-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N30mab/wD/sahwlyrTNKCIIaEs1kI0HxKu9IyKfriKptYRIOn6BCQeSovfiVl1bY LpZd6LvC7S/Upv1m1570Lg== 0000912057-00-014624.txt : 20000331 0000912057-00-014624.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-014624 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OSTEX INTERNATIONAL INC /WA/ CENTRAL INDEX KEY: 0000932631 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 911450247 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-25250 FILM NUMBER: 584629 BUSINESS ADDRESS: STREET 1: 2203 AIRPORT WY S STREET 2: STE 400 CITY: SEATTLE STATE: WA ZIP: 98134 BUSINESS PHONE: 2062928082 MAIL ADDRESS: STREET 1: 2203 AIRPORT WAY STREET 2: SUITE 400 CITY: SEATLE STATE: WA ZIP: 98134 10-K405 1 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K - ---- X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE - ---- ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 -- or -- - ---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES - ---- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ---------- ---------- 0-25250 COMMISSION FILE NUMBER OSTEX INTERNATIONAL, INC. EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER STATE OF WASHINGTON 91-1450247 STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION 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 Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the (none) (none) Act: TITLE OF CLASS EACH EXCHANGE ON WHICH REGISTERED COMMON STOCK, $.01 PAR VALUE TITLE OF CLASS
Indicate by check mark whether the registrant (1) has filed all Yes [ X ] 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 No [ ] requirements for the past 90 days. Indicate by check mark if disclosure of delinquent filers [ X ] pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant was approximately $47,833,000 on March 16, 2000, based on the per-share closing price of $4.81 on the Nasdaq National Market. The number of shares of Common Stock outstanding as of March 16, 2000 was 12,479,139. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1999 is incorporated by reference into Part I, Part II and Part III of this Form 10-K. (2) Portions of the Registrant's Proxy Statement for the Registrant's Annual Shareholders Meeting to be held Wednesday, May 24, 2000, to be filed pursuant to Regulation 14A is incorporated by reference into Part III of this Form 10-K. OSTEX INTERNATIONAL, INC. INDEX TO FORM 10-K
PART I PAGE ---- ITEM 1 BUSINESS 2 ITEM 1A RISK FACTORS 4 ITEM 1B EXECUTIVE OFFICERS OF THE REGISTRANT 9 ITEM 2 PROPERTIES 10 ITEM 3 LEGAL PROCEEDINGS 10 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS 11 ITEM 6 SELECTED FINANCIAL DATA 12 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 12 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 12 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 13 ITEM 11 EXECUTIVE COMPENSATION 13 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 13 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 13 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 14 SIGNATURES 17
For the purpose of this Form 10-K, the following capitalized terms shall have the following meanings: "Company" or "Ostex" shall mean Ostex International, Inc., a Washington corporation; "Annual Report to Shareholders" shall mean the annual report to shareholders of Ostex International, Inc. for the year ended December 31, 1999; and "Proxy Statement" shall mean the proxy statement for the 2000 shareholders meeting of Ostex International, Inc. to be held Wednesday, May 24, 2000, to be filed with the Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A. PART I When used in this report and in the Company's Annual Report to Shareholders (which discussion has been incorporated herein by reference), the words "believes," "intends", "anticipates," "plans to" and "expects" and similar expressions are intended to qualify as forward-looking statements. Such statements are subject to certain risks and uncertainties and there are a number of important factors that could cause actual results to differ materially from those projected. These factors include, among others, the factors described under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Other Factors that May Affect Operating Results" in the Company's Annual Report to Shareholders and the risk factors included herein. Readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to release publicly the results of any revisions to such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ITEM 1. BUSINESS Ostex was incorporated in the State of Washington in 1989. The Company is engaged in the discovery and commercialization of products associated with osteoporosis and other collagen-related diseases. The Company believes that its lead product, the OSTEOMARK-registered trademark- test, incorporates breakthrough and patented technology in the area of bone resorption measurement. Ostex has formed collaborative relationships with leading diagnostic and pharmaceutical companies to aid in the commercialization of Osteomark. As of December 31, 1999, the Company had 35 employees. Osteoporosis is a significant health problem. According to the National Osteoporosis Foundation (the "NOF"), osteoporosis afflicts approximately 30 million people in the U.S. alone. Additionally, millions of people are at risk of skeletal degradation associated with Paget's disease of bone, cancer that metastasizes to bone, hyperparathyroidism (overactivity of the parathyroid gland, characterized by a reduction of bone mass) and renal osteodystrophy. In spite of the serious human and economic consequences of these diseases (according to the NOF, the direct healthcare and indirect lost productivity costs of osteoporosis exceed $10 billion annually in the U.S. alone), medical intervention usually commences only after pain, immobility, fractures, or other symptoms have appeared. The Company expects the osteoporosis therapeutic market will increase significantly. The Company also believes new therapeutic products are under development for osteoporosis, some of which are in late-stage clinical trials, and that the Osteomark test can be used to effectively predict a patient's response to osteoporosis therapy and monitor existing therapies and other therapies which may be developed. The Company is the exclusive licensee of the Osteomark technology, known clinically as the NTx test, which is available in urine and serum formats that can aid in healthcare decision-making at early menopause and beyond. The Osteomark test is a non-invasive diagnostic test which quantitatively indicates the level of bone resorption. Individuals who are losing bone collagen at accelerated rates may indicate a condition which typically results in osteoporosis. The Company believes that early identification of high levels of bone resorption provides the opportunity to predict skeletal response (bone mineral density) to hormonal antiresorptive and other osteoporosis therapies in postmenopausal women and helps prevent the onset of osteoporosis. The Company also believes that the Osteomark test aids clinicians in monitoring the -2- effects of antiresorptive therapies in postmenopausal women, as well as in older patients who have already lost significant bone mass. On May 8, 1995, the Company's Osteomark test became commercially available in the United States as a urinary test that provides a quantitative measure of the excretion of cross-linked N-telopeptides of Type I collagen (NTx) as an indicator of human bone resorption, and in July 1996 the Company received expanded claims for the test. The 1996 claims allow that an Osteomark test measurement, if taken prior to the initiation of hormonal antiresorptive therapy, can be utilized to predict a patient's response to that therapy, in terms of its effect on bone mineral density. Additionally, the claims allow that the test can be used for therapeutic monitoring of antiresorptive therapies in postmenopausal women, as well as individuals diagnosed with osteoporosis and Paget's disease, and for therapeutic monitoring of estrogen-suppressing therapies. In March 1998, the claims were further expanded by allowing that, in addition to the 1996 claims, an Osteomark test measurement can identify the probability for a decrease in bone mineral density in postmenopausal women taking calcium supplements relative to those treated with hormonal antiresorptive therapy. The Company is manufacturing and marketing the Osteomark test in an Enzyme-linked Immunosorbent Assay ("ELISA") format for testing urine or serum samples. In February 1999, the Company began commercially marketing Osteomark NTx Serum. Osteomark NTx Serum is the first and only commercially available test in the United States that measures specific bone breakdown by osteoclasts using a blood sample. The Company believes that the use of a serum NTx test provides a number of advantages to testing laboratories, including the elimination of the requirement to normalize NTx values to creatinine concentration. Worldwide promotion of the Osteomark urine test kits is also supported by Johnson & Johnson Clinical Diagnostics, Inc. ("Johnson & Johnson"). In 1995 the Company entered into research, development, license and supply agreements with Johnson & Johnson. These agreements grant Johnson & Johnson a license to manufacture, sell and distribute certain products using Ostex's bone resorption technology. Currently, Johnson & Johnson distributes in the United States and certain foreign countries the Osteomark test in the existing microtiter plate format and has adapted the urine test for use with its automated analyzer. Ostex receives royalties on Johnson & Johnson's sales of products incorporating the Ostex technology. Under the Johnson & Johnson license agreement, the Company has the right to license its technology for use on automated instruments to one other company in addition to Johnson & Johnson. The Company is currently evaluating other potential collaborators to adapt the Osteomark test to other high-speed automated instruments. In the year ended December 31, 1999, the Company's largest customer, Johnson & Johnson, accounted for approximately 14% of the Company's product sales. The termination of the Company's relationship with Johnson & Johnson could have a material adverse effect on the Company's results of operations. See "Risk Factors - Reliance on Collaborative Agreements and Certain Relationships". In 1992, Ostex entered into a research and development agreement and a license agreement with Mochida Pharmaceutical Co., Ltd. ("Mochida"), a Japanese pharmaceutical company, for the commercialization of the Osteomark test in Japan. Under the research and development agreement, Mochida has an option to license the NTx serum test and has paid Ostex $3,350,000 in development fees to date. Future payments of $750,000 under the agreement are contingent upon Mochida's decision to exercise its option. Under the license agreement, Ostex granted Mochida exclusive marketing and distribution rights to certain Ostex products in Japan. Since 1992, Mochida has paid Ostex $2,500,000 in licensing fees for the Osteomark test. In January 1998, Mochida launched the Osteomark test in Japan for the management of patients with hyperparathyroidism and for patients with metastatic bone tumors. During 1999, Ostex sold Mochida the critical reagents to be assembled into finished products in Japan by Mochida. Beginning in 2000, Ostex will sell the finished product to Mochida. The Company also plans to develop and market the Osteomark test in other formats, including formats suitable for use in the physician's office. The Company has an agreement with Metrika, Inc. ("Metrika"), a diagnostic device company, to develop a physician's office "point-of-care" Osteomark test device. The -3- Company and Metrika have developed this fully disposable point-of-care NTx test as an indicator of bone resorption that computes an NTx value and displays it digitally. OSTEOMARK and OSTEX are registered United States ("U.S.") trademarks of the Company. The Company has also registered its OSTEOMARK trademark in 46 other countries. Additional trademark applications are pending. The Company's collagen breakdown test technology is covered by 29 U. S. patents, 4 European patents, 5 Japanese patents, and patents in Australia, Canada, Ireland, Korea, Russia, Spain, Hong Kong, and Singapore. Three of the European patents and two of the Japanese patents are in opposition proceedings. Additional patent applications are pending. See "Risk Factors - Dependence on Licensed Patents and Proprietary Rights". The Company's patents are variously directed to type I collagen breakdown products including NTx, CTx, and deoxypyridinoline, as well as related breakdown products of type II and type III collagen. The Company's patents will expire in 2007 or later. The Company's research and development expenditures, all of which were funded by the Company, totaled $1,734,000, $2,901,000, and $4,470,000, in 1999, 1998 and 1997, respectively. The Company's product sales from external customers in foreign countries totaled $822,000, $517,000, and $652,000, in 1999, 1998 and 1997, respectively. Foreign sales were primarily to Europe, Canada and South America. The Company's international business is subject to risks of currency fluctuations, governmental actions and other governmental proceedings abroad. The Company does not regard these risks as a deterrent to further expansions of its operations abroad. However, the Company closely reviews its methods of operations and adopts strategies responsive to changing economic and political conditions. The Company is developing an assay for Type II collagen degradation. Type II collagen is a primary constituent of joint cartilage. Osteoarthritis, a degenerative disease of joint cartilage, affects over 15 million people in the United States alone. The disease first appears in a limited number of joints. The first symptom, joint pain, occurs after substantial cartilage damage has taken place. Eventually, pain and tenderness increase and the joint motion becomes diminished. The Ostex Type II collagen degradation test under development has been designed to allow reliable monitoring of joint cartilage changes for validating the effectiveness of drugs under development and for identifying patients with early-stage disease. In addition, similar to the Osteomark test used in connection with osteoporosis, the Company believes that the Type II collagen degradation test will aid in the clinical management of osteoarthritis patients by monitoring the effectiveness of therapy. Ostex is investigating the use of its NTx test in cancer patient management. Independent researchers have shown that the level of bone resorption increases significantly when cancer metastasizes to bone. A patient's NTx level may be useful to identify cancer patients with elevated bone turnover who might warrant a bone scan to detect metastatic bone disease. Ostex is also in the early stages of developing an assay for measuring Type III collagen degradation. Type III collagen is a significant constituent of blood vessels such as coronary arteries. Measuring degradation of this type of collagen may be useful in identifying cardiovascular disease. ITEM 1A. RISK FACTORS UNCERTAINTY OF MARKET ACCEPTANCE The Company's lead product, the Osteomark test, became commercially available in May 1995 in the U.S. and sales have not been significant enough to generate net income. There can be no assurance that the Company's Osteomark test or any of its other products will gain acceptance from the medical community, clinical or hospital laboratories, physicians or patients as readily as other forms of diagnosis or any newly -4- developed diagnostic. There can be no assurance that the Company will be able to develop significant market share for its products, or any market share at all. Inability of the Company to achieve market acceptance for its products would have a material adverse effect on the Company's business, financial condition and results of operation. DEPENDENCE ON CORE TECHNOLOGY; UNCERTAINTY OF ADAPTATION TO DIFFERENT FORMATS The Company currently relies exclusively upon its core technology for the development of diagnostic products associated with osteoporosis and other collagen-related diseases. There can be no assurance that competitors of the Company will not be successful in developing new or more efficient or cost-effective diagnostics that are more readily accepted than the Company's products. The Company is in the process of undertaking ongoing and additional research and development to adapt its core technology to different formats, instruments and other delivery platforms that currently exist or may be developed. In particular, additional research and development will be required to adapt its core technology to high-speed, high-volume automated instruments typically used in large clinical laboratories or companies through which the Company may seek to expand the market for its products. There can be no assurance that the Company will be successful in adapting and further developing its core technology to meet such needs. The Company is developing physician office adaptations of its core technology. There can be no assurance that the Company or its development partner will either successfully develop or obtain required regulatory approval for a cost-effective instrument for physician office use. In addition, technological changes or medical advancements could diminish or eliminate the commercial viability of the Osteomark test or future products based upon the Company's core technology. The failure to adapt the Company's core technology to different formats, instruments and other delivery platforms, or otherwise to commercialize such core technology, would have a material adverse effect on the Company's business, financial condition and results of operation. RELIANCE ON COLLABORATIVE AGREEMENTS AND CERTAIN RELATIONSHIPS The Company has entered into collaborative or co-promotional agreements with several partners, including, among others, Johnson & Johnson, Mochida and Wyeth-Ayerst Laboratories, and intends to appoint a second international distributor for its automated instrument application. The level of each partner's involvement and support and the amount and timing of resources that these collaborators devote to these activities are not within the control of the Company and can significantly impact the Company's ability to achieve its objectives. There can be no assurance that these collaborators will perform their contractual obligations as expected or that the Company will derive any additional revenue from such arrangements. Moreover, the agreements may be terminated under certain circumstances. The Company expects to rely on these and additional agreements to develop and commercialize its future products. There can be no assurance that the Company will be able to negotiate acceptable collaborative agreements in the future or that such new agreements or existing agreements will be successful. In addition, there can be no assurance that the parties to the agreements will not pursue alternative technologies. LIMITED SALES AND MARKETING EXPERIENCE The Company has limited experience in sales, marketing and distribution. To market any of its products directly, the Company must develop and implement a substantial marketing and sales effort with technical expertise and supporting distribution capability. The Company intends to continue to market and sell its products in the U.S. through research and clinical laboratories, other companies, and collaborative arrangements and sell its products in other markets through distributors or collaborative arrangements. There can be no assurance that the Company will be able to establish effective sales and distribution capabilities or that its collaborators will be successful in gaining market acceptance for the Company's products or that the Company will achieve or maintain significant market share for its products. DEPENDENCE ON LICENSED PATENTS AND PROPRIETARY RIGHTS The Company's success depends, in large part, on its current and future patent position relating to its core technology. The Company's patent position involves complex legal and factual questions. The Company is the exclusive licensee of certain patents within and outside of the U.S. relating to the Company's core technology. Claims made under patent applications may be denied or significantly narrowed, and -5- issued patents may not provide significant commercial protection to the Company. There is no assurance that the Company's patents will not be successfully challenged or circumvented by others. The Company could incur substantial costs in proceedings before the U.S. Patent Office, including interference proceedings. These proceedings could also result in adverse decisions as to the patentability of the Company's licensed or assigned inventions. There can be no assurance that the Company's products do not or will not infringe on the patent or proprietary rights of others. The Company may be required to obtain additional licenses to the patents or other proprietary rights of others. The Company may also require licenses from the inventors of certain processes, technologies and assay formats in order to successfully market certain products. There can be no assurance that any such licenses would be made available on terms acceptable to the Company, if at all. If the Company needs and cannot or does not obtain such licenses, it could encounter delays in product introductions while it attempts to circumvent such patents or the development, manufacture, or sale of products requiring such licenses could be precluded. The Company believes there will continue to be significant litigation in the industry regarding patent and other intellectual property rights. The Company is aware of competitors that are developing products that may be covered by claims made in patents or patent applications of the Company. Because certain foreign patents are subject to third-party opposition following the date of grant of such patents, there can be no assurance that claims of the Company's foreign patents, once granted, will survive such opposition without cancellation or significant modification. Because U.S. applications are confidential until a patent issues, the Company cannot be assured that its patent claims have priority in the U.S. or will be entitled to patent protection. The Company also relies on trade secrets and other unpatented proprietary technology. No assurance can be given that the Company can meaningfully protect its rights in such unpatented technology or that others will not independently develop substantially equivalent products and processes or otherwise gain access to the Company's technology. The Company seeks to protect its trade secrets and proprietary know-how, in part, with confidentiality agreements with its employees and consultants. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently developed by competitors. In addition, protracted and costly litigation may be necessary to enforce and determine the scope and validity of the Company's proprietary rights. LENGTHY REGULATORY PROCESSES AND UNCERTAINTY OF REGULATORY APPROVALS The process of obtaining Food and Drug Administration (FDA) and other required regulatory approvals can be lengthy and expensive. The time required for approvals is uncertain, and often depends on the type, complexity and novelty of the product. There can be no assurance that regulatory agencies will act favorably or quickly in their review of any submission by the Company, and significant difficulties or costs may be encountered by the Company in its efforts to obtain approvals that could delay or preclude the Company from marketing its products. Furthermore, there can be no assurance that the agency will not request the development of additional data following original submissions, causing the Company to incur further cost and delay. Nor can there be any assurance that the FDA will not restrict the intended use of a submitted product as a condition for clearance. If the FDA concludes that a device is not substantially equivalent to another legally marketed device, submission of a premarket approval ("PMA") application will be required. If the FDA indicates that a PMA is required for any product of the Company, the application will require submission of results of clinical studies and manufacturing information, and likely a review by a panel of experts outside of the FDA. Clinical studies would need to be conducted in accordance with FDA requirements. The failure to comply would result in the FDA's refusal to accept the data or the imposition of regulatory sanctions. FDA review of a PMA application can take significantly longer than that for a premarket notification "510(k)" application to demonstrate "substantial equivalence" to a legally marketed product. Further, if a company wishes to propose modifications to a product subsequent to FDA approval of a PMA application, including changes in indications or other significant modifications to labeling, or modifications to the manufacturing process, or if a company wishes to change its manufacturing facility, a PMA supplement must first be submitted to the FDA for its review and approval. -6- EXTENSIVE CONTINUING GOVERNMENT REGULATION The research, development, manufacturing and marketing of the Company's products are subject to extensive continuing regulation by numerous governmental authorities in the U.S. and certain other countries, and the Company, its products, and its manufacturing facilities are subject to continual review and periodic inspection. The regulatory standards for manufacturing are applied stringently by the FDA. Discovery of previously unknown problems with a product, manufacturer, or facility may result in restrictions on such product or manufacturer or facility, including warning letters, fines, suspensions of regulatory approvals, product recalls, operating restrictions, delays in obtaining new product approvals, withdrawal of the product from the market, and criminal prosecution. Other violations of FDA requirements can result in similar penalties. The Company is also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens, and the handling of biohazardous materials. Any violation of, and the cost of compliance with, these laws and regulations could adversely impact the Company's operations. The Company is unable to predict the extent or likelihood of adverse government regulation that might arise from future U.S. or foreign government action. LIMITED MANUFACTURING EXPERIENCE The Company is developing adaptations of its core technology for use in physicians' offices and depends upon the efforts of collaborators for this development. Such adaptations have not been fully completed and there can be no assurance that, if developed, such adaptations could be manufactured in a commercially viable manner. Unless the Company develops additional in-house manufacturing capability for such products, it will be dependent upon outside sources for the manufacture of such products. There can be no assurance that the Company's reliance on others for the manufacture of its products will not result in problems with product supply. Interruptions in the availability of products could delay or prevent the development and commercial marketing of the Company's products. HISTORY OF LOSSES AND LIMITED OPERATING HISTORY The Company has a limited operating history and had a retained deficit through December 31, 1999 of $33,793,000. For the year-end December 31, 1999, the Company had a net loss of $1,570,000. The Company expects to incur additional costs as it continues with its operations, marketing efforts, research and development activities, and clinical trials. The Company expects to continue to incur losses in future periods and the Company is unable to predict when, if at all, it will achieve profitability. FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING The Company's future capital requirements depend upon many factors, including the effectiveness of Osteomark NTx Serum and Urine tests commercialization activities and arrangements; continued scientific progress in its research and development programs; the costs involved in filing, prosecuting and enforcing patent claims; the manufacturing needs for new products; 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 or through private placements, even if the Company does not have an immediate need for additional cash at that time. If additional financing is not available, the Company believes that its existing available cash, its future license and research revenues from existing collaboration agreements, its current level of product sales and interest income from short-term investments will be adequate to fund operations into the foreseeable future. INTENSE COMPETITIVE ENVIRONMENT Competition from biotechnology companies, diagnostic companies, pharmaceutical companies, and research and academic institutions is intense and is based on price as well as product performance. A number of diagnostic tests and procedures, and other non-invasive tests for osteoporosis and other bone disorders currently exist and others are in development, and the manufacturers of these tests will continue to -7- improve them. In addition, the diagnostic industry is subject to rapid technological change. There can be no assurance that the Company's competitors will not succeed in developing products that are more effective or less expensive than those which have been or are being developed by the Company or which would render the Company's core technology obsolete or non-competitive. Many of the Company's competitors have substantially greater financial, technical and human resources than the Company. In addition, many of these competitors have significantly greater experience and resources than the Company in undertaking clinical trials and other regulatory approval procedures as well as in marketing and achieving manufacturing efficiencies. There are also small companies, academic institutions, governmental agencies and other research organizations that are conducting research in the area of osteoporosis and other collagen-related diseases. These entities may also market commercial products either on their own or through collaborative efforts. The Company's competitors may develop technologies and products that are available for sale prior to the Company's products or at a lower cost or with better technical characteristics rendering the Company's products less competitive. DEPENDENCE ON THERAPEUTICS DEVELOPED BY OTHERS Acceptance of and demand for the diagnostic products that the Company is developing will be affected by the need perceived by physicians to diagnose bone, cartilage and connective tissue disorders for the purposes of treatment. There are currently a limited number of therapies that are effective in preventing osteoporosis or other bone, cartilage or connective tissue disorders, or in treating these disorders once diagnosed. In the event new therapies do not receive regulatory approval or experience delayed market acceptance, the Company could be adversely affected. Unfavorable publicity concerning a product of the Company or therapeutic products for osteoporosis could also have an adverse effect on the Company's ability to obtain regulatory approvals or to achieve market acceptance. UNCERTAINTY OF HEALTHCARE REIMBURSEMENT The Company's ability to commercialize its products will depend in part on the extent to which reimbursement for the cost of such products and related treatment will be available from third-party payors, such as government health administration authorities, private health coverage insurers and other organizations. The status of the scope of healthcare programs worldwide is uncertain and there can be no assurance that adequate third-party coverage will be available for the Company to maintain price levels sufficient for realization of an appropriate return on its investment in product development. Third-party payors are increasingly challenging the price and cost effectiveness of medical products and services. If the Company succeeds in bringing one or more products to the market, there can be no assurance that these products will be considered cost effective and that reimbursement to the consumer will be available or sufficient to allow the Company to sell its products on a competitive basis. VOLATILITY OF STOCK PRICE The volatility of the Company's stock price has been significant since it first became publicly traded in January 1995. The stock market may experience significant price and volume fluctuations unrelated to the operating performance of particular companies. Factors such as any loss of key management, the results of the Company's clinical trials or those of its competitors, adverse regulatory actions or decisions, evidence regarding the safety or efficacy of the Company's products or those of its competitors, announcements of technological innovations or new products by the Company or its competitors, governmental regulation, developments with respect to patents or other proprietary rights, product or patent litigation or public concern as to the safety of products developed by the Company may have a volatile effect on the market price of the Company's Common Stock. -8- ITEM 1B. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company and their ages are as follows:
NAME AGE POSITION - ---- --- -------- Thomas A. Bologna 51 Chairman, President and Chief Executive Officer Thomas F. Broderick 51 Vice President, Patent and General Counsel J. Daniel Clemens 43 Vice President, Product Development Michael C. Perry 55 Vice President, Sales and Marketing Nancy J.S. Mallinak 38 Vice President, Regulatory and Clinical Affairs Cory J. Smith 49 Vice President, Manufacturing
There were no family relationships between any executive officers of the Company. THOMAS A. BOLOGNA joined the Company in July 1997 as the President and Chief Executive Officer and as a member of the Board of Directors. From January 1996 to July 1997 Mr. Bologna was a principal in Healthcare Venture Associates, a consulting firm. From January 1994 to January 1996 Mr. Bologna was President and Chief Executive Officer for Scriptgen Pharmaceuticals, Inc., a biotechnology company with proprietary drug screening and development technology that is developing orally active drugs to regulate gene expression, and from July 1987 to January 1994 Mr. Bologna was the Chairman of the Board of Directors and President and Chief Executive Officer of Gen-Probe Incorporated, a biotechnology company commercializing genetic-probe-based technology for diagnostic and therapeutic applications. THOMAS F. BRODERICK was named the Vice President, Patent and General Counsel in November 1997. Mr. Broderick was Vice President, Intellectual Property from March 1997 to November 1997 and was Patent Counsel for the Company from April 1996 to March 1997. From 1989 to March 1996, Mr. Broderick was a partner at the patent law firm of Christensen, O'Connor, Johnson & Kindness in Seattle, Washington. J. DANIEL CLEMENS was named the Vice President, Product Development in September 1998. Mr. Clemens was Director of Research & Development for the Company from May 1992 to September 1998 and Manager of Product Development from October 1990 to May 1992. Prior to joining Ostex, Mr. Clemens was Senior Research & Development Scientist from February 1987 to October 1990 at Genetic Systems Corporation/Sanofi. MICHAEL C. PERRY joined the Company in February 2000 as Vice President, Sales and Marketing. Prior to joining Ostex, Mr. Perry was National Sales Manager for Sarstedt, Inc., a privately held company. Prior to Sarstedt, Mr. Perry was with Organon Teknika Corporation for over 20 years. NANCY J.S. MALLINAK was named Vice President, Regulatory and Clinical Affairs of the Company in February 1997. Ms. Mallinak was Director, Regulatory and Clinical Affairs for the Company from June 1995 to February 1997 and was Manager, Regulatory and Clinical Affairs for the Company from December 1992 to June 1995. From June 1989 to December 1992, Ms. Mallinak was Manager, Clinical Product Development in the Diagnostics Group of Baxter International, Inc., a general healthcare company. CORY J. SMITH was named Vice President, Manufacturing in September 1998. Mr. Smith was Director of Manufacturing for the Company from October 1993 to September 1998 and was the Manufacturing Engineer for the Company from September 1992 to October 1993. Prior to joining Ostex, -9- Mr. Smith was the Quality Assurance Manager from June 1991 to September 1992 at Genetic Systems Corporation/Sanofi. ITEM 2. PROPERTIES The Company's research laboratories, manufacturing operations, and administrative offices are located in Seattle, Washington. The Company leases approximately 32,000 square feet of space in Seattle under a lease that will expire in 2005. The Seattle facility has adequate capacity for the Company's present needs. ITEM 3. LEGAL PROCEEDINGS Information regarding legal proceedings is incorporated herein by reference to note 10 in the "Notes to Financial Statements" on page 28 of the Annual Report to Shareholders. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of shareholders during the fourth quarter ended December 31, 1999. -10- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS MARKET PRICE OF COMMON STOCK The Company's Common Stock is traded on the Nasdaq National Market-registered trademark- under the symbol "OSTX". The following table lists the high and low trading prices for the Company's Common Stock as reported on the Nasdaq National Market.
1999 HIGH LOW -------------------------------------- ------- -------- 1st quarter $2.44 $0.44 2nd quarter 1.75 0.97 3rd quarter 1.37 1.00 4th quarter 4.88 0.94
1998 HIGH LOW -------------------------------------- ------- -------- 1st quarter $3.06 $1.88 2nd quarter 3.00 1.25 3rd quarter 2.00 0.31 4th quarter 1.00 0.34
The closing price of the Common Stock on December 31, 1999 was $3.00. HOLDERS OF COMMON STOCK As of March 16, 2000, there were 12,479,139 shares of Common Stock outstanding held of record by approximately 133 shareholders. The Company believes there are approximately 3,700 additional owners of Common Stock who own shares held in street name. DIVIDEND POLICY The Company has never paid cash dividends and has no present intention of paying dividends in the foreseeable future. COMMON STOCK WARRANT During the period covered by this report on Form 10-K, the Company granted an unregistered warrant to an outside consultant for the purchase of 100,000 shares of Common Stock at an exercise price of $2.00, in exchange for services to be provided to the Company. The warrant vests in twelve equal monthly installments beginning one month after the grant date, March 23, 1999, and expires three years from the grant date, March 22, 2002. This warrant was exempt from registration under the Securities Act pursuant to Section 4 (2) of the Securities Act on the basis that the transaction did not involve a public offering. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C., Seattle, Washington. -11- ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference to "Selected Financial Data" on page 16 of the Annual Report to Shareholders, which is included as Exhibit 13.0 to this Annual Report on Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated herein by reference to pages 17-19 of the Annual Report to Shareholders, which is included as Exhibit 13.0 to this Annual Report on Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated herein by reference to the Financial Statements and "Notes to Financial Statements" on pages 20-29, and "Report of Independent Public Accountants" on page 30, of the Annual Report to Shareholders, which is included as Exhibit 13.0 to this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -12- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT a. Directors The information contained in the section entitled "Election of Directors and Director Information" of the Proxy Statement is incorporated herein by reference in response to this item. b. Executive Officers of the Registrant Information required by this item is contained in Part I of this Annual Report on Form 10-K in the section entitled "Executive Officers of the Registrant." c. Compliance With Section 16(a) Information contained in the section entitled "Compliance with Section 16(a) of the Exchange Act" of the Proxy Statement is incorporated herein by reference in response to this item. ITEM 11. EXECUTIVE COMPENSATION The information contained in the section entitled "Executive Compensation" of the Proxy Statement is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in the section entitled "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the section entitled "Compensation Committee Interlocks and Insider Participation" of the Proxy Statement is incorporated herein by reference in response to this item. -13- PART IV ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS, AND REPORTS ON FORM 8-K A. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS (1) FINANCIAL STATEMENTS The following financial statements and "Report on Independent Public Accountants" are incorporated by reference to pages 20 through 30 of the Annual Report to Shareholders and are listed below. Certain information provided in the Annual Report to Shareholders is included as Exhibit 13.0 to this Annual Report on Form 10-K.
Page within FINANCIAL STATEMENTS ANNUAL REPORT Balance Sheets 20 Statements of Operations 21 Statements of Cash Flows 22 Statements of Shareholders' Equity 23 Notes to Financial Statements 24 Report of Independent Public Accountants 30
(2) FINANCIAL STATEMENT SCHEDULES Financial Statement Schedules have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or notes thereto. (3) Exhibit Index (see note (1)) EXHIBIT INDEX
Exhibit NUMBER DESCRIPTION NOTES ------ ----------- ----- 3.1 Articles of Incorporation, as amended, dated January 1997 (2) 3.2 Bylaws, as amended (3) 4.1 Specimen Common Stock Certificate (3) 10.1A Amended and Restated Stock Option Plan* (3) 10.1B Form of Employee Stock Option Agreement* (3) 10.1C Form of Director's Stock Option Agreement* (3) 10.2 Amended and Restated Directors' Nonqualified Stock Option Plan dated July 16, (4) 1997* 10.3 Amended and Restated 1994 Stock Option Plan* (4) AGREEMENTS WITH HOLOGIC, INC. 10.4A Co-Promotion and Sales Representation Agreement dated January 14, 1997 (5)(6) 10.4B Joint Development, License and Supply Agreement dated January 14, 1997 (5)(6) 10.5 Form of Indemnification Agreement with officers and directors* (3) 10.7 Agreement with Thomas A. Bologna Executive Employment Agreement dated July 16, (7) 1997*
-14-
Exhibit NUMBER DESCRIPTION NOTES ------ ----------- ----- AGREEMENTS WITH MOCHIDA PHARMACEUTICAL CO., LTD. 10.12A Research and Development Agreement dated August 1992 (3) 10.12B Osteomark License Agreement Dated August 1992 (3) 10.12D Second Amendment to Osteomark License Agreement dated December 24, 1997 (5) AGREEMENTS WITH THE WASHINGTON RESEARCH FOUNDATION 10.13A Restated Exclusive License Agreement effective June 19, 1992 (Urinary (3) Assay for Measuring Bone Resorption) 10.13B Amendment to Restated Exclusive License Agreement effective January 1, (3) 1993 10.13C Second Amendment effective June 2, 1994 (3) 10.14 Exclusive License Agreement dated February 10, 1994 (O-CSF) AGREEMENTS WITH THE UNIVERSITY OF WASHINGTON 10.15A Research Agreement dated July 1, 1996 (Molecular Markers of Connective (5)(6) Tissue Degradation) 10.15B Research Agreement dated October 1, 1996 (Role of O-CSF in Osteoclast (5)(6) Regulation) 10.16A Know-How Transfer and Consulting Agreement dated September 18, 1989 with (3) David R. Eyre, Ph.D.* 10.16B Extension and Amendment dated May 1, 1992* (3) 10.19 Osteomark EIA Exclusive Distribution License Agreement dated March 28, (3) 1994 with Technogenetics S.R.L. 10.20 Osteomark EIA Distribution License Agreement dated July 12, 1994 with (3) BRAHMS Diagnostic (formerly Henning Berlin GmbH) 10.23 Osteomark Agreement dated February 12, 1993, as amended May 10, 1994, (3) with Nichols Institute Reference Laboratory LEASE AGREEMENTS 10.27A Lease Agreement dated October 2, 1995, with David A. Sabey and Sandra L. (8) Sabey (2) 10.27B First Amendment of Lease dated October 15, 1996, with the City of Seattle, successor-in-interest to David A. Sabey and Sandra L. Sabey AGREEMENTS WITH JOHNSON & JOHNSON CLINICAL DIAGNOSTICS, INC. 10.28A Distribution Agreement dated June 7, 1995 (9) 10.28B Research, Development, License and Supply Agreement dated June 7, 1995 (9) 10.29 Clinical Laboratory Services License and Supply Agreement dated October (8) 25, 1995, with SmithKline Beecham Clinical Laboratories, Inc. 10.30 Promotion Agreement dated September 30, 1997 with Wyeth-Ayerst (7) Laboratories 10.31 Agreement with Laboratory Corporation of America-TM-Holdings (LabCorp), (10) dated January 11, 1996 10.32A Joint Development, License and Co-Marketing Agreement dated April 10, (11) 1997 with Metrika, Inc. 10.33 Form of CS First Boston Corporation Warrant (12) 10.34 Form of Invemed Associates, Inc. Warrant (13)
-15-
Exhibit NUMBER DESCRIPTION NOTES ------ ----------- ----- 10.35 Shareholder Rights Agreement dated January 21, 1997 (14) 10.36 Physician Sales and Service Dealership Agreement dated October 1, 1999 (15) 13.0 Selected Financial Data, Management's Discussion and Analysis of Financial Condition and Results of Operations, Financial Statements and Notes to the Financial Statements from the Company's Annual Report to Shareholders for the year ended December 31, 1999 23.1 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule
- ----------------------------- * Management contract or compensatory plan or agreement. (1) Copies of exhibits may be obtained at prescribed rates from the Public Reference Section of the Commission at 450 5th Street NW, Room 1024, Washington, D.C. 20549, or through the Commission's Edgar system located on the internet at www.sec.gov. (2) Incorporated herein by reference to exhibit of the same number filed with Form 10-K with the Commission for the year ended December 31, 1996 (3) Incorporated herein by reference from Item 16(a) of Registrant's Form S-1 Registration Statement as declared effective January 24, 1995 (No. 33-86118). (4) Incorporated herein by reference to exhibit of the same number filed with Form S-8 with the Commission on January 13, 1998. (5) Confidential treatment requested. Exhibit omits information that has been filed separately with the Commission. (6) Incorporated herein by reference to exhibits of the same number filed with Form 10-K with the Commission for the year ended December 31, 1996, and as amended with Form 10-K/A on October 17, 1997. (7) Incorporated herein by reference to exhibits of the same number filed with Form 10-K with the Commission for the year ended December 31, 1997. (8) Incorporated herein by reference to exhibit of the same number filed with Form 10-K with the Commission for the year ended December 31, 1995. (9) Incorporated herein by reference to exhibit of the same number filed with Form 10-Q with the Commission for the quarter ended June 30, 1995 (10) Incorporated herein by reference to exhibit of the same number filed with Form 10-Q with the Commission for the quarter ended March 31, 1996. (11) Incorporated herein by reference to exhibit of the same number filed with Form 10-Q with the Commission for the quarter ended September 30, 1997. (12) Incorporated herein by reference to exhibit number 1.1A filed with the Registrant's Form S-1 Registration Statement as declared effective January 24, 1995 (No. 33-86118). (13) Incorporated herein by reference to exhibit number 1.1B filed with the Registrant's Form S-1 Registration Statement as declared effective January 24, 1995 (No. 33-86118). (14) Incorporated herein by reference to exhibit number 4.5 filed with Form 8-A with the Commission in January 1997. (15) Confidential treatment has been granted or requested with respect to portions of this exhibit. (B) REPORTS ON FORM 8-K None -16- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on March 24, 2000. OSTEX INTERNATIONAL, INC. By /s/ THOMAS A BOLOGNA ---------------------------------- Thomas A. Bologna Chairman, President and Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITIES DATE --------- ---------- ---- Chairman, President and /S/ THOMAS A. BOLOGNA Chief Executive Officer March 24, 2000 - ---------------------------------------- (principal executive officer and Thomas A. Bologna principal financial officer) /S/ THOMAS J. CABLE Director March 24, 2000 - ---------------------------------------- Thomas J. Cable /S/ ELISABETH L. EVANS Director March 24, 2000 - ---------------------------------------- Elisabeth L. Evans /S/ DAVID R. EYRE Director March 24, 2000 - ---------------------------------------- David R. Eyre /S/ FREDRIC J. FELDMAN Director March 24, 2000 - ---------------------------------------- Fredric J. Feldman /S/ GREGORY D. PHELPS Director March 24, 2000 - ---------------------------------------- Gregory D. Phelps /S/ JOHN H. TRIMMER Director March 24, 2000 - ---------------------------------------- John H. Trimmer
EX-10.36 2 EX-10.36 =============================================================================== EXHIBIT 10.36 Redacted Version ================================================================================ DEALERSHIP AGREEMENT This Dealership Agreement ("Agreement") is entered into this 1st day of October, 1999, (the "Effective Date") by and between OSTEX INTERNATIONAL, INC., a Washington corporation, 2203 Airport Way South, Suite 400, Seattle, Washington 98134 (hereinafter referred to as "Ostex") and PHYSICIAN SALES AND SERVICE, INC., a Florida corporation, with offices at 4345 Southpoint Blvd., Jacksonville, FL 32216 (hereinafter referred to as "PSS"). WITNESSETH: In consideration of the mutual promises made herein, the parties agree as follows: 1. DEFINITIONS. As used herein: a) "Territory" shall mean the U.S.A. b) "Product" shall mean the Osteomark-registered trademark- NTx/Creatinine quantitative point-of-care ("POC") device manufactured exclusively for Ostex by Metrika, Inc. c) "Office Market" shall mean office-based physicians, [ * ]. 2. GRANT OF DEALERSHIP. Ostex hereby grants PSS an exclusive Dealership to serve the Office Market in the Territory with respect to the promotion and sale of the Product. PSS accepts such Dealership and shall undertake its best efforts to promote the sale of the Product. PSS understands that Ostex has expended and will continue to expend substantial efforts and funds to secure and retain public goodwill toward the Product and its trademarks, and recognizes the vital interest to Ostex in the proper marketing of the Product. It shall be a material condition of this Agreement that PSS will sell the Product only to the Office Market within the Territory. It is expressly understood and agreed that although this Agreement is exclusive, Ostex may sell the Product to [ * ] for distribution to the Office Market in the Territory, provided the [ * ] distribute the Product with their own sales force and solely in connection with the marketing of [ * ] to the Office Market. During the term of this - ------------------------------- [*] Confidential Treatment Requested Agreement, Ostex will 1not sell the Product to [ * ], for distribution to the Office Market in the Territory, [ * ]. Furthermore, if Ostex sells such Product to [ * ] at a [ * ] that Ostex sells the Product to PSS, Ostex will share [ * ] percent of the proceeds attributable to the [ * ] with PSS. During the term of this Agreement, and at any time that PSS is selling the Product, PSS shall not represent other products that compete with the Ostex Product. 3. PRICING, SUPPLY, AND RETURNS. For the first [ * ] months of this Agreement, Ostex agrees to sell the Product to PSS at the price of [ * ] dollars [ * ] per [ * ] point-of-care devices. Prior to the Product achieving CLIA waiver status, Ostex agrees to provide PSS [ * ] urine controls and [ * ] point-of-care devices with every [ * ] point-of-care devices that PSS orders. After the Product achieves CLIA waiver status, Ostex agrees to sell to PSS urine controls for use with the Product at a price [ * ]. Between the fifth and sixth month of this Agreement, the parties will review and may adjust the Product pricing (by no more than +/- [ * ]) in view of the progressive rollout results. At that time the parties will also agree to minimum purchase requirements of the Product for the remaining term of this Agreement, commencing [ * ]. If at the end of any calendar year these performance expectations are not met, Ostex may at its sole discretion convert this Agreement to a [ * ] dealership or terminate this Agreement. Sales shall be FOB Seattle, WA, or Sunnyvale, CA. The terms of payment are net thirty (30) days of invoice date. Past due accounts are subject to a service and handling charge of 1 % per month. Within [ * ] days before the beginning of each calendar quarter, in consultation with Ostex, PSS will provide Ostex with a "Rolling Forecast" of PSS's requirements for Product for the twelve-month period commencing on the next calendar quarter. PSS's stated requirements for the first three-month period of each twelve-month period will constitute a firm purchase order that will obligate PSS to purchase the indicated number of Product devices. The forecasted demand for the fourth, fifth, and sixth months of each Rolling Forecast shall be relied upon by Ostex for the purposes of manufacturing and supply obligations hereunder, but PSS may within the subsequent Rolling Forecast vary its initial forecast for such months by no more than [ * ] percent ([ * ]%) of the aggregate - --------------------------------- [*] Confidential Treatment Requested 2 unless agreed to by Ostex. The final [ * ] months of each Rolling Forecast will constitute non-binding estimates of PSS's requirements for the periods described therein. Ostex shall accept return of Product purchased by PSS under this Agreement under the following conditions: (i) the Product was originally shipped to PSS with less than [ * ] months shelf life; (ii) the Product is unopened and unused; (iii) PSS provides the necessary data for Ostex to authorize a return (e.g., lot number, expiration date, condition, and purchase order number of the Product). Upon receipt and confirmation of information requested, Ostex will issue a Return Material Authorization ("RMA") number that PSS must include on all paperwork that accompanies the returned Product (including the outside of the return packaging). Ostex shall also accept return of Product purchased by PSS under this Agreement in the event that Ostex becomes bankrupt or insolvent or undergoes a change of ownership. 4. PRODUCT LAUNCH. Ostex will organize with the PSS Marketing team a progressive rollout of the Product on a [ * ] basis. PSS will establish with Ostex inventory minimums and sales goals by [*]. Minimum acceptable inventory will be [ * ] days. 5. PSS'S RESPONSIBILITIES. a) PSS agrees to actively promote the sale of the Product to the Office Market in the Territory, to the best of PSS's ability nationally, and to otherwise safeguard Ostex' interest wherever possible. All promotional material will be reviewed and approved by Ostex prior to PSS's use, in accordance with Ostex' promotional and advertising policy. b) PSS shall provide Ostex with monthly sales reports indicating sales of Product to physicians by [ * ]. c) PSS agrees to keep Ostex informed about market trends and conditions, experiences with customers, and major negotiations and prospective sales possibilities. d) PSS agrees to turn over to Ostex any and all leads from any potential customers who are not in the Office Market. e) PSS further agrees to assist Ostex in promoting the Osteomark NTx assay [ * ], and to that end to transmit to Ostex hereunder leads with respect to potential sales of NTx [ * ]. - --------------------------------- [*] Confidential Treatment Requested 3 f) PSS agrees to provide at Ostex direction proper documentation of PSS's handling of the Product to assure that OstexProduct in PSS's possession complies with all orders, rules and regulations issued by the FDA and QS Regulation. g) PSS shall provide all in-service training for Product sold by PSS to the Office Market. h) PSS agrees not to alter the Product in any way and not to remove the Ostex name, trademarks, or trade dress from the Product or its packaging. i) PSS shall provide a place of business with adequate communications service to efficiently effect the business of Product sales. j) PSS shall maintain adequate inventory of Ostex sales materials and technical information and make effective use of such items in its best judgment. 6. OSTEX RESPONSIBILITIES a) Ostex will provide assistance to the PSS Marketing team in launching the Product [ * ]. b) Ostex will at its option support PSS's annual national sales meeting at [ * ] for the first year, and thereafter at invited [ * ]. Additionally, Ostex will participate in quarterly promotions to include Platinum Plus promotions. c) Ostex shall provide an 800 support number for PSS and customers. d) Ostex shall provide PSS with a reasonable quantity of promotional materials to assist in PSS's marketing efforts. Additional promotional materials can be purchased from Ostex [ * ]. e) Ostex shall turn over to PSS all Office Market leads for the Product but not for other Ostex products. f) Ostex will provide a product video or computer display for use in the sales activities of PSS's sales personnel. - --------------------------------- [*] Confidential Treatment Requested 4 7. CONFIDENTIAL INFORMATION PSS and Ostex agree not to make available or accessible to any third party or use except as authorized for the purposes of performing this Agreement any technical or commercial data or other information of a competitive, special or confidential nature, transmitted to either party by the other, and this undertaking shall continue to be applicable for a period of [ * ] following the expiration or termination of the Agreement for whatever cause. However, upon expiration or termination of this agreement PSS will promptly provide sufficient customer information to Ostex so that Ostex to can continue to service such existing customers of the Product in the Office Market. 8. INSURANCE PSS shall procure and maintain in full force and effect during the term of this Agreement an insurance policy or policies, protecting PSS, its officers, directors, employees and agents against any loss, liability or expense whatsoever, arising out of or in connection with PSS's sale of the Product. Ostex shall indemnify and hold harmless PSS and its agents, employees, officers and directors from claims relating to the use of the Product, product liability, warranty claims and all matters relating to the Product except to the extent that the claim arises from or is related to the acts, omissions or misrepresentations of the PSS, its employees, officers, directors and agents. Ostex shall secure Product liability insurance in an amount not less than [ * ] and shall secure a vendor endorsement naming PSS as an additional insured. 9. TRADE SHOWS AND TRAINING COURSES. a) PSS agrees to display and promote the Product at a reasonable number of local meetings or exhibits as they may arise, at its sole cost and expense. All exhibit material developed for and all promotional material distributed at such local meetings and exhibits will be reviewed and approved by Ostex prior to use, in accordance with Ostex promotion and advertising policy. b) From time to time, PSS agrees to send select members of its sales and marketing group to Ostex for training, at PSS's sole cost and expense. Ostex agrees to provide appropriate training to PSS's employees at PSS's locations at [ * ]. - --------------------------------- [*] Confidential Treatment Requested 5 10. OSTEX NAME AND TRADEMARK In the event the PSS wishes to fix a label on the outer packaging box containing the Products, showing that the PSS has an Ostex Dealership, PSS agrees to coordinate with Ostex in advance the manner, size, location and appearance of such label. PSS shall use the name Ostex and the Ostex-registered trademark- and Osteomark-registered trademark- trademarks only for the duration of this Agreement and only for the design of marketing materials for the Product, and only after having obtained specific prior approval in writing from Ostex. PSS will, therefore, submit all such proposals to Ostex for approval. PSS agrees to immediately cease use of the name Ostex and the Ostex-registered trademark- and Osteomark-registered trademark- trademarks upon expiration or termination of this Agreement. 11. TERM OF THE AGREEMENT This Agreement shall come into effect on the Effective Date set forth above, and shall continue for a period of [ * ] years from the Effective Date, unless terminated earlier as provided herein. This Agreement shall be automatically renewed for successive [ * ] periods, unless either party notifies the other party in writing of its intention not to renew this Agreement at least [ * ] days prior to the expiration of the then current term. 12. IMMEDIATE TERMINATION PRIOR TO EXPIRATION OF THE AGREEMENT Either party shall have the right to terminate this Agreement with immediate effect during the term of the Agreement if the other party shall be adjudged bankrupt or insolvent, or shall become insolvent, or if a receiver or other officer is appointed by any court or governmental authority to administer or liquidate the company, or in the event of dissolution proceedings by or against said other party. 13. TERMINATION WITH CAUSE Either party shall have the right to terminate this Agreement in the event that the other party defaults in the material performance of this Agreement and continues in default thereof after [ * ] days' written notice by the first party of such default. During this [ * ] day cure period the parties agree to discuss the conflict at senior levels with the goal of resolving the conflict without termination or litigation. If the conflict is not resolved within the [ * ] day cure period, the notifying party may terminate the Agreement or, if the notifying party is Ostex, convert this Agreement to a nonexclusive dealership. If Ostex terminates this Agreement following the [ * ] day cure period, Ostex must provide - --------------------------------- [*] Confidential Treatment Requested 6 an additional [ * ] day separation period during which PSS can sell its inventory of Product. 14. TERMINATION WITHOUT CAUSE Either party shall have the right to terminate this Agreement, without cause, upon [ * ] months prior written notice. 15. UNDERTAKINGS RELATED TO TERMINATION Upon termination or expiration of this Agreement for whatever cause: a) PSS agrees to return Ostex immediately after such termination or expiration, or separation period, all written materials forwarded by Ostex to PSS hereunder. b) Ostex shall have the option to purchase from PSS, exercisable in Ostex's sole discretion, and PSS agrees to sell to Ostex at the price that PSS paid to Ostex, any or all Ostex Product to which PSS has title upon said termination or expiration. c) PSS agrees that no obligation shall exist for Ostex to indemnify PSS for damages of any kind pertaining to PSS's investment in the promotion of the Product, it being understood that the PSS price permits a sufficient return on investment. 16. AMENDMENTS This Agreement cannot be amended except in writing duly signed by an authorized representative of Ostex and PSS. 17. NON-ASSIGNABILITY The Agreement shall not be assignable by either party without the written consent of the other, except that Ostex may assign this Agreement to any affiliated Ostex company without consent. Any attempted assignment in violation hereof shall be void. 18. NOTICES All notices required to be given hereunder shall be deemed given if in writing and deposited in the United States mail in a sealed envelope, certified, with postage thereon prepaid and addressed to Ostex or PSS, at the addresses listed on page 1 of this Agreement or at such other address as the parties may direct by notice given as herein provided. - --------------------------------- [*] Confidential Treatment Requested 7 19. INDEPENDENT CONTRACTOR Each of the parties is an independent contractor. Neither party has any authority, expressed or implied, to act for the other in dealings with others, and neither shall purport to act as the agent or employee of the other. PSS and Ostex shall be responsible for compliance with all laws and regulations governing their respective businesses, and will hold the other party harmless from all claims arising out of its conduct. No employee of PSS shall be deemed in any manner whatsoever to be an employee of Ostex, and as such shall not be entitled to and is not qualified under any employee benefit plans provided by Ostex for Ostex employees. The employees of PSS shall not be entitled to participate in any plans, arrangements or distributions by Ostex pertaining to, or in connection with, any bonus, pension, health, insurance, welfare or similar benefit plan offered by Ostex to employees. PSS and its employees shall be solely responsible for any and all city, state and federal income taxes, social security withholding taxes and any other tax obligation to which the employees of PSS may be subjects. Ostex shall not be responsible for any payments due to or on account of PSS's employees in connection with the Agreement. 20. WAIVER The waiver by either party of a default or breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent default or breach. 21. ARBITRATION. In the event of any controversy or threatened breach arising under or relating to this Agreement, the parties agree to submit such issue to arbitration at an office of the American Arbitration Association, according to the rules and regulations of that Association. The arbitration shall take place in Seattle, WA if initiated by PSS, or in Jacksonville, FL if initiated by Ostex. The arbitrators shall be authorized to award the costs and expenses of arbitration to the prevailing party. Judgment on an arbitration award entered pursuant to a vote duly taken may be entered in any court of competent jurisdiction. The party desiring arbitration shall give written notice to that effect to the other party, stating the dispute to be arbitrated and the name and address of the person designated to act as arbitrator on its behalf. Within ten (10) days after said notice shall be given, the other party shall give written notice to the first party, stating the name and address of the person designated to act as arbitrator on its behalf. In the event that the second party shall fail to notify the first party of its designation of an arbitrator as aforesaid within the time above specified, then the appointment of the second arbitrator shall be made in the same manner as hereinafter provided for the appointment of a third arbitrator by the American Arbitration Association. The arbitrators so chosen shall meet within ten (10) days after the second arbitrator shall be appointed and within thirty (30) days thereafter shall decide the controversy they were appointed to arbitrate. 8 In the event that within the aforesaid period, the two arbitrators shall be unable to agree on a decision they shall appoint a third arbitrator, and if they cannot agree on said appointment, the third arbitrator shall be appointed on their application or on the application of either party, by the American Arbitration Association. The three (3) arbitrators shall meet and decide the dispute. A decision in which two (2) of the three (3) arbitrators shall concur shall be binding and conclusive on the parties. In designating arbitrators and deciding the dispute, the arbitrators shall act according to the rules then in force of the American Arbitration Association, subject, however, to such limitations as the provisions of this Agreement may place on them. Any claims for breach of this Agreement or any cause of action whatsoever arising out of, or in any way related to this Agreement, shall be waived and forfeited, unless asserted by the claiming party by commencement of an arbitration proceeding with respect to such breach within one (1) year after the claiming party has become aware of the claim. In the event any proceeding is brought to enforce or interpret any of the terms of this Agreement, including Ostex Standard Terms and Conditions of Sale or policies, the prevailing party shall be entitled to recover from the other party all reasonable attorney's fees, together with such other expenses, costs and disbursements as may be allowed by law. 22. ENTIRE AGREEMENT This Agreement constitutes the entire agreement between Ostex and PSS, is a complete and exclusive statement, and supersedes all previous agreements of any kind concerning the subject matter and scope hereof. 23. CHOICE OF LAW This Agreement shall be governed by and interpreted under the laws of the State of Washington without regard to the conflicts of laws rules thereof. Accepted: OSTEX INTERNATIONAL, INC. PHYSICIAN SALES AND SERVICE, INC. Name: THOMAS A. BOLOGNA D. J. HARPER -------------------------------- ------------------------------------- Signature: /s/ THOMAS A. BOLOGNA /S/ D. J. HARPER ------------------------------ ------------------------------------ Title: Chairman, President & CEO Senior Vice President Date: OCTOBER 7,1999 11/10/99 ---------------------------------- ------------------------------------ 9 EX-13 3 EX-13 EXHIBIT 13 SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) - ----------------------------------------------------------------------------------------------------------------------- FISCAL YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995 REVENUES: Product sales and research testing services $ 4,732 $ 3,047 $ 3,658 $ 2,860 $ 1,830 License fees and research and development payments - - 450 1,087 1,495 ----------- ------------ ------------ ----------- ------------ Total revenues 4,732 3,047 4,108 3,947 3,325 COST OF PRODUCTS SOLD 1,130 814 899 926 603 GROSS MARGIN ON PRODUCT SALES 3,602 2,233 2,759 1,934 1,227 (Percentage of sales) 76% 73% 75% 68% 67% OPERATING EXPENSES: Research and development 1,734 2,901 4,470 3,163 3,200 Selling, general and administrative 3,831 8,122 8,031 9,201 6,583 ----------- ------------ ------------ ----------- ------------ Total operating expenses 5,565 11,023 12,501 12,364 9,783 ----------- ------------ ------------ ----------- ------------ Loss from operations (1,963) (8,790) (9,292) (9,343) (7,061) Other Income: Proceeds from legal settlement - - 6,200 - - Interest income, net 393 695 828 1,273 1,684 ----------- ------------ ------------ ----------- ------------ Net loss $ (1,570) $ (8,095) $ (2,264) $(8,070) $ (5,377) =========== ============ ============ =========== ============ - ----------------------------------------------------------------------------------------------------------------------- Basic and diluted net loss per common and common equivalent share $ (0.13) $ (0.64) $ (0.18) $ (0.65) $ (0.45) =========== ============ ============ =========== ============ - ----------------------------------------------------------------------------------------------------------------------- Weighed average shares used in calculation net loss per share 12,522 12,696 12,574 12,441 11,929 =========== ============ ============ =========== ============
(IN THOUSANDS) - ----------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1999 1998 1997 1996 1995 BALANCE SHEET DATA: Cash, cash equivalents and short-term investments $ 8,400 $ 10,979 $ 18,965 $ 21,229 $ 27,794 Working capital 9,205 10,624 18,368 20,901 28,361 Total assets 12,297 15,065 24,112 25,691 32,841 Accumulated deficit (33,793) (32,223) (24,128) (21,864) (13,794) Total shareholders' equity $ 11,709 $ 13,488 $ 21,644 $ 23,526 $ 31,518 =========== ============ ============ =========== ============
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Ostex International, Inc. (the "Company") is engaged in the discovery and commercialization of products associated with osteoporosis and other collagen-related diseases. The Company's lead product, the OSTEOMARK-registered trademark- NTx test, incorporates breakthrough and patented technology in the area of bone resorption measurement. Ostex has formed collaborative relationships with leading reference laboratories and pharmaceutical companies to aid in the commercialization of Osteomark. 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 on page 19 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 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, 1999, that attempt to advise interested parties of the risks and factors that may affect the Company's business. On May 8, 1995, the Osteomark NTx Urine test first became commercially available in the United States as a urinary test that provides a quantitative measure of the excretion of cross-linked N-telopeptides of type I collagen ("NTx") as an indicator of human bone resorption. Prior to becoming commercially available, the Osteomark NTx Urine test was available in the United States only for research purposes. On February 2, 1999, the Company received clearance to market the Osteomark NTx Serum test in the United States. Osteomark NTx Serum is the first and only commercially available test in the United States that measures specific bone breakdown by osteoclasts using a blood sample. The Company's revenues have consisted primarily of product sales and fees for research testing services, as well as licensing fees and research and development payments from Mochida Pharmaceutical, Co., Ltd. ("Mochida"). Mochida has agreed to pay Ostex up to approximately $6,600,000 in a combination of licensing fees and research and development milestone payments, of which $5,850,000 has been received to date. Under the research and development agreement, Mochida has an option to license the NTx Serum test. Future payments totaling $750,000 are contingent upon Mochida's decision to exercise its option to license the NTx Serum test and achievement of certain milestones. Expenses incurred have been primarily for production, selling, administrative, and research and development activities and have exceeded revenues in each year since the Company's inception. As of December 31, 1999, the Company had an accumulated deficit of $33,793,000. Successful future operations depend upon the Company's ability to effectively commercialize and market its products. The Company will require a substantial amount of additional funds to develop new products and to fund the level of selling, general and administrative expenses that the Company expects to incur in connection with its product commercialization efforts in the next several years. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997. The Company had total revenues of $4,732,000 for the year ended December 31, 1999, compared to $3,047,000 and $4,108,000 for the years ended December 31, 1998 and 1997, respectively. Revenue from product sales and research testing services for the year ended December 31, 1999 was $4,732,000, compared to $3,047,000 and $3,658,000 in the years ended December 31, 1998 and 1997, respectively. The increase of $1,685,000 in 1999 compared to 1998 revenue is attributable to higher volumes of Osteomark urine kits and the introduction of the Osteomark serum kit, both of which are sold to laboratories, pharmaceutical companies and distributors worldwide. Lower urine kit volume and reduction in duplicate testing of patient samples for some customers resulted in a $611,000 decrease in 1998 revenue compared to 1997. No license fees and research and development payments were received during 1999 nor in 1998. In 1997, $450,000 in net license fees and research and development payments were received from Mochida. The decreases in 1999 and 1998 were expected and are due to prior years attainment of scheduled milestones. The Company's cost of products sold totaled $1,130,000 for the year ended December 31, 1999, compared to $814,000 and $899,000 for the same periods in 1998 and 1997, respectively. The gross margin rate on product sales for the year ended 1999 was 76%, compared to 73% for 1998 and 75% for 1997. The increase in gross margin rate from 1998 to 1999 was due to higher manufacturing volume and a slight increase in the average sales price per kit. The slight decrease from 1997 to 1998 was a function of decreased manufacturing volume. Increased manufacturing volume reduces unit cost by spreading certain fixed overhead expenses over a higher number of units produced. The Company's research and development expenditures totaled $1,734,000, $2,901,000, and $4,470,000, in 1999, 1998, and 1997, respectively. The $1,167,000 decrease from 1998 to 1999 was primarily attributable to the Company's restructuring plan implemented in December 1998. Research and development expenses also decreased in 1998 over 1997 due to the cost of certain clinical studies that occurred during 1997 and the reduction in funding to outside companies associated with the NTx point-of-care development program. Included in 1997 was a study for the determination of the NTx reference range in males, a study to complement physician interpretation of NTx results in postmenopausal women, and preliminary studies for the use of the Osteomark test in helping to identify bone metastases. Additionally, research and development expenditures include research grants to the University of Washington; however these grants have decreased year after year for 1997, 1998 and 1999. Selling, general and administrative expenses totaled $3,831,000, $8,122,000, and $8,031,000, in 1999, 1998 and 1997, respectively. The $4,291,000 decrease in expenses from 1998 to 1999 was driven primarily by the Company's December 1998 restructuring plan and reductions in both litigation and marketing related activities. The slight increase from 1997 to 1998 was due to the implementation of expanded and new marketing programs including direct mail and advertising activities and the Company's physician education program. Proceeds from legal settlement resulted from the receipt of a non-recurring lump sum payment of $6,200,000 from Boehringer Mannheim GmbH ("Boehringer Mannheim") in October 1997. The settlement between the two parties was the result of a ruling by the American Arbitration Association awarding damages to the Company in connection with a dispute between the Company and Boehringer Mannheim. Interest income totaled $421,000, $747,000, and $901,000 for the years ended December 31, 1999, 1998, and 1997, respectively. The decreases in 1999 and 1998 were primarily due to lower average invested balances resulting from using cash to fund the Company's operating losses. At December 31, 1999, the Company had tax net operating loss carryforwards of $38,100,000, which will begin to expire in 2004. Income taxes are provided in the Statements of Operations as required by Statement of Financial Accounting Standards No. 109, "Accounting For Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred taxes are determined using an asset and liability approach. The Company has determined that the tax assets do not satisfy the recognition criteria set forth in SFAS No. 109. Accordingly, a valuation adjustment has been recorded against the applicable deferred tax assets, and therefore no tax benefit has been recorded. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1999 the Company had $8,400,000 in cash and cash equivalents and short-term investments, working capital of $9,205,000 and total shareholders' equity of $11,709,000. During 1999, cash, cash equivalents and short-term investments decreased by $2,579,000, working capital decreased by $1,419,000 and shareholders' equity decreased by $1,779,000. The decreases were primarily the result of the net loss incurred during 1999. The Company used $1,951,000 of cash for operating activities in 1999 and $76,000 for the purchase of laboratory, manufacturing and office equipment. During 1999, the Company repurchased on the open market 245,000 shares of common stock at a total cost of $286,000. In 1996, the Company entered into a note agreement that provides up to $1,500,000 for expansion of manufacturing and administrative facilities and has borrowed $746,000 against the note. The note is repayable in 48 equal monthly installments of principal and interest of $20,000. As of December 31, 1999, outstanding borrowings under this agreement were $115,000. The Company's future capital requirements depend upon many factors, including the effectiveness of Osteomark NTx Serum and Urine tests commercialization activities and arrangements; continued scientific progress in its research and development programs; the costs involved in filing, prosecuting and enforcing patent claims; the manufacturing needs for new products; 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 or through private placements, even if the Company does not have an immediate need for additional cash at that time. If additional financing is not available, the Company believes that its existing available cash, its future license and research revenues from existing collaboration agreements, its current level of product sales and interest income from short-term investments will be adequate to fund operations into the foreseeable future. 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, activities of competitors, 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 1999 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. OSTEX INTERNATIONAL, INC. BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1999 1998 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,562 $ 2,744 Short-term investments 6,838 8,235 Trade receivables and other current assets, net of allowance of $34 in 1999 and $80 in 1998 1,142 858 Inventory, at cost 251 247 -------------- --------------- Total current assets 9,793 12,084 -------------- --------------- Property, Plant and Equipment, net 1,905 2,382 Other Assets 599 599 -------------- --------------- Total assets $ 12,297 $ 15,065 ============== =============== - -------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 278 $ 557 Accrued expenses 195 696 Current portion of note payable 115 207 -------------- --------------- Total current liabilities 588 1,460 -------------- --------------- NONCURRENT LIABILITIES Note payable, net of current portion - 117 -------------- --------------- Commitments and Contingencies SHAREHOLDERS' EQUITY: Common stock, $.01 par value, 50,000,000 authorized; 12,469,050 and 12,696,250 issued and outstanding 125 127 Additional paid-in capital 45,494 45,642 Accumulated items of comprehensive income (loss) Accumulated deficit (117) (58) (33,793) (32,223) -------------- --------------- Total shareholders' equity 11,709 13,488 -------------- --------------- Total liabilities and shareholders' equity $ 12,297 $ 15,065 ============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. OSTEX INTERNATIONAL, INC. STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) - ------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1999 1998 1997 REVENUE: Product sales and research testing services (RTS) $ 4,732 $ 3,047 $3,658 License fees and research and development payments - - 450 ---------------- ---------------- ---------------- Total revenues 4,732 3,047 4,108 ---------------- ---------------- ---------------- COST OF PRODUCTS SOLD 1,130 814 899 GROSS MARGIN ON PRODUCT SALES 3,602 2,233 2,759 (Percentage of sales) 76% 73% 75% OPERATING EXPENSES: Research and development 1,734 2,901 4,470 Selling, general and administrative 3,831 8,122 8,031 ---------------- ---------------- ---------------- Total operating expenses 5,565 11,023 12,501 ---------------- ---------------- ---------------- Loss from operations (1,963) (8,790) (9,292) OTHER INCOME (EXPENSES): Proceeds from legal settlement - - 6,200 Interest income 421 747 901 Interest expense (28) (52) (73) ---------------- ---------------- ---------------- Net loss $ (1,570) $ (8,095) $ (2,264) ==================================================== - ------------------------------------------------------------------------------------------------------------------- Basic and diluted net loss per common and common equivalent share $ (0.13) $ (0.64) $ (0.18) - ------------------------------------------------------------------------------------------------------------------- Weighted average shares used in calculation net loss per share 12,522 12,696 12,574 - -------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. OSTEX INTERNATIONAL, INC. STATEMENTS OF CASH FLOWS
(IN THOUSANDS) - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,570) $ (8,095) $ (2,264) Adjustments to reconcile net loss to net cash used in operating activities - Depreciation and amortization 553 685 651 Expense from issuance of warrants 134 - 197 (Increase) decrease in receivables and other current assets (284) 486 (183) (Increase) decrease in inventory (4) (46) (48) Decrease in other assets - 38 - Increase (decrease) in accounts payable (279) (872) 170 Increase (decrease) in accrued expenses (501) 166 296 -------------- -------------- -------------- Net cash used in operating activities (1,951) (7,638) (1,181) -------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments (5,801) (31,606) (20,426) Proceeds from sales and maturities of short-term investments 7,139 40,074 23,535 Purchase of property, plant and equipment (76) (102) (1,105) -------------- -------------- -------------- Net cash provided by investing activities 1,262 8,366 2,004 -------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock and exercise of stock options 2 - 252 Stock Repurchases (286) Payments on note payable (209) (185) (163) -------------- -------------- -------------- Net cash provided by (used in) financing activities (493) (185) 89 -------------- -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,182) 543 912 CASH AND CASH EQUIVALENTS, beginning of period 2,744 2,201 1,289 -------------- -------------- -------------- CASH AND CASH EQUIVALENTS, end of period $ 1,562 $ 2,744 $ 2,201 ============== ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. OSTEX INTERNATIONAL, INC. STATEMENTS OF SHAREHOLDERS EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) Accumulated Additional Other Total Common Stock Paid-in Comprehensive Accumulated Comprehensive Shareholders' Shares Amount Capital Income (Loss) Deficit Loss Equity ------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 12,442 $ 125 $45,195 $ 70 $ (21,864) $ 23,526 - ------------------------------------------------------------------------------------------------------------------------------------ Expense for stock and option grants 70 - 197 - - - 197 Stock options exercised 184 2 250 - - - 252 Comprehensive loss Unrealized loss on short-term investments - - - (67) - (67) (67) Net loss - - - - (2,264) (2,264) (2,264) ------------------------------------------------------------------------------------------- Comprehensive loss (2,331) ------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 12,696 127 45,642 3 (24,128) 21,644 ------------------------------------------------------------------------------------------- Expense for stock and option grants - - - - - - - Stock options exercised - - - - - - - Comprehensive loss Unrealized loss on short-term investments - - - (61) - (61) (61) Net loss - - - - (8,095) (8,095) (8,095) ------------------------------------------------------------------------------------------- Comprehensive loss (8,156) ------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 12,696 127 45,642 (58) (32,223) 13,488 ------------------------------------------------------------------------------------------- Warrants issued to outside consultants - - 134 - - - 134 Stock options exercised 18 - 2 - - - 2 Stock repurchase plan (245) (2) (284) (286) Comprehensive loss Unrealized loss on short-term investments - - - (59) - (59) (59) Net loss - - - - (1,570) (1,570) (1,570) ------------------------------------------------------------------------------------------- Comprehensive loss (1,629) ------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 12,469 $ 125 $45,494 $ (117) $ (33,793) $ 11,709 -------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. NOTES TO FINANCIAL STATEMENTS NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Ostex International, Inc. (the "Company"), a Washington corporation incorporated in May 1989, is engaged in the discovery and commercialization of products associated with osteoporosis and other collagen-related diseases. The Company's lead product, the Osteomark NTx test, incorporates breakthrough and patented technology in the area of bone resorption measurement. The Company markets the Osteomark NTx Serum and Urine tests through distributors and medical laboratories. ESTIMATES AND UNCERTAINTIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION Product sales are recognized upon shipment. Research testing fees are recognized when the services are substantially complete. License fees and research and development payments are recognized upon attainment of the agreed upon milestones. RESEARCH AND DEVELOPMENT EXPENSES Research and development costs are expensed as incurred. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. The carrying amount approximates fair value due to the short maturities of these investments. SHORT-TERM INVESTMENTS The Company considers all of its short-term investments to be "available for sale," reporting them at fair market value with unrealized gains and losses included as a component of comprehensive income (loss) in shareholders' equity. Realized gains and losses and declines in value of securities judged to be other than temporary are included in interest income. Contractual maturities range from one to 35 years. CONCENTRATION OF CREDIT RISK Trade receivables potentially subject the Company to credit risk. The Company extends credit to its customers based upon an evaluation of the customer's financial condition and credit history and generally does not require collateral. The Company historically has incurred minimal credit losses. The Company's customers includes research and clinical laboratories and other companies, of which one customer accounted for approximately 14%, 16% and 22% of total revenues for the years ended December 31, 1999, 1998 and 1997, respectively. INVENTORY Inventory consists principally of raw materials and finished goods. Inventories are stated at the lower of cost (first-in, first-out) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their useful lives or the lease term. Estimated lives range from five to ten years. Depreciation expense charged to operations during 1999, 1998 and 1997 was $553,000, $685,000 and $614,000, respectively. COMPREHENSIVE INCOME The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and disclosure of comprehensive income (loss). Disclosure has been made for all years presented in the statements of shareholders' equity. NOTE 2 SHORT-TERM INVESTMENTS The Company's short-term investments at December 31, 1999 and 1998 consisted of the following:
1999 1998 ---- ---- Federal agency obligations and discount notes $ 947,000 $3,418,000 Government agency obligations 4,754,000 2,935,000 Corporate and municipal bonds 1,137,000 1,882,000 ---------------- ----------------- $6,838,000 $8,235,000 ================ =================
NOTE 3 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 1999 and 1998 consisted of the following:
1999 1998 ---- ---- Leasehold improvements $2,405,000 $2,426,000 Laboratory and manufacturing equipment 1,315,000 1,304,000 Computers and office equipment 1,136,000 1,050,000 ------------------- ------------------ 4,856,000 4,780,000 Accumulated depreciation and amortization (2,951,000) (2,398,000) ------------------- ------------------ Net property, plant and equipment $1,905,000 $2,382,000 =================== ==================
NOTE 4 OTHER ASSETS Other assets represent a $599,000 investment in preferred stock of Metrika, Inc., a privately held, development stage, medical device company. The investment is recorded in the accompanying financial statements at cost and represents an ownership interest of less than 5%. The Company periodically assesses the valuation of this asset based on historical financial data and future projections. Management currently believes that the asset is not impaired. However, given the nature of the business, there is a risk that the investment may become impaired in the future. NOTE 5 NOTE PAYABLE In July 1996, the Company borrowed $746,000 under a secured promissory note agreement. The note is secured by real property and equipment and is payable in equal monthly installments of principal and interest of approximately $20,000. The note agreement contains certain financial covenants which require the reporting of certain financial ratios and other restrictions. As of December 31, 1999, the Company was not in compliance with these covenants. However, the Company has obtained a waiver from the covenants based upon the relatively low repayment balance and the Company's strong cash position. Based on the existing payment schedule, the loan will be paid in full at the end of June 2000. The interest rate is 12.5% and the note agreement allows the Company to make additional borrowings, up to a maximum of $1,500,000 for future capital needs. NOTE 6 SHAREHOLDERS' EQUITY STOCK OPTION PLANS The Company has three stock option plans: the Amended and Restated Stock Option Plan (the "Old Plan"), the 1994 Stock Option Plan (the "1994 Plan"), both administered by the Compensation Committee of the Board of Directors, and the Directors' Nonqualified Stock Option Plan (the "Directors' Plan"), (collectively the "Stock Option Plans"). The Old Plan no longer permits additional stock option grants. Shares of common stock reserved for issuance to the Company's employees and directors under the 1994 Plan and the Directors' Plan are 1,750,000 and 350,000, respectively. Shares available for future grants under the 1994 Plan and the Directors' Plan at December 31,1999 are 233,543 and 25,000, respectively. These options generally vest ratably over three to four years. All options granted under these plans expire upon the earlier of 90 days after termination of employment or ten years from date of grant. Options are granted with exercise prices equal to or greater than fair market value. Information relating to stock options outstanding and stock options exercisable at December 31, 1999 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------- ------------------------------ WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER OF LIFE IN EXERCISE NUMBER OF EXERCISE EXERCISE PRICES SHARES YEARS PRICE SHARES PRICE - ------------------------------------------------------------------------------------------------------------- $ 0.08 - $ 1.75 543,935 8 $1.00 218,348 $ .86 $ 2.10 - $ 5.00 1,428,959 7 $3.17 920,476 $ 3.19 $ 5.63 - $ 17.13 20,500 6 $12.76 20,250 $ 12.85 --------------- --------------- -------------- --------------- -------------- 1,993,394 8 $2.68 1,159,074 $ 2.92 =============== =============== ============== =============== ==============
Information relating to stock options activity is as follows:
1999 1998 1997 -------------------------- ------------------------- -------------------------- WEIGHTED WEIGHTED WEIGHTED AVG. AVG. AVG. EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------------------------------------------------------------------------------- Outstanding at beginning of period 1,836,087 $3.28 1,962,301 $3.34 1,827,626 $6.61 Granted 551,485 1.10 338,500 1.91 2,227,925 3.76 Exercised (17,500) .11 -- -- (184,000) 1.37 Cancelled (376,678) 2.27 (464,714) 3.47 (1,909,250) 7.14 ----------- -------------- ----------- ------------- ------------ ------------- Outstanding at end of period 1,993,394 $2.68 1,836,087 $3.04 1,962,301 $ 3.34 =========== ============== =========== ============= ============ ============= Vested at end of period 1,159,074 2.92 779,638 $3.28 481,451 $ 3.34 Weighted average fair value of options granted $1.23 $1.36 $2.24
Options outstanding have weighted average remaining contractual lives of eight and nine years at December 31, 1999 and 1998, respectively. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). Accordingly, no compensation cost has been recognized for stock options issued at market value on the date of grant. Had compensation cost for the Company's stock option plans been determined based on the fair value of the options at the grant date for awards in 1999, 1998 and 1997 consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per common equivalent share would have changed to the pro forma amounts indicated below:
1999 1998 1997 ---- ---- ---- Net loss - as reported $(1,570,000) $(8,095,000) $(2,264,000) Net loss - pro forma $(2,171,000) $(8,513,000) $(2,222,000) Basic and diluted net loss per common and common equivalent share - as reported $ (0.13) $ (0.64) $ (0.18) Basic and diluted net loss per common and common equivalent share - pro forma $ (0.17) $ (0.67) $ (0.18)
The fair value of each option grant is established on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for new grants in 1999: zero dividend yield; expected volatility of 129%; average risk-free interest rate of 6.0% and expected lives of five years. Assumptions for options granted in 1998 were: zero dividend yield; expected volatility of 88%; average risk-free interest rate of 5.0%; and expected lives of five years. Assumptions for options granted in 1997 were: zero dividend yield; expected volatility of 85%; average risk-free interest rate of 6.8%; and expected lives of five years. The difference between reported and pro forma net loss in 1997 was a $42,000 credit to income as the model recognizes canceled options in the period they occur. The SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, therefore the resulting pro forma compensation cost may not be representative of that to be expected in future years. COMMON STOCK WARRANT During 1999, the Company issued a warrant to an outside consultant for the purchase of 100,000 shares of common stock at an exercise price of $2.00, in exchange for services to be provided to the Company. The warrant vests in twelve equal monthly installments beginning one month after the grant date, and expires three years from the grant date. The Company recorded this warrant in accordance with the provisions of SFAS No. 123 and EITF Issue 96-18, which require that the fair value of the warrant be recognized as expense, and that the fair value be remeasured at each balance sheet date (variable accounting). Total expense recognized in 1999 related to this warrant was approximately $134,000. NOTE 7 LICENSING AGREEMENTS Under the Company's license agreements with the Washington Research Foundation ("WRF"), the Company has the worldwide exclusive right to commercialize technology developed from certain research conducted by the University of Washington ("UW"). As consideration for the licenses acquired and for the attainment of certain milestones, the Company paid WRF certain nonrefundable fees and issued common stock to the WRF and UW. In addition, future cash payments and common stock grants may be due upon attainment of certain other milestones. All legal costs incurred by WRF in connection with the filing, prosecution, and maintenance of certain defined patent rights are paid by the Company. The Company is obligated to pay WRF royalties on net sales of any licensed products. NOTE 8 REVENUES The Company has a sublicense agreement and a research and development agreement with Mochida Pharmaceutical Co., Ltd. ("Mochida"). Under the sublicense agreement, the Company granted Mochida exclusive manufacturing, marketing and distribution rights to certain of the Company's products in Japan. The Company has received all milestone payments to be earned in connection with the license agreement for the urine assay. Mochida has an option to license the Company's serum assay. Under the research and development agreement, the Company received no payments during 1999 and 1998, and a net payment of $450,000 in 1997. NOTE 9 RELATED PARTY TRANSACTIONS RESEARCH AGREEMENTS The Company has entered into two research agreements with the University of Washington which extend through December 31, 2000. Total expense was $150,000, $367,000 and $499,000 during 1999, 1998 and 1997, respectively. Minimum payments in 2000 under this agreement will be $150,000. NOTE 10 COMMITMENTS AND CONTINGENCIES LEASES The Company has entered into noncancelable operating leases for office space and certain equipment. Future minimum payments under these leases are as follows: 2000 515,000 2001 546,000 2002 544,000 2003 534,000 2004 531,000 Thereafter 398,000 -------------- Total $3,068,000 ==============
Total rent expense was approximately $457,000, $481,000 and $584,000 in 1999, 1998 and 1997, respectively. LITIGATION 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 the Company's patented technology. At the present time management cannot predict the outcome of the lawsuit but intends to continue to vigorously assert its position. On November 19, 1999, Roche Diagnostics ("Roche") filed a lawsuit against the Company in Belgium seeking to invalidate three of the Company's European patents as they apply to Belgium. The lawsuit also seeks a declaration that Roche does not infringe the patents in any European country where Roche markets or plans to market their Elecsys-(beta)-Crosslaps (Serum)-registered trademark- diagnostic test. The Company believes that this lawsuit will not lead to an award of damages against the Company. NOTE 11 OTHER INCOME - PROCEEDS FROM LEGAL SETTLEMENT On November 4, 1997, the Company announced settlement with Boehringer Mannheim GmbH ("Boehringer Mannheim") under which the Company received a lump sum payment of $6,200,000. The settlement between the two parties was the result of a ruling by the American Arbitration Association awarding damages to the Company in connection with a dispute between the Company and Boehringer Mannheim. NOTE 12 FEDERAL INCOME TAXES Deferred taxes are determined using an asset and liability approach. The Company has incurred operating losses since inception and accordingly has determined that the net deferred tax assets do not satisfy recognition criteria. Therefore, a valuation allowance has been recorded against the net deferred tax assets and no tax benefit has been recorded in the accompanying statement of operations. The change in the valuation allowance during 1999, 1998 and 1997 was $478,000, $2,966,000 and $586,000, respectively. The Company's deferred tax assets (liabilities) are as follows:
1999 1998 1997 ---- ---- ---- Net operating loss carryforward $ 12,956,000 $ 12,512,000 $10,039,000 Research and experimentation credits 650,000 588,000 363,000 Excess of market value over the exercise price of common stock options - - 77,000 Property, Plant and Equipment 230,000 145,000 (47,000) Other 108,000 221,000 68,000 ---------------------- -------------------- ---------------- Gross deferred tax asset 13,944,000 13,466,000 10,500,000 Valuation allowance (13,944,000) (13,466,000) (10,500,000) ---------------------- -------------------- ---------------- Net deferred tax asset $ - $ - $ - ====================== ==================== ================
At December 31, 1999, the Company had tax net operating loss carryforwards of $38,100,000 which expire between 2004 and 2019. EX-23.1 4 EX-23.1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included (or incorporated by reference) in this Form 10-K into the Company's previously filed Registration Statement Nos. 333-4802 and 333-44143. /s/ Arthur Andersen LLP Seattle, Washington March 30, 2000 EX-27.1 5 EX-27.1
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1,562,000 6,838,000 1,072,000 34,000 251,000 9,793,000 1,905,000 553,000 12,297,000 588,000 0 0 0 125,000 11,584,000 12,297,000 4,732,000 4,732,000 1,130,000 1,130,000 5,565,000 0 28,000 (1,570,000) 0 (1,570,000) 0 0 0 (1,570,000) (0.13) (0.13)
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