-----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, WxDSCjarX7jRNBTOta32WIH1TwlEWe5Z8sn67/axoBWLI2gm+azxLhqGKJ0wpHH1 y8J87X7uMLcI3mHxyjGMEg== 0001047469-99-013257.txt : 19990406 0001047469-99-013257.hdr.sgml : 19990406 ACCESSION NUMBER: 0001047469-99-013257 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OSTEX INTERNATIONAL INC /WA/ CENTRAL INDEX KEY: 0000932631 STANDARD INDUSTRIAL CLASSIFICATION: 2835 IRS NUMBER: 911450247 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-25250 FILM NUMBER: 99585466 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/A 1 FORM 10-K405/A - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K AMENDMENT NO. 1 /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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 I.R.S. EMPLOYER IDENTIFICATION NUMBER OR ORGANIZATION
2203 AIRPORT WAY SOUTH, SUITE 400, SEATTLE, WASHINGTON 98134 206-292-8082 ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES ------------------------------
Securities registered pursuant to Securities registered pursuant to Section Section 12(b) 12(g) of the Act: of the Act: (none) (none) COMMON STOCK, $.01 PAR VALUE TITLE OF EACH EXCHANGE ON WHICH TITLE OF CLASS CLASS REGISTERED
------------------------ Indicate by check mark whether the registrant (1) has filed all reports YES [X] required to be filed by Section 13 or 15(d) of the Securities Exchange Act of NO [ ] 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Indicate by check mark if disclosure of delinquent filers pursuant to Item [X] 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 $13,775,000 on March 19, 1999, based on the per-share closing price of $1.38 on the Nasdaq National Market. The number of shares of Common Stock outstanding as of March 22, 1999 was 12,542,500. ------------------------ DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1998 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 Thursday, June 3, 1999, 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
PAGE ----- PART I ITEM 1 BUSINESS..................................................................................... 2 ITEM 1A RISK FACTORS................................................................................. 5 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...................................................................... 11 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 11 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................... 11 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................. 11 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......... 11 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................... 12 ITEM 11 EXECUTIVE COMPENSATION....................................................................... 12 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................... 12 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................... 12 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................. 13 SIGNATURES................................................................................................. 16
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, 1998; and "Proxy Statement" shall mean the proxy statement for the 1998 shareholders meeting of Ostex International, Inc. to be held Thursday, June 3, 1999, 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, 1998, 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 2 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 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 from the Food and Drug Administration (the "FDA") 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 received clearance to market 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 is adapting the urine test for use with its automated analyzer. Ostex will receive 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, 1998, the Company's largest customer, Johnson & Johnson, accounted for approximately 16% 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 3 patients with hyperparathyroidism and for patients with metastatic bone tumors. Ostex sells Mochida the critical reagents to be assembled into finished products in Japan by Mochida. The Company also plans to develop 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 Company and Metrika are developing this fully disposable point-of-care NTx test as an indicator of bone resorption that computes NTx values and displays them 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 20 U. S. patents, 3 European patents, 3 Japanese patents, and patents in Australia, Canada, Ireland, Spain, Hong Kong, and Singapore. Two of the European patents and one 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 research and development expenditures, all of which were funded by the Company, totaled $2,901,000, $4,470,000, and $3,163,000, in 1998, 1997 and 1996, respectively. The Company's foreign product sales, all to non-affiliates, totaled $517,000, $652,000, and $370,000, in 1998, 1997 and 1996, 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. 4 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 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 5 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 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 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 6 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. 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, 1998 of $32,223,000. For the year-end December 31, 1998, the Company had a net loss of $8,095,000. 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. 7 FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING The Company will continue to require substantial funds for research and development, general and administration, and the marketing of its products. The amount of the Company's future capital requirements will depend on many factors, including the status of the development of its products, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, competing technological and market developments, the ability of the Company to maintain existing collaborative and licensing arrangements, and the ability of the Company to establish new collaborative and licensing arrangements. The Company expects that its existing capital resources will be sufficient to fund the Company's activities through 1999. However, the Company may be required to seek additional financing. There can be no assurance that additional funds, whether through additional financings, collaborative arrangements with corporate sponsors or other sources, will be available, if at all, in a timely manner or on terms acceptable to the Company. If adequate funds are not available, the Company may be required to delay, scale back or eliminate one or more of its programs or obtain funds through arrangements that are unfavorable to the Company. 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 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 8 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. 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.................................... 50 President and Chief Executive Officer Thomas F. Broderick.................................. 50 Vice President, Patent and General Counsel J. Daniel Clemens.................................... 42 Vice President, Product Development Donna J. DeLong...................................... 50 Vice President, Marketing Nancy J.S. Mallinak.................................. 37 Vice President, Regulatory and Clinical Affairs Cory J. Smith........................................ 48 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 until 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, 9 Mr. Clemens was Senior Research & Development Scientist from February 1987 to October 1990 at Genetic Systems Corporation/Sanofi. DONNA J. DELONG joined the Company in February 1998 as Vice President, Marketing. From May 1996 to February 1998, Ms. DeLong was Senior Director of Marketing at Chiron Diagnostics, a division of Chiron Corporation, a healthcare company; from October 1993 to April of 1996, Ms. DeLong was the Director of Marketing at Neopath Inc., a medical diagnostics company; and from May 1990 to October 1993 Ms. DeLong was the Director of Marketing at Sanofi Diagnostics Pasteur, a medical diagnostics company. 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, 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, 1998. ------------------------ 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol "OSTX". Information regarding the Common Stock trading activity for 1998 and 1997 is incorporated herein by reference to the "Shareholder Information--Price Range of Common Stock" on page 32 of the Annual Report to Shareholders, which is included as Exhibit 13.0 to this Annual Report on Form 10-K. As of March 22, 1999, there were 12,542,500 shares of Common Stock outstanding held of record by approximately 131 shareholders. The Company believes there are approximately 3,700 additional owners of Common Stock who own shares held in street name. The Company has never paid cash dividends and has no present intention of paying dividends in the foreseeable future. TRANSFER AGENT AND REGISTRAR--The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C., Seattle, Washington. 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. ------------------------ 11 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. ------------------------ 12 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS The information contained in the Financial Statements and "Notes to Financial Statements" are located on pages 20-29 of the Annual Report to Shareholders and are listed below. This information 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
(B) REPORTS ON FORM 8-K None (C) EXHIBIT INDEX (14) EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - - -------------------- ----------------------------------------------------------------------------------- (8) 3.1 Articles of Incorporation, as amended, dated January 1997 (1) 3.2 Bylaws, as amended (1) 4.1 Specimen Common Stock Certificate (1) 10.1A Amended and Restated Stock Option Plan* (1) 10.1B Form of Employee Stock Option Agreement* (1) 10.1C Form of Director's Stock Option Agreement* (9) 10.2 Amended and Restated Directors' Nonqualified Stock Option Plan dated July 16, 1997* (9) 10.3 Amended and Restated 1994 Stock Option Plan* Agreements with Hologic, Inc. (3)(12) 10.4A Co-Promotion and Sales Representation Agreement dated January 14, 1997 (3)(12) 10.4B Joint Development, License and Supply Agreement dated January 14, 1997 (1) 10.5 Form of Indemnification Agreement with officers and directors* Agreement with Thomas A. Bologna (13) 10.7 Executive Employment Agreement dated July 16, 1997* Agreements with Mochida Pharmaceutical Co., Ltd. (1) 10.12A Research and Development Agreement dated August 1992 (1) 10.12B Osteomark License Agreement Dated August 1992
13
EXHIBIT NUMBER DESCRIPTION - - -------------------- ----------------------------------------------------------------------------------- (3) 10.12D Second Amendment to Osteomark License Agreement dated December 24, 1997 Agreements with the Washington Research Foundation (1) 10.13A Restated Exclusive License Agreement effective June 19, 1992 (Urinary Assay for Measuring Bone Resorption) (1) 10.13B Amendment to Restated Exclusive License Agreement effective January 1, 1993 (1) 10.13C Second Amendment effective June 2, 1994 (1) 10.14 Exclusive License Agreement dated February 10, 1994 (O-CSF) Agreements with the University of Washington (3)(12) 10.15A Research Agreement dated July 1, 1996 (Molecular Markers of Connective Tissue Degradation) (3)(12) 10.15B Research Agreement dated October 1, 1996 (Role of O-CSF in Osteoclast Regulation) (1) 10.16A Know-How Transfer and Consulting Agreement dated September 18, 1989 with David R. Eyre, Ph.D.* (1) 10.16B Extension and Amendment dated May 1, 1992* (1) 10.19 Osteomark EIA Exclusive Distribution License Agreement dated March 28, 1994 with Technogenetics S.R.L. (1) 10.20 Osteomark EIA Distribution License Agreement dated July 12, 1994 with BRAHMS Diagnostic (formerly Henning Berlin GmbH) (1) 10.23 Osteomark Agreement dated February 12, 1993, as amended May 10, 1994, with Nichols Institute Reference Laboratory Lease Agreements (4) 10.27A Lease Agreement dated October 2, 1995, with David A. Sabey and Sandra L. Sabey (8) 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. (5) 10.28A Distribution Agreement dated June 7, 1995 (5) 10.28B Research, Development, License and Supply Agreement dated June 7, 1995 (4) 10.29 Clinical Laboratory Services License and Supply Agreement dated October 25, 1995, with SmithKline Beecham Clinical Laboratories, Inc. (13) 10.30 Promotion Agreement dated September 30, 1997 with Wyeth-Ayerst Laboratories (6) 10.31 Agreement with Laboratory Corporation of America-TM- Holdings (LabCorp), dated January 11, 1996 (7) 10.32A Joint Development, License and Co-Marketing Agreement dated April 10, 1997 with Metrika, Inc. (10) 10.33 Form of CS First Boston Corporation Warrant (11) 10.34 Form of Invemed Associates, Inc. Warrant
14
EXHIBIT NUMBER DESCRIPTION - - -------------------- ----------------------------------------------------------------------------------- (2) 10.35 Shareholder Rights Agreement dated January 21, 1997 ** 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, 1998 23.1 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule
- - ------------------------ * Management contract or compensatory plan or agreement. ** Filed Herewith in. (1) 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). (2) Incorporated herein by reference to exhibit number 4.5 filed with Form 8-A with the Commission in January 1997. (3) Confidential treatment requested. Exhibit omits information that has been filed separately with the Commission. (4) 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. (5) 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. (6) 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. (7) 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. (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, 1996. (9) Incorporated herein by reference to exhibit of the same number filed with Form S-8 with the Commission on January 13, 1998. (10) 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). (11) 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). (12) 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. (13) 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. (14) 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. 15 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 22, 1999. OSTEX INTERNATIONAL, INC. BY /S/ THOMAS A. BOLOGNA ----------------------------------------- Thomas A. Bologna 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 - - ------------------------------ --------------------------- ------------------- President and Chief /s/ THOMAS A. BOLOGNA Executive Officer - - ------------------------------ (principal executive March 22, 1999 Thomas A. Bologna officer and principal financial officer) /s/ THOMAS J. CABLE Chairman of the Board of - - ------------------------------ Directors March 22, 1999 Thomas J. Cable /s/ ELISABETH L. EVANS Director - - ------------------------------ March 22, 1999 Elisabeth L. Evans /s/ DAVID R. EYRE Director - - ------------------------------ March 22, 1999 David R. Eyre /s/ FREDRIC J. FELDMAN Director - - ------------------------------ March 22, 1999 Fredric J. Feldman /s/ GREGORY D. PHELPS Director - - ------------------------------ March 22, 1999 Gregory D. Phelps /s/ JOHN H. TRIMMER Director - - ------------------------------ March 22, 1999 John H. Trimmer 16 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - - --------------------- ------------------------------------------------------------------------------------------- (8) 3.1 Articles of Incorporation, as amended, dated January 1997 (1) 3.2 Bylaws, as amended (1) 4.1 Specimen Common Stock Certificate (1) 10.1A Amended and Restated Stock Option Plan* (1) 10.1B Form of Employee Stock Option Agreement* (1) 10.1C Form of Director's Stock Option Agreement* (9) 10.2 Amended and Restated Directors' Nonqualified Stock Option Plan dated July 16, 1997* (9) 10.3 Amended and Restated 1994 Stock Option Plan* Agreements with Hologic, Inc. (3)(12) 10.4A Co-Promotion and Sales Representation Agreement dated January 14, 1997 (3)(12) 10.4B Joint Development, License and Supply Agreement dated January 14, 1997 (1) 10.5 Form of Indemnification Agreement with officers and directors* Agreement with Thomas A. Bologna (13) 10.7 Executive Employment Agreement dated July 16, 1997* Agreements with Mochida Pharmaceutical Co., Ltd. (1) 10.12A Research and Development Agreement dated August 1992 (1) 10.12B Osteomark License Agreement Dated August 1992 (3) 10.12D Second Amendment to Osteomark License Agreement dated December 24,1997 Agreements with the Washington Research Foundation (1) 10.13A Restated Exclusive License Agreement effective June 19, 1992 (Urinary Assay for Measuring Bone Resorption) (1) 10.13B Amendment to Restated Exclusive License Agreement effective January 1, 1993 (1) 10.13C Second Amendment effective June 2, 1994 (1) 10.14 Exclusive License Agreement dated February 10, 1994 (O-CSF) Agreements with the University of Washington (3)(12) 10.15A Research Agreement dated July 1, 1996 (Molecular Markers of Connective Tissue Degradation) (3)(12) 10.15B Research Agreement dated October 1, 1996 (Role of O-CSF in Osteoclast Regulation) (1) 10.16A Know-How Transfer and Consulting Agreement dated September 18, 1989 with David R. Eyre, Ph.D.* (1) 10.16B Extension and Amendment dated May 1, 1992* (1) 10.19 Osteomark EIA Exclusive Distribution License Agreement dated March 28, 1994 with Technogenetics S.R.L. (1) 10.20 Osteomark EIA Distribution License Agreement dated July 12, 1994 with BRAHMS Diagnostic (formerly Henning Berlin GmbH) (1) 10.23 Osteomark Agreement dated February 12, 1993, as amended May 10, 1994, with Nichols Institute Reference Laboratory
17
EXHIBIT NUMBER DESCRIPTION - - --------------------- ------------------------------------------------------------------------------------------- Lease Agreements (4) 10.27A Lease Agreement dated October 2, 1995, with David A. Sabey and Sandra L. Sabey (8) 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. (5) 10.28A Distribution Agreement dated June 7, 1995 (5) 10.28B Research, Development, License and Supply Agreement dated June 7, 1995 (4) 10.29 Clinical Laboratory Services License and Supply Agreement dated October 25, 1995, with SmithKline Beecham Clinical Laboratories, Inc. (13) 10.30 Promotion Agreement dated September 30, 1997 with Wyeth-Ayerst Laboratories (6) 10.31 Agreement with Laboratory Corporation of America-TM- Holdings (LabCorp), dated January 11, 1996 (7) 10.32A Joint Development, License and Co-Marketing Agreement dated April 10, 1997 with Metrika, Inc. (10) 10.33 Form of CS First Boston Corporation Warrant (11) 10.34 Form of Invemed Associates, Inc. Warrant (2) 10.35 Shareholder Rights Agreement dated January 21, 1997 ** 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, 1998 23.1 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule
- - ------------------------ * Management contract or compensatory plan or agreement. ** Filed Herewith in. (1) 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). (2) Incorporated herein by reference to exhibit number 4.5 filed with Form 8-A with the Commission in January 1997. (3) Confidential treatment requested. Exhibit omits information that has been filed separately with the Commission. (4) 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. (5) 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. (6) 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. (7) 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. 18 (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, 1996. (9) Incorporated herein by reference to exhibit of the same number filed with Form S-8 with the Commission on January 13, 1998. (10) 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). (11) 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). (12) 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. (13) 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. 19 EX-13.0 2 EXHIBIT 13.0 OSTEX INTERNATIONAL, INC. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED DECEMBER 31, ------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Revenues: Product sales and research testing services............................ $ 3,047 $ 3,658 $ 2,860 $ 1,830 $ 1,152 License fees and research and development payments................ -- 450 1,087 1,495 630 -------- -------- -------- -------- -------- Total revenues.................... 3,047 4,108 3,947 3,325 1,782 -------- -------- -------- -------- -------- Operating Expenses: Cost of products sold................. 814 899 926 603 517 Research and development.............. 2,901 4,470 3,163 3,200 3,308 Selling, general and administrative... 8,122 8,031 9,201 6,583 2,222 -------- -------- -------- -------- -------- Total operating expenses.......... 11,837 13,400 13,290 10,386 6,047 -------- -------- -------- -------- -------- Loss from operations.............. (8,790) (9,292) (9,343) (7,061) (4,265) Other Income: Proceeds from legal settlement........ -- 6,200 -- -- -- Interest income, net.................. 695 828 1,273 1,684 194 -------- -------- -------- -------- -------- Net loss.......................... $ (8,095) $ (2,264) $ (8,070) $ (5,377) $ (4,071) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Basic and diluted net loss per common and common equivalent share........... $ (0.64) $ (0.18) $ (0.65) $ (0.45) $ (0.47) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Shares used in calculation of net loss per share........................ 12,696 12,574 12,441 11,929 8,737 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
DECEMBER 31, ------------------------------------------ 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------ (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short term investments........................... $10,979 $18,965 $21,229 $27,794 $3,668 Working capital......................... 10,624 18,368 20,901 28,361 3,172 Total assets............................ 15,065 24,112 25,691 32,841 5,590 Accumulated deficit..................... (32,223) (24,128) (21,864) (13,794) (8,417) ------- ------- ------- ------- ------ Total shareholders' equity.............. $13,488 $21,644 $23,526 $31,518 $4,698 ------- ------- ------- ------- ------ ------- ------- ------- ------- ------
1 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 diagnostic 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 fiscal year ended December 31, 1998, 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 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. 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 fees 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 selling, administrative, and research and development activities and have exceeded revenues in each year since the Company's inception. As of December 31, 1998, the Company had an accumulated deficit of $32,223,000. Successful future operations depend upon the Company's ability to effectively commercialize and market its products. The Company will require 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, 1998, 1997 AND 1996. The Company had total revenues of $3,047,000 for the year ended December 31, 1998, compared to $4,108,000 and $3,947,000 for the years ended December 31, 1997 and 1996, respectively. 2 Revenue from product sales and research testing services for the year ended December 31, 1998 was $3,047,000, compared to $3,658,000 and $2,860,000 in the years ended December 31, 1997 and 1996, respectively. The decrease of $611,000 in 1998 compared to 1997 revenue is attributable to slightly lower volumes of Osteomark kits sold to laboratories and distributors worldwide. Some of the Company's customers have gone to testing each patient sample only once rather than in duplicate. Higher volume resulted in a $798,000 increase in 1997 compared to 1996 revenue. No license and research and development payments were received during 1998. In 1997, $450,000 in license and research and development fees was received from Mochida, while the fees in 1996 totaled $1,087,000, primarily from Mochida. The decreases in 1998 and 1997 were expected and are due to attainment of scheduled milestones. The Company's cost of products sold totaled $814,000 for the year ended December 31, 1998, compared to $899,000 and $926,000 for the same periods in 1997 and 1996, respectively. The gross profit rate on product sales for the year ended 1998 was 73%, compared to 75% for 1997 and 68% for 1996. The slight decrease in gross profit rate from 1997 to 1998 was due to lower manufacturing volume while the increase from 1996 to 1997 was a function of increased manufacturing volume and overall efficiency gains made in part by improvements in the production process. 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 $2,901,000, $4,470,000, and $3,163,000, in 1998, 1997, and 1996, respectively. The $1,569,000 decrease from 1997 to 1998 was primarily attributable to the Company's decision to reduce the level of funding to outside companies for the NTx point-of-care development programs. Research and development expenses increased in 1997 over 1996 due to the cost of clinical studies commenced at the end of 1996 and during 1997 and expenses to outside companies associated with the NTx point-of-care development programs. 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 included research grants to the University of Washington ("UW") in 1998, 1997 and 1996. Selling, general and administrative expenses totaled $8,122,000, $8,031,000, and $9,201,000, in 1998, 1997 and 1996, respectively. 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. The $1,170,000 decrease from 1996 to 1997 was primarily due to the completion of the Company's free testing program in 1996 and the completion of a hearing before the American Arbitration Association against Boehringer Mannheim GmbH ("Boehringer Mannheim") in September 1996, partially offset by increased cost of litigation in connection with the Osteometer Biotech A/S lawsuit (see Note number 10 on page 28 in the Notes to Financial Statements). Proceeds from legal settlement resulted from the receipt of a non-recurring lump sum payment of $6,200,000 from 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 $747,000, $901,000, and $1,317,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The decreases in 1998 and 1997 were primarily due to lower average invested balances resulting from using cash to fund the Company's operating losses. At December 31, 1998, the Company had tax net operating loss carryforwards of $31,779,000, 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. 3 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, 1998 the Company had $10,979,000 cash and cash equivalents and short-term investments, working capital of $10,624,000 and total shareholders' equity of $13,488,000. During 1998, cash, cash equivalents and short-term investments decreased by $7,986,000, working capital decreased by $7,744,000 and shareholders' equity decreased by $8,156,000. The decreases were primarily the result of the net loss incurred during 1998. The Company used $7,638,000 of cash for operating activities in 1998 and $102,000 for the purchase of laboratory, manufacturing and office equipment. 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, 1998, outstanding borrowings under this agreement were $324,000. The Company does not anticipate additional borrowings during 1999 and has no material capital purchase commitments. 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; and the time and costs involved in obtaining regulatory approvals. Additional funds from equity or debt financing will 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 through 1999. 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 1998 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. The Company is currently upgrading its financial and manufacturing information system software to a Year 2000 compliant version. The Company is in the process of testing this system upgrade and expects it to be fully implement by December 31, 1999. The Company has assessed the Year 2000 compliance of its other computer system software and manufacturing equipment and expects to complete all necessary upgrades to be Year 2000 compliant no later than December 31, 1999. In addition, the Company has contacted all key vendors and suppliers regarding Year 2000 compliance and has received no responses indicating that any vendor or supplier will not be Year 2000 compliant. The Company has also created a Year 2000 project team that periodically reviews relevant issues regarding compliance. The costs of Year 2000 initiatives have primarily been incurred and are not expected to be material to the Company's results of operations or financial position in future periods. Failure to timely complete the Company's Year 2000 initiatives could result in the Company's software being rendered inoperative. Although the company has 4 no formal contingency plans in place, in such event, the Company would attempt to perform its MIS functions, and other functions currently implemented by software, manually through the dedication of additional personnel to performing such functions. While the Company believes its planning efforts are adequate to address its Year 2000 concerns, there can be no assurance that the systems and products of other companies of which the Company's operations rely will be converted on a timely basis and will not have a material adverse effect on the Company's results of operations. 5 OSTEX INTERNATIONAL, INC. BALANCE SHEETS
DECEMBER 31, ------------------ 1998 1997 -------- -------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS Current Assets: Cash and cash equivalents................................................ $ 2,744 $ 2,201 Short-term investments................................................... 8,235 16,764 Trade receivables and other current assets, net of allowance of $80 in 1998 and $25 in 1997................................................... 858 1,344 Inventory, at cost....................................................... 247 201 -------- -------- Total current assets................................................. 12,084 20,510 -------- -------- Property, Plant and Equipment, net......................................... 2,382 2,965 Other Assets............................................................... 599 637 -------- -------- Total assets......................................................... $ 15,065 $ 24,112 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable......................................................... $ 557 $ 1,429 Accrued expenses......................................................... 696 530 Current portion of note payable.......................................... 207 183 -------- -------- Total current liabilities............................................ 1,460 2,142 -------- -------- Noncurrent Liabilities Note payable, net of current portion..................................... 117 326 -------- -------- Commitments and Contingencies Shareholders' Equity: Common stock, $.01 par value, 50,000,000 authorized; 12,696,250 issued and outstanding in 1998 and 1997..................... 127 127 Additional paid-in capital............................................... 45,642 45,642 Accumulated items of comprehensive income (loss)......................... (58) 3 Accumulated deficit...................................................... (32,223) (24,128) -------- -------- Total shareholders' equity........................................... 13,488 21,644 -------- -------- Total liabilities and shareholders' equity........................... $ 15,065 $ 24,112 -------- -------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-1 OSTEX INTERNATIONAL, INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1997 1996 -------- -------- -------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Revenues: Product sales and research testing services.............................. $ 3,047 $ 3,658 $ 2,860 License fees and research and development payments....................... -- 450 1,087 -------- -------- -------- Total revenues....................................................... 3,047 4,108 3,947 -------- -------- -------- Operating Expenses: Cost of products sold.................................................... 814 899 926 Research and development................................................. 2,901 4,470 3,163 Selling, general and administrative...................................... 8,122 8,031 9,201 -------- -------- -------- Total operating expenses............................................. 11,837 13,400 13,290 -------- -------- -------- Loss from operations................................................. (8,790) (9,292) (9,343) Other Income (Expense): Proceeds from legal settlement........................................... -- 6,200 -- Interest income.......................................................... 747 901 1,317 Interest expense......................................................... (52) (73) (44) -------- -------- -------- Net loss............................................................. $ (8,095) $ (2,264) $ (8,070) -------- -------- -------- -------- -------- -------- Basic and diluted net loss per common and common equivalent share.................................................. $ (0.64) $ (0.18) $ (0.65) Shares used in calculation of net loss per share........................... 12,696 12,574 12,441
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-2 OSTEX INTERNATIONAL, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1997 1996 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss................................................................. $ (8,095) $ (2,264) $ (8,070) Adjustments to reconcile net loss to net cash used in operating activities-- Depreciation and amortization.......................................... 685 651 504 Expense from stock awards and grants................................... -- 197 33 (Increase) decrease in receivables and other current assets............ 486 (183) 493 (Increase) decrease in inventory....................................... (46) (48) 83 Decrease in other assets............................................... 38 -- -- Increase (decrease) in accounts payable................................ (872) 170 104 Increase in accrued expenses........................................... 166 296 66 -------- -------- -------- Net cash used in operating activities................................ (7,638) (1,181) (6,787) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments...................................... (31,606) (20,426) (22,958) Proceeds from sales and maturities of short-term investments............. 40,074 23,535 24,575 Purchase of property, plant and equipment................................ (102) (1,105) (495) -------- -------- -------- Net cash provided by investing activities............................ 8,366 2,004 1,122 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock and exercise of stock options................................................................ -- 252 41 Proceeds from borrowings on note payable................................. -- -- 746 Payments on note payable................................................. (185) (163) (74) -------- -------- -------- Net cash provided by (used in) financing activities.................. (185) 89 713 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 543 912 (4,952) CASH AND CASH EQUIVALENTS, beginning of period............................. 2,201 1,289 6,241 -------- -------- -------- CASH AND CASH EQUIVALENTS, end of period................................... $ 2,744 $ 2,201 $ 1,289 -------- -------- -------- -------- -------- -------- SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: Stock granted for research and development services...................... $ -- $ 191 $ -- -------- -------- -------- -------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-3 OSTEX INTERNATIONAL, INC. STATEMENTS OF SHAREHOLDERS EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED COMMON STOCK ADDITIONAL OTHER TOTAL -------------- PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHAREHOLDERS' SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT LOSS EQUITY ------ ------ ---------- ------------- ----------- ------------- ------------- Balance, December 31, 1995......... 12,433 $125 $45,121 $ 66 $(13,794) $31,518 Compensation expense for stock option grants.................... -- -- 33 -- -- -- 33 Stock options exercised............ 9 41 -- -- -- 41 Comprehensive loss Unrealized gain on short-term investments.................... -- -- -- 4 -- 4 4 Net loss......................... -- -- -- -- (8,070) (8,070) (8,070) ------------- Comprehensive loss................. (8,066) ------------- ------------- 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 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
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-4 OSTEX INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 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. Actual results could differ from those estimates. REVENUE RECOGNITION License fees and research and development payments are recognized upon attainment of the agreed-upon milestones. Research testing fees are recognized when the services are substantially complete. Product sales are recognized upon shipment. 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 a maturity of three months or less when purchased to be cash equivalents. The carrying amount approximates fair value due to the short maturity of these instruments. SHORT-TERM INVESTMENTS The Company considers all of its investments as "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. 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 has historically incurred minimal credit losses. The Company's range of customers includes research and clinical laboratories and other companies, of which one customer (Johnson & Johnson Clinical Diagnostics, Inc.) accounted for approximately 16%, 22% and 13% of total revenues for the years ended December 31, 1998, 1997 and 1996, respectively. F-5 OSTEX INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 on the straight-line method over the estimated useful life of the asset. Leasehold improvements are amortized over the shorter of useful lives or the lease term. Estimated lives range from five to eight years. Depreciation and amortization expense charged to operations during 1998, 1997 and 1996 was $685,000, $614,000 and $502,000, respectively. COMPREHENSIVE INCOME The Company has adopted SFAS 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. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform to the current year presentation. 2. SHORT-TERM INVESTMENTS The Company's short-term investments at December 31, 1998 and 1997, consisted of the following:
1998 1997 ---------- ----------- United States treasury obligations................ $ 0 $ 7,955,000 Federal agency obligations and discount notes..... 3,418,000 2,686,000 Government agency obligations..................... 2,935,000 3,389,000 Corporate and municipal bonds..................... 1,882,000 2,734,000 ---------- ----------- $8,235,000 $16,764,000 ---------- ----------- ---------- -----------
The maturities of all classes of the Company's assets were less than two years at December 31, 1998 and 1997. F-6 OSTEX INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. PROPERTY, PLANT & EQUIPMENT Property, plant & equipment at December 31, 1998 and 1997 consisted of the following:
1998 1997 ----------- ----------- Leasehold improvements............................ $ 2,426,000 $ 2,426,000 Laboratory and manufacturing equipment............ 1,304,000 1,277,000 Computers and office equipment.................... 1,050,000 975,000 ----------- ----------- 4,780,000 4,678,000 Accumulated depreciation and amortization......... (2,398,000) (1,713,000) ----------- ----------- Net property, plant & equipment................... $ 2,382,000 $ 2,965,000 ----------- ----------- ----------- -----------
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 10%. 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 $20,000. 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. Minimum principal payments are as follows:
1999.............................................. 207,000 2000.............................................. 117,000 -------- $324,000 -------- --------
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, and shares available for grant under the 1994 Plan and the Directors' Plan at December 31, 1998 are 354,900 and 110,000, 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 10 years from the date of grant. Options are granted with exercise prices equal to fair market value. F-7 OSTEX INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. SHAREHOLDERS' EQUITY (CONTINUED) Information relating to stock options outstanding and stock options exercisable at December 31, 1998 is as follows:
OPTIONS OUTSTANDING --------------------------------------------- OPTIONS EXERCISEABLE WEIGHTED -------------------------- AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER OF REMAINING LIFE AVERAGE NUMBER OF AVERAGE EXERCISE PRICES SHARES IN YEARS EXERCISE PRICE SHARES EXERCISE PRICE - - ---------------- --------- ----------------- -------------- --------- -------------- $ .08 - $ 1.75 207,050 7 $ .81 78,750 $ .42 $2.10 - $ 5.00 1,596,287 9 $ 3.17 671,856 $ 3.26 $5.63 - $17.13 32,750 7 $10.87 29,032 $11.45 --------- --------- ------ 1,836,087 9 $ 3.04 779,638 $ 3.28 --------- --------- ------ --------- --------- ------
Information relating to stock options activity is as follows:
1998 1997 1996 -------------------- --------------------- -------------------- WTD AVG WTD AVG WTD AVG SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE --------- --------- ---------- --------- --------- --------- Outstanding at beginning of period...... 1,962,301 $3.34 1,827,626 $6.61 1,431,279 $4.51 Granted................................. 338,500 1.91 2,227,925 3.76 446,000 12.30 Exercised............................... -- -- (184,000) 1.37 (8,950) 4.56 Canceled................................ (464,714) 3.47 (1,909,250) 7.14 (40,703) 9.64 --------- ---------- --------- Outstanding at end of period............ 1,836,087 $3.04 1,962,301 $3.34 1,827,626 $6.61 --------- ---------- --------- --------- ---------- --------- Exerciseable at end of period........... 779,638 $3.28 481,451 $3.34 914,029 $4.03 Weighted average fair value of options granted............................... $ 1.36 $ 2.24 $ 7.00
Options outstanding have weighted average remaining contractual lives of nine and eight years at December 31, 1998 and 1997. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." 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 1998, 1997 and 1996 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:
1998 1997 1996 ----------- ----------- ----------- Net loss--as reported.............. $(8,095,000) $(2,264,000) $(8,070,000) Net loss--pro forma................ $(8,513,000) $(2,222,000) $(8,729,000) Basic and diluted net loss per common and common equivalent share--as reported............... $ (.64) $ (.18) $ (.65) Basic and diluted net loss per common and common equivalent share--pro forma................. $ (.67) $ (.18) $ (.70)
F-8 OSTEX INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. SHAREHOLDERS' EQUITY (CONTINUED) 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 1998: 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 rates of 6.8%; and expected lives of five years. Assumptions for options granted in 1996 were: zero dividend yield; expected volatility of 59%; average risk-free interest rates of 6.1%; 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. 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 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. During 1998, 1997 and 1996, the Company incurred approximately $150,000, $123,000 and $154,000 of patent expenses. The Company is obligated to pay WRF royalties on net sales of any licensed products. 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 exclusive manufacturing, marketing and distribution rights to certain of the Company's products in Japan. Through December 31, 1998, the Company had earned fees and milestone payments of $2,000,000, including $450,000 in 1997 and none in 1998 and 1996. The Company has received all milestone payments to be earned in connection with the license agreement for the urine test. Mochida has an option to license the Company's serum test. Under the research and development agreement, the Company earned no payments during 1998 and 1997 and $1,080,000 during 1996. 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 $367,000, $499,000 and $304,000 during 1998, 1997 and 1996, respectively. Minimum payments in 1999 and 2000 under these agreements will be $160,000 and $150,000, respectively. F-9 OSTEX INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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:
1999.............................................. $501,000 2000.............................................. 494,000 2001.............................................. 496,000 2002.............................................. 527,000 2003.............................................. 527,000 ---------- $2,545,000 ---------- ----------
Total rent expense was approximately $481,000, $584,000 and $538,000 in 1998, 1997 and 1996, 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 patented Ostex technology. The lawsuit is currently scheduled for trial commencing August, 1999. At the present time management cannot predict the outcome of the lawsuit but intends to continue to vigorously assert its position. 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. 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 F-10 OSTEX INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. FEDERAL INCOME TAXES (CONTINUED) statement of operations. The change in the valuation allowance during 1998 and 1997 was $2,966,000 and $586,000, respectively. The Company's deferred tax assets (liabilities) are as follows:
DECEMBER 31, -------------------------- 1998 1997 ------------ ------------ Net operating loss carryforward................... $ 12,512,000 $ 10,039,000 Research and experimentation credits.............. 588,000 363,000 Excess of market value over the exercise price of common stock options............................ -- 77,000 Property, plant and equipment..................... 145,000 (47,000) Other............................................. 221,000 68,000 ------------ ------------ Gross deferred tax asset.......................... 13,466,000 10,500,000 Valuation allowance............................... (13,466,000) (10,500,000) ------------ ------------ Net deferred tax asset............................ $ -- $ -- ------------ ------------ ------------ ------------
At December 31, 1998, the Company had tax net operating loss carryforwards of $36,800,000 which expire between 2004 and 2018. 13. SUBSEQUENT EVENT In January 1999, the Board of Directors approved a plan to repurchase up to 1,000,000 shares of the Company's common stock. F-11 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Ostex International, Inc.: We have audited the accompanying balance sheets of Ostex International, Inc. (a Washington corporation) as of December 31, 1998 and 1997, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ostex International, Inc. as of December 31, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Seattle, Washington, January 29, 1999 SHAREHOLDER INFORMATION CORPORATE HEADQUARTERS Ostex International, Inc. 2203 Airport Way South, Suite 400 Seattle, WA 98134-9967 Tel: (206) 292-8082 Fax: (206) 292-8625 INDEPENDENT ACCOUNTANTS Arthur Andersen LLP 801 Second Avenue, Suite 800 Seattle, WA 98104 LEGAL COUNSEL Perkins Coie LLP 1201 Third Avenue, 40th Floor Seattle, WA 98101 TRANSFER AGENT AND REGISTRAR ChaseMellon Shareholder Services L.L.C. Shareholder Relations 85 Challenger Road Ridgefield Park, NJ 07660 Website: www.chasemellon.com INVESTOR RELATIONS Lippert/Heilshorn & Associates, Inc. 300 Montgomery Street, Suite 1140 San Francisco, CA 94104 SEC FORM 10-K A copy of the Company's annual report to the Securities and Exchange Commission on Form 10-K is available without charge upon written request to Investor Relations at the Company's headquarters. SHAREHOLDERS OF RECORD As of December 31, 1998, the Company had 133 registered shareholders of record of its common stock. SHAREHOLDER INQUIRIES Communications concerning transfer requirements, lost certificates and changes of address should be directed to the Transfer Agent. For general information about the Company and its activities, contact the Investor Relations Department at Company headquarters. INFORMATION SERVICE For timely information about Ostex, news releases are available via facsimile on the Company's News-on-Demand service by calling (800) 356-8061 or on the World Wide Web at http://www.hnt.com/ bizwire/cnn/451.htm. PRICE RANGE OF COMMON STOCK The following table lists the high and low trading prices for the Company's common stock as reported on the Nasdaq National Market System.
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 1997 HIGH LOW - - ----------------------------------------------------------------------- --------- --------- 1st quarter............................................................ $ 7.88 $ 3.75 2nd quarter............................................................ 4.38 1.94 3rd quarter............................................................ 4.13 2.25 4th quarter............................................................ $ 4.50 $ 2.13
The Company's common stock is traded on the Nasdaq National Market-Registered Trademark-under the symbol OSTX. No dividends have been paid on the common stock. ANNUAL MEETING The Annual Meeting of Shareholders will be held Thursday, June 3, 1999, at 9:00 am at the Sheraton Seattle Hotel & Towers, Seattle, Washington. OSTEX WEBSITE For more information about Ostex, visit http://www.ostex.com. Osteomark and Ostex are registered trademarks of Ostex International, Inc. Nasdaq National Market is a registered trademark of the National Association of Securities Dealers, Inc. 2 EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included 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 22, 1999 EX-27.1 4 EXH 27.1
5 YEAR DEC-31-1998 JAN-1-1998 DEC-31-1998 2,744,000 8,235,000 518,000 80,000 247,000 12,084,000 2,382,000 685,000 15,065,000 1,460,000 0 0 0 127,000 13,361,000 15,065,000 3,047,000 3,047,000 814,000 814,000 11,023,000 55,000 52,000 (8,095,000) 0 (8,095,000) 0 0 0 (8,095,000) (0.64) (0.64)
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