SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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X QUARTERLY REPORT
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FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
-- or --
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TRANSITION REPORT
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FOR THE TRANSITION PERIOD FROM TO
OSTEX INTERNATIONAL, INC.
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
0-25250
COMMISSION FILE NUMBER
STATE OF WASHINGTON
STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION
91-1450247
I.R.S. EMPLOYER IDENTIFICATION NUMBER
2203 AIRPORT WAY SOUTH, SUITE 400, SEATTLE, WASHINGTON 98134
206-292-8082
ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES
[N/A]
FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT
--------------------------
Indicate by checkmark 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 X No
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THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING AS OF MAY
5, 1997 WAS 12,518,250.
OSTEX INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
PAGE
ITEM 1 - FINANCIAL STATEMENTS
Condensed Balance Sheets ..............................F-1
Condensed Statements of Operations ....................F-2
Condensed Statements of Cash Flow .....................F-3
Notes to Condensed Financial Statements ..............F-4
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..2
PART II -- OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS .....................................4
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ....................4
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Attached hereto are Ostex International, Inc.'s (the "Company's or Ostex'")
unaudited condensed balance sheet as of March 31, 1997, and audited condensed
balance sheet as of December 31, 1996, and the unaudited condensed statements of
operations and cash flow for the quarters ended March 31, 1997 and 1996. Notes
follow the unaudited financial statements and are an integral part thereof.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements which
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed below, that could cause actual results
to differ materially from historical results or those anticipated. Words used
herein such as "believes," "anticipates," "expects," "intends," and similar
expressions are intended to identify forward-looking statements but are not the
exclusive means of identifying such statements. In addition, the disclosures
under the caption on page 3 "Other Factors that May Affect Operating Results" in
this section, consist principally of a brief discussion of risks which may
affect future results and are thus, in their entirety, forward-looking in
nature. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's other
reports previously filed with the Securities and Exchange Commission (the
"SEC"), including the Company's Annual Report on Form 10-K for fiscal year ended
December 31, 1996, that attempt to advise interested parties of the risks and
factors that may affect the Company's business.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996
The Company had revenues from product sales of $654,000 for the quarter
ended March 31, 1997, compared to $587,000 for the quarter ended March 31, 1996.
The increase in 1997 is attributable solely to higher volumes of OsteomarkAE
kits sold to foreign distributors and domestic laboratories during the quarter
which were offset by decreased sales to the Company's domestic distributor as
orders were postponed during the 1997 quarter in order to bring distributor
excess inventory levels of Osteomark Kits in line with customer demand. During
the three months ended March 31, 1997, foreign sales increased 28% and sales to
domestic customers increased 7% compared to the same period of 1996.
The Company's cost of products sold totaled $151,000 for the quarter
ended March 31, 1997, compared to $168,000 for the same period of 1996. The cost
of products sold as a percentage of sales for the 1997 first quarter was 23%
compared to 29% for the first quarter 1996. The decrease is a result of a
decline in unit manufacturing costs resulting from increased production volume
that caused fixed manufacturing costs to be spread over the higher number of
units produced during the first quarter 1997.
The Company's research and development expenditures totaled $1,078,000
for the quarter ended March 31, 1997, compared to $745,000 for the quarter ended
March 31, 1996. Funding of research conducted at the University of Washington
increased by approximately $196,000 during the 1997 quarter compared to the 1996
quarter. This research is focused on molecular markers of connective tissue
degradation, and on developing further understanding of the osteoclast colony
stimulating factor ("O-CSF") as a potential therapeutic agent. These grants are
expected to continue through 1999. Regulatory expenses increased approximately
$136,000 during the first quarter of 1997 compared to the same quarter of 1996
in connection with clinical trials that commenced at the end of 1996 and during
the first quarter 1997 for determination of variability and the NTx reference
range in males, variability of NTx in postmenopausal women, and use of the
Osteomark test to help identify bone metastases.
Selling, general and administrative expenses totaled $1,923,000 for the
quarter ended March 31, 1997, compared to $1,855,000 for the same period ended
March 31, 1996. The higher expense level during the three months ended March 31,
1997 was due to compensation associated with additions to the management team in
the third quarter of 1996, increased legal fees associated with defending or
bringing lawsuits and additional costs to support the field selling effort,
offset by a decrease in outside advertising and professional fees.
Interest income totaled $249,000 for the quarter ended March 31, 1997,
compared to $412,000 for the quarter ended March 31, 1996. The decrease is due
to lower invested balances resulting from using cash to fund the Company's
operating losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from inception primarily through
three private placements of preferred stock aggregating approximately
$12,800,000 and an initial public offering of 3,645,642 shares of common stock,
which generated net proceeds of approximately $32,000,000. Additional funds of
approximately $13,154,000 have been generated through sales of Osteomark kits
and research testing services, and collaborative research and licensing
agreements. As of March 31, 1997, the Company had $18,239,000 in cash and cash
equivalents and short-term investments, working capital of $18,416,000 and total
shareholders' equity of $21,118,000. During the three month period ending March
31, 1997, cash, cash equivalents and short-term investments decreased by
$2,990,000, working capital decreased by $2,485,000 and shareholders equity
decreased by $2,408,000, and the Company used $2,632,000 of cash for operating
activities to fund net losses as compared to $1,772,000 during the three month
period ended March 31, 1996.
The Company's future capital requirements depend upon many factors,
including effective commercialization activities and arrangements, continued
scientific progress in its research and development programs, progress toward
development of the O-CSF technology, which potentially has therapeutic uses, the
costs involved in filing, prosecuting and enforcing patent claims, the costs
involved in legal efforts to enforce patent rights and distribution contracts,
and the time and costs involved in obtaining regulatory approvals. Additional
funds from equity or debt financing may be required. There can be no assurance
that such additional funds will be available on favorable terms, if at all.
Because of the Company's significant long-term cash requirements, it may seek to
raise additional capital if conditions in the public equity markets are
favorable, even if the Company does not have an immediate need for additional
cash at that time. If additional financing is not available, the Company
anticipates that its existing available cash, its future license and research
revenues from existing collaboration agreements, product sales and interest
income from short-term investments will be adequate to satisfy its capital
requirements and to fund operations through at least mid 1998. In addition,
although the Company was awarded $6,400,000 as a result of the arbitration of a
dispute with Boehringer Mannheim that amount has not been received by the
Company or recognized in the Company's financial statements. On April 28, 1997,
Boehringer Mannheim filed a motion in District Court to vacate the award. See
Part II, Item 1 entitled "Legal Proceedings" for additional information.
OTHER FACTORS THAT MAY AFFECT OPERATING RESULTS
The Company's operating results may fluctuate due to a number of
factors including, but not limited to, volume and timing of product sales,
pricing, market acceptance of the Company's products, changing economic
conditions in the healthcare industry, delays and increased costs of product and
technology development, the Company's ability to develop and maintain
collaborative arrangements, the outcome of litigation, and the effect of the
Company's accounting policies and other risk factors detailed in the Company's
1996 Form 10-K and other SEC filings. All of the foregoing factors are difficult
for the Company to predict and can materially adversely affect the Company's
business and operating results.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 25, 1995, the Company commenced an arbitration proceeding
against Boehringer Mannheim for breach of contract. The hearing before a panel
of the American Arbitration Association ( the "Panel") was held in Seattle on
September 3-11, 1996. On January 28, 1997, Ostex received a final award from the
Panel. The Panel determined that Boehringer Mannheim breached a license
agreement by failing to use its best efforts to effectively promote the
Osteomark MTP kits. Boehringer Mannheim's counterclaims against the Company were
denied by the Panel. The Panel's award instructs Boehringer Mannheim to pay the
Company $5,720,000 in damages for lost profits, and $700,000 to reimburse the
Company for part of its attorneys' fees and expenses. The award provides that
interest will be paid on such amounts, at the rate of 8% per annum, to the
extent that such amounts remain unpaid 30 days from January 28, 1997, the date
of the award. On April 28, 1997, Boehringer Mannheim filed a motion in District
Court to vacate the award. The Company intends to vigorously respond to that
motion. The award has not been reflected in the Company's financial statements
as of March 31, 1997.
In June 1996, the Company filed an action in the United States District
Court for the Western District of Washington against Osteometer Biotech A/S, a
medical technology company based in Denmark ("Osteometer"), and Diagnostic
Systems Laboratories Inc. for patent infringement. The Company believes
Osteometer's bone resorption immunoassay incorporates technology which infringes
on patented Ostex technology. In September 1996, the defendants filed a response
denying infringement and counterclaimed that Ostex' patent is invalid and
unenforceable. The lawsuit is scheduled for trial commencing December 2, 1997.
At the present time management cannot predict the outcome of the lawsuit but
intends to continue to vigorously defend its position.
In April 1997, the Company was served a lawsuit filed in the United
States District Court, Central District of California by C.R. Bard ("Bard"). The
complaint alleges that Ostex' Osteomark product infringes patents assigned to
Bard in 1993. Management believes that this suit is without merit and that
Ostex' Osteomark product falls outside the claims of the subject patent.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS 1
The following exhibit is filed herewith:
27.1 Financial Data Schedule
1 Copies of the exhibits may be obtained at prescribed rates from the
Public Reference Section of the Securities and Exchange Commission at
450 5th Street NW, Room 1024, Washington, D.C., 20549.
(B) REPORTS ON FORM 8-K
Report on Form 8-K dated January 10, 1997, reporting the declaration of a
dividend of one preferred share purchase right for each outstanding share of
common stock to shareholders of record on January 27, 1997, pursuant to the
Company's Rights Agreement with ChaseMellon Shareholder Services L.L.C., as
rights agent.
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.
OSTEX INTERNATIONAL, INC.
DATE: May 13, 1997 By /S/ ROBERT M. LITTAUER
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Robert M. Littauer
Senior Vice President,
Finance and Administration
(principal financial and principal
accounting officer)
OSTEX INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, December 31,
1997 1996
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(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 713 $ 1,289
Short-term investments 17,526 19,940
Trade receivables and other current assets, net 1,262 1,161
Inventory, at cost 199 153
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Total current assets 19,700 22,543
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation 2,507 2,474
OTHER ASSETS, net 674 674
==================== =====================
Total assets $ 22,881 $ 25,691
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CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,284 $ 1,642
NONCURRENT LIABILITIES:
Note payable, net of current portion 479 523
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Total liabilities 1,763 2,165
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SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000,000
authorized; 12,447,617 and 12,441,617 issued
and outstanding 125 125
Additional paid-in capital 45,126 45,265
Accumulated deficit (24,133) (21,864)
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Total shareholders' equity 21,118 23,526
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Total liabilities and shareholders' equity $ 22,881 $ 25,691
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The accompanying notes are an integral part of these condensed balance sheets.
OSTEX INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Quarter Ended
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March 31, March 31,
1997 1996
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REVENUE:
Product sales $ 654 $ 587
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OPERATING EXPENSES:
Cost of products sold 151 168
Research and development 1,078 745
Selling, general and administrative 1,923 1,855
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Total operating expenses 3,152 2,768
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Loss from operations (2,498) (2,181)
OTHER INCOME (EXPENSE):
Interest income 249 412
Interest expense (20) -
====================== ====================
Net loss $ (2,269) $ (1,769)
====================== ====================
NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE $ (0.18) $ (0.14)
====================== ====================
Shares used in calculation 12,448 12,440
====================== ====================
The accompanying notes are an integral part of these condensed financial statements.
OSTEX INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
Quarter Ended
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March 31, March 31,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES $ (2,632) $ (1,772)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (3,033) (10,734)
Proceeds from sales of short-term investments 5,276 11,098
Purchase of property, plant and equipment (174) (154)
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Net cash provided by investing activities 2,069 210
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options 26 33
Payments on note payable (39) -
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Net cash (used in) provided by financing activities (13) 33
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NET DECREASE IN CASH AND CASH
EQUIVALENTS (576) (1,529)
CASH AND CASH EQUIVALENTS, beginning of period 1,289 6,241
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===================== ====================
CASH AND CASH EQUIVALENTS, end of period $ 713 $ 4,712
===================== ====================
The accompanying notes are an integral part of these condensed financial statements.
OSTEX INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The unaudited condensed financial statements include the accounts of Ostex
International, Inc. (a Washington corporation) (the "Company"). These financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and pursuant to the rules and
regulations of the Securities and Exchange Commission. While these statements
reflect all normal recurring adjustments which are, in the opinion of
management, necessary for fair presentation of the results of the interim
periods, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. For
further information, refer to the financial statements and footnotes thereto
included in the Company's annual report filed on Form 10-K for the year ended
December 31, 1996.
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
For the three months ended March 31,1997, net loss per common and common
equivalent share was based on the weighted average number of common shares
outstanding during each period. Common stock equivalents include shares issuable
upon the exercise of outstanding stock options or warrants. These shares are not
included in the computation of net loss per share because the effect of
including such shares would be antidilutive.
2. RELATED PARTY TRANSACTIONS
LEGAL AND CONSULTING SERVICES
Total operating expenses include legal and consulting fees for services provided
by a related party totaling $50,000 and $18,000 for the quarters ended March
1997 and 1996, respectively.
3. CONTINGENCIES
LEGAL PROCEEDINGS
Refer to Part II, Item 1 of this Form 10-Q.
4. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128), which is
effective for periods beginning after December 15, 1997. SFAS 128 establishes
new standards for computing and presenting earnings per share (EPS). Upon
adoption of SFAS 128, companies will report basic EPS and diluted EPS instead of
previously reported primary and fully diluted EPS. Under the new standard, the
Company's basic and diluted EPS for the quarter ended March 31, 1997, would both
be a net loss per share of $(0.18).