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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-26154
EXOGEN, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3208468
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Constitution Avenue
P.O. Box 6860, Piscataway, NJ 08855
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (732) 981-0990
N/A
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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: 11,846,642 shares outstanding at April 30, 1998.
<PAGE>
EXOGEN, INC.
Quarterly Report on Form 10-Q
March 31, 1998
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)
March 31, September 30,
1998 1997
-------- --------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 6,508 $ 4,018
Short-term investments ............................................. 5,669 4,526
Accounts receivable, net ........................................... 2,719 3,384
Inventories ........................................................ 1,065 1,515
Other current assets ............................................... 502 297
-------- --------
Total current assets .................................. 16,463 13,740
Furniture, fixtures and equipment, net ................................. 626 758
Other assets ........................................................... 254 291
-------- --------
Total assets .......................................... $ 17,343 $ 14,789
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 423 $ 463
Accrued liabilities ................................................ 2,583 2,178
Capital lease obligations .......................................... -- 2
Other current liabilities .......................................... 22 55
-------- --------
Total current liabilities ............................. 3,028 2,698
-------- --------
Total liabilities ..................................... 3,028 2,698
-------- --------
Commitments and contingencies (Note 2)
Stockholders' equity:
Preferred Stock, $0.0001 par value; 3,000,000 shares
authorized at March 31, 1998, and September 30,1997;
no shares issued or outstanding ............................... -- --
Common Stock, $0.0001 par value; 27,000,000 shares
authorized at March 31, 1998, and September 30, 1997;
11,846,267 shares issued and outstanding at March 31, 1998, and
9,998,140 shares issued and outstanding at September 30, 1997 . 1 1
Additional paid-in capital ......................................... 54,235 46,691
Cumulative translation adjustment .................................. (333) (275)
Accumulated deficit ................................................ (39,588) (34,326)
-------- --------
Total stockholders' equity ............................ 14,315 12,091
-------- --------
Total liabilities and stockholders' equity ............ $ 17,343 $ 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 Six Months Ended
March 31, March 31,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product sales .......................... $ 2,642 $ 1,685 $ 4,514 $ 3,476
-------- -------- -------- --------
Total revenues ................... 2,642 1,685 4,514 3,476
-------- -------- -------- --------
Operating costs and expenses:
Cost of product sales .................. 1,248 955 2,080 2,088
Research and development ............... 746 672 1,394 1,684
Selling, general, and administrative ... 3,018 3,150 5,838 6,401
Nonrecurring charge for international
doubtful accounts ................. 800 -- 800 --
-------- -------- -------- --------
Total operating costs and expenses 5,812 4,777 10,112 10,173
-------- -------- -------- --------
Operating loss .............................. (3,170) (3,092) (5,598) (6,697)
Other income (expense):
Interest income, net ................... 176 198 356 439
Other expense, net ..................... (8) (16) (18) (40)
-------- -------- -------- --------
Total other income, net .......... 168 182 338 399
-------- -------- -------- --------
Loss before income taxes .................... (3,002) (2,910) (5,260) (6,298)
Provision for income taxes .................. 2 -- 2 --
-------- -------- -------- --------
Net loss .................................... $ (3,004) $ (2,910) $ (5,262) $ (6,298)
======== ======== ======== ========
Basic net loss per common share ............. $ (0.25) $ (0.29) $ (0.45) $ (0.63)
======== ======== ======== ========
Diluted net loss per common share ........... $ (0.25) $ (0.29) $ (0.45) $ (0.63)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss .................................... $(3,004) $(2,910) $(5,262) $(6,298)
Other comprehensive loss:
Foreign currency translation adjustments (28) (123) (58) (144)
------- ------- ------- -------
Total other comprehensive loss ... (28) (123) (58) (144)
------- ------- ------- -------
Comprehensive loss .......................... $(3,032) $(3,033) $(5,320) $(6,442)
======= ======= ======= =======
</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)
Six Months Ended
March 31,
--------------------
1998 1997
------- -------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ......................................................... $(5,262) $(6,298)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................... 232 242
Amortization of net premium on short- and long-term
investments ............................................... -- 34
Amortization of nonemployee stock
option/warrant compensation ............................... 60 60
Provision for losses on accounts receivable ................. 143 --
Nonrecurring charge for international doubtful accounts ..... 800 --
Other adjustments ........................................... (3) 51
Decrease (increase) in assets:
Accounts receivable, net .................................... (324) (683)
Interest receivable ......................................... 1 64
Inventories ................................................. 440 (190)
Other current assets ........................................ (205) (131)
Other assets ................................................ 32 --
Increase (decrease) in liabilities:
Accounts payable ............................................ (39) (142)
Accrued liabilities ......................................... 412 362
Other current liabilities ................................... (33) (61)
------- -------
Net cash used in operating activities .................. (3,746) (6,692)
------- -------
Cash flows from investing activities:
Purchase of short- and long-term investments ..................... (4,643) (1,392)
Proceeds from sale of short- and long-term
investments .................................................... 3,500 3,573
Purchase of furniture, fixtures and equipment .................... (96) (135)
------- -------
Net cash (used in) provided by investing activities .... (1,239) 2,046
------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(continued)
Six Months Ended
March 31,
--------------------
1998 1997
------- -------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from exercise of stock options .......................... 9 4
Proceeds from sale of Common Stock ............................... 7,475 125
Principal payments under capital leases .......................... -- (9)
------- -------
Net cash provided by financing activities .............. 7,484 120
------- -------
Effect of exchange rate changes on cash and cash
equivalents ......................................................... (9) (12)
------- -------
Net increase (decrease) in cash and cash equivalents .................. 2,490 (4,538)
Cash and cash equivalents, beginning of period ........................ 4,018 8,115
------- -------
Cash and cash equivalents, end of period .............................. $ 6,508 $ 3,577
======= =======
</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 March 31, 1998; the results of
operations for the three and six months ended March 31, 1998 and 1997;
and the cash flows for the six 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.
The weighted-average number of shares used in the calculation of basic
and diluted net loss per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------ ------------------------------
1998 1997 1998 1997
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Weighted-average shares outstanding..... 11,831,505 9,937,649 11,627,652 9,923,778
</TABLE>
<PAGE>
Net loss per share under the provisions of SFAS 128 for periods prior
to 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
March 31, 1998 and 1997, but not included in the calculation of diluted
net loss per share because such shares are antidilutive:
<TABLE>
<CAPTION>
March 31,
------------------------
1998 1997
------- -------
<S> <C> <C>
Options................................. 945,861 632,398
Warrants................................ 100,000 -
</TABLE>
4. COMPREHENSIVE INCOME
Effective fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income
and its components (revenue, expenses, gains, and losses) in a full set
of general-purpose financial statements.
5. NONRECURRING CHARGE
The operating loss for the three months and six months ended March 31,
1998, includes an $800,000 nonrecurring charge to write down certain
international accounts receivable, primarily in Germany. The
nonrecurring charge was precipitated by a recent German court case,
unrelated to the Company, that challenged a 1995 ruling upon which the
Company had previously relied, and may reduce the collectibility of
certain accounts receivable in Germany.
6. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
Finished goods.......................... $ 789 $ 1,218
Parts and components.................... 276 297
--------- ---------
$ 1,065 $ 1,515
========= =========
</TABLE>
<PAGE>
7. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------
1998 1997
------ -------
(in thousands)
<S> <C> <C>
Interest paid........................... $ 3 $ 7
Income taxes paid....................... $ 2 $ -
</TABLE>
8. SUBSEQUENT EVENT
In April 1998, the Company received a $400,000 milestone payment from
Teijin Limited, related to the Company's development agreement with
Teijin for commercialization of the Company's Sonic Accelerated
Fracture Healing System ("SAFHS") device in Japan. The Company will
record the payment as revenue in the quarter ended June 30, 1998.
<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
Six Months Ended March 31, 1998, and March 31, 1997
For the six months ended March 31, 1998, essentially all of the Company's
product sales were from the Company's Sonic Accelerated Fracture Healing System
("SAFHS") devices. For the six months ended March 31, 1998, product sales were
$4.5 million, compared with $3.5 million for the six months ended March 31,
1997. The increase of $1.0 million (or 30%) was primarily a result of an
increase in volume, partially offset by a decrease in the average realized
selling price of SAFHS devices. This decrease was primarily caused by a shift in
international sales from direct sales to sales to distributors, including sales
to Teijin Limited ("Teijin"), the Company's Japanese distributor.
Domestic product sales were $4.0 million (or 89% of total product sales) for the
six months ended March 31, 1998, an increase of $1.6 million (or 64%) over $2.4
million of domestic product sales for the six months ended March 31, 1997. An
increase in domestic sales volume and in the average realized selling price of
SAFHS devices caused the increase in domestic product sales.
Product sales in Europe, primarily derived from sales in Germany, were $188,000
(or 4% of total product sales) for the six months ended March 31, 1998, a
decrease of $851,000 (or 82%) compared with $1.0 million of product sales in
Europe for the six months ended March 31, 1997. The decrease was a result of (i)
an adjustment in the quarter ended December 31, 1997, to increase the reserves
for European sales allowances and returns and (ii) the Company's election, since
September 1997, to sell SAFHS devices in Germany only when reimbursement is
preapproved. In addition to product sales in Europe, in March 1998, the Company
recorded its initial sales to Teijin of $332,000 (or 7% of total product sales)
for the six months ended March 31, 1998.
<PAGE>
Cost of product sales was $2.1 million for the six months ended March 31, 1998,
and for the six months ended March 31, 1997. 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 six months ended March 31, 1998, was $2.4
million (or 54% as a percentage of product sales), compared with $1.4 million
(or 40%) for the six months ended March 31, 1997. The $1.0 million increase (or
75%) 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 sales volume, partially offset by a decrease in the average realized selling
price of SAFHS devices.
Research and development expenses for the six months ended March 31, 1998,
decreased to $1.4 million from $1.7 million for the six months ended March 31,
1997. The decrease of $290,000 (or 17%) was primarily a result of (i) a
reduction from fiscal 1997 in the number of research projects funded during the
first quarter and (ii) savings from a workforce reduction in fiscal 1997.
Selling, general, and administrative expenses for the six months ended March 31,
1998, decreased to $5.8 million from $6.4 million for the six months ended March
31, 1997. The decrease of $563,000 (or 9%) resulted from (i) a reduction in
marketing consultation and (ii) savings from a workforce reduction in fiscal
1997.
In March 1998, the Company recorded an $800,000 nonrecurring charge to
operations to write down certain European accounts receivable, primarily in
Germany. The nonrecurring charge was precipitated by a recent German court case,
unrelated to the Company, that challenged a 1995 ruling upon which the Company
had previously relied, and may reduce the collectibility of certain accounts
receivable in Germany. The Company continues to pursue collection of these
receivables case-by-case.
Net interest income for the six months ended March 31, 1998, decreased to
$356,000 from $439,000 for the six months ended March 31, 1997, consistent with
the level of funds available for investment.
The Company incurred a net loss of $5.3 million, or $0.45 per share, for the six
months ended March 31, 1998, compared with a net loss of $6.3 million, or $0.63
per share, for the six months ended March 31, 1997. (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 $1.0 million (or 16%) in net loss was caused principally by the factors
discussed above.
Three Months Ended March 31, 1998, and March 31, 1997
For the three months ended March 31, 1998, 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 March 31, 1998, product sales were
$2.6 million, compared with $1.7 million for the three months ended March 31,
1997. The increase of $957,000 (or 57%) was primarily a result of an increase in
volume, partially offset by a decrease in the average realized selling price of
SAFHS devices. This decrease was primarily caused by a shift in international
sales from direct sales to sales to distributors, including sales to Teijin.
<PAGE>
Domestic product sales were $2.1 million (or 80% of total product sales) for the
three months ended March 31, 1998, an increase of $936,000 (or 79%) over $1.2
million of domestic product sales for the three months ended March 31, 1997. An
increase in domestic sales volume and in the average realized selling price of
SAFHS devices caused the increase in domestic product sales.
Product sales in Europe, primarily derived from sales in Germany, were $188,000
(or 7% of total product sales) for the three months ended March 31, 1998, a
decrease of $311,000 (or 62%) compared with $499,000 of product sales in Europe
for the three months ended March 31, 1997. Since September 1997, the Company has
elected to sell SAFHS devices in Germany only when reimbursement is preapproved,
which has caused the decrease in sales in Europe. In addition to product sales
in Europe, in March 1998, the Company recorded its initial sales to Teijin of
$332,000 (or 13% of total product sales) for the three months ended March 31,
1998.
Cost of product sales was $1.2 million for the three months ended March 31,
1998, compared with $955,000 for the three months ended March 31, 1997. 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
March 31, 1998, was $1.4 million (or 53% as a percentage of product sales),
compared with $730,000 (or 43%) for the three months ended March 31, 1997. The
$664,000 increase (or 91%) in gross profit was principally due to (i) an
increase in sales volume and (ii) reduced per-unit product costs principally
related to the introduction of the SAFHS 2000, partially offset by a decrease in
the average realized selling price of SAFHS devices.
Research and development expenses for the three months ended March 31, 1998,
increased to $746,000 from $672,000 for the three months ended March 31, 1997.
The increase of $74,000 (or 11%) was primarily a result of the commencement of
additional research projects, partially offset by savings from a workforce
reduction in fiscal 1997.
Selling, general, and administrative expenses for the three months ended March
31, 1998, decreased to $3.0 million from $3.2 million for the three months ended
March 31, 1997. The decrease of $132,000 (or 4%) resulted primarily from an
overall reduction in marketing expenses, which were greater in fiscal 1997
because of the introduction of the SAFHS 2000 in April 1997. Savings from a
workforce reduction in fiscal 1997 added to the decrease in expenses.
In March 1998, the Company recorded an $800,000 nonrecurring charge to
operations to write down certain European accounts receivable, primarily in
Germany. The nonrecurring charge was precipitated by a recent German court case,
unrelated to the Company, that challenged a 1995 ruling upon which the Company
had previously relied, and may reduce the collectibility of certain accounts
receivable in Germany. The Company continues to pursue collection of these
receivables case-by-case.
Net interest income for the three months ended March 31, 1998, decreased to
$176,000 from $198,000 for the three months ended March 31, 1997, consistent
with the level of funds available for investment.
The Company incurred a net loss of $3.0 million, or $0.25 per share, for the
three months ended March 31, 1998, compared with a net loss of $2.9 million, or
$0.29 per share, for the three months ended March 31, 1997. (Per share data are
<PAGE>
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 increase
of $94,000 (or 3%) 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 $39.6 million at March 31,
1998. 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). In October 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 six months ended March 31, 1998, the Company used net cash of $3.7
million for operating activities, primarily to fund selling and marketing of the
SAFHS 2000. Working capital was $13.4 million at March 31, 1998, an increase of
$2.4 million (or 22%) from the balance at September 30, 1997. The Company's
capital expenditures for the six months ended March 31, 1998, were $96,000. 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 March 31, 1998, the Company has recorded $1.5 million
of revenues related to development agreements with Teijin. No such revenues were
recognized in the six months ended March 31, 1998 or 1997, although in April
1998, the Company recorded an additional $400,000 of such revenues. 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 is responsible for
manufacturing and supplying SAFHS devices to Teijin for clinical trials and
sales in Japan, while 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 continues to assess the year 2000 compliance impact on the Company's
operations, but does not expect compliance costs to be material.
<PAGE>
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
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, Japan, 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
<PAGE>
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
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 March 31,
1998, had an accumulated deficit of approximately $39.6 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
<PAGE>
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
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, the United Kingdom, 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 or its partners can successfully
market the SAFHS device in Europe or in Japan or that the Company can secure
additional marketing partners in the Pacific Rim on terms acceptable to the
Company, or at all.
<PAGE>
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.
Product sales in Europe, which were primarily derived from sales in Germany,
were 14% of total product sales in fiscal 1996, 18% in fiscal 1997, and for the
six months ended March 31, 1998, were 4% of total product sales.
In the three months ended March 31, 1998, the Company recorded its initial sales
to Teijin, its Japanese distributor. The Company is responsible for
manufacturing and supplying SAFHS devices to Teijin for clinical trials and
sales in Japan, while Teijin is responsible for complying with the regulatory
requirements and marketing and distributing the SAFHS device in Japan. Product
sales to Japan were 7% of total product sales for the six months ended March 31,
1998.
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 March 31, 1998, the balance in European accounts receivable, net of
allowances for returns and bad debt, was $326,000. The European accounts
receivable is primarily derived from sales in Germany, where the Company has
received limited local reimbursement on a case-by-case basis. In the quarter
ended March 31, 1998, the Company recorded an $800,000 nonrecurring charge to
operations to write down certain of its European accounts receivable, primarily
in Germany, which exceeded 180 days outstanding. The nonrecurring charge was
precipitated by a recent German court case, unrelated to the Company, that
challenged a 1995 ruling upon which the Company had previously relied, and may
reduce the collectibility of certain accounts receivable in Germany. 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. In May 1998, an article in a German medical publication indicated
that the reviewing body has recommended to the German Minister of Health not to
provide national reimbursement for SAFHS therapy; it is the Company's
understanding that the Minister of Health will now decide whether or not to
<PAGE>
accept this recommendation. If the recommendation is accepted, the Company will
seek an appeal or resubmit its application with further information, if
necessary. Unless and until such approval is obtained, the Company has elected
to sell SAFHS devices in Europe only when reimbursement is preapproved, which
has caused a downward trend in European sales. There can be no assurance that
the Company will ultimately receive nationwide approval in any European country
on a timely basis, if at all. Lack of European approvals for the Company's
products could have a material adverse effect on the Company's European
business, financial condition, results of operations, and cash flows.
The Company's European operations 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 Quality
System Regulations. Any failure by either the Company or the contract
manufacturer to maintain its respective facility in accordance with the FDA's
Good Manufacturing Practices ("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
<PAGE>
development and technological change. The Company's products could be rendered
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. In June 1997, the Company 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 third quarter of fiscal
<PAGE>
1998. No assurance can be given that such application will be made, and if made,
that a PMA or a 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,
and in 1998, for the SAFHS 2000. 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
<PAGE>
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
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 completed 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.
<PAGE>
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
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
<PAGE>
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.
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
<PAGE>
the net revenues generated from the sale of SAFHS devices. The
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 has again
made a motion to dismiss Pilla's counterclaims; however, there
can be no assurance that the motion will be granted or that
Pilla's counterclaims will not be upheld. 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 if they are upheld by
the Court.
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 March 31, 1998, the Company has
used all of net offering proceeds as follows: $9.1 million for
research and development, $11.4 million for sales expansion,
$787,000 for manufacturing, and $7.2 million for working
capital and general corporate use. This represents a material
change from the use of proceeds described in the prospectus.
Since the effective date, the Company has shifted funds from
research and development to marketing and reimbursement in
support of the SAFHS device.
<PAGE>
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Stockholders was held on
February 25, 1998.
(c) The motions before stockholders were:
(1) To elect seven Directors.
<TABLE>
<CAPTION>
Votes Votes Votes Broker
Name of Director For Against Withheld Abstentions Nonvotes
---------------- --- ------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
John P. Ryaby 10,043,202 - 193,647 - -
Patrick A. McBrayer 10,043,754 - 193,095 - -
Buzz Benson 10,043,754 - 193,095 - -
Donald J. Lothrop 10,038,754 - 198,095 - -
Peter C. Madeja 10,038,254 - 198,595 - -
David J. Ottensmeyer,
M.D. 10,027,153 - 209,696 - -
Terence D. Wall 10,043,754 - 193,095 - -
</TABLE>
(2) To approve an amendment to the 1995 Stock
Option / Stock Issuance Plan, which included
an increase in the number of shares of
Common Stock available for issuance
thereunder from 750,000 to 1,350,000 shares.
Votes For 7,038,487
Votes Against 1,047,575
Votes Withheld -
Abstentions 13,490
Broker Nonvotes 2,137,297
(3) To approve an amendment to the Employee
Stock Purchase Plan to increase the number
of shares of Common Stock available for
issuance thereunder from 150,000 to 350,000
shares.
Votes For 6,999,910
Votes Against 1,195,668
Votes Withheld -
Abstentions 13,470
Broker Nonvotes 2,027,801
<PAGE>
(4) To ratify the selection of Arthur Andersen
LLP, independent public accountants, as
auditors of the Company for the fiscal year
ending September 30, 1998.
Votes For 10,176,714
Votes Against 48,525
Votes Withheld -
Abstentions 11,610
Broker Nonvotes -
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 [RESERVED]
10.11 [RESERVED]
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 The 1995 Stock Option / Stock Issuance Plan,
as amended on November 14, 1997.
Incorporated by reference to Exhibit 99.1 to
the Company's Form S-8 Registration
Statement (Registration No. 333-51731).
10.21 The Employee Stock Purchase Plan, as amended
on November 14, 1997. Incorporated by
reference to Exhibit 99.9 to the Company's
Form S-8 Registration Statement
(Registration No. 333-51731).
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)
May 12, 1998 By: /s/ Patrick A. McBrayer
-------------------------
Patrick A. McBrayer, President and
Chief Executive Officer
May 12, 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 [RESERVED]
10.11 [RESERVED]
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 The 1995 Stock Option / Stock Issuance Plan, as
amended on November 14, 1997. Incorporated by
reference to Exhibit 99.1 to the Company's Form S-8
Registration Statement (Registration No. 333-51731).
10.21 The Employee Stock Purchase Plan, as amended on
November 14, 1997. Incorporated by reference to
Exhibit 99.9 to the Company's Form S-8 Registration
Statement (Registration No. 333-51731).
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.
<PAGE>
EXOGEN, INC.
EXHIBIT INDEX (continued)
Number Description
------ -----------
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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
IN THOUSANDS, EXCEPT SHARE DATA AT 3/31/98, OR 6 MONTHS ENDED 3/31/98.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,508
<SECURITIES> 5,669
<RECEIVABLES> 6,500
<ALLOWANCES> 3,781
<INVENTORY> 1,065
<CURRENT-ASSETS> 16,463
<PP&E> 1,727
<DEPRECIATION> 1,101
<TOTAL-ASSETS> 17,343
<CURRENT-LIABILITIES> 3,028
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 14,314
<TOTAL-LIABILITY-AND-EQUITY> 17,343
<SALES> 4,514
<TOTAL-REVENUES> 4,514
<CGS> 2,080
<TOTAL-COSTS> 2,080
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 943
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (5,260)
<INCOME-TAX> 2
<INCOME-CONTINUING> (5,262)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,262)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
