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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
-- or --
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
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FOR THE TRANSITION PERIOD FROM TO
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0-25250
COMMISSION FILE NUMBER
OSTEX INTERNATIONAL, INC.
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
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STATE OF WASHINGTON 91-1450247
STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION I.R.S. EMPLOYER IDENTIFICATION NUMBER
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2203 AIRPORT WAY SOUTH, SUITE 400, SEATTLE, WASHINGTON 98134
206-292-8082
ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES
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Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the
(none) (none) Act:
TITLE OF CLASS EACH EXCHANGE ON WHICH REGISTERED COMMON STOCK, $.01 PAR VALUE
TITLE OF CLASS
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Indicate by check mark whether the registrant (1) has filed all Yes [ X ]
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing No [ ]
requirements for the past 90 days.
Indicate by check mark if disclosure of delinquent filers [ X ]
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant was approximately $47,833,000 on March 16,
2000, based on the per-share closing price of $4.81 on the Nasdaq National
Market.
The number of shares of Common Stock outstanding as of March 16, 2000 was
12,479,139.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1999 is incorporated by reference into Part I, Part
II and Part III of this Form 10-K.
(2) Portions of the Registrant's Proxy Statement for the Registrant's Annual
Shareholders Meeting to be held Wednesday, May 24, 2000, to be filed
pursuant to Regulation 14A is incorporated by reference into Part III of
this Form 10-K.
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OSTEX INTERNATIONAL, INC.
INDEX TO FORM 10-K
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PART I
PAGE
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ITEM 1 BUSINESS 2
ITEM 1A RISK FACTORS 4
ITEM 1B EXECUTIVE OFFICERS OF THE REGISTRANT 9
ITEM 2 PROPERTIES 10
ITEM 3 LEGAL PROCEEDINGS 10
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS 11
ITEM 6 SELECTED FINANCIAL DATA 12
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 12
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 12
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 12
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 13
ITEM 11 EXECUTIVE COMPENSATION 13
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 13
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 13
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 14
SIGNATURES 17
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For the purpose of this Form 10-K, the following capitalized terms shall have
the following meanings:
"Company" or "Ostex" shall mean Ostex International, Inc., a Washington
corporation;
"Annual Report to Shareholders" shall mean the annual report to
shareholders of Ostex International, Inc. for the year ended December 31, 1999;
and
"Proxy Statement" shall mean the proxy statement for the 2000
shareholders meeting of Ostex International, Inc. to be held Wednesday, May 24,
2000, to be filed with the Securities and Exchange Commission (the "Commission")
pursuant to Regulation 14A.
PART I
When used in this report and in the Company's Annual Report to
Shareholders (which discussion has been incorporated herein by reference), the
words "believes," "intends", "anticipates," "plans to" and "expects" and similar
expressions are intended to qualify as forward-looking statements. Such
statements are subject to certain risks and uncertainties and there are a number
of important factors that could cause actual results to differ materially from
those projected. These factors include, among others, the factors described
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Other Factors that May Affect Operating Results" in the Company's
Annual Report to Shareholders and the risk factors included herein. Readers are
cautioned not to place undue reliance on such forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
release publicly the results of any revisions to such forward-looking statements
that may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
ITEM 1. BUSINESS
Ostex was incorporated in the State of Washington in 1989. The Company is
engaged in the discovery and commercialization of products associated with
osteoporosis and other collagen-related diseases. The Company believes that its
lead product, the OSTEOMARK-registered trademark- test, incorporates
breakthrough and patented technology in the area of bone resorption measurement.
Ostex has formed collaborative relationships with leading diagnostic and
pharmaceutical companies to aid in the commercialization of Osteomark. As of
December 31, 1999, the Company had 35 employees.
Osteoporosis is a significant health problem. According to the National
Osteoporosis Foundation (the "NOF"), osteoporosis afflicts approximately 30
million people in the U.S. alone. Additionally, millions of people are at risk
of skeletal degradation associated with Paget's disease of bone, cancer that
metastasizes to bone, hyperparathyroidism (overactivity of the parathyroid
gland, characterized by a reduction of bone mass) and renal osteodystrophy. In
spite of the serious human and economic consequences of these diseases
(according to the NOF, the direct healthcare and indirect lost productivity
costs of osteoporosis exceed $10 billion annually in the U.S. alone), medical
intervention usually commences only after pain, immobility, fractures, or other
symptoms have appeared. The Company expects the osteoporosis therapeutic market
will increase significantly. The Company also believes new therapeutic products
are under development for osteoporosis, some of which are in late-stage clinical
trials, and that the Osteomark test can be used to effectively predict a
patient's response to osteoporosis therapy and monitor existing therapies and
other therapies which may be developed.
The Company is the exclusive licensee of the Osteomark technology, known
clinically as the NTx test, which is available in urine and serum formats that
can aid in healthcare decision-making at early menopause and beyond. The
Osteomark test is a non-invasive diagnostic test which quantitatively indicates
the level of bone resorption. Individuals who are losing bone collagen at
accelerated rates may indicate a condition which typically results in
osteoporosis. The Company believes that early identification of high levels of
bone resorption provides the opportunity to predict skeletal response (bone
mineral density) to hormonal antiresorptive and other osteoporosis therapies in
postmenopausal women and helps prevent the onset of osteoporosis. The Company
also believes that the Osteomark test aids clinicians in monitoring the
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effects of antiresorptive therapies in postmenopausal women, as well as in older
patients who have already lost significant bone mass.
On May 8, 1995, the Company's Osteomark test became commercially
available in the United States as a urinary test that provides a quantitative
measure of the excretion of cross-linked N-telopeptides of Type I collagen (NTx)
as an indicator of human bone resorption, and in July 1996 the Company received
expanded claims for the test. The 1996 claims allow that an Osteomark test
measurement, if taken prior to the initiation of hormonal antiresorptive
therapy, can be utilized to predict a patient's response to that therapy, in
terms of its effect on bone mineral density. Additionally, the claims allow that
the test can be used for therapeutic monitoring of antiresorptive therapies in
postmenopausal women, as well as individuals diagnosed with osteoporosis and
Paget's disease, and for therapeutic monitoring of estrogen-suppressing
therapies. In March 1998, the claims were further expanded by allowing that, in
addition to the 1996 claims, an Osteomark test measurement can identify the
probability for a decrease in bone mineral density in postmenopausal women
taking calcium supplements relative to those treated with hormonal
antiresorptive therapy. The Company is manufacturing and marketing the Osteomark
test in an Enzyme-linked Immunosorbent Assay ("ELISA") format for testing urine
or serum samples.
In February 1999, the Company began commercially marketing Osteomark NTx
Serum. Osteomark NTx Serum is the first and only commercially available test in
the United States that measures specific bone breakdown by osteoclasts using a
blood sample. The Company believes that the use of a serum NTx test provides a
number of advantages to testing laboratories, including the elimination of the
requirement to normalize NTx values to creatinine concentration.
Worldwide promotion of the Osteomark urine test kits is also supported by
Johnson & Johnson Clinical Diagnostics, Inc. ("Johnson & Johnson"). In 1995 the
Company entered into research, development, license and supply agreements with
Johnson & Johnson. These agreements grant Johnson & Johnson a license to
manufacture, sell and distribute certain products using Ostex's bone resorption
technology. Currently, Johnson & Johnson distributes in the United States and
certain foreign countries the Osteomark test in the existing microtiter plate
format and has adapted the urine test for use with its automated analyzer. Ostex
receives royalties on Johnson & Johnson's sales of products incorporating the
Ostex technology.
Under the Johnson & Johnson license agreement, the Company has the right
to license its technology for use on automated instruments to one other company
in addition to Johnson & Johnson. The Company is currently evaluating other
potential collaborators to adapt the Osteomark test to other high-speed
automated instruments.
In the year ended December 31, 1999, the Company's largest customer,
Johnson & Johnson, accounted for approximately 14% of the Company's product
sales. The termination of the Company's relationship with Johnson & Johnson
could have a material adverse effect on the Company's results of operations. See
"Risk Factors - Reliance on Collaborative Agreements and Certain Relationships".
In 1992, Ostex entered into a research and development agreement and a
license agreement with Mochida Pharmaceutical Co., Ltd. ("Mochida"), a Japanese
pharmaceutical company, for the commercialization of the Osteomark test in
Japan. Under the research and development agreement, Mochida has an option to
license the NTx serum test and has paid Ostex $3,350,000 in development fees to
date. Future payments of $750,000 under the agreement are contingent upon
Mochida's decision to exercise its option. Under the license agreement, Ostex
granted Mochida exclusive marketing and distribution rights to certain Ostex
products in Japan. Since 1992, Mochida has paid Ostex $2,500,000 in licensing
fees for the Osteomark test. In January 1998, Mochida launched the Osteomark
test in Japan for the management of patients with hyperparathyroidism and for
patients with metastatic bone tumors. During 1999, Ostex sold Mochida the
critical reagents to be assembled into finished products in Japan by Mochida.
Beginning in 2000, Ostex will sell the finished product to Mochida.
The Company also plans to develop and market the Osteomark test in other
formats, including formats suitable for use in the physician's office. The
Company has an agreement with Metrika, Inc. ("Metrika"), a diagnostic device
company, to develop a physician's office "point-of-care" Osteomark test device.
The
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Company and Metrika have developed this fully disposable point-of-care NTx
test as an indicator of bone resorption that computes an NTx value and displays
it digitally.
OSTEOMARK and OSTEX are registered United States ("U.S.") trademarks of
the Company. The Company has also registered its OSTEOMARK trademark in 46 other
countries. Additional trademark applications are pending.
The Company's collagen breakdown test technology is covered by 29 U. S.
patents, 4 European patents, 5 Japanese patents, and patents in Australia,
Canada, Ireland, Korea, Russia, Spain, Hong Kong, and Singapore. Three of the
European patents and two of the Japanese patents are in opposition proceedings.
Additional patent applications are pending. See "Risk Factors - Dependence on
Licensed Patents and Proprietary Rights". The Company's patents are variously
directed to type I collagen breakdown products including NTx, CTx, and
deoxypyridinoline, as well as related breakdown products of type II and type III
collagen. The Company's patents will expire in 2007 or later.
The Company's research and development expenditures, all of which were
funded by the Company, totaled $1,734,000, $2,901,000, and $4,470,000, in 1999,
1998 and 1997, respectively.
The Company's product sales from external customers in foreign countries
totaled $822,000, $517,000, and $652,000, in 1999, 1998 and 1997, respectively.
Foreign sales were primarily to Europe, Canada and South America.
The Company's international business is subject to risks of currency
fluctuations, governmental actions and other governmental proceedings abroad.
The Company does not regard these risks as a deterrent to further expansions of
its operations abroad. However, the Company closely reviews its methods of
operations and adopts strategies responsive to changing economic and political
conditions.
The Company is developing an assay for Type II collagen degradation.
Type II collagen is a primary constituent of joint cartilage. Osteoarthritis, a
degenerative disease of joint cartilage, affects over 15 million people in the
United States alone. The disease first appears in a limited number of joints.
The first symptom, joint pain, occurs after substantial cartilage damage has
taken place. Eventually, pain and tenderness increase and the joint motion
becomes diminished. The Ostex Type II collagen degradation test under
development has been designed to allow reliable monitoring of joint cartilage
changes for validating the effectiveness of drugs under development and for
identifying patients with early-stage disease. In addition, similar to the
Osteomark test used in connection with osteoporosis, the Company believes that
the Type II collagen degradation test will aid in the clinical management of
osteoarthritis patients by monitoring the effectiveness of therapy.
Ostex is investigating the use of its NTx test in cancer patient
management. Independent researchers have shown that the level of bone resorption
increases significantly when cancer metastasizes to bone. A patient's NTx level
may be useful to identify cancer patients with elevated bone turnover who might
warrant a bone scan to detect metastatic bone disease.
Ostex is also in the early stages of developing an assay for measuring
Type III collagen degradation. Type III collagen is a significant constituent of
blood vessels such as coronary arteries. Measuring degradation of this type of
collagen may be useful in identifying cardiovascular disease.
ITEM 1A. RISK FACTORS
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's lead product, the Osteomark test, became commercially
available in May 1995 in the U.S. and sales have not been significant enough to
generate net income. There can be no assurance that the Company's Osteomark test
or any of its other products will gain acceptance from the medical community,
clinical or hospital laboratories, physicians or patients as readily as other
forms of diagnosis or any newly
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developed diagnostic. There can be no assurance that the Company will be able to
develop significant market share for its products, or any market share at all.
Inability of the Company to achieve market acceptance for its products would
have a material adverse effect on the Company's business, financial condition
and results of operation.
DEPENDENCE ON CORE TECHNOLOGY; UNCERTAINTY OF ADAPTATION TO DIFFERENT FORMATS
The Company currently relies exclusively upon its core technology for the
development of diagnostic products associated with osteoporosis and other
collagen-related diseases. There can be no assurance that competitors of the
Company will not be successful in developing new or more efficient or
cost-effective diagnostics that are more readily accepted than the Company's
products. The Company is in the process of undertaking ongoing and additional
research and development to adapt its core technology to different formats,
instruments and other delivery platforms that currently exist or may be
developed. In particular, additional research and development will be required
to adapt its core technology to high-speed, high-volume automated instruments
typically used in large clinical laboratories or companies through which the
Company may seek to expand the market for its products. There can be no
assurance that the Company will be successful in adapting and further developing
its core technology to meet such needs. The Company is developing physician
office adaptations of its core technology. There can be no assurance that the
Company or its development partner will either successfully develop or obtain
required regulatory approval for a cost-effective instrument for physician
office use. In addition, technological changes or medical advancements could
diminish or eliminate the commercial viability of the Osteomark test or future
products based upon the Company's core technology. The failure to adapt the
Company's core technology to different formats, instruments and other delivery
platforms, or otherwise to commercialize such core technology, would have a
material adverse effect on the Company's business, financial condition and
results of operation.
RELIANCE ON COLLABORATIVE AGREEMENTS AND CERTAIN RELATIONSHIPS
The Company has entered into collaborative or co-promotional agreements
with several partners, including, among others, Johnson & Johnson, Mochida and
Wyeth-Ayerst Laboratories, and intends to appoint a second international
distributor for its automated instrument application. The level of each
partner's involvement and support and the amount and timing of resources that
these collaborators devote to these activities are not within the control of the
Company and can significantly impact the Company's ability to achieve its
objectives. There can be no assurance that these collaborators will perform
their contractual obligations as expected or that the Company will derive any
additional revenue from such arrangements. Moreover, the agreements may be
terminated under certain circumstances. The Company expects to rely on these and
additional agreements to develop and commercialize its future products. There
can be no assurance that the Company will be able to negotiate acceptable
collaborative agreements in the future or that such new agreements or existing
agreements will be successful. In addition, there can be no assurance that the
parties to the agreements will not pursue alternative technologies.
LIMITED SALES AND MARKETING EXPERIENCE
The Company has limited experience in sales, marketing and distribution.
To market any of its products directly, the Company must develop and implement a
substantial marketing and sales effort with technical expertise and supporting
distribution capability. The Company intends to continue to market and sell its
products in the U.S. through research and clinical laboratories, other
companies, and collaborative arrangements and sell its products in other markets
through distributors or collaborative arrangements. There can be no assurance
that the Company will be able to establish effective sales and distribution
capabilities or that its collaborators will be successful in gaining market
acceptance for the Company's products or that the Company will achieve or
maintain significant market share for its products.
DEPENDENCE ON LICENSED PATENTS AND PROPRIETARY RIGHTS
The Company's success depends, in large part, on its current and future
patent position relating to its core technology. The Company's patent position
involves complex legal and factual questions. The Company is the exclusive
licensee of certain patents within and outside of the U.S. relating to the
Company's core technology. Claims made under patent applications may be denied
or significantly narrowed, and
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issued patents may not provide significant commercial protection to the Company.
There is no assurance that the Company's patents will not be successfully
challenged or circumvented by others. The Company could incur substantial costs
in proceedings before the U.S. Patent Office, including interference
proceedings. These proceedings could also result in adverse decisions as to the
patentability of the Company's licensed or assigned inventions. There can be no
assurance that the Company's products do not or will not infringe on the patent
or proprietary rights of others. The Company may be required to obtain
additional licenses to the patents or other proprietary rights of others. The
Company may also require licenses from the inventors of certain processes,
technologies and assay formats in order to successfully market certain products.
There can be no assurance that any such licenses would be made available on
terms acceptable to the Company, if at all. If the Company needs and cannot or
does not obtain such licenses, it could encounter delays in product
introductions while it attempts to circumvent such patents or the development,
manufacture, or sale of products requiring such licenses could be precluded. The
Company believes there will continue to be significant litigation in the
industry regarding patent and other intellectual property rights.
The Company is aware of competitors that are developing products that may
be covered by claims made in patents or patent applications of the Company.
Because certain foreign patents are subject to third-party opposition following
the date of grant of such patents, there can be no assurance that claims of the
Company's foreign patents, once granted, will survive such opposition without
cancellation or significant modification. Because U.S. applications are
confidential until a patent issues, the Company cannot be assured that its
patent claims have priority in the U.S. or will be entitled to patent
protection.
The Company also relies on trade secrets and other unpatented proprietary
technology. No assurance can be given that the Company can meaningfully protect
its rights in such unpatented technology or that others will not independently
develop substantially equivalent products and processes or otherwise gain access
to the Company's technology. The Company seeks to protect its trade secrets and
proprietary know-how, in part, with confidentiality agreements with its
employees and consultants. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known or be
independently developed by competitors. In addition, protracted and costly
litigation may be necessary to enforce and determine the scope and validity of
the Company's proprietary rights.
LENGTHY REGULATORY PROCESSES AND UNCERTAINTY OF REGULATORY APPROVALS
The process of obtaining Food and Drug Administration (FDA) and other
required regulatory approvals can be lengthy and expensive. The time required
for approvals is uncertain, and often depends on the type, complexity and
novelty of the product. There can be no assurance that regulatory agencies will
act favorably or quickly in their review of any submission by the Company, and
significant difficulties or costs may be encountered by the Company in its
efforts to obtain approvals that could delay or preclude the Company from
marketing its products. Furthermore, there can be no assurance that the agency
will not request the development of additional data following original
submissions, causing the Company to incur further cost and delay. Nor can there
be any assurance that the FDA will not restrict the intended use of a submitted
product as a condition for clearance.
If the FDA concludes that a device is not substantially equivalent to
another legally marketed device, submission of a premarket approval ("PMA")
application will be required. If the FDA indicates that a PMA is required for
any product of the Company, the application will require submission of results
of clinical studies and manufacturing information, and likely a review by a
panel of experts outside of the FDA. Clinical studies would need to be conducted
in accordance with FDA requirements. The failure to comply would result in the
FDA's refusal to accept the data or the imposition of regulatory sanctions. FDA
review of a PMA application can take significantly longer than that for a
premarket notification "510(k)" application to demonstrate "substantial
equivalence" to a legally marketed product. Further, if a company wishes to
propose modifications to a product subsequent to FDA approval of a PMA
application, including changes in indications or other significant modifications
to labeling, or modifications to the manufacturing process, or if a company
wishes to change its manufacturing facility, a PMA supplement must first be
submitted to the FDA for its review and approval.
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EXTENSIVE CONTINUING GOVERNMENT REGULATION
The research, development, manufacturing and marketing of the Company's
products are subject to extensive continuing regulation by numerous governmental
authorities in the U.S. and certain other countries, and the Company, its
products, and its manufacturing facilities are subject to continual review and
periodic inspection. The regulatory standards for manufacturing are applied
stringently by the FDA. Discovery of previously unknown problems with a product,
manufacturer, or facility may result in restrictions on such product or
manufacturer or facility, including warning letters, fines, suspensions of
regulatory approvals, product recalls, operating restrictions, delays in
obtaining new product approvals, withdrawal of the product from the market, and
criminal prosecution. Other violations of FDA requirements can result in similar
penalties. The Company is also subject to numerous environmental, health and
workplace safety laws and regulations, including those governing laboratory
procedures, exposure to blood-borne pathogens, and the handling of biohazardous
materials. Any violation of, and the cost of compliance with, these laws and
regulations could adversely impact the Company's operations. The Company is
unable to predict the extent or likelihood of adverse government regulation that
might arise from future U.S. or foreign government action.
LIMITED MANUFACTURING EXPERIENCE
The Company is developing adaptations of its core technology for use
in physicians' offices and depends upon the efforts of collaborators for this
development. Such adaptations have not been fully completed and there can be no
assurance that, if developed, such adaptations could be manufactured in a
commercially viable manner. Unless the Company develops additional in-house
manufacturing capability for such products, it will be dependent upon outside
sources for the manufacture of such products. There can be no assurance that the
Company's reliance on others for the manufacture of its products will not result
in problems with product supply. Interruptions in the availability of products
could delay or prevent the development and commercial marketing of the Company's
products.
HISTORY OF LOSSES AND LIMITED OPERATING HISTORY
The Company has a limited operating history and had a retained deficit
through December 31, 1999 of $33,793,000. For the year-end December 31, 1999,
the Company had a net loss of $1,570,000. The Company expects to incur
additional costs as it continues with its operations, marketing efforts,
research and development activities, and clinical trials. The Company expects to
continue to incur losses in future periods and the Company is unable to predict
when, if at all, it will achieve profitability.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING
The Company's future capital requirements depend upon many factors,
including the effectiveness of Osteomark NTx Serum and Urine tests
commercialization activities and arrangements; continued scientific progress in
its research and development programs; the costs involved in filing, prosecuting
and enforcing patent claims; the manufacturing needs for new products; and the
time and costs involved in obtaining regulatory approvals. Additional funds from
equity or debt financing may be required. There can be no assurance that such
additional funds will be available on favorable terms, if at all. Because of the
Company's significant long-term cash requirements, it may seek to raise
additional capital if conditions in the public equity markets are favorable or
through private placements, even if the Company does not have an immediate need
for additional cash at that time. If additional financing is not available, the
Company believes that its existing available cash, its future license and
research revenues from existing collaboration agreements, its current level of
product sales and interest income from short-term investments will be adequate
to fund operations into the foreseeable future.
INTENSE COMPETITIVE ENVIRONMENT
Competition from biotechnology companies, diagnostic companies,
pharmaceutical companies, and research and academic institutions is intense and
is based on price as well as product performance. A number of diagnostic tests
and procedures, and other non-invasive tests for osteoporosis and other bone
disorders currently exist and others are in development, and the manufacturers
of these tests will continue to
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improve them. In addition, the diagnostic industry is subject to rapid
technological change. There can be no assurance that the Company's competitors
will not succeed in developing products that are more effective or less
expensive than those which have been or are being developed by the Company or
which would render the Company's core technology obsolete or non-competitive.
Many of the Company's competitors have substantially greater financial,
technical and human resources than the Company. In addition, many of these
competitors have significantly greater experience and resources than the Company
in undertaking clinical trials and other regulatory approval procedures as well
as in marketing and achieving manufacturing efficiencies. There are also small
companies, academic institutions, governmental agencies and other research
organizations that are conducting research in the area of osteoporosis and other
collagen-related diseases. These entities may also market commercial products
either on their own or through collaborative efforts. The Company's competitors
may develop technologies and products that are available for sale prior to the
Company's products or at a lower cost or with better technical characteristics
rendering the Company's products less competitive.
DEPENDENCE ON THERAPEUTICS DEVELOPED BY OTHERS
Acceptance of and demand for the diagnostic products that the Company is
developing will be affected by the need perceived by physicians to diagnose
bone, cartilage and connective tissue disorders for the purposes of treatment.
There are currently a limited number of therapies that are effective in
preventing osteoporosis or other bone, cartilage or connective tissue disorders,
or in treating these disorders once diagnosed. In the event new therapies do not
receive regulatory approval or experience delayed market acceptance, the Company
could be adversely affected. Unfavorable publicity concerning a product of the
Company or therapeutic products for osteoporosis could also have an adverse
effect on the Company's ability to obtain regulatory approvals or to achieve
market acceptance.
UNCERTAINTY OF HEALTHCARE REIMBURSEMENT
The Company's ability to commercialize its products will depend in part
on the extent to which reimbursement for the cost of such products and related
treatment will be available from third-party payors, such as government health
administration authorities, private health coverage insurers and other
organizations. The status of the scope of healthcare programs worldwide is
uncertain and there can be no assurance that adequate third-party coverage will
be available for the Company to maintain price levels sufficient for realization
of an appropriate return on its investment in product development. Third-party
payors are increasingly challenging the price and cost effectiveness of medical
products and services. If the Company succeeds in bringing one or more products
to the market, there can be no assurance that these products will be considered
cost effective and that reimbursement to the consumer will be available or
sufficient to allow the Company to sell its products on a competitive basis.
VOLATILITY OF STOCK PRICE
The volatility of the Company's stock price has been significant since it
first became publicly traded in January 1995. The stock market may experience
significant price and volume fluctuations unrelated to the operating performance
of particular companies. Factors such as any loss of key management, the results
of the Company's clinical trials or those of its competitors, adverse regulatory
actions or decisions, evidence regarding the safety or efficacy of the Company's
products or those of its competitors, announcements of technological innovations
or new products by the Company or its competitors, governmental regulation,
developments with respect to patents or other proprietary rights, product or
patent litigation or public concern as to the safety of products developed by
the Company may have a volatile effect on the market price of the Company's
Common Stock.
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ITEM 1B. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages are as follows:
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NAME AGE POSITION
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Thomas A. Bologna 51 Chairman, President and Chief Executive
Officer
Thomas F. Broderick 51 Vice President, Patent and General Counsel
J. Daniel Clemens 43 Vice President, Product Development
Michael C. Perry 55 Vice President, Sales and Marketing
Nancy J.S. Mallinak 38 Vice President, Regulatory and Clinical
Affairs
Cory J. Smith 49 Vice President, Manufacturing
</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 to July 1997 Mr. Bologna was a principal in Healthcare Venture Associates,
a consulting firm. From January 1994 to January 1996 Mr. Bologna was President
and Chief Executive Officer for Scriptgen Pharmaceuticals, Inc., a biotechnology
company with proprietary drug screening and development technology that is
developing orally active drugs to regulate gene expression, and from July 1987
to January 1994 Mr. Bologna was the Chairman of the Board of Directors and
President and Chief Executive Officer of Gen-Probe Incorporated, a biotechnology
company commercializing genetic-probe-based technology for diagnostic and
therapeutic applications.
THOMAS F. BRODERICK was named the Vice President, Patent and General
Counsel in November 1997. Mr. Broderick was Vice President, Intellectual
Property from March 1997 to November 1997 and was Patent Counsel for the Company
from April 1996 to March 1997. From 1989 to March 1996, Mr. Broderick was a
partner at the patent law firm of Christensen, O'Connor, Johnson & Kindness in
Seattle, Washington.
J. DANIEL CLEMENS was named the Vice President, Product Development in
September 1998. Mr. Clemens was Director of Research & Development for the
Company from May 1992 to September 1998 and Manager of Product Development from
October 1990 to May 1992. Prior to joining Ostex, Mr. Clemens was Senior
Research & Development Scientist from February 1987 to October 1990 at Genetic
Systems Corporation/Sanofi.
MICHAEL C. PERRY joined the Company in February 2000 as Vice President,
Sales and Marketing. Prior to joining Ostex, Mr. Perry was National Sales
Manager for Sarstedt, Inc., a privately held company. Prior to Sarstedt, Mr.
Perry was with Organon Teknika Corporation for over 20 years.
NANCY J.S. MALLINAK was named Vice President, Regulatory and Clinical
Affairs of the Company in February 1997. Ms. Mallinak was Director, Regulatory
and Clinical Affairs for the Company from June 1995 to February 1997 and was
Manager, Regulatory and Clinical Affairs for the Company from December 1992 to
June 1995. From June 1989 to December 1992, Ms. Mallinak was Manager, Clinical
Product Development in the Diagnostics Group of Baxter International, Inc., a
general healthcare company.
CORY J. SMITH was named Vice President, Manufacturing in September 1998.
Mr. Smith was Director of Manufacturing for the Company from October 1993 to
September 1998 and was the Manufacturing Engineer for the Company from September
1992 to October 1993. Prior to joining Ostex,
-9-
<PAGE>
Mr. Smith was the Quality Assurance Manager from June 1991 to September 1992 at
Genetic Systems Corporation/Sanofi.
ITEM 2. PROPERTIES
The Company's research laboratories, manufacturing operations, and
administrative offices are located in Seattle, Washington. The Company leases
approximately 32,000 square feet of space in Seattle under a lease that will
expire in 2005. The Seattle facility has adequate capacity for the Company's
present needs.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings is incorporated herein by
reference to note 10 in the "Notes to Financial Statements" on page 28 of the
Annual Report to Shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter ended December 31, 1999.
-10-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET PRICE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National
Market-registered trademark- under the symbol "OSTX". The following table lists
the high and low trading prices for the Company's Common Stock as reported on
the Nasdaq National Market.
<TABLE>
<CAPTION>
1999 HIGH LOW
-------------------------------------- ------- --------
<S> <C> <C>
1st quarter $2.44 $0.44
2nd quarter 1.75 0.97
3rd quarter 1.37 1.00
4th quarter 4.88 0.94
</TABLE>
<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
</TABLE>
The closing price of the Common Stock on December 31, 1999 was $3.00.
HOLDERS OF COMMON STOCK
As of March 16, 2000, there were 12,479,139 shares of Common Stock
outstanding held of record by approximately 133 shareholders. The Company
believes there are approximately 3,700 additional owners of Common Stock who own
shares held in street name.
DIVIDEND POLICY
The Company has never paid cash dividends and has no present intention of
paying dividends in the foreseeable future.
COMMON STOCK WARRANT
During the period covered by this report on Form 10-K, the Company
granted an unregistered warrant to an outside consultant for the purchase of
100,000 shares of Common Stock at an exercise price of $2.00, in exchange for
services to be provided to the Company. The warrant vests in twelve equal
monthly installments beginning one month after the grant date, March 23, 1999,
and expires three years from the grant date, March 22, 2002.
This warrant was exempt from registration under the Securities Act
pursuant to Section 4 (2) of the Securities Act on the basis that the
transaction did not involve a public offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C., Seattle, Washington.
-11-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference
to "Selected Financial Data" on page 16 of the Annual Report to Shareholders,
which is included as Exhibit 13.0 to this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated herein by reference
to pages 17-19 of the Annual Report to Shareholders, which is included as
Exhibit 13.0 to this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference
to the Financial Statements and "Notes to Financial Statements" on pages 20-29,
and "Report of Independent Public Accountants" on page 30, of the Annual Report
to Shareholders, which is included as Exhibit 13.0 to this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-12-
<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.
-13-
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS, AND
REPORTS ON FORM 8-K
A. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
(1) FINANCIAL STATEMENTS
The following financial statements and "Report on Independent
Public Accountants" are incorporated by reference to pages 20 through 30 of the
Annual Report to Shareholders and are listed below. Certain information provided
in the Annual Report to Shareholders is included as Exhibit 13.0 to this Annual
Report on Form 10-K.
<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>
(2) FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules have been omitted because of the
absence of conditions under which they are required or because the required
information is included in the financial statements or notes thereto.
(3) Exhibit Index (see note (1))
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
NUMBER DESCRIPTION NOTES
------ ----------- -----
<S> <C> <C>
3.1 Articles of Incorporation, as amended, dated January 1997 (2)
3.2 Bylaws, as amended (3)
4.1 Specimen Common Stock Certificate (3)
10.1A Amended and Restated Stock Option Plan* (3)
10.1B Form of Employee Stock Option Agreement* (3)
10.1C Form of Director's Stock Option Agreement* (3)
10.2 Amended and Restated Directors' Nonqualified Stock Option Plan dated July 16, (4)
1997*
10.3 Amended and Restated 1994 Stock Option Plan* (4)
AGREEMENTS WITH HOLOGIC, INC.
10.4A Co-Promotion and Sales Representation Agreement dated January 14, 1997 (5)(6)
10.4B Joint Development, License and Supply Agreement dated January 14, 1997 (5)(6)
10.5 Form of Indemnification Agreement with officers and directors* (3)
10.7 Agreement with Thomas A. Bologna Executive Employment Agreement dated July 16, (7)
1997*
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
Exhibit
NUMBER DESCRIPTION NOTES
------ ----------- -----
<S> <C> <C>
AGREEMENTS WITH MOCHIDA PHARMACEUTICAL CO., LTD.
10.12A Research and Development Agreement dated August 1992 (3)
10.12B Osteomark License Agreement Dated August 1992 (3)
10.12D Second Amendment to Osteomark License Agreement dated December 24, 1997 (5)
AGREEMENTS WITH THE WASHINGTON RESEARCH FOUNDATION
10.13A Restated Exclusive License Agreement effective June 19, 1992 (Urinary (3)
Assay for Measuring Bone Resorption)
10.13B Amendment to Restated Exclusive License Agreement effective January 1, (3)
1993
10.13C Second Amendment effective June 2, 1994 (3)
10.14 Exclusive License Agreement dated February 10, 1994 (O-CSF)
AGREEMENTS WITH THE UNIVERSITY OF WASHINGTON
10.15A Research Agreement dated July 1, 1996 (Molecular Markers of Connective (5)(6)
Tissue Degradation)
10.15B Research Agreement dated October 1, 1996 (Role of O-CSF in Osteoclast (5)(6)
Regulation)
10.16A Know-How Transfer and Consulting Agreement dated September 18, 1989 with (3)
David R. Eyre, Ph.D.*
10.16B Extension and Amendment dated May 1, 1992* (3)
10.19 Osteomark EIA Exclusive Distribution License Agreement dated March 28, (3)
1994 with Technogenetics S.R.L.
10.20 Osteomark EIA Distribution License Agreement dated July 12, 1994 with (3)
BRAHMS Diagnostic (formerly Henning Berlin GmbH)
10.23 Osteomark Agreement dated February 12, 1993, as amended May 10, 1994, (3)
with Nichols Institute Reference Laboratory
LEASE AGREEMENTS
10.27A Lease Agreement dated October 2, 1995, with David A. Sabey and Sandra L. (8)
Sabey (2)
10.27B First Amendment of Lease dated October 15, 1996, with the City of
Seattle, successor-in-interest to David A. Sabey and Sandra L. Sabey
AGREEMENTS WITH JOHNSON & JOHNSON CLINICAL DIAGNOSTICS, INC.
10.28A Distribution Agreement dated June 7, 1995 (9)
10.28B Research, Development, License and Supply Agreement dated June 7, 1995 (9)
10.29 Clinical Laboratory Services License and Supply Agreement
dated October (8) 25, 1995, with SmithKline Beecham Clinical
Laboratories, Inc.
10.30 Promotion Agreement dated September 30, 1997 with Wyeth-Ayerst (7)
Laboratories
10.31 Agreement with Laboratory Corporation of America-TM-Holdings (LabCorp), (10)
dated January 11, 1996
10.32A Joint Development, License and Co-Marketing Agreement dated April 10, (11)
1997 with Metrika, Inc.
10.33 Form of CS First Boston Corporation Warrant (12)
10.34 Form of Invemed Associates, Inc. Warrant (13)
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
Exhibit
NUMBER DESCRIPTION NOTES
------ ----------- -----
<S> <C> <C>
10.35 Shareholder Rights Agreement dated January 21, 1997 (14)
10.36 Physician Sales and Service Dealership Agreement dated October 1, 1999 (15)
13.0 Selected Financial Data, Management's Discussion and Analysis
of Financial Condition and Results of Operations, Financial
Statements and Notes to the Financial Statements from the
Company's Annual Report to Shareholders for the year ended
December 31, 1999
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
</TABLE>
- -----------------------------
* Management contract or compensatory plan or agreement.
(1) Copies of exhibits may be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 5th Street NW, Room 1024,
Washington, D.C. 20549, or through the Commission's Edgar system located
on the internet at www.sec.gov.
(2) Incorporated herein by reference to exhibit of the same number filed with
Form 10-K with the Commission for the year ended December 31, 1996
(3) Incorporated herein by reference from Item 16(a) of Registrant's Form S-1
Registration Statement as declared effective January 24, 1995 (No.
33-86118).
(4) Incorporated herein by reference to exhibit of the same number filed with
Form S-8 with the Commission on January 13, 1998.
(5) Confidential treatment requested. Exhibit omits information that has been
filed separately with the Commission.
(6) Incorporated herein by reference to exhibits of the same number filed
with Form 10-K with the Commission for the year ended December 31, 1996,
and as amended with Form 10-K/A on October 17, 1997.
(7) Incorporated herein by reference to exhibits of the same number filed
with Form 10-K with the Commission for the year ended December 31, 1997.
(8) Incorporated herein by reference to exhibit of the same number filed with
Form 10-K with the Commission for the year ended December 31, 1995.
(9) Incorporated herein by reference to exhibit of the same number filed with
Form 10-Q with the Commission for the quarter ended June 30, 1995
(10) Incorporated herein by reference to exhibit of the same number filed with
Form 10-Q with the Commission for the quarter ended March 31, 1996.
(11) Incorporated herein by reference to exhibit of the same number filed with
Form 10-Q with the Commission for the quarter ended September 30, 1997.
(12) Incorporated herein by reference to exhibit number 1.1A filed with the
Registrant's Form S-1 Registration Statement as declared effective
January 24, 1995 (No. 33-86118).
(13) Incorporated herein by reference to exhibit number 1.1B filed with the
Registrant's Form S-1 Registration Statement as declared effective
January 24, 1995 (No. 33-86118).
(14) Incorporated herein by reference to exhibit number 4.5 filed with Form
8-A with the Commission in January 1997.
(15) Confidential treatment has been granted or requested with respect to
portions of this exhibit.
(B) REPORTS ON FORM 8-K
None
-16-
<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 24, 2000.
OSTEX INTERNATIONAL, INC.
By /s/ THOMAS A BOLOGNA
----------------------------------
Thomas A. Bologna
Chairman, President and Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITIES DATE
--------- ---------- ----
<S> <C> <C>
Chairman, President and
/S/ THOMAS A. BOLOGNA Chief Executive Officer March 24, 2000
- ---------------------------------------- (principal executive officer and
Thomas A. Bologna principal financial officer)
/S/ THOMAS J. CABLE Director March 24, 2000
- ----------------------------------------
Thomas J. Cable
/S/ ELISABETH L. EVANS Director March 24, 2000
- ----------------------------------------
Elisabeth L. Evans
/S/ DAVID R. EYRE Director March 24, 2000
- ----------------------------------------
David R. Eyre
/S/ FREDRIC J. FELDMAN Director March 24, 2000
- ----------------------------------------
Fredric J. Feldman
/S/ GREGORY D. PHELPS Director March 24, 2000
- ----------------------------------------
Gregory D. Phelps
/S/ JOHN H. TRIMMER Director March 24, 2000
- ----------------------------------------
John H. Trimmer
</TABLE>
<PAGE>
===============================================================================
EXHIBIT 10.36
Redacted Version
================================================================================
DEALERSHIP AGREEMENT
This Dealership Agreement ("Agreement") is entered into this 1st day of
October, 1999, (the "Effective Date") by and between OSTEX INTERNATIONAL, INC.,
a Washington corporation, 2203 Airport Way South, Suite 400, Seattle, Washington
98134 (hereinafter referred to as "Ostex") and PHYSICIAN SALES AND SERVICE,
INC., a Florida corporation, with offices at 4345 Southpoint Blvd.,
Jacksonville, FL 32216 (hereinafter referred to as "PSS").
WITNESSETH:
In consideration of the mutual promises made herein, the parties agree as
follows:
1. DEFINITIONS. As used herein:
a) "Territory" shall mean the U.S.A.
b) "Product" shall mean the Osteomark-registered trademark-
NTx/Creatinine quantitative point-of-care ("POC") device
manufactured exclusively for Ostex by Metrika, Inc.
c) "Office Market" shall mean office-based physicians, [ * ].
2. GRANT OF DEALERSHIP.
Ostex hereby grants PSS an exclusive Dealership to serve the Office
Market in the Territory with respect to the promotion and sale of the
Product. PSS accepts such Dealership and shall undertake its best
efforts to promote the sale of the Product. PSS understands that Ostex
has expended and will continue to expend substantial efforts and funds
to secure and retain public goodwill toward the Product and its
trademarks, and recognizes the vital interest to Ostex in the proper
marketing of the Product. It shall be a material condition of this
Agreement that PSS will sell the Product only to the Office Market
within the Territory.
It is expressly understood and agreed that although this Agreement is
exclusive, Ostex may sell the Product to [ * ] for distribution to the
Office Market in the Territory, provided the [ * ] distribute the
Product with their own sales force and solely in connection with the
marketing of [ * ] to the Office Market. During the term of this
- -------------------------------
[*] Confidential Treatment Requested
<PAGE>
Agreement, Ostex will 1not sell the Product to [ * ], for distribution
to the Office Market in the Territory, [ * ]. Furthermore, if Ostex
sells such Product to [ * ] at a [ * ] that Ostex sells the Product to
PSS, Ostex will share [ * ] percent of the proceeds attributable to the
[ * ] with PSS.
During the term of this Agreement, and at any time that PSS is selling
the Product, PSS shall not represent other products that compete with
the Ostex Product.
3. PRICING, SUPPLY, AND RETURNS.
For the first [ * ] months of this Agreement, Ostex agrees to sell the
Product to PSS at the price of [ * ] dollars [ * ] per [ * ]
point-of-care devices.
Prior to the Product achieving CLIA waiver status, Ostex agrees to
provide PSS [ * ] urine controls and [ * ] point-of-care devices with
every [ * ] point-of-care devices that PSS orders.
After the Product achieves CLIA waiver status, Ostex agrees to sell to
PSS urine controls for use with the Product at a price [ * ].
Between the fifth and sixth month of this Agreement, the parties will
review and may adjust the Product pricing (by no more than +/- [ * ])
in view of the progressive rollout results. At that time the parties
will also agree to minimum purchase requirements of the Product for the
remaining term of this Agreement, commencing [ * ]. If at the end of
any calendar year these performance expectations are not met, Ostex may
at its sole discretion convert this Agreement to a [ * ] dealership or
terminate this Agreement.
Sales shall be FOB Seattle, WA, or Sunnyvale, CA.
The terms of payment are net thirty (30) days of invoice date. Past due
accounts are subject to a service and handling charge of 1 % per month.
Within [ * ] days before the beginning of each calendar quarter, in
consultation with Ostex, PSS will provide Ostex with a "Rolling
Forecast" of PSS's requirements for Product for the twelve-month period
commencing on the next calendar quarter. PSS's stated requirements for
the first three-month period of each twelve-month period will
constitute a firm purchase order that will obligate PSS to purchase the
indicated number of Product devices. The forecasted demand for the
fourth, fifth, and sixth months of each Rolling Forecast shall be
relied upon by Ostex for the purposes of manufacturing and supply
obligations hereunder, but PSS may within the subsequent Rolling
Forecast vary its initial forecast for such months by no more than [ *
] percent ([ * ]%) of the aggregate
- ---------------------------------
[*] Confidential Treatment Requested
2
<PAGE>
unless agreed to by Ostex. The final [ * ] months of each Rolling
Forecast will constitute non-binding estimates of PSS's requirements
for the periods described therein.
Ostex shall accept return of Product purchased by PSS under this
Agreement under the following conditions: (i) the Product was
originally shipped to PSS with less than [ * ] months shelf life; (ii)
the Product is unopened and unused; (iii) PSS provides the necessary
data for Ostex to authorize a return (e.g., lot number, expiration
date, condition, and purchase order number of the Product). Upon
receipt and confirmation of information requested, Ostex will issue a
Return Material Authorization ("RMA") number that PSS must include on
all paperwork that accompanies the returned Product (including the
outside of the return packaging).
Ostex shall also accept return of Product purchased by PSS under this
Agreement in the event that Ostex becomes bankrupt or insolvent or
undergoes a change of ownership.
4. PRODUCT LAUNCH.
Ostex will organize with the PSS Marketing team a progressive rollout
of the Product on a [ * ] basis.
PSS will establish with Ostex inventory minimums and sales goals by
[*]. Minimum acceptable inventory will be [ * ] days.
5. PSS'S RESPONSIBILITIES.
a) PSS agrees to actively promote the sale of the Product to the
Office Market in the Territory, to the best of PSS's ability
nationally, and to otherwise safeguard Ostex' interest
wherever possible. All promotional material will be reviewed
and approved by Ostex prior to PSS's use, in accordance with
Ostex' promotional and advertising policy.
b) PSS shall provide Ostex with monthly sales reports indicating
sales of Product to physicians by [ * ].
c) PSS agrees to keep Ostex informed about market trends and
conditions, experiences with customers, and major negotiations
and prospective sales possibilities.
d) PSS agrees to turn over to Ostex any and all leads from any
potential customers who are not in the Office Market.
e) PSS further agrees to assist Ostex in promoting the Osteomark
NTx assay [ * ], and to that end to transmit to Ostex
hereunder leads with respect to potential sales of NTx [ * ].
- ---------------------------------
[*] Confidential Treatment Requested
3
<PAGE>
f) PSS agrees to provide at Ostex direction proper documentation
of PSS's handling of the Product to assure that OstexProduct
in PSS's possession complies with all orders, rules and
regulations issued by the FDA and QS Regulation.
g) PSS shall provide all in-service training for Product sold by
PSS to the Office Market.
h) PSS agrees not to alter the Product in any way and not to
remove the Ostex name, trademarks, or trade dress from the
Product or its packaging.
i) PSS shall provide a place of business with adequate
communications service to efficiently effect the business of
Product sales.
j) PSS shall maintain adequate inventory of Ostex sales materials
and technical information and make effective use of such items
in its best judgment.
6. OSTEX RESPONSIBILITIES
a) Ostex will provide assistance to the PSS Marketing team in
launching the Product [ * ].
b) Ostex will at its option support PSS's annual national sales
meeting at [ * ] for the first year, and thereafter at invited
[ * ]. Additionally, Ostex will participate in quarterly
promotions to include Platinum Plus promotions.
c) Ostex shall provide an 800 support number for PSS and
customers.
d) Ostex shall provide PSS with a reasonable quantity of
promotional materials to assist in PSS's marketing efforts.
Additional promotional materials can be purchased from Ostex [
* ].
e) Ostex shall turn over to PSS all Office Market leads for the
Product but not for other Ostex products.
f) Ostex will provide a product video or computer display for use
in the sales activities of PSS's sales personnel.
- ---------------------------------
[*] Confidential Treatment Requested
4
<PAGE>
7. CONFIDENTIAL INFORMATION
PSS and Ostex agree not to make available or accessible to any third
party or use except as authorized for the purposes of performing this
Agreement any technical or commercial data or other information of a
competitive, special or confidential nature, transmitted to either
party by the other, and this undertaking shall continue to be
applicable for a period of [ * ] following the expiration or
termination of the Agreement for whatever cause. However, upon
expiration or termination of this agreement PSS will promptly provide
sufficient customer information to Ostex so that Ostex to can continue
to service such existing customers of the Product in the Office Market.
8. INSURANCE
PSS shall procure and maintain in full force and effect during the term
of this Agreement an insurance policy or policies, protecting PSS, its
officers, directors, employees and agents against any loss, liability
or expense whatsoever, arising out of or in connection with PSS's sale
of the Product.
Ostex shall indemnify and hold harmless PSS and its agents, employees,
officers and directors from claims relating to the use of the Product,
product liability, warranty claims and all matters relating to the
Product except to the extent that the claim arises from or is related
to the acts, omissions or misrepresentations of the PSS, its employees,
officers, directors and agents.
Ostex shall secure Product liability insurance in an amount not less
than [ * ] and shall secure a vendor endorsement naming PSS as an
additional insured.
9. TRADE SHOWS AND TRAINING COURSES.
a) PSS agrees to display and promote the Product at a reasonable
number of local meetings or exhibits as they may arise, at its
sole cost and expense. All exhibit material developed for and
all promotional material distributed at such local meetings
and exhibits will be reviewed and approved by Ostex prior to
use, in accordance with Ostex promotion and advertising
policy.
b) From time to time, PSS agrees to send select members of its
sales and marketing group to Ostex for training, at PSS's sole
cost and expense. Ostex agrees to provide appropriate training
to PSS's employees at PSS's locations at [ * ].
- ---------------------------------
[*] Confidential Treatment Requested
5
<PAGE>
10. OSTEX NAME AND TRADEMARK
In the event the PSS wishes to fix a label on the outer packaging box
containing the Products, showing that the PSS has an Ostex Dealership,
PSS agrees to coordinate with Ostex in advance the manner, size,
location and appearance of such label.
PSS shall use the name Ostex and the Ostex-registered trademark- and
Osteomark-registered trademark- trademarks only for the duration of
this Agreement and only for the design of marketing materials for the
Product, and only after having obtained specific prior approval in
writing from Ostex. PSS will, therefore, submit all such proposals to
Ostex for approval.
PSS agrees to immediately cease use of the name Ostex and the
Ostex-registered trademark- and Osteomark-registered trademark-
trademarks upon expiration or termination of this Agreement.
11. TERM OF THE AGREEMENT
This Agreement shall come into effect on the Effective Date set forth
above, and shall continue for a period of [ * ] years from the
Effective Date, unless terminated earlier as provided herein.
This Agreement shall be automatically renewed for successive [ * ]
periods, unless either party notifies the other party in writing of its
intention not to renew this Agreement at least [ * ] days prior to the
expiration of the then current term.
12. IMMEDIATE TERMINATION PRIOR TO EXPIRATION OF THE AGREEMENT
Either party shall have the right to terminate this Agreement with
immediate effect during the term of the Agreement if the other party
shall be adjudged bankrupt or insolvent, or shall become insolvent, or
if a receiver or other officer is appointed by any court or
governmental authority to administer or liquidate the company, or in
the event of dissolution proceedings by or against said other party.
13. TERMINATION WITH CAUSE
Either party shall have the right to terminate this Agreement in the
event that the other party defaults in the material performance of this
Agreement and continues in default thereof after [ * ] days' written
notice by the first party of such default. During this [ * ] day cure
period the parties agree to discuss the conflict at senior levels with
the goal of resolving the conflict without termination or litigation.
If the conflict is not resolved within the [ * ] day cure period, the
notifying party may terminate the Agreement or, if the notifying party
is Ostex, convert this Agreement to a nonexclusive dealership. If Ostex
terminates this Agreement following the [ * ] day cure period, Ostex
must provide
- ---------------------------------
[*] Confidential Treatment Requested
6
<PAGE>
an additional [ * ] day separation period during which PSS can sell its
inventory of Product.
14. TERMINATION WITHOUT CAUSE
Either party shall have the right to terminate this Agreement, without
cause, upon [ * ] months prior written notice.
15. UNDERTAKINGS RELATED TO TERMINATION
Upon termination or expiration of this Agreement for whatever cause:
a) PSS agrees to return Ostex immediately after such termination
or expiration, or separation period, all written materials
forwarded by Ostex to PSS hereunder.
b) Ostex shall have the option to purchase from PSS, exercisable
in Ostex's sole discretion, and PSS agrees to sell to Ostex at
the price that PSS paid to Ostex, any or all Ostex Product to
which PSS has title upon said termination or expiration.
c) PSS agrees that no obligation shall exist for Ostex to
indemnify PSS for damages of any kind pertaining to PSS's
investment in the promotion of the Product, it being
understood that the PSS price permits a sufficient return on
investment.
16. AMENDMENTS
This Agreement cannot be amended except in writing duly signed by an
authorized representative of Ostex and PSS.
17. NON-ASSIGNABILITY
The Agreement shall not be assignable by either party without the
written consent of the other, except that Ostex may assign this
Agreement to any affiliated Ostex company without consent. Any
attempted assignment in violation hereof shall be void.
18. NOTICES
All notices required to be given hereunder shall be deemed given if in
writing and deposited in the United States mail in a sealed envelope,
certified, with postage thereon prepaid and addressed to Ostex or PSS,
at the addresses listed on page 1 of this Agreement or at such other
address as the parties may direct by notice given as herein provided.
- ---------------------------------
[*] Confidential Treatment Requested
7
<PAGE>
19. INDEPENDENT CONTRACTOR
Each of the parties is an independent contractor. Neither party has any
authority, expressed or implied, to act for the other in dealings with
others, and neither shall purport to act as the agent or employee of
the other. PSS and Ostex shall be responsible for compliance with all
laws and regulations governing their respective businesses, and will
hold the other party harmless from all claims arising out of its
conduct. No employee of PSS shall be deemed in any manner whatsoever to
be an employee of Ostex, and as such shall not be entitled to and is
not qualified under any employee benefit plans provided by Ostex for
Ostex employees. The employees of PSS shall not be entitled to
participate in any plans, arrangements or distributions by Ostex
pertaining to, or in connection with, any bonus, pension, health,
insurance, welfare or similar benefit plan offered by Ostex to
employees. PSS and its employees shall be solely responsible for any
and all city, state and federal income taxes, social security
withholding taxes and any other tax obligation to which the employees
of PSS may be subjects. Ostex shall not be responsible for any payments
due to or on account of PSS's employees in connection with the
Agreement.
20. WAIVER
The waiver by either party of a default or breach of any provision of
this Agreement by the other party shall not operate or be construed as
a waiver of any subsequent default or breach.
21. ARBITRATION.
In the event of any controversy or threatened breach arising under or
relating to this Agreement, the parties agree to submit such issue to
arbitration at an office of the American Arbitration Association,
according to the rules and regulations of that Association. The
arbitration shall take place in Seattle, WA if initiated by PSS, or in
Jacksonville, FL if initiated by Ostex. The arbitrators shall be
authorized to award the costs and expenses of arbitration to the
prevailing party. Judgment on an arbitration award entered pursuant to
a vote duly taken may be entered in any court of competent
jurisdiction.
The party desiring arbitration shall give written notice to that effect
to the other party, stating the dispute to be arbitrated and the name
and address of the person designated to act as arbitrator on its
behalf. Within ten (10) days after said notice shall be given, the
other party shall give written notice to the first party, stating the
name and address of the person designated to act as arbitrator on its
behalf. In the event that the second party shall fail to notify the
first party of its designation of an arbitrator as aforesaid within the
time above specified, then the appointment of the second arbitrator
shall be made in the same manner as hereinafter provided for the
appointment of a third arbitrator by the American Arbitration
Association. The arbitrators so chosen shall meet within ten (10) days
after the second arbitrator shall be appointed and within thirty (30)
days thereafter shall decide the controversy they were appointed to
arbitrate.
8
<PAGE>
In the event that within the aforesaid period, the two arbitrators
shall be unable to agree on a decision they shall appoint a third
arbitrator, and if they cannot agree on said appointment, the third
arbitrator shall be appointed on their application or on the
application of either party, by the American Arbitration Association.
The three (3) arbitrators shall meet and decide the dispute. A decision
in which two (2) of the three (3) arbitrators shall concur shall be
binding and conclusive on the parties. In designating arbitrators and
deciding the dispute, the arbitrators shall act according to the rules
then in force of the American Arbitration Association, subject,
however, to such limitations as the provisions of this Agreement may
place on them.
Any claims for breach of this Agreement or any cause of action
whatsoever arising out of, or in any way related to this Agreement,
shall be waived and forfeited, unless asserted by the claiming party by
commencement of an arbitration proceeding with respect to such breach
within one (1) year after the claiming party has become aware of the
claim.
In the event any proceeding is brought to enforce or interpret any of
the terms of this Agreement, including Ostex Standard Terms and
Conditions of Sale or policies, the prevailing party shall be entitled
to recover from the other party all reasonable attorney's fees,
together with such other expenses, costs and disbursements as may be
allowed by law.
22. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between Ostex and PSS,
is a complete and exclusive statement, and supersedes all previous
agreements of any kind concerning the subject matter and scope hereof.
23. CHOICE OF LAW
This Agreement shall be governed by and interpreted under the laws of
the State of Washington without regard to the conflicts of laws rules thereof.
Accepted:
OSTEX INTERNATIONAL, INC. PHYSICIAN SALES AND SERVICE, INC.
Name: THOMAS A. BOLOGNA D. J. HARPER
-------------------------------- -------------------------------------
Signature: /s/ THOMAS A. BOLOGNA /S/ D. J. HARPER
------------------------------ ------------------------------------
Title: Chairman, President & CEO Senior Vice President
Date: OCTOBER 7,1999 11/10/99
---------------------------------- ------------------------------------
9
<PAGE>
EXHIBIT 13
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
REVENUES:
Product sales and research testing services $ 4,732 $ 3,047 $ 3,658 $ 2,860 $ 1,830
License fees and research and development
payments - - 450 1,087 1,495
----------- ------------ ------------ ----------- ------------
Total revenues 4,732 3,047 4,108 3,947 3,325
COST OF PRODUCTS SOLD 1,130 814 899 926 603
GROSS MARGIN ON PRODUCT SALES 3,602 2,233 2,759 1,934 1,227
(Percentage of sales) 76% 73% 75% 68% 67%
OPERATING EXPENSES:
Research and development 1,734 2,901 4,470 3,163 3,200
Selling, general and administrative 3,831 8,122 8,031 9,201 6,583
----------- ------------ ------------ ----------- ------------
Total operating expenses 5,565 11,023 12,501 12,364 9,783
----------- ------------ ------------ ----------- ------------
Loss from operations (1,963) (8,790) (9,292) (9,343) (7,061)
Other Income:
Proceeds from legal settlement - - 6,200 - -
Interest income, net 393 695 828 1,273 1,684
----------- ------------ ------------ ----------- ------------
Net loss $ (1,570) $ (8,095) $ (2,264) $(8,070) $ (5,377)
=========== ============ ============ =========== ============
- -----------------------------------------------------------------------------------------------------------------------
Basic and diluted net loss per common and
common equivalent share $ (0.13) $ (0.64) $ (0.18) $ (0.65) $ (0.45)
=========== ============ ============ =========== ============
- -----------------------------------------------------------------------------------------------------------------------
Weighed average shares used in calculation
net loss per share 12,522 12,696 12,574 12,441 11,929
=========== ============ ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 8,400 $ 10,979 $ 18,965 $ 21,229 $ 27,794
Working capital 9,205 10,624 18,368 20,901 28,361
Total assets 12,297 15,065 24,112 25,691 32,841
Accumulated deficit (33,793) (32,223) (24,128) (21,864) (13,794)
Total shareholders' equity $ 11,709 $ 13,488 $ 21,644 $ 23,526 $ 31,518
=========== ============ ============ =========== ============
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Ostex International, Inc. (the "Company") is engaged in the discovery
and commercialization of products associated with osteoporosis and other
collagen-related diseases. The Company's lead product, the OSTEOMARK-registered
trademark- NTx test, incorporates breakthrough and patented technology in the
area of bone resorption measurement. Ostex has formed collaborative
relationships with leading reference laboratories and pharmaceutical companies
to aid in the commercialization of Osteomark.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements which
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed below, that could cause actual results
to differ materially from historical results or those anticipated. Words used
herein such as "believes," "anticipates," "expects," "intends," and similar
expressions are intended to identify forward-looking statements but are not the
exclusive means of identifying such statements. In addition, the disclosures on
page 19 under the caption "Other Factors that May Affect Operating Results,"
consist principally of a brief discussion of risks which may affect future
results and are thus, in their entirety, forward-looking in nature. Readers are
urged to carefully review and consider the various disclosures made by the
Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission (the "SEC"), including the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999, that attempt to
advise interested parties of the risks and factors that may affect the Company's
business.
On May 8, 1995, the Osteomark NTx Urine test first became commercially
available in the United States as a urinary test that provides a quantitative
measure of the excretion of cross-linked N-telopeptides of type I collagen
("NTx") as an indicator of human bone resorption. Prior to becoming commercially
available, the Osteomark NTx Urine test was available in the United States only
for research purposes. On February 2, 1999, the Company received clearance to
market the Osteomark NTx Serum test in the United States. Osteomark NTx Serum is
the first and only commercially available test in the United States that
measures specific bone breakdown by osteoclasts using a blood sample.
The Company's revenues have consisted primarily of product sales and
fees for research testing services, as well as licensing fees and research and
development payments from Mochida Pharmaceutical, Co., Ltd. ("Mochida"). Mochida
has agreed to pay Ostex up to approximately $6,600,000 in a combination of
licensing fees and research and development milestone payments, of which
$5,850,000 has been received to date. Under the research and development
agreement, Mochida has an option to license the NTx Serum test. Future payments
totaling $750,000 are contingent upon Mochida's decision to exercise its option
to license the NTx Serum test and achievement of certain milestones.
Expenses incurred have been primarily for production, selling,
administrative, and research and development activities and have exceeded
revenues in each year since the Company's inception. As of December 31, 1999,
the Company had an accumulated deficit of $33,793,000. Successful future
operations depend upon the Company's ability to effectively commercialize and
market its products. The Company will require a substantial amount of additional
funds to develop new products and to fund the level of selling, general and
administrative expenses that the Company expects to incur in connection with its
product commercialization efforts in the next several years.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997. The Company had total revenues of
$4,732,000 for the year ended December 31, 1999, compared to $3,047,000 and
$4,108,000 for the years ended December 31, 1998 and 1997, respectively.
Revenue from product sales and research testing services for the year
ended December 31, 1999 was $4,732,000, compared to $3,047,000 and $3,658,000 in
the years ended December 31, 1998 and 1997, respectively. The increase of
$1,685,000 in 1999 compared to 1998 revenue is attributable to higher volumes of
Osteomark urine kits and the introduction of the Osteomark serum kit, both of
which are sold to laboratories, pharmaceutical companies and distributors
worldwide. Lower urine kit volume and reduction
<PAGE>
in duplicate testing of patient samples for some customers resulted in a
$611,000 decrease in 1998 revenue compared to 1997.
No license fees and research and development payments were received
during 1999 nor in 1998. In 1997, $450,000 in net license fees and research and
development payments were received from Mochida. The decreases in 1999 and 1998
were expected and are due to prior years attainment of scheduled milestones.
The Company's cost of products sold totaled $1,130,000 for the year
ended December 31, 1999, compared to $814,000 and $899,000 for the same periods
in 1998 and 1997, respectively. The gross margin rate on product sales for the
year ended 1999 was 76%, compared to 73% for 1998 and 75% for 1997. The increase
in gross margin rate from 1998 to 1999 was due to higher manufacturing volume
and a slight increase in the average sales price per kit. The slight decrease
from 1997 to 1998 was a function of decreased manufacturing volume. Increased
manufacturing volume reduces unit cost by spreading certain fixed overhead
expenses over a higher number of units produced.
The Company's research and development expenditures totaled $1,734,000,
$2,901,000, and $4,470,000, in 1999, 1998, and 1997, respectively. The
$1,167,000 decrease from 1998 to 1999 was primarily attributable to the
Company's restructuring plan implemented in December 1998. Research and
development expenses also decreased in 1998 over 1997 due to the cost of certain
clinical studies that occurred during 1997 and the reduction in funding to
outside companies associated with the NTx point-of-care development program.
Included in 1997 was a study for the determination of the NTx reference range in
males, a study to complement physician interpretation of NTx results in
postmenopausal women, and preliminary studies for the use of the Osteomark test
in helping to identify bone metastases. Additionally, research and development
expenditures include research grants to the University of Washington; however
these grants have decreased year after year for 1997, 1998 and 1999.
Selling, general and administrative expenses totaled $3,831,000,
$8,122,000, and $8,031,000, in 1999, 1998 and 1997, respectively. The $4,291,000
decrease in expenses from 1998 to 1999 was driven primarily by the Company's
December 1998 restructuring plan and reductions in both litigation and marketing
related activities. The slight increase from 1997 to 1998 was due to the
implementation of expanded and new marketing programs including direct mail and
advertising activities and the Company's physician education program.
Proceeds from legal settlement resulted from the receipt of a
non-recurring lump sum payment of $6,200,000 from Boehringer Mannheim GmbH
("Boehringer Mannheim") in October 1997. The settlement between the two parties
was the result of a ruling by the American Arbitration Association awarding
damages to the Company in connection with a dispute between the Company and
Boehringer Mannheim.
Interest income totaled $421,000, $747,000, and $901,000 for the years
ended December 31, 1999, 1998, and 1997, respectively. The decreases in 1999 and
1998 were primarily due to lower average invested balances resulting from using
cash to fund the Company's operating losses.
At December 31, 1999, the Company had tax net operating loss
carryforwards of $38,100,000, which will begin to expire in 2004. Income taxes
are provided in the Statements of Operations as required by Statement of
Financial Accounting Standards No. 109, "Accounting For Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, deferred taxes are determined using an asset and
liability approach. The Company has determined that the tax assets do not
satisfy the recognition criteria set forth in SFAS No. 109. Accordingly, a
valuation adjustment has been recorded against the applicable deferred tax
assets, and therefore no tax benefit has been recorded.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999 the Company had $8,400,000 in cash and cash
equivalents and short-term investments, working capital of $9,205,000 and total
shareholders' equity of $11,709,000. During 1999, cash, cash equivalents and
short-term investments decreased by $2,579,000, working capital decreased by
$1,419,000 and shareholders' equity decreased by $1,779,000. The decreases were
primarily the result of the net loss incurred during 1999.
The Company used $1,951,000 of cash for operating activities in 1999
and $76,000 for the purchase of laboratory, manufacturing and office equipment.
During 1999, the Company repurchased on the open market 245,000 shares of common
stock at a total cost of $286,000. In 1996, the Company entered into a note
agreement that provides up to $1,500,000 for expansion of manufacturing and
administrative facilities and has borrowed $746,000 against the note. The note
is repayable in 48 equal
<PAGE>
monthly installments of principal and interest of $20,000. As of December 31,
1999, outstanding borrowings under this agreement were $115,000.
The Company's future capital requirements depend upon many factors,
including the effectiveness of Osteomark NTx Serum and Urine tests
commercialization activities and arrangements; continued scientific progress in
its research and development programs; the costs involved in filing, prosecuting
and enforcing patent claims; the manufacturing needs for new products; and the
time and costs involved in obtaining regulatory approvals. Additional funds from
equity or debt financing may be required. There can be no assurance that such
additional funds will be available on favorable terms, if at all. Because of the
Company's significant long-term cash requirements, it may seek to raise
additional capital if conditions in the public equity markets are favorable or
through private placements, even if the Company does not have an immediate need
for additional cash at that time. If additional financing is not available, the
Company believes that its existing available cash, its future license and
research revenues from existing collaboration agreements, its current level of
product sales and interest income from short-term investments will be adequate
to fund operations into the foreseeable future.
OTHER FACTORS THAT MAY AFFECT OPERATING RESULTS
The Company's operating results may fluctuate due to a number of
factors including, but not limited to, volume and timing of product sales,
pricing, market acceptance of the Company's products, changing economic
conditions in the healthcare industry, activities of competitors, delays and
increased costs of product and technology development, the Company's ability to
develop and maintain collaborative arrangements, the outcome of litigation, and
the effect of the Company's accounting policies and other risk factors detailed
in the Company's 1999 Form 10-K and other SEC filings. All of the foregoing
factors are difficult for the Company to predict and can materially adversely
affect the Company's business and operating results.
<PAGE>
OSTEX INTERNATIONAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,562 $ 2,744
Short-term investments 6,838 8,235
Trade receivables and other current assets,
net of allowance of $34 in 1999 and $80 in 1998 1,142 858
Inventory, at cost 251 247
-------------- ---------------
Total current assets 9,793 12,084
-------------- ---------------
Property, Plant and Equipment, net 1,905 2,382
Other Assets 599 599
-------------- ---------------
Total assets $ 12,297 $ 15,065
============== ===============
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 278 $ 557
Accrued expenses 195 696
Current portion of note payable 115 207
-------------- ---------------
Total current liabilities 588 1,460
-------------- ---------------
NONCURRENT LIABILITIES
Note payable, net of current portion - 117
-------------- ---------------
Commitments and Contingencies
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 authorized;
12,469,050 and 12,696,250 issued and outstanding 125 127
Additional paid-in capital 45,494 45,642
Accumulated items of comprehensive income (loss)
Accumulated deficit (117) (58)
(33,793) (32,223)
-------------- ---------------
Total shareholders' equity 11,709 13,488
-------------- ---------------
Total liabilities and shareholders' equity $ 12,297 $ 15,065
============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
OSTEX INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997
<S> <C> <C> <C>
REVENUE:
Product sales and research testing services (RTS) $ 4,732 $ 3,047 $3,658
License fees and research and development payments - - 450
---------------- ---------------- ----------------
Total revenues 4,732 3,047 4,108
---------------- ---------------- ----------------
COST OF PRODUCTS SOLD 1,130 814 899
GROSS MARGIN ON PRODUCT SALES 3,602 2,233 2,759
(Percentage of sales) 76% 73% 75%
OPERATING EXPENSES:
Research and development 1,734 2,901 4,470
Selling, general and administrative 3,831 8,122 8,031
---------------- ---------------- ----------------
Total operating expenses 5,565 11,023 12,501
---------------- ---------------- ----------------
Loss from operations (1,963) (8,790) (9,292)
OTHER INCOME (EXPENSES):
Proceeds from legal settlement - - 6,200
Interest income 421 747 901
Interest expense (28) (52) (73)
---------------- ---------------- ----------------
Net loss $ (1,570) $ (8,095) $ (2,264)
====================================================
- -------------------------------------------------------------------------------------------------------------------
Basic and diluted net loss per common and
common equivalent share $ (0.13) $ (0.64) $ (0.18)
- -------------------------------------------------------------------------------------------------------------------
Weighted average shares used in calculation
net loss per share
12,522 12,696 12,574
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
OSTEX INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,570) $ (8,095) $ (2,264)
Adjustments to reconcile net loss to net cash used
in operating activities -
Depreciation and amortization 553 685 651
Expense from issuance of warrants 134 - 197
(Increase) decrease in receivables and other current assets (284) 486 (183)
(Increase) decrease in inventory (4) (46) (48)
Decrease in other assets - 38 -
Increase (decrease) in accounts payable (279) (872) 170
Increase (decrease) in accrued expenses (501) 166 296
-------------- -------------- --------------
Net cash used in operating activities (1,951) (7,638) (1,181)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (5,801) (31,606) (20,426)
Proceeds from sales and maturities of short-term investments 7,139 40,074 23,535
Purchase of property, plant and equipment (76) (102) (1,105)
-------------- -------------- --------------
Net cash provided by investing activities 1,262 8,366 2,004
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock
and exercise of stock options 2 - 252
Stock Repurchases (286)
Payments on note payable (209) (185) (163)
-------------- -------------- --------------
Net cash provided by (used in) financing activities (493) (185) 89
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,182) 543 912
CASH AND CASH EQUIVALENTS, beginning of period 2,744 2,201 1,289
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 1,562 $ 2,744 $ 2,201
============== ============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
OSTEX INTERNATIONAL, INC.
STATEMENTS OF SHAREHOLDERS EQUITY
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Accumulated
Additional Other Total
Common Stock Paid-in Comprehensive Accumulated Comprehensive Shareholders'
Shares Amount Capital Income (Loss) Deficit Loss Equity
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 12,442 $ 125 $45,195 $ 70 $ (21,864) $ 23,526
- ------------------------------------------------------------------------------------------------------------------------------------
Expense for stock and option grants 70 - 197 - - - 197
Stock options exercised 184 2 250 - - - 252
Comprehensive loss
Unrealized loss on short-term
investments - - - (67) - (67) (67)
Net loss - - - - (2,264) (2,264) (2,264)
-------------------------------------------------------------------------------------------
Comprehensive loss (2,331)
-------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 12,696 127 45,642 3 (24,128) 21,644
-------------------------------------------------------------------------------------------
Expense for stock and option grants - - - - - - -
Stock options exercised - -
- - - - -
Comprehensive loss
Unrealized loss on short-term
investments - - - (61) - (61) (61)
Net loss
- - - - (8,095) (8,095) (8,095)
-------------------------------------------------------------------------------------------
Comprehensive loss (8,156)
-------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998
12,696 127 45,642 (58) (32,223) 13,488
-------------------------------------------------------------------------------------------
Warrants issued to outside consultants - - 134 - - - 134
Stock options exercised 18 - 2 - - - 2
Stock repurchase plan (245) (2) (284) (286)
Comprehensive loss
Unrealized loss on short-term
investments - - - (59) - (59) (59)
Net loss - - - - (1,570) (1,570) (1,570)
-------------------------------------------------------------------------------------------
Comprehensive loss (1,629)
-------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 12,469 $ 125 $45,494 $ (117) $ (33,793) $ 11,709
-------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Ostex International, Inc. (the "Company"), a Washington corporation incorporated
in May 1989, is engaged in the discovery and commercialization of products
associated with osteoporosis and other collagen-related diseases. The Company's
lead product, the Osteomark NTx test, incorporates breakthrough and patented
technology in the area of bone resorption measurement. The Company markets the
Osteomark NTx Serum and Urine tests through distributors and medical
laboratories.
ESTIMATES AND UNCERTAINTIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REVENUE RECOGNITION
Product sales are recognized upon shipment. Research testing fees are recognized
when the services are substantially complete. License fees and research and
development payments are recognized upon attainment of the agreed upon
milestones.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the short maturities of these investments.
SHORT-TERM INVESTMENTS
The Company considers all of its short-term investments to be "available for
sale," reporting them at fair market value with unrealized gains and losses
included as a component of comprehensive income (loss) in shareholders' equity.
Realized gains and losses and declines in value of securities judged to be other
than temporary are included in interest income. Contractual maturities range
from one to 35 years.
CONCENTRATION OF CREDIT RISK
Trade receivables potentially subject the Company to credit risk. The Company
extends credit to its customers based upon an evaluation of the customer's
financial condition and credit history and generally does not require
collateral. The Company historically has incurred minimal credit losses.
The Company's customers includes research and clinical laboratories and other
companies, of which one customer accounted for approximately 14%, 16% and 22% of
total revenues for the years ended December 31, 1999, 1998 and 1997,
respectively.
INVENTORY
Inventory consists principally of raw materials and finished goods. Inventories
are stated at the lower of cost (first-in, first-out) or market.
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of their useful lives or the lease
term. Estimated lives range from five to ten years. Depreciation expense charged
to operations during 1999, 1998 and 1997 was $553,000, $685,000 and $614,000,
respectively.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
disclosure of comprehensive income (loss). Disclosure has been made for all
years presented in the statements of shareholders' equity.
NOTE 2
SHORT-TERM INVESTMENTS
The Company's short-term investments at December 31, 1999 and 1998 consisted of
the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Federal agency obligations and discount notes $ 947,000 $3,418,000
Government agency obligations 4,754,000 2,935,000
Corporate and municipal bonds 1,137,000 1,882,000
---------------- -----------------
$6,838,000 $8,235,000
================ =================
</TABLE>
NOTE 3
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Leasehold improvements $2,405,000 $2,426,000
Laboratory and manufacturing equipment 1,315,000 1,304,000
Computers and office equipment 1,136,000 1,050,000
------------------- ------------------
4,856,000 4,780,000
Accumulated depreciation and amortization (2,951,000) (2,398,000)
------------------- ------------------
Net property, plant and equipment $1,905,000 $2,382,000
=================== ==================
</TABLE>
NOTE 4
OTHER ASSETS
Other assets represent a $599,000 investment in preferred stock of Metrika,
Inc., a privately held, development stage, medical device company. The
investment is recorded in the accompanying financial statements at cost and
represents an ownership interest of less than 5%. The Company periodically
assesses the valuation of this asset based on historical financial data and
future projections. Management currently believes that the asset is not
impaired. However, given the nature of the business, there is a risk that the
investment may become impaired in the future.
NOTE 5
NOTE PAYABLE
In July 1996, the Company borrowed $746,000 under a secured promissory note
agreement. The note is secured by real property and equipment and is payable in
equal monthly installments of principal and interest of approximately $20,000.
The note agreement contains certain financial covenants which require the
reporting of certain financial ratios and other restrictions. As of December 31,
1999, the Company was not in compliance with these covenants. However, the
Company has obtained a waiver from the covenants based upon the relatively low
repayment balance and the Company's strong cash position. Based on the
<PAGE>
existing payment schedule, the loan will be paid in full at the end of June
2000. The interest rate is 12.5% and the note agreement allows the Company to
make additional borrowings, up to a maximum of $1,500,000 for future capital
needs.
NOTE 6
SHAREHOLDERS' EQUITY
STOCK OPTION PLANS
The Company has three stock option plans: the Amended and Restated Stock Option
Plan (the "Old Plan"), the 1994 Stock Option Plan (the "1994 Plan"), both
administered by the Compensation Committee of the Board of Directors, and the
Directors' Nonqualified Stock Option Plan (the "Directors' Plan"), (collectively
the "Stock Option Plans"). The Old Plan no longer permits additional stock
option grants.
Shares of common stock reserved for issuance to the Company's employees and
directors under the 1994 Plan and the Directors' Plan are 1,750,000 and 350,000,
respectively. Shares available for future grants under the 1994 Plan and the
Directors' Plan at December 31,1999 are 233,543 and 25,000, respectively. These
options generally vest ratably over three to four years. All options granted
under these plans expire upon the earlier of 90 days after termination of
employment or ten years from date of grant. Options are granted with exercise
prices equal to or greater than fair market value.
Information relating to stock options outstanding and stock options exercisable
at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF LIFE IN EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES SHARES YEARS PRICE SHARES PRICE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.08 - $ 1.75 543,935 8 $1.00 218,348 $ .86
$ 2.10 - $ 5.00 1,428,959 7 $3.17 920,476 $ 3.19
$ 5.63 - $ 17.13 20,500 6 $12.76 20,250 $ 12.85
--------------- --------------- -------------- --------------- --------------
1,993,394 8 $2.68 1,159,074 $ 2.92
=============== =============== ============== =============== ==============
</TABLE>
Information relating to stock options activity is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVG. AVG. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------------------------------------------------------------------------------
Outstanding at beginning of
<S> <C> <C> <C> <C> <C> <C>
period 1,836,087 $3.28 1,962,301 $3.34 1,827,626 $6.61
Granted 551,485 1.10 338,500 1.91 2,227,925 3.76
Exercised (17,500) .11 -- -- (184,000) 1.37
Cancelled (376,678) 2.27 (464,714) 3.47 (1,909,250) 7.14
----------- -------------- ----------- ------------- ------------ -------------
Outstanding at end of period 1,993,394 $2.68 1,836,087 $3.04 1,962,301 $ 3.34
=========== ============== =========== ============= ============ =============
Vested at end of period 1,159,074 2.92 779,638 $3.28 481,451 $ 3.34
Weighted average fair
value of options granted $1.23 $1.36 $2.24
</TABLE>
Options outstanding have weighted average remaining contractual lives of eight
and nine years at December 31, 1999 and 1998, respectively.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123). Accordingly, no compensation cost has been recognized for stock
options issued at market value on the date of grant. Had compensation
<PAGE>
cost for the Company's stock option plans been determined based on the fair
value of the options at the grant date for awards in 1999, 1998 and 1997
consistent with the provisions of SFAS No. 123, the Company's net loss and net
loss per common equivalent share would have changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported $(1,570,000) $(8,095,000) $(2,264,000)
Net loss - pro forma $(2,171,000) $(8,513,000) $(2,222,000)
Basic and diluted net loss per common
and common equivalent share - as reported $ (0.13) $ (0.64) $ (0.18)
Basic and diluted net loss per common
and common equivalent share - pro forma $ (0.17) $ (0.67) $ (0.18)
</TABLE>
The fair value of each option grant is established on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for new grants in 1999: zero dividend yield; expected
volatility of 129%; average risk-free interest rate of 6.0% and expected lives
of five years. Assumptions for options granted in 1998 were: zero dividend
yield; expected volatility of 88%; average risk-free interest rate of 5.0%; and
expected lives of five years. Assumptions for options granted in 1997 were: zero
dividend yield; expected volatility of 85%; average risk-free interest rate of
6.8%; and expected lives of five years. The difference between reported and pro
forma net loss in 1997 was a $42,000 credit to income as the model recognizes
canceled options in the period they occur. The SFAS No. 123 method of accounting
has not been applied to options granted prior to January 1, 1995, therefore the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
COMMON STOCK WARRANT
During 1999, the Company issued a warrant to an outside consultant for the
purchase of 100,000 shares of common stock at an exercise price of $2.00, in
exchange for services to be provided to the Company. The warrant vests in
twelve equal monthly installments beginning one month after the grant date,
and expires three years from the grant date. The Company recorded this
warrant in accordance with the provisions of SFAS No. 123 and EITF Issue
96-18, which require that the fair value of the warrant be recognized as
expense, and that the fair value be remeasured at each balance sheet date
(variable accounting). Total expense recognized in 1999 related to this
warrant was approximately $134,000.
NOTE 7
LICENSING AGREEMENTS
Under the Company's license agreements with the Washington Research Foundation
("WRF"), the Company has the worldwide exclusive right to commercialize
technology developed from certain research conducted by the University of
Washington ("UW"). As consideration for the licenses acquired and for the
attainment of certain milestones, the Company paid WRF certain nonrefundable
fees and issued common stock to the WRF and UW. In addition, future cash
payments and common stock grants may be due upon attainment of certain other
milestones. All legal costs incurred by WRF in connection with the filing,
prosecution, and maintenance of certain defined patent rights are paid by the
Company. The Company is obligated to pay WRF royalties on net sales of any
licensed products.
NOTE 8
REVENUES
The Company has a sublicense agreement and a research and development agreement
with Mochida Pharmaceutical Co., Ltd. ("Mochida"). Under the sublicense
agreement, the Company granted Mochida exclusive manufacturing, marketing and
distribution rights to certain of the Company's products in Japan. The Company
has received all milestone payments to be earned in connection with the license
agreement for the urine assay. Mochida has an option to license the Company's
serum assay. Under the research and development agreement, the Company received
no payments during 1999 and 1998, and a net payment of $450,000 in 1997.
<PAGE>
NOTE 9
RELATED PARTY TRANSACTIONS
RESEARCH AGREEMENTS
The Company has entered into two research agreements with the University of
Washington which extend through December 31, 2000. Total expense was $150,000,
$367,000 and $499,000 during 1999, 1998 and 1997, respectively. Minimum payments
in 2000 under this agreement will be $150,000.
NOTE 10
COMMITMENTS AND CONTINGENCIES
LEASES
The Company has entered into noncancelable operating leases for office space and
certain equipment. Future minimum payments under these leases are as follows:
<TABLE>
<S> <C>
2000 515,000
2001 546,000
2002 544,000
2003 534,000
2004 531,000
Thereafter 398,000
--------------
Total $3,068,000
==============
</TABLE>
Total rent expense was approximately $457,000, $481,000 and $584,000 in 1999,
1998 and 1997, respectively.
LITIGATION
In June 1996, the Company filed an action in the United States District Court
for the Western District of Washington against Osteometer Biotech A/S, a medical
technology company based in Denmark ("Osteometer"), and Diagnostic Systems
Laboratories, Inc. for patent infringement. The Company believes Osteometer's
bone resorption immunoassay incorporates technology which infringes the
Company's patented technology. At the present time management cannot predict the
outcome of the lawsuit but intends to continue to vigorously assert its
position.
On November 19, 1999, Roche Diagnostics ("Roche") filed a lawsuit against the
Company in Belgium seeking to invalidate three of the Company's European patents
as they apply to Belgium. The lawsuit also seeks a declaration that Roche does
not infringe the patents in any European country where Roche markets or plans to
market their Elecsys-(beta)-Crosslaps (Serum)-registered trademark- diagnostic
test. The Company believes that this lawsuit will not lead to an award of
damages against the Company.
NOTE 11
OTHER INCOME - PROCEEDS FROM LEGAL SETTLEMENT
On November 4, 1997, the Company announced settlement with Boehringer Mannheim
GmbH ("Boehringer Mannheim") under which the Company received a lump sum payment
of $6,200,000. The settlement between the two parties was the result of a ruling
by the American Arbitration Association awarding damages to the Company in
connection with a dispute between the Company and Boehringer Mannheim.
NOTE 12
FEDERAL INCOME TAXES
Deferred taxes are determined using an asset and liability approach. The Company
has incurred operating losses since inception and accordingly has determined
that the net deferred tax assets do not satisfy recognition criteria. Therefore,
a valuation allowance has been recorded against the net deferred tax assets and
no tax benefit has been recorded in the accompanying statement of operations.
The change in the
<PAGE>
valuation allowance during 1999, 1998 and 1997 was $478,000, $2,966,000 and
$586,000, respectively. The Company's deferred tax assets (liabilities) are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net operating loss carryforward $ 12,956,000 $ 12,512,000 $10,039,000
Research and experimentation credits 650,000 588,000 363,000
Excess of market value over the exercise
price of common stock options - - 77,000
Property, Plant and Equipment 230,000 145,000 (47,000)
Other 108,000 221,000 68,000
---------------------- -------------------- ----------------
Gross deferred tax asset 13,944,000 13,466,000 10,500,000
Valuation allowance (13,944,000) (13,466,000) (10,500,000)
---------------------- -------------------- ----------------
Net deferred tax asset $ - $ - $ -
====================== ==================== ================
</TABLE>
At December 31, 1999, the Company had tax net operating loss carryforwards of
$38,100,000 which expire between 2004 and 2019.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included (or incorporated by reference) in this Form 10-K into the
Company's previously filed Registration Statement Nos. 333-4802 and 333-44143.
/s/ Arthur Andersen LLP
Seattle, Washington
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,562,000
<SECURITIES> 6,838,000
<RECEIVABLES> 1,072,000
<ALLOWANCES> 34,000
<INVENTORY> 251,000
<CURRENT-ASSETS> 9,793,000
<PP&E> 1,905,000
<DEPRECIATION> 553,000
<TOTAL-ASSETS> 12,297,000
<CURRENT-LIABILITIES> 588,000
<BONDS> 0
0
0
<COMMON> 125,000
<OTHER-SE> 11,584,000
<TOTAL-LIABILITY-AND-EQUITY> 12,297,000
<SALES> 4,732,000
<TOTAL-REVENUES> 4,732,000
<CGS> 1,130,000
<TOTAL-COSTS> 1,130,000
<OTHER-EXPENSES> 5,565,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,000
<INCOME-PRETAX> (1,570,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,570,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,570,000)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
