##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
 OR
 o
    
    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)
 DELAWARE
    
    13-3357370(STATE OR OTHER JURISDICTION OF 
INCORPORATION OR ORGANIZATION)
    
    (I.R.S. EMPLOYER
IDENTIFICATION NO.)
 51 James Way, Eatontown, New Jersey, 07724  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)  (732) 542-2800  (REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



OSTEOTECH, INC.
 FORM 10-Q
 Table of Contents
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2010 and
December 31, 2009
    
    
    2Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2010 and 2009
    
    
    3Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2010 and 2009
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 6. Exhibits
    
    
    25Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   - 1 -




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##### Table of Contents



Part I. FINANCIAL INFORMATION
 
 Item 1.
    
    FINANCIAL STATEMENTS
 OSTEOTECH,
INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 dollars in thousands
 September 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    13,777
    
    
    $
    10,708Accounts receivable, net of allowance
of $125 in 2010 and $304 in
2009
    
    
    15,815
    
    
    
    16,165Deferred processing costs
    
    
    31,715
    
    
    
    38,562Inventories
    
    
    1,602
    
    
    
    1,819Prepaid expenses and other current assets
    
    
    2,998
    
    
    
    3,247Total current assets
    
    
    65,907
    
    
    
    70,501Property, plant and equipment, net
    
    
    25,637
    
    
    
    29,575Other assets
    
    
    17,752
    
    
    
    16,861Total assets
    
    
    109,296
    
    
    $
    116,937LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable and accrued liabilities
    
    $
    12,454
    
    
    $
    16,206Current maturities of capital lease obligation
    
    
    1,074
    
    
    
    994Total current liabilities
    
    
    13,528
    
    
    
    17,200Capital lease obligation
    
    
    11,365
    
    
    
    12,181Other liabilities
    
    
    7,006
    
    
    
    7,270Total liabilities
    
    
    31,899
    
    
    
    36,651Commitments and ContingenciesStockholders EquityPreferred stock, $0.01 par value; 5,000,000 shares authorized; no
shares
issued or outstandingCommon stock, $0.01 par value; 70,000,000 shares authorized; issued
18,361,033 shares in 2010 and 18,179,180 shares in 2009
    
    
    184
    
    
    
    182Additional paid-in capital
    
    
    72,507
    
    
    
    71,337Treasury stock, at cost, 115,670 shares in 2010 and 2009
    
    
    (227
    )
    
    
    (227
    )Accumulated other comprehensive income
    
    
    1,274
    
    
    
    1,410Retained earnings
    
    
    3,659
    
    
    
    7,584Total stockholders equity
    
    
    77,397
    
    
    
    80,286Total liabilities and stockholders equity
    
    $
    109,296
    
    
    $
    116,937
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##### Table of Contents



OSTEOTECH,
INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (dollars in thousands, except per share data
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    $
    23,104
    
    
    $
    22,961
    
    
    $
    69,628
    
    
    $
    70,363Cost of revenue
    
    
    11,521
    
    
    
    12,502
    
    
    
    35,000
    
    
    
    36,406Gross profit
    
    
    11,583
    
    
    
    10,459
    
    
    
    34,628
    
    
    
    33,957Marketing, selling, and general and
administrative expenses
    
    
    13,096
    
    
    
    10,648
    
    
    
    34,189
    
    
    
    33,034Research and development expenses
    
    
    920
    
    
    
    1,544
    
    
    
    3,179
    
    
    
    5,19514,016
    
    
    
    12,192
    
    
    
    37,368
    
    
    
    38,229Operating loss
    
    
    (2,433
    )
    
    
    (1,733
    )
    
    
    (2,740
    )
    
    
    (4,272
    )Other expense:Interest expense, net
    
    
    (310
    )
    
    
    (354
    )
    
    
    (965
    )
    
    
    (1,063
    )Other
    
    
    136
    
    
    
    58
    
    
    
    (198
    )
    
    
    106(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
    )Net loss
    
    $
    (2,457
    )
    
    $
    (1,907
    )
    
    $
    (3,925
    )
    
    $
    (4,907
    )Loss per share: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:Basic
    
    
    18,182,443
    
    
    
    18,120,350
    
    
    
    18,134,819
    
    
    
    17,925,718Diluted
    
    
    18,182,443
    
    
    
    18,120,350
    
    
    
    18,134,819
    
    
    
    17,925,718
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##### Table of Contents



OSTEOTECH,
INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  dollars in thousands
 Nine Months EndedSeptember 30,2010
    
    
    2009Cash Flow From Operating ActivitiesNet loss
    
    $
    (3,925
    )
    
    $
    (4,907
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    4,270
    
    
    
    4,619Stock-based compensation expense, net
    
    
    985
    
    
    
    996Changes 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
    
    
    
    500Prepaid expenses and other current assets
    
    
    (126
    )
    
    
    312Accounts 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 ActivitiesCapital expenditures
    
    
    (292
    )
    
    
    (1,267
    )Other, net
    
    
    (639
    )
    
    
    (465
    )Net cash used in investing activities
    
    
    (931
    )
    
    
    (1,732
    )Cash Flow From Financing ActivitiesPurchase of treasury stock
    
    
    
    
    
    
    (102
    )Proceeds from issuance of common stock
    
    
    187
    
    
    
    48Principal payments on capital lease obligation
    
    
    (736
    )
    
    
    (663
    )Net cash used in financing activities
    
    
    (549
    )
    
    
    (717
    )Effect of exchange rate changes on cash
    
    
    (40
    )
    
    
    62Net decrease in cash and cash equivalents
    
    
    3,069
    
    
    
    (8,216
    )Cash and cash equivalents at beginning of period
    
    
    10,708
    
    
    
    18,823Cash and cash equivalents at end of period
    
    $
    13,777
    
    
    $
    10,607Supplementary cash flow dataCash paid during the period for interest
    
    $
    1,009
    
    
    $
    1,137Cash paid during the period for taxes
    
    $
    43
    
    
    $
    110
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##### Table of Contents



OSTEOTECH,
INC. AND SUBSIDIARIES
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 dollars in thousands, except per share data
 1. Basis of Presentation
 General
  Recent Accounting Pronouncements
  2. Merger
     - 5 -




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##### Table of Contents



OSTEOTECH,
INC. AND SUBSIDIARIES
 Notes to Unaudited Condensed Consolidated Financial Statements
 dollars in thousands, except per share data
    3. Deferred Processing Costs
  September 30,
    
    
    December 31,2010
    
    
    2009Unprocessed donor tissue
    
    $
    13,065
    
    
    $
    16,692Tissue in process
    
    
    4,431
    
    
    
    4,062Implantable donor tissue
    
    
    14,219
    
    
    
    17,808$
    31,715
    
    
    $
    38,562
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##### Table of Contents



OSTEOTECH,
INC. AND SUBSIDIARIES
 Notes to Unaudited Condensed Consolidated Financial Statements
 dollars in thousands, except per share data
 4. Inventories
  September 30,
    
    
    December 31,2010
    
    
    2009Supplies
    
    $
    409
    
    
    $
    428Raw materials
    
    
    581
    
    
    
    779Finished goods
    
    
    612
    
    
    
    612$
    1,602
    
    
    $
    1,819
 5. Revolving Credit Facility
     6. Stockholders Equity
 Stock Compensation Plans
   - 7 -




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##### Table of Contents



OSTEOTECH,
INC. AND SUBSIDIARIES
 Notes to Unaudited Condensed Consolidated Financial Statements
 dollars in thousands, except per share data
  RSUs
    
    
    OptionsWeighted-AverageWeighted-
    
    
    
    
    
    
    Weighted-
    
    
    RemainingAverage
    
    
    
    
    
    
    Average
    
    
    ContractualNumber of
    
    
    Grant Date
    
    
    Number of
    
    
    Exercise
    
    
    TermShares
    
    
    Fair Value
    
    
    Shares
    
    
    Price
    
    
    (Years)Outstanding, January 1, 2010
    
    
    434,283
    
    
    $
    4.58
    
    
    
    1,386,812
    
    
    $
    6.04Granted
    
    
    291,830
    
    
    $
    4.75
    
    
    
    Vested RSUs or exercised options
    
    
    (178,354
    )
    
    $
    5.64
    
    
    
    (36,437
    )
    
    $
    5.10Forfeited, cancelled or expired
    
    
    (63,872
    )
    
    $
    3.23
    
    
    
    (92,900
    )
    
    $
    9.69Outstanding, September 30, 2010
    
    
    483,887
    
    
    $
    4.47
    
    
    
    1,257,475
    
    
    $
    5.79
    
    
    
    3.61Options exercisable
    
    
    
    
    
    
    
    
    
    
    1,257,475
    
    
    $
    5.79
    
    
    
    3.61
   7. Income Taxes
  Income Taxes.
  - 8 -




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##### Table of Contents



OSTEOTECH,
INC. AND SUBSIDIARIES
 Notes to Unaudited Condensed Consolidated Financial Statements
 dollars in thousands, except per share data
   8. Commitments and Contingencies
 Litigation
 minSURG International, Inc. v. Nuvasive, Inc., et al.
 TM
  Medtronic Merger Litigation
   - 9 -




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##### Table of Contents



OSTEOTECH,
INC. AND SUBSIDIARIES
 Notes to Unaudited Condensed Consolidated Financial Statements
 dollars in thousands, except per share data
  9. Comprehensive Loss
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net loss
    
    $
    (2,457
    )
    
    $
    (1,907
    )
    
    $
    (3,925
    )
    
    $
    (4,907
    )Currency translation adjustments
    
    
    236
    
    
    
    78
    
    
    
    (136
    )
    
    
    67Comprehensive loss
    
    $
    (2,221
    )
    
    $
    (1,829
    )
    
    $
    (4,061
    )
    
    $
    (4,840
    )
 10. Loss Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net 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
    
    
    
    17,925,718Effect 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
    
    
    
    17,925,718Basic loss per share
    
    $
    (0.14
    )
    
    $
    (0.11
    )
    
    $
    (0.22
    )
    
    $
    (0.27
    )Diluted loss per share
    
    $
    (0.14
    )
    
    $
    (0.11
    )
    
    $
    (0.22
    )
    
    $
    (0.27
    )
  11. Fair Value Measurements
 Fair Value Measurements and Disclosures
     - 10 -




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##### Table of Contents



OSTEOTECH,
INC. AND SUBSIDIARIES
 Notes to Unaudited Condensed Consolidated Financial Statements
 dollars in thousands, except per share data
  Quoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Asset:Money market funds
    
    $
    5,842
    
    
    $
    
    
    
    $
    
  12. Operating Segments
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    
    
    

    restated
    
    

    
    
    
    restatedDBM
    
    $
    13,241
    
    
    $
    14,611
    
    
    $
    40,502
    
    
    $
    43,445Hybrid/Synthetic
    
    
    3,353
    
    
    
    894
    
    
    
    8,588
    
    
    
    2,289Traditional Tissue
    
    
    4,972
    
    
    
    5,101
    
    
    
    14,975
    
    
    
    15,821Spinal Allograft
    
    
    1,384
    
    
    
    1,966
    
    
    
    4,969
    
    
    
    5,708Other
    
    
    154
    
    
    
    389
    
    
    
    594
    
    
    
    3,100$
    23,104
    
    
    $
    22,961
    
    
    $
    69,628
    
    
    $
    70,363
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Operating income (loss):
    
    

    
    
    restated
    
    
    

    
    
    restatedDBM
    
    $
    5,052
    
    
    $
    4,462
    
    
    $
    13,608
    
    
    $
    12,162Hybrid/Synthetic
    
    
    832
    
    
    
    (261
    )
    
    
    1,759
    
    
    
    (393
    )Traditional Tissue
    
    
    (569
    )
    
    
    (220
    )
    
    
    214
    
    
    
    848Spinal Allograft
    
    
    33
    
    
    
    320
    
    
    
    (67
    )
    
    
    871Other
    
    
    (12
    )
    
    
    (410
    )
    
    
    4
    
    
    
    795Corporate
    
    
    (7,769
    )
    
    
    (5,624
    )
    
    
    (18,258
    )
    
    
    (18,555
    )$
    (2,433
    )
    
    $
    (1,733
    )
    
    $
    (2,740
    )
    
    $
    (4,272
    )
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##### Table of Contents



OSTEOTECH,
INC. AND SUBSIDIARIES
 Notes to Unaudited Condensed Consolidated Financial Statements
 dollars in thousands, except per share data
 13. Other Expense
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Other
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Foreign exchange gain (loss)
    
    $
    154
    
    
    $
    74
    
    
    $
    (155
    )
    
    $
    116Other
    
    
    (18
    )
    
    
    (16
    )
    
    
    (43
    )
    
    
    (10
    )$
    136
    
    
    $
    58
    
    
    $
    (198
    )
    
    $
    106
  - 12 -




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##### Table of Contents



Item 2. MANAGEMENTS 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.
     - 13 -




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##### Table of Contents



FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 Results of Operations
 Critical Accounting Policies and Estimates
  Net loss
 Three Months Ended
    
    
    Nine Months Ended(dollars in thousands, except
    
    September 30,
    
    
    September 30,per share amounts)
    
    2010
    
    
    2009
    
    
    Change
    
    
    2010
    
    
    2009
    
    
    ChangeNet loss
    
    $
    (2,457
    )
    
    $
    (1,907
    )
    
    $
    (550
    )
    
    $
    (3,925
    )
    
    $
    (4,907
    )
    
    $
    982Loss per share:Basic
    
    $
    (0.14
    )
    
    $
    (0.11
    )
    
    
    
    
    
    $
    (0.22
    )
    
    $
    (0.27
    )Diluted
    
    $
    (0.14
    )
    
    $
    (0.11
    )
    
    
    
    
    
    $
    (0.22
    )
    
    $
    (0.27
    )
   - 14 -




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##### Table of Contents



Revenue
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Percent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Percent(dollars in thousands)
    
    2010
    
    
    2009
    
    
    Change
    
    
    Change
    
    
    2010
    
    
    2009
    
    
    Change
    
    
    ChangeDBM
    
    $
    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
    %
 ® ®
 ® ® ®
  ® ®
   - 15 -




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##### Table of Contents



Gross Profit Margin
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(dollars in thousands)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Gross Profit
    
    $
    11,583
    
    
    $
    10,459
    
    
    $
    34,628
    
    
    $
    33,957Gross Margin
    
    
    50
    %
    
    
    46
    %
    
    
    50
    %
    
    
    48
    %
  Operating Expenses
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Percent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Percent(dollars in thousands)
    
    2010
    
    
    2009
    
    
    Change
    
    
    Change
    
    
    2010
    
    
    2009
    
    
    Change
    
    
    ChangeMarketing, 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
    %
  
  - 16 -




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##### Table of Contents



Operating Income (Loss) By Segment
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Percent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Percent(dollars in thousands)
    
    2010
    
    
    2009
    
    
    Change
    
    
    Change
    
    
    2010
    
    
    2009
    
    
    Change
    
    
    ChangeDBM
    
    $
    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
    %
   Other Expense
  Income Tax Provision
  Income Taxes.
  - 17 -




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##### Table of Contents



Liquidity and Capital Resources  (dollars in thousands)
 September 30,
    
    
    December 31,2010
    
    
    2009Cash and cash equivalents
    
    $
    13,777
    
    
    $
    10,708Working Capital
    
    $
    52,379
    
    
    $
    53,301Stockholders equity
    
    $
    77,397
    
    
    $
    80,286
 Nine Months EndedSeptember 30,Summary of our cash flow:
    
    2010
    
    
    2009Net 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
    )
    
    $
    62Net increase (decrease) in cash and cash equivalents
    
    $
    3,069
    
    
    $
    (8,216
    )
 Cash Flow From Operating Activities
   - 18 -




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##### Table of Contents



Cash Flow From Investing Activities
  Cash Flow From Financing Activities
  Financing Needs
  
    
    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.
   - 19 -




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##### Table of Contents



Credit Facility
     Recent Accounting Developments
 Recent Accounting Pronouncements,
 Contractual Obligations
  Impact of Inflation and Foreign Currency Exchange Fluctuations
    - 20 -




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##### Table of Contents



Litigation
 minSURG International, Inc. v. Nuvasive, Inc., et al.
 TM
 Medtronic Merger Litigation
    
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   - 21 -




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##### Table of Contents



Item 4.
CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
   - 22 -




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
   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.
  
    
    managements attention to our day-to-day business may be diverted to investigating
other strategic alternatives;
 
    
    the consequences of our managements 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;
 
    
    the disruption to our relationships with customers and suppliers as a result of our and
their efforts relating to the proposed Merger;
 
    
    actual and potential litigation associated with our proposed transaction with
Medtronic;
 
    
    our inability to acquire further necessary financing to fund our ongoing operations
post-termination of our proposed Merger with Medtronic;
 
    
    the potential distraction to our sales force caused by uncertainties relating to the
proposed Merger; and
 
    
    the potential loss of business to our competitors.
  - 23 -




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##### Table of Contents



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.
  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.
  If the Merger with Medtronic is not consummated, we may need to re-schedule the Annual Meeting of
Stockholders.
   - 24 -




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##### Table of Contents



Item 6. EXHIBITS
  Exhibit
    
    
    
    PageNumber
    
    Description
    
    Number2.1
    
    
    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 Registrants current Report on Form 8-K,
filed on August 17, 2010.)3.1
    
    
    Restated Certificate of Incorporation of Osteotech, as amended (incorporated by
reference to Exhibit 3.1 to Registrants Annual Report on Form 10-K, filed on March
27, 2002)3.2
    
    
    Fifth Amended and Restated Bylaws of Osteotech (incorporated by reference to Exhibit
3.1 to Registrants Current Report on Form 8-K, filed on November 7, 2007)4.1
    
    
    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 Registrants current Report on Form 8-K,
filed on August 17, 2010.)31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
    
    +31.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
    
    +32.1
    
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
    
    +32.2
    
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
    
    +
 +
    
    Filed herewith.  - 25 -




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##### Table of Contents



SIGNATURES
  Date:  November 8, 2010
    Osteotech, Inc.  (Registrant)Date:  November 8, 2010
    By:
    /s/ Sam Owusu-AkyawSam Owusu-AkyawPresident and Chief Executive
Officer
(Principal Executive Officer) Date:  November 8, 2010
    By:
    /s/ Mark H. BurroughsMark H. BurroughsExecutive Vice President,
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)  - 26 -




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    
    
    PageNumber
    
    Description
    
    Number2.1
    
    
    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 Registrants current Report on Form
8-K, filed on August 17, 2010.)3.1
    
    
    Restated Certificate of Incorporation of
Osteotech, as amended (incorporated by reference
to Exhibit 3.1 to Registrants Annual Report on
Form 10-K, filed on March 27, 2002)3.2
    
    
    Fifth Amended and Restated Bylaws of Osteotech
(incorporated by reference to Exhibit 3.1 to
Registrants Current Report on Form 8-K, filed on
November 7, 2007)4.1
    
    
    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 Registrants current Report on Form
8-K, filed on August 17, 2010.)31.1
    
    
    Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
    
    +31.2
    
    
    Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
    
    +32.1
    
    
    Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
    
    +32.2
    
    
    Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
    
    +
 +
    
    Filed herewith.  - 27 -