##### 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, 2009
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 0-19278
 OSTEOTECH, INC.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    13-3357370
(I.R.S. Employer
Identification No.)
 51 James Way, Eatontown, New Jersey 07724
 (732) 542-2800
 þ o
 Yes
o No 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, 2009 and
December 31, 2008
    
    
    3Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2009 and 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2009 and 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    21Item 6. Exhibits
    
    
    21Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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PART I. FINANCIAL INFORMATION
 
 Item 1.
 OSTEOTECH, INC. and SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (dollars in thousands)
 September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,607
    
    
    $
    18,823Accounts receivable, net of
allowance of $219 in 2009 and $401
in 2008
    
    
    19,393
    
    
    
    17,968Deferred processing costs
    
    
    45,476
    
    
    
    38,715Inventories
    
    
    1,683
    
    
    
    1,467Prepaid expenses and other current
assets
    
    
    2,303
    
    
    
    3,115Total current assets
    
    
    79,462
    
    
    
    80,088Property, plant and equipment, net
    
    
    30,894
    
    
    
    34,005Other assets
    
    
    8,718
    
    
    
    13,022Total assets
    
    $
    119,074
    
    
    $
    127,115LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued
liabilities
    
    $
    19,973
    
    
    $
    23,569Current maturities of capital lease
obligation
    
    
    968
    
    
    
    895Total current liabilities
    
    
    20,941
    
    
    
    24,464Capital lease obligation
    
    
    12,439
    
    
    
    13,175Other liabilities
    
    
    6,742
    
    
    
    6,626Total liabilities
    
    
    40,122
    
    
    
    44,265Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value;
5,000,000 shares authorized; no
shares issued or outstandingCommon stock, $.01 par value;
70,000,000 shares authorized;
issued 18,131,447 shares in 2009 and
17,979,846 shares in 2008
    
    
    181
    
    
    
    180Additional paid-in capital
    
    
    70,844
    
    
    
    69,801Treasury stock, at cost; 115,670
shares in 2009 and 65,190 shares in
2008
    
    
    (227
    )
    
    
    (125
    )Accumulated other comprehensive income
    
    
    1,460
    
    
    
    1,393Retained earnings
    
    
    6,694
    
    
    
    11,601Total stockholders
equity
    
    
    78,952
    
    
    
    82,850Total liabilities and
stockholders equity
    
    $
    119,074
    
    
    $
    127,115
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OSTEOTECH, INC. and SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  (dollars in thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue
    
    $
    22,961
    
    
    $
    24,063
    
    
    $
    70,363
    
    
    $
    79,247Cost of revenue
    
    
    12,502
    
    
    
    11,182
    
    
    
    36,406
    
    
    
    37,622Gross profit
    
    
    10,459
    
    
    
    12,881
    
    
    
    33,957
    
    
    
    41,625Marketing, selling and general and administrative expenses
    
    
    10,648
    
    
    
    10,476
    
    
    
    33,034
    
    
    
    33,479Research and development expenses
    
    
    1,544
    
    
    
    1,739
    
    
    
    5,195
    
    
    
    5,27312,192
    
    
    
    12,215
    
    
    
    38,229
    
    
    
    38,752Operating income (loss)
    
    
    (1,733
    )
    
    
    666
    
    
    
    (4,272
    )
    
    
    2,873Other income (expense):Interest income
    
    
    4
    
    
    
    104
    
    
    
    28
    
    
    
    396Interest expense
    
    
    (358
    )
    
    
    (380
    )
    
    
    (1,091
    )
    
    
    (1,158
    )Other
    
    
    58
    
    
    
    (270
    )
    
    
    106
    
    
    
    953(296
    )
    
    
    (546
    )
    
    
    (957
    )
    
    
    191Income (loss) before income taxes
    
    
    (2,029
    )
    
    
    120
    
    
    
    (5,229
    )
    
    
    3,064Income tax provision (benefit)
    
    
    (122
    )
    
    
    62
    
    
    
    (322
    )
    
    
    452Net income (loss)
    
    $
    (1,907
    )
    
    $
    58
    
    
    $
    (4,907
    )
    
    $
    2,612Earnings (loss) per share:Basic
    
    $
    (0.11
    )
    
    $
    
    
    
    $
    (0.27
    )
    
    $
    0.15Diluted
    
    $
    (0.11
    )
    
    $
    
    
    
    $
    (0.27
    )
    
    $
    0.15Shares used in computing earnings (loss) per share:Basic
    
    
    18,120,350
    
    
    
    17,881,018
    
    
    
    17,925,718
    
    
    
    17,749,402Diluted
    
    
    18,120,350
    
    
    
    17,993,900
    
    
    
    17,925,718
    
    
    
    17,854,319
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OSTEOTECH, INC. and SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  (dollars in thousands)
 Nine Months EndedSeptember 30,2009
    
    
    2008Cash Flow From Operating ActivitiesNet income (loss)
    
    $
    (4,907
    )
    
    $
    2,612Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    4,619
    
    
    
    4,237Stock-based compensation expense, net
    
    
    996
    
    
    
    916Changes in current assets and liabilities:Accounts receivable
    
    
    (1,425
    )
    
    
    (1,067
    )Deferred processing costs
    
    
    (2,112
    )
    
    
    (7,533
    )Inventories
    
    
    (216
    )
    
    
    (204
    )Prepaid expenses and other current assets
    
    
    812
    
    
    
    365Accounts payable and other liabilities
    
    
    (3,596
    )
    
    
    3,045Net cash provided by (used in) operating activities
    
    
    (5,829
    )
    
    
    2,371Cash Flow From Investing ActivitiesCapital expenditures
    
    
    (1,267
    )
    
    
    (4,923
    )Other, net
    
    
    (465
    )
    
    
    (692
    )Net cash used in investing activities
    
    
    (1,732
    )
    
    
    (5,615
    )Cash Flow From Financing ActivitiesPurchase of treasury stock
    
    
    (102
    )
    
    
    Proceeds from issuance of common stock
    
    
    48
    
    
    
    424Principal payments on capital lease obligation
    
    
    (663
    )
    
    
    (597
    )Net cash used in financing activities
    
    
    (717
    )
    
    
    (173
    )Effect of exchange rate changes on cash
    
    
    62
    
    
    
    (29
    )Net decrease in cash and cash equivalents
    
    
    (8,216
    )
    
    
    (3,446
    )Cash and cash equivalents at beginning of period
    
    
    18,823
    
    
    
    22,777Cash and cash equivalents at end of period
    
    $
    10,607
    
    
    $
    19,331Supplementary cash flow data:Cash paid during the period for interest
    
    $
    1,137
    
    
    $
    1,152Cash paid during the period for taxes
    
    $
    110
    
    
    $
    357
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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
    Generally Accepted Accounting Principles
 Fair Value Measurements and Disclosures (Topic 820)  Measuring Liabilities at Fair
Value.
 Subsequent Events
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OSTEOTECH, INC. and SUBSIDIARIES 
Notes to Unaudited Condensed Consolidated Financial Statements  (dollars in thousands, except per share data)
 2. Deferred Processing Costs
  September 30,
    
    
    December 31,2009
    
    
    2008Unprocessed donor tissue
    
    $
    22,461
    
    
    $
    16,922Tissue in process
    
    
    6,960
    
    
    
    4,506Implantable donor tissue
    
    
    16,055
    
    
    
    17,287$
    45,476
    
    
    $
    38,715
 $
 3. Inventories
  September 30,
    
    
    December 31,2009
    
    
    2008Supplies
    
    $
    423
    
    
    $
    478Raw materials
    
    
    800
    
    
    
    533Finished goods
    
    
    460
    
    
    
    456$
    1,683
    
    
    $
    1,467
 4. Shareholders Equity
 Stock Compensation Plans
   RSUs
    
    
    OptionsWeighted-AverageWeighted-
    
    
    
    
    
    
    Weighted-
    
    
    RemainingAverage
    
    
    
    
    
    
    Average
    
    
    ContractualNumber of
    
    
    Grant Date
    
    
    Number of
    
    
    Exercise
    
    
    TermShares
    
    
    Fair Value
    
    
    Shares
    
    
    Price
    
    
    (Years)Outstanding, January 1, 2009
    
    
    790,663
    
    
    $
    4.88
    
    
    
    1,390,962
    
    
    $
    7.42Granted
    
    
    121,528
    
    
    $
    3.41
    
    
    
    100,000
    
    
    $
    4.74Vested RSUs or exercised options
    
    
    (207,709
    )
    
    $
    6.81
    
    
    
    
    
    
    $
    Forfeited, cancelled or expired
    
    
    (20,749
    )
    
    $
    4.17
    
    
    
    (52,900
    )
    
    $
    25.90Outstanding, September 30, 2009
    
    
    683,733
    
    
    $
    4.05
    
    
    
    1,438,062
    
    
    $
    6.56
    
    
    
    4.3Options exercisable
    
    
    
    
    
    
    
    
    
    
    1,331,812
    
    
    $
    6.71
    
    
    
    3.8
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OSTEOTECH, INC. and SUBSIDIARIES 
Notes to Unaudited Condensed Consolidated Financial Statements  (dollars in thousands, except per share data)
  Dividend yield
    
    
    0Expected term (years)
    
    
    8.5Expected volatility
    
    
    73.4
    %Risk-free interest rate
    
    
    3.38
    %Fair value of options granted
    
    $
    3.58
     Stock Repurchase Program
  5. Income Taxes
 Income Taxes
  - 8 -




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OSTEOTECH, INC. and SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements  (dollars in thousands, except per share data)
     6. Commitments and Contingencies
 Litigation
  Other Contingencies
  7. Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    (1,907
    )
    
    $
    58
    
    
    $
    (4,907
    )
    
    $
    2,612Currency translation adjustments
    
    $
    78
    
    
    
    (400
    )
    
    
    67
    
    
    
    (128
    )Comprehensive income (loss)
    
    $
    (1,829
    )
    
    $
    (342
    )
    
    $
    (4,840
    )
    
    $
    2,484
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##### Table of Contents



OSTEOTECH, INC. andSUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements  (dollars in thousands, except per share data)
 8. Earnings (Loss) Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss) available to common
stockholders
    
    $
    (1,907
    )
    
    $
    58
    
    
    $
    (4,907
    )
    
    $
    2,612Denominator for basic earnings (loss) per
share, weighted average common shares
outstanding
    
    
    18,120,350
    
    
    
    17,881,018
    
    
    
    17,925,718
    
    
    
    17,749,402Effect of dilutive securities after
application of the treasury stock method:Restricted stock units
    
    
    
    
    
    
    22,111
    
    
    
    
    
    
    
    8,857Stock options
    
    
    
    
    
    
    90,771
    
    
    
    
    
    
    
    96,060Denominator for diluted earnings (loss)
per share
    
    
    18,120,350
    
    
    
    17,993,900
    
    
    
    17,925,718
    
    
    
    17,854,319Basic earnings (loss) per share
    
    $
    (0.11
    )
    
    $
    
    
    
    $
    (0.27
    )
    
    $
    0.15Diluted earnings (loss) per share
    
    $
    (0.11
    )
    
    $
    
    
    
    $
    (0.27
    )
    
    $
    0.15
  9. Fair Value Measurements
      Quoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Asset:Money market funds
    
    $
    5,770
    
    
    $
    
    
    
    $
    
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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)
  10. Operating Segments
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Revenue:
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008DBM
    
    $
    14,611
    
    
    $
    14,023
    
    
    $
    43,445
    
    
    $
    47,564Hybrid/Synthetics
    
    
    894
    
    
    
    816
    
    
    
    2,289
    
    
    
    2,187Traditional Tissue
    
    
    5,101
    
    
    
    5,246
    
    
    
    15,821
    
    
    
    15,606Spinal Allografts
    
    
    1,966
    
    
    
    1,943
    
    
    
    5,708
    
    
    
    6,479Client Services
    
    
    125
    
    
    
    1,706
    
    
    
    2,013
    
    
    
    6,527Other
    
    
    264
    
    
    
    329
    
    
    
    1,087
    
    
    
    884$
    22,961
    
    
    $
    24,063
    
    
    $
    70,363
    
    
    $
    79,247
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Operating Income (loss):
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008DBM
    
    $
    4,462
    
    
    $
    4,262
    
    
    $
    12,162
    
    
    $
    15,345Hybrid/Synthetics
    
    
    (261
    )
    
    
    104
    
    
    
    (393
    )
    
    
    (2
    )Traditional Tissue
    
    
    (220
    )
    
    
    923
    
    
    
    848
    
    
    
    2,449Spinal Allografts
    
    
    320
    
    
    
    (116
    )
    
    
    871
    
    
    
    (100
    )Client Services
    
    
    8
    
    
    
    956
    
    
    
    1,133
    
    
    
    4,002Other
    
    
    (418
    )
    
    
    115
    
    
    
    (338
    )
    
    
    577Corporate
    
    
    (5,624
    )
    
    
    (5,578
    )
    
    
    (18,555
    )
    
    
    (19,398
    )$
    (1,733
    )
    
    $
    666
    
    
    $
    (4,272
    )
    
    $
    2,873
  11. Other Income (Expense)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Other:
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Foreign exchange gain (loss)
    
    $
    74
    
    
    $
    (277
    )
    
    $
    116
    
    
    $
    (53
    )Litigation Settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000Other
    
    
    (16
    )
    
    
    7
    
    
    
    (10
    )
    
    
    6$
    58
    
    
    $
    (270
    )
    
    $
    106
    
    
    $
    953
  - 11 -




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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.
 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, of our Annual Report on Form 10-K for the year ended December 31, 2008 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.
 FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 Results of Operations
 Critical Accounting Policies and Estimates
  Net Income (Loss)
 Three Months Ended
    
    
    Nine Months Ended(dollars in thousands, except per
    
    September 30,
    
    
    September 30,share amounts)
    
    2009
    
    
    2008
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    ChangeNet income (loss)
    
    $
    (1,907
    )
    
    $
    58
    
    
    $
    (1,965
    )
    
    $
    (4,907
    )
    
    $
    2,612
    
    
    $
    (7,519
    )Earnings (loss) per share:Basic
    
    $
    (0.11
    )
    
    $
    
    
    
    
    
    
    
    $
    (0.27
    )
    
    $
    0.15Diluted
    
    $
    (0.11
    )
    
    $
    
    
    
    
    
    
    
    $
    (0.27
    )
    
    $
    0.15
  Revenue
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Percent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Percent(dollars in thousands,)
    
    2009
    
    
    2008
    
    
    Change
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    Change
    
    
    ChangeDBM
    
    $
    14,611
    
    
    $
    14,023
    
    
    $
    588
    
    
    
    4
    %
    
    $
    43,445
    
    
    $
    47,564
    
    
    $
    (4,119
    )
    
    
    -9
    %Hybrid/Synthetic
    
    $
    894
    
    
    $
    816
    
    
    $
    78
    
    
    
    10
    %
    
    $
    2,289
    
    
    $
    2,187
    
    
    $
    102
    
    
    
    5
    %Traditional Tissue
    
    $
    5,101
    
    
    $
    5,246
    
    
    $
    (145
    )
    
    
    -3
    %
    
    $
    15,821
    
    
    $
    15,606
    
    
    $
    215
    
    
    
    1
    %Spinal Allograft
    
    $
    1,966
    
    
    $
    1,943
    
    
    $
    23
    
    
    
    1
    %
    
    $
    5,708
    
    
    $
    6,479
    
    
    $
    (771
    )
    
    
    -12
    %Client Services
    
    $
    125
    
    
    $
    1,706
    
    
    $
    (1,581
    )
    
    
    -93
    %
    
    $
    2,013
    
    
    $
    6,527
    
    
    $
    (4,514
    )
    
    
    -69
    %Other
    
    $
    264
    
    
    $
    329
    
    
    $
    (65
    )
    
    
    -20
    %
    
    $
    1,087
    
    
    $
    884
    
    
    $
    203
    
    
    
    23
    %$
    22,961
    
    
    $
    24,063
    
    
    $
    (1,102
    )
    
    
    -5
    %
    
    $
    70,363
    
    
    $
    79,247
    
    
    $
    (8,884
    )
    
    
    -11
    %
 ® ® ®
 ® ® ® ®
      - 14 -




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##### Table of Contents



Gross Profit Margin
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Gross Profit
    
    $
    10,459
    
    
    $
    12,881
    
    
    $
    33,957
    
    
    $
    41,625Gross Margin
    
    
    46
    %
    
    
    54
    %
    
    
    48
    %
    
    
    53
    %
  Operating Expenses
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Percent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Percent(dollars in thousands)
    
    2009
    
    
    2008
    
    
    Change
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    Change
    
    
    ChangeMarketing, selling and
general and
administrative
    
    $
    10,648
    
    
    $
    10,476
    
    
    $
    172
    
    
    
    2
    %
    
    $
    33,034
    
    
    $
    33,479
    
    
    $
    (445
    )
    
    
    -1
    %Research and
development
    
    $
    1,544
    
    
    $
    1,739
    
    
    $
    (195
    )
    
    
    -11
    %
    
    $
    5,195
    
    
    $
    5,273
    
    
    $
    (78
    )
    
    
    -1
    %$
    12,192
    
    
    $
    12,215
    
    
    $
    (23
    )
    
    
    0
    %
    
    $
    38,229
    
    
    $
    38,752
    
    
    $
    (523
    )
    
    
    -1
    %
   - 15 -




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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,)
    
    2009
    
    
    2008
    
    
    Change
    
    
    Change
    
    
    2009
    
    
    2008
    
    
    Change
    
    
    ChangeDBM
    
    $
    4,462
    
    
    $
    4,262
    
    
    $
    200
    
    
    
    5
    %
    
    $
    12,162
    
    
    $
    15,345
    
    
    $
    (3,183
    )
    
    
    -21
    %Hybrid/Synthetic
    
    $
    (261
    )
    
    $
    104
    
    
    $
    (365
    )
    
    
    -351
    %
    
    $
    (393
    )
    
    $
    (2
    )
    
    $
    (391
    )
    
    
    19550
    %Traditional Tissue
    
    $
    (220
    )
    
    $
    923
    
    
    $
    (1,143
    )
    
    
    -124
    %
    
    $
    848
    
    
    $
    2,449
    
    
    $
    (1,601
    )
    
    
    -65
    %Spinal Allograft
    
    $
    320
    
    
    $
    (116
    )
    
    $
    436
    
    
    
    -376
    %
    
    $
    871
    
    
    $
    (100
    )
    
    $
    971
    
    
    
    -971
    %Client Services
    
    $
    8
    
    
    $
    956
    
    
    $
    (948
    )
    
    
    -99
    %
    
    $
    1,133
    
    
    $
    4,002
    
    
    $
    (2,869
    )
    
    
    -72
    %Other Product Lines
    
    $
    (418
    )
    
    $
    115
    
    
    $
    (533
    )
    
    
    -463
    %
    
    $
    (338
    )
    
    $
    577
    
    
    $
    (915
    )
    
    
    -159
    %$
    3,891
    
    
    $
    6,244
    
    
    $
    (2,353
    )
    
    
    -38
    %
    
    $
    14,283
    
    
    $
    22,271
    
    
    $
    (7,988
    )
    
    
    -36
    %Corporate
    
    $
    (5,624
    )
    
    $
    (5,578
    )
    
    $
    (46
    )
    
    
    1
    %
    
    $
    (18,555
    )
    
    $
    (19,398
    )
    
    $
    843
    
    
    
    -4
    %Operating Income (Loss)
    
    $
    (1,733
    )
    
    $
    666
    
    
    $
    (2,399
    )
    
    
    -360
    %
    
    $
    (4,272
    )
    
    $
    2,873
    
    
    $
    (7,145
    )
    
    
    -249
    %
   Other Income (Expense)
   Income Tax Provision
 Income Taxes
   - 16 -




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##### Table of Contents



Liquidity and Capital Resources
 September 30,
    
    
    December 31,(dollars in thousands)
    
    2009
    
    
    2008Cash and cash equivalents
    
    $
    10,607
    
    
    $
    18,823Working Capital
    
    $
    58,521
    
    
    $
    55,624Stockholders equity
    
    $
    78,952
    
    
    $
    82,850
  Nine Months EndedSeptember 30,2009
    
    
    2008Net cash provided by (used in) operating activities
    
    $
    (5,829
    )
    
    $
    2,371Net cash (used in) investing activities
    
    $
    (1,732
    )
    
    $
    (5,615
    )Net cash (used in) financing activities
    
    $
    (717
    )
    
    $
    (173
    )Effect of foreign currency exchange rates on cash
    
    $
    62
    
    
    $
    (29
    )Net decrease in cash and cash equivalents
    
    $
    (8,216
    )
    
    $
    (3,446
    )
 Cash Flow From Operating Activities
  Cash Flow From Investing Activities
  Cash Flow From Financing Activities
   - 17 -




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##### Table of Contents



Financing Needs
  
    
    the 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
 
    
    the resources we devote to the development, manufacture and marketing of
our services and products.
  Repurchase of Common Stock
  Recent Accounting Developments
 Recent Accounting Pronouncements,
 Contractual Obligations
   - 18 -




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##### Table of Contents



Impact of Inflation and Foreign Currency Exchange Fluctuations
    Litigation
   Government Proceedings
  
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     - 19 -




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##### Table of Contents



st
 
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
   - 20 -




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K
  Exhibit
    
    
    
    PageNumber
    
    Description
    
    Number3.1
    
    
    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)10.1
    
    
    Nontransferable Independent Director Stock Option Agreement, dated July 1, 2009,
between the Company and Kenneth Fallon
    
    +10.2
    
    
    Amendment No. 1 to Nontransferable Independent Director Stock Option Agreement
between the Company and Kenneth Fallon, dated September 3, 2009
    
    +10.3
    
    
    Form of Letter Agreement between the Company and Non-Employee Directors, dated
September 3, 2009
    
    +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.  - 21 -




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##### Table of Contents



SIGNATURES
  Date:  November 9, 2009
    Osteotech, Inc. (Registrant)Date:  November 9, 2009
    By:
    /s/ Sam Owusu-AkyawSam Owusu-AkyawPresident and Chief Executive
Officer
(Principal Executive Officer)Date:  November 9, 2009
    By:
    /s/ Mark H. BurroughsMark H. BurroughsExecutive Vice President,
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)  - 22 -




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    
    
    PageNumber
    
    Description
    
    Number10.1
    
    
    Nontransferable Independent Director Stock Option
Agreement, dated July 1, 2009, between the Company
and Kenneth Fallon
    
    +10.2
    
    
    Amendment No. 1 to Nontransferable Independent
Director Stock Option Agreement between the
Company and Kenneth Fallon, dated September 3,
2009
    
    +10.3
    
    
    Form of Letter Agreement between the Company and
Non-Employee Directors, dated September 3, 2009
    
    +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.  - 23 -