##### 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 March 31, 2008.
 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
    
    13-3357370(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification No.)organization)
 51 James Way, Eatontown, New Jersey 07724
 (732) 542-2800
 Not Applicable
 þ o
 Rule 12b-2
 Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    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 Statements
    
    
    3Condensed Consolidated Balance Sheets as of March 31, 2008 and
December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2008 and 2007
    
    
    5Notes to Unaudited 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 Risks
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    21Item 6. Exhibits and Reports on Form 8-K
    
    
    21Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   -2-




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PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 OSTEOTECH, INC. and SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS  (dollars in thousands)
 March 31
    
    
    December 312008
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    21,264
    
    
    $
    22,777Accounts
receivable, net of allowance of $310 in 2008 and $267 in 2007
    
    
    21,275
    
    
    
    19,353Deferred processing costs
    
    
    28,929
    
    
    
    30,850Inventories
    
    
    1,245
    
    
    
    1,171Prepaid expenses and other current assets
    
    
    3,314
    
    
    
    3,957Total current assets
    
    
    76,027
    
    
    
    78,108Property, plant and equipment, net
    
    
    34,739
    
    
    
    34,508Other assets
    
    
    10,654
    
    
    
    7,735Total assets
    
    $
    121,420
    
    
    $
    120,351LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    18,687
    
    
    $
    19,364Current maturities of capital lease obligation
    
    
    828
    
    
    
    807Total current liabilities
    
    
    19,515
    
    
    
    20,171Capital lease obligation
    
    
    13,855
    
    
    
    14,069Other liabilities
    
    
    7,129
    
    
    
    7,083Total liabilities
    
    $
    40,499
    
    
       $
    41,323Commitments 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 and outstanding 17,767,428 shares
in 2008 and 17,697,539 shares in 2007
    
    
    178
    
    
    
    177Additional paid-in capital
    
    
    68,822
    
    
    
    68,022Accumulated other comprehensive income
    
    
    1,715
    
    
    
    1,431Retained earnings
    
    
    10,206
    
    
    
    9,398Total stockholders equity
    
    
    80,921
    
    
    
    79,028Total liabilities and stockholders equity
    
    $
    121,420
    
    
    $
    120,351
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OSTEOTECH, INC. and SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS   (dollars in thousands, except per share data)
 Three Months EndedMarch 31,2008
    
    
    2007Revenue
    
    $
    27,631
    
    
    $
    25,217Cost of revenue
    
    
    13,389
    
    
    
    12,900Gross profit
    
    
    14,242
    
    
    
    12,317Marketing, selling and general and administrative
    
    
    11,680
    
    
    
    11,690Research and development
    
    
    1,760
    
    
    
    1,16413,440
    
    
    
    12,854Operating income (loss)
    
    
    802
    
    
    
    (537
    )Other income (expense):Interest income
    
    
    179
    
    
    
    260Interest expense
    
    
    (391
    )
    
    
    (410
    )Other
    
    
    278
    
    
    
    13666
    
    
    
    (14
    )Income (loss) before income taxes
    
    
    868
    
    
    
    (551
    )Income tax provision
    
    
    60
    
    
    
    97Net income (loss)
    
    $
    808
    
    
    $
    (648
    )Earnings (loss) per share:Basic
    
    $
    .05
    
    
    $
    (.04
    )Diluted
    
    $
    .05
    
    
    
    (.04
    )Shares used in computing earnings (loss) per share:Basic
    
    
    17,716,902
    
    
    
    17,419,332Diluted
    
    
    17,906,646
    
    
    
    17,419,332
   -4-




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OSTEOTECH, INC. and SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS   (dollars in thousands)
 Three Months EndedMarch 31,2008
    
    
    2007Cash Flow From Operating ActivitiesNet income (loss)
    
    $
    808
    
    
    $
    (648
    )Adjustments to reconcile net income (loss)
to net cash provided by operating activities:Depreciation and amortization
    
    
    1,343
    
    
    
    1,365Stock-based compensation expense
    
    
    506
    
    
    
    155Changes in current assets and liabilities:Accounts receivable
    
    
    (1,922
    )
    
    
    328Deferred processing costs
    
    
    (944
    )
    
    
    (554
    )Inventories
    
    
    (74
    )
    
    
    (186
    )Prepaid expenses and other current assets
    
    
    393
    
    
    
    278Note receivable from patent litigation settlement
    
    
    250
    
    
    
    250Accounts payable and other liabilities
    
    
    (677
    )
    
    
    299Net cash (used in) provided by operating activities
    
    
    (317
    )
    
    
    1,287Cash Flow From Investing ActivitiesCapital expenditures
    
    
    (1,376
    )
    
    
    (163
    )Other, net
    
    
    26
    
    
    
    (174
    )Net cash (used in) investing activities
    
    
    (1,350
    )
    
    
    (337
    )Cash Flow From Financing ActivitiesProceeds from issuance of common stock
    
    
    295
    
    
    
    118Principal payments on capital lease obligation
    
    
    (194
    )
    
    
    (175
    )Net cash provided by (used in) financing activities
    
    
    101
    
    
    
    (57
    )Effect of exchange rate changes on cash
    
    
    53
    
    
    
    9Net (decrease) increase in cash and cash equivalents
    
    
    (1,513
    )
    
    
    902Cash and cash equivalents at beginning of period
    
    
    22,777
    
    
    
    17,946Cash and cash equivalents at end of period
    
    $
    21,264
    
    
    $
    18,848Supplementary cash flow data:Cash paid during the period for interest
    
    $
    388
    
    
    $
    409Cash (refunded) paid during the period for taxes
    
    $
    152
    
    
    $
    (36
    )
   -5-




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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
 10-K for the year ended December 31, 2007.
 Accounting Policies
     -6-




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OSTEOTECH, INC. and SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements  (dollars in thousands, except per share data)
  
    
    Level 1  Quoted prices in active markets for identical assets or liabilities.
    
    Level 2  Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can
be corroborated by observable market data for substantially the full term of the
assets or liabilities.
    
    Level 3  Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or liabilities.
   2. Deferred Processing Costs
  March 31
    
    
    December 312008
    
    
    2007Unprocessed donor tissue
    
    $
    14,074
    
    
    $
    14,172Tissue in process
    
    
    5,597
    
    
    
    4,777Implantable donor tissue
    
    
    9,258
    
    
    
    11,901$
    28,929
    
    
    $
    30,850
   -7-




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OSTEOTECH,
INC. and SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements  (dollars in thousands, except per share data)
 3. Inventories
  March 31,
    
    
    December 31,2008
    
    
    2007Supplies
    
    $
    429
    
    
    $
    279Raw materials
    
    
    548
    
    
    
    664Finished goods
    
    
    268
    
    
    
    228$
    1,245
    
    
    $
    1,171
 4. Stock Compensation Plans
   Three Months EndedMarch 31,2008
    
    
    2007Grants:RSUs
    
    
    22,250
    
    
    
    17,200Weighted average fair value
    
    $
    4.30
    
    
    $
    6.73Non-cash compensation expense recognized in
statements of operations
    
    $
    512
    
    
    $
    155
 March 31, 2008Unrecorded fair value of unvested share based awards
    
    $
    4,188Weighted average period over which fair value of unvested share based
awards will be charged to operations
    
        1.8 yearsIntrinsic value of options exercisable
    
    $
    327Intrinsic value of options outstanding
    
    $
    341Contractual term of options exercisable
    
    4.74 yearsContractual term of options outstanding
    
        4.82 yearsShares of common stock available for future issuance under stock
compensation plans
    
    
    1,171,328
  -8-




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OSTEOTECH, INC. and SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements  (dollars in thousands, except per share data)
  5. Income Taxes
     6. Commitments and Contingencies
 Litigation
   -9-




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OSTEOTECH,
INC. and SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements  (dollars in thousands, except per share data)
 7. Comprehensive Income (Loss)
  Three Months EndedMarch 31,2008
    
    
    2007Net income (loss)
    
    $
    808
    
    
    $
    (648
    )Currency translation adjustments
    
    
    284
    
    
    
    (13
    )Comprehensive income (loss)
    
    $
    1,092
    
    
    $
    (661
    )
 8. Earnings (Loss) Per Share
  Three Months EndedMarch 31,2008
    
    
    2007Net income (loss) available to common
stockholders
    
    $
    808
    
    
    $
    (648
    )Denominator for basic earnings (loss) per share,
weighted average common shares outstanding
    
    
    17,716,902
    
    
    
    17,419,332Effect of dilutive securities after application
of the treasury stock method:Restricted stock units
    
    
    33,320Stock options
    
    
    156,424Denominator for diluted earnings (loss) per
share
    
    
    17,906,646
    
    
    
    17,419,332Basic earnings (loss) per share
    
    $
    .05
    
    
    $
    (.04
    )Diluted earnings (loss) per share
    
    $
    .05
    
    
    $
    (.04
    )
   -10-




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OSTEOTECH, INC. and SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements  (dollars in thousands, except per share data)
 9. Operating Segments
  Three Months EndedMarch 31,2008
    
    
    2007Revenue:DBM
    
    $
    16,966
    
    
    $
    15,482Hybrid/Synthetics
    
    
    644
    
    
    
    233Traditional Tissue
    
    
    5,110
    
    
    
    4,611Spinal Allografts
    
    
    2,250
    
    
    
    2,788Client Services
    
    
    2,424
    
    
    
    1,928Other
    
    
    237
    
    
    
    175$
    27,631
    
    
    $
    25,217
 Three Months EndedMarch 31,2008
    
    
    2007Operating income (loss):DBM
    
    $
    5,981
    
    
    $
    3,107Hybrid/Synthetics
    
    
    (172
    )
    
    
    46Traditional Tissue
    
    
    856
    
    
    
    1,406Spinal Allografts
    
    
    (238
    )
    
    
    329Client Services
    
    
    1,429
    
    
    
    1,578Other
    
    
    232
    
    
    
    138Corporate
    
    
    (7,286
    )
    
    
    (7,141
    )$
    802
    
    
    $
    (537
    )
  10. Other Income (Expense)
   -11-




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OSTEOTECH, INC. and SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements  (dollars in thousands, except per share data)
     -12-




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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, 2007 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 MONTHS ENDED MARCH 31, 2008 AND 2007
 Results of Operations
 Critical Accounting Policies and Estimates
  Net Income (Loss)
 Three Months EndedMarch 31,Percent(dollars in thousands, except per share amounts)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeNet income (loss)
    
    $
    808
    
    
    $
    (648
    )
    
    $
    1,456
    
    
    
    225
    %Earnings (loss) per share:Basic
    
    $
    .05
    
    
    $
    (.04
    )Diluted
    
    $
    .05
    
    
    $
    (.04
    )
    -13-




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Revenue
   Three Months EndedMarch 31,Percent(dollars in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeDBM Segment
    
    $
    16,966
    
    
    $
    15,482
    
    
    $
    1,484
    
    
    
    10
    %Hybrid Synthetic Segment
    
    
    644
    
    
    
    233
    
    
    
    411
    
    
    
    176
    %Traditional Tissue Segment
    
    
    5,110
    
    
    
    4,611
    
    
    
    499
    
    
    
    11
    %Spinal Allograft Segment
    
    
    2,250
    
    
    
    2,788
    
    
    
    (538
    )
    
    
    (19
    %)Client Services Segment
    
    
    2,424
    
    
    
    1,928
    
    
    
    496
    
    
    
    26
    %Other Product Lines
    
    
    237
    
    
    
    175
    
    
    
    62
    
    
    
    35
    %$
    27,631
    
    
    $
    25,217
    
    
    $
    2,414
    
    
    
    10
    %
 ® ®
 ® ® ®
   -14-




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®
   Gross Profit Margin
 Three Months EndedMarch 31,(dollars in thousands)
    
    2008
    
    
    2007Gross profit
    
    $
    14,242
    
    
    $
    12,317Gross margin
    
    
    52
    %
    
    
    49
    %
  Operating Expenses
 Three Months EndedMarch 31,Percent(dollars in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeMarketing, selling and
general and administrative
    
    $
    11,680
    
    
    $
    11,690
    
    
    $
    (10
    )
    
    
    Research and development
    
    
    1,760
    
    
    
    1,164
    
    
    
    596
    
    
    
    51
    %Total
    
    $
    13,440
    
    
    $
    12,854
    
    
    $
    586
    
    
    
    5
    %
  ®
  -15-




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Operating Income (Loss)
 Three Months EndedMarch 31,Percent(dollars in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeDBM Segment
    
    $
    5,981
    
    
    $
    3,107
    
    
    $
    2,874
    
    
    
    93
    %Hybrid/Synthetic Segment
    
    
    (172
    )
    
    
    46
    
    
    
    (218
    )
    
    
    (474
    %)Traditional Tissue Segment
    
    
    856
    
    
    
    1,406
    
    
    
    (550
    )
    
    
    (39
    %)Spinal Allograft Segment
    
    
    (238
    )
    
    
    329
    
    
    
    (567
    )
    
    
    (172
    %)Client Services Segment
    
    
    1,429
    
    
    
    1,578
    
    
    
    (149
    )
    
    
    (9
    %)Other Product Lines
    
    
    232
    
    
    
    138
    
    
    
    94
    
    
    
    68
    %8,088
    
    
    
    6,604
    
    
    
    1,484
    
    
    
    22
    %Corporate
    
    
    (7,286
    )
    
    
    (7,141
    )
    
    
    145
    
    
    
    2
    %Operating income (loss)
    
    $
    802
    
    
    $
    (537
    )
    
    $
    1,339
    
    
    
    249
    %
    Other Income (Expense)
  Income Tax Provision
   -16-




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Liquidity and Capital Resources
       -17-




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Recent Accounting Developments
     
    
    Level 1  Quoted prices in active markets for identical assets or liabilities.
    
    Level 2  Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
    
    Level 3  Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities.
    -18-




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Contractual Obligations
  Impact of Inflation and Foreign Currency Exchange Fluctuations
  Litigation
    -19-




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
 
  -20-




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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
    
    
    Resignation Agreement and Release, dated April 17, 2008, between Osteotech, Inc. and
Richard Russo (incorporated by reference to Exhibit 99.1 to Registrants Current
Report on Form 8-K, filed on April 9, 2008)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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SIGNATURES
  Date:  May 6, 2008
    Osteotech, Inc.(Registrant)Date:  May 6, 2008
    By:
    /s/ Sam Owusu-AkyawSam Owusu-AkyawPresident and Chief Executive Officer
(Principal Executive Officer)Date:  May 6, 2008
    By:
    /s/ Mark H. BurroughsMark H. BurroughsExecutive Vice President,
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer) 
  -22-




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EXHIBIT INDEX
 Exhibit
    
    
    
    PageNumber
    
    Description
    
    Number31.1
    
    
    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-