Selected Financial Highlights
(In thousands, except per share data)
Fiscal Year Ended December 31, 1996 1995 1994 1993 1992
Statement of Operations Data:
Revenues:
Product sales and research
testing services $ 2,860 $ 1,830 $ 1,152 $ 417 $ -
Research and development fees 1,087 1,495 630 585 675
Licensing fees - - - 900 900
-------- -------- -------- -------- -------
Total revenues 3,947 3,325 1,782 1,902 1,575
Operating expenses:
Costs of products sold 926 603 517 226 -
Research and development 3,163 3,200 3,308 1,940 1,279
Selling, general and -------- -------- -------- -------- -------
administrative 9,201 6,583 2,222 1,754 1,160
Total operating expenses 13,290 10,386 6,047 3,920 2,439
Loss from operations (9,343) (7,061) (4,265) (2,018) (864)
Other income (expense):
Interest income 1,317 1,684 194 128 75
Interest expense (44) - - - -
-------- -------- -------- -------- -------
Net loss $ (8,070) $ (5,377) $ (4,071) $ (1,890) $ (789)
======== ======== ======== ======== =======
Net loss per common and
common equivalent share $ (.65) $ (.45) $ (.47) - -
-------- -------- -------- -------- -------
Weighted average number of
common and common
equivalent shares outstanding 12,441 11,929 8,737 - -
-------- -------- -------- -------- -------
(In thousands)
December 31, 1996 1995 1994 1993 1992
Balance Sheet Data:
Cash, cash equivalents and
short-term investments $ 21,229 $ 27,794 $ 3,668 $ 7,916 $ 2,688
Working capital 20,901 28,361 3,172 7,890 2,988
Total assets 25,691 32,841 5,590 8,807 3,495
Accumulated deficit (21,864) (13,794) (8,417) (4,346) (2,456)
Total shareholders' equity 23,526 31,518 4,698 8,460 3,348
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Ostex International, Inc. (the "Company") is engaged in the discovery,
development and commercialization of diagnostics and therapeutics for diseases
of the skeleton and connective tissues. The Company believes its lead product,
the Osteomark(R) assay, incorporates breakthrough technology in the area of bone
resorption measurement. Ostex has formed collaborative relationships with a
number of leading diagnostic and pharmaceutical companies to aid in the
commercialization of the Osteomark test.
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 12 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, including the Company's Annual Report on Form 10-K for
fiscal year ended December 31, 1996, that attempt to advise interested parties
of the risks and factors that may affect the company's business.
On May 8, 1995, the Osteomark test first became commercially available in the
United States as a urinary assay that provides a quantitative measure of the
excretion of cross-linked N-telopeptides of type I collagen ("NTx") as an
indicator of human bone resorption. Prior to becoming commercially available,
the Osteomark test was available domestically only for research purposes.
To date, the Company's revenues have consisted primarily of product sales and
fees for research testing services, as well as licensing, research and
development fees from Mochida Pharmaceutical, Co., Ltd. ("Mochida"), Johnson &
Johnson Clinical Diagnostics, Inc. ("Johnson & Johnson") and Boehringer Mannheim
Diagnostics ("Boehringer Mannheim"). 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 $5,350,000 has been earned to date.
Pursuant to the research and development agreement, Mochida has an option to
license the NTx serum assay under development. Future payments totaling
$1,250,000 are contingent upon Mochida's decision to exercise its option to
license the NTx serum assay and achievement of certain milestones.
Expenses incurred have been primarily for selling, administrative, research and
development activities and have exceeded revenues in each year since the
Company's inception. As of December 31, 1996, the Company had an accumulated
deficit of $21,864,000. 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, 1996, 1995 and 1994. The Company had revenues of
$3,947,000 for the year ended December 31, 1996, compared to $3,325,000 and
$1,782,000in the years ended December 31, 1995 and 1994, respectively. Research
and development fees received during 1996 totaled $1,087,000, almost all from
Mochida. Research and development fees in 1995 amounted to $1,495,000 and
consisted of $1,000,000 from Johnson & Johnson and $495,000 from Mochida. This
is compared to $630,000 in 1994, consisting of $450,000 from Boehringer Mannheim
and $180,000 from Mochida.
Revenue from product sales and research testing services for the year ended
December 31, 1996 was $2,860,000, compared to $1,830,000 and $1,152,000 in the
years ended December 31, 1995 and 1994, respectively. The increase of $1,030,000
in 1996 revenue is attributable to higher volumes of Osteomark kits sold to
laboratories and distributors worldwide during the year. The increase of
$678,000 in 1995 is attributable to higher billings for research testing
services sold to companies conducting drug development trials and higher volumes
of kits sold in the U.S. for investigation and research use. The Company's cost
of products sold totaled $926,000 for the year ended December 31, 1996, compared
to $603,000 and $517,000 for the same periods in 1995 and 1994, respectively.
The gross profit rate on product sales for the year ended 1996 was 68%, compared
to 67% for 1995 and 55% for 1994. The change in gross profit rate from 1994 to
1995 was a function of increased volume and overall efficiency gains made in
part by improvements in the production process.
The Company's research and development expenditures totaled $3,163,000,
$3,200,000, and $3,308,000, in 1996, 1995, and 1994, respectively. Research and
development expenditures have remained steady from 1995 to 1996 due to an
increase in research and development grants and royalties paid to the Washington
Research Foundation ("WRF") offset by decreased clinical trial expenditures due
to the completion of one of its clinical trial in November 1995. The decrease in
1995 compared to 1994 is due primarily to the completion of the Company's first
clinical trial.
Selling, general and administrative expenses totaled $9,201,000, $6,583,000, and
$2,222,000, in 1996, 1995 and 1994, respectively. The 40% increase from 1995 to
1996 is due primarily to the implementation of marketing programs to support the
Osteomark assay in the United States, the addition of sales personnel to support
these efforts, increased legal costs involved with the Boehringer Mannheim
arbitration and patent litigation costs. The 196% increase from 1994 to 1995 is
due to the implementation of marketing programs, including national newspaper
and magazine advertising campaigns, test market initiatives and other efforts to
support the launch of the Osteomark test domestically. The addition of sales
personnel to support the field selling effort, legal fees associated with
pursuing patent infringement cases and increased costs associated with becoming
a public company at the beginning of 1995 also contributed to the significantly
higher levels of selling, general and administrative expenses in 1995.
Interest income totaled $1,317,000, $1,684,000, and $194,000 for the years ended
December 31, 1996, 1995, and 1994, respectively. The decrease in 1996 was
primarily due to lower average invested balances resulting from financing the
Company's operations. The increase from 1994 to 1995 was due to higher invested
balances resulting from investment of the proceeds from the public offering of
Company common stock in February 1995.
At December 31, 1996, the Company had tax net operating loss carryforwards of
$26,994,000, 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
The Company has financed its operations from inception primarily through three
private placements of preferred stock that provided approximately $12,800,000
aggregate proceeds, and its initial public offering of 3,645,642 shares of
common stock that provided net proceeds of approximately $32,000,000. Additional
funds of approximately $12,500,000 have been generated through sales of
Osteomark assay kits and fees for research testing services, and collaborative
research and licensing agreements. As of December 31, 1996, the Company had
$21,229,000 in cash and cash equivalents and short-term investments, working
capital of $20,901,000 and total shareholders' equity of $23,526,000. During
1996, cash, cash equivalents and short-term investments decreased by $6,565,000,
working capital decreased by $7,460,000 and shareholders' equity decreased by
$7,992,000.
During 1996, the Company used $6,787,000 of cash for operating activities and
approximately $495,000 for the purchase of laboratory, manufacturing and office
equipment. The Company entered into a note agreement that provides up to
$1,500,000 for expansion of manufacturing and administrative facilities and has
borrowed $746,000 against the note. The note is repayable in 48 equal monthly
installments of principal and interest of $19,784. As of December 31, 1996,
outstanding borrowings under this agreement amounted to $672,000. The Company is
committed to spend approximately $1,000,000 during 1997 for relocation (and
expansion) of its laboratory facilities, $500,000 of which will be financed with
proceeds from the note agreement.
The Company's future capital requirements depend upon many factors, including
effectiveness of Osteomark assay commercialization activities and arrangements;
continued scientific progress in its research and development programs; progress
toward development of the O-CSF technology, which potentially has therapeutic
uses; the costs involved in filing, prosecuting and enforcing patent claims; the
costs involved in legal efforts to enforce patent rights and distribution
contracts; 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, even if the Company does not have an immediate need for additional
cash at that time. If additional financing is not available, the Company
anticipates that its existing available cash, its future license and research
revenues from existing collaboration agreements, product sales and interest
income from short-term investments will be adequate to satisfy its capital
requirements and to fund operations through at least 1998. In addition, the
Company was awarded $6,400,000 as a result of the arbitration of a dispute with
Boehringer Mannheim. Boehringer Mannheim has indicated in post-arbitration
motions that it plans to appeal the award.
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, 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 1996 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.
BALANCE SHEETS
(In thousands, except share amounts)
December 31, 1996 1995
ASSETS
Current Assets:
Cash and cash equivalents $ 1,289 $ 6,241
Short-term investments 19,940 21,553
Trade receivables, net of allowance
of $25 in 1996 640 1,077
Interest receivable 365 482
Inventory, at cost 153 236
Other 156 95
--------- ---------
Total current assets 22,543 29,684
--------- ---------
Property, Plant and Equipment, at cost 3,573 3,078
Less-- accumulated depreciation and amortization (1,099) (597)
--------- ---------
Property, plant and equipment, net 2,474 2,481
--------- ---------
Other Assets, net 674 676
--------- ---------
Total assets $ 25,691 $ 32,841
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,259 $ 1,155
Accrued expenses 234 168
Note payable 149 -
--------- ---------
Total current liabilities 1,642 1,323
--------- ---------
Non-Current Liabilities:
Note payable, net of current portion 523 -
--------- ---------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.01 par value, 50,000,000
shares authorized; 12,441,617 and 12,432,667
issued and outstanding, respectively 125 125
Additional paid-in capital 45,195 45,121
Unrealized gain on short-term investments 70 66
Accumulated deficit (21,864) (13,794)
--------- ---------
Total shareholders' equity 23,526 31,518
--------- ---------
Total liabilities and shareholders' equity $ 25,691 $ 32,841
========= =========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended December 31, 1996 1995 1994
Revenue:
Product sales and research testing services $ 2,860 $ 1,830 $ 1,152
Research and development fees 1,087 1,495 630
-----------------------------------
Total revenues 3,947 3,325 1,782
-----------------------------------
Operating Expenses:
Costs of products sold 926 603 517
Research and development 3,163 3,200 3,308
Selling, general and administrative 9,201 6,583 2,222
-----------------------------------
Total operating expenses 13,290 10,386 6,047
-----------------------------------
Loss from operations (9,343) (7,061) (4,265)
Other Income (Expense):
Interest income 1,317 1,684 194
Interest expense (44) - -
-----------------------------------
Net loss $ (8,070) $ (5,377) $ (4,071)
===================================
Net loss per common and common equivalent share $ (.65) $ (.45) $ (.47)
-----------------------------------
Weighted average number of common and common
equivalent shares outstanding 12,441 11,929 8,737
-----------------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, 1996 1995 1994
Cash Flows from Operating Activities:
Net loss $ (8,070) $ (5,377) $ (4,071)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 504 295 153
Compensation expense from stock awards and grants 33 40 84
Decrease (increase) in receivables 554 (1,318) (37)
Decrease (increase) in inventory 83 (161) 19
Increase in other current assets (61) (15) (45)
Increase in accounts payable and accrued expenses 170 511 465
Loss on disposal of property, plant and equipment - - 5
------------------------------------
Net cash used in operating activities (6,787) (6,025) (3,427)
------------------------------------
Cash Flows from Investing Activities:
Purchases of short-term investments (22,958) (52,521) (7,249)
Proceeds from sales and maturities of short-term investments 24,575 32,996 10,288
Purchases of property, plant and equipment (495) (1,746) (574)
Long-term investments - (500) (232)
------------------------------------
Net cash provided by (used in) investing activities 1,122 (21,771) 2,233
------------------------------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock
and exercise of stock options 41 32,166 225
Deferred offering costs - - (240)
Proceeds from borrowings on note payable 746 - -
Payments on note payable (74) - -
Proceeds from stock subscription payment - 165 -
------------------------------------
Net cash provided by (used in) financing activities 713 32,331 (15)
------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (4,952) 4,535 (1,209)
Cash and Cash Equivalents, beginning of period 6,241 1,706 2,915
------------------------------------
Cash and Cash Equivalents, end of period $ 1,289 $ 6,241 $ 1,706
====================================
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
Unrealized
Preferred Stock Common Stock Additional Gain on Stock Total
Paid-In Short-term Subscriptions Accumulated Shareholders'
Shares Amount Shares Amount Capital Investments Receivable Deficit Equity
-----------------------------------------------------------------------------------------------------
Balance, December 31, 1993 $1,059 $ 10 $2,720 $ 27 $ 12,934 $ - $(165) $ (4,346) $ 8,460
Issuance of common stock
in exchange for license
granted - February 10,
1994 ($5.00 per share) - - 5 - 25 - - - 25
Compensation expense
for stock option grants - - - - 59 - - - 59
Stock options and
warrants exercised - - 286 3 222 - - - 225
Net loss - - - - - - - (4,071) (4,071)
----------------------------------------------------------------------------------------------------
Balance, December 31, 1994 1,059 10 3,011 30 13,240 - (165) (8,417) 4,698
Sale of common stock
in initial public
offering and conversion
of preferred stock (1,059) (10) 9,153 92 31,468 - - - 31,550
Compensation expense
for stock option
grants - - - - 40 - - - 40
Stock options and
warrants exercised - - 269 3 373 - - - 376
Payment for subscription
receivable - - - - - - 165 - 165
Unrealized gain on
short-term investments - - - - - 66 - - 66
Net loss - - - - - - - (5,377) (5,377)
----------------------------------------------------------------------------------------------------
Balance, December 31, 1995 - - 12,433 125 45,121 66 - (13,794) 31,518
Compensation expense
for stock option grants - - - - 33 - - - 33
Stock options exercised - - 9 - 41 - - - 41
Unrealized gain on
short-term investments - - - - - 4 - - 4
Net loss - - - - - - - (8,070) (8,070)
----------------------------------------------------------------------------------------------------
Balance, December 31, 1996 - $ - $12,442 $125 $ 45,195 $ 70 $ - $ (21,864) $ 23,526
====================================================================================================
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Ostex International, Inc. (the "Company") is engaged in the discovery,
development and commercialization of diagnostics and therapeutics for diseases
of the skeleton and connective tissues. The Company believes its lead product,
the Osteomark assay, incorporates breakthrough technology in the area of bone
resorption measurement. Ostex has formed collaborative relationships with a
number of leading diagnostic and pharmaceutical companies to aid in the
commercialization of the Osteomark test.
The Company markets the Osteomark assay through distributors and its own sales
force. While the United States has been the Company's principal market, an
increasing percentage of the Company's sales are overseas, primarily in Europe.
The Company was incorporated in the state of Washington on May 11, 1989 and
completed its initial public offering ("IPO") of common stock in February 1995.
Prior to the year ended December 31, 1995, the Company was considered to be in
the development stage for financial reporting purposes.
ESTIMATES AND UNCERTAINTIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities. Actual results could
differ from those estimates.
REVENUE RECOGNITION
License and research and development fees are recognized when the related
contract is signed and upon attainment of the agreed-upon milestones. Research
testing fees are recognized when the services are substantially complete.
Product sales are recognized upon shipment.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and
depreciated on the straight-line method over the estimated useful life of the
asset. Estimated lives range from five to 10 years. Depreciation expense charged
to operations during 1996, 1995 and 1994 was $502,000, $294,000 and $153,000,
respectively.
SHORT-TERM INVESTMENTS
The Company considers all of its investments as "available
for sale," reporting them at fair market value with unrealized gains and losses
included in Shareholders' Equity. Realized gains and losses and declines in
value of securities judged to be other-than-temporary are included in income.
INVENTORY
Inventory consists principally of raw materials and finished goods. Inventories
are stated at the lower of cost (first-in, first-out) or market.
STATEMENTS OF CASH FLOWS
For the purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less when
purchased to be cash equivalents. The carrying amount approximates fair value
due to the short maturity of these instruments.
NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE
For the years ended December 31, 1996 and 1995, net loss per common and common
equivalent share was based on the weighted average number of common shares
outstanding during each period. The 1994 net loss per share computation assumes
all series of convertible preferred stock outstanding at December 31, 1994 had
been converted to common stock as of January 1, 1994. The actual conversion
occurred in 1995 in connection with the completion of the Company's IPO. Common
stock equivalents in 1994 include shares issuable upon the exercise of
outstanding stock options or warrants granted within one year of the IPO.
ADVERTISING
The production costs of advertising are expensed as incurred.
NOTE 2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1996 and 1995, consisted of the
following (in thousands):
1996 1995
Leasehold improvements $ 1,463 $ 1,346
Laboratory and manufacturing
equipment 1,198 1,045
Computers and office equipment 912 687
-----------------
3,573 3,078
Accumulated depreciation (1,099) (597)
-----------------
Net property, plant and equipment $ 2,474 $ 2,481
=================
NOTE 3. SHORT-TERM INVESTMENTS
The Company's short-term investments at December 31, 1996 and 1995, consisted of
the following (in thousands):
1996 1995
United States treasury obligations $ 8,807 $ 15,082
Federal agency obligations and
discount notes 7,636 2,626
Corporate and municipal bonds 3,427 1,815
Commercial paper - 1,964
Unrealized gain on short-term
investments 70 66
------------------
$ 19,940 $ 21,553
==================
The maturity of all classes of the Company's short-term investments was less
than two years at December 31, 1996 and 1995.
NOTE 4. OTHER ASSETS
Other assets include investments totaling $637,000 in preferred stock of Metrika
Laboratories, Inc., a privately held medical device company in the development
stage. The investment represents an ownership interest of less than 10% and is
recorded in the accompanying financial statements at cost.
NOTE 5. ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1995, consisted of the following (in
thousands):
1996 1995
Business taxes payable $ 127 $ 19
Accrued wages, benefits
and payroll taxes 107 149
---------------
$ 234 $ 168
===============
NOTE 6. NOTE PAYABLE
In July 1996, the Company borrowed $746,000 under a secured promissory note
agreement. The note agreement allows the Company to make additional borrowings
up to a maximum of $1,500,000 for future capital needs. The note is secured by
real property and equipment and is payable in equal monthly installments of
principal and interest of $19,784. The interest rate is fixed at 12.5% for
amounts owed as of December 31, 1996. Interest on any future borrowings will be
based on the three-year U.S. Treasury Note at the time of securing the loan,
plus a margin of 5.80%. During 1996, the Company made $44,000 in payments for
interest.
Minimum principal payments are as follows (in thousands):
1997 $ 149
1998 183
1999 207
2000 133
-----
$ 672
=====
NOTE 7. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On January 25, 1995, the Company completed its initial public offering of
3,645,642 shares of common stock at
$9.50 per share for proceeds of $34,634,000 less underwriting discounts,
commissions and other offering costs approximating $3,085,000. Convertible
preferred stock outstanding immediately prior to the closing was converted into
5,506,464 shares of common stock.
NOTE 7. SHAREHOLDERS' EQUITY (continued)
STOCK OPTION PLANS
The Company has an Amended and Restated Stock Option Plan, which was originally
adopted in 1989 (the "Old Plan"), under which a total of 1,653,000 shares of
common stock are reserved for issuance. As of December 31, 1996, 479,000 shares
have been exercised, and 1,174,000 shares are subject to outstanding options at
exercise prices ranging from $.08 to $5.00 per share with a remaining
weighted-average contractual life of six years. No further options may be
granted by the Company under the Old Plan, which is administered by the
Compensation Committee of the Board of Directors. These options vest over
periods of three to four years. Total options vested under the Old Plan were
856,000, 603,000 and 707,500 shares, respectively, as of December 31, 1996, 1995
and 1994. The weighted-average exercise price of these vested options was $3.68
as of December 31, 1996. All options granted under the Old Plan expire either 90
days after termination of employment or 10 years from the date of grant,
whichever occurs first.
Prior to the Company's IPO, the Company granted nonqualified options whose
exercise price was below the estimated fair market value of the Company's common
stock on the dates of grant. The difference between the grant price and the
estimated fair market value on the dates of grant was recognized as compensation
expense over the vesting period of the option. Total compensation expense
recognized was approximately $33,000, $40,000 and $59,000 in 1996, 1995 and
1994, respectively. Compensation expense to be recognized in future periods
related to these grants was approximately $6,000 as of December 31, 1996.
In June 1994, the Company adopted its 1994 Stock Option Plan (the "1994 Plan")
and its Directors' Nonqualified Stock Option Plan (the "Directors' Plan"). An
aggregate of 1,000,000 shares of common stock were collectively reserved for
issuance under these plans. As of December 31, 1996, options for 1,000 shares
had been exercised, and 654,000 shares are subject to outstanding options at
exercise prices ranging from $8.75 to $17.13 per share with a remaining
weighted-average contractual life of nine years.
All options granted under the 1994 Plan and Directors' Plan expire either 90
days after termination of employment or 10 years from the date of grant,
whichever occurs first. All options have been granted at the market value of the
common stock on the date of grant and vest over three to four years. Total
options vested under the 1994 Plan and Directors' Plan were 58,000 at December
31, 1996 and none in prior years. The weighted-average exercise price of vested
options was $9.23 as of December 31, 1996.
Information relating to activity under the Company's stock option plans is as
follows:
Weighted
Shares Average
Subject to Exercise
Option Price
Balance, December 31, 1993 973,750 $ 1.26
Granted 776,750 5.00
Exercised (192,185) .80
Canceled (13,125) 4.33
------------------------
Balance, December 31, 1994 1,545,190 3.19
Granted 245,500 9.09
Exercised (268,786) 1.38
Canceled (90,625) 3.56
------------------------
Balance, December 31, 1995 1,431,279 4.51
Granted 446,000 12.30
Exercised (8,950) 4.56
Canceled (40,703) 9.64
------------------------
Balance, December 31, 1996 1,827,626 $ 6.61
========================
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). Accordingly, no compensation cost has been recognized for stock
options issued at market value on the date of grant. Had compensation cost for
the Company's stock option plans been determined based on the fair value of the
options at the grant date for awards in 1996 and 1995 consistent with the
provisions of SFAS No. 123, the Company's net loss and net loss per common
equivalent share would have been increased to the pro forma amounts indicated
below (in thousands):
1996 1995
Net loss - as reported $ (8,070) $ (5,377)
Net loss - pro forma $ (8,729) $ (5,528)
Net loss per common and common
equivalent share - as reported $ (.65) $ (.45)
Net loss per common and common
equivalent share - pro forma $ (.70) $ (.46)
The fair value of each option grant is established on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: zero dividend yield; expected
volatility of 59%; risk-free interest rates varying by grant date between 5.8%
and 6.5%; and expected lives of five years. Because the SFAS No. 123 method of
accounting has not been applied to options granted prior to January 1, 1995, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years. The weighted-average grant date fair value of options
granted during 1996 and 1995 according to the Black-Scholes option pricing model
was $7.00 and $5.11.
NOTE 8. LICENSING AGREEMENTS
Under the Company's worldwide exclusive license agreements with the Washington
Research Foundation ("WRF") for the Urinary Assay for Measuring Bone Resorption
and Osteoclast Colony Stimulating Factor ("O-CSF") technologies, the Company has
the right to manufacture and market these technologies developed from certain
research by the Univer-sity 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. Under the O-CSF license, both cash
consideration paid and the market value of shares issued shall not exceed
$500,000 for each therapeutic licensed product and $150,000 for each diagnostic
licensed product. All legal costs incurred by WRF in connection with the filing,
prosecution and maintenance of certain defined patent rights, will be paid by
the Company. During 1996, 1995 and 1994, the Company incurred approximately
$154,000, $379,000 and $220,000 of license fees, including the value of stock
grants, and patent legal expenses. All license and legal fees and stock grants
have been expensed as research and development costs. The Company is obligated
to pay WRF royalties on net sales of any licensed products.
NOTE 9. REVENUES
The Company has a license agreement and a research and development agreement
with Mochida. Under the license agreement, the Company granted exclusive
manufacturing, marketing and distribution rights to certain of the Company's
products in Japan, and through December 31, 1996 had earned $2,000,000 in
connection with this agreement. Under the research and development agreement,
the Company earned fees of $1,080,000, $550,000 and $200,000 during 1996, 1995
and 1994, respectively. As of December 31, 1996, the Company had received all
milestone payments contemplated by the research and development agreement.
Mochida has an option to license the Company's NTx serum assay under
development.
During 1995, the Company entered into research, development, license and supply
agreements with Johnson & Johnson under which Ostex earned $1,000,000 during
1995. These agreements grant Johnson & Johnson a license to manufacture, sell
and distribute certain products utilizing Ostex's bone resorption technology.
Ostex will also receive royalties on Johnson & Johnson sales of products
incorporating the Ostex technology.
NOTE 10. RELATED PARTY TRANSACTIONS
LEGAL AND CONSULTING SERVICES
The Company's chairman and chief executive officer is a nonpracticing director
and shareholder in a law firm that provides legal services to the Company.
During 1996, 1995 and 1994, the Company paid approximately $215,000, $386,000
and $516,000, respectively, for these services. The 1995 and 1994 amounts
include cost of services rendered in connection with raising equity capital and,
accordingly, have been recorded as a charge to shareholders' equity.
RESEARCH AGREEMENTS
The Company has entered into two research agreements with the University of
Washington which extend through March 31, 1999. Total expense was $304,000,
$185,000 and $316,000 during 1996, 1995 and 1994, respectively. Future minimum
payments under these agreements as of December 31, 1996 are as follows (in
thousands):
1997 $ 535
1998 469
1999 200
-------
$ 1,204
=======
NOTE 11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has entered into certain noncancelable operating leases for office
space and equipment. Future minimum payments as of December 31, 1996 under these
leases are as follows (in thousands):
1997 $ 564
1998 490
1999 490
2000 484
2001 491
-------
$ 2,519
=======
Total rent expense was approximately $538,000, $374,000 and $251,000 in 1996,
1995 and 1994, respectively.
NOTE 11. COMMITMENTS AND CONTINGENCIES (continued)
LITIGATION
On August 25, 1995, the Company commenced an arbitration proceeding against
Boehringer Mannheim for breach of contract. The hearing before a panel of the
American Arbitration Association (the "Panel") was held in Seattle on September
3-11, 1996. On January 28, 1997, Ostex received a final award from the Panel.
The Panel's award instructs Boehringer Mannheim to pay Ostex $5,720,000 in
damages for lost profits, and $700,000 to reimburse Ostex for part of its
attorneys' fees and expenses. The award provides that interest will be paid on
such amounts, at the rate of 8% per annum, to the extent that such amounts
remain unpaid 30 days from the January 28, 1997 date of the award. The Panel
determined that Boehringer Mannheim breached a license agreement by failing to
use its best efforts to effectively promote the Osteomark MTP kits. Boehringer
Mannheim's counterclaims against Ostex were denied by the Panel. Boehringer
Mannheim has indicated in post-arbitration motions that it plans to appeal the
award. Accordingly, the award has not been reflected in the Company's financial
statements as of December 31, 1996.
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
biotechnology company based in Denmark, and Diagnostic Systems Laboratories,
Inc., for patent infringement. The Company believes Osteometer's bone resorption
immunoassay incorporates technology which infringes on patented Ostex
technology. In September 1996, the defendants filed a response denying
infringement and counterclaimed that Ostex's patent is invalid and
unenforceable. The lawsuit is scheduled for trial commencing December 2, 1997.
At the present time management cannot estimate the outcome of the infringement
action.
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 statements of operations.
The change in the valuation allowance during 1996 and 1995 was $2,755,000 and
$3,475,000, respectively. The Company's deferred tax assets (liabilities) at
December 31, 1996 and 1995 are as follows (in thousands):
1996 1995
Net operating loss carryforward $ 9,448 $ 6,576
Research and experimentation
credits 62 135
Excess of market value over the
exercise price of common
stock options 77 65
Section 195 start-up expenses 52 151
Amortization and depreciation (44) (64)
Other 68 45
--------------------
Gross deferred tax asset 9,663 6,908
Valuation allowance (9,663) (6,908)
--------------------
Net deferred tax asset $ - $ -
====================
At December 31, 1996, the Company had tax net operating loss carryforwards of
$26,994,000, which will begin to expire in 2004.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Ostex International, Inc.:
We have audited the accompanying balance sheets of Ostex International, Inc. (a
Washington corporation) as of December 31, 1996 and 1995, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ostex International, Inc. as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/S/ Athur Andersen L.L.P.
Seattle, Washington,
February 12, 1997
CORPORATE DIRECTORY
EXECUTIVE OFFICERS AND DIRECTORS
H. RAYMOND CAIRNCROSS
Chairman of the Board of Directors, Co-Founder, and Chief Executive Officer
ROBERT J. GLASER
Director, President, and Chief Operating Officer
ROBERT M. LITTAUER
Senior Vice President, Finance and Administration
JEFFREY J. MILLER, PH.D., J.D.
Senior Vice President, Corporate Development,Secretary
THOMAS F. BRODERICK
Vice President, Intellectual Property
NANCY J.S. MALLINAK
Vice President, Regulatory and Clinical Affairs
WILLIAM K. STRELKE
Vice President, Sales and Marketing
JOHN WYNNE
Vice President, European Operation
THOMAS J. CABLE
Director;
Partner and Co-Founder,
Cable & Howse Ventures, Inc.
DAVID R. EYRE, PH.D.
Director and Co-Founder;
Burgess Chair of Orthopedic Research,
University of Washington
GILBERT S. OMENN, M.D., PH.D.
Director;
Dean, School of Public Health, University of Washington
GREGORY D. PHELPS
Director;
Senior Vice President,
Genzyme Corporation
SCIENTIFIC ADVISORY BOARD
CHARLES H. CHESNUT III, M.D.
Chair, Ostex Scientific Advisory Board;
Professor of Medicine and Radiology,
Professor of Nutritional Sciences,
Adjunct Professor of Orthopedics,
University of Washington
ELIZABETH BARRETT-CONNOR, M.D.
Professor and Chair,
Family and Preventive Medicine,
Director, Division of Epidemiology,
University of California, San Diego
DAVID R. EYRE, PH.D.
Burgess Chair of Orthopedic Research, Adjunct Professor of Biochemistry and
Oral Biology, Director, Osteoporosis Research Laboratories, University of
Washington
HERBERT A. FLEISCH, PH.D.
Professor and Chairman, Department of Pathophysiology, University of Berne,
Berne, Switzerland
C. CONRAD JOHNSTON, JR. M.D.
Professor of Medicine, Indiana School of Medicine, Director, Division of
Endocrinology and Metabolism, Indiana University Medical Center
HOWARD JUDD, M.D.
Chairman, Department of Obstetrics and Gynecology, Olive View/UCLA Medical
Center; Professor, Department of Obstetrics and Gynecology, Chief, Division of
Reproductive Endocrinology, UCLA Clinical Center for Women's Health Initiative
ROBERT LINDSAY, M.D., PH.D.
Chief of Internal Medicine, Helen Hayes Hospital, New York; President,
National Osteoporosis Foundation
ALLAN LIPTON
Professor, Departments of Medicine; Chief, Division of Oncology, The Milton
S. Hershey Medical Center, The Pennsylvania State University
SOCRATES PAPAPOULOS, M.D.
Associate Professor of Medicine, Director of Bone and Mineral Research,
Department of Endocrinology and Metabolism, University of Leiden Medical School,
Leiden, The Netherlands
VERONICA RAVNIKAR, M.D.
Professor of Obstetrics and Gynecology, Director of Reproductive
Endocrinology and Infertility, University of Massachusetts Medical Center
FREDERICK R. SINGER, M.D.
Medical Director, Osteoporosis/Metabolic Bone Disease Program, St. Johns
Hospital and Health Center; Professor of Medicine in Residence, UCLA
CORPORATE HEADQUARTERS
OSTEX INTERNATIONAL, INC.
2203 Airport Way South, Suite 400
Seattle, WA 98134-9967
Tel: (206) 292-8082
Fax: (206) 292-8625
INDEPENDENT ACCOUNTANTS
ARTHUR ANDERSEN LLP
801 Second Avenue, Suite 800
Seattle, WA 98104
LEGAL COUNSEL
CAIRNCROSS & HEMPELMANN
701 Fifth Avenue, 70th Floor
Seattle, WA 98104
TRANSFER AGENT AND REGISTRAR
CHASEMELLON SHAREHOLDER SERVICES L.L.C.
520 Pike Street, Suite 1220
Seattle, WA 98101
INVESTOR RELATIONS
LIPPERT/HEILSHORN & ASSOCIATES 300 Montgomery Street, Suite 1140 San Francisco,
CA 94104
SEC FORM 10-K
A copy of the Company's annual report to the Securities and Exchange Commission
on Form 10-K is available without charge upon written request to Investor
Relations at the Company's headquarters.
SHAREHOLDERS OF RECORD
As of December 31, 1996, the Company had 156 registered shareholders of record
of its common stock.
SHAREHOLDER INQUIRIES
Communications concerning transfer requirements, lost certificates and changes
of address should be directed to the Transfer Agent. For general information
about the Company and its activities, contact the Investor Relations Department
at Company headquarters.
INFORMATION SERVICE
For timely information about Ostex, news releases are available via facsimile on
the Company's News-on-Demand service by calling (800) 356-8061 or on the World
Wide Web at http://www.hnt.com/bizwire/cnn/451.htm.
PRICE RANGE OF COMMON STOCK
The following table lists the high and low trading places for the Company's
common stock as reported on the Nasdaq National Market System.
1996 High Low
1st quarter $ 20.00 $ 12.25
2nd quarter 16.25 9.125
3rd quarter 11.50 6.625
4th quarter 8.75 5.25
------------------------------------
1995 High Low
1st quarter $ 10.88 $ 9.375
(from January 25)
2nd quarter 23.50 8.00
3rd quarter 23.50 16.75
4th quarter 25.00 16.00
The Company's common stock is traded on the Nasdaq National Market System under
the symbol OSTX. No dividends have been paid on the common stock.
ANNUAL MEETING
The Annual Meeting of Shareholders will be held Monday, June 2, 1997 at 9:00 am
at the Bellevue Athletic Club, Bellevue, WA.
OSTEX WEBSITE
The Ostex Website is currently under development. For more information about
Ostex, visit us at http://www.ostex.com.
Osteomark and Ostex are registered trademarks of Ostex International, Inc.