SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
-- or --
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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0-25250
COMMISSION FILE NUMBER
OSTEX INTERNATIONAL, INC.
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
STATE OF WASHINGTON
STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION
91-1450247
I.R.S. EMPLOYER IDENTIFICATION NUMBER
2203 AIRPORT WAY SOUTH, SUITE 400, SEATTLE, WASHINGTON 98134
206-292-8082
ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES
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Securities registered pursuant to Section 12(b) of the Act:
(none) (none)
TITLE OF CLASS EACH EXCHANGE ON WHICH REGISTERED
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
TITLE OF CLASS
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Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), Yes [ X ]
and (2) has been subject to such filing requirements for
the past 90 days. No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant was approximately $23,308,000 on March 17,
1998, based on the per-share closing price of $2.28 on the Nasdaq Stock Market.
The number of shares of Common Stock outstanding as of March 27,
1998 was 12,696,250.
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1997 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 Monday, May 18, 1998, to be filed
pursuant to Regulation 14A is incorporated by reference into Part III of this
Form 10-K.
<PAGE>
OSTEX INTERNATIONAL, INC.
INDEX TO FORM 10-K
PART I
PAGE
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ITEM 1 - BUSINESS 2
ITEM 1A - RISK FACTORS 4
ITEM 1B - EXECUTIVE OFFICERS OF THE REGISTRANT 8
ITEM 2 - PROPERTIES 9
ITEM 3 - LEGAL PROCEEDINGS 9
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS 10
ITEM 6 - SELECTED FINANCIAL DATA 10
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 10
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 10
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 11
ITEM 11 - EXECUTIVE COMPENSATION 11
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 11
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 11
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 12
SIGNATURES 16
<PAGE>
<PAGE>
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,
1997; and
"Proxy Statement" shall mean the proxy statement for the 1998
shareholders meeting of Ostex International, Inc. to be held Monday, May 18,
1998, to be filed with the Securities and Exchange Commission (the "Commission")
pursuant to Regulation 14A.
PART I
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 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, 1997, the Company had 56 employees.
Osteoporosis is a significant health problem. According to the National
Osteoporosis Foundation (the "NOF"), osteoporosis afflicts approximately 28
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 assay, which is a urine test that can aid in healthcare
decision-making at early menopause and beyond. The Osteomark assay is a
non-invasive diagnostic test which quantitatively indicates the level of
bone resorption. Individuals who are losing bone collagen at accelerated
rates may indicate a condition which typically results in osteoporosis. The
Company believes that early identification of high levels of bone resorption
provides the opportunity to predict skeletal response (bone mineral density) to
hormonal resorptive therapy in postmenopausal women and helps prevent the onset
of osteoporosis. The Company also believes that the Osteomark assay 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 assay became commercially
available in the United States as a urinary assay 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 assay.
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 antiresorptive therapy.
<PAGE>
The Company is manufacturing and marketing the Osteomark assay initially
in an Enzyme-linked Immunosorbent Assay ("ELISA") format for testing urine
samples. Worldwide promotion of the Osteomark 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 assay in the existing microtiter plate
format and is adapting the urine assay for use with its automated analyzer. The
companies intend to adapt the serum assay for use on high-speed, high volume,
automated instruments typically used in large clinical laboratories. 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 assay to other high-speed
automated instruments.
In the year ended December 31, 1997, the Company's largest customer,
Johnson & Johnson, accounted for approximately 24% of the Company's product
sales and research testing services. The termination of the Company's
relationship with Johnson & Johnson could have a material adverse effect on the
Company's results of operations.
Ostex has also 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 assay in
Japan. Under the research and development agreement, Mochida has an option to
license the NTx serum assay 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 assay. In January 1998 Mochida launched the Osteomark
assay in Japan for the management of patients with hyperparathyroidism and for
patients with metastatic bone tumors. Ostex will to sell Mochida the critical
reagents to be assembled into finished products in Japan by Mochida.
The Company also plans to develop the Osteomark assay in other formats,
including formats suitable for use in the physician's office. The Company has
entered into agreements with Hologic, Inc. ("Hologic"), a worldwide leader in
X-ray and ultrasound bone densitometers used to measure bone density to assist
in the diagnosis and monitoring of osteoporosis and other bone diseases, and
Metrika, Inc. ("Metrika"), a diagnostic device company, to develop physician
office "point-of-care" Osteomark assay devices.
The Company and Metrika are developing a point-of-care NTx test as
an indicator of bone resorption which uses a hand-held, fully disposable
device that computes NTx values and displays them digitally. Additionally, Ostex
and Hologic are developing a low-cost point-of-care NTx test for bone resorption
based on the Osteomark assay pursuant to a joint development agreement. Under
this agreement, the companies, working with Serex, Inc. ("Serex"), will develop
and market a point-of-care Osteomark test, utilizing Serex's strip-test
technology and a hand-held, battery-operated meter that computes NTx values upon
insertion of the strip. Ostex believes that the joint product will reduce the
cost and simplify the process of obtaining patient results.
OSTEOMARK and OSTEX are registered United States trademarks of Ostex
International, Inc. The Company has also registered its OSTEOMARK trademark in
42 other countries. Additional trademark applications are pending.
The Company's collagen resorption assay technology is covered by 17 U. S.
patents, 2 European patents, 2 Australian patents, and patents in Canada,
Ireland, Spain, Hong Kong, and Singapore. The European patents are in opposition
proceedings before the European Patent Office. Additional patent applications
are pending in Japan and elsewhere.
The Company's research and development expenditures, all of which were
funded by the Company, totaled $4,470,000, $3,163,000, and $3,200,000, in 1997,
1996, and 1995, respectively.
<PAGE>
The Company's foreign product sales, all to non-affiliates, totaled
$652,000, $370,000, $528,000, in 1997, 1996 and 1995, respectively.
Foreign sales were primarily to Europe and Japan.
The Company is in the latter stages of adapting the Osteomark assay to
a serum format. 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 and to
ultimately perform NTx testing on random access, automated analyzers. Ostex
plans to initiate clinical studies of its serum NTx test in an ELISA format
during the second quarter of 1998.
The Company is developing an assay for Type II collagen degradation.
This type of 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
assay 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 assay used in connection with osteoporosis, the Company believes
that the Type II assay 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 high bone turnover who might
warrant a bone scan to confirm the stage (degree of spread) of the disease.
The American Cancer Society estimated that over 200,000 new cases of
prostate cancer would be diagnosed in 1997, with 60%-80% progressing to bone
metastases.
Ostex is also in the early stages of developing an assay for measuring
Type III collagen degradation. Type III collagen is a significant constituent of
blood vessels such as coronary arteries. Measuring degradation of this type of
collagen may be useful in identifying cardiovascular disease.
ITEM 1A. RISK FACTORS
When used in this discussion, 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
(which discussion has been incorporated herein by reference) and the risk
factors set forth below. 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.
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's lead product, the Osteomark assay, became commercially
available in May 1995 in the United States and sales of this product have
increased over time. However, there can be no assurance that the Company's
Osteomark assay 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 significant
additional research and development to adapt its core technology to serum
testing and 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
<PAGE>
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 partners 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 assay 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,
Hologic, Wyeth-Ayerst Laboratories,and Metrika and intends to appoint a second
international distributor for its NTx test on automated instruments. 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.
In the year ended December 31, 1997, the Company's largest customer,
Johnson & Johnson, accounted for approximately 24% of the Company's product
sales and research testing services. The termination of the Company's
relationship with Johnson & Johnson could have a material adverse effect on the
Company's results of operations.
LIMITED SALES AND MARKETING EXPERIENCE
The Company has limited experience in sales, marketing and distribution.
To market any of its products directly, the Company must develop and implement a
substantial marketing and sales effort with technical expertise and supporting
distribution capability. The Company intends to continue to market and sell its
products in the U.S. through national distributors and its own limited sales
force and to market 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 it or
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. The Company is dependent upon the Washington Research
Foundation (the "WRF") for the filing and prosecution of patents and patent
applications licensed to the Company. 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 delivery 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.
<PAGE>
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 clearance can
be lengthy and expensive. The time required for FDA approvals is uncertain, and
often depends on the type, complexity and novelty of the product. There can be
no assurance that the FDA will act favorably or quickly in its review of any
submission by the Company, and significant difficulties or costs may be
encountered by the Company in its efforts to obtain FDA clearance that could
delay or preclude the Company from marketing its products. Furthermore, there
can be no assurance that the FDA will not request the development of additional
data following original submissions, causing the Company to incur further cost
and delay. Nor can there be any assurance that the FDA will not restrict the
intended use of a submitted product as a condition for clearance.
If the FDA concludes that a device is not substantially equivalent to
another legally marketed device, submission of a pre-market approval application
("PMA") 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 510(k)
"device" premarket notification procedure 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.
<PAGE>
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 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, 1997 of $24,128,000. For the year-end December 31, 1997,
the Company had a net loss of $2,264,000 ($8,464,000, excluding a non-recurring
receipt of $6,200,000 from the settlement of a dispute with Boehringer Mannheim
GmbH. The Company expects to incur additional substantial costs as it continues
with its operations, marketing efforts, research and development activities, and
clinical trials. The Company expects to continue to incur losses in future
periods and the Company is unable to predict when, if at all, it will achieve
profitability.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING
The Company 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 before
the end of 1999. 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. 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 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
<PAGE>
Company or therapeutic products for osteoporosis could also have an adverse
effect on the Company's ability to obtain regulatory approvals or to achieve
market acceptance.
UNCERTAINTY OF HEALTHCARE REIMBURSEMENT
The Company's ability to commercialize its products will depend in part
on the extent to which reimbursement for the cost of such products and related
treatment will be available from third-party payors, such as government health
administration authorities, private health coverage insurers and other
organizations. The status of the scope of healthcare programs worldwide is
uncertain and there can be no assurance that adequate third-party coverage will
be available for the Company to maintain price levels sufficient for realization
of an appropriate return on its investment in product development. Third-party
payors are increasingly challenging the price and cost effectiveness of medical
products and services. If the Company succeeds in bringing one or more products
to the market, there can be no assurance that these products will be considered
cost effective and that reimbursement to the consumer will be available or
sufficient to allow the Company to sell its products on a competitive basis.
VOLATILITY OF STOCK PRICE
The volatility of the Company's stock price has been significant since it
first became publicly traded in January 1995. The stock market may experience
significant price and volume fluctuations unrelated to the operating performance
of particular companies. Factors such as any loss of key management, the results
of the Company's clinical trials or those of its competitors, adverse regulatory
actions or decisions, evidence regarding the safety or efficacy of the Company's
products or those of its competitors, announcements of technological innovations
or new products by the Company or its competitors, governmental regulation,
developments with respect to patents or other proprietary rights, product or
patent litigation or public concern as to the safety of products developed by
the Company may have a volatile effect on the market price of the Company's
Common Stock.
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 49 President and Chief Executive Officer
Thomas F. Broderick 49 Vice President, Patent and General Counsel
Donna J. DeLong 49 Vice President, Marketing
Robert M. Littauer 49 Senior Vice President, Finance and
Administration and Secretary
Nancy J.S. Mallinak 36 Vice President, Regulatory and Clinical
Affairs
William K. Strelke 44 Vice President, Sales
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 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
<PAGE>
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.
DONNA 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.
ROBERT M. LITTAUER joined the Company in September 1996 as Senior Vice
President, Finance and Administration, and was appointed the Corporate Secretary
in November 1997. From 1987 to September 1996, Mr. Littauer was Senior Vice
President, Chief Financial Officer and Treasurer of NeoRx Corporation, a
biotechnology company developing therapeutic products for cancer and
cardiovascular diseases.
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.
WILLIAM K. STRELKE was named Vice President, Sales in November 1997. Mr
Strelke was Vice President, Sales and Marketing for the Company from October
1994 to November 1997, and was the Director of Sales and Marketing for the
Company from January 1994 to October 1994. Prior to joining Ostex, Mr. Strelke
served from March 1993 to January 1994 at Mitchell International, Inc., a
healthcare facility design and construction consulting company, where he was
Vice President and Regional Director. From January 1983 to March 1993, Mr.
Strelke held various positions with responsibility for sales and distribution
management with the Scientific Products Division of Baxter International
(previously American Hospital Supply Corporation), a general healthcare company.
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 11 in the "Notes to Financial Statements" on pages 32 and 33
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, 1997.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Information regarding the Common Stock trading activity for 1997 and 1996
is incorporated herein by reference to the "Shareholder Information - Price
Range of Common Stock" on page 36 of the Annual Report to Shareholders, which is
included as Exhibit 13.0 to this Annual Report on Form 10-K.
As of March 17, 1998, there were 12,696,250 shares of Common Stock
outstanding held of record by approximately 154 shareholders. The Company
believes there are approximately 3,600 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 20 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 21-23 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 24-33,
and "Report of Independent Public Accountants" on page 34, 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.
<PAGE>
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.
<PAGE>
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 24-33 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 24
Statements of Operations 25
Statements of Cash Flows 26
Statements of Shareholders' Equity 27
Notes to Financial Statements 28
Report of Independent Public Accountants 34
(B) REPORTS ON FORM 8-K
None
<PAGE>
(C) EXHIBIT INDEX (13)
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
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. (division of Recordati Pharmaceutical)
(1) 10.20 Osteomark EIA Distribution License Agreement dated
July 12, 1994 with BRAHMS Diagnostic (formerly
Henning Berlin GmbH)
<PAGE>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
(1)10.23 Osteomark Agreement dated February 12, 1993, as
amended May 10, 1994, with Nichols Institute
Reference Laboratory
(1)10.25 License Agreement dated July 8, 1994 with
Endrocrine Sciences
(1)10.26 License Agreement dated August 1994 with
Pacific Biometrics, Inc.
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.
10.30 Promotion Agreement dated September 30, 1997 with
Wyeth-Ayerst Laboratories
(6)10.31 Agreement with Laboratory Corporation of Americao
Holdings (LabCorp), dated January 11, 1996
(7)10.32 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, 1997
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
- -----------------------------
(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) 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.
<PAGE>
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 27, 1998.
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
--------- ---------- ----
/S/THOMAS A. BOLOGNA President and
- ------------------------ Chief Executive Officer March 27, 1998
Thomas A. Bologna (principal executive officer)
/S/ ROBERT M. LITTAUER Senior Vice President, Finance
- ------------------------ and Administration and Secretary March 27, 1998
Robert M. Littauer (principal financial and principal
accounting officer)
/S/ THOMAS J. CABLE Chairman of the Board
- ------------------------ of Directors March 27, 1998
Thomas J. Cable
/S/ ELISABETH L. EVANS
- ------------------------ March 27, 1998
Elisabeth L. Evans Director
/S/ DAVID R. EYRE Director March 27, 1998
- ------------------------
David R. Eyre
/S/ FREDRIC J. FELDMAN
- ------------------------ Director March 27, 1998
Fredric J. Feldman
/S/ GREGORY D. PHELPS
- ------------------------ Director March 27, 1998
Gregory D. Phelps
- ------------------------ Director March 27, 1998
Gilbert S. Omenn
/S/ JOHN H. TRIMMER Director March 27, 1998
- ------------------------
John H. Trimmer
Exhibit 10.7
EXECUTIVE EMPLOYMENT AGREEMENT
OSTEX INTERNATIONAL, INC.
THOMAS A. BOLOGNA
Dated as of July 16, 1997
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (this "Agreement") between Ostex
International, Inc. (the "Company"), a Washington corporation and Thomas
A. Bologna ("Executive") is dated and entered into as of July 16, 1997.
In consideration of the mutual covenants and promises contained herein,
the Company and the Executive agree as follows:
1. Employment
The Company will employ the Executive and the Executive will accept
employment by the Company as its President and Chief Executive Officer, with
duties and responsibilities customarily associated with such position. The
Executive will perform such duties as may be assigned from time to time by the
Board of Directors of the Company which relate to the business of the Company,
its subsidiaries or any business ventures in which the Company or its
subsidiaries may participate.
2. Attention and Effort
The Executive will devote his full business time, attention and effort
to the Company's business and will use his skills and render services to the
best of his ability to serve the interests of the Company. Notwithstanding
anything herein to the contrary, the parties agree that Executive may serve as a
member of the board of Directors of other corporations or entities (provided
that such corporations or entities do not compete with the Company) and engage
in consulting and other activities related to such directorships and that such
service shall not constitute a violation of Executive's duties and obligations
to the Company; provided, however, that such directorships and related
consulting and other activities (i) shall be limited to those which the
Executive currently performs pursuant to existing agreements that have been
disclosed to the Company and (ii) shall not materially detract from or interfere
with the Executive's obligations under this Section 2.
3. Term
Unless otherwise terminated as provided in paragraphs 6 and 7 of this
Agreement, the Executive's term of employment under this Agreement shall
commence on the date hereof and shall expire on July 15, 2001; provided,
however, that this Agreement shall be automatically renewed thereafter for
additional terms of one year each unless either the Company or the Executive
gives the other written notice of termination at least 30 days prior to the end
of the then current term.
<PAGE>
4. Compensation
4.1 Base Salary
The Executive's compensation shall consist, in part, of an annual base
salary of $275,000 before all customary payroll deductions (the "Base Salary").
The Base Salary shall be paid in substantially equal installments at the same
intervals as other officers of the Company are paid. The Base Salary shall be
increased effective on the first anniversary of this Agreement by not less than
10% of the Base Salary. Thereafter, further increases to the Base Salary will be
reviewed annually by the Board of Directors and any adjustments shall be made at
the sole discretion of the Board of Directors. The Base Salary shall not be
reduced without Executive's express consent.
4.2 Bonus
For services rendered for the period through December 31, 1997, the
Executive shall be paid a bonus of $50,000, of which $25,000 shall be paid on
the date of this Agreement and $25,000 shall be paid on January 10, 1998.
5. Benefits and Expenses
5.1 Expenses
The Company shall promptly reimburse the Executive for all reasonable
and necessary business expenses incurred and advanced by him in carrying out his
duties under this Agreement. The Executive shall present to the Company from
time to time an itemized account of such expenses in such form as may be
required by the Company.
5.2 Benefits
During the term of employment hereunder, the Executive shall be
entitled to participate fully in any and all benefit plans, programs, policies
and any and all fringe benefits which may be made available to the senior
executives of the Company generally, including but not limited to medical,
dental, disability, pension and retirement benefits, life insurance and other
death benefits.
5.3 Travel and Relocation Expenses
During the term of Executive's employment, the Company shall reimburse
the Executive for or pay directly the reasonable expense of (i) round trip air
travel from San Diego to Seattle once per week, (ii) leasing a furnished
apartment in Seattle (including utilities, telephone and similar expenses), such
leases to be subject to the Company's approval (iii) limited moving expenses,
and (iv) temporary living accommodations in Seattle until an apartment is
rented. The Company and the Executive shall agree on a budget for such expenses
<PAGE>
as soon as practicable after the date of this Agreement and shall initial such
final budget to acknowledge the agreed levels of expenses. To the extent that
such reimbursement or direct payment shall be treated as taxable income, the
Executive shall receive a "gross up" bonus to compensate the Executive for any
and all income taxes that the Executive may be required to pay with respect to
such reimbursement and gross up bonus (whenever such taxes may be assessed or
paid). The Executive shall report all such reimbursement and "gross up" bonuses
as ordinary income for income tax purposes. Upon termination of Executive's
employment, if Executive so requests, the Company shall reimburse the Executive
for the reasonable expense of relocating to San Diego (or another location
designated by Executive within the United States) and shall assume any lease
which Executive may have entered into in Seattle.
5.4 Stock Options
Simultaneously herewith, the Company has granted options to purchase
700,000 shares of Common Stock to the Executive under the authority of its
Amended and Restated 1994 Stock Option Plan and pursuant to the terms and
conditions of the Stock Option Agreement dated July 16, 1997 between the parties
(the "Stock Option Agreement"). Annually, the Board of Directors shall consider,
at its sole discretion, granting additional stock options to the Executive. The
Company represents and warrants to the Executive that all stock options (both
incentive stock options and nonqualified stock options) it has granted under the
1994 Stock Option Plan have contained a provision that vested options will
terminate upon the expiration of 90 days from the date of an optionee's
termination of employment or contractual relationship with the Company for any
reason other than death or disability.
5.5 Insurance
During the term of the Executive's employment, the Company will obtain
term life insurance on the life of the Executive, which insurance will provide
for the payment of an amount equal to the Base Salary for one year (or an amount
equal to two times the Base Salary following a Change in Control) to the
Executive's spouse in the event of the Executive's death; provided that the
Company may obtain such insurance for a larger amount, with the balance payable
to the Company in the event of the Executive's death.
<PAGE>
6. Termination
Employment of the Executive pursuant to this Agreement may be
terminated as follows, but in any case, the provisions of Sections 8 and 9 shall
survive the termination of the Executive's employment:
6.1 By the Company
With or without Cause (as defined below), the Board of Directors may
terminate the employment of the Executive at any time during the Term upon
giving Notice of Termination (as defined below).
6.2 By the Executive
The Executive may terminate his employment at any time for any reason
upon giving Notice of Termination.
6.3 Automatic Termination
Employment shall terminate automatically upon death or total disability
of the Executive. The term "total disability" as used herein, shall mean an
inability to perform the duties set forth in paragraph 1 of this Agreement
because of illness or physical or mental disability for a period or periods
aggregating 120 calendar days in any 12-month period, unless the Executive is
granted a leave of absence by the Board of Directors of the Company. Executive
and the Company hereby acknowledge that the Executive's ability to perform the
duties specified in paragraph 1 of this Agreement is of the essence of this
Agreement. Termination hereunder shall be deemed to be effective immediately
upon the Executive's death or 30 days following a Notice of Termination based
upon a determination by the Board of Directors of the Company of the Executive's
total disability, as defined herein.
6.4 Notice
The term "Notice of Termination" shall mean written notice of
termination of the Executive's employment. The Executive's employment shall
terminate effective upon receipt of the Notice of Termination or the date
specified in the Notice of Termination, whichever is later, provided that the
Executive shall be entitled to termination payments in accordance with paragraph
7 of this Agreement.
<PAGE>
6.5 Cause
Wherever reference is made in this Agreement to termination being with
or without Cause, "Cause" means cause given by the Executive to the Company and
is limited to the following:
(i) The willful and material breach of any provision of
Sections 1 or 2 (including but not limited to the refusal to follow
reasonable and lawful directives of the Board of Directors) or Sections
8 or 9;
(ii) Conviction of a felony or of a crime involving moral
turpitude;
(iii) Continuing misuse of alcohol or controlled
substances; or
(iv) The willful misconduct or gross negligence of the
Executive that results in a material adverse effect on the Company:
provided, however, that to the extent that a breach of Sections 6.5(i), (iii) or
(iv) is curable, the Board of Directors will give the Executive written notice
of such breach and the Executive will have 30 days from the receipt of such
notice to cure such breach.
7. Termination Payments
In the event of termination of the employment of the Executive, all
compensation and benefits set forth in this Agreement shall terminate except as
specifically provided in this paragraph 7:
7.1 Termination by the Company
If the Board of Directors terminates the Executive's employment without
Cause, the Executive shall be entitled to receive (i) any unpaid Base Salary
which has accrued for services already performed as of the date termination of
the Executive's employment becomes effective, (ii) the then existing Base Salary
the Executive would have received if his employment had continued for 12 months,
payable as provided in subparagraph 4.1 of this Agreement, (iii) any bonus that
has been earned but not paid, and (iv) continuation of benefits for himself, his
spouse and his dependents (paid for by the Company) set forth in Section 5.2 for
a period of 12 months following such termination. If the Executive is terminated
by the Board of Directors for Cause, the Executive shall not be entitled to
receive the benefits set forth in clauses (ii) and (iv). If such termination
occurs without Cause in connection with or at any time following a Change in
Control (as defined in the Company's Amended and Restated 1994 Stock Option
Plan), the Executive shall be entitled to a lump sum payment equal to two years'
Base Salary, plus a bonus of 30% of such amount, and continuation of benefits
(paid for by the Company) set forth in Section 5.2 for a period of 24 months
following such termination.
<PAGE>
7.2 Termination by the Executive
If the Executive voluntarily terminates his employment, the Executive
shall not be entitled to receive any payments hereunder other than (i) any
unpaid Base Salary which has accrued for services already performed as of the
date termination of the Executive's employment becomes effective and (ii) any
unpaid bonus which has been earned but not yet paid.
7.3 Termination Because of Death or Total Disability
In the event of a termination of the Executive's employment because of
his death or total disability, the Executive or his personal representative
shall not be entitled to receive any payments hereunder other than (i) any
unpaid Base Salary which has accrued for services already performed as of the
date termination of the Executive's employment becomes effective, (ii) any bonus
which has been earned but not paid and (iii) a continuation of medical and
dental benefits for himself, his spouse and his dependents (paid for by the
Company) for a period of eighteen months following such termination.
8. Nondisclosure
As a condition of his employment hereunder, the Executive has executed
and delivered to the Company Employee Confidentiality and Invention Agreement
(the "Nondisclosure Agreement") in the form attached hereto as Exhibit A and
incorporated herein by reference as if set forth in full herein, which
Nondisclosure Agreement shall survive the termination of the Executive's
employment.
9. Noncompetition and Nonsolicitation
9.1 Applicability
This Section 9 shall survive the termination of the Executive's
employment with the Company or the expiration of the term of this Agreement.
9.2 Scope of Competition
The Executive agrees that he will not, directly or indirectly, during
his employment and for a period of two years after the date on which his
employment with the Company terminates, be employed by, own, manage, operate,
join, control or participate in the ownership, management, operation or control
of or be connected with, in any manner, any person or entity engaged in any
business activity anywhere in the world (including without limitation research,
development, manufacturing, selling, leasing, licensing or providing services)
<PAGE>
which is competitive with any products or services that the Company is
developing or exploiting during the Executive's employment with the Company,
unless released from such obligation in writing by the Company's Board of
Directors. The Executive shall be deemed to be connected with such business if
such business is carried on by a partnership, corporation or association of
which he is an employee, member, consultant or agent; provided, however, that
nothing herein shall prevent the purchase or ownership by the Executive of
shares which constitute less than 2% of the outstanding equity securities of a
publicly or privately held corporation.
9.3 Scope of Nonsolicitation
The Executive shall not, in addition, directly or indirectly (i)
solicit, or entice any employee or consultant of the Company to cease his
relationship with the Company or (ii) solicit, entice or in any way divert any
customer or supplier of the Company from doing business with the Company. This
Section 9.3 shall apply during the time period and geographical area described
in Section 9.2 hereof.
9.4 Equitable Relief
The Executive acknowledges that the provisions of this Section 9 are
essential to the Company, that the Company would not enter into this Agreement
if it did not include covenants not to compete or solicit and that damages
sustained by the Company as a result of a breach of such covenants cannot be
adequately remedied by damages, and the Executive agrees that the Company,
notwithstanding any other provision of this Agreement, in addition to any other
remedy it may have under this Agreement or at law, shall be entitled to
injunctive and other equitable relief to prevent or curtail any breach of any
provision of this Agreement, including without limitation this Section 9. The
Executive acknowledges that the covenants in this Agreement are reasonable and
that compliance with such covenants will not prevent him from pursuing his
livelihood.
9.5 Effect of Violation
The Executive and the Company agree that additional consideration has
been given for the Executive entering into the noncompetition and
nonsolicitation provisions of this Agreement and the Nondisclosure Agreement
described in Section 10, such additional consideration including, without
limitation certain provisions for termination payments pursuant to Section 7 and
other payments pursuant to Section 8 of this Agreement. Material violation by
the Executive of such noncompetition and nonsolicitation provisions or the
Nondisclosure Agreement shall relieve the Company of any obligation it may have
to make such termination payments under Section 7, but shall not relieve the
Executive of his obligation hereunder not to compete or solicit.
<PAGE>
9.6 Definition of the Company
For purposes of Sections 9.2 and 9.3 hereof, "the Company" shall
include all subsidiaries of the Company, the Company's parent corporation and
any business ventures in which the Company, its subsidiaries or its parent
corporation may participate.
10. Form of Notice
Every notice required by the terms of this Agreement shall be given in
writing by serving the same upon the party to whom it was addressed personally,
by courier, by facsimile transmission (with hard copy delivered by overnight
courier) or by registered or certified mail, return receipt requested, at the
address set forth below or at such other address as may hereafter be designated
by notice given in compliance with the terms hereof:
If to the Executive: Thomas A. Bologna
c/o Ostex International, Inc.
2203 Airport Way South, Suite 400
Seattle, Washington 98134
If to the Company: Ostex International, Inc.
2203 Airport Way South, Suite 400
Seattle, Washington 98134
Attention: Chief Financial Officer
Copy to: James R. Lisbakken
Perkins Coie
1201 Third Avenue, 40th Floor
Seattle, Washington 98101
or such other address as shall be provided in accordance with the terms hereof.
Notice shall be effective upon personal delivery, delivery by courier, receipt
of facsimile transmission or three days after mailing.
<PAGE>
11. Successors and Assigns
For purposes of this Agreement, "Company Successor" means (a) any
corporation resulting from any merger, consolidation or other reorganization to
which the Company is a party or (b) any corporation, partnership, association or
other person or entity to which the Company may transfer all or substantially
all of the assets and business. The Executive agrees that this Agreement may be
transferred or assigned by the Company to the Company Successor. Any Company
Successor shall succeed to the rights and obligations of the Company hereunder
and shall be bound by the terms of this Agreement. If all or substantially all
of the outstanding voting stock of the Company is transferred to another
corporation, partnership, association or other person or entity, the Company, at
the request of the Executive, will reaffirm in writing it's obligations under
this Agreement. This Agreement is not assignable by the Executive. The Company
agrees that it will require any Company Successor (as a condition to any
transaction described in this Section) to expressly assume and agree to perform
this Agreement, including (without limitation) payment of the amounts set forth
in Section 7 above.
12. Waiver
No waiver of any of the provisions hereof shall be valid unless in
writing, signed by the party against whom such claim or waiver is sought to be
enforced, nor shall failure to enforce any right hereunder constitute a
continuing waiver of the same or a waiver of any other right hereunder.
13. Amendments in Writing
No amendment, modification, waiver, termination or discharge of any
provision of this Agreement, nor consent to any departure therefrom by either
party hereto, shall in any event be effective unless the same shall be in
writing, specifically identifying this Agreement and the provision intended to
be amended, modified, waived, terminated or discharged and signed by the Company
and the Executive, and each such amendment, modification, waiver, termination or
discharge shall be effective only in the specific instance and for the specific
purpose for which given. No provision of this Agreement shall be varied,
contradicted or explained by any oral agreement, course of dealing or
performance or any other matter not set forth in an agreement in writing and
signed by the Company and the Executive.
14. Applicable Law
This Agreement shall be governed by the substantive laws of the state
of Washington, without regard to its conflicts of laws provisions.
<PAGE>
15. Severability
All provisions of this Agreement are severable, and the
unenforceability or invalidity of any single provision hereof shall not affect
the remaining provisions.
16. Headings
All headings or titles in this Agreement are for the purpose of
reference only and shall not in any way affect the interpretation or
construction of this Agreement.
17. Attorneys' Fees
The Company will reimburse the Executive for reasonable attorneys fees
in connection with the preparation and review of this Agreement, up to a maximum
or $3,000.
18. Entire Agreement
This Agreement, the Stock Option Agreement and the Nondisclosure
Agreement constitute the full and entire understanding and agreement between the
parties with respect to the subject matter hereof and supersede all prior
agreements with respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties have executed and entered into this
Agreement on the date set forth above.
EXECUTIVE:
/S/ THOMAS A. BOLOGNA
-----------------------
Thomas A. Bologna
COMPANY:
OSTEX INTERNATIONAL, INC.
By: /S/ THOMAS J. CABLE
----------------------
Its Chairman of the
Board of Directors
Exhibit 10.12D
NOTE: CONFIDENTIAL TREATMENT REQUESTED. EXHIBIT OMITS INFORMATION THAT HAS
BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
SECOND AMENDMENT
TO
OSTEOMARK-registered trademark- LICENSE AGREEMENT
This Second Amendment to Osteomark-registered trademark- License
Agreement (this "Second Amendment") is effective as of December 24, 1997, by and
between Ostex International, Inc. ("Ostex") and Mochida Pharmaceutical Co., Ltd.
("Mochida").
RECITALS
A. WHEREAS, Ostex and Mochida are parties to that certain Osteomark-TM-
License Agreement, as amended, dated as of August 21, 1992 (the "License
Agreement"), pursuant to which Ostex granted a license to Mochida to
commercialize the urine-based assay to measure bone resorption in Japan.
B. WHEREAS, Section 5.2 of the License Agreement established
"a flexible pricing formula to enable both Ostex and Mochida to remain
profitable while selling Finished Product in the Territory."
C. WHEREAS, circumstances have changed since the License Agreement was
entered into in 1992, to such extent that: first, Mochida's cost of
manufacturing Osteomark microtiter kits is now established, and such cost is
significantly higher than was anticipated in 1992; second, the Japanese
government control of the national health care system has shifted toward
deregulation, thereby disrupting the reimbursement pricing system upon which the
original pricing formula was based; and third, Mochida requires stable
circumstances during the initial stage of the Osteomark product launch to avoid
cost, supply, packaging and quality control problems.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree that the License
Agreement is amended as follows:
AGREEMENT
1. Exchange Rate. Section 4.8 of the License Agreement is
hereby amended to read in its entirety as follows:
4.8 Exchange Rate. All monies due Ostex under this Agreement
shall be paid in United States Dollars. The parties agree
that the prices stated in Yen in this Agreement are based
on an exchange rate of (Y)115:$1. The parties agree that
they will share equally the risk of fluctuations in the
exchange rate. To this end, the prices stated in this
Agreement will be paid in United States Dollars at the
exchange rate determined in accordance with the following
formula:
AER = 115 + (ER - 115)
--------
2
where:
AER = the Agreed Exchange Rate for converting the
stated prices to United States Dollars; and
ER = the Exchange Rate quoted by the Wall Street
Journal on the date on which Ostex prepares the
first draft of the relevant invoice for each
shipment (a copy of the relevant page of the Wall
Street Journal shall be sent to Mochida with the
invoice).
<PAGE>
Notwithstanding the foregoing, the transfer price for the
shipment of Critical Reagents to Mochida under Mochida
Order No. MS-970027 shall be converted and paid at the
spot exchange rate quoted by the Wall Street Journal on
December 3, 1997.
2. Manufacture and Pricing of Kit Components. Section 5 of
the License Agreement is hereby replaced in its entirety by the following
new Section 5:
5. Supply of Critical Reagents and Kit Components.
5.1 Supply of Critical Reagents. Ostex shall provide
to Mochida a supply of the Critical Reagents to be assembled into
Finished Products and to be marketed, promoted, sold and distributed by
Mochida in accordance with the terms of this Agreement and the relevant
quality criteria jointly established by Ostex and Mochida (the "Quality
Criteria"). Such Critical Reagents shall be manufactured by Ostex, or
by one or more third-party licensees of Ostex at Ostex's
responsibility, and shall meet the Quality Criteria.
5.2 Manufacture and Supply of Kit Components. Mochida
shall transfer the right and responsibility for the manufacture of all
components of Finished Products, other than Finished Product labeling
and packaging materials, (the "Kit Components") to Ostex by the time to
be agreed upon between the parties but no later than December 31, 2000,
on the terms and conditions set forth below. Mochida will file
applications with and pursue the approval of the applicable Japanese
governmental authorities to obtain registrations to import all Kit
Components by such date. Such Kit Components shall be manufactured by
Ostex, or by one or more third-party licensees of Ostex, and shall meet
the Quality Criteria to be agreed between the parties covering Kit
Components. If or when Mochida requests Ostex to label the Kit
Components, Ostex shall accept such request by Mochida at no additional
cost, fee or expense in the following way: Ostex shall supply Mochida
with specifications for the preparation of labels which can be applied
using Ostex machinery, and Mochida shall supply Ostex with labels in
Japanese to be applied to such Kit Components. In the event that
Mochida finds it difficult to obtain blank label stock meeting Ostex's
specifications, then at Mochida's option, Ostex through its vendor,
will supply such stock to Mochida, or will print such labels using
Mochida's artwork, at Mochida's cost.
5.3 Quantity of Critical Reagents and Kit
Components.
(a) Mochida shall provide to Ostex
at least sixty (60) days
prior to the commencement of each calendar quarter, a quarterly
forecast of commercial demand for Critical Reagents (or, if applicable,
Kit Components) to be imported by Mochida into the Territory during
such quarter. Mochida shall deliver to Ostex at least sixty (60) days
prior to the expected shipment date a purchase order for a specified
quantity of Critical Reagents (or, if applicable, Kit Components).
(b) Ostex shall deliver to Mochida
shipments of Critical
Reagents or Kit Components (once responsibility for manufacturing such
Kit Components has been transferred to Ostex) in quantities reasonably
necessary to satisfy the commercial demand for Finished Products within
the Territory. Ostex and Mochida shall, from time to time as necessary
following the commencement of commercial sales, adjust the terms of
quantity and delivery to correspond to such commercial demand, in
accordance with the quarterly forecasts provided by Mochida pursuant to
Section 5.3(a) above.
<PAGE>
NOTE: CONFIDENTIAL TREATMENT REQUESTED
(c) Notwithstanding the foregoing or
any other provision of
this Agreement, it is understood between Ostex and Mochida that, in the
event formats other than the current microtiter format for the
technology are developed or utilized by the parties, and the delivery
of Critical Reagents or Kit Components for such format pursuant to the
transfer prices set forth in this Agreement would be less profitable to
Ostex, the parties agree that they will renegotiate such transfer
prices in good faith. In any event, Ostex shall be under no obligation
to supply Critical Reagents or Kit Components to Mochida for a format
other than the current microtiter format at a price which is less
profitable than the current pricing for the microtiter format.
5.4 Price for Critical Reagents and Kit Components.
Mochida shall pay for each shipment of Critical Reagents or Kit
Components, within sixty (60) days of the date of invoice for such
shipment, the amounts set forth below:
(a) For all Critical Reagents ordered
by Mochida prior to
July 6, 1999 (including Mochida's Order No. MS-970027), Mochida shall
purchase Critical Reagents at a price of (Y)XXXXXXXX per kit, payable
in United States Dollars at the exchange rate set forth in Section 4.8.
For orders received by Ostex on or after July 6, 1999, Mochida will
purchase quantities of Critical Reagents at a price of (Y)XXXXXXX per
kit, payable in United States Dollars at the exchange rate set forth in
Section 4.8. In the event that Kit Component manufacturing rights have
not been transferred to Ostex by December 31, 2000 the parties shall
renegotiate the price for Critical Reagents at that time, provided that
nothing in this section shall limit Ostex's ability to enforce the
provisions of this Agreement regarding such transfer of manufacturing
rights.
(b) On or after the transfer to Ostex
of responsibility for
the manufacture of Kit Components, as an alternative to the pricing of
Critical Reagents set forth in Section 5.4(a) above, Mochida shall pay
to Ostex, for all Kit Components required for each Finished Product,
the price set forth in this Section 5.4(b). Such price shall equal
(Y)XXXXXXX per kit, payable in United States Dollars at the exchange
rate set forth in Section 4.8, subject, in addition to any other
adjustments provided for herein, to annual adjustments from January
1998 proportionate to one-half of the increase in the U.S. Consumer
Price Index (All Urban Consumers) ("CPI"), which adjustment shall occur
upon publication of such index on the publication date most closely
following each anniversary after January 1998. Ostex shall send Mochida
a copy of the publication of such index annually from January, 1998.
(c) In the event that the average
price at which Mochida
sells Finished Product in any calendar year increases more than XX%
over the average price at which Mochida sold Finished Product during
the preceding year, Mochida shall so notify Ostex, and the parties
shall renegotiate in good faith the prices set forth in Section 5.4 (a)
and (b) above to allow for an equitable sharing of such increase.
5.5 Delivery. Ostex shall deliver each shipment of
Critical Reagents and Kit Components F.A.S. carrier (as defined in, or
otherwise in accordance with INCOTERMS, in effect at the time of each
shipment), in accordance with instructions issued in writing by Mochida
with respect to each shipment.
5.6 Risk of Loss. The risk of loss with regard to
each shipment of Critical Reagents and Kit Components shall pass to
Mochida upon delivery thereof to the carrier in accordance with Section
5.5 above.
<PAGE>
5.7 Acceptance. Ostex warrants that Critical Reagents
and Kit Components supplied by Ostex shall meet the Quality Criteria.
Mochida shall inspect shipments of Critical Reagents within sixty (60)
days after receipt of Critical Reagents and Kit Components within
thirty (30) days after receipt of Kit Components, by Mochida at its
factory in Japan, and shall notify Ostex of the results of such
inspection within such periods. If Mochida notifies Ostex of any
defects in quality within such periods, Ostex shall promptly supply
Mochida, free of charge, with Critical Reagents or Kit Components in
such amount as to replenish or make good such defects in quality. In
the event that there is a shortage in quantity, Ostex will, at its own
expense, correct such shortage as soon as possible. In no event shall
this Section 5.7 affect the risk of loss specified in Section 5.6
above. For example, without limiting the generality of the foregoing,
in the event that a shipment of Critical Reagents or Kit Components is
damaged in shipment, Mochida shall bear the loss and damage, and at its
discretion shall obtain insurance money covering such loss and damages
for its own sake. In this case, if Mochida places with Ostex an
additional order to fill the insufficiency of Critical Reagents or Kit
Components lost or damaged, Ostex shall be responsible for supplying
Mochida with such Critical Reagents or Kit Components as promptly as
possible. Pricing for such an additional order for Critical Reagents or
Kit Components shall be governed by Schedule 5.7 attached hereto,
subject to adjustment from time to time by reasonable agreement of the
parties. Both parties shall review this Section 5.7 to determine the
practical conditions for the inspection period and acceptance period
regarding the shipment of Critical Reagents and Kit Components before
first shipment of such materials. Notwithstanding the foregoing, if,
after Critical Reagents or Kit Components have been accepted by
Mochida, a defect is discovered in the Critical Reagents or the Kit
Components which was not reasonably capable of discovery by Mochida
during the inspection period, Ostex agrees it will work with Mochida in
good faith to resolve such defects in an equitable manner. Further, the
parties specifically agree that if or when such defects were caused in
the process of the manufacture by Ostex, Ostex shall replenish or make
good such defects in the quality at its cost and responsibility.
5.8 [This Section Intentionally Deleted]
3. Indemnification. Section 15 of the License
Agreement is hereby amended to read in
its entirety as follows:
Mochida shall defend, indemnify, save and hold harmless Ostex
and its directors, officers, employees, and agents from all
losses, claims, suits, damages, costs, fees and expenses,
including without limitation attorneys' fees (hereinafter
collectively referred to as the "Loss"), resulting from or
arising out of the importation of Critical Reagents or the
manufacturing, marketing, sale, or distribution of Finished
Product by Mochida, including without limitation any damages,
losses or liabilities whatsoever with respect to death or
injury to any person or damage to any property. Ostex shall
promptly notify Mochida of any Loss for which indemnification
is sought hereunder.
Further, in the event that the manufacture of Kit Components
is transferred to Ostex pursuant to Section 5.2, Ostex shall
defend, indemnify, save and hold harmless Mochida and its
directors, officers, employees, and agents from any and all
Loss resulting from or arising solely out of the manufacturing
process of Kit Components by Ostex or its licensees, including
without limitation any damages, losses, or liabilities
whatsoever with respect to death or injury to any person or
damage to any property. Mochida shall promptly notify Ostex of
any Loss for which indemnification is sought hereunder.
<PAGE>
The foregoing indemnification by Ostex shall apply mutatis
mutandis as to any and all Loss incurred to Mochida resulting
from or arising from the manufacturing process of Critical
Reagents by Ostex or its licensees.
The indemnification by Mochida provided herein shall not apply
if or when such Loss is based on, or caused by, willful
misconduct or negligence of Ostex, its licensees or vendors
(including their directors, officers or employees). Further,
the indemnification by Ostex provided herein shall not apply
if or when such Loss is based on willful misconduct or
negligence of Mochida, its directors, officer or employees.
4. Full Force and Effect. This Second Amendment is made pursuant to the
License Agreement and shall constitute an integral part thereof. All capitalized
terms that are used in this Second Amendment and are not otherwise defined
herein are intended to have the meanings assigned to such terms in the License
Agreement. Except as specifically amended in this Second Amendment, the License
Agreement shall remain in full force and effect in accordance with its terms.
DATED as of the date first written above.
OSTEX INTERNATIONAL, INC. MOCHIDA PHARMACEUTICAL CO., LTD.
By: /S/ THOMAS A. BOLOGNA By: EI MOCHIDA
-------------------------------- -------------------------
Name: Thomas A. Bologna Name: Ei Mochida Ph.D.
Its: President & C.E.O. Its: Chairman
<PAGE>
NOTE: CONFIDENTIAL TREATMENT REQUESTED
OSTEX INTERNATIONAL, INC.
SECOND AMENDMENT TO
OSTEOMARK LICENSE AGREEMENT
SCHEDULE 5.7
KIT COMPONENT PRICE LIST
OSTEOMARK, COMPONENT SET, UNLABELED
<TABLE>
<CAPTION>
PRICE
ITEM DESCRIPTION QTY UM in YEN
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1028 PLATE SEALERS 1 PD XXXXXXX
6036 ANTI. COATED MICROTITER PL., 1PK 1 EA XXXXXXX
6037 1 NM BCE CALIBRATOR,0.5ML FILLED 1 EA XXXXXXX
6038 30 NM BCE CALIBR., 0.5ML FILLED 1 EA XXXXXXX
6039 100NM BCE CALIBRATOR,0.5ML FILL 1 EA XXXXXXX
6040 300 NM BCE CALIBRATOR,0.5ML FILL 1 EA XXXXXXX
6041 1000NM BCE CALIBRATOR,0.5 ML FILL 1 EA XXXXXXX
6042 3000NM BCE CALIBRATOR,0.5ML FILL 1 EA XXXXXXX
6043 ANTIBODY-CONJUGTE,0.5ML, FILLED 1 EA XXXXXXX
6044 CONJUGATE DILUENT, 30ML, FILLED 1 EA XXXXXXX
6045 BUFFERED SUBSTRATE, 30ML, FILLED 1 EA XXXXXXX
6026 CHROMOGEN REAGENT, 0.9ML FILLED 1 EA XXXXXXX
6046 30X WASH CONCENTRATE,125ML, FILLED 1 EA XXXXXXX
6028 STOPPING REAGENT, 25ML FILLED 1 EA XXXXXXX
6047 LEVEL 1 URINE CONTROL,0.5ML,FILLED 1 EA XXXXXXX
6048 LEVEL 2 URINE CONTROL,0.5ML,FILLED 1 EA XXXXXXX
Total XXXXXXX
</TABLE>
<TABLE>
<CAPTION>
CRITICAL REAGENT COMPONENT PRICE LIST
OSTEOMARK, CRITICAL REAGENT COMPONENT SET
PRICE2 PRICE3
ITEM DESCRIPTION QTY1 UM in Yen in Yen
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2027 300 pmol/mL NTx in PBS TBD ML XXXXXXX XXXXXXX
2007 NTx Concentrate TBD NM XXXXXXX XXXXXXX
2023 1H11 - HRP Conjugate Concentrate TBD MG XXXXXXX XXXXXXX
Total XXXXXXX XXXXXXX
- ---------------------------
</TABLE>
1 Prices shown are sufficient for manufacture of 1 kit of Finished Product.
Units shipped will depend on quantity of finished product ordered and the titre
of NTx per lot.
2 Price for orders received by Ostex before July 6, 1999
3 Price for orders received by Ostex on or after July 6, 1999 to December 31,
2000
Wyeth-Ayerst Laboratories
September 30, 1997
Page 5
September 30, 1997
Wyeth-Ayerst Laboratories
P.O. Box 8299
Philadelphia, PA 19101-1245
Dear Sirs:
This letter sets forth the proposed terms and conditions for an
extension of the Agreement between Ostex International, Inc. ("OSTEX") and
Wyeth-Ayerst Laboratories ("W-A") dated September 20, 1995, regarding detailing
of diagnostic testing, prevention and treatment of osteoporosis to health care
professionals.
1. OSTEX grants W-A a world-wide, non-exclusive right to detail
osteoporosis diagnostic tests developed by OSTEX together with
technology, data, test results, clinical and other studies related
thereto and sales materials, medical education programs, disease
management programs and sample tests so as to promote the sale and
utilization of OSTEX's osteoporosis tests.
2. W-A grants OSTEX the non-exclusive right to detail W-A products
marketed by W-A together with promotional, educational and sales
materials so as to encourage the use of W-A's Premarin(R) family of
products in the prevention and treatment of osteoporosis.
3. It is understood and agreed that each party shall determine, in its
sole discretion, the detailing activities it shall undertake, including
frequency, detail position, physician targets, field force commitment,
call plan and whether or not to detail.
4. The parties shall appoint coordinators who shall meet regularly to
develop advertising, marketing and sales programs, including sales
training programs, for the OSTEX and W-A products to be detailed
hereunder. Such programs may include medical education for health care
professionals, disease management programs for managed care audiences
and convention exhibits for key target audiences. Each party shall
provide appropriate training materials and trainers to educate the
trainers and/or sales representatives of the other party.
5. OSTEX agrees to conduct or arrange for the conduct of assays to
generate data derived from osteoporosis diagnostic tests developed by
OSTEX and utilized in patients receiving W-A products. OSTEX grants W-A
the non-exclusive right to utilize OSTEX test data in detailing W-A
products.
<PAGE>
6. Neither party shall be obligated to make payments to the other for any
rights granted or services to be performed hereunder. Each party shall
be responsible for its own expenses in connection with negotiations,
documents, or transactions, services or performance contemplated hereby
and additionally neither party shall have any liability whatsoever for
any fees or expenses of the other party owed to third parties.
7. Neither party shall have any responsibility for the hiring,
firing, compensation or employee benefits of the other party's employees.
Except as specifically set forth herein, no employee or representative of a
party shall have any authority to bind or obligate the other party for any sum
or in any manner whatsoever, or to create or impose any contractual or other
liability on the other party without such other party's written approval. OSTEX
and W-A's legal relationship under this Agreement shall be that the parties are
independent of each other and not that of partners or joint venturers. Neither
party's representatives shall have any authority regarding sales of the other
party's products or to bind or obligate the other party for any orders, prices,
discounts, rebates, allowances, etc., or any other commercial terms and
conditions of sale.
8. Each party hereby represents and warrants to the other that its
products shall be approved by FDA for marketing; that neither the
products' applications for market approval nor any other filing with
FDA or other reports or records shall contain any misrepresentations of
material fact. Each party further represents and warrants that in the
performance of its obligations hereunder each party and its
representatives shall at all times comply with all applicable laws,
rules, and regulations issued or promulgated by any governmental
authority having jurisdiction over the activities contemplated
hereunder.
9. Each party shall give the other party notice of all complaints or
adverse experiences associated with the products of the other party. If
the information obtained indicates a serious or unusual experience or
complaint, it shall be reported to the other party by telephone or in
writing within twenty-four hours after initial receipt. Other
information shall be reported within five working days. Reports shall
contain the name, address and telephone number of the source, and an
indication of the adverse drug experience or other complaint.
10. All advertising, marketing and sales promotion materials utilized
hereunder shall be created by or on behalf of or approved by the party
whose products are being described. Such materials shall be reviewed
and approved by the other party prior to use by the other party which
approval shall not be unreasonably withheld. All advertising, marketing
and sales promotion materials, detailing and other activities by either
party shall be in accordance with approved product labeling and all
applicable laws and regulations.
<PAGE>
11. No advertising, promotional, sales or publicity concerning this
Agreement or the business relationship between OSTEX and W-A created
hereby or wherein the name of the other party or its products are
mentioned shall be released or made use of by anyone acting on behalf
of a party without the prior approval of the other party. Nothing
contained in this Section 11 shall be deemed to prohibit either party
(a) from detailing with respect to the products of the other as
provided herein or (b) from notifying appropriate governmental agencies
in accordance with, or otherwise complying with the requirements of any
applicable law or regulation.
12. The term of this Agreement shall be for one (1) year from the
date hereof in accordance with the provisions of Section 12 of the
Agreement dated September 20, 1995. This Agreement may be extended for
additional terms of one (1) year each upon the mutual agreement of the parties.
Either party may terminate this Agreement by thirty (30) days' notice in writing
to the other. Upon the effective date of termination, the detailing activities
specified herein shall cease and promotional materials utilized shall be
guarantied until disposition is agreed upon by the parties. Termination of this
Agreement shall not relieve the parties hereto of any liability which accrued
hereunder prior to the effective date of such termination nor preclude either
party from pursuing all rights and remedies it may have hereunder or at law or
in equity with respect to any breach of this Agreement nor prejudice either
party's right to obtain performance of any obligation provided for in this
Agreement which expressly survives termination.
13. Nothing contained herein shall be deemed to grant to OSTEX, either
expressly or impliedly, a license or other right or interest in any
patent, trademark, trade name or logo or other similar property of W-A,
except as may be necessary for OSTEX to detail W-A products hereunder.
Nothing contained herein shall be deemed to grant to W-A, either
expressly or impliedly, a license or other right or interest in any
patent, trademark, trade name or logo or other similar property of
OSTEX, except as may be necessary for W-A to perform its obligations
hereunder.
14. Each party shall indemnify, defend and hold harmless the other
and its officers, directors, agents, servants and employees against any and
all claims, losses, damages and liabilities, including reasonable attorneys'
fees, but excluding loss of profits and consequential damages, to the extent
that any such claim, loss, damage or liability is based on or determined by a
court of competent jurisdiction to result from or arise out of utilization of
such party's products. Provided, however, that a party shall have no obligation
to indemnify the other party for any act or omission of the other party or any
employee, representative or agent thereof or any product of the other party or
unapproved advertising, marketing, promotion or selling activity or warranties
or representations of the other party or any violation of any applicable statute
or regulation, or breach of this Agreement by the other party.
<PAGE>
15. Except as otherwise expressly provided under this Agreement, each party
shall hold in confidence all confidential information provided by the
other party in furtherance of this Agreement. The foregoing
confidentiality obligations shall not apply to:
a) any information which at the time of disclosure or
acquisition is part of the public knowledge or
literature, or thereafter becomes part of the public
knowledge or literature otherwise than by
unauthorized disclosure by the recipient;
b) any information which at the time of disclosure or
acquisition was in the recipient's possession
as evidenced by its written records; or
c) any information which becomes available to the
recipient from any other source not bound to
secrecy to the disclosing party with respect to such
information.
16. If the performance by either party is prevented, restricted or
interfered with by reason of any event or cause whatsoever beyond the
reasonable control of the party so affected, such party shall be
excused from performance to the extent of such prevention, restriction
or interference; provided that such cause is not the result of a breach
of this Agreement. In any such case, prompt written notice shall be
given by the affected party to the other of the existence of such cause
and of readiness to resume performance. Labor disputes shall be deemed
to be events beyond the reasonable control of the party affected, and
neither party shall be required to settle a labor dispute against its
will.
17. Neither party may assign this Agreement or rights granted
hereunder in whole or in part without the written consent of the other
party except to their affiliates or subsidiaries or to a successor to or
assignee of all or substantially all of the pharmaceutical interests, assets and
good will of the assigning party; provided, however, that W-A shall have the
right to terminate this Agreement at any time on not less than fifteen (15)
days' notice in writing to OSTEX upon the occurrence of any transaction or
series of transactions which results in the transfer of ownership or control,
directly or indirectly, of a majority of the capital stock, with right to vote,
or of substantially all of the assets of OSTEX or of any parent company of
OSTEX.
18. These terms and conditions constitute the complete and exclusive
understanding of OSTEX and W-A with respect to the subject matter
hereof, and no statements or agreements, oral or written, made prior to
or at the signing hereof shall modify the written terms hereof. Neither
party shall claim any modification or revision of any provision hereof
unless such modification or revision is in writing, signed by the other
party and states it is an amendment to this Agreement.
<PAGE>
19. The failure on the part of OSTEX or W-A to exercise or enforce any
rights conferred hereunder shall not be deemed to be a waiver of any
such rights nor operate to bar the exercise or enforcement thereof at
any time or times thereafter.
20. The construction, validity and performance of this Agreement shall be
governed in all respects by the laws of Pennsylvania, excluding,
however, its laws respecting choice of law.
If the foregoing terms and conditions meet with your approval, please
signify your acceptance by signing, dating and returning the enclosed copy of
this letter.
Very truly yours,
OSTEX INTERNATIONAL, INC.
By: /S/ Thomas A. Bologna
Thomas A. Bologna
President and Chief Executive
Officer
Accepted:
WYETH-AYERST LABORATORIES
By: /S/ Susan Jasper
Title: Group Product Director
Date: October 20, 1997
OSTEX INTERNATIONAL, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended December 31, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product sales and research testing services $ 3,658 $ 2,860 $ 1,830 $ 1,152 $ 417
License and research and development fees 450 1,087 1,495 630 1,485
------------------------------------------------------
Total revenues 4,108 3,947 3,325 1,782 1,902
------------------------------------------------------
Operating expenses:
Costs of products sold 899 926 603 517 226
Research and development 4,470 3,163 3,200 3,308 1,940
Selling, general and administrative 8,031 9,201 6,583 2,222 1,754
------------------------------------------------------
Total operating expenses 13,400 13,290 10,386 6,047 3,920
------------------------------------------------------
Loss from operations (9,292) (9,343) (7,061) (4,265) (2,018)
Other income:
Proceeds from legal settlement 6,200 - - - -
Interest income, net 828 1,273 1,684 194 128
------------------------------------------------------
======================================================
Net loss $ (2,264) $ (8,070) $ (5,377) $ (4,071) $(1,890)
- -------------------------------------------------------------======================================================
Basic and diluted net loss per common and
common equivalent share $ (0.18) $ (0.65) $ (.045) $ (0.47) $ -
- -------------------------------------------------------------======================================================
Shares used in calculation of net loss per share $ 12,574 $ 12,441 $ 11,929 $ 8,737 $ -
- -------------------------------------------------------------======================================================
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995 1994 1993
Balance Sheet Data:
Cash, cash equivalents and short-term
investments $ 18,965 $ 21,229 $ 27,794 $ 3,668 $
7,916
Working capital 18,368 20,901 28,361 3,172 7,890
Total assets 24,112 25,691 32,841 5,590 8,807
Accumulated deficit (24,128) (21,864) (13,794) (8,417) (4,346)
Total shareholders equity $ 21,644 $ 23,526 $ 31,518 $ 4,698 $ 8,460
- -------------------------------------------------------------======================================================
</TABLE>
<PAGE>
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 believes its lead product, the
OSTEOMARK-registered trademark- test, incorporates breakthrough 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 23 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, 1997, that attempt to
advise interested parties of the risks and factors that may affect the Company's
business.
On May 8, 1995, the Osteomark test first became commercially available in
the United States as a urinary assay 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 test was available domestically only for research purposes.
To date, the Company's revenues have consisted primarily of product sales
and fees for research testing services, as well as licensing, research and
development fees from Mochida Pharmaceutical, Co., Ltd. ("Mochida"), and Johnson
& Johnson Clinical Diagnostics, Inc. ("Johnson & Johnson"). 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 assay under development. Future payments
totaling $750,000 are contingent upon Mochida's decision to exercise its option
to license the NTx serum assay and achievement of certain milestones.
Expenses incurred have been primarily for selling, administrative, research
and development activities and have exceeded revenues in each year since the
Company's inception. As of December 31, 1997, the Company had an accumulated
deficit of $24,128,000. Successful future operations depend upon the Company's
ability to effectively commercialize and market its products. The Company will
require a substantial amount of additional funds to develop new products and to
fund the level of selling, general and administrative expenses that the Company
expects to incur in connection with its product commercialization efforts in the
next several years.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995.
The Company had revenues of $4,108,000 for the year ended December 31,
1997, compared to $3,947,000 and $3,325,000 for the years ended December 31,
1996 and 1995, respectively. Revenue from product sales and research testing
services for the year ended December 31, 1997 was $3,658,000, compared to
$2,860,000 and $1,830,000 in the years ended December 31, 1996 and 1995,
respectively. The increase of $798,000 in 1997 and $1,030,000 in 1996 is
attributable to higher volumes of Osteomark kits sold to laboratories and
distributors worldwide during those years.
<PAGE>
License and research and development fees received during 1997 totaled
$450,000, all from Mochida. License and research and development fees in 1996
totaled $1,087,000, primarily from Mochida. The $637,000 reduction in fees
collected under license and research and development agreements with Mochida
from 1996 to 1997 was expected and is due to attainment of scheduled milestones.
In 1995 fees of $1,495,000 consisted of $1,000,000 from Johnson & Johnson and
$495,000 from Mochida.
The Company's cost of products sold totaled $899,000 for the year ended
December 31, 1997, compared to $926,000 and $603,000 for the same periods in
1996 and 1995, respectively. The gross profit rate on product sales for the year
ended 1997 was 75%, compared to 68% for 1996 and 67% for 1995. The change in
gross profit rate from 1996 to 1997 and from 1995 to 1996 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 $4,470,000,
$3,163,000, and $3,200,000, in 1997, 1996, and 1995, respectively. The
$1,307,000 increase from 1996 to 1997 was primarily attributable to funding the
NTx test point-of-care development programs with Hologic, Inc. ("Hologic") and
Metrika, Inc. ("Metrika"). In addition, research and development expenses
increased due to the cost of clinical studies commenced at the end of 1996 and
during 1997. 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 increased in 1997 due to the extension of research
grants to the University of Washington ("UW"). Expenditures remained steady from
1995 to 1996 due to an increase in research and development grants and royalties
paid to the Washington Research Foundation ("WRF") offset by decreased clinical
trial expenditures due to the completion of a clinical trial in November 1995.
Selling, general and administrative expenses totaled $8,031,000,
$9,201,000, and $6,583,000, in 1997, 1996 and 1995, respectively. The 13%
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 costs of litigation in
connection with the Osteometer and C.R. Bard lawsuits (see Note number 11 on
page 32 in the Notes to Financial Statements). The 40% increase in selling,
general and administrative expenses from 1995 to 1996 was due primarily to the
implementation of marketing programs to support the Osteomark test in the United
States, the addition of sales personnel to support these efforts, increased
legal costs involved with the Boehringer Mannheim arbitration and patent
litigation costs.
Proceeds from legal settlement resulted from the receipt of a non-recurring
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 $901,000, $1,317,000, and $1,684,000 for the years
ended December 31, 1997, 1996, and 1995, respectively. The decrease in 1997 and
1996 was primarily due to lower average invested balances resulting from using
cash to fund the Company's operating losses.
At December 31, 1996, the Company had tax net operating loss carryforwards
of $29,527,000, which will begin to expire in 2004. Income taxes are provided in
the Statements of Operations as required by Statement of Financial Accounting
Standards No. 109, "Accounting For Income Taxes" ("SFAS No. 109"). Under SFAS
No. 109, deferred taxes are determined using an asset and liability approach.
The Company has determined that the tax assets do not satisfy the recognition
criteria set forth in SFAS No. 109. Accordingly, a valuation adjustment has been
recorded against the applicable deferred tax assets, and therefore no tax
benefit has been recorded.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from inception primarily through
three private placements of preferred stock that provided approximately
$12,800,000 aggregate proceeds, and its initial public offering of 3,645,642
shares of common stock that provided net proceeds of approximately $32,000,000.
Funds of approximately $16,608,000 have been generated through sales of
Osteomark test kits and fees for research testing services, collaborative
research and licensing agreements. The settlement of a dispute with Boehringer
Mannheim provided an additional $6,200,000. As of December 31, 1997, the Company
had $18,965,000 in cash and cash equivalents and short-term investments, working
capital of $18,368,000 and total shareholders' equity of $21,644,000. During
1997, cash, cash equivalents and short-term investments decreased by $2,264,000,
working capital decreased by $2,533,000 and shareholders' equity decreased by
$1,882,000. The decreases were primarily the result of the net loss incurred
during 1997.
The Company used $1,181,000 of cash for operating activities in 1997
($7,381,000 excluding the receipt of $6,200,000 from Boehringer Mannheim), and
$1,105,000 for laboratory expansion and 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
$19,784. As of December 31, 1997, outstanding borrowings under this agreement
amounted to $509,000. The Company does not anticipate additional borrowings
during 1998 and has no material capital purchase commitments.
The Company's future capital requirements depend upon many factors,
including effectiveness of Osteomark test commercialization activities and
arrangements; continued scientific progress in its research and development
programs; the costs involved in filing, prosecuting and enforcing patent claims;
the costs involved in legal efforts to enforce patent rights; 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,
even if the Company does not have an immediate need for additional cash at that
time. If additional financing is not available, the Company anticipates that its
existing available cash, its future license and research revenues from existing
collaboration agreements, its current level of product sales and interest income
from short-term investments will be adequate to fund its 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 1997 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 in the process of evaluating its information
technology infrastructure for the Year 2000 compliance. The Company does not
expect that the cost to modify its information technology infrastructure to be
Year 2000 compliant will be material to its financial condition or results of
operations. The Company does not anticipate any material disruption in its
operations as a result of any failure by the Company to be in compliance. The
Company does not currently have any information concerning the Year 2000
compliance status of its suppliers and customers. In the event that any of the
Company's significant suppliers or customers does not successfully and timely
achieve Year 2000 compliance, the Company's business or operations could be
adversely affected.
<PAGE>
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31, 1997 1996
ASSETS
Current Assets:
Cash and cash equivalents $ 2,201 $ 1,289
Short-term investments 16,764 19,940
Trade receivables and other current assets,
net of allowance of $25 in 1997 and 1996 1,344 1,161
Inventory, at cost 201 153
-----------------
Total current assets 20,510 22,543
-----------------
Property, Plant and Equipment, net of
accumulated depreciation 2,965 2,474
Other Assets 637 674
-----------------
Total assets $24,112 $ 25,691
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,429 $ 1,259
Accrued expenses 530 234
Current portion of note payable 183 149
------------------
Total current liabilities 2,142 1,642
------------------
Noncurrent Liabilities:
Note payable, net of current portion 326 523
------------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.01 par value, 50,000,000
shares authorized; 12,696,250 and 12,441,617
issued and outstanding, respectively 127 125
Additional paid-in capital 45,642 45,195
Unrealized gain on short-term investments 3 70
Accumulated deficit (24,128) (21,864)
-----------------
Total shareholders' equity 21,644 23,526
-----------------
Total liabilities and
shareholders' equity $24,112 $25,691
=================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Revenue:
Product sales and research testing services $ 3,658 $ 2,860 $ 1,830
License and research and development fees 450 1,087 1,495
------------------------------
Total revenues 4,108 3,947 3,325
Operating Expenses:
Cost of products sold 899 926 603
Research and development 4,470 3,163 3,200
Selling, general and administrative 8,031 9,201 6,583
------------------------------
Total operating expenses 13,400 13,290 10,386
------------------------------
Loss from operations (9,292) (9,343) (7,061)
Other Income (Expense):
Proceeds from legal settlement 6,200 - -
Interest income 901 1,317 1,684
Interest expense (73) (44) -
------------------------------
Net loss $(2,264) $(8,070) $(5,377)
==============================
Basic and diluted net loss per common and
common equivalent share $ (0.18) $ (0.65) $ (0.45)
==============================
Shares used in calculation of net loss per share 12,574 12,441 11,929
==============================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(2,264) $(8,070) $(5,377)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 651 504 295
Expense from stock awards
and grants 197 33 40
(Increase) decrease in receivables (10) 554 (1,318)
(Increase) decrease in inventory (48) 83 (161)
(Increase) in other current assets (173) (61) (15)
Increase in accounts payable
and accrued expenses 466 170 511
-----------------------------
Net cash used in operating
activities (1,181) (6,787) (6,025)
-----------------------------
Cash Flows from Investing Activities:
Purchases of short-term investments (20,426) (22,958) (52,521)
Proceeds from sales and maturities of
short-term investments 23,535 24,575 32,996
Purchases of property, plant and equipment (1,105) (495) (1,746)
Long-term investments - - (500)
-----------------------------
Net cash provided by (used
in) investing activities 2,004 1,122 (21,771)
-----------------------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock
and exercise of stock options 252 41 32,166
Proceeds from borrowings on note payable - 746 -
Payments on note payable (163) (74) -
Proceeds from stock subscription payment - - 165
-----------------------------
Net cash provided by
financing activities 89 713 32,331
-----------------------------
Net Increase (Decrease) in
Cash and Cash Equivalents 912 (4,952) 4,535
Cash and Cash Equivalents,
beginning of period 1,289 6,241 1,706
-----------------------------
Cash and Cash Equivalents,
end of period $ 2,201 $ 1,289 $ 6,241
=============================
Supplemental Disclosure of Noncash Transactions:
Stock granted for research and
development services $ 191 $ - $ -
=============================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Unrealized
Additional Gain/Loss on Stock Total
Preferred Stock Common Stock Paid-In Short-term Subscriptions Accumulated Shareholders'
Shares Amount Shares Amount Capital Investments Receivable Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 1,059 $10 3,011 $30 $13,240 $- $(165) $(8,417) $ 4,698
-----------------------------------------------------------------------------------------------
Sale of common stock in initial
public offering and
conversionof preferred stock (1,059) (10) 9,153 92 31,468 - - - 31,550
Compensation expense for stock
option grants - - - - 40 - - - 40
Stock options and warrants
exercised - - 269 3 373 - - - 376
Payment for subscription
receivable - - - - - - 165 - 165
Unrealized gain on short-term
investments - - - - - 66 - - 66
Net loss - - - - - - - (5,377) (5,377)
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
Unrealized gain on short-term
investments - - - - - 4 - - 4
Net loss - - - - - - - (8,070) (8,070)
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
Unrealized loss on short-term
investments - - - - - (67) - - (67)
Net loss - - - - - - - (2,264) (2,264)
Balance, December 31, 1997 - $- 12,696 $127 $45,642 $3 $ - $(24,128) $21,644
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Ostex International, Inc. (the "Company"), a Washington Corporation, is
engaged in the discovery and commercialization of products associated with
osteoporosis and other collagen-related diseases. The Company believes its lead
product, the Osteomark-registered trademark- NTx test, incorporates breakthrough
technology in the area of bone resorption measurement. The Company markets the
Osteomark NTx test through laboratories and distributors worldwide.
The Company was incorporated in the state of Washington on May 11, 1989 and
completed its initial public offering of common stock in February 1995. The
United States has been the Company's principal market. Foreign sales were
approximately $652, $370 and $528 in 1997, 1996 and 1995, respectively. Foreign
sales were primarily to Europe and Japan.
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 and research and development fees 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.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful life of the asset. Estimated
lives range from five to 10 years. Depreciation expense charged to operations
during 1997, 1996 and 1995 was $614, $502 and $294, respectively.
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 in
Shareholders' Equity. Realized gains and losses and declines in value of
securities judged to be other than temporary are included in income.
INVENTORY
Inventory consists principally of raw materials and finished goods.
Inventories are stated at the lower of cost (first-in, first-out) or market.
STATEMENTS OF CASH FLOWS
For the purpose of the statements of cash flows, 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.
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
The Company adopted SFAS No. 128, "Earnings per Share," effective December
15, 1997. Basic net loss per share is the net loss divided by the average number
of shares outstanding during the year. Diluted net loss per share is calculated
as the net loss divided by the sum of the average number of shares outstanding
during the year plus the net additional shares that would have been issued had
all dilutive options been exercised, less shares that would be repurchased with
the proceeds from such exercise (Treasury Stock Method). During all years
presented, the effect of including outstanding options is antidilutive,
therefore, options have been excluded from the calculation of diluted net loss
per share. There is no difference between previously reported net loss per share
and the basic and diluted net loss per share.
<PAGE>
NOTE 2
OTHER ASSETS
Other assets primarily include investments totaling $637 in preferred stock
of Metrika, Inc., a privately held medical device company in the development
stage. The investment is recorded in the accompanying financial statements at
cost and represents an ownership interest of less than 10%.
NOTE 3
PROPERTY, PLANT & EQUIPMENT
Property, plant & equipment at December 31, 1997 and 1996 consisted of the
following:
1997 1996
Leasehold improvements $ 2,426 $ 1,463
Laboratory and manufacturing
equipment 1,277 1,198
Computers and office equipment 975 912
---------------
4,678 3,573
Accumulated depreciation and
amortization (1,713) (1,099)
---------------
Net property, plant and equipment $ 2,965 $ 2,474
===============
NOTE 4
SHORT-TERM INVESTMENTS
The Company's short-term investments at December 31, 1997 and 1996, consisted of
the following:
1997 1996
United States treasury obligations $7,955 $8,807
Federal agency obligations and
discount notes 2,686 7,706
Government agency obligations 3,389 -
Corporate and municipal bonds 2,734 3,427
---------------
$16,764 $19,940
===============
The maturity of all classes of the Company's short-term investments was less
than two years at December 31, 1997 and 1996.
NOTE 5
ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1996, consisted of the following:
1997 1996
Business taxes payable $359 $127
Accrued wages, benefits and
payroll taxes 171 107
------------
$530 $234
============
NOTE 6
NOTE PAYABLE
In July 1996, the Company borrowed $746 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. The interest rate
is based on the three-year U.S. Treasury Note, at the time of drawdown, plus a
margin of 5.80%, (12.5% as of December 31, 1997 and 1996). The note agreement
allows the Company to make additional borrowings, up to a maximum of $1,500 for
future capital needs. The note contains a number of covenants that, among other
things, require the Company to meet specific financial ratios, including minimum
tangible net worth, maximum liabilities to total net worth and a minimum level
of cash, cash equivalents and short-term investments. The Company was in
compliance with these covenants at December 31, 1997 and 1996. Minimum principal
payments are as follows:
1998 $183
1999 207
2000 119
----
$509
<PAGE>
NOTE 7
SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On January 25, 1995 the Company completed its initial public offering of
3,645,642 shares of common stock at $9.50 per share for proceeds of $34,634,
less underwriting discounts, commissions and other offering costs approximating
$3,085. Convertible preferred stock outstanding immediately prior to the closing
was converted into 5,506,464 shares of common stock.
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. The 1994 and Directors' Plans were amended in 1997 by the
shareholders to increase the number of options that could be reserved for
issuance under these plans. Shares of common stock reserved for issuance to the
Company's employees and directors under the Stock Option Plans are 2,107,000 and
350,000, respectively, and shares available for grant to the Company's employees
and directors at December 31, 1997, under the Stock Option Plans are 259,000 and
145,000, respectively. Under all option plans, as of December 31, 1997, options
for 667,000 shares have been exercised, and 1,962,000 shares are subject to
outstanding options at exercise prices ranging from $.08 to $17.13 per share
with a remaining weighted average contractual life of 8 years. These options
vest over periods of two to four years. Total options vested as of December 31,
1997 were 481,000, with a weighted average exercise price of $3.34. All options
granted under these plans expire either 90 days after termination of employment
or 10 years from the date of grant, whichever occurs first.
Prior to the Company's initial public offering, the Company granted
nonqualified options under the Old Plan whose exercise price was below the
estimated fair market value of the Company's common stock on date of grant. The
difference between the grant price and the estimated fair market value on date
of grant is recognized as compensation expense over the vesting period. Total
compensation expense recognized was approximately $6, $33 and $40 in 1997, 1996
and 1995, respectively. Information relating to stock options outstanding and
stock options exerciseable at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exerciseable
------------------------------------------------- ----------------------------
Weighted Average Weighted Average
Range of Exercise Number Remaining Life Exercise Price Number Weighted Average
Prices of shares in Years of Shares Exercise Price
<S> <C> <C> <C> <C> <C>
$ .08 - $ .80 78,750 3 $.42 78,750 $ .42
$2.10 - $5.00 1,825,001 9 $3.27 378,367 $ 3.45
$5.75 - $17.13 58,550 8 $9.33 24,334 $11.04
-----------------------------------------------------------------------------------
1,962,301 8 $3.34 481,451 $ 3.34
===================================================================================
</TABLE>
<PAGE>
Information relating to activity under the Company's stock option plans
is as follows:
Weighted
Shares Average
Subject to Exercise
Option Price
Balance, December 31, 1994 1,545,190 $ 3.19
Granted 245,500 9.09
Exercised (268,786) 1.38
Canceled (90,625) 3.56
-----------------------
Balance, December 31, 1995 1,431,279 4.51
Granted 446,000 12.30
Exercised (8,950) 4.56
Canceled (40,703) 9.64
-----------------------
Balance, December 31, 1996 1,827,626 6.61
Granted 2,227,925 3.76
Exercised (184,000) 1.37
Canceled (1,909,250) 7.14
-----------------------
Balance, December 31, 1997 1,962,301 $ 3.34
=======================
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 two stock option plans been determined based on the fair value of
the options at the grant date for awards in 1997, 1996 and 1995 consistent with
the provisions of SFAS 123, the Company's net loss and net loss per common
equivalent share would have changed to the pro forma amounts indicated below:
1997 1996 1995
Net loss - as reported $(2,264) $(8,070) $(5,377)
Net loss - pro forma $(2,222) $(8,729) $(5,528)
Basic and diluted net
loss per common
and common
equivalent share -
as reported $(.18) $(.65) $(.45)
Basic and diluted net
loss per common
and common
equivalent share -
pro forma $(.18) $(.70) $(.46)
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 1997: zero dividend yield; expected
volatility of 85.3%; risk-free interest rates varying by grant date between 6.4%
and 7.1%; and expected lives of five years. Assumptions for options granted in
1996 were: zero dividend yield; expected volatility of 59%; risk-free interest
rates between 5.8% and 6.5%; and expected lives of five years. The difference
between reported and pro forma net loss in 1997 is a $42 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.
NOTE 8
LICENSING AGREEMENTS
Under the Company's worldwide exclusive license agreements with the
Washington Research Foundation ("WRF"), the Company has the right to manufacture
and market 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 up to $500 and common stock grants of up to 5,000 shares 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 1997, 1996 and 1995, the Company
incurred approximately $123, $154 and $379 of license fees, including the value
of stock grants, and patent legal expenses. All license and legal fees and stock
grants have been expensed as research and development costs. The Company is
obligated to pay WRF royalties on net sales of any licensed products.
<PAGE>
NOTE 9
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, 1997, the Company had earned fees and milestone payments of $2,000,
including $450 during 1997, in connection with this agreement. Under the
research and development agreement, the Company earned no fees during 1997 and
$1,080 and $550 during 1996 and 1995, respectively. As of December 31, 1997, the
Company had received all milestone payments to be earned in connection with the
license agreement for the urine assay. Mochida has an option to license the
Company's serum assay under development.
During 1995, the Company entered into
research, development, license and supply agreements with Johnson & Johnson
Clinical Diagnostics, Inc. ("JJCD") under which Ostex earned $1,000 during 1995.
These agreements grant JJCD a license to manufacture, sell and distribute
certain products utilizing Ostex' bone resorption technology. Ostex will also
receive royalties on JJCD sales of products incorporating the Ostex technology.
NOTE 10
RELATED PARTY TRANSACTIONS
Research Agreements The Company has entered
into two research agreements with the University of Washington which extend
through December 31, 1999. Total expense was $499, $304 and $185 during 1997,
1996 and 1995, respectively. Following is a schedule of future minimum payments
under these agreements as of December 31, 1997:
1998 $428
1999 310
-----
$738
NOTE 11
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:
1998 $ 514
1999 501
2000 494
2001 496
2002 527
------
$2,532
======
Total rent expense was approximately $584, $538 and $374 in 1997, 1996 and 1995,
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 of United States Patent No.
5,455,179. The Company believes Osteometer's bone resorption immunoassay
incorporates technology which infringes patented Ostex technology. In September
1996, the defendants filed a response denying infringement and counterclaimed
that Ostex' patent is invalid and unenforceable. By order dated July 7, 1997,
the Court granted Ostex' motion to file a supplemental complaint, to add a
second cause of action based upon United States Patent No. 5,641,837, which
issued on June 24, 1997. On October 24, 1997, Ostex filed a second supplemental
complaint to add third and fourth causes of action based upon U.S. Patent No.
5,652,112, which issued on July 29, 1997, and U.S. Patent No. 5,656,439, which
issued on August 12, 1997. The lawsuit is currently scheduled for trial
commencing October 20, 1998. At the present time management cannot predict the
outcome of the lawsuit but intends to continue to vigorously assert its
position.
<PAGE>
On April 9, 1997, the Company was served with a lawsuit filed in the United
States District Court, Central District of California by C.R. Bard, Inc.
("Bard"). The complaint alleges that Ostex' Osteomark product infringes U.S.
Patent No. 4,628,027 assigned to Bard in 1993. On June 4, 1997 the Company filed
a response denying infringement and counterclaimed that Bard's patent is invalid
and unenforceable. On November 7, 1997 the judge set a trial date of November
10, 1998, and on December 27, 1997, the Company filed a motion for summary
judgment. Management believes that this suit is without merit and that Ostex'
Osteomark product falls outside the claims of the subject patent.
NOTE 12
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. The settlement between the two parties was the result of
a ruling by the American Arbitration Association awarding damages to the Company
in connection with a dispute between the Company and Boehringer Mannheim.
NOTE 13
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 statements of operations. The
change in the valuation allowance during 1997 and 1996 was $586 and $3,006,
respectively. The Company's deferred tax assets (liabilities) are as follows:
December 31, 1997 1996 1995
Net operating loss
carryforward $10,039 $9,448 $6,576
Research and
experimentation
credits 363 313 135
Excess of market value
over the exercise
price of common
stock options 77 77 65
Section 195 start-up
expenses - 52 151
Amortization and
depreciation (47) (44) (64)
Other 68 68 45
-------------------------------
Gross deferred
tax asset 10,500 9,914 6,908
Valuation allowance (10,500) (9,914) (6,908)
-------------------------------
Net deferred tax asset $ - $ - $ -
===============================
At December 31, 1997, the Company had tax net operating loss carryforwards of
$29,527 which expire between 2004 and 2012.
<PAGE>
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, 1997 and 1996, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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, 1997 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
Seattle, Washington
February 13, 1998
<PAGE>
CORPORATE DIRECTORY
BOARD OF DIRECTORS
Thomas J. Cable
Chairman of the Board of Directors
Thomas A. Bologna
President and Chief Executive Officer
Elisabeth L. Evans, M.D.
Physician, Obstetrics and Gynecology,
Overlake Obstetricians and Gynecologists, P.C.
David R. Eyre, Ph.D.
Co-Founder;
Burgess Chair of Orthopedic Research,
University of Washington
Fredric J. Feldman, Ph.D.
President, FJF Associates
Gilbert S. Omenn, M.D., Ph.D.
Executive Vice President for Medical Affairs
University of Michigan Health System
Gregory D. Phelps
John H. Trimmer
EXECUTIVE OFFICERS
AND MANAGEMENT
Thomas A. Bologna
President and Chief Executive Officer
John M. Brenneman
Director, Finance and Operations
Thomas F. Broderick
Vice President, Patent and General Counsel
J. Daniel Clemens
Director, Research and Development
Donna J. DeLong
Vice President, Marketing
Robert M. Littauer
Senior Vice President, Finance and Administration
Nancy J.S. Mallinak
Vice President, Regulatory and Clinical Affairs
Cory J. Smith
Director, Manufacturing
William K. Strelke
Vice President, Sales
SCIENTIFIC ADVISORY BOARD
Charles H. Chesnut III, M.D.
Chair, Ostex Scientific Advisory Board; Professor of Medicine and Radiology,
Professor of Nutritional Sciences, Adjunct Professor of Orthopedics, University
of Washington
Elizabeth Barrett-Connor, M.D.
Professor and Chair, Family and Preventive Medicine; Director, Division of
Epidemiology, University of
California, San Diego
Laurence M. Demers, Ph.D.
Distinguished Professor, Departments of Pathology
and Medicine; Director of Clinical Chemistry, Core-Endocrine Laboratory, The
Pennsylvania State Geisinger Health System, The Milton S. Hershey Medical
Center, The Pennsylvania State University College of Medicine
David R. Eyre, Ph.D.
Burgess Chair of Orthopedic Research, Adjunct Professor of Biochemistry and Oral
Biology, Director, Orthopedic Research Laboratories, University of Washington
C. Conrad Johnston, Jr., M.D.
Professor of Medicine, Indiana School of Medicine;
Director, Division of Endocrinology and Metabolism, Indiana University Medical
Center
Howard Judd, M.D.
Chairman, Department of Obstetrics and Gynecology, Olive View/UCLA Medical
Center; Professor,
Department of Obstetrics and Gynecology, Chief,
Division of Reproductive Endocrinology, UCLA
Clinical Center for Women's Health Initiative
Robert Lindsay, M.D., Ph.D.
Chief of Internal Medicine, Helen Hayes Hospital
New York; President, National Osteoporosis Foundation
Allan Lipton, M.D.
Professor, Department of Medicine; Chief, Division
of Oncology, The Milton S. Hershey Medical Center,
The Pennsylvania State University
Veronica Ravnikar, M.D.
Professor of Obstetrics and Gynecology, Director of Reproductive Endocrinology
and Infertility, University
of Massachusetts Medical Center
Markus Seibel, M.D.
Head, Endocrine and Osteodiagnostic Laboratories, Department of Medicine,
Division of Endocrinology & Metabolism, University of Heidelberg, Germany
Frederick R. Singer, M.D.
Medical Director, Osteoporosis/Metabolic Bone Disease Program, St. Johns
Hospital and Health Center;
Professor of Medicine in Residence, UCLA
<PAGE>
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.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
Website: www.chasemellon.com
INVESTOR RELATIONS
Lippert/Heilshorn & Associates
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, 1997, the Company had 160
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 Investor Relations 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 places for the Company's
common stock as reported on the Nasdaq National Market System.
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
1996 High Low
1st quarter $20.00 $12.25
2nd quarter 16.25 9.13
3rd quarter 11.50 6.63
4th quarter $ 8.75 $ 5.25
The Company's common stock is traded on the Nasdaq National Market System under
the symbol OSTX. No dividends have been paid on the common stock.
ANNUAL MEETING
The Annual Meeting of Shareholders will be held Monday, May 18, 1998, at 9:00 am
at the Museum
of History & Industry, Seattle, Washington.
OSTEX WEBSITE
For more information about Ostex, visit us at http://www.ostex.com.
Osteomark and Ostex are registered trademarks of Ostex International, Inc.
Evista is a registered trademark of Eli Lilly and Company. Fosamax is a
registered trademark of Merck & Co., Inc.
Premarin is a registered trademark of American Home Products Corporation.
Miacalcin is a registered trademark of Sandoz Pharmaceutical Corporation.
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 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,201
<SECURITIES> 16,764
<RECEIVABLES> 755
<ALLOWANCES> 25
<INVENTORY> 201
<CURRENT-ASSETS> 20,510
<PP&E> 4,678
<DEPRECIATION> 1,713
<TOTAL-ASSETS> 24,112
<CURRENT-LIABILITIES> 2,142
<BONDS> 326
0
0
<COMMON> 127
<OTHER-SE> 21,517
<TOTAL-LIABILITY-AND-EQUITY> 24,112
<SALES> 3,658
<TOTAL-REVENUES> 4,108
<CGS> 899
<TOTAL-COSTS> 899
<OTHER-EXPENSES> 12,501
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 828
<INCOME-PRETAX> (2,264)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,264)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,264)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
