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 SEPTEMBER 30, 1997
-- or --
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TRANSITION REPORT
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OR 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
NOVEMBER 5, 1997 WAS 12,636,250.
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 5
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 September 30, 1997, and audited
condensed balance sheet as of December 31, 1996, the unaudited condensed
statements of operations for the three months ended September 30, 1997 and 1996,
and for the nine months ended September 30, 1997 and 1996, and the statements of
cash flow for the nine months ended September 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 SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Total revenues were $1,505,000 for the quarter ended September 30, 1997,
compared to $1,859,000 for the quarter ended September 30, 1996. Product sales
were $1,055,000 during the three month period ended September 30, 1997, compared
to $776,000 for the same period in 1996. The 36 % increase was due to higher
volumes of OSTEOMARK-registered trademark- kits sold to domestic
laboratories and foreign distributors during the 1997 quarter compared to
the same period of 1996. License and research and development fees were $450,000
during the three month period ended September 30, 1997, compared to $1,083,000
during the same period in 1996. The $633,000 reduction in fees collected under
license and research and development agreements with Mochida Pharmaceutical Ltd.
("Mochida") was expected and is due to attainment of scheduled milestones. The
Company does not expect to receive any further milestone payments under the
license agreement with Mochida and future payments of up to $750,000 under the
research and development agreement are contingent upon Mochida's decision to
exercise its option to license the NTx serum assay and achievement of certain
serum assay development milestones.
The Company's cost of products sold totaled $228,000 for the quarter
ended September 30, 1997, compared to $247,000 for the same period of 1996. The
decrease was primarily due to elimination of excess facility costs. The cost of
products sold decreased as a percentage of product sales to 22% in the 1997
third quarter compared to 32% in the 1996 third quarter due to a reduction in
unit manufacturing costs resulting from increased production volume allowing
fixed manufacturing costs to be spread over a higher base of units produced
during the quarter ended September 30, 1997, compared to the same period in
1996.
The Company's research and development expenditures totaled $1,090,000
for the quarter ended September 30, 1997, compared to $757,000 for the quarter
ended September 30, 1996. The $333,000 increase was primarily attributable to
the NTx assay point-of-care development programs with Metrika Laboratories, Inc.
("Metrika") and Hologic, Inc. ("Hologic"). In addition, research and development
expenses increased due to the cost of clinical studies commenced at the end of
1996 and during the first quarter 1997. Included in the Company's studies in the
1997 quarter was a study for the determination of variability and the NTx
reference range in males, a study for variability of NTx in postmenopausal
women, and a study for the use of the Osteomark test in helping to identify bone
metastases.
Selling, general and administrative expenses totaled $1,903,000 for the
quarter ended September 30, 1997, compared to $2,328,000 for the three month
period ended September 30, 1996. The $425,000 decrease was primarily due to
completion of the Company's free testing program in 1996 and the completion of a
hearing before the American Arbitration Association against Boehringer Mannheim
in September 1996, partially offset by increased costs of litigation in
connection with the Osteometer and C.R. Bard cases (see "Legal Proceedings" in
Part II, Item 1 of this 10-Q). The Company anticipates a substantial increase in
legal expenses in connection with the Osteometer patent infringement lawsuit
during the fourth quarter of 1997 as the proceeding enters a discovery phase,
and continuing into fiscal year 1998.
Interest income totaled $196,000 for the quarter ended September 30,
1997, compared to $299,000 for the quarter ended September 30, 1996. The
decrease is due to lower invested balances resulting from using cash to fund the
Company's operating losses.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Total revenues were $3,108,000 for the nine month period ended September
30, 1997, compared to $3,300,000 for the nine month period ended September 30,
1996. Product sales were $2,658,000 during the nine month period ended September
30, 1997, compared to $2,217,000 for the same period in 1996. The 20 % increase
was due to higher volumes of Osteomark kits sold to domestic laboratories and
foreign distributors during the 1997 period compared to the same period of 1996.
License and research and development fees were $450,000 during the nine month
period ended September 30, 1997, compared to $1,083,000 during the same period
in 1996. The reduction in fees collected under license and research and
development agreements with Mochida was expected and is due to attainment of
scheduled milestones. The Company does not expect to receive any further
milestone payments under the license agreement with Mochida and future payments
of up to $750,000 under the research and development agreement are contingent
upon Mochida's decision to exercise its option to license the NTx serum assay
and achievement of certain serum assay development milestones.
The Company's cost of products sold totaled $640,000 for the nine month
period ended September 30, 1997, compared to $682,000 for the nine months ended
September 30, 1996. The decrease was primarily due to a reduction of excess
facility costs. The cost of products sold decreased as a percentage of product
sales to 24% in the 1997 period compared to 31% in the 1996 period due to a
reduction in unit manufacturing costs resulting from increased production volume
allowing fixed manufacturing costs to be spread over a higher base of units
produced during the nine months ended September 30, 1997, compared to the same
period in 1996.
The Company's research and development expenditures totaled $3,522,000
for the nine month period ended September 30, 1997, compared to $2,203,000 for
the nine months ended September 30, 1996. The increase of $1,319,000 is due to
research spending in connection with the development of NTx assay point-of-care
devices under the development agreements with Metrika and Hologic discussed
above, as well as funding of research conducted at the University of Washington.
Research at the University of Washington is focused on molecular markers of
connective tissue degradation, and on developing a further understanding of the
osteoclast colony stimulating factor ("O-CSF") as a potential therapeutic agent.
This research funding is expected to continue through 1999. In addition,
research and development expenses increased due to the cost of clinical studies
commenced at the end of 1996 and during the first quarter 1997.
Selling, general and administrative expenses totaled $5,688,000 for the
nine month period ended September 30, 1997, compared to $6,695,000 for the nine
months ended September 30, 1996. The lower expense level was due to the
completion of a hearing before the American Arbitration Association against
Boehringer Mannheim in September 1996 (see "Legal Proceedings" in Part II, Item
1 of this 10-Q), and the completion of the Company's free testing program in
1996. However, the decrease was partially offset by increased costs of
litigation in connection with the Osteometer and C.R. Bard cases (see "Legal
Proceedings" in Part II, Item 1 of this 10-Q). As discussed above, legal costs
associated with the Osteometer patent infringement lawsuit are expected to
increase substantially in the fourth quarter 1997, and continue into fiscal year
1998.
Interest income totaled $675,000 for the nine month period ended
September 30, 1997, compared to $1,036,000 for the same period in 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 September 30, 1997, the Company had $14,178,000 in cash and cash
equivalents and short-term investments, working capital of $14,214,000 and total
shareholders' equity of $17,635,000. As a result of funding operating losses
during the nine months ended September 30, 1997, cash, cash equivalents and
short-term investments decreased by $7,051,000, working capital decreased by
$6,687,000 and shareholders equity decreased by $5,891,000. During the nine
month period ended September 30, 1997 the Company purchased $1,093,000 in
property and equipment, received $124,000 from the exercise of stock options and
paid $121,000 of notes payable.
In October 1997, the Company received $6,200,000 in settlement of
certain litigation (see "Legal Proceedings" in Part II, Item 1 of this 10-Q).
The Company did not reflect the settlement in its balance sheet at September 30,
1997. This will be reflected in income and assets during the quarter ending
December 31, 1997.
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. The Company may require additional funds from equity or
debt financings. 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
mid 1999. 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.
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,
product 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 November 4, 1997, the Company announced settlement with Boehringer
Mannheim under which the Company received a lump sum payment of $6,200,000. The
settlement between the two parties is the result of the previously reported
January 28, 1997 ruling by the American Arbitration Association in connection
with the Company's claims against Boehringer Mannheim.
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. On October 24, 1997, Ostex filed a second supplemental
complaint to add third and fourth causes of action based upon U.S. Patent No.
5,652,112, which issued on July 29, 1997, and U.S. Patent No. 5,656,439, which
issued on August 12, 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.
On April 9, 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 U.S.
Patent No. 4,628,027 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
The following exhibits are filed herewith:
10.32 1 Joint Development, License and Co-Marketing Agreement dated
April 10, 1997 with Metrika Laboratories.
27.1 Financial Data Schedule
1 Confidential treatment requested. Exhibit omits information that has
been filed separately with the Securities and Exchange Commission.
(B) REPORTS ON FORM 8-K
None
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.
DATED: November 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)
September 30, December 31,
1997 1996
-------------------- ---------------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,941 1,289
Short-term investments 12,237 19,940
Trade receivables and other current assets 1,295 1,161
Inventory, at cost 144 153
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Total current assets 15,617 22,543
PROPERTY, PLANT AND EQUIPMENT, less
accumulated depreciation and amortization 3,120 2,474
OTHER ASSETS 673 674
==================== =====================
Total assets $ 19,410 $ 25,691
==================== =====================
CURRENT LIABILITIES:
Accounts payable, accrued expenses and other $ 1,403 $ 1,642
NONCURRENT LIABILITIES:
Noate Payable, net of current portion 372 523
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Total liabilities 1,775 2,165
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SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000
authorized; 12,636,250 and 12,441,617 issued
and outstanding, respectively 127 125
Additional paid-in capital 45,515 45,195
Unrealized (loss)/gain on short-term investments (19) 70
Accumulated deficit (27,988) (21,864)
-------------------- ---------------------
Total shareholders' equity 17,635 23,526
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Total liabilities and shareholders' equity $ 19,410 $ 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)
Three Months Ended Nine Months Ended
------------------------------------ ------------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
----------------- ----------------- ----------------- ------------------
REVENUE:
Product sales and research testing services $ 1,055 $ 776 $ 2,658 $ 2,217
License and research and development fees 450 1,083 450 1,083
----------------- ----------------- ----------------- ------------------
Total revenues 1,505 1,859 3,108 3,300
OPERATING EXPENSES:
Cost of products sold 228 247 640 682
Research and development 1,090 757 3,522 2,203
Selling, general and administrative 1,903 2,328 5,688 6,695
----------------- ----------------- ----------------- ------------------
Total operating expenses 3,221 3,332 9,850 9,580
----------------- ----------------- ----------------- ------------------
Loss from operations (1,716) (1,473) (6,742) (6,280)
OTHER INCOME (EXPENSE):
Interest income 196 299 675 1,036
Interest expense (18) (23) (57) (23)
----------------- ----------------- ----------------- ------------------
Net loss $ (1,538) $ (1,197) $ (6,124) $ (5,267)
================= ================= ================= ==================
NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE $ (0.12) $ (0.10) $ (0.49) $ (0.42)
Shares used in calculation 12,635 12,442 12,547 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)
Nine Months Ended September 30,
--------------------------------------------
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES $ (5,872) $ (5,786)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (3,592) (16,872)
Proceeds from sales of short-term investments 11,206 17,622
Purchase of property, plant and equipment (1,093) (275)
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Net cash provided by investing activities 6,521 475
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options 124 41
Proceeds from borrowings on note payable - 746
Payments on note payable (121) (36)
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Net cash provided by financing activities 3 751
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 652 (4,560)
CASH AND CASH EQUIVALENTS, beginning of period 1,289 6,241
--------------------- --------------------
CASH AND CASH EQUIVALENTS, end of period $ 1,941 $ 1,681
===================== ====================
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 nine months ended September 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. These shares are not
included in the computation of net loss per share because the effect of
including such shares would be antidilutive.
2. CONTINGENCIES
Legal Proceedings
Refer to Part II, Item 1 of this Form 10-Q.
3. 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, both
the Company's basic and diluted EPS for the quarter ended September 30, 1997,
would be a net loss per share of $.12, and for the nine months ended September
30, 1997, both basic and diluted EPS would be a net loss per share of $.49.
4. SUBSEQUENT EVENTS
In October 1997, the Company received $6,200,000 in settlement of
certain litigation (see "Legal Proceedings" in Part II, Item 1 of this 10-Q).
The Company did not reflect the settlement in its balance sheet at September 30,
1997. This will be reflected in income and assets during the quarter ending
December 31, 1997.