EXOGEN INC
10-Q, 1998-02-06
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS
Previous: GREAT AMERICAN BACKRUB STORE INC, 8-K, 1998-02-06
Next: CRANBROOK FUNDS, NSAR-B, 1998-02-06



                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  ____________

                                    FORM 10-Q

(Mark One)
[ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended December 31, 1997

                                       OR

[   ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

      For the transition period from ____________ to ____________

                         Commission file number 0-26154

                                  EXOGEN, INC.
- --------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

           Delaware                                      22-3208468
- --------------------------------------------------------------------------------
(State or other jurisdiction of                      (I.R.S. Employer 
 incorporation or organization)                      Identification No.)

                             10 Constitution Avenue
                       P.O. Box 6860, Piscataway, NJ 08855
- --------------------------------------------------------------------------------
              (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code     (732) 981-0990

                                       N/A
- --------------------------------------------------------------------------------
               Former name, former address and former fiscal year,
                          if changed since last report.


Indicate by check [X] whether the registrant (1) has filed all reports  required
to be filed by  Sections  13 or 15(d)  of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days.   Yes [ X ]    No  [   ]

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock,  as of the latest  practicable  date Common Stock,  par
value $0.0001 per share: 11,844,454 shares outstanding at January 30, 1998.
<PAGE>

                                  EXOGEN, INC.
                          Quarterly Report on Form 10-Q
                                December 31, 1997



                                Table of Contents


                                                                                

PART I--Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . 

         Item 1--Financial Statements:
                  Consolidated Balance Sheets . . . . . . . . . . . . . . . . . 
                  Consolidated Statements of Operations . . . . . . . . . . . . 
                  Consolidated Statements of Comprehensive Income . . . . . . . 
                  Consolidated Statements of Cash Flows . . . . . . . . . . . . 
`                 Notes to Consolidated Financial Statements . . . . . . . . . .

         Item 2--Management's Discussion and Analysis of
           Financial Condition and Results of Operations . . . . . . . . . . . .

PART II--Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . .

         Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . .

         Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . .

         Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . .

         Item 4. Submission of Matters to a Vote of Security Holders . . . . . .

         Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . .

         Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



<PAGE>
<TABLE>
<CAPTION>
                                             EXOGEN, INC.

                                     CONSOLIDATED BALANCE SHEETS
                                  (in thousands, except share data)

                                                                      December 31,     September 30,
                                                                          1997              1997
                                                                      ------------      ------------
                                                                       (Unaudited)
                    ASSETS

<S>                                                                   <C>               <C>
Current assets:
    Cash and cash equivalents ...................................     $     10,295      $      4,018
    Short-term investments ......................................            3,692             4,526
    Accounts receivable, net ....................................            3,139             3,384
    Inventories .................................................            1,507             1,515
    Other current assets ........................................              635               297
                                                                      ------------      ------------
                 Total current assets ...........................           19,268            13,740
Furniture, fixtures and equipment, net ..........................              666               758
Other assets ....................................................              257               291
                                                                      ------------      ------------
                 Total assets ...................................     $     20,191      $     14,789
                                                                      ============      ============

                    LIABILITIES AND STOCKHOLDERS' EQUITY


Current liabilities:
    Accounts payable ............................................     $        602      $        463
    Accrued liabilities .........................................            2,299             2,178
    Capital lease obligations ...................................             --                   2
    Other current liabilities ...................................               70                55
                                                                      ------------      ------------
                 Total current liabilities ......................            2,971             2,698
                                                                      ------------      ------------
                 Total liabilities ..............................            2,971             2,698

Commitments and contingencies (Note 2)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                             EXOGEN, INC.

                                     CONSOLIDATED BALANCE SHEETS
                                  (in thousands, except share data)
                                             (continued)

                                                                      December 31,     September 30,
                                                                          1997              1997
                                                                      ------------      ------------
                                                                       (Unaudited)
                     

<S>                                                                   <C>               <C>
Stockholders' equity:
    Preferred Stock, $0.0001 par value;  3,000,000 shares
         authorized at December 31, 1997, and September 30,1997;
         no shares issued or outstanding ........................             --                --
    Common Stock,  $0.0001 par value; 27,000,000 shares
         authorized at December 31, 1997, and September 30, 1997;
         11,802,159 shares issued and outstanding at
         December 31, 1997, and 9,998,140 shares issued and
         outstanding  at September 30, 1997 .....................                1                 1
    Additional paid-in capital ..................................           54,108            46,691
    Cumulative translation adjustment ...........................             (305)             (275)
    Accumulated deficit .........................................          (36,584)          (34,326)
                                                                      ------------      ------------
                 Total stockholders' equity .....................           17,220            12,091
                                                                      ------------      ------------
                 Total liabilities and stockholders' equity .....     $     20,191      $     14,789
                                                                      ============      ============



</TABLE>

              The accompanying  notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                  EXOGEN, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)


                                                           Three Months Ended
                                                               December 31,
                                                         ----------------------
                                                           1997           1996
                                                         -------        -------
                                                               (Unaudited)
<S>                                                      <C>            <C>
Revenues:
     Product sales ...............................       $ 1,872        $ 1,791
                                                         -------        -------
           Total revenues ........................         1,872          1,791
                                                         -------        -------

Operating costs and expenses:
     Cost of product sales .......................           832          1,133
     Research and development ....................           648          1,012
     Selling, general, and administrative ........         2,820          3,251
                                                         -------        -------
           Total operating costs and expenses ....         4,300          5,396
                                                         -------        -------

Operating loss ...................................        (2,428)        (3,605)

Other income (expense):
     Interest income, net ........................           180            241
     Other expense, net ..........................           (10)           (24)
                                                         -------        -------
           Total other income, net ...............           170            217
                                                         -------        -------

Net loss .........................................       $(2,258)       $(3,388)
                                                         =======        =======

Basic net loss per common share ..................       $ (0.20)       $ (0.34)
                                                         =======        =======
Diluted net loss per common share ................       $ (0.20)       $ (0.34)
                                                         =======        =======

</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                  EXOGEN, INC.
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (in thousands)


                                                          Three Months Ended
                                                              December 31,
                                                         ----------------------
                                                           1997           1996
                                                         -------        -------
                                                               (Unaudited)
<S>                                                      <C>            <C>
Net loss .........................................       $(2,258)       $(3,388)

Other comprehensive loss:
     Foreign currency translation adjustments ....           (30)           (21)
                                                         -------        -------
           Total other comprehensive loss ........           (30)           (21)
                                                         -------        -------

Comprehensive loss ...............................       $(2,288)       $(3,409)
                                                         =======        =======

</TABLE>


              The accompanying  notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                         EXOGEN, INC.

                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                        (in thousands)

                                                                         Three Months Ended
                                                                             December 31,
                                                                       ----------------------
                                                                         1997          1996
                                                                       --------      --------
                                                                             (Unaudited)
<S>                                                                    <C>           <C>
Cash flows from operating activities:
     Net loss ....................................................     $ (2,258)     $ (3,388)
     Adjustments to reconcile net loss to net cash used in
        operating activities:
          Depreciation and amortization ..........................          114           120
          Amortization of net premium on short- and long-term
            investments ..........................................           14            21
          Amortization of nonemployee stock
            option/warrant compensation ..........................           30            30
          Provision for losses on accounts receivable ............           68          --
          Other adjustments ......................................           (3)            1
     Decrease (increase) in assets:
          Accounts receivable, net ...............................          154          (564)
          Interest receivable ....................................          (36)           42
          Inventories ............................................            3          (111)
          Other current assets ...................................         (301)          (30)
          Other assets ...........................................           30          --
     Increase (decrease) in liabilities:
          Accounts payable .......................................          139           (94)
          Accrued liabilities ....................................          125           656
          Other current liabilities ..............................           15            10
                                                                       --------      --------
               Net cash used in operating activities .............       (1,906)       (3,307)
                                                                       --------      --------

Cash flows from investing activities:
     Purchase of short- and long-term investments ................         (680)       (1,392)
     Proceeds from sale of short- and long-term
       investments ...............................................        1,500         2,874
     Purchase of furniture, fixtures and equipment ...............          (19)         (102)
                                                                       --------      --------
               Net cash provided by investing activities .........          801         1,380
                                                                       --------      --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                         EXOGEN, INC.

                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                        (in thousands)
                                         (continued)

                                                                         Three Months Ended
                                                                             December 31,
                                                                       ----------------------
                                                                         1997          1996
                                                                       --------      --------
                                                                             (Unaudited)
<S>                                                                    <C>           <C>
Cash flows from financing activities:
     Proceeds from exercise of stock options .....................            3          --
     Proceeds from sale of Common Stock ..........................        7,384          --
     Principal payments under capital leases .....................         --              (5)
                                                                       --------      --------
               Net cash provided by (used in) financing activities        7,387            (5)
                                                                       --------      --------

Effect of exchange rate changes on cash and cash
  equivalents ....................................................           (5)           (5)
                                                                       --------      --------

Net increase (decrease) in cash and cash equivalents .............        6,277        (1,937)
Cash and cash equivalents, beginning of period ...................        4,018         8,115
                                                                       --------      --------
Cash and cash equivalents, end of period .........................     $ 10,295      $  6,178
                                                                       ========      ========

</TABLE>

              The accompanying  notes are an integral part of these consolidated
financial statements.
<PAGE>
                                  EXOGEN, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       BASIS OF PRESENTATION

         The accompanying  unaudited condensed consolidated financial statements
         reflect all adjustments  (including normal recurring  adjustments) that
         management considers necessary to present fairly the financial position
         of Exogen, Inc. ("the Company") as of December 31, 1997, the results of
         operations  for the three months ended  December 31, 1997 and 1996, and
         the cash  flows  for the  three  months  then  ended.  The  results  of
         operations  for the  respective  interim  periods  are not  necessarily
         indicative  of the  results  to be  expected  for the  full  year.  The
         unaudited condensed  consolidated  financial statements,  which include
         the  financial  position,  results  of  operations,  and cash flows for
         Exogen,  Inc. and its wholly owned  subsidiary,  Exogen  (Europe) GmbH,
         should be read in conjunction with the audited  consolidated  financial
         statements  for the year ended  September  30,  1997,  included  in the
         Company's Annual Report on Form 10-K.


2.       COMMITMENTS AND CONTINGENCIES

         The Company is subject to claims and litigation in the ordinary  course
         of business.  In management's  opinion, such claims are not material to
         the Company's  financial  position,  its results of operations,  or its
         cash flows.


3.       NET LOSS PER COMMON SHARE

         In the first quarter of fiscal 1998, the Company  adopted  Statement of
         Financial  Accounting  Standards  No. 128 ("SFAS  128"),  "Earnings per
         Share,"  which  requires  the  presentation  of both basic and  diluted
         earnings  per  share  on the  face of the  Consolidated  Statements  of
         Operations. Options and warrants are not included in the calculation of
         diluted  earnings  per  share  if the  effect  would  be  antidilutive.
         Accordingly, basic and diluted net loss per share do not differ for any
         period presented.

         Net loss per share under the  provisions  of SFAS 128 for periods prior
         to the first  quarter of fiscal  1998 did not differ  from the net loss
         per share as reported in those prior periods.

         The following table  summarizes  securities that were outstanding as of
         December  31, 1997 and 1996,  but not  included in the  calculation  of
         diluted net loss per share because such shares are antidilutive:
<TABLE>
<CAPTION>
                                                              December 31,
                                                      -------------------------
                                                        1997              1996
                                                      -------           -------
<S>                                                   <C>               <C>
         Options.................................     618,373           580,711
         Warrants................................     100,000              -
</TABLE>
<PAGE>

4.       INVENTORIES

         Inventories consist of the following:

<TABLE>
<CAPTION>

                                                 December 31,     September 30,
                                                     1997             1997
                                                   -------          ------- 
                                                         (in thousands)
<S>                                                <C>              <C>
         Finished goods......................      $ 1,203          $ 1,218
         Parts and components................          304              297
                                                   -------          ------- 
                                                   $ 1,507          $ 1,515
                                                   =======          =======

</TABLE>

5.       SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>

                                                 Three Months Ended December 31,
                                                 -------------------------------
                                                      1997           1996
                                                     -----          ----
                                                         (in thousands)
<S>                                                  <C>            <C>
         Interest paid...........................    $   2          $  4

</TABLE>

6.       PRIVATE PLACEMENT OF COMMON STOCK

         On October 20, 1997,  the Company  completed a private  placement  (the
         "Private  Placement")  of  1,799,019  shares  of its  Common  Stock for
         aggregate net proceeds of $7.4 million. The Common Stock subject to the
         Private  Placement was sold by the Company  pursuant to Regulation D of
         the  Securities  Act of 1933, as amended,  on the basis that the Common
         Stock was issued under  circumstances  not involving a public offering.
         Pursuant to a Registration Rights Agreement, dated October 20, 1997, by
         and among the Company and the investors in the Private  Placement,  the
         Company filed a registration  statement on January 2, 1998, to register
         the shares of Common Stock sold in the Private Placement.
<PAGE>

                                  EXOGEN, INC.


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


The following is  management's  discussion of significant  factors that affected
the Company's interim financial condition and results of operations. This should
be read in conjunction  with  Management's  Discussion and Analysis of Financial
Condition and Results of Operations  included in the Company's  Annual Report on
Form 10-K for the year ended September 30, 1997.

This Report on Form 10-Q contains certain statements of a forward-looking nature
relating to future events or the future  financial  performance  of the Company.
Such  statements  are only  predictions,  and the actual  events or results  may
differ materially from the results discussed in the forward-looking  statements.
Factors  that  could  cause or  contribute  to such  differences  include  those
discussed  below under "Business  Considerations"  as well as those discussed in
other filings made by the Company with the Securities  and Exchange  Commission,
including the Company's Form 10-K.

Results of Operations

Three Months Ended December 31, 1997, and December 31, 1996

For the three months ended December 31, 1997,  essentially  all of the Company's
product sales were from the Company's Sonic Accelerated  Fracture Healing System
("SAFHS")  devices.  For the three months ended December 31, 1997, product sales
were $1.9  million,  compared  with $1.8  million  for the  three  months  ended
December 31, 1996.  The increase of $81,000 (or 5%) was primarily a result of an
increase  in  the  average  realized  selling  price  of  a  SAFHS,   which  was
approximately $2,120 for the three months ended December 31, 1997, compared with
approximately $2,040 for the three months ended December 31, 1996.

International product sales, primarily derived from sales in Germany, were 7% of
total  product  sales in units for the three  months  ended  December  31, 1997,
compared  with 27% of total  product  sales in units for the three  months ended
December 31, 1996. International product net revenues for the three months ended
December 31, 1997, were reduced to zero as a result of an adjustment to increase
the reserves for  international  sales  allowances  and returns.  The Company is
seeking  nationwide  reimbursement  approval by the National  Krankenkasse,  the
German governing  organization that establishes medical reimbursement policy for
health-care  providers.  To this end,  in August  1997 the  Company  submitted a
formal application to the National Krankenkasse. The Company has elected to sell
SAFHS  devices in Germany  only when  reimbursement  is  preapproved,  which has
caused a decrease in international sales.

Cost of product sales was $832,000 for the three months ended December 31, 1997,
compared  with $1.1  million  for the three  months  ended  December  31,  1996.
Included  in cost of sales were  royalties  and the cost of  manufacture  of the
SAFHS  device by the Company and an outside  source.  Gross profit for the three
months  ended  December 31,  1997,  was $1.0 million (or 56% as a percentage  of
product  sales),  compared  with  $658,000  (or 37%) for the three  months ended
December  31,  1996.  The  $382,000  increase  (or  58%)  in  gross  profit  was
principally due to (i) reduced per-unit product costs principally related to the
introduction  of the SAFHS 2000 and (ii) an  increase  in the  average  realized
selling price of a SAFHS.
<PAGE>
Research and development  expenses for the three months ended December 31, 1997,
decreased to $648,000 from $1.0 million for the three months ended  December 31,
1996. The decrease of $364,000 (or 36%) was primarily a result of (i) reductions
in the number of  research  projects  funded and (ii)  savings  from a workforce
reduction in fiscal 1997.

Selling,  general,  and  administrative  expenses  for the  three  months  ended
December  31,  1997,  decreased  to $2.8 million from $3.3 million for the three
months ended  December 31, 1996. The decrease of $431,000 (or 13%) resulted from
(i) a reduction  in  marketing  consultation  and (ii)  savings from a workforce
reduction in fiscal 1997.

Net interest  income for the three months ended December 31, 1997,  decreased to
$180,000 from $241,000 for the three months ended December 31, 1996,  consistent
with the level of funds available for investment.

The Company  incurred a net loss of $2.3  million,  or $0.20 per share,  for the
three months ended December 31, 1997,  compared with a net loss of $3.4 million,
or $0.34 per share,  for the three  months ended  December 31, 1996.  (Per share
data are based upon weighted average shares  outstanding,  which exclude options
and  warrants  because  they are  antidilutive.  See Note 3 to the  Consolidated
Financial Statements for a discussion of the calculation of per share data.) The
decrease  of $1.1  million  (or 33%) in net loss was caused  principally  by the
factors discussed above.

Liquidity and Capital Resources

Since  inception,   the  Company's  expenses  have  significantly  exceeded  its
revenues,  resulting in an accumulated  deficit of $36.6 million at December 31,
1997.  Through  September  30,  1997,  the  Company  had funded  its  operations
primarily  through  two  early-stage  private  placements  of equity  securities
(aggregating  $17.6 million) and an Initial  Public  Offering of Common Stock in
July 1995 (aggregating $28.5 million,  including proceeds from the overallotment
option).  On October 20,  1997,  the Company  completed a private  placement  of
1,799,019 shares of its Common Stock for aggregate net proceeds of $7.4 million.

For the three months ended  December 31, 1997, the Company used net cash of $1.9
million for operating activities, primarily to fund selling and marketing of the
SAFHS 2000.  Working capital was $16.3 million at December 31, 1997, an increase
of $5.3  million (or 48%) from the balance at September  30,  1997.  Included in
working capital were  international  net receivables of $1.1 million at December
31, 1997. The Company's capital expenditures for the three months ended December
31, 1997, were $19,000.  The Company estimates that equipment and furnishings to
expand in-house manufacturing and administrative support activities will require
capital  expenditures of  approximately  $300,000 during each of fiscal 1998 and
1999.

From  December  1995 through  December 31, 1997,  the Company has recorded  $1.5
million of revenues  related to development  agreements with Teijin  Limited,  a
Japanese corporation. No such revenues were recognized in the three months ended
December  31,  1997 or  1996.  These  development  agreements  cover  two of the
Company's  technologies:  (i) the SAFHS  device  and (ii) the  mechanical-stress
device under development. The SAFHS agreement provides for milestone payments to
the Company for  Teijin's  development  of the product for launch in Japan.  The
Company will  manufacture and supply SAFHS devices to Teijin for clinical trials
<PAGE>
and  subsequent  sales in Japan.  Teijin is  responsible  for complying with the
regulatory  requirements  and  marketing  and  distributing  the SAFHS device in
Japan. The  mechanical-stress  agreement  provides for milestone payments to the
Company that will support,  in part, the Company's clinical trials in the United
States  in  exchange  for a first  option  in favor of  Teijin  to  negotiate  a
development and distribution agreement for this device for the Japanese market.

The Company plans to finance its capital needs from existing  capital  resources
and the proceeds of the October 1997 private placement, the combination of which
the Company believes will be sufficient to fund its operations into fiscal 1999.
Additional  funding might not be available when needed or on terms acceptable to
the  Company,  which  would  have a  material  adverse  effect on the  Company's
business, financial condition, results of operations, and cash flows.

Year 2000 Compliance

Many existing  computerized  applications  were  designed and developed  without
considering the impact of the upcoming change in the century.  If not corrected,
many of these  applications  could fail or create errors by or at the year 2000.
Management  is  assessing  the year  2000  compliance  impact  on the  Company's
operations, but does not expect compliance costs to be material.

Business Considerations

Limited Operating History

The Company has a limited  history of operations  that,  to date,  has consisted
primarily of research and development,  product engineering,  obtaining approval
from the U.S.  Food and Drug  Administration  ("FDA")  for the  Company's  SAFHS
device,  developing the Company's sales and marketing organization,  supervising
the  manufacture  of the SAFHS  device by a  contract  manufacturer,  developing
in-house manufacturing capability, and selling its SAFHS device domestically and
internationally.  The Company was formed for the purpose of acquiring  the SAFHS
technology  and  related  clinical  data,  as  well  as  the   mechanical-stress
technology.  The Company has  limited  direct  clinical  trial  experience.  The
Company received approval of its Pre-Market Approval ("PMA") Application for the
SAFHS  Model 2A device and began  marketing  it in  October  1994,  and  further
received approval of the SAFHS 2000 device and began marketing the SAFHS 2000 in
May 1997,  and  therefore  has limited  experience  in marketing and selling its
products  in  commercial   quantities.   The  Company  had  no  previous  direct
manufacturing  experience prior to commencing in-house refurbishing of its SAFHS
device  in  fiscal  1996.  Whether  the  Company  can  successfully  manage  the
transition to a larger-scale  commercial  enterprise will depend,  in part, upon
further  developing  its  distribution  network;   successfully  developing  its
manufacturing  capability;   and  strengthening  its  financial  and  management
systems,   procedures,   and  controls.   Failure  to  make  such  a  transition
successfully  would have a material  adverse  effect on the Company's  business,
financial condition, results of operations, and cash flows.

Uncertainty of Market Potential and Market Acceptance

The Company's  SAFHS device was approved by the FDA for commercial  marketing in
October 1994 to treat closed, cast-immobilized, fresh fractures of the tibia and
distal radius within approved indications. Since that time, the Company has been
engaged  in  efforts  to gain  physician  acceptance  of the  SAFHS  device  and
reimbursement  coverage for its use. The market potential of the Company's SAFHS
device  depends  on  the  acceptance  by the  medical  community  of the  use of
ultrasound technology as a safe and effective method of treating fresh fractures
<PAGE>
and the use of the Company's  SAFHS device by physicians  for treatment of these
fractures.  The SAFHS device is based upon new technology that had not been used
previously to treat bone  fractures.  There can be no assurance that  physicians
will prescribe  treatment using the SAFHS device. In addition,  use of the SAFHS
device  depends  significantly  on the  availability  and extent of  third-party
reimbursement  (which  has  occurred  substantially  on a  case-by-case  basis),
increased  awareness of the effectiveness of the SAFHS  technology,  and focused
sales efforts by the Company.  Electrical  stimulation  devices,  the only other
non-invasive devices commercially available for the treatment of bone fractures,
have gained only limited physician  acceptance to date. Failure of the Company's
SAFHS device to achieve market  acceptance  would have a material adverse effect
on the Company's business,  financial condition, results of operations, and cash
flows.

Dependence on Third-Party Reimbursement

Successful  sales of SAFHS  devices  in the  United  States,  Europe,  and other
countries depend on the availability of adequate  reimbursement from third-party
payors  such as managed  care  organizations,  workers'  compensation  insurers,
private  insurance  plans,  and  government   entities.   There  is  significant
uncertainty  concerning  third-party  reimbursement  for the use of any  medical
device incorporating new technology, such as the SAFHS device.  Reimbursement by
a  third-party  payor may depend on a number of factors,  including  the payor's
determination that the use of the SAFHS device is safe and effective,  medically
necessary,  appropriate  for  the  specific  patient,  cost-effective,  and  not
experimental  or  investigational.  In  addition,  devices  incorporating  a new
technology are often  prescribed by physicians for indications  other than those
approved by the FDA (off-label).  Reimbursement  for such off-label uses may not
be  available  or  permitted  by  government  regulations.  Since  reimbursement
approval is required from each payor  individually,  seeking such approvals is a
time-consuming   and  costly  process  that  requires  the  Company  to  provide
scientific  and  clinical  support for the use of the SAFHS device to each payor
separately.  In most cases,  in the United  States,  the  Company  has  received
reimbursement  approval from  third-party  payors only on a case-by-case  basis.
Currently,  third-party payors that have conducted technology assessments of the
SAFHS therapy,  and have established medical guidelines for its use, require the
Company, in most cases, to obtain preauthorization from these third-party payors
prior to providing the SAFHS devices to the patients.  There can be no assurance
that  third-party  reimbursement  will be  sufficiently  available for the SAFHS
device or any of the Company's  other products that may be developed,  that such
third-party  reimbursement will be adequate,  or that other third-party  payors,
including  Medicare,  will not  recommend  that the SAFHS  device not be covered
under their programs.

In August 1996, the Technology  Advisory  Committee of the Health Care Financing
Administration  ("HCFA")  recommended that the SAFHS device not be covered under
the Medicare  program.  The Company,  however,  continues to pursue coverage for
SAFHS by providing additional information to the HCFA staff; in the interim, the
Company is not shipping orders to patients  covered under  Medicare.  The United
States Congress is also considering  various  proposals to significantly  reduce
Medicare and  Medicaid  expenditures,  which,  if they were enacted and if SAFHS
were covered under Medicare or Medicaid, could have a material adverse effect on
the Company's business,  financial  condition,  results of operations,  and cash
flows. In addition,  third-party payors are increasingly limiting  reimbursement
coverage for medical devices, and in many instances have put pressure on medical
suppliers to lower their prices. The Company has limited experience in obtaining
reimbursement  for its products in countries  other than the United States,  and
<PAGE>
has obtained only limited  reimbursement in Germany.  There is no assurance that
the Company's efforts to obtain  reimbursement  approval in Germany and in other
countries  will  be  successful.   Lack  of  or  inadequate   reimbursement   by
governmental and other third-party  payors for the Company's products would have
a  material  adverse  effect on the  Company's  business,  financial  condition,
results of operations, and cash flows.

History of Losses; Profitability Uncertain; Fluctuations in Operating Results

The Company has incurred  substantial losses since inception and, as of December
31, 1997, had an accumulated deficit of approximately $36.6 million. Such losses
have resulted  principally from expenses  associated with obtaining FDA approval
for the  Company's  SAFHS  device,  engineering  and  developing  the  SAFHS and
mechanical-stress   devices,  and  establishing  and  expanding  the  sales  and
marketing organization and reimbursement  activities in the United States and in
Europe.  The Company expects to generate  substantial  additional  losses in the
future  primarily  attributable  to development of, and clinical trials for, the
mechanical-stress  device, clinical trials for expanded indications of the SAFHS
technology,  the  continued  expansion of domestic and  international  sales and
marketing activities,  and the expansion of in-house  manufacturing  capability.
Results of operations may fluctuate  significantly from quarter to quarter based
on such factors,  and will also depend upon reimbursement by third-party payors,
new  product  introductions  by  the  Company  or  its  competitors,  timing  of
regulatory actions, expenditures incurred in the research and development of new
products, and the mix of product sales between the United States and abroad. The
Company's future revenues and profitability are critically  dependent on whether
it can successfully market and sell its SAFHS device.  There can be no assurance
that significant revenues or profitability will ever be achieved.

Dependence on Principal Product

Essentially all of the Company's product revenues to date have been derived from
sales of its SAFHS  device.  The SAFHS device is expected to continue to account
for substantially all of the Company's revenues for the foreseeable  future. The
Company's   long-term   success   will   depend   in  part  on  the   successful
commercialization  of  the  SAFHS  device  for  its  approved  indications,  the
development  and  regulatory  approval  of SAFHS  devices  to  treat  additional
indications,  and the acceptance of the SAFHS treatment by the medical community
and third-party  payors.  Failure to gain market acceptance for the SAFHS device
or to obtain adequate reimbursement coverage,  among other factors, would have a
material adverse effect on the Company's business,  financial condition, results
of operations, and cash flows.

Limited Sales and Marketing Experience

The Company  began  marketing  the SAFHS device in the United  States in October
1994. Because of limited market awareness of SAFHS therapy,  the sales effort is
a lengthy process,  requiring the Company to educate  physicians and third-party
payors  regarding  the  clinical  benefits and  cost-effectiveness  of the SAFHS
technology,  to assist  patients in the  reimbursement  process,  and to provide
product  support to  patients.  The Company uses a  combination  of direct sales
representatives and a network of independent sales representatives to market and
distribute its products.  Independent  sales  representatives  typically  market
orthopaedic   and  other   devices  for  a  variety  of   manufacturers.   These
representatives  do not have prior  experience  in the sale or use of devices to
accelerate  fresh-fracture  healing.  There  can  be  no  assurance  that  these
<PAGE>
independent sales  representatives will commit the necessary resources to market
the SAFHS  device  effectively  or that the  Company's  direct  sales staff will
succeed  in its  efforts to  promote  the SAFHS  technology  to  physicians  and
third-party payors.

The  Company  markets the SAFHS  device in several  European  countries  through
independent  distributors  and sales agents,  and has recorded sales in Germany,
Austria, the Netherlands, Denmark, Switzerland, Belgium, and Israel. The Company
also will collaborate with marketing  partners in the Pacific Rim to assist with
regulatory requirements and to market and distribute the Company's products. The
Company has entered into one such agreement  covering Japan with Teijin Limited,
a Japanese corporation.  Each of the foreign markets in which the Company sells,
or  plans  to  sell,  its  products  has its  own  regulatory  requirements  and
approvals,  and the distribution,  price, and market structure to be established
by the Company  might vary from country to country.  No  assurance  can be given
that the Company can  successfully  market the SAFHS device in Europe or that it
can secure additional  marketing partners in the Pacific Rim on terms acceptable
to the Company, or at all.

The Company's  marketing  success in the United States and abroad will depend on
whether it can gain further regulatory approvals,  successfully  demonstrate the
cost-effectiveness  of its products,  further develop direct sales capability to
augment its existing  distribution  network,  and  establish  arrangements  with
distributors  and  marketing  partners.  Failure by the Company to  successfully
market  its  products  domestically  and  internationally  would have a material
adverse  effect on the  Company's  business,  financial  condition,  results  of
operations, and cash flows.

Risks Associated with International Operations

The Company  established a subsidiary  in Germany  during fiscal 1995 as part of
its strategy to introduce the SAFHS device in Europe,  and commenced  commercial
distribution  of the device in certain  European  countries  during fiscal 1996.
International  product sales,  which were  principally  in Germany,  were 13% of
total  product  sales in units in fiscal 1996,  23% in fiscal 1997,  and for the
three months ended  December 31, 1997,  were 7% of total product sales in units.
The  international  product net revenues for the three months ended December 31,
1997,  were  reduced to zero with an  adjustment  to increase  the  reserves for
international  sales allowances and returns.  Management  expects  international
revenues to represent a significant  percentage of total  revenues.  The Company
believes that its  profitability  and continued growth will require expansion of
sales in foreign markets, and so it intends to continue to expand its operations
outside the United States and enter additional international markets, which will
require significant  management attention and financial resources.  There can be
no assurance that the Company will be able to achieve  market  acceptance of its
products in international  markets or maintain or increase  international market
demand for its products.

As of December 31, 1997, the balance in international  accounts receivable,  net
of allowances for returns and bad debt, was $1.1 million,  with days outstanding
of approximately  420 days. The international  accounts  receivable is primarily
derived  from sales in Germany,  where the Company has  received  limited  local
reimbursement  on a case-by-case  basis. To assist the collection of outstanding
claims and to expedite the reimbursement  process on future claims,  the Company
is  seeking  nationwide  approval  by  the  National  Krankenkasse,  the  German
governing   organization  that  establishes  medical  reimbursement  policy  for
health-care  providers.  To this end,  in August  1997 the  Company  submitted a
formal  application  to  the  National  Krankenkasse.  The  application  process
includes a scientific assessment and a reimbursement assessment;  the Company is
<PAGE>
currently in the  scientific-assessment  phase. In the interim,  the Company has
elected to sell SAFHS devices in Germany only when reimbursement is preapproved,
which  has  caused a  downward  trend in  international  sales.  There can be no
assurance  that the Company  will  obtain a favorable  ruling on its request for
nationwide  approval  on a timely  basis,  if at all.  Lack of  approval  by the
National  Krankenkasse for the Company's  products could have a material adverse
effect on the Company's business,  financial  condition,  results of operations,
and cash flows.

The Company's international product sales are denominated in foreign currencies.
Management  can give no assurances  that changes in currency and exchange  rates
will not  materially  affect the  Company's  revenues,  costs,  cash flows,  and
business  practices  and  plans.  Additional  risks  inherent  in the  Company's
international  business  activities  generally  include  unexpected  changes  in
regulatory requirements,  tariffs and other trade barriers,  delays in receiving
payments  on  accounts  receivable  balances,   reimbursement   approvals  (both
government  and private),  difficulties  in managing  international  operations,
potentially adverse tax consequences,  restrictions on repatriation of earnings,
and the burdens of complying  with a wide variety of foreign laws.  There can be
no assurances  that such factors will not have a material  adverse effect on the
Company's  future  international  revenues and,  consequently,  on the Company's
business, financial condition, results of operations, or cash flows.

Manufacturing and Related Risks

The Company has developed in-house  refurbishing  capability for the SAFHS Model
2A device and in-house  manufacturing  capability for the SAFHS 2000 device.  In
addition,  the Company uses a contract  manufacturer to manufacture a portion of
the  Company's  SAFHS  2000  production.  Both the  Company's  and the  contract
manufacturer's  respective  facilities  have been inspected by the FDA, and have
been  approved  for the  production  of the SAFHS  2000  under  the  FDA's  Good
Manufacturing  Practices ("GMP") requirements. Any failure by either the Company
or the contract  manufacturer to maintain its respective  facility in accordance
with GMP  requirements  could result in the inability to  manufacture  the SAFHS
device on a commercial  scale, and could limit the Company's  ability to deliver
the SAFHS device to physicians or patients,  which would have a material adverse
effect on the Company's business,  financial  condition,  results of operations,
and cash flows.

Several  components  incorporated  in the SAFHS device  currently  are, and will
continue to be,  manufactured  by  single-source  vendors.  For certain of these
components,  there  are  relatively  few  alternative  sources  of  supply,  and
establishing  additional or replacement  suppliers for such components cannot be
accomplished  quickly. Any supply interruption from single-source  vendors would
have a material adverse effect on the Company's business,  financial  condition,
results of operations, and cash flows.

Intense Competition and Risks Associated with Rapid Technological Change

The medical device industry is characterized by intense competition. Many of the
Company's  existing  and  potential   competitors  have  substantially   greater
financial,  marketing,  sales,  distribution,  and technical  resources than the
Company  and more  experience  in research  and  development,  clinical  trials,
regulatory matters,  manufacturing,  and marketing.  In addition,  most of these
companies  have  established  third-party   reimbursement  for  their  products.
Furthermore,  the medical  device  industry is  characterized  by rapid  product
development and technological  change.  The Company's products could be rendered
<PAGE>
obsolete  or  uneconomical  by  technological  advances  by one or  more  of the
Company's  competitors or by other  therapies such as drugs to treat  conditions
addressed  by  the  Company's  products.   The  Company's  business,   financial
condition,  results of  operations,  and cash flows will depend upon whether the
Company can compete  effectively  with other  developers of such medical devices
and therapies.

The SAFHS device competes with non-invasive  bone-growth  electrical-stimulation
devices and with various surgical  treatments.  The Company's  mechanical-stress
device to prevent bone loss related to osteoporosis,  if developed and marketed,
will  compete  with  drug  therapies  and  exercise  regimens.  There  can be no
assurance  that such  device  will ever be  developed,  approved  by the FDA, or
become    commercially    available.    Four    companies    currently    market
electrical-stimulation   devices  for  the  treatment  of  non-union   fractures
(fractures that remain unhealed after nine months). The Company believes that at
least  one of these  companies  is  conducting  clinical  trials  for the use of
electrical stimulation for the treatment of fresh fractures. In addition,  other
companies are  developing a variety of products and  technologies  to be used in
the  treatment  of  fractures  and   osteoporosis,   including  growth  factors,
bone-graft substitutes, and exercise/physical therapy equipment. There can be no
assurance that  competitors  will not develop  products that are superior to the
Company's products,  achieve greater market acceptance,  or render the Company's
technology and products obsolete or  noncompetitive.  As a result, the Company's
long-term  viability  may  depend on  whether it can  continue  to  develop  new
products.  There can be no  assurance  that the Company  will be able to compete
successfully  against current or future competitors or that competition will not
have a material adverse effect on the Company's business,  financial  condition,
results of operations, or cash flows.

Extensive Government Regulation

The manufacture and sale of medical devices are subject to extensive  government
regulation in the United States and in other countries. The process of obtaining
FDA and other required  regulatory  approvals can be time-consuming,  expensive,
and  uncertain,  frequently  requiring  several years from  commencing  clinical
trials to receiving regulatory approval.  For example, the process of conducting
clinical  trials and  obtaining  the PMA for the SAFHS Model 2A took nine years.
The Company is required to file PMA supplements for new or expanded  indications
for its SAFHS  technology.  In addition,  modifications to its SAFHS devices may
require PMA  supplements.  If a  supplement  were not  accepted by the FDA,  the
Company  would be required to  undertake  and complete the entire PMA process in
order to use future  SAFHS  devices to treat  those  additional  indications  or
commercialize a modified device. There can be no assurance that the Company will
obtain any such  approvals  on a timely  basis,  or at all,  which  could have a
material adverse effect on the Company's business,  financial condition, results
of operations, and cash flows.

The Company filed a PMA Supplement for its  second-generation  SAFHS,  the SAFHS
2000, in December 1995, and in March 1997, the FDA approved this supplement.  In
May 1997, the Company commenced commercial distribution of the SAFHS 2000 in the
United States.  The Company recently filed a PMA Supplement  seeking approval of
an expanded indication for the SAFHS 2000, but withdrew that application in July
1997 to revise and  resubmit  it for both  expanded  and new  applications.  The
Company  expects to refile this  Supplement  during the second quarter of fiscal
1998.  The  Company  will also be  required  to file a PMA  application  for its
mechanical-stress device, if and when development is completed. No assurance can
be  given  that  such  application  will be made,  and if made,  that a PMA or a
<PAGE>
supplement to an existing PMA will be granted on a timely  basis,  or at all. In
order for the  Company to market  the SAFHS  device or any  future  products  in
foreign jurisdictions, it will be required to seek regulatory approvals in those
jurisdictions.  No assurance  can be given that the Company can obtain  required
regulatory approvals in foreign countries on a timely basis, or at all.

Regulatory  approvals,  if granted,  may include significant  limitations on the
indicated  uses for which a product  may be  marketed.  FDA  enforcement  policy
strictly  prohibits the promotion by the Company and any of its  distributors of
approved  medical devices for off-label uses. There can be no assurance that the
Company  will not  become  subject  to FDA  actions  as a result of  physicians'
prescribing the SAFHS device for off-label uses. In addition,  product approvals
may be  withdrawn  for  failure  to  comply  with  regulatory  standards  or the
occurrence of unforeseen  problems following initial  marketing.  The Company is
required to adhere to FDA regulations setting forth GMP requirements relating to
tests,  control,  and  documentation.  Ongoing  compliance  with  GMP and  other
applicable regulatory  requirements is monitored through periodic inspections by
state and federal  agencies,  including the FDA, and by  comparable  agencies in
other   countries.   Failure  to  comply  with  applicable   United  States  and
international  regulatory  requirements  can result in  failure of the  relevant
government  agency to grant  pre-market  approval  for  devices,  withdrawal  of
approval, total or partial suspension of production,  fines, injunctions,  civil
penalties, recall or seizure of products, and criminal prosecution. Furthermore,
changes in existing regulations or adoption of new regulations or policies could
prevent the Company from obtaining,  or affect the timing of, future  regulatory
approvals or clearances.

During 1996, the Company received  regulatory  approval of the SAFHS Model 2A in
Germany.  Under German law, medical devices must have a "GS" mark affixed to the
product  labeling.  The GS mark,  which the Company  received in December  1995,
denotes that the product meets certain  safety  standards.  In 1996, the Company
also received the "CE" (Medical  Device  Directive) mark for the SAFHS Model 2A.
The CE mark is  recognized by countries  that are members of the European  Union
and the  European  Free Trade  Association,  and  effective  June 1998,  will be
required to be affixed to all medical devices sold in the European Union.

There can be no  assurance  that the  Company  will be able to obtain  necessary
regulatory  approvals or clearances in the United  States,  Europe,  the Pacific
Rim, or elsewhere on a timely basis,  or at all. Delays in receipt of or failure
to  receive  such  approvals  or  clearances,  the loss of  previously  received
approvals or clearances, or failure to comply with existing or future regulatory
requirements  would have a material  adverse  effect on the Company's  business,
financial condition, results of operations, and cash flows.

Limited Protection of Patents, Copyrights and Proprietary Rights; Risk of Patent
Infringement

The Company relies on a combination of patents, trade secrets,  copyrights,  and
confidentiality  agreements to protect its proprietary  technology,  rights, and
know-how.  No assurance can be given that the Company's patent applications will
issue as patents or that any issued  patents  owned by the Company  will provide
competitive  advantages for the Company's  products or will not be  successfully
challenged  or   circumvented   by   competitors.   Under  current  law,  patent
applications  in the United  States are  maintained in secrecy until patents are
issued,  and patent  applications in foreign countries are maintained in secrecy
for a period after filing.  The right to a device patent in the United States is
attributable  to the first to invent the device,  not the first to file a patent
<PAGE>
application.  Accordingly,  the  Company  cannot  be sure that its  products  or
technologies do not infringe  patents that may be granted in the future pursuant
to pending patent  applications or that its products do not infringe any patents
or proprietary rights of third parties. In the event that any relevant claims of
third-party  patents are upheld as valid and  enforceable,  the Company could be
prevented from selling its products or could be required to obtain licenses from
the owners of such  patents or be  required to  redesign  its  products to avoid
infringement.  There can be no assurance  that such licenses  would be available
or, if  available,  would be on terms  acceptable  to the  Company,  or that the
Company would be successful in any attempt to redesign its products or processes
to avoid  infringement.  The  Company's  failure to obtain these  licenses or to
redesign  its products  would have a material  adverse  effect on the  Company's
business,  financial  condition,  results of  operations,  and cash  flows.  The
Company also relies on trade  secrets and  proprietary  information,  and enters
into confidentiality agreements with its employees,  consultants,  and advisors.
There can be no assurance that the  obligations to maintain the  confidentiality
of such trade  secrets and  proprietary  information  will  effectively  prevent
disclosure  of the  Company's  confidential  information  or provide  meaningful
protection for the Company's  confidential  information if there is unauthorized
use  or  disclosure,   or  that  the  Company's  trade  secrets  or  proprietary
information  will not be independently  developed by the Company's  competitors.
The Company also holds rights to copyrights on text and on software developed by
or for itself for use in its SAFHS  device.  There can be no assurance  that any
copyrights  owned by the Company will  provide  competitive  advantages  for the
Company's products or will not be challenged or circumvented by its competitors.
Litigation may be necessary to defend against claims of infringement, to enforce
patents and  copyrights  issued or licensed to the Company,  or to protect trade
secrets,  and could result in  substantial  cost to, and diversion of effort by,
the Company.  There can be no assurance  that the Company  would  prevail in any
such litigation.

Uncertainty of New Product Development

The Company plans to seek FDA approval to commence  clinical  trials in the near
future to expand the approved  indications  for the SAFHS  technology to include
other fractures,  spine fusion,  and cartilage repair. In addition,  the Company
has  developed  a  mechanical-stress  device to  prevent  bone loss  related  to
osteoporosis.  The Company has  commenced a pilot  clinical  trial in the United
States,  and  anticipates  that it  will be  required  to  undertake  additional
development  activities  and human  clinical  trials before  seeking  regulatory
approval for this device.  There can be no assurance that the  mechanical-stress
device will prove to be safe and efficacious, that product development will ever
be  successfully  completed,  that a PMA, if applied for, will be granted by the
FDA  on a  timely  basis,  or  at  all,  that  adequate  levels  of  third-party
reimbursement will be available, or that the mechanical-stress  device will ever
achieve  commercial  acceptance.  The  Company's  inability to show  efficacy in
additional  applications of its SAFHS  technology,  to successfully  develop the
mechanical-stress   device,   or  to  achieve  market  acceptance  of  such  new
applications  and products would have a material adverse effect on the Company's
business, financial condition, results of operations, and cash flows.

Royalty Payment Obligations; Potential Loss of Exclusive License

The Company is required to pay a royalty on any net  revenues  from sales of the
mechanical-stress device, if such device is successfully developed. In the event
that the Company does not  commercially  exploit the  underlying  technology  as
required by the license agreement for such technology,  the Company will forfeit
its  exclusive  license  to the  mechanical-stress  technology.  There can be no
<PAGE>
assurance that the Company will commercially  exploit such technology within the
meaning of such license,  and forfeiture of such exclusive  license could have a
material adverse effect on the Company's business,  financial condition, results
of operations, and cash flows.

Product Liability and Insurance

The Company  faces an inherent  business  risk of exposure to product  liability
claims in the event that the use of its products is alleged to have  resulted in
adverse effects. There can be no assurance that liability claims will not exceed
the coverage limits of the Company's  insurance  policies or that such insurance
will  continue to be  available on  commercially  reasonable  terms,  or at all.
Consequently,  product  liability claims could have a material adverse effect on
the Company's business,  financial  condition,  results of operations,  and cash
flows.

Reliance on Key Personnel

The  Company's  success  depends to a  significant  extent  upon a number of key
management and technical personnel.  The loss of the services of one or more key
employees  could  have a  material  adverse  effect on the  Company's  business,
financial  condition,  results of operations,  and cash flows.  The Company also
believes  that its future  success  will  depend in large part on whether it can
attract and retain highly skilled  technical,  management,  sales and marketing,
and  reimbursement  personnel.  Competition  for such personnel is intense,  and
there can be no assurance  that the Company will be successful in attracting and
retaining such  personnel.  The Company's  failure to attract,  hire, and retain
these personnel would have a material adverse effect on the Company's  business,
financial condition, results of operations, and cash flows.

Possible Volatility of Stock Price

The trading price of the Company's  Common Stock could be subject to significant
fluctuations  in  response  to  variations  in  quarterly   operating   results,
announcements of technological innovations or new products by the Company or its
competitors, changes in earning estimates by analysts, general conditions in the
medical device  industry,  and other events or factors.  In addition,  the stock
market in general has  experienced  extreme price and volume  fluctuations  that
have  affected the market  price for many  companies  in  industries  similar or
related to that of the Company  and that have been  unrelated  to the  operating
performance of these companies.  These market  fluctuations may adversely affect
the market price of the Company's Common Stock.

Certain Anti-Takeover Provisions

The Company's Second Amended and Restated  Certificate of  Incorporation  grants
the  Board  of  Directors  the  authority  to issue up to  3,000,000  shares  of
preferred  stock of the  Company,  $0.0001  par value per share (the  "Preferred
Stock"), in one or more series and to fix the rights,  preferences,  privileges,
and restrictions thereof,  including dividend rights, dividend rates, conversion
rights,  voting rights,  terms of  redemption,  redemption  prices,  liquidation
preferences, and the number of shares constituting any series or the designation
of such series,  without further vote or action by the  stockholders.  Effective
December  6, 1996,  pursuant to the Rights  Agreement,  the  Company's  Board of
Directors  declared  a  dividend  of  one  Right  to  purchase,   under  certain
circumstances, one one-hundredth share of the Company's Series A Preferred Stock
for each outstanding share of Common Stock of the Company.  Although the Company
has no present plans to issue any additional  shares of Preferred  Stock, it may
do so in the future.
<PAGE>
The Company's Bylaws specify procedures for director nominations by stockholders
and the submission of other proposals for consideration at stockholder meetings.
Certain provisions of Delaware law applicable to the Company could also delay or
make more  difficult a merger,  tender  offer,  or proxy  contest  involving the
Company,  including  Section 203, which  prohibits a Delaware  corporation  from
engaging in any  business  combination  with any  interested  stockholder  for a
period of three years unless certain  conditions are met. The possible  issuance
of Preferred  Stock  (including  pursuant to the Rights  Plan),  the  procedures
required for director  nominations and stockholder  proposals,  and Delaware law
could have the effect of delaying,  deferring, or preventing a change in control
of the Company,  including  without  limitation,  discouraging  a proxy contest,
making more difficult the  acquisition  of a substantial  block of the Company's
Common Stock,  or limiting the price that  investors  might be willing to pay in
the future for shares of the Company's Common Stock.
<PAGE>



                                     PART II
                                OTHER INFORMATION



ITEM 1.           Legal Proceedings

                  On April  4,  1995,  a former  consultant  to  Interpore,  the
                  company from which Exogen  purchased  certain SAFHS ultrasound
                  assets,  filed a complaint against Interpore and Exogen in the
                  United States District Court for the Southern  District of New
                  York,  claiming  the  right,   pursuant  to  the  terms  of  a
                  consulting   agreement   between  such   consultant   and  the
                  predecessor  company to Interpore,  to certain royalties,  not
                  exceeding 1.25% of the net revenues generated from the sale of
                  SAFHS devices. On June 5, 1995, Exogen answered the complaint,
                  denied  that  it has  any  liability  to the  consultant,  and
                  asserted  a number  of  specific  defenses.  On the same  day,
                  Interpore did the same, and also asserted cross-claims against
                  Exogen,  claiming  that any  royalties  found to be due to the
                  consultant  should be paid by Exogen and that Exogen should be
                  liable  for  Interpore's   attorneys'  fees  and  other  costs
                  incurred in the litigation.  On July 7, 1995,  Exogen answered
                  Interpore's cross-claims,  denied that it has any liability to
                  the consultant or to Interpore,  asserted a number of specific
                  defenses to  Interpore's  claims,  and  asserted  cross-claims
                  against  Interpore  that any royalties  found to be due to the
                  consultant  should be paid by Interpore and that  Interpore be
                  liable for Exogen's  attorneys'  fees and other costs incurred
                  in the litigation. Exogen and Interpore since have agreed that
                  (i)  Exogen's  counsel  will assume the status of lead defense
                  counsel in the litigation;  (ii) any adverse  judgment entered
                  in the litigation will be entered against Exogen and Interpore
                  jointly  and  severally;   and  (iii)  Exogen  will  indemnify
                  Interpore for any payments that are required to be made to the
                  consultant  as a result  of the  litigation,  and  Exogen  and
                  Interpore  thereafter will resolve separately their respective
                  liabilities.  As a result  of the  foregoing,  in  March  1996
                  Exogen and Interpore dismissed their claims against each other
                  in this  litigation,  without  prejudice  to  their  right  to
                  resolve them, if necessary,  as described  above.  The Company
                  does not believe that the consultant's  claims have merit, and
                  together with Interpore,  is vigorously defending this action.
                  The discovery process has been completed,  and the Company has
                  made a motion  that the Court enter a judgment in favor of the
                  Company and Interpore and against the consultant. There can be
                  no assurance, however, that the motion will be granted or that
                  the consultant's claims will not be upheld.

                  In March  1997,  the  Company  received  a demand  from  Pilla
                  Consulting,  Inc. and Arthur A. Pilla (collectively,  "Pilla")
                  for royalties allegedly due pursuant to a consulting agreement
                  between  Pilla  Consulting  and  the  predecessor  company  to
                  Interpore.  Pilla claims  entitlement to royalties of 1.25% of
                  the net revenues generated from the sale of SAFHS devices. The
<PAGE>
                  Company does not believe that Pilla's claim has any merit. For
                  that reason,  on April 2, 1997,  the Company filed a complaint
                  against  Pilla in the Supreme  Court for the State of New York
                  seeking a judicial  declaration that the Company is not liable
                  to Pilla for any  royalties.  Pilla  asserted  a  counterclaim
                  against  the  Company,  seeking  to be  awarded  the  demanded
                  royalties,  that the Company asked the Court to dismiss on the
                  grounds  that  Pilla  failed  to  state  a claim  against  the
                  Company.  Pilla subsequently asked the Court for permission to
                  amend  its  answer.   The  Court  recently  dismissed  Pilla's
                  counterclaim  and denied Pilla  permission to amend,  but gave
                  Pilla permission to replead its counterclaim. In January 1998,
                  Pilla served an amended  counterclaim.  The Company intends to
                  aggressively pursue the action against Pilla and to vigorously
                  defend  against  the   counterclaims  by  Pilla  seeking  said
                  royalties or equivalent payments under any legal theory. There
                  can be no assurance,  however,  that Pilla's claim will not be
                  upheld.


ITEM 2.           Changes in Securities and Use of Proceeds

                  Initial Public Offering

                  The  Company  filed,   effective  July  19,  1995,  its  first
                  registration statement (the "Registration  Statement") on Form
                  S-1 (Registration  No. 33-92740)  under the  Securities Act of
                  1933,  as  amended.  The class of  securities  registered  was
                  Common Stock. The offering commenced on July 20, 1995, and all
                  securities   were   sold  in  the   offering.   The   managing
                  underwriters  for the  offering  were  Robertson,  Stephens  &
                  Company (now known as BancAmerica Robertson Stephens); Cowen &
                  Company; and Piper Jaffray, Inc.

                  Pursuant to the Registration Statement, the Company registered
                  and sold  2,875,000  shares of Common  Stock for an  aggregate
                  offering  price of $31.6 million.  The Company  incurred total
                  expenses  in the  offering  of $3.1  million,  of  which  $2.2
                  million represented underwriting discounts and commissions and
                  approximately  $910,000  represented other expenses.  All such
                  expenses were direct or indirect  payments to others.  The net
                  offering  proceeds to the Company  after  deducting  the total
                  expenses were $28.5 million.

                  From the effective date to December 31, 1997, the  approximate
                  amount of net  offering  proceeds  used was $8.4  million  for
                  research and  development,  $4.0 million for sales  expansion,
                  $710,000  for  manufacturing, and  $5.9  million  for  working
                  capital and general corporate use.

                  Private Placement of Common Stock

                  On October 20, 1997, the Company completed a private placement
                  (the "Private  Placement")  of 1,799,019  shares of its Common
                  Stock for aggregate  net proceeds of $7.4 million.  The Common
                  Stock subject to the Private Placement was sold by the Company
                  pursuant to  Regulation D of the  Securities  Act of 1933,  as
                  amended,  on the basis that the Common  Stock was issued under
                  circumstances  not involving a public offering.  Pursuant to a

<PAGE>
                  Registraton  Rights Agreement,  dated October 20, 1997, by and
                  among the Company and the investors in the Private  Placement,
                  the Company filed a registration statement on January 2, 1998,
                  to  register  the shares of Common  Stock sold in the  Private
                  Placement.



ITEM 3.           Defaults Upon Senior Securities

                  None.


ITEM 4.           Submission of Matters to a Vote of Security Holders

                  None.


ITEM 5.           Other Information

                  None.


ITEM 6.           Exhibits and Reports on Form 8-K

                  (a)      Exhibits
                             3.1    Second  Amended and Restated  Certificate of
                                    Incorporation  of the Company.  Incorporated
                                    by reference to Exhibit 3.1 to the Company's
                                    Form 10-Q for the third  quarter  ended June
                                    30, 1995.
                             3.2    Amended and Restated  Bylaws of the Company.
                                    Incorporated  by reference to Exhibit 3.3 to
                                    the   Company's   Form   S-1    Registration
                                    Statement (Registration No. 33-92740).  
                             4.1    See Exhibits 3.1 and 3.2 for  provisions  of
                                    the Certificate of Incorporation  and Bylaws
                                    of the Company defining rights of holders of
                                    Common Stock of the Company.
                            10.1    Amended  and  Restated   Investors'   Rights
                                    Agreement  dated as of  November  14,  1994,
                                    among the Company,  the investors  listed on
                                    Schedule  A  thereto,  and  the  individuals
                                    listed on  Schedule B thereto.  Incorporated
                                    by   reference   to  Exhibit   10.1  to  the
                                    Company's  Form S-1  Registration  Statement
                                    (Registration No. 33-92740).
                            10.2    Asset Purchase  Agreement  dated as of March
                                    1, 1993,  among  Applied  Epigenetics,  Inc.
                                    ("AEI"), Interpore International,  Inc., and
                                    Interpore Orthopaedics, Inc. Incorporated by
                                    reference to Exhibit  10.2 to the  Company's
                                    Form     S-1     Registration      Statement
                                    (Registration No. 33-92740).
                            10.3    [RESERVED]
                            10.4    Employment Agreement dated February 3, 1994,
                                    between   the   Company   and  John   Bohan.
                                    Incorporated by reference to Exhibit 10.4 to
                                    the   Company's   Form   S-1    Registration
                                    Statement (Registration No. 33-92740).
<PAGE>
                            10.5    Form of  Consulting  Agreements  between the
                                    Company  and each of Drs.  McLeod and Rubin,
                                    as amended.  Incorporated  by  reference  to
                                    Exhibit  10.5  to  the  Company's  Form  S-1
                                    Registration  Statement   (Registration  No.
                                    33-92740).
                            10.6    Form of Stock Restriction  Agreement between
                                    the  Company  and  each of Drs.  McLeod  and
                                    Rubin and Messrs.  Reisner,  Ryaby,  Talish,
                                    McBrayer,   and   Bohan.   Incorporated   by
                                    reference to Exhibit  10.6 to the  Company's
                                    Form     S-1     Registration      Statement
                                    (Registration No. 33-92740).
                            10.7    Form of Stock Purchase Agreement between the
                                    Company and each of Messrs.  Reisner, Ryaby,
                                    and Talish.  Incorporated  by  reference  to
                                    Exhibit  10.7  to  the  Company's  Form  S-1
                                    Registration  Statement   (Registration  No.
                                    33-92740).
                            10.8    Manufacturing  Agreement  dated  January 20,
                                    1994,  between the  Company  and  Hi-Tronics
                                    Designs,  Inc.  Incorporated by reference to
                                    Exhibit  10.8  to  the  Company's  Form  S-1
                                    Registration  Statement   (Registration  No.
                                    33-92740).
                            10.9    Form  of  1993  Stock   Option  Plan  Option
                                    Agreement.   Incorporated  by  reference  to
                                    Exhibit  10.9  to  the  Company's  Form  S-1
                                    Registration Statement (Registration No.
                                    33-92740).
                            10.10   1995  Stock  Option / Stock  Issuance  Plan.
                                    Incorporated  by reference to Exhibit  10.10
                                    to  the  Company's  Form  S-1   Registration
                                    Statement (Registration No. 33-92740).
                            10.11   Employee Stock  Purchase Plan.  Incorporated
                                    by  reference   to  Exhibit   10.12  to  the
                                    Company's  Form S-1  Registration  Statement
                                    (Registration No. 33-92740).
                            10.12   Lease  Agreement dated December 13, 1994, by
                                    and between the Company and Siemens  Medical
                                    Systems,  Inc.  Incorporated by reference to
                                    Exhibit  10.13  to the  Company's  Form  S-1
                                    Registration  Statement   (Registration  No.
                                    33-92740).
                            10.13   License  Agreement  dated  March  26,  1992,
                                    between  AEI  and  Drs.  McLeod  and  Rubin.
                                    Incorporated  by reference to Exhibit  10.14
                                    to  the  Company's  Form  S-1   Registration
                                    Statement (Registration No. 33-92740).
                            10.14   SAFHS  Agreement  dated  November  30, 1995,
                                    between  the  Company  and  Teijin  Limited.
                                    Incorporated  by reference to Exhibit  10.14
                                    to the  Company's  Form  10-K  for the  year
                                    ended September 30, 1995.
                            10.15+  Mechanical-Stress  Agreement  dated November
                                    30,  1995,  between  the  Company and Teijin
                                    Limited.   Incorporated   by   reference  to
                                    Exhibit 10.15 to the Company's Form 10-K for
                                    the year ended September 30, 1995.
<PAGE>
                            10.16   Employment  Agreement  dated  March 1, 1997,
                                    between the Company and Patrick A. McBrayer.
                                    Incorporated  by reference to Exhibit  10.16
                                    to the  Company's  Form 10-Q for the  second
                                    quarter ended March 31, 1997.
                            10.17   Severance  Agreement,  dated  May 27,  1997,
                                    between   the   Company   and  John   Bohan.
                                    Incorporated  by reference to Exhibit  10.17
                                    to the  Company's  Form  10-K  for the  year
                                    ended September 30, 1997.
                            10.18   Common  Stock  Purchase   Agreement,   dated
                                    October  20,  1997,  between the Company and
                                    certain   investors  listed  on  Schedule  1
                                    thereto.   Incorporated   by   reference  to
                                    Exhibit 10.18 to the Company's Form 10-K for
                                    the year ended September 30, 1997.
                            10.19   Registration Rights Agreement, dated October
                                    20,  1997,  between  the Company and certain
                                    investors  listed  on  Schedule  1  thereto.
                                    Incorporated  by reference to Exhibit  10.19
                                    to the  Company's  Form  10-K  for the  year
                                    ended September 30, 1997.
                            10.20   Form of  Amendment  to 1995  Stock  Option /
                                    Stock   Issuance   Plan.   Incorporated   by
                                    reference to Exhibit  10.20 to the Company's
                                    Form 10-K for the year ended  September  30,
                                    1997.
                            10.21   Form of Amendment to Employee Stock Purchase
                                    Plan.  Incorporated  by reference to Exhibit
                                    10.21  to the  Company's  Form  10-K for the
                                    year ended September 30, 1997.
                            21.1    List   of   Subsidiary.    Incorporated   by
                                    reference to Exhibit  21.1 to the  Company's
                                    Form 10-K for the year ended  September  30,
                                    1995.
                            27*     Financial Data Schedule.
                            99.1    Preferred  Shares  Rights  Agreement,  dated
                                    December  6, 1996,  between  the Company and
                                    Registrar  and Transfer  Company,  including
                                    the Certificate of  Determination,  the Form
                                    of Rights  Certificate,  and the  summary of
                                    Rights  attached  thereto as  Exhibits A, B,
                                    and   C,   respectively.   Incorporated   by
                                    reference to Exhibit  99.1 to the  Company's
                                    Form 10-K for the year ended  September  30,
                                    1996.

                           * Filed herewith.
                           + Confidential treatment granted.

                  (b)      Reports on Form 8-K
                                    No reports on Form 8-K were filed during the
                                    quarter for which this report is filed.
<PAGE>


                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.





                                         EXOGEN, INC.
                                         (Registrant)




February 6, 1998                     By: /s/ Patrick A. McBrayer
                                         -------------------------
                                         Patrick A. McBrayer, President and
                                         Chief Executive Officer




February 6, 1998                    By:  /s/ Richard H. Reisner
                                         ------------------------
                                         Richard H. Reisner, Vice President and
                                         Chief Financial Officer (Principal 
                                         Financial Officer and Principal
                                         Accounting Officer)

<PAGE>

                                  EXOGEN, INC.

                                  EXHIBIT INDEX

              Number                           Description  
              ------                           -----------  

              3.1          Second   Amended   and   Restated    Certificate   of
                           Incorporation   of  the  Company.   Incorporated   by
                           reference to Exhibit 3.1 to the  Company's  Form 10-Q
                           for the third quarter ended June 30, 1995.
              3.2          Amended   and   Restated   Bylaws  of  the   Company.
                           Incorporated  by  reference  to  Exhibit  3.3  to the
                           Company's    Form    S-1    Registration    Statement
                           (Registration No. 33-92740).
              4.1          See  Exhibits  3.1  and  3.2  for  provisions  of the
                           Certificate  of  Incorporation   and  Bylaws  of  the
                           Company defining rights of holders of Common Stock of
                           the Company.
             10.1          Amended  and  Restated  Investors'  Rights  Agreement
                           dated as of November 14, 1994, among the Company, the
                           investors  listed  on  Schedule  A  thereto,  and the
                           individuals    listed   on    Schedule   B   thereto.
                           Incorporated  by  reference  to  Exhibit  10.1 to the
                           Company's    Form    S-1    Registration    Statement
                           (Registration No. 33-92740).
             10.2          Asset Purchase  Agreement  dated as of March 1, 1993,
                           among Applied  Epigenetics,  Inc. ("AEI"),  Interpore
                           International, Inc., and Interpore Orthopaedics, Inc.
                           Incorporated  by  reference  to  Exhibit  10.2 to the
                           Company's    Form    S-1    Registration    Statement
                           (Registration No. 33-92740).
             10.3          [RESERVED]
             10.4          Employment  Agreement dated February 3, 1994, between
                           the Company and John Bohan. Incorporated by reference
                           to   Exhibit   10.4  to  the   Company's   Form   S-1
                           Registration Statement (Registration No. 33-92740).
             10.5          Form of Consulting Agreements between the Company and
                           each  of  Drs.   McLeod   and  Rubin,   as   amended.
                           Incorporated  by  reference  to  Exhibit  10.5 to the
                           Company's    Form    S-1    Registration    Statement
                           (Registration No. 33-92740).
             10.6          Form  of  Stock  Restriction  Agreement  between  the
                           Company and each of Drs. McLeod and Rubin and Messrs.
                           Reisner,   Ryaby,   Talish,   McBrayer,   and  Bohan.
                           Incorporated  by  reference  to  Exhibit  10.6 to the
                           Company's    Form    S-1    Registration    Statement
                           (Registration No. 33- 92740).
             10.7          Form of Stock Purchase  Agreement between the Company
                           and  each of  Messrs.  Reisner,  Ryaby,  and  Talish.
                           Incorporated  by  reference  to  Exhibit  10.7 to the
                           Company's    Form    S-1    Registration    Statement
                           (Registration No. 33-92740).
             10.8          Manufacturing   Agreement  dated  January  20,  1994,
                           between  the  Company and  Hi-Tronics  Designs,  Inc.
                           Incorporated  by  reference  to  Exhibit  10.8 to the
                           Company's    Form    S-1    Registration    Statement
                           (Registration No. 33-92740).
<PAGE>
                                  EXOGEN, INC.

                            EXHIBIT INDEX (continued)

            Number                             Description  
            ------                             -----------  

             10.9          Form of 1993  Stock  Option  Plan  Option  Agreement.
                           Incorporated  by  reference  to  Exhibit  10.9 to the
                           Company's    Form    S-1    Registration    Statement
                           (Registration No. 33-92740).
             10.10         1995 Stock Option / Stock Issuance Plan. Incorporated
                           by reference to Exhibit 10.10 to the  Company's  Form
                           S-1   Registration   Statement    (Registration   No.
                           33-92740).
             10.11         Employee  Stock  Purchase   Plan.   Incorporated   by
                           reference to Exhibit 10.12 to the Company's  Form S-1
                           Registration Statement (Registration No. 33-92740).
             10.12         Lease  Agreement  dated  December  13,  1994,  by and
                           between the Company and Siemens Medical Systems, Inc.
                           Incorporated  by  reference  to Exhibit  10.13 to the
                           Company's    Form    S-1    Registration    Statement
                           (Registration No. 33-92740).
             10.13         License  Agreement dated March 26, 1992,  between AEI
                           and Drs. McLeod and Rubin.  Incorporated by reference
                           to   Exhibit   10.14  to  the   Company's   Form  S-1
                           Registration Statement (Registration No. 33-92740).
             10.14         SAFHS Agreement dated November 30, 1995,  between the
                           Company and Teijin Limited. Incorporated by reference
                           to Exhibit 10.14 to the  Company's  Form 10-K for the
                           year ended September 30, 1995.
             10.15+        Mechanical-Stress  Agreement dated November 30, 1995,
                           between the Company and Teijin Limited.  Incorporated
                           by reference to Exhibit 10.15 to the  Company's  Form
                           10-K for the year ended September 30, 1995.
             10.16         Employment Agreement dated March 1, 1997, between the
                           Company  and  Patrick A.  McBrayer.  Incorporated  by
                           reference to Exhibit 10.16 to the Company's Form 10-Q
                           for the second quarter ended March 31, 1997.
             10.17         Severance Agreement,  dated May 27, 1997, between the
                           Company and John Bohan.  Incorporated by reference to
                           Exhibit 10.17 to the Company's Form 10-K for the year
                           ended September 30, 1997.
             10.18         Common Stock  Purchase  Agreement,  dated October 20,
                           1997,  between  the  Company  and  certain  investors
                           listed  on  Schedule  1  thereto.   Incorporated   by
                           reference to Exhibit 10.18 to the Company's Form 10-K
                           for the year ended September 30, 1997.
             10.19         Registration  Rights  Agreement,  dated  October  20,
                           1997,  between  the  Company  and  certain  investors
                           listed  on  Schedule  1  thereto.   Incorporated   by
                           reference to Exhibit 10.19 to the Company's Form 10-K
                           for the year ended September 30, 1997.
             10.20         Form  of  Amendment  to  1995  Stock  Option  / Stock
                           Issuance Plan.  Incorporated  by reference to Exhibit
                           10.20 to the  Company's  Form 10-K for the year ended
                           September 30, 1997.
<PAGE>
                                  EXOGEN, INC.

                            EXHIBIT INDEX (continued)

            Number                             Description    
            ------                             -----------    

             10.21         Form of Amendment to Employee  Stock  Purchase  Plan.
                           Incorporated  by  reference  to Exhibit  10.21 to the
                           Company's Form 10-K for the year ended  September 30,
                           1997.
             21.1          List of  Subsidiary.  Incorporated  by  reference  to
                           Exhibit 21.1 to the Company's  Form 10-K for the year
                           ended September 30, 1995.
             27*           Financial Data Schedule.
             99.1          Preferred Shares Rights Agreement,  dated December 6,
                           1996,  between the Company and Registrar and Transfer
                           Company,  including the Certificate of Determination,
                           the Form of Rights  Certificate,  and the  summary of
                           Rights  attached  thereto  as  Exhibits  A, B, and C,
                           respectively.  Incorporated  by  reference to Exhibit
                           99.1 to the  Company's  Form 10-K for the year  ended
                           September 30, 1996.

                           * Filed herewith.
                           + Confidential treatment granted.


<PAGE>



<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
In thousands except share data 
at 12/31/97, or 3 months ended 12/31/97.
</LEGEND>
       
<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          SEP-30-1998
<PERIOD-END>                               DEC-31-1997
<CASH>                                          10,295
<SECURITIES>                                     3,692
<RECEIVABLES>                                    5,679
<ALLOWANCES>                                     2,540
<INVENTORY>                                      1,507
<CURRENT-ASSETS>                                19,268
<PP&E>                                           1,672
<DEPRECIATION>                                   1,006
<TOTAL-ASSETS>                                  20,191
<CURRENT-LIABILITIES>                            2,971
<BONDS>                                              0
                                0
                                          0
<COMMON>                                             1
<OTHER-SE>                                      17,219
<TOTAL-LIABILITY-AND-EQUITY>                    20,191
<SALES>                                          1,872
<TOTAL-REVENUES>                                 1,872
<CGS>                                              832
<TOTAL-COSTS>                                      832
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                    68
<INTEREST-EXPENSE>                                   2
<INCOME-PRETAX>                                (2,258)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                            (2,258)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   (2,258)
<EPS-PRIMARY>                                   (0.20)
<EPS-DILUTED>                                   (0.20)
         

</TABLE>


© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission