<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
AMENDMENT NO. 1
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
0-25250
COMMISSION FILE NUMBER
------------------------------
OSTEX INTERNATIONAL, INC.
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
<TABLE>
<CAPTION>
STATE OF WASHINGTON 91-1450247
- - --------------------------------------------- ---------------------------------------------
<S> <C>
STATE OR OTHER JURISDICTION OF INCORPORATION I.R.S. EMPLOYER IDENTIFICATION NUMBER
OR ORGANIZATION
</TABLE>
2203 AIRPORT WAY SOUTH, SUITE 400, SEATTLE, WASHINGTON 98134
206-292-8082
ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES
------------------------------
<TABLE>
<CAPTION>
Securities registered pursuant to Securities registered pursuant to Section
Section 12(b) 12(g)
of the Act: of the Act:
<S> <C> <C>
(none) (none) COMMON STOCK, $.01 PAR VALUE
TITLE OF EACH EXCHANGE ON WHICH TITLE OF CLASS
CLASS REGISTERED
</TABLE>
------------------------
<TABLE>
<S> <C>
Indicate by check mark whether the registrant (1) has filed all reports YES [X]
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of NO [ ]
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark if disclosure of delinquent filers pursuant to Item [X]
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
</TABLE>
------------------------
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant was approximately $13,775,000 on March 19,
1999, based on the per-share closing price of $1.38 on the Nasdaq National
Market.
The number of shares of Common Stock outstanding as of March 22, 1999 was
12,542,500.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1998 is incorporated by reference into Part I, Part
II and Part III of this Form 10-K.
(2) Portions of the Registrant's Proxy Statement for the Registrant's Annual
Shareholders Meeting to be held Thursday, June 3, 1999, to be filed pursuant
to Regulation 14A is incorporated by reference into Part III of this Form
10-K.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
OSTEX INTERNATIONAL, INC.
INDEX TO FORM 10-K
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I
ITEM 1 BUSINESS..................................................................................... 2
ITEM 1A RISK FACTORS................................................................................. 5
ITEM 1B EXECUTIVE OFFICERS OF THE REGISTRANT......................................................... 9
ITEM 2 PROPERTIES................................................................................... 10
ITEM 3 LEGAL PROCEEDINGS............................................................................ 10
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................... 10
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS........................ 11
ITEM 6 SELECTED FINANCIAL DATA...................................................................... 11
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 11
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................... 11
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................. 11
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......... 11
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................... 12
ITEM 11 EXECUTIVE COMPENSATION....................................................................... 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................... 12
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................... 12
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................. 13
SIGNATURES................................................................................................. 16
</TABLE>
<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, 1998; and
"Proxy Statement" shall mean the proxy statement for the 1998 shareholders
meeting of Ostex International, Inc. to be held Thursday, June 3, 1999, to be
filed with the Securities and Exchange Commission (the "Commission") pursuant to
Regulation 14A.
------------------------
PART I
When used in this report and in the Company's Annual Report to Shareholders
(which discussion has been incorporated herein by reference), the words
"believes," "intends, "anticipates," "plans to" and "expects" and similar
expressions are intended to qualify as forward-looking statements. Such
statements are subject to certain risks and uncertainties and there are a number
of important factors that could cause actual results to differ materially from
those projected. These factors include, among others, the factors described
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Other Factors that May Affect Operating Results" in the Company's
Annual Report to Shareholders and the risk factors included herein. Readers are
cautioned not to place undue reliance on such forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
release publicly the results of any revisions to such forward-looking statements
that may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
ITEM 1. BUSINESS
Ostex was incorporated in the State of Washington in 1989. The Company is
engaged in the discovery and commercialization of products associated with
osteoporosis and other collagen-related diseases. The Company believes that its
lead product, the OSTEOMARK-Registered Trademark- test, incorporates
breakthrough and patented technology in the area of bone resorption measurement.
Ostex has formed collaborative relationships with leading diagnostic and
pharmaceutical companies to aid in the commercialization of Osteomark. As of
December 31, 1998, the Company had 35 employees.
Osteoporosis is a significant health problem. According to the National
Osteoporosis Foundation (the "NOF"), osteoporosis afflicts approximately 30
million people in the U.S. alone. Additionally millions of people are at risk of
skeletal degradation associated with Paget's disease of bone, cancer that
metastasizes to bone, hyperparathyroidism (overactivity of the parathyroid
gland, characterized by a reduction of bone mass) and renal osteodystrophy. In
spite of the serious human and economic consequences of these diseases
(according to the NOF, the direct healthcare and indirect lost productivity
costs of osteoporosis exceed $10 billion annually in the U.S. alone), medical
intervention usually commences only after pain, immobility, fractures, or other
symptoms have appeared. The Company expects the osteoporosis therapeutic market
will increase significantly. The Company also believes new therapeutic products
are under development for osteoporosis, some of which are in late-stage clinical
trials, and that the Osteomark test can be used to effectively predict a
patient's response to osteoporosis therapy and monitor existing therapies and
other therapies which may be developed.
The Company is the exclusive licensee of the Osteomark technology, known
clinically as the NTx test, which is available in urine and serum formats that
can aid in healthcare decision-making at early menopause and beyond. The
Osteomark test is a non-invasive diagnostic test which quantitatively indicates
the level of bone resorption. Individuals who are losing bone collagen at
accelerated rates may indicate a condition which typically results in
osteoporosis. The Company believes that early identification of high
2
<PAGE>
levels of bone resorption provides the opportunity to predict skeletal response
(bone mineral density) to hormonal antiresorptive and other osteoporosis
therapies in postmenopausal women and helps prevent the onset of osteoporosis.
The Company also believes that the Osteomark test aids clinicians in monitoring
the effects of antiresorptive therapies in postmenopausal women, as well as in
older patients who have already lost significant bone mass.
On May 8, 1995, the Company's Osteomark test became commercially available
in the United States as a urinary test that provides a quantitative measure of
the excretion of cross-linked N-telopeptides of Type I collagen (NTx) as an
indicator of human bone resorption, and in July 1996 the Company received
expanded claims from the Food and Drug Administration (the "FDA") for the test.
The 1996 claims allow that an Osteomark test measurement, if taken prior to the
initiation of hormonal antiresorptive therapy, can be utilized to predict a
patient's response to that therapy, in terms of its effect on bone mineral
density. Additionally, the claims allow that the test can be used for
therapeutic monitoring of antiresorptive therapies in postmenopausal women, as
well as individuals diagnosed with osteoporosis and Paget's disease, and for
therapeutic monitoring of estrogen-suppressing therapies. In March 1998, the
claims were further expanded by allowing that, in addition to the 1996 claims,
an Osteomark test measurement can identify the probability for a decrease in
bone mineral density in postmenopausal women taking calcium supplements relative
to those treated with hormonal antiresorptive therapy. The Company is
manufacturing and marketing the Osteomark test in an Enzyme-linked Immunosorbent
Assay ("ELISA") format for testing urine or serum samples.
In February 1999, the Company received clearance to market Osteomark NTx
Serum. Osteomark NTx Serum is the first and only commercially available test in
the United States that measures specific bone breakdown by osteoclasts using a
blood sample. The Company believes that the use of a serum NTx test provides a
number of advantages to testing laboratories, including the elimination of the
requirement to normalize NTx values to creatinine concentration.
Worldwide promotion of the Osteomark urine test kits is also supported by
Johnson & Johnson Clinical Diagnostics, Inc. ("Johnson & Johnson"). In 1995 the
Company entered into research, development, license and supply agreements with
Johnson & Johnson. These agreements grant Johnson & Johnson a license to
manufacture, sell and distribute certain products using Ostex's bone resorption
technology. Currently, Johnson & Johnson distributes in the United States and
certain foreign countries the Osteomark test in the existing microtiter plate
format and is adapting the urine test for use with its automated analyzer. Ostex
will receive royalties on Johnson & Johnson's sales of products incorporating
the Ostex technology.
Under the Johnson & Johnson license agreement, the Company has the right to
license its technology for use on automated instruments to one other company in
addition to Johnson & Johnson. The Company is currently evaluating other
potential collaborators to adapt the Osteomark test to other high-speed
automated instruments.
In the year ended December 31, 1998, the Company's largest customer, Johnson
& Johnson, accounted for approximately 16% of the Company's product sales. The
termination of the Company's relationship with Johnson & Johnson could have a
material adverse effect on the Company's results of operations. See "Risk
Factors--Reliance on Collaborative Agreements and Certain Relationships".
In 1992, Ostex entered into a research and development agreement and a
license agreement with Mochida Pharmaceutical Co., Ltd. ("Mochida"), a Japanese
pharmaceutical company, for the commercialization of the Osteomark test in
Japan. Under the research and development agreement, Mochida has an option to
license the NTx serum test and has paid Ostex $3,350,000 in development fees to
date. Future payments of $750,000 under the agreement are contingent upon
Mochida's decision to exercise its option. Under the license agreement, Ostex
granted Mochida exclusive marketing and distribution rights to certain Ostex
products in Japan. Since 1992, Mochida has paid Ostex $2,500,000 in licensing
fees for the Osteomark test. In January 1998, Mochida launched the Osteomark
test in Japan for the management of
3
<PAGE>
patients with hyperparathyroidism and for patients with metastatic bone tumors.
Ostex sells Mochida the critical reagents to be assembled into finished products
in Japan by Mochida.
The Company also plans to develop the Osteomark test in other formats,
including formats suitable for use in the physician's office. The Company has an
agreement with Metrika, Inc. ("Metrika"), a diagnostic device company, to
develop a physician's office "point-of-care" Osteomark test device. The Company
and Metrika are developing this fully disposable point-of-care NTx test as an
indicator of bone resorption that computes NTx values and displays them
digitally.
OSTEOMARK and OSTEX are registered United States ("U.S.") trademarks of the
Company. The Company has also registered its OSTEOMARK trademark in 46 other
countries. Additional trademark applications are pending.
The Company's collagen breakdown test technology is covered by 20 U. S.
patents, 3 European patents, 3 Japanese patents, and patents in Australia,
Canada, Ireland, Spain, Hong Kong, and Singapore. Two of the European patents
and one of the Japanese patents are in opposition proceedings. Additional patent
applications are pending. See "Risk Factors--Dependence on Licensed Patents and
Proprietary Rights".
The Company's research and development expenditures, all of which were
funded by the Company, totaled $2,901,000, $4,470,000, and $3,163,000, in 1998,
1997 and 1996, respectively.
The Company's foreign product sales, all to non-affiliates, totaled
$517,000, $652,000, and $370,000, in 1998, 1997 and 1996, respectively. Foreign
sales were primarily to Europe, Canada and South America.
The Company's international business is subject to risks of currency
fluctuations, governmental actions and other governmental proceedings abroad.
The Company does not regard these risks as a deterrent to further expansions of
its operations abroad. However, the Company closely reviews its methods of
operations and adopts strategies responsive to changing economic and political
conditions.
The Company is developing an assay for Type II collagen degradation. Type II
collagen is a primary constituent of joint cartilage. Osteoarthritis, a
degenerative disease of joint cartilage, affects over 15 million people in the
United States alone. The disease first appears in a limited number of joints.
The first symptom, joint pain, occurs after substantial cartilage damage has
taken place. Eventually, pain and tenderness increase and the joint motion
becomes diminished. The Ostex Type II collagen degradation test under
development has been designed to allow reliable monitoring of joint cartilage
changes for validating the effectiveness of drugs under development and for
identifying patients with early-stage disease. In addition, similar to the
Osteomark test used in connection with osteoporosis, the Company believes that
the Type II collagen degradation test will aid in the clinical management of
osteoarthritis patients by monitoring the effectiveness of therapy.
Ostex is investigating the use of its NTx test in cancer patient management.
Independent researchers have shown that the level of bone resorption increases
significantly when cancer metastasizes to bone. A patient's NTx level may be
useful to identify cancer patients with elevated bone turnover who might warrant
a bone scan to detect metastatic bone disease.
Ostex is also in the early stages of developing an assay for measuring Type
III collagen degradation. Type III collagen is a significant constituent of
blood vessels such as coronary arteries. Measuring degradation of this type of
collagen may be useful in identifying cardiovascular disease.
4
<PAGE>
ITEM 1A. RISK FACTORS
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's lead product, the Osteomark test, became commercially
available in May 1995 in the U.S. and sales have not been significant enough to
generate net income. There can be no assurance that the Company's Osteomark test
or any of its other products will gain acceptance from the medical community,
clinical or hospital laboratories, physicians or patients as readily as other
forms of diagnosis or any newly developed diagnostic. There can be no assurance
that the Company will be able to develop significant market share for its
products, or any market share at all. Inability of the Company to achieve market
acceptance for its products would have a material adverse effect on the
Company's business, financial condition and results of operation.
DEPENDENCE ON CORE TECHNOLOGY; UNCERTAINTY OF ADAPTATION TO DIFFERENT FORMATS
The Company currently relies exclusively upon its core technology for the
development of diagnostic products associated with osteoporosis and other
collagen-related diseases. There can be no assurance that competitors of the
Company will not be successful in developing new or more efficient or
cost-effective diagnostics that are more readily accepted than the Company's
products. The Company is in the process of undertaking ongoing and additional
research and development to adapt its core technology to different formats,
instruments and other delivery platforms that currently exist or may be
developed. In particular, additional research and development will be required
to adapt its core technology to high-speed, high-volume automated instruments
typically used in large clinical laboratories or companies through which the
Company may seek to expand the market for its products. There can be no
assurance that the Company will be successful in adapting and further developing
its core technology to meet such needs. The Company is developing physician
office adaptations of its core technology. There can be no assurance that the
Company or its development partner will either successfully develop or obtain
required regulatory approval for a cost-effective instrument for physician
office use. In addition, technological changes or medical advancements could
diminish or eliminate the commercial viability of the Osteomark test or future
products based upon the Company's core technology. The failure to adapt the
Company's core technology to different formats, instruments and other delivery
platforms, or otherwise to commercialize such core technology, would have a
material adverse effect on the Company's business, financial condition and
results of operation.
RELIANCE ON COLLABORATIVE AGREEMENTS AND CERTAIN RELATIONSHIPS
The Company has entered into collaborative or co-promotional agreements with
several partners, including, among others, Johnson & Johnson, Mochida and
Wyeth-Ayerst Laboratories, and intends to appoint a second international
distributor for its automated instrument application. The level of each
partner's involvement and support and the amount and timing of resources that
these collaborators devote to these activities are not within the control of the
Company and can significantly impact the Company's ability to achieve its
objectives. There can be no assurance that these collaborators will perform
their contractual obligations as expected or that the Company will derive any
additional revenue from such arrangements. Moreover, the agreements may be
terminated under certain circumstances. The Company expects to rely on these and
additional agreements to develop and commercialize its future products. There
can be no assurance that the Company will be able to negotiate acceptable
collaborative agreements in the future or that such new agreements or existing
agreements will be successful. In addition, there can be no assurance that the
parties to the agreements will not pursue alternative technologies.
LIMITED SALES AND MARKETING EXPERIENCE
The Company has limited experience in sales, marketing and distribution. To
market any of its products directly, the Company must develop and implement a
substantial marketing and sales effort with
5
<PAGE>
technical expertise and supporting distribution capability. The Company intends
to continue to market and sell its products in the U.S. through research and
clinical laboratories, other companies, and collaborative arrangements and sell
its products in other markets through distributors or collaborative
arrangements. There can be no assurance that the Company will be able to
establish effective sales and distribution capabilities or that its
collaborators will be successful in gaining market acceptance for the Company's
products or that the Company will achieve or maintain significant market share
for its products.
DEPENDENCE ON LICENSED PATENTS AND PROPRIETARY RIGHTS
The Company's success depends, in large part, on its current and future
patent position relating to its core technology. The Company's patent position
involves complex legal and factual questions. The Company is the exclusive
licensee of certain patents within and outside of the U.S. relating to the
Company's core technology. Claims made under patent applications may be denied
or significantly narrowed, and issued patents may not provide significant
commercial protection to the Company. There is no assurance that the Company's
patents will not be successfully challenged or circumvented by others. The
Company could incur substantial costs in proceedings before the U.S. Patent
Office, including interference proceedings. These proceedings could also result
in adverse decisions as to the patentability of the Company's licensed or
assigned inventions. There can be no assurance that the Company's products do
not or will not infringe on the patent or proprietary rights of others. The
Company may be required to obtain additional licenses to the patents or other
proprietary rights of others. The Company may also require licenses from the
inventors of certain processes, technologies and assay formats in order to
successfully market certain products. There can be no assurance that any such
licenses would be made available on terms acceptable to the Company, if at all.
If the Company needs and cannot or does not obtain such licenses, it could
encounter delays in product introductions while it attempts to circumvent such
patents or the development, manufacture, or sale of products requiring such
licenses could be precluded. The Company believes there will continue to be
significant litigation in the industry regarding patent and other intellectual
property rights.
The Company is aware of competitors that are developing products that may be
covered by claims made in patents or patent applications of the Company. Because
certain foreign patents are subject to third-party opposition following the date
of grant of such patents, there can be no assurance that claims of the Company's
foreign patents, once granted, will survive such opposition without cancellation
or significant modification. Because U.S. applications are confidential until a
patent issues, the Company cannot be assured that its patent claims have
priority in the U.S. or will be entitled to patent protection.
The Company also relies on trade secrets and other unpatented proprietary
technology. No assurance can be given that the Company can meaningfully protect
its rights in such unpatented technology or that others will not independently
develop substantially equivalent products and processes or otherwise gain access
to the Company's technology. The Company seeks to protect its trade secrets and
proprietary know-how, in part, with confidentiality agreements with its
employees and consultants. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known or be
independently developed by competitors. In addition, protracted and costly
litigation may be necessary to enforce and determine the scope and validity of
the Company's proprietary rights.
LENGTHY REGULATORY PROCESSES AND UNCERTAINTY OF REGULATORY APPROVALS
The process of obtaining FDA and other required regulatory approvals can be
lengthy and expensive. The time required for approvals is uncertain, and often
depends on the type, complexity and novelty of the product. There can be no
assurance that regulatory agencies will act favorably or quickly in their review
of any submission by the Company, and significant difficulties or costs may be
encountered by the Company in its efforts to obtain approvals that could delay
or preclude the Company from marketing its products. Furthermore, there can be
no assurance that the agency will not request the development of additional
6
<PAGE>
data following original submissions, causing the Company to incur further cost
and delay. Nor can there be any assurance that the FDA will not restrict the
intended use of a submitted product as a condition for clearance.
If the FDA concludes that a device is not substantially equivalent to
another legally marketed device, submission of a premarket approval ("PMA")
application will be required. If the FDA indicates that a PMA is required for
any product of the Company, the application will require submission of results
of clinical studies and manufacturing information, and likely a review by a
panel of experts outside of the FDA. Clinical studies would need to be conducted
in accordance with FDA requirements. The failure to comply would result in the
FDA's refusal to accept the data or the imposition of regulatory sanctions. FDA
review of a PMA application can take significantly longer than that for a
premarket notification "510(k)" application to demonstrate "substantial
equivalence" to a legally marketed product. Further, if a company wishes to
propose modifications to a product subsequent to FDA approval of a PMA
application, including changes in indications or other significant modifications
to labeling, or modifications to the manufacturing process, or if a company
wishes to change its manufacturing facility, a PMA supplement must first be
submitted to the FDA for its review and approval.
EXTENSIVE CONTINUING GOVERNMENT REGULATION
The research, development, manufacturing and marketing of the Company's
products are subject to extensive continuing regulation by numerous governmental
authorities in the U.S. and certain other countries, and the Company, its
products, and its manufacturing facilities are subject to continual review and
periodic inspection. The regulatory standards for manufacturing are applied
stringently by the FDA. Discovery of previously unknown problems with a product,
manufacturer, or facility may result in restrictions on such product or
manufacturer or facility, including warning letters, fines, suspensions of
regulatory approvals, product recalls, operating restrictions, delays in
obtaining new product approvals, withdrawal of the product from the market, and
criminal prosecution. Other violations of FDA requirements can result in similar
penalties. The Company is also subject to numerous environmental, health and
workplace safety laws and regulations, including those governing laboratory
procedures, exposure to blood-borne pathogens, and the handling of biohazardous
materials. Any violation of, and the cost of compliance with, these laws and
regulations could adversely impact the Company's operations. The Company is
unable to predict the extent or likelihood of adverse government regulation that
might arise from future U.S. or foreign government action.
LIMITED MANUFACTURING EXPERIENCE
The Company is developing adaptations of its core technology for use in
physicians' offices and depends upon the efforts of collaborators for this
development. Such adaptations have not been fully completed and there can be no
assurance that, if developed, such adaptations could be manufactured in a
commercially viable manner. Unless the Company develops additional in-house
manufacturing capability for such products, it will be dependent upon outside
sources for the manufacture of such products. There can be no assurance that the
Company's reliance on others for the manufacture of its products will not result
in problems with product supply. Interruptions in the availability of products
could delay or prevent the development and commercial marketing of the Company's
products.
HISTORY OF LOSSES AND LIMITED OPERATING HISTORY
The Company has a limited operating history and had a retained deficit
through December 31, 1998 of $32,223,000. For the year-end December 31, 1998,
the Company had a net loss of $8,095,000. The Company expects to incur
additional costs as it continues with its operations, marketing efforts,
research and development activities, and clinical trials. The Company expects to
continue to incur losses in future periods and the Company is unable to predict
when, if at all, it will achieve profitability.
7
<PAGE>
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING
The Company will continue to require substantial funds for research and
development, general and administration, and the marketing of its products. The
amount of the Company's future capital requirements will depend on many factors,
including the status of the development of its products, the time and costs
involved in obtaining regulatory approvals, the costs involved in filing,
prosecuting and enforcing patent claims, competing technological and market
developments, the ability of the Company to maintain existing collaborative and
licensing arrangements, and the ability of the Company to establish new
collaborative and licensing arrangements. The Company expects that its existing
capital resources will be sufficient to fund the Company's activities through
1999. However, the Company may be required to seek additional financing. There
can be no assurance that additional funds, whether through additional
financings, collaborative arrangements with corporate sponsors or other sources,
will be available, if at all, in a timely manner or on terms acceptable to the
Company. If adequate funds are not available, the Company may be required to
delay, scale back or eliminate one or more of its programs or obtain funds
through arrangements that are unfavorable to the Company.
INTENSE COMPETITIVE ENVIRONMENT
Competition from biotechnology companies, diagnostic companies,
pharmaceutical companies and research and academic institutions is intense and
is based on price as well as product performance. A number of diagnostic tests
and procedures, and other non-invasive tests for osteoporosis and other bone
disorders currently exist and others are in development, and the manufacturers
of these tests will continue to improve them. In addition, the diagnostic
industry is subject to rapid technological change. There can be no assurance
that the Company's competitors will not succeed in developing products that are
more effective or less expensive than those which have been or are being
developed by the Company or which would render the Company's core technology
obsolete or non-competitive. Many of the Company's competitors have
substantially greater financial, technical and human resources than the Company.
In addition, many of these competitors have significantly greater experience and
resources than the Company in undertaking clinical trials and other regulatory
approval procedures as well as in marketing and achieving manufacturing
efficiencies. There are also small companies, academic institutions,
governmental agencies and other research organizations that are conducting
research in the area of osteoporosis and other collagen-related diseases. These
entities may also market commercial products either on their own or through
collaborative efforts. The Company's competitors may develop technologies and
products that are available for sale prior to the Company's products or at a
lower cost or with better technical characteristics rendering the Company's
products less competitive.
DEPENDENCE ON THERAPEUTICS DEVELOPED BY OTHERS
Acceptance of and demand for the diagnostic products that the Company is
developing will be affected by the need perceived by physicians to diagnose
bone, cartilage and connective tissue disorders for the purposes of treatment.
There are currently a limited number of therapies that are effective in
preventing osteoporosis or other bone, cartilage or connective tissue disorders,
or in treating these disorders once diagnosed. In the event new therapies do not
receive regulatory approval or experience delayed market acceptance, the Company
could be adversely affected. Unfavorable publicity concerning a product of the
Company or therapeutic products for osteoporosis could also have an adverse
effect on the Company's ability to obtain regulatory approvals or to achieve
market acceptance.
UNCERTAINTY OF HEALTHCARE REIMBURSEMENT
The Company's ability to commercialize its products will depend in part on
the extent to which reimbursement for the cost of such products and related
treatment will be available from third-party payors, such as government health
administration authorities, private health coverage insurers and other
organizations. The status of the scope of healthcare programs worldwide is
uncertain and there can be no
8
<PAGE>
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:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ----------------------------------------------------- ----------- -----------------------------------------------------
<S> <C> <C>
Thomas A. Bologna.................................... 50 President and Chief Executive Officer
Thomas F. Broderick.................................. 50 Vice President, Patent and General Counsel
J. Daniel Clemens.................................... 42 Vice President, Product Development
Donna J. DeLong...................................... 50 Vice President, Marketing
Nancy J.S. Mallinak.................................. 37 Vice President, Regulatory and Clinical Affairs
Cory J. Smith........................................ 48 Vice President, Manufacturing
</TABLE>
There were no family relationships between any executive officers of the
Company.
THOMAS A. BOLOGNA joined the Company in July 1997 as the President and Chief
Executive Officer and as a member of the Board of Directors. From January 1996
until July 1997 Mr. Bologna was a principal in Healthcare Venture Associates, a
consulting firm. From January 1994 to January 1996 Mr. Bologna was President and
Chief Executive Officer for Scriptgen Pharmaceuticals, Inc., a biotechnology
company with proprietary drug screening and development technology that is
developing orally active drugs to regulate gene expression, and from July 1987
to January 1994 Mr. Bologna was the Chairman of the Board of Directors and
President and Chief Executive Officer of Gen-Probe Incorporated, a biotechnology
company commercializing genetic-probe-based technology for diagnostic and
therapeutic applications.
THOMAS F. BRODERICK was named the Vice President, Patent and General Counsel
in November 1997. Mr. Broderick was Vice President, Intellectual Property from
March 1997 to November 1997 and was Patent Counsel for the Company from April
1996 to March 1997. From 1989 to March 1996, Mr. Broderick was a partner at the
patent law firm of Christensen, O'Connor, Johnson & Kindness in Seattle,
Washington.
J. DANIEL CLEMENS was named the Vice President, Product Development in
September 1998. Mr. Clemens was Director of Research & Development for the
Company from May 1992 to September 1998 and Manager of Product Development from
October 1990 to May 1992. Prior to joining Ostex,
9
<PAGE>
Mr. Clemens was Senior Research & Development Scientist from February 1987 to
October 1990 at Genetic Systems Corporation/Sanofi.
DONNA J. DELONG joined the Company in February 1998 as Vice President,
Marketing. From May 1996 to February 1998, Ms. DeLong was Senior Director of
Marketing at Chiron Diagnostics, a division of Chiron Corporation, a healthcare
company; from October 1993 to April of 1996, Ms. DeLong was the Director of
Marketing at Neopath Inc., a medical diagnostics company; and from May 1990 to
October 1993 Ms. DeLong was the Director of Marketing at Sanofi Diagnostics
Pasteur, a medical diagnostics company.
NANCY J.S. MALLINAK was named Vice President, Regulatory and Clinical
Affairs of the Company in February 1997. Ms. Mallinak was Director, Regulatory
and Clinical Affairs for the Company from June 1995 to February 1997 and was
Manager, Regulatory and Clinical Affairs for the Company from December 1992 to
June 1995. From June 1989 to December 1992, Ms. Mallinak was Manager, Clinical
Product Development in the Diagnostics Group of Baxter International, Inc., a
general healthcare company.
CORY J. SMITH was named Vice President, Manufacturing in September 1998. Mr.
Smith was Director of Manufacturing for the Company from October 1993 to
September 1998 and was the Manufacturing Engineer for the Company from September
1992 to October 1993. Prior to joining Ostex, Mr. Smith was the Quality
Assurance Manager from June 1991 to September 1992 at Genetic Systems
Corporation/ Sanofi.
ITEM 2. PROPERTIES
The Company's research laboratories, manufacturing operations, and
administrative offices are located in Seattle, Washington. The Company leases
approximately 32,000 square feet of space in Seattle under a lease that will
expire in 2005. The Seattle facility has adequate capacity for the Company's
present needs.
ITEM 3. LEGAL PROCEEDINGS
Information regarding Legal Proceedings is incorporated herein by reference
to note 10 in the "Notes to Financial Statements" on page 28 of the Annual
Report to Shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter ended December 31, 1998.
------------------------
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "OSTX". Information regarding the Common Stock trading activity for 1998
and 1997 is incorporated herein by reference to the "Shareholder
Information--Price Range of Common Stock" on page 32 of the Annual Report to
Shareholders, which is included as Exhibit 13.0 to this Annual Report on Form
10-K.
As of March 22, 1999, there were 12,542,500 shares of Common Stock
outstanding held of record by approximately 131 shareholders. The Company
believes there are approximately 3,700 additional owners of Common Stock who own
shares held in street name.
The Company has never paid cash dividends and has no present intention of
paying dividends in the foreseeable future.
TRANSFER AGENT AND REGISTRAR--The transfer agent and registrar for the
Common Stock is ChaseMellon Shareholder Services, L.L.C., Seattle, Washington.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference to
"Selected Financial Data" on page 16 of the Annual Report to Shareholders, which
is included as Exhibit 13.0 to this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated herein by reference to
pages 17-19 of the Annual Report to Shareholders, which is included as Exhibit
13.0 to this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference to
the Financial Statements and "Notes to Financial Statements" on pages 20-29, and
"Report of Independent Public Accountants" on page 30, of the Annual Report to
Shareholders, which is included as Exhibit 13.0 to this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
------------------------
11
<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.
------------------------
12
<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 20-29 of the Annual Report to
Shareholders and are listed below. This information is included as Exhibit 13.0
to this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
PAGE WITHIN
FINANCIAL STATEMENTS ANNUAL REPORT
- - ------------------------------------------------------------------------------- -------------------
<S> <C>
Balance Sheets................................................................. 20
Statements of Operations....................................................... 21
Statements of Cash Flows....................................................... 22
Statements of Shareholders' Equity............................................. 23
Notes to Financial Statements.................................................. 24
Report of Independent Public Accountants....................................... 30
</TABLE>
(B) REPORTS ON FORM 8-K
None
(C) EXHIBIT INDEX (14)
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - -------------------- -----------------------------------------------------------------------------------
<S> <C> <C>
(8) 3.1 Articles of Incorporation, as amended, dated January 1997
(1) 3.2 Bylaws, as amended
(1) 4.1 Specimen Common Stock Certificate
(1) 10.1A Amended and Restated Stock Option Plan*
(1) 10.1B Form of Employee Stock Option Agreement*
(1) 10.1C Form of Director's Stock Option Agreement*
(9) 10.2 Amended and Restated Directors' Nonqualified Stock Option Plan dated July 16, 1997*
(9) 10.3 Amended and Restated 1994 Stock Option Plan*
Agreements with Hologic, Inc.
(3)(12) 10.4A Co-Promotion and Sales Representation Agreement dated January 14, 1997
(3)(12) 10.4B Joint Development, License and Supply Agreement dated January 14, 1997
(1) 10.5 Form of Indemnification Agreement with officers and directors*
Agreement with Thomas A. Bologna
(13) 10.7 Executive Employment Agreement dated July 16, 1997*
Agreements with Mochida Pharmaceutical Co., Ltd.
(1) 10.12A Research and Development Agreement dated August 1992
(1) 10.12B Osteomark License Agreement Dated August 1992
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - -------------------- -----------------------------------------------------------------------------------
<S> <C> <C>
(3) 10.12D Second Amendment to Osteomark License Agreement dated December 24, 1997
Agreements with the Washington Research Foundation
(1) 10.13A Restated Exclusive License Agreement effective June 19, 1992 (Urinary Assay for
Measuring Bone Resorption)
(1) 10.13B Amendment to Restated Exclusive License Agreement effective January 1, 1993
(1) 10.13C Second Amendment effective June 2, 1994
(1) 10.14 Exclusive License Agreement dated February 10, 1994 (O-CSF)
Agreements with the University of Washington
(3)(12) 10.15A Research Agreement dated July 1, 1996 (Molecular Markers of Connective Tissue
Degradation)
(3)(12) 10.15B Research Agreement dated October 1, 1996 (Role of O-CSF in Osteoclast Regulation)
(1) 10.16A Know-How Transfer and Consulting Agreement dated September 18, 1989 with David R.
Eyre, Ph.D.*
(1) 10.16B Extension and Amendment dated May 1, 1992*
(1) 10.19 Osteomark EIA Exclusive Distribution License Agreement dated March 28, 1994 with
Technogenetics S.R.L.
(1) 10.20 Osteomark EIA Distribution License Agreement dated July 12, 1994 with BRAHMS
Diagnostic (formerly Henning Berlin GmbH)
(1) 10.23 Osteomark Agreement dated February 12, 1993, as amended May 10, 1994, with Nichols
Institute Reference Laboratory
Lease Agreements
(4) 10.27A Lease Agreement dated October 2, 1995, with David A. Sabey and Sandra L. Sabey
(8) 10.27B First Amendment of Lease dated October 15, 1996, with the City of Seattle,
successor-in-interest to David A. Sabey and Sandra L. Sabey
Agreements with Johnson & Johnson Clinical Diagnostics, Inc.
(5) 10.28A Distribution Agreement dated June 7, 1995
(5) 10.28B Research, Development, License and Supply Agreement dated June 7, 1995
(4) 10.29 Clinical Laboratory Services License and Supply Agreement dated October 25, 1995,
with SmithKline Beecham Clinical Laboratories, Inc.
(13) 10.30 Promotion Agreement dated September 30, 1997 with Wyeth-Ayerst Laboratories
(6) 10.31 Agreement with Laboratory Corporation of America-TM- Holdings (LabCorp), dated
January 11, 1996
(7) 10.32A Joint Development, License and Co-Marketing Agreement dated April 10, 1997 with
Metrika, Inc.
(10) 10.33 Form of CS First Boston Corporation Warrant
(11) 10.34 Form of Invemed Associates, Inc. Warrant
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - -------------------- -----------------------------------------------------------------------------------
<S> <C> <C>
(2) 10.35 Shareholder Rights Agreement dated January 21, 1997
** 13.0 Selected Financial Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Financial Statements and Notes to the
Financial Statements from the Company's Annual Report to Shareholders for the
year ended December 31, 1998
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
</TABLE>
- - ------------------------
* Management contract or compensatory plan or agreement.
** Filed Herewith in.
(1) Incorporated herein by reference from Item 16(a) of Registrant's Form
S-1 Registration Statement as declared effective January 24, 1995 (No.
33-86118).
(2) Incorporated herein by reference to exhibit number 4.5 filed with Form
8-A with the Commission in January 1997.
(3) Confidential treatment requested. Exhibit omits information that has
been filed separately with the Commission.
(4) Incorporated herein by reference to exhibit of the same number filed
with Form 10-K with the Commission for the year ended December 31, 1995.
(5) Incorporated herein by reference to exhibit of the same number filed
with Form 10-Q with the Commission for the quarter ended June 30, 1995.
(6) Incorporated herein by reference to exhibit of the same number filed
with Form 10-Q with the Commission for the quarter ended March 31, 1996.
(7) Incorporated herein by reference to exhibit of the same number filed
with Form 10-Q with the Commission for the quarter ended September 30,
1997.
(8) Incorporated herein by reference to exhibit of the same number filed
with Form 10-K with the Commission for the year ended December 31, 1996.
(9) Incorporated herein by reference to exhibit of the same number filed
with Form S-8 with the Commission on January 13, 1998.
(10) Incorporated herein by reference to exhibit number 1.1A filed with the
Registrant's Form S-1 Registration Statement as declared effective
January 24, 1995 (No. 33-86118).
(11) Incorporated herein by reference to exhibit number 1.1B filed with the
Registrant's Form S-1 Registration Statement as declared effective
January 24, 1995 (No. 33-86118).
(12) Incorporated herein by reference to exhibits of the same number filed
with Form 10-K with the Commission for the year ended December 31, 1996,
and as amended with Form 10-K/A on October 17, 1997.
(13) Incorporated herein by reference to exhibits of the same number filed
with Form 10-K with the Commission for the year ended December 31, 1997.
(14) Copies of exhibits may be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 5th Street NW, Room 1024,
Washington, D.C. 20549, or through the Commission's Edgar system located
on the internet at www.sec.gov.
15
<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 22, 1999.
OSTEX INTERNATIONAL, INC.
BY /S/ THOMAS A. BOLOGNA
-----------------------------------------
Thomas A. Bologna
PRESIDENT AND CHIEF
EXECUTIVE OFFICER AND DIRECTOR
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITIES DATE
- - ------------------------------ --------------------------- -------------------
President and Chief
/s/ THOMAS A. BOLOGNA Executive Officer
- - ------------------------------ (principal executive March 22, 1999
Thomas A. Bologna officer and principal
financial officer)
/s/ THOMAS J. CABLE Chairman of the Board of
- - ------------------------------ Directors March 22, 1999
Thomas J. Cable
/s/ ELISABETH L. EVANS Director
- - ------------------------------ March 22, 1999
Elisabeth L. Evans
/s/ DAVID R. EYRE Director
- - ------------------------------ March 22, 1999
David R. Eyre
/s/ FREDRIC J. FELDMAN Director
- - ------------------------------ March 22, 1999
Fredric J. Feldman
/s/ GREGORY D. PHELPS Director
- - ------------------------------ March 22, 1999
Gregory D. Phelps
/s/ JOHN H. TRIMMER Director
- - ------------------------------ March 22, 1999
John H. Trimmer
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - --------------------- -------------------------------------------------------------------------------------------
<S> <C> <C>
(8) 3.1 Articles of Incorporation, as amended, dated January 1997
(1) 3.2 Bylaws, as amended
(1) 4.1 Specimen Common Stock Certificate
(1) 10.1A Amended and Restated Stock Option Plan*
(1) 10.1B Form of Employee Stock Option Agreement*
(1) 10.1C Form of Director's Stock Option Agreement*
(9) 10.2 Amended and Restated Directors' Nonqualified Stock Option Plan dated July 16, 1997*
(9) 10.3 Amended and Restated 1994 Stock Option Plan*
Agreements with Hologic, Inc.
(3)(12) 10.4A Co-Promotion and Sales Representation Agreement dated January 14, 1997
(3)(12) 10.4B Joint Development, License and Supply Agreement dated January 14, 1997
(1) 10.5 Form of Indemnification Agreement with officers and directors*
Agreement with Thomas A. Bologna
(13) 10.7 Executive Employment Agreement dated July 16, 1997*
Agreements with Mochida Pharmaceutical Co., Ltd.
(1) 10.12A Research and Development Agreement dated August 1992
(1) 10.12B Osteomark License Agreement Dated August 1992
(3) 10.12D Second Amendment to Osteomark License Agreement dated December 24,1997
Agreements with the Washington Research Foundation
(1) 10.13A Restated Exclusive License Agreement effective June 19, 1992 (Urinary Assay for Measuring
Bone Resorption)
(1) 10.13B Amendment to Restated Exclusive License Agreement effective January 1, 1993
(1) 10.13C Second Amendment effective June 2, 1994
(1) 10.14 Exclusive License Agreement dated February 10, 1994 (O-CSF)
Agreements with the University of Washington
(3)(12) 10.15A Research Agreement dated July 1, 1996 (Molecular Markers of Connective Tissue
Degradation)
(3)(12) 10.15B Research Agreement dated October 1, 1996 (Role of O-CSF in Osteoclast Regulation)
(1) 10.16A Know-How Transfer and Consulting Agreement dated September 18, 1989 with David R. Eyre,
Ph.D.*
(1) 10.16B Extension and Amendment dated May 1, 1992*
(1) 10.19 Osteomark EIA Exclusive Distribution License Agreement dated March 28, 1994 with
Technogenetics S.R.L.
(1) 10.20 Osteomark EIA Distribution License Agreement dated July 12, 1994 with BRAHMS Diagnostic
(formerly Henning Berlin GmbH)
(1) 10.23 Osteomark Agreement dated February 12, 1993, as amended May 10, 1994, with Nichols
Institute Reference Laboratory
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - --------------------- -------------------------------------------------------------------------------------------
<S> <C> <C>
Lease Agreements
(4) 10.27A Lease Agreement dated October 2, 1995, with David A. Sabey and Sandra L. Sabey
(8) 10.27B First Amendment of Lease dated October 15, 1996, with the City of Seattle,
successor-in-interest to David A. Sabey and Sandra L. Sabey
Agreements with Johnson & Johnson Clinical Diagnostics, Inc.
(5) 10.28A Distribution Agreement dated June 7, 1995
(5) 10.28B Research, Development, License and Supply Agreement dated June 7, 1995
(4) 10.29 Clinical Laboratory Services License and Supply Agreement dated October 25, 1995, with
SmithKline Beecham Clinical Laboratories, Inc.
(13) 10.30 Promotion Agreement dated September 30, 1997 with Wyeth-Ayerst Laboratories
(6) 10.31 Agreement with Laboratory Corporation of America-TM- Holdings (LabCorp), dated January 11,
1996
(7) 10.32A Joint Development, License and Co-Marketing Agreement dated April 10, 1997 with Metrika,
Inc.
(10) 10.33 Form of CS First Boston Corporation Warrant
(11) 10.34 Form of Invemed Associates, Inc. Warrant
(2) 10.35 Shareholder Rights Agreement dated January 21, 1997
** 13.0 Selected Financial Data, Management's Discussion and Analysis of Financial Condition and
Results of Operations, Financial Statements and Notes to the Financial Statements from
the Company's Annual Report to Shareholders for the year ended December 31, 1998
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
</TABLE>
- - ------------------------
* Management contract or compensatory plan or agreement.
** Filed Herewith in.
(1) Incorporated herein by reference from Item 16(a) of Registrant's Form S-1
Registration Statement as declared effective January 24, 1995 (No.
33-86118).
(2) Incorporated herein by reference to exhibit number 4.5 filed with Form 8-A
with the Commission in January 1997.
(3) Confidential treatment requested. Exhibit omits information that has been
filed separately with the Commission.
(4) Incorporated herein by reference to exhibit of the same number filed with
Form 10-K with the Commission for the year ended December 31, 1995.
(5) Incorporated herein by reference to exhibit of the same number filed with
Form 10-Q with the Commission for the quarter ended June 30, 1995.
(6) Incorporated herein by reference to exhibit of the same number filed with
Form 10-Q with the Commission for the quarter ended March 31, 1996.
(7) Incorporated herein by reference to exhibit of the same number filed with
Form 10-Q with the Commission for the quarter ended September 30, 1997.
18
<PAGE>
(8) Incorporated herein by reference to exhibit of the same number filed with
Form 10-K with the Commission for the year ended December 31, 1996.
(9) Incorporated herein by reference to exhibit of the same number filed with
Form S-8 with the Commission on January 13, 1998.
(10) Incorporated herein by reference to exhibit number 1.1A filed with the
Registrant's Form S-1 Registration Statement as declared effective January
24, 1995 (No. 33-86118).
(11) Incorporated herein by reference to exhibit number 1.1B filed with the
Registrant's Form S-1 Registration Statement as declared effective January
24, 1995 (No. 33-86118).
(12) Incorporated herein by reference to exhibits of the same number filed with
Form 10-K with the Commission for the year ended December 31, 1996, and as
amended with Form 10-K/A on October 17, 1997.
(13) Incorporated herein by reference to exhibits of the same number filed with
Form 10-K with the Commission for the year ended December 31, 1997.
19
<PAGE>
OSTEX INTERNATIONAL, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales and research testing
services............................ $ 3,047 $ 3,658 $ 2,860 $ 1,830 $ 1,152
License fees and research and
development payments................ -- 450 1,087 1,495 630
-------- -------- -------- -------- --------
Total revenues.................... 3,047 4,108 3,947 3,325 1,782
-------- -------- -------- -------- --------
Operating Expenses:
Cost of products sold................. 814 899 926 603 517
Research and development.............. 2,901 4,470 3,163 3,200 3,308
Selling, general and administrative... 8,122 8,031 9,201 6,583 2,222
-------- -------- -------- -------- --------
Total operating expenses.......... 11,837 13,400 13,290 10,386 6,047
-------- -------- -------- -------- --------
Loss from operations.............. (8,790) (9,292) (9,343) (7,061) (4,265)
Other Income:
Proceeds from legal settlement........ -- 6,200 -- -- --
Interest income, net.................. 695 828 1,273 1,684 194
-------- -------- -------- -------- --------
Net loss.......................... $ (8,095) $ (2,264) $ (8,070) $ (5,377) $ (4,071)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic and diluted net loss per common
and common equivalent share........... $ (0.64) $ (0.18) $ (0.65) $ (0.45) $ (0.47)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Shares used in calculation of net
loss per share........................ 12,696 12,574 12,441 11,929 8,737
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
------- ------- ------- ------- ------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short term
investments........................... $10,979 $18,965 $21,229 $27,794 $3,668
Working capital......................... 10,624 18,368 20,901 28,361 3,172
Total assets............................ 15,065 24,112 25,691 32,841 5,590
Accumulated deficit..................... (32,223) (24,128) (21,864) (13,794) (8,417)
------- ------- ------- ------- ------
Total shareholders' equity.............. $13,488 $21,644 $23,526 $31,518 $4,698
------- ------- ------- ------- ------
------- ------- ------- ------- ------
</TABLE>
1
<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's lead product, the
OSTEOMARK-Registered Trademark- NTx test, incorporates breakthrough and patented
technology in the area of bone resorption measurement. Ostex has formed
collaborative relationships with leading diagnostic and pharmaceutical companies
to aid in the commercialization of Osteomark.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed below, that could cause actual results to differ
materially from historical results or those anticipated. Words used herein such
as "believes," "anticipates," "expects," "intends," and similar expressions are
intended to identify forward-looking statements but are not the exclusive means
of identifying such statements. In addition, the disclosures on page 19 under
the caption "Other Factors that May Affect Operating Results," consist
principally of a brief discussion of risks which may affect future results and
are thus, in their entirety, forward-looking in nature. Readers are urged to
carefully review and consider the various disclosures made by the Company in
this report and in the Company's other reports filed with the Securities and
Exchange Commission (the "SEC"), including the Company's Annual Report on Form
10-K for fiscal year ended December 31, 1998, that attempt to advise interested
parties of the risks and factors that may affect the Company's business.
On May 8, 1995, the Osteomark NTx Urine test first became commercially
available in the United States as a urinary test that provides a quantitative
measure of the excretion of cross-linked N-telopeptides of type I collagen
("NTx") as an indicator of human bone resorption. Prior to becoming commercially
available, the Osteomark urine test was available in the United States only for
research purposes. On February 2, 1999, the Company received clearance to market
the Osteomark NTx Serum test. Osteomark NTx Serum is the first and only
commercially available test in the United States that measures specific bone
breakdown by osteoclasts using a blood sample.
The Company's revenues have consisted primarily of product sales and fees
for research testing services, as well as licensing fees and research and
development fees from Mochida Pharmaceutical, Co., Ltd. ("Mochida"). Mochida has
agreed to pay Ostex up to approximately $6,600,000 in a combination of licensing
fees and research and development milestone payments, of which $5,850,000 has
been received to date. Under the research and development agreement, Mochida has
an option to license the NTx serum test. Future payments totaling $750,000 are
contingent upon Mochida's decision to exercise its option to license the NTx
serum test and achievement of certain milestones.
Expenses incurred have been primarily for selling, administrative, and
research and development activities and have exceeded revenues in each year
since the Company's inception. As of December 31, 1998, the Company had an
accumulated deficit of $32,223,000. Successful future operations depend upon the
Company's ability to effectively commercialize and market its products. The
Company will require additional funds to develop new products and to fund the
level of selling, general and administrative expenses that the Company expects
to incur in connection with its product commercialization efforts in the next
several years.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996. The Company had total
revenues of $3,047,000 for the year ended December 31, 1998, compared to
$4,108,000 and $3,947,000 for the years ended December 31, 1997 and 1996,
respectively.
2
<PAGE>
Revenue from product sales and research testing services for the year ended
December 31, 1998 was $3,047,000, compared to $3,658,000 and $2,860,000 in the
years ended December 31, 1997 and 1996, respectively. The decrease of $611,000
in 1998 compared to 1997 revenue is attributable to slightly lower volumes of
Osteomark kits sold to laboratories and distributors worldwide. Some of the
Company's customers have gone to testing each patient sample only once rather
than in duplicate. Higher volume resulted in a $798,000 increase in 1997
compared to 1996 revenue.
No license and research and development payments were received during 1998.
In 1997, $450,000 in license and research and development fees was received from
Mochida, while the fees in 1996 totaled $1,087,000, primarily from Mochida. The
decreases in 1998 and 1997 were expected and are due to attainment of scheduled
milestones.
The Company's cost of products sold totaled $814,000 for the year ended
December 31, 1998, compared to $899,000 and $926,000 for the same periods in
1997 and 1996, respectively. The gross profit rate on product sales for the year
ended 1998 was 73%, compared to 75% for 1997 and 68% for 1996. The slight
decrease in gross profit rate from 1997 to 1998 was due to lower manufacturing
volume while the increase from 1996 to 1997 was a function of increased
manufacturing volume and overall efficiency gains made in part by improvements
in the production process. Increased manufacturing volume reduces unit cost by
spreading certain fixed overhead expenses over a higher number of units
produced.
The Company's research and development expenditures totaled $2,901,000,
$4,470,000, and $3,163,000, in 1998, 1997, and 1996, respectively. The
$1,569,000 decrease from 1997 to 1998 was primarily attributable to the
Company's decision to reduce the level of funding to outside companies for the
NTx point-of-care development programs. Research and development expenses
increased in 1997 over 1996 due to the cost of clinical studies commenced at the
end of 1996 and during 1997 and expenses to outside companies associated with
the NTx point-of-care development programs. Included in 1997 was a study for the
determination of the NTx reference range in males, a study to complement
physician interpretation of NTx results in postmenopausal women, and preliminary
studies for the use of the Osteomark test in helping to identify bone
metastases. Additionally, research and development expenditures included
research grants to the University of Washington ("UW") in 1998, 1997 and 1996.
Selling, general and administrative expenses totaled $8,122,000, $8,031,000,
and $9,201,000, in 1998, 1997 and 1996, respectively. The slight increase from
1997 to 1998 was due to the implementation of expanded and new marketing
programs including direct mail and advertising activities, and the Company's
physician education program. The $1,170,000 decrease from 1996 to 1997 was
primarily due to the completion of the Company's free testing program in 1996
and the completion of a hearing before the American Arbitration Association
against Boehringer Mannheim GmbH ("Boehringer Mannheim") in September 1996,
partially offset by increased cost of litigation in connection with the
Osteometer Biotech A/S lawsuit (see Note number 10 on page 28 in the Notes to
Financial Statements).
Proceeds from legal settlement resulted from the receipt of a non-recurring
lump sum payment of $6,200,000 from Boehringer Mannheim in October 1997. The
settlement between the two parties was the result of a ruling by the American
Arbitration Association awarding damages to the Company in connection with a
dispute between the Company and Boehringer Mannheim.
Interest income totaled $747,000, $901,000, and $1,317,000 for the years
ended December 31, 1998, 1997, and 1996, respectively. The decreases in 1998 and
1997 were primarily due to lower average invested balances resulting from using
cash to fund the Company's operating losses.
At December 31, 1998, the Company had tax net operating loss carryforwards
of $31,779,000, which will begin to expire in 2004. Income taxes are provided in
the Statements of Operations as required by Statement of Financial Accounting
Standards No. 109, "Accounting For Income Taxes" ("SFAS No. 109"). Under SFAS
No. 109, deferred taxes are determined using an asset and liability approach.
The Company has determined that the tax assets do not satisfy the recognition
criteria set forth in SFAS No. 109.
3
<PAGE>
Accordingly, a valuation adjustment has been recorded against the applicable
deferred tax assets, and therefore no tax benefit has been recorded.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998 the Company had $10,979,000 cash and cash
equivalents and short-term investments, working capital of $10,624,000 and total
shareholders' equity of $13,488,000. During 1998, cash, cash equivalents and
short-term investments decreased by $7,986,000, working capital decreased by
$7,744,000 and shareholders' equity decreased by $8,156,000. The decreases were
primarily the result of the net loss incurred during 1998.
The Company used $7,638,000 of cash for operating activities in 1998 and
$102,000 for the purchase of laboratory, manufacturing and office equipment. In
1996, the Company entered into a note agreement that provides up to $1,500,000
for expansion of manufacturing and administrative facilities and has borrowed
$746,000 against the note. The note is repayable in 48 equal monthly
installments of principal and interest of $20,000. As of December 31, 1998,
outstanding borrowings under this agreement were $324,000. The Company does not
anticipate additional borrowings during 1999 and has no material capital
purchase commitments.
The Company's future capital requirements depend upon many factors,
including the effectiveness of Osteomark NTx Serum and Urine tests
commercialization activities and arrangements; continued scientific progress in
its research and development programs; the costs involved in filing, prosecuting
and enforcing patent claims; and the time and costs involved in obtaining
regulatory approvals. Additional funds from equity or debt financing will be
required. There can be no assurance that such additional funds will be available
on favorable terms, if at all. Because of the Company's significant long-term
cash requirements, it may seek to raise additional capital if conditions in the
public equity markets are favorable or through private placements, even if the
Company does not have an immediate need for additional cash at that time. If
additional financing is not available, the Company believes that its existing
available cash, its future license and research revenues from existing
collaboration agreements, its current level of product sales and interest income
from short-term investments will be adequate to fund operations through 1999.
OTHER FACTORS THAT MAY AFFECT OPERATING RESULTS
The Company's operating results may fluctuate due to a number of factors
including, but not limited to, volume and timing of product sales, pricing,
market acceptance of the Company's products, changing economic conditions in the
healthcare industry, activities of competitors, delays and increased costs of
product and technology development, the Company's ability to develop and
maintain collaborative arrangements, the outcome of litigation, and the effect
of the Company's accounting policies and other risk factors detailed in the
Company's 1998 Form 10-K and other SEC filings. All of the foregoing factors are
difficult for the Company to predict and can materially adversely affect the
Company's business and operating results.
The Company is currently upgrading its financial and manufacturing
information system software to a Year 2000 compliant version. The Company is in
the process of testing this system upgrade and expects it to be fully implement
by December 31, 1999. The Company has assessed the Year 2000 compliance of its
other computer system software and manufacturing equipment and expects to
complete all necessary upgrades to be Year 2000 compliant no later than December
31, 1999. In addition, the Company has contacted all key vendors and suppliers
regarding Year 2000 compliance and has received no responses indicating that any
vendor or supplier will not be Year 2000 compliant. The Company has also created
a Year 2000 project team that periodically reviews relevant issues regarding
compliance. The costs of Year 2000 initiatives have primarily been incurred and
are not expected to be material to the Company's results of operations or
financial position in future periods. Failure to timely complete the Company's
Year 2000 initiatives could result in the Company's software being rendered
inoperative. Although the company has
4
<PAGE>
no formal contingency plans in place, in such event, the Company would attempt
to perform its MIS functions, and other functions currently implemented by
software, manually through the dedication of additional personnel to performing
such functions. While the Company believes its planning efforts are adequate to
address its Year 2000 concerns, there can be no assurance that the systems and
products of other companies of which the Company's operations rely will be
converted on a timely basis and will not have a material adverse effect on the
Company's results of operations.
5
<PAGE>
OSTEX INTERNATIONAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
(IN THOUSANDS,
EXCEPT SHARE
AMOUNTS)
ASSETS
Current Assets:
Cash and cash equivalents................................................ $ 2,744 $ 2,201
Short-term investments................................................... 8,235 16,764
Trade receivables and other current assets, net of allowance of $80 in
1998 and $25 in 1997................................................... 858 1,344
Inventory, at cost....................................................... 247 201
-------- --------
Total current assets................................................. 12,084 20,510
-------- --------
Property, Plant and Equipment, net......................................... 2,382 2,965
Other Assets............................................................... 599 637
-------- --------
Total assets......................................................... $ 15,065 $ 24,112
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................................................... $ 557 $ 1,429
Accrued expenses......................................................... 696 530
Current portion of note payable.......................................... 207 183
-------- --------
Total current liabilities............................................ 1,460 2,142
-------- --------
Noncurrent Liabilities
Note payable, net of current portion..................................... 117 326
-------- --------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.01 par value, 50,000,000 authorized;
12,696,250 issued and outstanding in 1998 and 1997..................... 127 127
Additional paid-in capital............................................... 45,642 45,642
Accumulated items of comprehensive income (loss)......................... (58) 3
Accumulated deficit...................................................... (32,223) (24,128)
-------- --------
Total shareholders' equity........................................... 13,488 21,644
-------- --------
Total liabilities and shareholders' equity........................... $ 15,065 $ 24,112
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
OSTEX INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
Revenues:
Product sales and research testing services.............................. $ 3,047 $ 3,658 $ 2,860
License fees and research and development payments....................... -- 450 1,087
-------- -------- --------
Total revenues....................................................... 3,047 4,108 3,947
-------- -------- --------
Operating Expenses:
Cost of products sold.................................................... 814 899 926
Research and development................................................. 2,901 4,470 3,163
Selling, general and administrative...................................... 8,122 8,031 9,201
-------- -------- --------
Total operating expenses............................................. 11,837 13,400 13,290
-------- -------- --------
Loss from operations................................................. (8,790) (9,292) (9,343)
Other Income (Expense):
Proceeds from legal settlement........................................... -- 6,200 --
Interest income.......................................................... 747 901 1,317
Interest expense......................................................... (52) (73) (44)
-------- -------- --------
Net loss............................................................. $ (8,095) $ (2,264) $ (8,070)
-------- -------- --------
-------- -------- --------
Basic and diluted net loss per common and
common equivalent share.................................................. $ (0.64) $ (0.18) $ (0.65)
Shares used in calculation of net loss per share........................... 12,696 12,574 12,441
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
OSTEX INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................. $ (8,095) $ (2,264) $ (8,070)
Adjustments to reconcile net loss to net cash used in operating
activities--
Depreciation and amortization.......................................... 685 651 504
Expense from stock awards and grants................................... -- 197 33
(Increase) decrease in receivables and other current assets............ 486 (183) 493
(Increase) decrease in inventory....................................... (46) (48) 83
Decrease in other assets............................................... 38 -- --
Increase (decrease) in accounts payable................................ (872) 170 104
Increase in accrued expenses........................................... 166 296 66
-------- -------- --------
Net cash used in operating activities................................ (7,638) (1,181) (6,787)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments...................................... (31,606) (20,426) (22,958)
Proceeds from sales and maturities of short-term investments............. 40,074 23,535 24,575
Purchase of property, plant and equipment................................ (102) (1,105) (495)
-------- -------- --------
Net cash provided by investing activities............................ 8,366 2,004 1,122
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and exercise of stock
options................................................................ -- 252 41
Proceeds from borrowings on note payable................................. -- -- 746
Payments on note payable................................................. (185) (163) (74)
-------- -------- --------
Net cash provided by (used in) financing activities.................. (185) 89 713
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 543 912 (4,952)
CASH AND CASH EQUIVALENTS, beginning of period............................. 2,201 1,289 6,241
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period................................... $ 2,744 $ 2,201 $ 1,289
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Stock granted for research and development services...................... $ -- $ 191 $ --
-------- -------- --------
-------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
OSTEX INTERNATIONAL, INC.
STATEMENTS OF SHAREHOLDERS EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
-------------- PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT LOSS EQUITY
------ ------ ---------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995......... 12,433 $125 $45,121 $ 66 $(13,794) $31,518
Compensation expense for stock
option grants.................... -- -- 33 -- -- -- 33
Stock options exercised............ 9 41 -- -- -- 41
Comprehensive loss
Unrealized gain on short-term
investments.................... -- -- -- 4 -- 4 4
Net loss......................... -- -- -- -- (8,070) (8,070) (8,070)
-------------
Comprehensive loss................. (8,066)
-------------
-------------
Balance, December 31, 1996......... 12,442 125 45,195 70 (21,864) 23,526
Expense for stock and option
grants........................... 70 -- 197 -- -- -- 197
Stock options exercised............ 184 2 250 -- -- -- 252
Comprehensive loss
Unrealized loss on short-term
investments.................... -- -- -- (67) -- (67) (67)
Net loss......................... -- -- -- -- (2,264) (2,264) (2,264)
-------------
Comprehensive loss................. (2,331)
-------------
-------------
Balance, December 31, 1997......... 12,696 127 45,642 3 (24,128) 21,644
Comprehensive loss
Unrealized loss on short-term
investments.................... -- -- -- (61) -- (61) (61)
Net loss......................... -- -- -- -- (8,095) (8,095) (8,095)
-------------
Comprehensive loss................. (8,156)
-------------
-------------
Balance, December 31, 1998......... 12,696 $127 $45,642 $(58) $(32,223) $13,488
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
OSTEX INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Ostex International, Inc. (the "Company"), a Washington Corporation
incorporated in May 1989, is engaged in the discovery and commercialization of
products associated with osteoporosis and other collagen-related diseases. The
Company's lead product, the Osteomark NTx test, incorporates breakthrough and
patented technology in the area of bone resorption measurement. The Company
markets the Osteomark NTx Serum and Urine tests through distributors and medical
laboratories.
ESTIMATES AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
REVENUE RECOGNITION
License fees and research and development payments are recognized upon
attainment of the agreed-upon milestones. Research testing fees are recognized
when the services are substantially complete. Product sales are recognized upon
shipment.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amount
approximates fair value due to the short maturity of these instruments.
SHORT-TERM INVESTMENTS
The Company considers all of its investments as "available for sale,"
reporting them at fair market value with unrealized gains and losses included as
a component of comprehensive income (loss) in shareholders' equity. Realized
gains and losses and declines in value of securities judged to be other than
temporary are included in interest income.
CONCENTRATION OF CREDIT RISK
Trade receivables potentially subject the Company to credit risk. The
Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not require
collateral. The Company has historically incurred minimal credit losses.
The Company's range of customers includes research and clinical laboratories
and other companies, of which one customer (Johnson & Johnson Clinical
Diagnostics, Inc.) accounted for approximately 16%, 22% and 13% of total
revenues for the years ended December 31, 1998, 1997 and 1996, respectively.
F-5
<PAGE>
OSTEX INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory consists principally of raw materials and finished goods.
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated on the
straight-line method over the estimated useful life of the asset. Leasehold
improvements are amortized over the shorter of useful lives or the lease term.
Estimated lives range from five to eight years. Depreciation and amortization
expense charged to operations during 1998, 1997 and 1996 was $685,000, $614,000
and $502,000, respectively.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and disclosure of comprehensive income
(loss). Disclosure has been made for all years presented in the statements of
shareholders' equity.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
2. SHORT-TERM INVESTMENTS
The Company's short-term investments at December 31, 1998 and 1997,
consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
United States treasury obligations................ $ 0 $ 7,955,000
Federal agency obligations and discount notes..... 3,418,000 2,686,000
Government agency obligations..................... 2,935,000 3,389,000
Corporate and municipal bonds..................... 1,882,000 2,734,000
---------- -----------
$8,235,000 $16,764,000
---------- -----------
---------- -----------
</TABLE>
The maturities of all classes of the Company's assets were less than two
years at December 31, 1998 and 1997.
F-6
<PAGE>
OSTEX INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, PLANT & EQUIPMENT
Property, plant & equipment at December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Leasehold improvements............................ $ 2,426,000 $ 2,426,000
Laboratory and manufacturing equipment............ 1,304,000 1,277,000
Computers and office equipment.................... 1,050,000 975,000
----------- -----------
4,780,000 4,678,000
Accumulated depreciation and amortization......... (2,398,000) (1,713,000)
----------- -----------
Net property, plant & equipment................... $ 2,382,000 $ 2,965,000
----------- -----------
----------- -----------
</TABLE>
4. OTHER ASSETS
Other assets represent a $599,000 investment in preferred stock of Metrika,
Inc., a privately held development stage, medical device company. The investment
is recorded in the accompanying financial statements at cost and represents an
ownership interest of less than 10%.
5. NOTE PAYABLE
In July 1996, the Company borrowed $746,000 under a secured promissory note
agreement. The note is secured by real property and equipment and is payable in
equal monthly installments of principal and interest of $20,000. The interest
rate is 12.5% and the note agreement allows the Company to make additional
borrowings, up to a maximum of $1,500,000 for future capital needs.
Minimum principal payments are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999.............................................. 207,000
2000.............................................. 117,000
--------
$324,000
--------
--------
</TABLE>
6. SHAREHOLDERS' EQUITY
STOCK OPTION PLANS
The Company has three stock option plans; the Amended and Restated Stock
Option Plan (the "Old Plan"), the 1994 Stock Option Plan (the "1994 Plan"), both
administered by the Compensation Committee of the Board of Directors, and the
Directors' Nonqualified Stock Option Plan (the "Directors' Plan"), (collectively
the "Stock Option Plans"). The Old Plan no longer permits additional stock
option grants. Shares of common stock reserved for issuance to the Company's
employees and directors under the 1994 Plan and the Directors' Plan are
1,750,000 and 350,000, respectively, and shares available for grant under the
1994 Plan and the Directors' Plan at December 31, 1998 are 354,900 and 110,000,
respectively. These options generally vest ratably over three to four years. All
options granted under these plans expire upon the earlier of 90 days after
termination of employment or 10 years from the date of grant. Options are
granted with exercise prices equal to fair market value.
F-7
<PAGE>
OSTEX INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
Information relating to stock options outstanding and stock options
exercisable at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------- OPTIONS EXERCISEABLE
WEIGHTED --------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING LIFE AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES SHARES IN YEARS EXERCISE PRICE SHARES EXERCISE PRICE
- - ---------------- --------- ----------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ .08 - $ 1.75 207,050 7 $ .81 78,750 $ .42
$2.10 - $ 5.00 1,596,287 9 $ 3.17 671,856 $ 3.26
$5.63 - $17.13 32,750 7 $10.87 29,032 $11.45
--------- --------- ------
1,836,087 9 $ 3.04 779,638 $ 3.28
--------- --------- ------
--------- --------- ------
</TABLE>
Information relating to stock options activity is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- --------------------- --------------------
WTD AVG WTD AVG WTD AVG
SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
--------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period...... 1,962,301 $3.34 1,827,626 $6.61 1,431,279 $4.51
Granted................................. 338,500 1.91 2,227,925 3.76 446,000 12.30
Exercised............................... -- -- (184,000) 1.37 (8,950) 4.56
Canceled................................ (464,714) 3.47 (1,909,250) 7.14 (40,703) 9.64
--------- ---------- ---------
Outstanding at end of period............ 1,836,087 $3.04 1,962,301 $3.34 1,827,626 $6.61
--------- ---------- ---------
--------- ---------- ---------
Exerciseable at end of period........... 779,638 $3.28 481,451 $3.34 914,029 $4.03
Weighted average fair value of options
granted............................... $ 1.36 $ 2.24 $ 7.00
</TABLE>
Options outstanding have weighted average remaining contractual lives of
nine and eight years at December 31, 1998 and 1997.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
for stock options issued at market value on the date of grant. Had compensation
cost for the Company's stock option plans been determined based on the fair
value of the options at the grant date for awards in 1998, 1997 and 1996
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per common equivalent share would have changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net loss--as reported.............. $(8,095,000) $(2,264,000) $(8,070,000)
Net loss--pro forma................ $(8,513,000) $(2,222,000) $(8,729,000)
Basic and diluted net loss per
common and common equivalent
share--as reported............... $ (.64) $ (.18) $ (.65)
Basic and diluted net loss per
common and common equivalent
share--pro forma................. $ (.67) $ (.18) $ (.70)
</TABLE>
F-8
<PAGE>
OSTEX INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
The fair value of each option grant is established on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for new grants in 1998: zero dividend yield; expected
volatility of 88%; average risk-free interest rate of 5.0%; and expected lives
of five years. Assumptions for options granted in 1997 were: zero dividend
yield; expected volatility of 85%; average risk-free interest rates of 6.8%; and
expected lives of five years. Assumptions for options granted in 1996 were: zero
dividend yield; expected volatility of 59%; average risk-free interest rates of
6.1%; and expected lives of five years. The difference between reported and pro
forma net loss in 1997 was a $42,000 credit to income as the model recognizes
canceled options in the period they occur. The SFAS No. 123 method of accounting
has not been applied to options granted prior to January 1, 1995, therefore the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
7. LICENSING AGREEMENTS
Under the Company's license agreements with the Washington Research
Foundation ("WRF"), the Company has the worldwide exclusive right to
commercialize technology developed from certain research by the University of
Washington ("UW"). As consideration for the licenses acquired and for the
attainment of certain milestones, the Company paid WRF certain nonrefundable
fees and issued common stock to the WRF and UW. In addition, future cash
payments and common stock grants may be due upon attainment of certain other
milestones. All legal costs incurred by WRF in connection with the filing,
prosecution, and maintenance of certain defined patent rights are paid by the
Company. During 1998, 1997 and 1996, the Company incurred approximately
$150,000, $123,000 and $154,000 of patent expenses. The Company is obligated to
pay WRF royalties on net sales of any licensed products.
8. REVENUES
The Company has a sublicense agreement and a research and development
agreement with Mochida Pharmaceutical Co., Ltd. ("Mochida"). Under the
sublicense agreement, the Company granted exclusive manufacturing, marketing and
distribution rights to certain of the Company's products in Japan. Through
December 31, 1998, the Company had earned fees and milestone payments of
$2,000,000, including $450,000 in 1997 and none in 1998 and 1996. The Company
has received all milestone payments to be earned in connection with the license
agreement for the urine test. Mochida has an option to license the Company's
serum test. Under the research and development agreement, the Company earned no
payments during 1998 and 1997 and $1,080,000 during 1996.
9. RELATED PARTY TRANSACTIONS
RESEARCH AGREEMENTS
The Company has entered into two research agreements with the University of
Washington which extend through December 31, 2000. Total expense was $367,000,
$499,000 and $304,000 during 1998, 1997 and 1996, respectively. Minimum payments
in 1999 and 2000 under these agreements will be $160,000 and $150,000,
respectively.
F-9
<PAGE>
OSTEX INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has entered into noncancelable operating leases for office space
and certain equipment. Future minimum payments under these leases are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999.............................................. $501,000
2000.............................................. 494,000
2001.............................................. 496,000
2002.............................................. 527,000
2003.............................................. 527,000
----------
$2,545,000
----------
----------
</TABLE>
Total rent expense was approximately $481,000, $584,000 and $538,000 in
1998, 1997 and 1996, respectively.
LITIGATION
In June 1996, the Company filed an action in the United States District
Court for the Western District of Washington against Osteometer Biotech A/S, a
medical technology company based in Denmark ("Osteometer"), and Diagnostic
Systems Laboratories Inc. for patent infringement. The Company believes
Osteometer's bone resorption immunoassay incorporates technology which infringes
patented Ostex technology. The lawsuit is currently scheduled for trial
commencing August, 1999. At the present time management cannot predict the
outcome of the lawsuit but intends to continue to vigorously assert its
position.
11. OTHER INCOME--PROCEEDS FROM LEGAL SETTLEMENT
On November 4, 1997, the Company announced settlement with Boehringer
Mannheim GMBH ("Boehringer Mannheim") under which the Company received a lump
sum payment of $6,200,000. The settlement between the two parties was the result
of a ruling by the American Arbitration Association awarding damages to the
Company in connection with a dispute between the Company and Boehringer
Mannheim.
12. FEDERAL INCOME TAXES
Deferred taxes are determined using an asset and liability approach.
The Company has incurred operating losses since inception and accordingly
has determined that the net deferred tax assets do not satisfy recognition
criteria. Therefore, a valuation allowance has been recorded against the net
deferred tax assets and no tax benefit has been recorded in the accompanying
F-10
<PAGE>
OSTEX INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. FEDERAL INCOME TAXES (CONTINUED)
statement of operations. The change in the valuation allowance during 1998 and
1997 was $2,966,000 and $586,000, respectively. The Company's deferred tax
assets (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net operating loss carryforward................... $ 12,512,000 $ 10,039,000
Research and experimentation credits.............. 588,000 363,000
Excess of market value over the exercise price of
common stock options............................ -- 77,000
Property, plant and equipment..................... 145,000 (47,000)
Other............................................. 221,000 68,000
------------ ------------
Gross deferred tax asset.......................... 13,466,000 10,500,000
Valuation allowance............................... (13,466,000) (10,500,000)
------------ ------------
Net deferred tax asset............................ $ -- $ --
------------ ------------
------------ ------------
</TABLE>
At December 31, 1998, the Company had tax net operating loss carryforwards
of $36,800,000 which expire between 2004 and 2018.
13. SUBSEQUENT EVENT
In January 1999, the Board of Directors approved a plan to repurchase up to
1,000,000 shares of the Company's common stock.
F-11
<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, 1998 and 1997, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ostex International, Inc. as
of December 31, 1998 and 1997 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington,
January 29, 1999
<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.
Shareholder Relations
85 Challenger Road
Ridgefield Park, NJ 07660
Website: www.chasemellon.com
INVESTOR RELATIONS
Lippert/Heilshorn & Associates, Inc.
300 Montgomery Street, Suite 1140
San Francisco, CA 94104
SEC FORM 10-K
A copy of the Company's annual report to the Securities and Exchange Commission
on Form 10-K is available without charge upon written request to Investor
Relations at the Company's headquarters.
SHAREHOLDERS OF RECORD
As of December 31, 1998, the Company had 133 registered shareholders of record
of its common stock.
SHAREHOLDER INQUIRIES
Communications concerning transfer requirements, lost certificates and changes
of address should be directed to the Transfer Agent. For general information
about the Company and its activities, contact the Investor Relations Department
at Company headquarters.
INFORMATION SERVICE
For timely information about Ostex, news releases are available via facsimile on
the Company's News-on-Demand service by calling (800) 356-8061 or on the World
Wide Web at http://www.hnt.com/ bizwire/cnn/451.htm.
<PAGE>
PRICE RANGE OF COMMON STOCK
The following table lists the high and low trading prices for the Company's
common stock as reported on the Nasdaq National Market System.
<TABLE>
<CAPTION>
1998 HIGH LOW
- - ----------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1st quarter............................................................ $ 3.06 $ 1.88
2nd quarter............................................................ 3.00 1.25
3rd quarter............................................................ 2.00 0.31
4th quarter............................................................ $ 1.00 $ 0.34
<CAPTION>
1997 HIGH LOW
- - ----------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1st quarter............................................................ $ 7.88 $ 3.75
2nd quarter............................................................ 4.38 1.94
3rd quarter............................................................ 4.13 2.25
4th quarter............................................................ $ 4.50 $ 2.13
</TABLE>
The Company's common stock is traded on the Nasdaq National
Market-Registered Trademark-under the symbol OSTX. No dividends have been paid
on the common stock.
ANNUAL MEETING
The Annual Meeting of Shareholders will be held Thursday, June 3, 1999, at 9:00
am at the Sheraton Seattle Hotel & Towers, Seattle, Washington.
OSTEX WEBSITE
For more information about Ostex, visit http://www.ostex.com.
Osteomark and Ostex are registered trademarks of Ostex International, Inc.
Nasdaq National Market is a registered trademark of the National Association of
Securities Dealers, Inc.
2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K into the Company's previously filed
Registration Statement Nos. 333-4802 and 333-44143.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington
March 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,744,000
<SECURITIES> 8,235,000
<RECEIVABLES> 518,000
<ALLOWANCES> 80,000
<INVENTORY> 247,000
<CURRENT-ASSETS> 12,084,000
<PP&E> 2,382,000
<DEPRECIATION> 685,000
<TOTAL-ASSETS> 15,065,000
<CURRENT-LIABILITIES> 1,460,000
<BONDS> 0
0
0
<COMMON> 127,000
<OTHER-SE> 13,361,000
<TOTAL-LIABILITY-AND-EQUITY> 15,065,000
<SALES> 3,047,000
<TOTAL-REVENUES> 3,047,000
<CGS> 814,000
<TOTAL-COSTS> 814,000
<OTHER-EXPENSES> 11,023,000
<LOSS-PROVISION> 55,000
<INTEREST-EXPENSE> 52,000
<INCOME-PRETAX> (8,095,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,095,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,095,000)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
