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 JUNE 30, 1997
-- or --
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TRANSITION REPORT
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FOR THE TRANSITION PERIOD FROM TO
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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
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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
AUGUST 13, 1997 WAS 12,633,750.
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OSTEX INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
PAGE
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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 2 - CHANGES IN SECURITIES......................................5
ITEM 4 - SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS...........................6
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ........................6
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 June 30, 1997, and audited
condensed balance sheet as of December 31, 1996, the unaudited condensed
statements of operations for the quarters ended June 30, 1997 and 1996, and for
the six months ended June 30, 1997 and 1996, and the statements of cash flow for
the six months ended June 30, 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 Quarterly Report on Form 10-Q contains 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 "Other Factors that May Affect
Operating Results", 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 the 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 JUNE 30, 1997 AND JUNE 30, 1996
The Company had revenues from product sales of $949,000 for the quarter
ended June 30, 1997, compared to $854,000 for the quarter ended June 30, 1996.
The increase in 1997 is attributable to higher volumes of
OSTEOMARK-registered trademark- kits sold to foreign distributors and
domestic laboratories during the quarter. The Company's foreign sales have
increased due to expanded selling efforts in Europe and Latin America. Foreign
sales represented 27% of total sales in the 1997 second quarter, compared to 10%
in the 1996 second quarter.
The Company's cost of products sold totaled $261,000 for the quarter
ended June 30, 1997, compared to $267,000 for the same period of 1996. The cost
of products sold decreased as a percentage of product sales to 28% in the 1997
second quarter compared to 31% in the 1996 quarter due to a higher average
selling price in the 1997 quarter that resulted from the completion of the Free
Testing Program.
The Company's research and development expenditures totaled $1,354,000
for the quarter ended June 30, 1997, compared to $701,000 for the quarter ended
June 30, 1996. The $653,000 increase was primarily attributable to the NTx assay
point-of-care development programs with Metrika Laboratories, Inc. ("Metrika")
and Hologic, Inc ("Hologic"). The Company entered into a contract with Metrika
in April 1997 for the development of a point-of-care device using the Company's
NTx assay. Under the Metrika agreement the Company issued 70,000 unregistered
shares of its common stock valued at $193,000 on the date of issuance for past
development costs and agreed to share future development costs. The increased
research and development expenses were also attributable to the cost of clinical
studies 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 $1,862,000 for the
quarter ended June 30, 1997, compared to $2,512,000 for the period ended June
30, 1996. The $650,000 decrease was primarily due to the completion of the
Company's Free Testing Program in 1996, partially offset by an increase in
expenses associated with the addition of executive management and sales
management during the third quarter of 1996 in connection with the Company's
expansion in Europe and Latin America.
Interest income totaled $230,000 for the quarter ended June 30, 1997,
compared to $325,000 for the quarter ended June 30, 1996. The decrease is due to
lower invested balances resulting from using cash to fund the Company's
operating losses.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
The Company recorded revenues of $1,603,000 for the six month period
ended June 30, 1997, compared to $1,441,000 for the six month period ended June
30, 1996. The increased revenues were due to higher volumes of Osteomark kits
sold domestically and through foreign distributors. The Company's foreign sales
have increased due to expanded selling efforts in Europe and Latin America.
Foreign sales represented 24% of total sales during the six months ended June
30, 1997, compared to 13% during the same period of 1996.
The Company's cost of products sold totaled $412,000 for the six month
period ended June 30, 1997, compared to $435,000 for the six months ended June
30, 1996. The cost of products sold decreased as a percentage of product sales
to 26% in the 1997 period compared to 30% in the 1996 period due a higher
average selling price that resulted from the completion of the Free Testing
Program.
The Company's research and development expenditures totaled $2,432,000
for the six month period ended June 30, 1997, compared to $1,446,000 for the six
months ended June 30, 1996. The increase of $986,000 is due to funding of
research conducted at the University of Washington and research spending in
connection with the development of two separate NTx assay point-of-care devices
under development agreements with Metrika and Hologic. Research at the
University of Washington 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. This research
funding is expected to continue through 1999. NTx assay point-of-care
development programs with Metrika and Hologic also contributed to the increase
for the six months ended June 30, 1997, compared to the six months ended June
30, 1996, as discussed above in the comparison of research and developments
costs for the second quarters of 1997 and 1996. The increased research and
development expenses were also attributable to the cost of clinical studies
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 $3,785,000 for the
six month period ended June 30, 1997, compared to $4,367,000 for the six months
ended June 30, 1996. The lower expense level was due to the completion of the
Company's Free Testing Program in 1996, partially offset by the addition of
executive management and sales management positions in Europe and Latin America.
Interest income totaled $479,000 for the six month period ended June 30,
1997, compared to $737,000 for the same period ended June 30, 1996. The decrease
is due to lower invested balances resulting from using cash to fund the
Company's operating losses.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had $15,401,000 in cash and cash
equivalents and short-term investments, working capital of $15,945,000 and total
shareholders' equity of $19,151,000. As a result of funding operating losses
during the six months ended June 30, 1997, cash, cash equivalents and short-term
investments decreased by $5,828,000, working capital decreased by $4,956,000 and
shareholders equity decreased by $4,375,000.
The Company's future capital requirements depend upon many factors,
including effective commercialization activities and collaborative arrangements,
continued progress in its research and development programs, progress toward
development of the O-CSF technology, the costs involved in filing, prosecuting
and enforcing patent claims, and the time and costs involved in obtaining
regulatory approvals. Additional funds from equity or debt financings 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. No assurance can be given, however, that such funds will in fact be
adequate until that time, since the Company's prediction is subject to a number
of risks and uncertainties, including those discussed in the following
paragraph. In addition, the Company was awarded $6,400,000 as a result of the
arbitration of a dispute with Boehringer Mannheim. This amount has not been
received by the Company or recognized in the Company's financial statements. 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, as well as 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 District Court Judge denied Boehringer Mannheim's
motion to vacate the arbitration award on July 8, 1997, and granted Ostex's
motion to confirm the arbitration award on July 14, 1997. Boehringer Mannheim
has indicated that it will post a supersedeas bond and appeal the decision to
the Ninth Circuit Court of Appeals. The award has not been reflected in the
Company's financial statements as of June 30, 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 of United States Patent No.
5,455,179. The Company believes Osteometer's bone resorption immunoassay
incorporates technology which infringes patented Ostex technology. In September
1996, the defendants filed a response denying infringement and counterclaimed
that Ostex' patent is invalid and unenforceable. By order dated July 7, 1997,
the Court granted Ostex's motion to file a supplemental complaint, to add a
second cause of action based upon United States Patent No. 5,641,837, which
issued on June 24, 1997. The lawsuit is currently scheduled for trial commencing
June 30, 1998. At the present time management cannot predict the outcome of the
lawsuit but intends to continue to vigorously assert its position.
In April 1997, the Company was served with 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 2. CHANGES IN SECURITIES
On April 10, 1997 the Company entered into a Stock Purchase Agreement
with Metrika as consideration for previous research and development costs
conducted by Metrika for the adaptation of the Company's NTx technology to be
used with Metrika's point-of-care device under development. The Company issued
to Metrika 70,633 shares of the Company's Common Stock, $.01 par value (the
"Shares"), valued at $193,000.
The Shares have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), but instead have been issued pursuant to the
exemption from the registration provisions provided by Section 4(2) of the
Securities Act. The shares must be held indefinitely unless subsequently
registered under the Securities Act or unless an exemption from such
registration is available. Metrika may be able to sell some or all of the shares
pursuant to the provisions of Rule 144 promulgated under the Securities Act
("Rule 144") which permit limited resales of shares purchased in a private
placement subject to the satisfaction of certain conditions, including, among
other things, the existence of a public market for the Shares, the availability
of certain current public information about the Company, the resale occurring
not less than one year after a party has purchased and paid for the security to
be sold, the sale being effected through a "broker transaction" or in
transactions directly with a "market maker" and the number of shares being sold
during any three-month period not exceeding specified limitations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 2, 1997, the Company held its 1997 Annual Meeting of Shareholders
(the "Annual Meeting"), at which the following members were elected to the Board
of Directors:
Affirmative Votes
VOTES WITHHELD
David R. Eyre 10,868,992 472,935
Fredric J. Feldman 10,860,699 481,228
The following members continued their terms on the Board of Directors:
Thomas J. Cable
Gregory D. Phelps
The following proposals were also approved at the Annual Meeting:
Affirmative Votes Votes
VOTES AGAINST WITHHELD
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The proposal to amend the Company's 6,235,594 2,751,185 2,356,148
1994 Stock Option Plan to increase the
number of shares of Common Stock
authorized to 1,750,000 shares
The proposal to amend the Company's 6,430,445 2,781,736 2,129,746
Directors' Nonqualified Stock
Option Plan to increase the
number of shares of Common Stock
authorized to 350,000 shares
Ratification of Arthur Andersen LLP 11,175,257 21,060 145,610
as the Company's independent
auditors for the fiscal year ending
December 31, 1997
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS1
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 April 29, 1997, announcing the retirement of the
Company's Chairman of the Board of Directors and Chief Executive Officer, H.
Raymond Cairncross, and resignation of the President and Chief Operating
Officer, Robert J. Glaser.
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: August 13, 1997 By /S/ ROBERT M. LITTAUER
----------------------------------
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)
June 30, December 31,
1997 1996
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(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 764 $ 1,289
Short-term investments 14,637 19,940
Trade receivables and other current assets 1,499 1,161
Inventory, at cost 157 153
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Total current assets 17,057 22,543
NET FURNITURE AND EQUIPMENT, at cost 2,952 2,474
OTHER ASSETS 673 674
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Total assets $ 20,682 $ 25,691
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CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,112 $ 1,642
NONCURRENT LIABILITIES:
Note Payable, net of current portion 419 523
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Total liabilities 1,531 2,165
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SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000
authorized; 12,633,750 and 12,441,617 issued
and outstanding, respectively 127 125
Additional paid-in capital 45,510 45,195
Unrealized (loss)/gain on short-term investments (35) 70
Accumulated deficit (26,451) (21,864)
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Total shareholders' equity 19,151 23,526
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Total liabilities and shareholders' equity $ 20,682 $ 25,691
==================== =====================
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 Year to Date
------------------------------------ ------------------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
----------------- ----------------- ----------------- ------------------
REVENUE:
Product sales $ 949 $ 854 $ 1,603 $ 1,441
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Total revenues 949 854 1,603 1,441
OPERATING EXPENSES:
Cost of products sold 261 267 412 435
Research and development 1,354 701 2,432 1,446
Selling, general and administrative 1,862 2,512 3,785 4,367
----------------- ----------------- ----------------- ------------------
Total operating expenses 3,477 3,480 6,629 6,248
----------------- ----------------- ----------------- ------------------
Loss from operations (2,528) (2,626) (5,026) (4,807)
OTHER INCOME (EXPENSE):
Interest income 230 325 479 737
Interest expense (19) - (39) -
----------------- ----------------- ----------------- ------------------
Net loss $ (2,317) $ (2,301) $ (4,586) $ (4,070)
================= ================= ================= ==================
NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE $ (0.18) $ (0.18) $ (0.37) $ (0.33)
Shares used in calculation 12,557 12,441 12,502 12,441
The accompanying notes are an integral part of these condensed financial statements.
OSTEX INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Year to Date
--------------------------------------------
June 30, June 30,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES $ (5,000) $ (3,918)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (3,592) (12,576)
Proceeds from sales of short-term investments 8,791 14,623
Purchase of property, plant and equipment (763) (202)
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Net cash provided by investing activities 4,436 1,845
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options 118 41
Payments on note payable (79) -
--------------------- --------------------
Net cash provided by financing activities 39 41
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NET INCREASE IN CASH AND CASH
EQUIVALENTS (525) (2,032)
CASH AND CASH EQUIVALENTS, beginning of period 1,289 6,241
--------------------- --------------------
CASH AND CASH EQUIVALENTS, end of period $ 764 $ 4,209
===================== ====================
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 and six months ended June 30,1997, 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 $54,000 and $56,000 for the quarters ended June 1997
and 1996, respectively, and $104,000 and 74,000 for the six months ended June
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 June 30, 1997, would both
be a net loss per share of $(.18), and for the six months ended June 30, 1997,
would both be a net loss per share of $(.37).