OSTEX INTERNATIONAL, INC.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended December 31, 1997 1996 1995 1994 1993
Statement of Operations Data:
Revenues:
Product sales and research testing services $ 3,658 $ 2,860 $ 1,830 $ 1,152 $ 417
License and research and development fees 450 1,087 1,495 630 1,485
------------------------------------------------------
Total revenues 4,108 3,947 3,325 1,782 1,902
------------------------------------------------------
Operating expenses:
Costs of products sold 899 926 603 517 226
Research and development 4,470 3,163 3,200 3,308 1,940
Selling, general and administrative 8,031 9,201 6,583 2,222 1,754
------------------------------------------------------
Total operating expenses 13,400 13,290 10,386 6,047 3,920
------------------------------------------------------
Loss from operations (9,292) (9,343) (7,061) (4,265) (2,018)
Other income:
Proceeds from legal settlement 6,200 - - - -
Interest income, net 828 1,273 1,684 194 128
------------------------------------------------------
======================================================
Net loss $ (2,264) $ (8,070) $ (5,377) $ (4,071) $(1,890)
- -------------------------------------------------------------======================================================
Basic and diluted net loss per common and
common equivalent share $ (0.18) $ (0.65) $ (.045) $ (0.47) $ -
- -------------------------------------------------------------======================================================
Shares used in calculation of net loss per share $ 12,574 $ 12,441 $ 11,929 $ 8,737 $ -
- -------------------------------------------------------------======================================================
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995 1994 1993
Balance Sheet Data:
Cash, cash equivalents and short-term
investments $ 18,965 $ 21,229 $ 27,794 $ 3,668 $
7,916
Working capital 18,368 20,901 28,361 3,172 7,890
Total assets 24,112 25,691 32,841 5,590 8,807
Accumulated deficit (24,128) (21,864) (13,794) (8,417) (4,346)
Total shareholders equity $ 21,644 $ 23,526 $ 31,518 $ 4,698 $ 8,460
- -------------------------------------------------------------======================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Ostex International, Inc. (the "Company") is engaged in the discovery and
commercialization of products associated with osteoporosis and other
collagen-related diseases. The Company believes its lead product, the
OSTEOMARK-registered trademark- test, incorporates breakthrough technology in
the area of bone resorption measurement. Ostex has formed collaborative
relationships with leading diagnostic and pharmaceutical companies to aid in the
commercialization of Osteomark.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements which
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed below, that could cause actual results
to differ materially from historical results or those anticipated. Words used
herein such as "believes," "anticipates," "expects," "intends," and similar
expressions are intended to identify forward-looking statements but are not the
exclusive means of identifying such statements. In addition, the disclosures on
page 23 under the caption "Other Factors that May Affect Operating Results,"
consist principally of a brief discussion of risks which may affect future
results and are thus, in their entirety, forward-looking in nature. Readers are
urged to carefully review and consider the various disclosures made by the
Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission (the "SEC"), including the Company's Annual
Report on Form 10-K for fiscal year ended December 31, 1997, that attempt to
advise interested parties of the risks and factors that may affect the Company's
business.
On May 8, 1995, the Osteomark test first became commercially available in
the United States as a urinary assay that provides a quantitative measure of the
excretion of cross-linked N-telopeptides of type I collagen ("NTx") as an
indicator of human bone resorption. Prior to becoming commercially available,
the Osteomark test was available domestically only for research purposes.
To date, the Company's revenues have consisted primarily of product sales
and fees for research testing services, as well as licensing, research and
development fees from Mochida Pharmaceutical, Co., Ltd. ("Mochida"), and Johnson
& Johnson Clinical Diagnostics, Inc. ("Johnson & Johnson"). Mochida has agreed
to pay Ostex up to approximately $6,600,000 in a combination of licensing fees
and research and development milestone payments, of which $5,850,000 has been
received to date. Under the research and development agreement, Mochida has an
option to license the NTx serum assay under development. Future payments
totaling $750,000 are contingent upon Mochida's decision to exercise its option
to license the NTx serum assay and achievement of certain milestones.
Expenses incurred have been primarily for selling, administrative, research
and development activities and have exceeded revenues in each year since the
Company's inception. As of December 31, 1997, the Company had an accumulated
deficit of $24,128,000. Successful future operations depend upon the Company's
ability to effectively commercialize and market its products. The Company will
require a substantial amount of additional funds to develop new products and to
fund the level of selling, general and administrative expenses that the Company
expects to incur in connection with its product commercialization efforts in the
next several years.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995.
The Company had revenues of $4,108,000 for the year ended December 31,
1997, compared to $3,947,000 and $3,325,000 for the years ended December 31,
1996 and 1995, respectively. Revenue from product sales and research testing
services for the year ended December 31, 1997 was $3,658,000, compared to
$2,860,000 and $1,830,000 in the years ended December 31, 1996 and 1995,
respectively. The increase of $798,000 in 1997 and $1,030,000 in 1996 is
attributable to higher volumes of Osteomark kits sold to laboratories and
distributors worldwide during those years.
License and research and development fees received during 1997 totaled
$450,000, all from Mochida. License and research and development fees in 1996
totaled $1,087,000, primarily from Mochida. The $637,000 reduction in fees
collected under license and research and development agreements with Mochida
from 1996 to 1997 was expected and is due to attainment of scheduled milestones.
In 1995 fees of $1,495,000 consisted of $1,000,000 from Johnson & Johnson and
$495,000 from Mochida.
The Company's cost of products sold totaled $899,000 for the year ended
December 31, 1997, compared to $926,000 and $603,000 for the same periods in
1996 and 1995, respectively. The gross profit rate on product sales for the year
ended 1997 was 75%, compared to 68% for 1996 and 67% for 1995. The change in
gross profit rate from 1996 to 1997 and from 1995 to 1996 was a function of
increased manufacturing volume and overall efficiency gains made in part by
improvements in the production process. Increased manufacturing volume reduces
unit cost by spreading certain fixed overhead expenses over a higher number of
units produced.
The Company's research and development expenditures totaled $4,470,000,
$3,163,000, and $3,200,000, in 1997, 1996, and 1995, respectively. The
$1,307,000 increase from 1996 to 1997 was primarily attributable to funding the
NTx test point-of-care development programs with Hologic, Inc. ("Hologic") and
Metrika, Inc. ("Metrika"). In addition, research and development expenses
increased due to the cost of clinical studies commenced at the end of 1996 and
during 1997. Included in 1997 was a study for the determination of the NTx
reference range in males, a study to complement physician interpretation of NTx
results in postmenopausal women, and preliminary studies for the use of the
Osteomark test in helping to identify bone metastases. Additionally, research
and development expenditures increased in 1997 due to the extension of research
grants to the University of Washington ("UW"). Expenditures remained steady from
1995 to 1996 due to an increase in research and development grants and royalties
paid to the Washington Research Foundation ("WRF") offset by decreased clinical
trial expenditures due to the completion of a clinical trial in November 1995.
Selling, general and administrative expenses totaled $8,031,000,
$9,201,000, and $6,583,000, in 1997, 1996 and 1995, respectively. The 13%
decrease from 1996 to 1997 was primarily due to the completion of the Company's
free testing program in 1996 and the completion of a hearing before the American
Arbitration Association against Boehringer Mannheim GmbH ("Boehringer Mannheim")
in September 1996, partially offset by increased costs of litigation in
connection with the Osteometer and C.R. Bard lawsuits (see Note number 11 on
page 32 in the Notes to Financial Statements). The 40% increase in selling,
general and administrative expenses from 1995 to 1996 was due primarily to the
implementation of marketing programs to support the Osteomark test in the United
States, the addition of sales personnel to support these efforts, increased
legal costs involved with the Boehringer Mannheim arbitration and patent
litigation costs.
Proceeds from legal settlement resulted from the receipt of a non-recurring
payment of $6,200,000 from Boehringer Mannheim in October 1997. The settlement
between the two parties was the result of a ruling by the American Arbitration
Association awarding damages to the Company in connection with a dispute between
the Company and Boehringer Mannheim.
Interest income totaled $901,000, $1,317,000, and $1,684,000 for the years
ended December 31, 1997, 1996, and 1995, respectively. The decrease in 1997 and
1996 was primarily due to lower average invested balances resulting from using
cash to fund the Company's operating losses.
At December 31, 1996, the Company had tax net operating loss carryforwards
of $29,527,000, which will begin to expire in 2004. Income taxes are provided in
the Statements of Operations as required by Statement of Financial Accounting
Standards No. 109, "Accounting For Income Taxes" ("SFAS No. 109"). Under SFAS
No. 109, deferred taxes are determined using an asset and liability approach.
The Company has determined that the tax assets do not satisfy the recognition
criteria set forth in SFAS No. 109. Accordingly, a valuation adjustment has been
recorded against the applicable deferred tax assets, and therefore no tax
benefit has been recorded.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from inception primarily through
three private placements of preferred stock that provided approximately
$12,800,000 aggregate proceeds, and its initial public offering of 3,645,642
shares of common stock that provided net proceeds of approximately $32,000,000.
Funds of approximately $16,608,000 have been generated through sales of
Osteomark test kits and fees for research testing services, collaborative
research and licensing agreements. The settlement of a dispute with Boehringer
Mannheim provided an additional $6,200,000. As of December 31, 1997, the Company
had $18,965,000 in cash and cash equivalents and short-term investments, working
capital of $18,368,000 and total shareholders' equity of $21,644,000. During
1997, cash, cash equivalents and short-term investments decreased by $2,264,000,
working capital decreased by $2,533,000 and shareholders' equity decreased by
$1,882,000. The decreases were primarily the result of the net loss incurred
during 1997.
The Company used $1,181,000 of cash for operating activities in 1997
($7,381,000 excluding the receipt of $6,200,000 from Boehringer Mannheim), and
$1,105,000 for laboratory expansion and the purchase of laboratory,
manufacturing and office equipment. In 1996, the Company entered into a note
agreement that provides up to $1,500,000 for expansion of manufacturing and
administrative facilities and has borrowed $746,000 against the note. The note
is repayable in 48 equal monthly installments of principal and interest of
$19,784. As of December 31, 1997, outstanding borrowings under this agreement
amounted to $509,000. The Company does not anticipate additional borrowings
during 1998 and has no material capital purchase commitments.
The Company's future capital requirements depend upon many factors,
including effectiveness of Osteomark test commercialization activities and
arrangements; continued scientific progress in its research and development
programs; the costs involved in filing, prosecuting and enforcing patent claims;
the costs involved in legal efforts to enforce patent rights; and the time and
costs involved in obtaining regulatory approvals. Additional funds from equity
or debt financing will be required. There can be no assurance that such
additional funds will be available on favorable terms, if at all. Because of the
Company's significant long-term cash requirements, it may seek to raise
additional capital if conditions in the public equity markets are favorable,
even if the Company does not have an immediate need for additional cash at that
time. If additional financing is not available, the Company anticipates that its
existing available cash, its future license and research revenues from existing
collaboration agreements, its current level of product sales and interest income
from short-term investments will be adequate to fund its operations through
1999.
OTHER FACTORS THAT MAY AFFECT OPERATING RESULTS
The Company's operating results may fluctuate due to a number of factors
including, but not limited to, volume and timing of product sales, pricing,
market acceptance of the Company's products, changing economic conditions in the
healthcare industry, activities of competitors, delays and increased costs of
product and technology development, the Company's ability to develop and
maintain collaborative arrangements, the outcome of litigation, and the effect
of the Company's accounting policies and other risk factors detailed in the
Company's 1997 Form 10-K and other SEC filings. All of the foregoing factors are
difficult for the Company to predict and can materially adversely affect the
Company's business and operating results.
The Company is currently in the process of evaluating its information
technology infrastructure for the Year 2000 compliance. The Company does not
expect that the cost to modify its information technology infrastructure to be
Year 2000 compliant will be material to its financial condition or results of
operations. The Company does not anticipate any material disruption in its
operations as a result of any failure by the Company to be in compliance. The
Company does not currently have any information concerning the Year 2000
compliance status of its suppliers and customers. In the event that any of the
Company's significant suppliers or customers does not successfully and timely
achieve Year 2000 compliance, the Company's business or operations could be
adversely affected.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31, 1997 1996
ASSETS
Current Assets:
Cash and cash equivalents $ 2,201 $ 1,289
Short-term investments 16,764 19,940
Trade receivables and other current assets,
net of allowance of $25 in 1997 and 1996 1,344 1,161
Inventory, at cost 201 153
-----------------
Total current assets 20,510 22,543
-----------------
Property, Plant and Equipment, net of
accumulated depreciation 2,965 2,474
Other Assets 637 674
-----------------
Total assets $24,112 $ 25,691
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,429 $ 1,259
Accrued expenses 530 234
Current portion of note payable 183 149
------------------
Total current liabilities 2,142 1,642
------------------
Noncurrent Liabilities:
Note payable, net of current portion 326 523
------------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.01 par value, 50,000,000
shares authorized; 12,696,250 and 12,441,617
issued and outstanding, respectively 127 125
Additional paid-in capital 45,642 45,195
Unrealized gain on short-term investments 3 70
Accumulated deficit (24,128) (21,864)
-----------------
Total shareholders' equity 21,644 23,526
-----------------
Total liabilities and
shareholders' equity $24,112 $25,691
=================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, 1997 1996 1995
Revenue:
Product sales and research testing services $ 3,658 $ 2,860 $ 1,830
License and research and development fees 450 1,087 1,495
------------------------------
Total revenues 4,108 3,947 3,325
Operating Expenses:
Cost of products sold 899 926 603
Research and development 4,470 3,163 3,200
Selling, general and administrative 8,031 9,201 6,583
------------------------------
Total operating expenses 13,400 13,290 10,386
------------------------------
Loss from operations (9,292) (9,343) (7,061)
Other Income (Expense):
Proceeds from legal settlement 6,200 - -
Interest income 901 1,317 1,684
Interest expense (73) (44) -
------------------------------
Net loss $(2,264) $(8,070) $(5,377)
==============================
Basic and diluted net loss per common and
common equivalent share $ (0.18) $ (0.65) $ (0.45)
==============================
Shares used in calculation of net loss per share 12,574 12,441 11,929
==============================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31, 1997 1996 1995
Cash Flows from Operating Activities:
Net loss $(2,264) $(8,070) $(5,377)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 651 504 295
Expense from stock awards
and grants 197 33 40
(Increase) decrease in receivables (10) 554 (1,318)
(Increase) decrease in inventory (48) 83 (161)
(Increase) in other current assets (173) (61) (15)
Increase in accounts payable
and accrued expenses 466 170 511
-----------------------------
Net cash used in operating
activities (1,181) (6,787) (6,025)
-----------------------------
Cash Flows from Investing Activities:
Purchases of short-term investments (20,426) (22,958) (52,521)
Proceeds from sales and maturities of
short-term investments 23,535 24,575 32,996
Purchases of property, plant and equipment (1,105) (495) (1,746)
Long-term investments - - (500)
-----------------------------
Net cash provided by (used
in) investing activities 2,004 1,122 (21,771)
-----------------------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock
and exercise of stock options 252 41 32,166
Proceeds from borrowings on note payable - 746 -
Payments on note payable (163) (74) -
Proceeds from stock subscription payment - - 165
-----------------------------
Net cash provided by
financing activities 89 713 32,331
-----------------------------
Net Increase (Decrease) in
Cash and Cash Equivalents 912 (4,952) 4,535
Cash and Cash Equivalents,
beginning of period 1,289 6,241 1,706
-----------------------------
Cash and Cash Equivalents,
end of period $ 2,201 $ 1,289 $ 6,241
=============================
Supplemental Disclosure of Noncash Transactions:
Stock granted for research and
development services $ 191 $ - $ -
=============================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Unrealized
Additional Gain/Loss on Stock Total
Preferred Stock Common Stock Paid-In Short-term Subscriptions Accumulated Shareholders'
Shares Amount Shares Amount Capital Investments Receivable Deficit Equity
Balance, December 31, 1994 1,059 $10 3,011 $30 $13,240 $- $(165) $(8,417) $ 4,698
-----------------------------------------------------------------------------------------------
Sale of common stock in initial
public offering and
conversionof preferred stock (1,059) (10) 9,153 92 31,468 - - - 31,550
Compensation expense for stock
option grants - - - - 40 - - - 40
Stock options and warrants
exercised - - 269 3 373 - - - 376
Payment for subscription
receivable - - - - - - 165 - 165
Unrealized gain on short-term
investments - - - - - 66 - - 66
Net loss - - - - - - - (5,377) (5,377)
Balance, December 31, 1995 - - 12,433 125 45,121 66 - (13,794) 31,518
Compensation expense for stock
option grants - - - - 33 - - - 33
Stock options exercised - - 9 - 41 - - - 41
Unrealized gain on short-term
investments - - - - - 4 - - 4
Net loss - - - - - - - (8,070) (8,070)
Balance, December 31, 1996 - - 12,442 125 45,195 70 - (21,864) 23,526
Expense for stock and
option grants - - 70 - 197 - - - 197
Stock options exercised - - 184 2 250 - - - 252
Unrealized loss on short-term
investments - - - - - (67) - - (67)
Net loss - - - - - - - (2,264) (2,264)
Balance, December 31, 1997 - $- 12,696 $127 $45,642 $3 $ - $(24,128) $21,644
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Ostex International, Inc. (the "Company"), a Washington Corporation, is
engaged in the discovery and commercialization of products associated with
osteoporosis and other collagen-related diseases. The Company believes its lead
product, the Osteomark-registered trademark- NTx test, incorporates breakthrough
technology in the area of bone resorption measurement. The Company markets the
Osteomark NTx test through laboratories and distributors worldwide.
The Company was incorporated in the state of Washington on May 11, 1989 and
completed its initial public offering of common stock in February 1995. The
United States has been the Company's principal market. Foreign sales were
approximately $652, $370 and $528 in 1997, 1996 and 1995, respectively. Foreign
sales were primarily to Europe and Japan.
ESTIMATES AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
REVENUE RECOGNITION
License and research and development fees are recognized upon attainment of
the agreed-upon milestones. Research testing fees are recognized when the
services are substantially complete. Product sales are recognized upon shipment.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful life of the asset. Estimated
lives range from five to 10 years. Depreciation expense charged to operations
during 1997, 1996 and 1995 was $614, $502 and $294, respectively.
SHORT-TERM INVESTMENTS
The Company considers all of its investments as "available for sale,"
reporting them at fair market value with unrealized gains and losses included in
Shareholders' Equity. Realized gains and losses and declines in value of
securities judged to be other than temporary are included in income.
INVENTORY
Inventory consists principally of raw materials and finished goods.
Inventories are stated at the lower of cost (first-in, first-out) or market.
STATEMENTS OF CASH FLOWS
For the purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less when
purchased to be cash equivalents. The carrying amount approximates fair value
due to the short maturity of these instruments.
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
The Company adopted SFAS No. 128, "Earnings per Share," effective December
15, 1997. Basic net loss per share is the net loss divided by the average number
of shares outstanding during the year. Diluted net loss per share is calculated
as the net loss divided by the sum of the average number of shares outstanding
during the year plus the net additional shares that would have been issued had
all dilutive options been exercised, less shares that would be repurchased with
the proceeds from such exercise (Treasury Stock Method). During all years
presented, the effect of including outstanding options is antidilutive,
therefore, options have been excluded from the calculation of diluted net loss
per share. There is no difference between previously reported net loss per share
and the basic and diluted net loss per share.
NOTE 2
OTHER ASSETS
Other assets primarily include investments totaling $637 in preferred stock
of Metrika, Inc., a privately held medical device company in the development
stage. The investment is recorded in the accompanying financial statements at
cost and represents an ownership interest of less than 10%.
NOTE 3
PROPERTY, PLANT & EQUIPMENT
Property, plant & equipment at December 31, 1997 and 1996 consisted of the
following:
1997 1996
Leasehold improvements $ 2,426 $ 1,463
Laboratory and manufacturing
equipment 1,277 1,198
Computers and office equipment 975 912
---------------
4,678 3,573
Accumulated depreciation and
amortization (1,713) (1,099)
---------------
Net property, plant and equipment $ 2,965 $ 2,474
===============
NOTE 4
SHORT-TERM INVESTMENTS
The Company's short-term investments at December 31, 1997 and 1996, consisted of
the following:
1997 1996
United States treasury obligations $7,955 $8,807
Federal agency obligations and
discount notes 2,686 7,706
Government agency obligations 3,389 -
Corporate and municipal bonds 2,734 3,427
---------------
$16,764 $19,940
===============
The maturity of all classes of the Company's short-term investments was less
than two years at December 31, 1997 and 1996.
NOTE 5
ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1996, consisted of the following:
1997 1996
Business taxes payable $359 $127
Accrued wages, benefits and
payroll taxes 171 107
------------
$530 $234
============
NOTE 6
NOTE PAYABLE
In July 1996, the Company borrowed $746 under a secured promissory note
agreement. The note is secured by real property and equipment and is payable in
equal monthly installments of principal and interest of $20. The interest rate
is based on the three-year U.S. Treasury Note, at the time of drawdown, plus a
margin of 5.80%, (12.5% as of December 31, 1997 and 1996). The note agreement
allows the Company to make additional borrowings, up to a maximum of $1,500 for
future capital needs. The note contains a number of covenants that, among other
things, require the Company to meet specific financial ratios, including minimum
tangible net worth, maximum liabilities to total net worth and a minimum level
of cash, cash equivalents and short-term investments. The Company was in
compliance with these covenants at December 31, 1997 and 1996. Minimum principal
payments are as follows:
1998 $183
1999 207
2000 119
----
$509
NOTE 7
SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On January 25, 1995 the Company completed its initial public offering of
3,645,642 shares of common stock at $9.50 per share for proceeds of $34,634,
less underwriting discounts, commissions and other offering costs approximating
$3,085. Convertible preferred stock outstanding immediately prior to the closing
was converted into 5,506,464 shares of common stock.
STOCK OPTION PLANS
The Company has three stock option plans; the Amended and Restated Stock
Option Plan (the "Old Plan"), the 1994 Stock Option Plan (the "1994 Plan"), both
administered by the Compensation Committee of the Board of Directors, and the
Directors' Nonqualified Stock Option Plan (the "Directors' Plan"), (collectively
the "Stock Option Plans"). The Old Plan no longer permits additional stock
option grants. The 1994 and Directors' Plans were amended in 1997 by the
shareholders to increase the number of options that could be reserved for
issuance under these plans. Shares of common stock reserved for issuance to the
Company's employees and directors under the Stock Option Plans are 2,107,000 and
350,000, respectively, and shares available for grant to the Company's employees
and directors at December 31, 1997, under the Stock Option Plans are 259,000 and
145,000, respectively. Under all option plans, as of December 31, 1997, options
for 667,000 shares have been exercised, and 1,962,000 shares are subject to
outstanding options at exercise prices ranging from $.08 to $17.13 per share
with a remaining weighted average contractual life of 8 years. These options
vest over periods of two to four years. Total options vested as of December 31,
1997 were 481,000, with a weighted average exercise price of $3.34. All options
granted under these plans expire either 90 days after termination of employment
or 10 years from the date of grant, whichever occurs first.
Prior to the Company's initial public offering, the Company granted
nonqualified options under the Old Plan whose exercise price was below the
estimated fair market value of the Company's common stock on date of grant. The
difference between the grant price and the estimated fair market value on date
of grant is recognized as compensation expense over the vesting period. Total
compensation expense recognized was approximately $6, $33 and $40 in 1997, 1996
and 1995, respectively. Information relating to stock options outstanding and
stock options exerciseable at December 31, 1997 is as follows:
Options Outstanding Options Exerciseable
------------------------------------------------- ----------------------------
Weighted Average Weighted Average
Range of Exercise Number Remaining Life Exercise Price Number Weighted Average
Prices of shares in Years of Shares Exercise Price
$ .08 - $ .80 78,750 3 $.42 78,750 $ .42
$2.10 - $5.00 1,825,001 9 $3.27 378,367 $ 3.45
$5.75 - $17.13 58,550 8 $9.33 24,334 $11.04
-----------------------------------------------------------------------------------
1,962,301 8 $3.34 481,451 $ 3.34
===================================================================================
Information relating to activity under the Company's stock option plans
is as follows:
Weighted
Shares Average
Subject to Exercise
Option Price
Balance, December 31, 1994 1,545,190 $ 3.19
Granted 245,500 9.09
Exercised (268,786) 1.38
Canceled (90,625) 3.56
-----------------------
Balance, December 31, 1995 1,431,279 4.51
Granted 446,000 12.30
Exercised (8,950) 4.56
Canceled (40,703) 9.64
-----------------------
Balance, December 31, 1996 1,827,626 6.61
Granted 2,227,925 3.76
Exercised (184,000) 1.37
Canceled (1,909,250) 7.14
-----------------------
Balance, December 31, 1997 1,962,301 $ 3.34
=======================
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for stock
options issued at market value on the date of grant. Had compensation cost for
the Company's two stock option plans been determined based on the fair value of
the options at the grant date for awards in 1997, 1996 and 1995 consistent with
the provisions of SFAS 123, the Company's net loss and net loss per common
equivalent share would have changed to the pro forma amounts indicated below:
1997 1996 1995
Net loss - as reported $(2,264) $(8,070) $(5,377)
Net loss - pro forma $(2,222) $(8,729) $(5,528)
Basic and diluted net
loss per common
and common
equivalent share -
as reported $(.18) $(.65) $(.45)
Basic and diluted net
loss per common
and common
equivalent share -
pro forma $(.18) $(.70) $(.46)
The fair value of each option grant is established on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for new grants in 1997: zero dividend yield; expected
volatility of 85.3%; risk-free interest rates varying by grant date between 6.4%
and 7.1%; and expected lives of five years. Assumptions for options granted in
1996 were: zero dividend yield; expected volatility of 59%; risk-free interest
rates between 5.8% and 6.5%; and expected lives of five years. The difference
between reported and pro forma net loss in 1997 is a $42 credit to income as the
model recognizes canceled options in the period they occur. The SFAS No. 123
method of accounting has not been applied to options granted prior to January 1,
1995, therefore the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
NOTE 8
LICENSING AGREEMENTS
Under the Company's worldwide exclusive license agreements with the
Washington Research Foundation ("WRF"), the Company has the right to manufacture
and market technology developed from certain research by the University of
Washington ("UW"). As consideration for the licenses acquired and for the
attainment of certain milestones, the Company paid WRF certain nonrefundable
fees and issued common stock to the WRF and UW. In addition, future cash
payments up to $500 and common stock grants of up to 5,000 shares may be due
upon attainment of certain other milestones. All legal costs incurred by WRF in
connection with the filing, prosecution, and maintenance of certain defined
patent rights, are paid by the Company. During 1997, 1996 and 1995, the Company
incurred approximately $123, $154 and $379 of license fees, including the value
of stock grants, and patent legal expenses. All license and legal fees and stock
grants have been expensed as research and development costs. The Company is
obligated to pay WRF royalties on net sales of any licensed products.
NOTE 9
REVENUES
The Company has a sublicense agreement and a research and development
agreement with Mochida Pharmaceutical Co., Ltd. ("Mochida"). Under the
sublicense agreement, the Company granted exclusive manufacturing, marketing and
distribution rights to certain of the Company's products in Japan. Through
December 31, 1997, the Company had earned fees and milestone payments of $2,000,
including $450 during 1997, in connection with this agreement. Under the
research and development agreement, the Company earned no fees during 1997 and
$1,080 and $550 during 1996 and 1995, respectively. As of December 31, 1997, the
Company had received all milestone payments to be earned in connection with the
license agreement for the urine assay. Mochida has an option to license the
Company's serum assay under development.
During 1995, the Company entered into
research, development, license and supply agreements with Johnson & Johnson
Clinical Diagnostics, Inc. ("JJCD") under which Ostex earned $1,000 during 1995.
These agreements grant JJCD a license to manufacture, sell and distribute
certain products utilizing Ostex' bone resorption technology. Ostex will also
receive royalties on JJCD sales of products incorporating the Ostex technology.
NOTE 10
RELATED PARTY TRANSACTIONS
Research Agreements The Company has entered
into two research agreements with the University of Washington which extend
through December 31, 1999. Total expense was $499, $304 and $185 during 1997,
1996 and 1995, respectively. Following is a schedule of future minimum payments
under these agreements as of December 31, 1997:
1998 $428
1999 310
-----
$738
NOTE 11
COMMITMENTS AND CONTINGENCIES
LEASES
The Company has entered into noncancelable operating leases for office space and
certain equipment. Future minimum payments under these leases are as follows:
1998 $ 514
1999 501
2000 494
2001 496
2002 527
------
$2,532
======
Total rent expense was approximately $584, $538 and $374 in 1997, 1996 and 1995,
respectively.
LITIGATION
In June 1996, the Company filed an action in the United States District
Court for the Western District of Washington against Osteometer Biotech A/S, a
medical technology company based in Denmark ("Osteometer"), and Diagnostic
Systems Laboratories Inc. for patent infringement of United States Patent No.
5,455,179. The Company believes Osteometer's bone resorption immunoassay
incorporates technology which infringes patented Ostex technology. In September
1996, the defendants filed a response denying infringement and counterclaimed
that Ostex' patent is invalid and unenforceable. By order dated July 7, 1997,
the Court granted Ostex' motion to file a supplemental complaint, to add a
second cause of action based upon United States Patent No. 5,641,837, which
issued on June 24, 1997. On October 24, 1997, Ostex filed a second supplemental
complaint to add third and fourth causes of action based upon U.S. Patent No.
5,652,112, which issued on July 29, 1997, and U.S. Patent No. 5,656,439, which
issued on August 12, 1997. The lawsuit is currently scheduled for trial
commencing October 20, 1998. At the present time management cannot predict the
outcome of the lawsuit but intends to continue to vigorously assert its
position.
On April 9, 1997, the Company was served with a lawsuit filed in the United
States District Court, Central District of California by C.R. Bard, Inc.
("Bard"). The complaint alleges that Ostex' Osteomark product infringes U.S.
Patent No. 4,628,027 assigned to Bard in 1993. On June 4, 1997 the Company filed
a response denying infringement and counterclaimed that Bard's patent is invalid
and unenforceable. On November 7, 1997 the judge set a trial date of November
10, 1998, and on December 27, 1997, the Company filed a motion for summary
judgment. Management believes that this suit is without merit and that Ostex'
Osteomark product falls outside the claims of the subject patent.
NOTE 12
OTHER INCOME - PROCEEDS FROM LEGAL SETTLEMENT
On November 4, 1997, the Company announced settlement with Boehringer
Mannheim GmbH ("Boehringer Mannheim") under which the Company received a lump
sum payment of $6,200. The settlement between the two parties was the result of
a ruling by the American Arbitration Association awarding damages to the Company
in connection with a dispute between the Company and Boehringer Mannheim.
NOTE 13
FEDERAL INCOME TAXES
Deferred taxes
are determined using an asset and liability approach. The Company has incurred
operating losses since inception and accordingly has determined that the net
deferred tax assets do not satisfy recognition criteria. Therefore, a valuation
allowance has been recorded against the net deferred tax assets and no tax
benefit has been recorded in the accompanying statements of operations. The
change in the valuation allowance during 1997 and 1996 was $586 and $3,006,
respectively. The Company's deferred tax assets (liabilities) are as follows:
December 31, 1997 1996 1995
Net operating loss
carryforward $10,039 $9,448 $6,576
Research and
experimentation
credits 363 313 135
Excess of market value
over the exercise
price of common
stock options 77 77 65
Section 195 start-up
expenses - 52 151
Amortization and
depreciation (47) (44) (64)
Other 68 68 45
-------------------------------
Gross deferred
tax asset 10,500 9,914 6,908
Valuation allowance (10,500) (9,914) (6,908)
-------------------------------
Net deferred tax asset $ - $ - $ -
===============================
At December 31, 1997, the Company had tax net operating loss carryforwards of
$29,527 which expire between 2004 and 2012.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Ostex International, Inc.:
We have audited the accompanying balance sheets of Ostex International, Inc. (a
Washington corporation) as of December 31, 1997 and 1996, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Ostex International, Inc. as of
December 31, 1997 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
Seattle, Washington
February 13, 1998
CORPORATE DIRECTORY
BOARD OF DIRECTORS
Thomas J. Cable
Chairman of the Board of Directors
Thomas A. Bologna
President and Chief Executive Officer
Elisabeth L. Evans, M.D.
Physician, Obstetrics and Gynecology,
Overlake Obstetricians and Gynecologists, P.C.
David R. Eyre, Ph.D.
Co-Founder;
Burgess Chair of Orthopedic Research,
University of Washington
Fredric J. Feldman, Ph.D.
President, FJF Associates
Gilbert S. Omenn, M.D., Ph.D.
Executive Vice President for Medical Affairs
University of Michigan Health System
Gregory D. Phelps
John H. Trimmer
EXECUTIVE OFFICERS
AND MANAGEMENT
Thomas A. Bologna
President and Chief Executive Officer
John M. Brenneman
Director, Finance and Operations
Thomas F. Broderick
Vice President, Patent and General Counsel
J. Daniel Clemens
Director, Research and Development
Donna J. DeLong
Vice President, Marketing
Robert M. Littauer
Senior Vice President, Finance and Administration
Nancy J.S. Mallinak
Vice President, Regulatory and Clinical Affairs
Cory J. Smith
Director, Manufacturing
William K. Strelke
Vice President, Sales
SCIENTIFIC ADVISORY BOARD
Charles H. Chesnut III, M.D.
Chair, Ostex Scientific Advisory Board; Professor of Medicine and Radiology,
Professor of Nutritional Sciences, Adjunct Professor of Orthopedics, University
of Washington
Elizabeth Barrett-Connor, M.D.
Professor and Chair, Family and Preventive Medicine; Director, Division of
Epidemiology, University of
California, San Diego
Laurence M. Demers, Ph.D.
Distinguished Professor, Departments of Pathology
and Medicine; Director of Clinical Chemistry, Core-Endocrine Laboratory, The
Pennsylvania State Geisinger Health System, The Milton S. Hershey Medical
Center, The Pennsylvania State University College of Medicine
David R. Eyre, Ph.D.
Burgess Chair of Orthopedic Research, Adjunct Professor of Biochemistry and Oral
Biology, Director, Orthopedic Research Laboratories, University of Washington
C. Conrad Johnston, Jr., M.D.
Professor of Medicine, Indiana School of Medicine;
Director, Division of Endocrinology and Metabolism, Indiana University Medical
Center
Howard Judd, M.D.
Chairman, Department of Obstetrics and Gynecology, Olive View/UCLA Medical
Center; Professor,
Department of Obstetrics and Gynecology, Chief,
Division of Reproductive Endocrinology, UCLA
Clinical Center for Women's Health Initiative
Robert Lindsay, M.D., Ph.D.
Chief of Internal Medicine, Helen Hayes Hospital
New York; President, National Osteoporosis Foundation
Allan Lipton, M.D.
Professor, Department of Medicine; Chief, Division
of Oncology, The Milton S. Hershey Medical Center,
The Pennsylvania State University
Veronica Ravnikar, M.D.
Professor of Obstetrics and Gynecology, Director of Reproductive Endocrinology
and Infertility, University
of Massachusetts Medical Center
Markus Seibel, M.D.
Head, Endocrine and Osteodiagnostic Laboratories, Department of Medicine,
Division of Endocrinology & Metabolism, University of Heidelberg, Germany
Frederick R. Singer, M.D.
Medical Director, Osteoporosis/Metabolic Bone Disease Program, St. Johns
Hospital and Health Center;
Professor of Medicine in Residence, UCLA
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
Ostex International, Inc.
2203 Airport Way South, Suite 400
Seattle, WA 98134-9967
Tel: (206) 292-8082
Fax: (206) 292-8625
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP
801 Second Avenue, Suite 800
Seattle, WA 98104
LEGAL COUNSEL
Perkins Coie LLP
1201 Third Avenue, 40th Floor
Seattle, WA 98101
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
Website: www.chasemellon.com
INVESTOR RELATIONS
Lippert/Heilshorn & Associates
300 Montgomery Street, Suite 1140
San Francisco, CA 94104
Sec Form 10-k
A copy of the Company's annual report to the Securities and Exchange Commission
on Form 10-K is available without charge upon written request to Investor
Relations at the Company's headquarters.
SHAREHOLDERS OF RECORD
As of December 31, 1997, the Company had 160
registered shareholders of record of its common stock.
SHAREHOLDER INQUIRIES
Communications concerning transfer requirements, lost certificates, and changes
of address should be directed to the Transfer Agent. For general information
about the Company and its activities, contact Investor Relations at Company
headquarters.
INFORMATION SERVICE
For timely information about Ostex, news
releases are available via facsimile on the Company's News-on-Demand service by
calling (800) 356-8061 or on the World Wide Web at
http://www.hnt.com/bizwire/cnn/451.htm.
PRICE RANGE OF COMMON STOCK
The following table lists the high and low trading places for the Company's
common stock as reported on the Nasdaq National Market System.
1997 High Low
1st quarter $ 7.88 $ 3.75
2nd quarter 4.38 1.94
3rd quarter 4.13 2.25
4th quarter $ 4.50 $ 2.13
1996 High Low
1st quarter $20.00 $12.25
2nd quarter 16.25 9.13
3rd quarter 11.50 6.63
4th quarter $ 8.75 $ 5.25
The Company's common stock is traded on the Nasdaq National Market System under
the symbol OSTX. No dividends have been paid on the common stock.
ANNUAL MEETING
The Annual Meeting of Shareholders will be held Monday, May 18, 1998, at 9:00 am
at the Museum
of History & Industry, Seattle, Washington.
OSTEX WEBSITE
For more information about Ostex, visit us at http://www.ostex.com.
Osteomark and Ostex are registered trademarks of Ostex International, Inc.
Evista is a registered trademark of Eli Lilly and Company. Fosamax is a
registered trademark of Merck & Co., Inc.
Premarin is a registered trademark of American Home Products Corporation.
Miacalcin is a registered trademark of Sandoz Pharmaceutical Corporation.