
|
33,957
|
|
Gross Margin
|
|
|
50
|
%
|
|
|
46
|
%
|
|
|
50
|
%
|
|
|
48
|
%
|
In the third quarter of 2010, and for the nine months ended September 30, 2010, our gross margin
improved compared to the prior year periods primarily due to lower costs and expenses resulting
from our cost containment programs.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
Marketing, selling and
general and
administrative
|
|
$
|
13,096
|
|
|
$
|
10,648
|
|
|
$
|
2,448
|
|
|
|
23
|
%
|
|
$
|
34,189
|
|
|
$
|
33,034
|
|
|
$
|
1,155
|
|
|
|
3
|
%
|
Research and
development
|
|
|
920
|
|
|
|
1,544
|
|
|
|
(624
|
)
|
|
|
-40
|
%
|
|
|
3,179
|
|
|
|
5,195
|
|
|
|
(2,016
|
)
|
|
|
-39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,016
|
|
|
$
|
12,192
|
|
|
$
|
1,824
|
|
|
|
15
|
%
|
|
$
|
37,368
|
|
|
$
|
38,229
|
|
|
$
|
(861
|
)
|
|
|
-2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in marketing, selling and general and administrative expenses for the three months
ended September 30, 2010 as compared to the prior year period is due primarily to the direct and
indirect out-of-pocket costs and expenses of $1.6 million
associated with the pursuit of strategic
alternatives and the proposed Merger. For the nine months ended September 30, 2010, marketing,
selling and general and administrative expenses increased as compared
to the same period in 2009
primarily due to the direct and indirect out-of-pocket costs and expenses of $2.5 million incurred
in connection with the pursuit of strategic alternatives and the proposed Merger and were only
partially offset by our cost containment efforts in all functional areas and our reduced spending
on new programs and initiatives as we concentrate on the launch of our new products.
In the three and nine months ended September 30, 2010, research and development expenses decreased
40% and 39%, respectively, as compared to the respective 2009 periods, primarily due to several new
tissue technologies and products that were still in development in 2009 moving into full
commercialization in 2010, our focus on cost containment initiatives and not initiating new
projects as we focused on the commercialization efforts of the new products.
- 16 -
Operating Income (Loss) By Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
DBM
|
|
$
|
5,052
|
|
|
$
|
4,462
|
|
|
$
|
590
|
|
|
|
13
|
%
|
|
$
|
13,608
|
|
|
$
|
12,162
|
|
|
$
|
1,446
|
|
|
|
12
|
%
|
Hybrid/Synthetic
|
|
|
832
|
|
|
|
(261
|
)
|
|
|
1,093
|
|
|
|
419
|
%
|
|
|
1,759
|
|
|
|
(393
|
)
|
|
|
2,152
|
|
|
|
548
|
%
|
Traditional Tissue
|
|
|
(569
|
)
|
|
|
(220
|
)
|
|
|
(349
|
)
|
|
|
-159
|
%
|
|
|
214
|
|
|
|
848
|
|
|
|
(634
|
)
|
|
|
-75
|
%
|
Spinal Allograft
|
|
|
33
|
|
|
|
320
|
|
|
|
(287
|
)
|
|
|
-90
|
%
|
|
|
(67
|
)
|
|
|
871
|
|
|
|
(938
|
)
|
|
|
-108
|
%
|
Other
|
|
|
(12
|
)
|
|
|
(410
|
)
|
|
|
398
|
|
|
|
97
|
%
|
|
|
4
|
|
|
|
795
|
|
|
|
(791
|
)
|
|
|
-99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Segment
Operating Income
|
|
|
5,336
|
|
|
|
3,891
|
|
|
|
1,445
|
|
|
|
37
|
%
|
|
|
15,518
|
|
|
|
14,283
|
|
|
|
1,235
|
|
|
|
9
|
%
|
Corporate
|
|
|
(7,769
|
)
|
|
|
(5,624
|
)
|
|
|
(2,145
|
)
|
|
|
38
|
%
|
|
|
(18,258
|
)
|
|
|
(18,555
|
)
|
|
|
297
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
$
|
(2,433
|
)
|
|
$
|
(1,733
|
)
|
|
$
|
(700
|
)
|
|
|
-40
|
%
|
|
$
|
(2,740
|
)
|
|
$
|
(4,272
|
)
|
|
$
|
1,532
|
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the three and nine
months ended September 30, 2010 increased 37% and 9%, respectively, as compared to the comparable
prior year periods due to higher gross profit and lower selling expenses. As a result, in the
three and nine months ended September 30, 2010, product segment operating income, as a percent of
revenue, increase to 23% and 22%, respectively, compared to 17% and 20% in the comparable prior
year periods.
Costs and expenses associated with Corporate for the three and nine months ended September 30, 2010
increased 38% and 2%, respectively, when compared to the comparable 2009 periods primarily due to
our incurring $1.6 million and $2.5 million of direct and indirect out-of-pocket costs and
expenses, in the respective 2010 periods, related to the review of strategic alternatives and the
proposed Merger.
Other Expense
For the three and nine months ended September 30, 2010, other expense was $0.2 million and $1.2
million, respectively, compared to $0.3 million and $1.0 million in the respective 2009 periods.
Interest expense associated with our capital lease obligation declined in the 2010 periods compared
to the 2009 periods and interest income on our invested cash balances was not significant. In the
third quarter of 2010, and in the comparable prior year period, we recorded foreign exchange gains
of $0.2 million and $0.1 million, respectively. We incurred a foreign exchange loss of $0.2 million
and a foreign exchange gain of $.0.1 million in the nine months ended September 30, 2010 and 2009,
respectively. Our foreign exchange gains result from the U.S. dollar weakening against the euro
whereas we incur foreign exchange losses when the U.S. dollar strengthens against the euro.
Income Tax Provision
At September 30, 2010, based on internal projections including the impact of timing differences
mainly relate to depreciation and amortization, we estimate we will not generate taxable income in
2010 and therefore only provided
for certain state and foreign taxes for the three and nine months ended September 30, 2010. In
2009, as a result of the effects of timing differences, we generated taxable income, and therefore
provided for Federal alternative minimum taxes in addition to certain state and foreign taxes.
During the three and nine months ended September 30, 2010, we recognized a tax benefit of $0.2
million as the result of a change in certain Federal tax regulations allowing us to carry back
additional operating losses to prior years to recover previously paid Federal alternative minimum
taxes and, the reversal of previously recorded provisions for 2010 Federal alternative minimum
taxes. During the three and nine months ended September 30, 2009, certain unrecognized tax
positions were effectively settled resulting in the recognition of tax benefits of $0.2 million and
$0.5 million, respectively. We continue not to recognize any Federal, state or certain foreign tax
benefits, which are subject to full valuation allowances in accordance with FASB Codification Topic
(ASC) 740,
Income Taxes.
The Company intends to maintain the valuation allowances until
sufficient positive evidence exists to support the reversal of a valuation allowance that we have
established. We evaluate our position with respect to the valuation allowances each quarter by
taking into consideration numerous factors, including, but not limited to: past, present and
forecasted results; the impact in each jurisdiction of operating activities; and the anticipated
effects of our strategic plan.
- 17 -
We file U.S., state, and foreign income tax returns in jurisdictions with varying statutes of
limitations. Tax years subsequent to 2006 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.
Our unrecognized tax benefits (UTBs) at September 30, 2010 and December 31, 2009 were not
material. If we prevail in matters for which either a receivable or a liability for a UTB has been
established, are required to pay an amount or utilize NOLs to settle a tax liability, or estimates
regarding a UTB change as a result of changes in facts and circumstances, our effective tax rate in
a given financial reporting period may be affected. It is expected that the amount of UTBs will
change in the next twelve months; however, we do not anticipate such change to be significant.
Liquidity and Capital Resources
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Cash and cash equivalents
|
|
$
|
13,777
|
|
|
$
|
10,708
|
|
Working Capital
|
|
$
|
52,379
|
|
|
$
|
53,301
|
|
Stockholders equity
|
|
$
|
77,397
|
|
|
$
|
80,286
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
Summary of our cash flow:
|
|
2010
|
|
|
2009
|
|
Net cash provided by (used in) operating activities
|
|
$
|
4,589
|
|
|
$
|
(5,829
|
)
|
Net cash used in investing activities
|
|
$
|
(931
|
)
|
|
$
|
(1,732
|
)
|
Net cash used in financing activities
|
|
$
|
(549
|
)
|
|
$
|
(717
|
)
|
Effect of foreign currency exchange rates on cash
|
|
$
|
(40
|
)
|
|
$
|
62
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
3,069
|
|
|
$
|
(8,216
|
)
|
|
|
|
|
|
|
|
Cash Flow From Operating Activities
Net cash provided by operating activities was $4.6 million in the nine months ended September 30,
2010 compared to a consumption of $5.8 million in cash by operating activities in the comparable
prior year period. The change resulted primarily from our efforts to more closely manage our
investment in working capital, especially our tissue
inventories, and a reduction in our net loss in the nine months ended September 30, 2010 as
compared to the prior year period. At September 30, 2010, working capital, excluding cash, was
$38.6 million compared to $42.6 million at December 31, 2009. During the nine months ended
September 30, 2010, we reduced our investment in inventory and deferred processing costs by $5.8
million. Offsetting that reduction was a $3.8 million reduction in accounts payable and accrued
expenses.
- 18 -
Cash Flow From Investing Activities
Net cash used in investing activities was $0.9 million and $1.7 million for the nine months ended
September 30, 2010 and 2009, respectively. We anticipate that for 2010, the funding of capital
expenditures and patent development will be below our 2009 levels.
Cash Flow From Financing Activities
Net cash used in financing activities was $0.5 million and $0.7 million for the nine months ended
September 30, 2010 and 2009, respectively. Principal payments on our capital lease obligation were
$0.7 in both the nine months ended September 30, 2010 and 2009. Partially offsetting these
payments in the nine months ended September 30, 2010 were $0.2 in proceeds from the sale of common
stock through the exercise of stock options. In the nine months ended September 30, 2009, we used
$0.1 million to repurchase our common stock which was partially offset from the proceeds from the
sale of common stock pursuant to our employee stock purchase plan.
Financing Needs
At September 30, 2010, cash and cash equivalents were $13.8 million, an increase of $3.1 million
from cash and cash equivalents at December 31, 2009 of $10.7 million. Our tissue inventory
reduction efforts, cost cutting initiatives and reduced spending on capital expenditures are the
primary reasons for the improvement in cash and cash equivalents. During 2010, we have also
incurred $2.5 million in direct and indirect out-of-pocket costs associated with the evaluation of
strategic alternatives and the proposed Merger ($1.3 million remains unpaid at September 30, 2010)
which had a negative impact on our financial results and cash balance. We continue to focus on the
launch of our new tissue products which we believe are the generators behind future revenue
growth. This revenue growth is the key factor for achieving the benefits of our internal financial
model leveraging our processing operation and back office infrastructure and generating increased
profitability and cash flow. Based on our current projections and estimates, we believe that our
currently available cash and cash equivalents, cash flow from operations and availability under the
Credit Agreement will be sufficient to meet our forecasted cash needs for the next twelve months.
We can provide no assurance that we will be able to maintain our current efforts to reduce tissue
inventories, cut costs and reduce spending on capital expenditures or that our new products will
continue to be accepted in the market or that we will realize the benefits of our financial model.
Separately, we continue to monitor and evaluate the impact, if any, that the announcement of the
proposed Merger will have on our customers, sales teams and employees, which, if negatively
received by any of these constituencies, could result in reduced revenues or increased costs
impacting profitability and cash flow. Our future liquidity and capital requirements will depend
upon numerous factors, including the:
|
|
|
revenue growth, which may be impinged by the announcement of the proposed Merger;
|
|
|
|
the costs, and continuing costs to effectuate the proposed Merger;
|
|
|
|
timing and expansion of our internal sales and marketing efforts, including additional
field sales staff, to support our product launches;
|
|
|
|
progress of our product launch 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
|
|
|
|
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 new product development could 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.
- 19 -
Credit Facility
We have 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 $10,000 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 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 ours. 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 for the quarter ending 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 Agreement 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 ours, which
impairs the interest of PNC.
As of September 30, 2010 and December 31, 2009, there were no amounts outstanding under the Credit
Agreement and we are in compliance with all covenants. The Credit Agreement expires on December
28, 2012.
PNC, at its option, can declare the Credit Agreement in default, if and when, the proposed Merger
is consummated and exercise any remedies to such default as defined in the Credit Agreement. As
stated above, no amounts were outstanding under the Credit Agreement as of September 30, 2010 and
we currently do not expect any amounts to be outstanding upon the closing of the Merger.
Recent Accounting Developments
For information on new accounting standards, refer to Note 1,
Recent Accounting Pronouncements,
in
Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere herein.
Contractual Obligations
As of September 30, 2010, there were no material changes in our contractual obligations from that
disclosed in Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended December 31, 2009.
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 the euro and other foreign currencies. To the extent our foreign source revenue
grows and represents a larger percentage of our consolidated revenues and profits, foreign currency
translation adjustments may impact our operating results to a greater extent. We do not hedge our
foreign currency transactions.
The majority of our sales to international stocking distributors are denominated in U.S. dollars.
Generally, our results of operations are directly or indirectly impacted by the strengthening or
weakening of the U.S. dollar against other foreign currencies, especially the euro, in countries to
which we sell. Generally, a weakening of the U.S. dollar against the euro, as occurred during the
third quarter of 2010, results in our realizing a foreign currency gain whereas a strengthening of
the U.S. dollar against the euro, as occurred during the nine months ended September 30, 2010,
results in our realizing a foreign currency loss.
- 20 -
Litigation
minSURG International, Inc. v. Nuvasive, Inc., et al.
On July 19, 2010, minSURG International, Inc. (minSURG) sued several entities, including us in
the United States District Court for the Middle District of Florida. MinSURGs complaint alleges
that our FacetLinx
TM
Fusion Technology infringes minSURGs U.S. Patent Nos. 7,708,761,
D590,943, and D574,495. The complaint also makes business torts allegations against
us, specifically, Lanham Act false advertising, Florida law unfair competition, defamation, and
tortious interference with business and contractual relationship allegations. We were served with
the complaint on July 28, 2010. On August 3, 2010 minSURG filed a motion for a preliminary
injunction, seeking an injunction only with respect to its claims that we (and other defendants)
was and continues to induce and contribute to the infringement of the 761 Patent. We filed our
response to the preliminary injunction motion on September 1, 2010. The Court held an evidentiary
hearing on the preliminary injunction motion on October 5, 2010. We also filed a motion to dismiss
all of minSURGs claims, for failure to effectively state a claim, on August 31, 2010. We await
decisions on minSURGs motion for a preliminary injunction, and on our motion to dismiss.
Medtronic Merger Litigation
In August 2010, four class action complaints were filed in the Superior Court of New Jersey,
Monmouth County, concerning the Merger. The first class action was instituted by certain
individual stockholders, individually and on behalf of all public stockholders of the Company,
against us, our board of directors, presidents, and chief executive officer, as well as Medtronic,
MSD, and Merger Sub. The complaint alleges breach of fiduciary duty by the members of the board of
directors arising out of the attempt to sell the Company by means of an allegedly unfair process
with preclusive deal protection devices and at an unfair price of $6.50 in cash for each share of
Common Stock. The complaint also alleges that Medtronic aided and abetted the alleged breaches of
fiduciary duties by the other defendants. The other three class action complaints filed with
respect to the proposed Merger are substantially the same as the first action filed. The lawsuits
have all been transferred to Chancery Court of New Jersey, Monmouth
County and consolidated. An amended complaint
was filed and has been designated as the operative complaint in this consolidated action. In addition
to the allegations summarized above, the amended complaint makes additional allegations that our
proxy statement relative to the special meeting of stockholders to be held on November 9, 2010 was
deficient because it did not disclose certain information about the proposed Merger and the
financial analysis performed by Deutsche Bank Securities, Inc., our financial advisor in connection
with the proposed merger. The plaintiff also alleges that we violated the corporate law of Delaware
when we canceled our annual stockholder meeting scheduled for August 23, 2010. The parties have
conducted limited discovery and the plaintiff has filed a motion with the
court for a temporary restraining
order to, among other things, delay the stockholder vote. On
November 8, 2010, the Chancery Court of New Jersey denied the
plaintiffs motion for a temporary restraining order.
The Company believes the claims made against it in this case are without merit and intendeds to
vigorously defend itself in this action.
We are not aware of any other material matters or legal proceedings initiated against us during the
three months ended September 30, 2010.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to certain market risks, see Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended
December 31, 2009. Except as discussed below, there have been no significant changes in our market
risk exposures since the fiscal 2009 year-end.
- 21 -
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. 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/foreign currency exchange rates 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.
At September 30, 2010, international stocking distributors accounted for 28% of our accounts
receivable.
Item 4.
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 September 30, 2010 related to the recording, processing,
summarization and reporting of information in our reports that we file with the Securities and
Exchange Commission (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 September 30, 2010.
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(f) under the Exchange Act, during the quarter ended September 30,
2010 that has materially affected, or is reasonably likely to materially affect our internal
control over financial reporting.
- 22 -
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Except as disclosed in Item 2, Litigation, in Part I of this Quarterly Report on Form 10-Q, there
were no material developments that occurred during the nine months ended September 30, 2010 in the
proceedings reported under Item 3. Legal Proceedings in our Annual Report on Form 10-K for the year
ended December 31, 2009, nor are we aware of any other material legal proceedings initiated against
us during the nine months ended September 30, 2010.
Item 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the
factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December
31, 2009, which could have a material impact on our business, financial condition or results of
operations. The risks described in our Annual Report on Form 10-K for the year ended December 31,
2009 are not the only risks facing the Company. Additional risks and uncertainties not presently
known to us or that we currently believe to be immaterial may also adversely affect our business,
financial condition or results of operations.
The following are new or modified risk factors that should be read in conjunction with the risk
factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.
Additional risks and uncertainties not presently known to us or that we currently believe to be
immaterial may also adversely affect our business, financial condition or results of operations.
Our business and our financial condition may be adversely affected if our proposed merger with
Medtronic is not completed, which could cause our stock price to decline.
Our proposed merger with Medtronic is subject to several customary conditions, including obtaining
clearance from governmental entities and the approvals of the transaction by the outstanding
holders of our Common Stock. During the period following execution of our definitive Merger
Agreement with Medtronic until we are able to close the transaction, our employees, agents,
distributors and customers could be significantly distracted and our business could be adversely
affected by the uncertainty created by the announcement of our proposed transaction. If our
proposed merger with Medtronic ultimately is not completed and we have to remain independent, we
believe our business would have been, and would continue to be, adversely affected by a variety of
risks, including those identified below, and we believe we would not be in as good a position as we
would have been had we not attempted the transaction with Medtronic in the first place:
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managements attention to our day-to-day business may be diverted to investigating
other strategic alternatives;
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the consequences of our managements attention having been diverted from our day-to-day
business over time between execution of our definitive Merger Agreement with Medtronic and
the date on which the agreement would terminate;
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the disruption to our relationships with customers and suppliers as a result of our and
their efforts relating to the proposed Merger;
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actual and potential litigation associated with our proposed transaction with
Medtronic;
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our inability to acquire further necessary financing to fund our ongoing operations
post-termination of our proposed Merger with Medtronic;
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the potential distraction to our sales force caused by uncertainties relating to the
proposed Merger; and
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the potential loss of business to our competitors.
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- 23 -
If the proposed Merger with Medtronic is not completed, the holders of our common stock, RSUs and
options to purchase common stock will not receive the cash Merger Consideration provided in the
Merger Agreement.
Pursuant to the Merger Agreement, each share of our Common Stock that is issued and outstanding
immediately prior to the completion of the Merger (other than shares held by us, Medtronic or its
subsidiaries, which will be
canceled without payment of any consideration, and shares for which appraisal rights have been
validly exercised and not withdrawn) will be converted into the right to receive the Merger
Consideration in cash, without interest. Each option to purchase our Common Stock that is
outstanding immediately prior to the completion of the Merger will be canceled in exchange for the
right to receive in cash the amount by which the Merger Consideration exceeds the exercise price,
multiplied by the number of shares subject to such option. Each RSU that is outstanding immediately
prior to the completion of the Merger will be canceled in exchange for the right to receive the
Merger Consideration per RSU in cash. The proposed Merger with Medtronic is subject to customary
conditions, including obtaining clearance from governmental entities and the approval of the Merger
by a majority of the outstanding holders of our Common Stock. We may not be able to meet all
closing conditions in order to complete the proposed Merger. If we are not able to complete the
Merger, the holders of our Common Stock, RSUs and options to purchase Common Stock will not receive
the Merger Consideration.
In connection with the proposed Merger with Medtronic, we may incur litigation costs which may harm
our business and financial condition and cause our stock price to decline.
The proposed Merger with Medtronic has resulted in and could result in additional litigation
against our Company in connection with the transaction itself regardless of whether we are able to
close the transaction. This would result in additional litigation costs and management distraction
and any failure to successfully defend against these actions could harm our business and our
financial condition and cause our stock price to decline.
If the Merger with Medtronic is not consummated, we may need to re-schedule the Annual Meeting of
Stockholders.
In accordance with the requirements of the Merger Agreement, we postponed the 2010 Annual Meeting
of Stockholders in favor of a Special Meeting of Stockholders to approve the Merger and Merger
Agreement. At the 2010 Annual Meeting, stockholders were requested to vote upon two proposals, the
election of directors and the approval of our independent registered public accounting firm. The
election of directors at the 2010 Annual Meeting of Stockholders was contested by a dissident
shareholder group which proposed to replace four of the existing members of the Board of Directors
with their own candidates. Although the major shareholders supporting the dissident group have
sold all or a substantial portion of their ownership positions in the Company, we can provide no
assurance that a re-scheduled Annual Meeting of Stockholders would not again result in a contested
election for seats on the Board of Directors. If there was a contested election, the members of
our current Board of Directors and management may be required to spend substantive time focusing on
the aspects and details of the proxy contest and Annual Meeting and not focused on our strategic
initiatives and on running the business. In addition, any proxy contest may be costly and may
provide another distraction to our customers, sales teams and employees and divert their attention
from our strategic initiatives, negatively impacting revenue growth, profitability and cash flow.
- 24 -
Item 6. EXHIBITS
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
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Exhibit
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Page
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Number
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Description
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Number
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2.1
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Agreement and Plan of Merger among Medtronic, Inc., Medtronic Sofamor Danek, Inc.,
England Merger Corporation and Osteotech, Inc. dated as of August 16, 2010
(incorporated by reference to Exhibit 2.1 to Registrants current Report on Form 8-K,
filed on August 17, 2010.)
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3.1
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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)
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3.2
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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)
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4.1
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First Amendment, dated as of August 16, 2010, to the Rights Agreement, dated as of
January 22, 2010, by and 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 August 17, 2010.)
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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+
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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+
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32.1
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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+
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32.2
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Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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+
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- 25 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: November 8, 2010
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Osteotech, Inc.
(Registrant)
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Date: November 8, 2010
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By:
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/s/ Sam Owusu-Akyaw
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Sam Owusu-Akyaw
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President and Chief Executive
Officer
(Principal Executive Officer)
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Date: November 8, 2010
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By:
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/s/ Mark H. Burroughs
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Mark H. Burroughs
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Executive Vice President,
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
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- 26 -
EXHIBIT INDEX
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Exhibit
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Page
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Number
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Description
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Number
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2.1
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Agreement and Plan of Merger among Medtronic,
Inc., Medtronic Sofamor Danek, Inc., England
Merger Corporation and Osteotech, Inc. dates as of
August 16, 2010 (incorporated by reference to
Exhibit 2.1 to Registrants current Report on Form
8-K, filed on August 17, 2010.)
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3.1
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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)
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3.2
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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)
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4.1
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First Amendment, dated as of August 16, 2010, to
the Rights Agreement, dated as of January 22,
2010, by and 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 August 17, 2010.)
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31.1
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Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
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+
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31.2
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Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
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+
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32.1
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Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
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+
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32.2
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Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
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+
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- 27 -
Exhibit 31.1
Certification Pursuant To
18 U.S.C. ss. 1350,
As Adopted Pursuant To
Section 302 of the Sarbanes-Oxley Act of 2002
I, Sam Owusu-Akyaw, certify that:
1.
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I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2010
of Osteotech, Inc.;
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2.
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Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
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3.
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Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
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4.
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The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)), for the registrant and have:
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(a)
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Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this report is being prepared;
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(b)
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Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, 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;
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(c)
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Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
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(d)
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Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and
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5.
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The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions):
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(a)
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All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and
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(b)
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Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting.
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November 8, 2010
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/s/ Sam Owusu-Akyaw
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Sam Owusu-Akyaw
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Chief Executive Officer
(Principal Executive Officer)
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Exhibit 31.2
Certification Pursuant To
18 U.S.C. ss. 1350,
As Adopted Pursuant To
Section 302 of the Sarbanes-Oxley Act of 2002
I, Mark H. Burroughs, certify that:
1.
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I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2010
of Osteotech, Inc.;
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2.
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Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
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3.
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Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
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4.
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The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)), for the registrant and have:
|
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(a)
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Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
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(b)
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Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
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(c)
|
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Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and
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(d)
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Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and
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5.
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The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions):
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(a)
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All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process summarize and report financial information; and
|
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(b)
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Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial
reporting.
|
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November 8, 2010
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/s/ Mark H. Burroughs
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Mark H. Burroughs
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Executive Vice President,
Chief Financial Officer
(Principal Financial Officer
and Chief Accounting Officer)
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EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C.§1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Osteotech, Inc. (the Company) on Form 10-Q for the
quarter ended September 30, 2010 as filed with the Securities and Exchange Commission on the date
hereof (the Report), I, Sam Owusu-Akyaw, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C.§1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
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/s/ Sam Owusu-Akyaw
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Sam Owusu-Akyaw
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Chief Executive Officer
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November 8, 2010
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C.§1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Osteotech, Inc. (the Company) on Form 10-Q for the
quarter ended September 30, 2010 as filed with the Securities and Exchange Commission on the date
hereof (the Report), I, Mark H. Burroughs, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C.§1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
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/s/ Mark H. Burroughs
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Mark H. Burroughs
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Chief Financial Officer
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November 8, 2010
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