SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
AMENDMENT NO. 1
FORM 10-Q/A
(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, 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
- --------------------------------------------------------------------------------
(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: 12,738,650 shares outstanding at January 31, 1999.
<PAGE>
EXOGEN, INC.
Quarterly Report on Form 10-Q
December 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 . . . . . . . . . . .
Item 3--Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
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,
1998 1998
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 5,041 $ 9,833
Short-term investments ............................................... 7,988 5,749
Accounts receivable, net ............................................. 3,043 2,703
Inventories .......................................................... 1,332 830
Interest receivable .................................................. 156 119
Other current assets ................................................. 438 459
--------- ---------
Total current assets .................................... 17,998 19,693
Furniture, fixtures and equipment, net ................................... 664 689
Other assets ............................................................. 392 414
--------- ---------
Total assets ............................................ $ 19,054 $ 20,796
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 827 $ 691
Accrued liabilities .................................................. 2,783 2,903
Accrued litigation settlement--current ............................... 178 424
Other current liabilities ............................................ 86 150
--------- ---------
Total current liabilities ............................... 3,874 4,168
Accrued litigation settlement--noncurrent ................................ 331 331
--------- ---------
Total liabilities ....................................... 4,205 4,499
Commitments and contingencies (Note 2)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands, except share data)
(continued)
December 31, September 30,
1998 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $0.0001 par value; 3,000,000 shares authorized
as of December 31, 1998, and September 30,1998;
no shares issued or outstanding ................................. -- --
Common stock, $0.0001 par value; 27,000,000 shares authorized
as of December 31, 1998, and September 30, 1998; 12,709,343
shares issued and outstanding as of December 31, 1998, and
12,703,718 shares issued and outstanding as of September 30, 1998 1 1
Additional paid-in capital ........................................... 58,558 58,495
Accumulated other comprehensive loss ................................. (290) (288)
Accumulated deficit .................................................. (43,420) (41,911)
--------- ---------
Total stockholders' equity .............................. 14,849 16,297
--------- ---------
Total liabilities and stockholders' equity .............. $ 19,054 $ 20,796
========= =========
</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,
----------------------
1998 1997
-------- -------
(Unaudited)
<S> <C> <C>
Revenues:
Product sales ............................... $ 3,269 $ 1,872
------- -------
Total revenues ........................ 3,269 1,872
------- -------
Operating costs and expenses:
Cost of product sales ....................... 977 832
Research and development .................... 843 648
Selling, general, and administrative ........ 3,146 2,820
------- -------
Total operating costs and expenses .... 4,966 4,300
------- -------
Operating loss ................................... (1,697) (2,428)
Other income (expense):
Interest income, net ........................ 194 180
Other, net .................................. (5) (10)
------- -------
Total other income, net ............... 189 170
------- -------
Loss before income taxes ......................... (1,508) (2,258)
Provision for income taxes ....................... 1 --
------- -------
Net loss ......................................... $(1,509) $(2,258)
======= =======
Basic net loss per common share .................. $ (0.12) $ (0.20)
======= =======
Diluted net loss per common share ................ $ (0.12) $ (0.20)
======= =======
</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
December 31,
----------------------
1998 1997
------- -------
(Unaudited)
<S> <C> <C>
Net loss ......................................... $(1,509) $(2,258)
Other comprehensive loss:
Foreign currency translation adjustments .... (2) (30)
------- -------
Total other comprehensive loss ........ (2) (30)
------- -------
Comprehensive loss ............................... $(1,511) $(2,288)
======= =======
</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,
-----------------------
1998 1997
-------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $ (1,509) $ (2,258)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ................................ 88 114
Amortization of net (discount) premium on short- and long-term
investments ................................................ (12) 14
Amortization of nonemployee stock
option/warrant compensation ................................ 33 30
Provision for losses on accounts receivable .................. 102 68
Other adjustments ............................................ -- (3)
Decrease (increase) in assets:
Accounts receivable, net ..................................... (441) 154
Interest receivable .......................................... (37) (36)
Inventories .................................................. (502) 3
Other current assets ......................................... 21 (301)
Other assets ................................................. 22 30
Increase (decrease) in liabilities:
Accounts payable ............................................. 133 139
Accrued liabilities .......................................... (119) 125
Accrued litigation settlement ................................ (191) --
Other current liabilities .................................... (64) 15
-------- --------
Net cash used in operating activities ................... (2,476) (1,906)
-------- --------
Cash flows from investing activities:
Purchase of short- and long-term investments ...................... (3,477) (680)
Proceeds from maturity of short- and long-term
investments ..................................................... 1,250 1,500
Purchase of furniture, fixtures and equipment ..................... (63) (19)
-------- --------
Net cash (used in) provided by investing activities ..... (2,290) 801
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(in thousands)
(continued)
Three Months Ended
December 31,
-----------------------
1998 1997
-------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from exercise of stock options ........................... 2 3
Proceeds from sale of common stock, net of issuance expenses ...... (26) 7,384
-------- --------
Net cash (used in) provided by financing activities ..... (24) 7,387
-------- --------
Effect of exchange rate changes on cash and cash
equivalents .......................................................... (2) (5)
-------- --------
Net (decrease) increase in cash and cash equivalents ................... (4,792) 6,277
Cash and cash equivalents, beginning of period ......................... 9,833 4,018
-------- --------
Cash and cash equivalents, end of period ............................... $ 5,041 $ 10,295
======== ========
</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. ("Exogen") as of December 31, 1998,
the results of operations and comprehensive income for the three months
ended December 31, 1998 and 1997, 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, comprehensive income, and cash flows for Exogen, Inc. and
its wholly owned subsidiary, Exogen (Europe) GmbH, should be read with
the audited consolidated financial statements for the year ended
September 30, 1998, included in Exogen's Annual Report on Form 10-K.
2. COMMITMENTS AND CONTINGENCIES
Exogen is subject to claims and litigation in the ordinary
course of business. Management is currently unaware of the existence of
any such claims and litigation.
3. NET LOSS PER COMMON SHARE
Exogen reports net loss per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per
Share," which requires the presentation of both basic and diluted
earnings per share. Basic earnings per share is computed by dividing
net loss by the weighted-average common shares outstanding for the
period. Diluted earnings per share includes options and warrants, if
dilutive. As Exogen has recorded losses during all periods presented,
the options and warrants are antidilutive, and therefore are not
included in the calculation of diluted earnings per share. Accordingly,
Exogen's basic and diluted net loss per common 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 common share is as follows:
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Weighted-average shares outstanding..... 12,706,714 11,428,231
</TABLE>
<PAGE>
The following table summarizes securities that were
outstanding as of December 31, 1998 and 1997, but were not included in
the calculation of diluted net loss per common share because such
shares are antidilutive:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
--------- -------
<S> <C> <C>
Options................................. 1,095,610 618,373
Warrants................................ 125,000 100,000
</TABLE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
-------- ---------
(in thousands)
<S> <C> <C>
Finished goods.......................... $ 919 $ 576
Parts and components.................... 413 254
-------- ---------
$ 1,332 $ 830
======== ========
</TABLE>
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
Three Months Ended December 31,
---------------------------------
1998 1997
---------- -------------
(in thousands)
<S> <C> <C>
Interest paid........................... $ 2 $ 2
</TABLE>
6. SEGMENT INFORMATION
Effective fiscal 1998, Exogen adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for
the way public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to stockholders.
<PAGE>
Exogen operates in one line of business and, therefore,
identifies its reportable business segments on the basis of geography.
This is the same basis of segmentation and basis of measurement of
segment profit or loss reported in Exogen's 1998 Annual Report on Form
10-K. The segment profit and loss, certain revenue and expense items,
and certain segment assets are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues from external customers:
United States ........................... $ 2,861 $ 1,872
Europe .................................. 231 --
Japan ................................... 177 --
Intersegment revenues:
United States ........................... 282 23
Europe .................................. -- --
Japan ................................... -- --
Segment (loss) profit:
United States ........................... (1,360) (1,796)
Europe .................................. (218) (462)
Japan ................................... 69 --
Segment assets (as of December 31):
United States ........................... 18,402 18,733
Europe .................................. 652 1,458
Japan ................................... -- --
</TABLE>
<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 Exogen'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 Exogen's Annual Report
on Form 10-K for the year ended September 30, 1998.
This Report on Form 10-Q contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of Exogen. 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 Exogen with the Securities and
Exchange Commission, including Exogen's Form 10-K.
Results of Operations
Three Months Ended December 31, 1998, and December 31, 1997
For the three months ended December 31, 1998, all product sales were
from Exogen's Sonic Accelerated Fracture Healing System ("SAFHS") devices. For
the three months ended December 31, 1998, product sales were $3.3 million,
compared with $1.9 million for the three months ended December 31, 1997. The
increase of $1.4 million (or 75%) was a result of a 67% increase in volume and a
5% increase in the average realized selling price of SAFHS devices.
Domestic product sales were $2.9 million (or 88% of total product
sales) for the three months ended December 31, 1998, an increase of $989,000 (or
53%) over $1.9 million of domestic product sales for the same period in fiscal
1998. An increase in domestic sales volume (43%) and in the average realized
selling price of SAFHS devices (7%) caused the increase in domestic product
sales.
Product sales in Europe, primarily derived from sales in Germany, were
$231,000 (or 7% of total product sales) for the three months ended December 31,
1998. For the three months ended December 31, 1997, Exogen recorded no net
revenues on sales in Europe. This reflected a first quarter fiscal 1998
adjustment to revenues of approximately $151,000 to increase the reserves for
uncollectible receivables in Europe.
Product sales to Teijin Limited ("Teijin"), Exogen's distributor in
Japan, were $177,000 (or 5% of total product sales) for the three months ended
December 31, 1998, compared with no product sales for the three months ended
December 31, 1997 (Exogen did not record its first sales to Teijin until March
1998). Exogen does not anticipate that quarterly volume in fiscal 1999 will
reach the quarterly volume achieved during the second half of fiscal 1998, when
Teijin purchased SAFHS devices for the first time as its initial inventory
build-up. During fiscal 1999, Exogen anticipates that sales to Teijin will
represent only the restocking of Teijin's inventory. For the entire fiscal 1998,
Exogen recorded product sales to Teijin of $1.4 million (or 13% of total product
sales).
<PAGE>
Cost of product sales was $977,000 for the three months ended December
31, 1998, compared with $832,000 for the three months ended December 31, 1997.
Included in cost of sales were royalties and the cost to manufacture the SAFHS
device by Exogen and an outside source. Gross profit for the three months ended
December 31, 1998, was $2.3 million (or 70% as a percentage of product sales),
compared with $1.0 million (or 56%) for the three months ended December 31,
1997. The $1.3 million increase (or 120%) in gross profit was principally due to
three factors:
o an increase in sales volume;
o reduced per-unit product costs; and
o an increase in the average realized selling price of SAFHS devices.
Research and development expenses for the three months ended December
31, 1998, increased to $843,000 from $648,000 for the three months ended
December 31, 1997. The increase of $195,000 (or 30%) was primarily a result of
increased activity related to preclinical studies and in the number of research
projects funded.
Selling, general, and administrative expenses for the three months
ended December 31, 1998, increased to $3.1 million from $2.8 million for the
three months ended December 31, 1997. The increase of $326,000 (or 12%) resulted
primarily from an increase in revenue-related expenses, such as commissions and
bad debt, partially offset by savings caused by the transfer of sales staff to
Smith & Nephew, Inc., Exogen's marketing partner.
Net interest income for the three months ended December 31, 1998,
increased to $194,000 from $180,000 for the three months ended December 31,
1997, consistent with the level of funds available for investment.
Exogen incurred a net loss of $1.5 million, or $0.12 per share, for the
three months ended December 31, 1998, compared with a net loss of $2.3 million,
or $0.20 per share, for the three months ended December 31, 1997. (Per share
data are based upon weighted average shares outstanding, which exclude options
and warrants because they are antidilutive.) The decrease of $749,000 (or 33%)
in net loss was caused principally by the factors discussed above.
Liquidity and Capital Resources
Since inception, Exogen's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $43.4 million as of December
31, 1998. Through December 31, 1998, Exogen has funded its operations primarily
through the following:
o private placements of equity securities;
o the July 1995 initial public offering of common stock; and
o the August 1998 sale of 820,000 shares of common stock to Smith &
Nephew for aggregate net proceeds of $4.0 million.
For the three months ended December 31, 1998, Exogen used net cash of
$2.5 million for operating activities, primarily to fund selling and marketing
the SAFHS 2000. Working capital was $14.1 million as of December 31, 1998, a
decrease of $1.4 million (or 9%) from the balance as of September 30, 1998.
Exogen's capital expenditures for the three months ended December 31, 1998, were
$63,000. Exogen estimates that equipment and furnishings to expand in-house
manufacturing and administrative support activities will require capital
expenditures of approximately $450,000 during each of fiscal 1999 and 2000.
<PAGE>
From December 1995 through December 31, 1998, Exogen has recorded $1.9
million of revenues representing milestone payments under Exogen's development
agreements with Teijin:
o $1.4 million related to the SAFHS development agreement; and
o $500,000 related to the mechanical-stress agreement.
All potential milestone payments under the SAFHS agreement have been earned and
paid.
Exogen plans to finance its capital needs from existing capital
resources, which Exogen believes will be sufficient to fund its operations into
fiscal 2000. Exogen has not initiated plans for funding beyond fiscal 2000.
However, if necessary, Exogen would consider other sources of financing, such as
private placements, strategic alliances, and the sale of assets, but there is no
assurance that such financing would be available when needed or on terms
acceptable to Exogen. If adequate funds are not available, Exogen may be
required to reduce its fixed costs and delay, reduce, or eliminate certain of
its activities, which would have a material adverse effect on Exogen's business,
financial condition, results of operations, and cash flows.
Accounts Receivable and Related Reserves
Exogen believes its accounts receivable balance of $3.0 million as of
December 31, 1998, net of reserves of $4.9 million, properly reflects
anticipated collections. Accounts receivable reserves have increased $566,000
since September 30, 1998, as a result of higher revenue levels and the delayed
write-off of older claims as Exogen continues to actively pursue payment of
these claims. Reserves against gross accounts receivable are comprised of
allowances for returns, pricing adjustments, and bad debts. Exogen records
revenues net of returns and pricing adjustments, while bad debt expense is
recorded as a "Selling, general, and administrative" expense.
The largest component of the reserves is the allowance for pricing
adjustments, which totals $3.2 million as of December 31, 1998. This allowance
is an estimate of adjustments that may be made to Exogen's invoiced price by
third-party payors, primarily medical insurance companies and government
entities, who are the principal reimbursers for Exogen's device. Based on fee
schedules derived by third-party payors or on provisions in patients' insurance
policies, these third-party payors may limit, modify, or deny the amount charged
for the SAFHS therapy. Exogen determines this reserve based upon historical
payment patterns within various payor categories, and also considers changes in
economic or other conditions that could affect the ability of third-party payors
to meet their obligations. Since the collection process involves multiple
parties (primary insurers, secondary insurers, and patients) and since the
appeals process in collecting medical claims can be lengthy and cumbersome,
accounts can age over an extended period of time.
<PAGE>
Exogen provides additional reserves on older claims to reflect the
reduced probability of collections on such claims, but does not write off such
amounts until Exogen determines that the claim is uncollectible based on one or
more of the following factors:
o discussion and correspondence from the payor regarding the
reason(s) for denied payment;
o Exogen's ability to provide additional information needed to
satisfy the third-party payor;
o economic or other conditions that surface regarding the payor's
ability to pay a claim; and
o the age of the invoice
Early in its operating history, Exogen had insufficient historical
information from which to analyze and establish its write-off practices. As a
result, Exogen used predetermined time criteria for writing off account
balances. Specifically, Exogen wrote off domestic receivable balances that were
older than eight months. As Exogen gained more experience in collecting accounts
and as it assembled additional historical data, it found that collections of
older accounts were possible. This data included information on Exogen's history
in appealing denied and/or reduced payments. As a result, in fiscal 1997, Exogen
adjusted its write-off practices to cease the automatic write-off of accounts
older than eight months. Consequently, accounts may now age longer than eight
months, but appropriate reserve levels are maintained and/or increased on these
accounts to cover their expected collectibility. Since a larger reserve is
required on older accounts, this adjustment in Exogen's write-off practices has
increased not only the dollar amount of the allowances but also the percentage
of the allowances relative to the gross accounts receivable balances. However,
the net accounts receivable balance continues to reflect the amount that Exogen
expects to collect. The timing of the write-offs has no impact on the expected
collection levels or on liquidity.
Of the net accounts receivable as of December 31, 1998, $289,000
represented European accounts receivable. The European accounts receivable was
net of a March 1998 nonrecurring write-down of $800,000 to reflect anticipated
reduced collectibility. Although Exogen continues to pursue collection of these
written-down European receivables case-by-case, collections have been limited,
and Exogen is not relying on the collection of these receivables to meets its
liquidity requirements.
Year 2000 Compliance
The Year 2000 compliance issue results from the inability of systems
that utilize computer programs to differentiate between the year 1900 and the
year 2000. This issue arises because many such programs were developed using two
digits rather than four digits to identify the applicable year. As a result,
programs that use time-sensitive calculations may not function correctly in the
year 2000. Those programs developed using four-digit years are probably Year
2000 compliant; however, all other programs will likely require modification
and/or replacement to be compliant. The Year 2000 issue not only affects
computer hardware and software, but also can affect equipment used in the
operations of Exogen, and extends to the systems of outside suppliers and
customers, upon which Exogen relies. Failure to address the Year 2000 issue on a
timely basis, or at all, for critical programs used by Exogen could result in
system failures or miscalculations, which could have a material adverse effect
on Exogen's business, results of operations, financial condition, and cash
flows.
<PAGE>
State of Readiness
In fiscal 1998, Exogen performed an initial assessment of its Year 2000
compliance. In addition, Exogen formed a Year 2000 task force, comprised of
employees across all functions, to perform a detailed review of Exogen's
operations for Year 2000 compliance. The task force has the additional
responsibilities of recommending, implementing, and monitoring corrective
actions. The task force manager reports to the Chief Financial Officer, and
updates are provided to the Board of Directors quarterly (or more frequently, if
needed).
The following summarizes the results of the initial assessment
performed by Exogen focused on the following principal areas of exposure:
SAFHS Device. Exogen expects the SAFHS device to function properly in
the year 2000. Although the device utilizes a two-digit year, the functions
performed by the device are not impacted. Certain custom-developed software used
by Exogen to analyze data collected by the device has been modified to interpret
the two-digit data. No further actions are anticipated.
Information Systems' Hardware and Software. The majority of hardware
and software used to manage and access Exogen's information systems has been
recently upgraded. As a result, most of this hardware and software is asserted
by the vendors to be Year 2000 compliant. Testing will be performed during the
second quarter of fiscal 1999 to verify compliance, and any equipment or
software found to be noncompliant will be upgraded or replaced.
Custom-Developed Business Applications. Exogen uses custom-developed
software to run certain critical operations. Such software was developed to be
Year 2000 compliant. Exogen will perform additional testing on the software
during the third quarter of fiscal 1999 to confirm compliance. If any
significant areas of noncompliance are found, programming modifications will
occur using Exogen's application development vendor.
Third-Party Business Software. Exogen uses various third-party software
to perform certain business processes (including purchasing, payroll, and stock
administration) and certain business functions (including spreadsheets, word
processing, and graphics). Many of these vendors have informed Exogen that they
are addressing the Year 2000 issue. In some cases, these vendors are upgrading
their current software. In other cases, Exogen will need to purchase new
software. Since Exogen regularly upgrades its software to the latest versions,
the costs associated with certain of these upgrades are part of normal
operations. Other software, if its functionality no longer meets business
requirements, would also be replaced as part of normal operations.
Other Equipment Using Computer Programs. Exogen uses various equipment
to handle functions performed within Exogen, including manufacturing,
telecommunicating, photocopying, and faxing. Some of this equipment is not Year
2000 compliant. Exogen has already replaced some of the noncompliant equipment
in the first quarter of fiscal 1999, and will make additional replacements
during the balance of fiscal 1999.
Suppliers. Exogen relies on outside organizations to supply, in various
degrees, information, goods, and services, including the following:
o supplies, raw materials, and finished goods;
o payroll services;
o banking/financial services;
o distribution services; and
o utilities/communications services.
<PAGE>
Exogen has received information from some suppliers regarding their Year 2000
preparedness. These suppliers are either compliant or claim they will be
compliant prior to the year 2000. In other cases, where possible and critical,
Exogen plans to investigate the suppliers' Year 2000 compliance. Where the
supplier is critical and it is reasonably likely that the supplier will be
affected by the Year 2000 issue, Exogen plans to stock additional inventory
and/or qualify other suppliers to mitigate any disruption to operations.
However, Exogen cannot guarantee the availability of additional supply or the
Year 2000 compliance of alternative vendors. The failure of key suppliers to be
Year 2000 compliant, on a timely basis or at all, could have a material adverse
effect on Exogen's business, results of operations, financial condition, and
cash flows.
Customers. Exogen's customer base includes physicians, patients, and
third-party payors. The Year 2000 issue is not expected to affect the flow of
prescriptions for the device from physicians, nor the use of the product by the
patient. However, Exogen relies on third-party reimbursement organizations at
the state, federal, and private levels to pay for Exogen's device. Exogen has
received reimbursement from over 800 third-party payors, although there is not a
significant concentration with any particular payor. Exogen will attempt to
assess the impact of the Year 2000 issue on certain payors. If a significant
percentage of payors do not address the Year 2000 issue on a timely basis,
Exogen's cash flow could be materially reduced until such issues are corrected.
Exogen may consider financing alternatives if it is reasonably likely that a
significant portion of its cash flows could be impacted and existing resources
are not sufficient to cover such exposure. The inability of payors to achieve
Year 2000 compliance could affect their ability to make timely, accurate, or
complete payments, which could have a material adverse effect on Exogen's
business, results of operations, financial condition, and cash flows.
Marketing Partners. Exogen relies on Smith and Nephew to provide the
required sales organization and related support to sell the SAFHS device in the
United States. In Japan, Exogen is dependent on Teijin for the distribution of
the SAFHS device. There are no current computer systems connecting Exogen with
either of its two marketing partners. However, the ability of Smith and Nephew
and Teijin to effectively function as business organizations, and to effectively
perform the functions on which Exogen relies, is dependent on each organization
addressing the Year 2000 issue on a timely basis. Exogen is investigating each
organization's state of preparedness to determine if any significant risks exist
for Exogen, and, if so, Exogen will develop mutual actions needed to mitigate
those risks. The inability of either of these marketing partners to properly
address the Year 2000 issue in its business operations could have a material
adverse effect on Exogen's business, results of operations, financial condition,
and cash flows.
Risks
As discussed above, Exogen is not currently aware of any Year 2000
compliance issues that exist, or that cannot be corrected on a timely basis,
relating to its:
o product;
o information systems hardware and software;
o custom-developed applications;
o general business software; and
o other equipment that uses computer programs.
<PAGE>
As a result, Exogen does not believe that any of these areas will have a
material adverse effect on Exogen's business, results of operations, financial
condition, and cash flows. There can be no assurances, however, that Exogen will
not find Year 2000 issues in these areas as further compliance testing occurs,
or that such issues, if found, can be corrected on a timely basis.
Exogen relies on, and will continue to rely on, third parties to
provide:
o equipment, goods, and services;
o reimbursement for the SAFHS device; and
o marketing and distribution support for the SAFHS device.
There can be no assurance that these third parties will adequately address Year
2000 compliance issues or that contingency plans in certain areas are possible
or practical. As a result, there could be a material adverse effect on Exogen's
business, results of operations, financial condition, and cash flows.
Costs
Certain costs in addressing the Year 2000 issue would be part of
Exogen's normal operating expenses, regardless of whether a Year 2000 issue
existed. However, Exogen does expect to incur additional expenses during fiscal
1999 in this area that are solely for Year 2000 compliance purposes. Such costs
are not expected to be material. Based on the initial assessment discussed
above, Exogen estimates the cost of remediation associated with the Year 2000
issue to range from $100,000 to $150,000 during fiscal 1999.
Contingency Plan
Exogen expects to be compliant prior to the year 2000, and does not
foresee significant risks associated with achieving such compliance. However,
certain risks exist over which Exogen has little or no control. To mitigate such
risks, the Year 2000 task force will develop a contingency plan by using the
most "reasonably likely" worst-case scenario and by assessing the critical Year
2000 risks to Exogen. Exogen anticipates that such a contingency plan will be
developed by the end of the third quarter of fiscal 1999. Like many
organizations, Exogen does not have previous experience with issues like the
Year 2000 issue. However, Exogen believes it is developing appropriate
strategies to address the issue, but such strategies do not guarantee success in
a timely manner, or at all.
These statements concerning the Year 2000 compliance issue contain
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. There can be no assurance that any estimates or other
forward-looking statements will be achieved, and actual results could differ
significantly from those planned or contemplated. Exogen plans to update the
status of its Year 2000 preparedness as necessary in its periodic filings and in
accordance with applicable securities laws.
<PAGE>
Business Considerations
History of Losses and Expectation of Continued Losses at Least Through 2000
We have had a history of substantial net losses since our inception. We
incurred net losses of $1.5 million for the three months ended December 31,
1998, $7.6 million for the year ended September 30, 1998, $11.2 million for the
year ended September 30, 1997, and $10.6 million for the year ended September
30, 1996. As of December 31, 1998, we had an accumulated deficit of $43.4
million. The net losses we have incurred to date and the net losses we expect to
continue to incur for at least the next two years have been due to several
factors, including the following:
o engineering and developing the SAFHS device and the
mechanical-stress device;
o conducting clinical trials for the SAFHS device and
mechanical-stress device;
o obtaining FDA approval of the SAFHS device;
o developing and expanding our marketing, sales, and distribution
network domestically and internationally;
o expanding our reimbursement activities domestically and
internationally; and
o expanding in-house manufacturing capability.
Although we have been marketing and selling the SAFHS device since
1994, we are still experiencing material losses. We have not achieved
profitability, and we expect to continue to incur operating losses at least
through 2000. Although our revenues have grown in recent quarters, we cannot be
certain that we will achieve sufficient revenues for profitability. Our future
revenues and profitability, if any, are critically dependent on whether we
successfully market and sell, and obtain reimbursement for, the SAFHS device.
Even if we do achieve profitability, we cannot be certain that we can sustain or
increase profitability on a quarterly or annual basis in the future.
Substantial Dependence on the SAFHS Device; Uncertainty of Market Acceptance
Our future growth depends substantially on the commercial success of
the SAFHS device. Essentially all of our product revenues are derived from sales
of the SAFHS device. We expect the SAFHS device to continue to account for
substantially all of our product revenues for the foreseeable future. Our
long-term success will depend on the following:
o successful domestic and international commercialization of the
SAFHS device for its approved uses, including the ability of our
exclusive U.S. distributor, Smith & Nephew, to successfully market
the SAFHS device in the United States;
o whether the medical community will accept the ultrasound
technology of the SAFHS device as a safe and effective method of
treating fresh, bone fractures;
o whether third-party payors, including traditional fee-for-service
insurers, workers' compensation insurers, HMOs and other managed
care organizations, automobile insurers, third-party
administrators, Medicare, and other government entities, will
provide third-party reimbursement of the SAFHS device; and
o development and regulatory approval of the SAFHS device for
additional uses.
<PAGE>
If the market does not accept the SAFHS device, our business, financial
condition, results of operations, and cash flows will be materially and
adversely affected.
Substantial Dependence on Smith & Nephew U.S. Distribution Arrangement
Our future growth depends substantially on the ability of our exclusive
U.S. distributor, Smith & Nephew, to successfully market the SAFHS device in the
United States. On August 10, 1998, Smith & Nephew acquired exclusive rights to
market the SAFHS device in the United States, under a multi-year master
agreement, a U.S. sales representative agreement, and a stock purchase
agreement. As a result, we are no longer involved in any direct sales activities
relating to the SAFHS device in the United States. Although the U.S. sales
representative agreement has a term of 10 years, it may be terminated by mutual
agreement of Exogen and Smith & Nephew, or by Smith & Nephew in the event of a
default by Exogen.
We cannot assure you that Smith & Nephew will succeed in its efforts to
market the SAFHS device. Smith & Nephew's sales personnel do not have prior
experience in the sale or use of the SAFHS device, although we are providing
them with training and other support. Although we believe that Smith & Nephew is
economically motivated to succeed in performing its responsibilities under the
agreements, the amount of resources and time Smith & Nephew devotes to its
responsibilities is not within our control, and therefore we cannot assure you
that Smith &Nephew will perform its obligations as expected. If the U.S.
distribution arrangement with Smith & Nephew is not successful or if the
arrangement is terminated, our business, financial condition, results of
operations, and cash flows will be materially and adversely affected.
Substantial Dependence on Third Parties in Europe and Japan to Sell the SAFHS
Device
We depend on independent distributors, sales agents, and marketing
partners to sell the SAFHS device in Europe, Japan, and other territories.
Revenues derived from international sales of the SAFHS device represented 12%
for the three months ended December 31, 1998, 19% for the year ended September
30, 1998, 18% for the year ended September 30, 1997, and 14% for the year ended
September 30, 1996.
Through a subsidiary in Germany, we began selling and marketing the
SAFHS device in Europe in February 1996. We also sell and market the SAFHS
device in Europe through independent distributors and sales agents. We have
recorded sales in Germany, Austria, Holland, Denmark, Switzerland, Belgium, the
United Kingdom, and Israel. Revenues derived from sales of the SAFHS device in
Europe represented 7% for the three months ended December 31, 1998, 6% for the
year ended September 30, 1998, 18% for the year ended September 30, 1997, and
14% for the year ended September 30, 1996. Most of our sales of the SAFHS device
in Europe are derived from Germany, where we receive limited local reimbursement
only on a case-by-case basis. Our European accounts receivable as of December
31, 1998, net of allowances for returns, bad debt, and amounts a third-party
payor might deduct from the price, was $289,000.
<PAGE>
In Japan, we market and sell the SAFHS device through an exclusive
distribution arrangement with Teijin Limited, a Japanese corporation. We are
responsible for manufacturing and supplying the SAFHS device to Teijin for
clinical trials and sales in Japan, while Teijin is responsible for obtaining
regulatory approval and for marketing and distributing the SAFHS device in
Japan. In May 1998, Teijin announced that the Health and Welfare Ministry of
Japan had approved reimbursement for the SAFHS device, which was the final
approval it needed to begin commercial distribution of the SAFHS device in
Japan. In June 1998, Teijin began commercial sales of the SAFHS device in Japan.
Revenues derived from sales of the SAFHS device to Teijin represented 5% for the
three months ended December 31, 1998, and 13% for the year ended September 30,
1998. Most of Teijin's purchases of SAFHS devices in fiscal 19998 represented an
initial inventory build-up by Teijin to begin commercial distribution in Japan,
primarily in the second half of the year. Purchases by Teijin in fiscal 1999
should be principally to restock the inventory that Teijin sells. We do not
anticipate that any of Teijin's quarterly restocking purchases will reach the
quarterly volume achieved by Teijin's initial stocking of inventory in fiscal
1998.
Under the distribution arrangement with Smith & Nephew, Smith & Nephew
has an option to obtain exclusive distribution rights to the SAFHS device
worldwide (except for Japan). We cannot assure you that Smith & Nephew will
exercise its option to obtain worldwide (except for Japan) distribution rights
to the SAFHS device. We also cannot assure you that the existence of this option
will not materially and adversely affect our ability to maintain effective
distribution arrangements in international markets, pending the exercise or
expiration of this option.
<PAGE>
We cannot assure you that our independent distributors, sales agents,
and marketing partners will succeed in marketing and selling the SAFHS device in
Europe, Japan, and other territories. Each of the foreign markets in which we
sell, or plan to sell, our products have separate regulatory and product
approval requirements. We cannot assure you that we will be able to obtain the
necessary regulatory approvals of the SAFHS device in foreign markets. If our
independent distributors, sales agents, and marketing partners are not
successful in marketing and selling the SAFHS device in Europe, Japan, and other
territories, our business, financial condition, results of operations, and cash
flows could be materially and adversely affected.
Risks Associated with International Operations
Our international operations are subject to other inherent risks,
including the following:
o fluctuations in currency exchange rates;
o regulatory and product approval requirements;
o tariffs and other trade barriers;
o greater difficulty in accounts receivable collection and longer
collection periods;
o reimbursement approvals (both government and private);
o difficulties and costs of staffing and managing foreign operations
and distributors;
o potentially adverse tax consequences;
o reduced protection for intellectual property rights in some
countries, including restrictions on repatriation of earnings;
o burdens of complying with a wide variety of foreign laws;
o the impact of recessions in economies outside the United States;
o political and economic instability; and
o seasonal reductions in business activity during the summer months
in Europe and other parts of the world.
In addition, our international operations and sales are denominated in
local foreign currencies. In Japan, where we do not have operations, our sales
to Teijin are denominated in U.S. dollars. We do not currently engage in
currency hedging activities.
If we fail to successfully market and sell the SAFHS device in
international markets, our business, financial condition, results of operations,
and cash flows could be materially and adversely affected.
<PAGE>
Quarterly Operating Results Are Subject to Significant Fluctuations
Our revenues and operating results may vary significantly from quarter
to quarter due to a number of factors, not all of which are within our control.
These factors include the following:
o the success of our exclusive U.S. distributor, Smith & Nephew, in
marketing the SAFHS device in the United States;
o the timing of sales of the SAFHS device;
o the mix of sales of the SAFHS device in the United States and
Europe and to Japan;
o the timing of reimbursement approval and payments by governmental
authorities and third-party payors;
o new product introductions by us or our competitors;
o expenses incurred in the research and development of new products;
o changes in our pricing policies or those of our competitors;
o timing of regulatory actions;
o general economic and market conditions;
o the Asian economic crisis and instability; and
o currency fluctuations.
Our revenues for the foreseeable future are almost entirely dependent
on sales of the SAFHS device. If revenues grow slower than we anticipate, our
business, financial condition, results of operations, and cash flows will be
materially and adversely affected.
Dependence on Third-Party Reimbursement
Successful sales of the SAFHS device in the United States, Europe,
Japan, and other territories will depend, in part, on whether we will be
reimbursed by third-party payors, including traditional fee-for-service
insurers, workers' compensation insurers, HMOs and other managed care
organizations, automobile insurers, third-party administrators, Medicare, and
other 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. Third-party payors are increasingly
challenging the price of medical devices, and as a result, are limiting
reimbursement coverage for medical devices and, in many instances, are putting
pressure on medical suppliers to lower their prices. Legislative bodies in the
United States and around the world continue to propose fundamental reforms in
the health care industry that could affect the availability of third-party
reimbursement, and we cannot predict the timing or effect of any such
legislation.
<PAGE>
United States. We cannot assure you that costs associated with medical
devices incorporating new technology, such as the SAFHS device, will be
reimbursed. To expedite reimbursement for SAFHS devices in the United States, we
seek reimbursement approval from third-party payors, when possible, prior to
shipping the devices. Regardless of the availability of reimbursement
preapproval, our reimbursement staff works closely with third-party payors,
pursuing reimbursement case-by-case. Prior to approving coverage for a new
medical technology, most third-party payors require evidence that the technology
is safe and effective, not experimental or investigational, and medically
necessary and appropriate for the specific patient. Third-party payors typically
require that the technology has received FDA approval or clearance for
marketing. Also, new technologies are often prescribed for uses other than those
approved by the FDA (off-label applications), for which reimbursement by
third-party payors may not be available. An increasing number of third-party
payors and managed care plans are also beginning to require evidence that the
technology is cost effective. We have obtained a nationally recognized product
code for the ultrasound device, and this code may expedite reimbursement from
third-party payors for the SAFHS device. However, we cannot assure you that such
codes will be utilized appropriately, or at all.
We have developed a multi-level program to obtain coverage and
reimbursement from third-party payors for the SAFHS device as a new treatment.
The SAFHS device is classified by third-party payors as durable medical
equipment. Although we have not received broad approval from any reimbursement
authority for payment of the SAFHS device, we have received approval from
various third-party payors on a case-by-case basis.
The Health Care Financing Administration ("HCFA"), which administers
the Medicare program, has a national coverage policy for electrical-stimulation
devices that initiate the healing of non-union fractures. In August 1996, HCFA's
Technology Advisory Committee recommended that the SAFHS device not be covered
under the Medicare program. The committee's recommendation stated, "The
available data, although demonstrating a reduction in physician-determined
healing time for the study population, could not be generalized to the Medicare
population in a way that would allow a conclusion that SAFHS was an effective
procedure." Since that time, we have continued to pursue coverage for SAFHS
through meetings with HCFA staff, and have provided additional support of the
clinical benefits of the SAFHS therapy, including information related to the
Medicare population. In addition, we have been working with consultants and the
Health Industry Manufacturers Association to pursue various avenues to obtain
Medicare coverage for the SAFHS device. To date, we have been unable to change
the Medicare noncoverage decision; however, we have an ongoing dialogue with
HCFA staff. The United States Congress has the power to significantly reduce
Medicare and Medicaid expenditures, and considers from time to time proposals to
reduce such expenditures. We cannot predict when Congress may enact legislation
reducing Medicare and Medicaid expenditures, and if such legislation is enacted,
what effect, if any, such legislation may have on our business, financial
condition, results of operation and cash flows.
We cannot assure you that we will be successful in obtaining
third-party reimbursement from third-party payors, including Medicare, or that
third-party payors will recommend that their programs cover the SAFHS device. If
we are unable to obtain adequate third-party reimbursement for the SAFHS device,
our business, financial condition, results of operations, and cash flows will be
materially and adversely affected.
<PAGE>
International. Our international reimbursement plan varies by country.
In Germany, Holland, and France, we are using indigenous clinical data as well
as data collected in the United States on the effectiveness of the SAFHS device
to support our filings for reimbursement coverage.
The operating loss for fiscal 1998 includes an $800,000 nonrecurring
charge, recorded in the three months ended March 31, 1998, to write down certain
international accounts receivable--primarily in Germany--that exceeded 180 days
outstanding. The nonrecurring charge was precipitated by a German Supreme Social
Court ruling made available to Exogen in the quarter ended March 31, 1998. The
ruling stated that reimbursement under the Bundesausschuss system (the German
federal organization that establishes medical reimbursement policy for
outpatient healthcare providers) for new medical therapies could occur only if
the new therapy was part of the official book of therapies of the
Bundesausschuss. Prior to this ruling, Exogen relied on a 1995 German Supreme
Social Court ruling that established that new medical therapies must be
reimbursed under the pre-Bundesausschuss system if (i) treatment was proven
effective and economical and (ii) treatment did not exceed the scope of what was
necessary. Exogen believed the clinical effectiveness of the SAFHS device and
the device's economic benefits would satisfy the requirements of the 1995
ruling. However, based on the later ruling and the fact that the SAFHS therapy
is not part of the official book of therapies, Exogen recorded the nonrecurring
charge.
To assist in the collection of outstanding claims and to expedite the
reimbursement process on future claims, Exogen is seeking nationwide approval by
the Bundesausschuss. To this end, in August 1997, Exogen submitted a formal
application to the National Krankenkasse (the predecessor to the
Bundesausschuss). The application process includes scientific and economic
assessments. In August 1998, the Minister of Health accepted the recommendation
of the Bundesausschuss not to approve national reimbursement for SAFHS therapy.
Exogen is appealing the Minister of Health's decision through administrative and
legal channels, but has been delayed by the November 1998 election of a new
government and concurrent appointment of a new Minister of Health. Exogen has
also filed a lawsuit against the Bundesausschuss to challenge its decision. Both
actions are being actively pursued at this time.
<PAGE>
Because there is no nationwide reimbursement approval for the SAFHS
device by the Bundesausschuss, Exogen has adopted the policy that, since
September 1997, for each prescription submitted to Exogen in Germany, Exogen
ships the SAFHS device only after receiving reimbursement approval for that
device. This preapproval involves a case-by-case review by a local reimbursement
authority, which has the discretion to reimburse for the device regardless of
the decision of the Bundesausschuss. The local decision is based on data
supplied by Exogen and the prescribing physician.
In Holland, we have received approval from the Ministry of Health,
Welfare, and Sports of The Netherlands for the nationwide reimbursement of
Exogen's SAFHS device for the treatment of nonunion fractures older than six
months. The approval, which will be effective April 1, 1999, was based on an
extensive review by the Ziekenfondsraad (Sick Fund Council) of the clinical
efficacy and economic benefits of SAFHS therapy.
In France, we have applied to be listed on the Tarif Interministeriel
des Prestations Sanitaries ("TIPS"). France's list of medical devices allowed
for prescription by physicians working in the private sector and for
reimbursement by the National Health Insurance. That application is still
pending, and therefore we do not sell SAFHS devices in France at this time.
In Japan, our Japanese distributor, Teijin, received nationwide
reimbursement approval from the Japanese Health and Welfare Ministry in May
1998.
We cannot assure you that we will be successful in obtaining national
reimbursement approval in Germany, France, or other countries. If we do not
obtain national reimbursement approval of the SAFHS device in Germany, France,
and other countries, our business, financial condition, results of operations,
and cash flows could be materially and adversely affected.
Extensive Government Regulation
United States. Our current product and our future products, if any, are
subject to extensive regulation by the FDA in the United States and by similar
regulatory authorities in other countries. Prior to commercial sale in the
United States, each of our products must undergo an extensive regulatory
approval process conducted by the FDA under the Federal Food, Drug and Cosmetic
Act ("FDC Act"). The FDA regulates the clinical testing, manufacturing,
labeling, distributing, and promoting of medical devices. Noncompliance with
applicable requirements can result in failure of the government to grant
pre-market approval ("PMA") for devices, withdrawal of the PMA, total or partial
suspension of production, fines, injunctions, civil penalties, recall or seizure
of products, and criminal prosecution.
Medical devices are classified into three classes (I, II, or III) on
the basis of the controls necessary to reasonably assure their safety and
effectiveness. The SAFHS device is classified as a Class III device, the class
subject to the highest level of regulation by the FDA. In addition to the
general control requirements of the FDC Act (including registration, labeling,
pre-market notification, and adherence to Good Manufacturing Practices ["GMP"]),
the SAFHS device is also subject to pre-market approval.
<PAGE>
Before a new Class III device can be introduced into the market, the
manufacturer must obtain FDA clearance through a PMA application. The less
burdensome 510(k) pre-market notification process has not been, and is not
expected to be, available for any of our products. Accordingly, we have had to
obtain, and expect to apply for, PMAs and PMA supplements for our future
products.
A PMA application must be supported by extensive data, including
preclinical and clinical trial data, to demonstrate the safety and efficacy of
the device for the uses specified in the PMA application. If human clinical
trials of a device are required and the device presents a "significant risk,"
the manufacturer or the distributor of the device must file an Ivestigational
Device Exemption ("IDE") and have an approved application prior to commencing
human clinical trials.
The IDE application must be supported by data, typically including the
results of animal and laboratory testing. If the IDE application is approved,
human clinical trials may begin at a specific number of investigational sites
with a specified maximum number of patients, as recommended by the FDA. Sponsors
of clinical trials are permitted to sell those devices distributed in the course
of study as long as compensation does not exceed recovery of the costs of
manufacturing, researching, developing, and handling.
Upon receipt of the PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to permit a
substantive review. If the FDA determines that the PMA application is
sufficiently complete to permit a substantive review, the FDA will "file" the
application. An FDA review of a PMA application generally takes between two and
three years from the date the PMA application is filed, but may take
significantly longer. The review time is often significantly extended by
requests from the FDA for more information or clarification of information
already provided in the submission. During the review period, an advisory
committee, including clinicians, will likely be convened to review and evaluate
the application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's GMP requirements prior to approval of a PMA
application.
The PMA process can be expensive, lengthy, and uncertain. We cannot
assure you that we will be able to obtain necessary regulatory approvals. The
loss of previously received approvals, or failure to comply with existing or
future regulatory requirements, would have a material adverse effect on our
business, financial condition, results of operations, and cash flows.
We are required to file a PMA supplement for new or expanded uses of
our SAFHS technology and for any material modifications to the SAFHS device. If
a PMA supplement is not accepted by the FDA for a new or expanded use or
material modification of the SAFHS device, we must commence and complete the
entire pre-market approval process with respect to such use or modification of
the SAFHS device. We began commercial distribution of the SAFHS 2000, the
second-generation SAFHS device, in the United States in May 1997 pursuant to FDA
approval of a PMA supplement in March 1997. In August 1998, we resubmitted a PMA
supplement for expanded and new applications of the SAFHS 2000 device. We cannot
guarantee that this supplement will be accepted on a timely basis or at all. In
addition, we will be required to file a PMA application for our
mechanical-stress device, if and when development is completed. We cannot assure
you that any PMA application relating to the mechanical-stress device will be
filed or granted on a timely basis, or at all.
<PAGE>
Any products manufactured or distributed by us pursuant to an approved
PMA are subject to pervasive and continuous regulation by the FDA, including
record-keeping requirements, reports of adverse experience with the use of the
device, postmarket surveillance, postmarket registry, and other actions as
deemed necessary by the FDA. Product labeling and promoting activities are
subject to scrutiny by the FDA and, in certain instances, by the Federal Trade
Commission. Exogen and its agents may promote products only for the products'
approved indications. We cannot assure you that the FDA will not impose
modifications to the labeling that could adversely affect our ability to market,
sell, or be reimbursed for the SAFHS device. In addition, we cannot assure you
that we will not become subject to FDA actions as a result of physicians'
prescribing the SAFHS device for off-label uses.
We are also subject to numerous federal, state, and local laws relating
to such matters as safe working conditions, manufacturing practices,
environmental protection, fire-hazard control, and disposal of hazardous or
potentially hazardous substances. We cannot assure you that we will not be
required to incur significant costs to comply with such laws and regulations in
the future, or that such laws or regulations will not have a material adverse
effect upon our business, financial conditions, results of operations, or cash
flows.
International. To market and sell the SAFHS device or any future
products in foreign markets, we must comply with foreign government regulations,
the requirements of which differ substantially from country to country. In
Europe, we are required to comply with the Medical Device Directive, which
covers most medical devices. Under the Medical Device Directive, most medical
devices must qualify for the CE mark, and effective June 1998, must bear a CE
mark to be marketed and sold in the European Union. To obtain the CE mark, a
manufacturer must demonstrate compliance with product safety requirements as
well as quality system requirements. The CE mark is recognized by countries that
are members of the European Union and the European Free Trade Association. We
received the CE mark for the SAFHS Model 2A in August 1996 and for the SAFHS
2000 in March 1998. We cannot assure you that we will be able to obtain CE marks
for future generations, if any, of the SAFHS device.
Although members of the European Union must accept for marketing
medical devices bearing a CE mark without imposing further requirements related
to product safety and performance, each country may require the use of its own
language on labels and instructions for use. National Competent Authorities, who
are required to enforce compliance with the requirements of the Medical Device
Directive, can restrict, prohibit, and recall CE-marked products if they are
considered to be unsafe. Such a decision must be confirmed by the European
Commission to be valid. Member countries may impose additional requirements as
long as they do not violate the Medical Device Directive or constitute technical
barriers to trade.
We cannot assure you that the FDA or any foreign regulatory authority
will approve our current or future products in a timely manner, or at all. If we
experience delays or failure in obtaining such approvals, lose any previously
received approvals, or fail to comply with existing or future regulatory
requirements, our business, financial condition, results of operations, and cash
flows will be materially and adversely affected.
<PAGE>
Uncertainty of New Product Development
We plan to seek FDA approval to begin clinical trials to expand the
approved uses for the SAFHS technology to include other long-bone fractures,
lower-spine fusion, and cartilage repair. We also plan to undertake additional
development activities and human clinical trials for our mechanical-stress
device, which is designed to prevent bone loss related to osteoporosis. Our
research and development efforts with respect to expanded uses of the SAFHS
technology and the mechanical-stress device may not lead to development of
applications or products that are shown to be safe and effective in clinical
trials. In addition, these new applications or products may not:
o meet applicable regulatory standards;
o be capable of being manufactured in commercial quantities at
acceptable costs;
o be eligible for third-party reimbursement from governmental or
private insurers;
o be successfully marketed; or
o achieve market acceptance.
At any stage of the development process, new applications or products
that appeared promising in preclinical studies or trials may not demonstrate
efficacy in larger-scale clinical trials and as a result, would not receive
regulatory approval. As a result, it is possible that we may have to curtail,
redirect, suspend, or eliminate some or all of our product development programs.
Risks Associated with Intense Competition
The medical device industry is intensely competitive. The SAFHS device
competes with non-invasive bone-growth electrical-stimulation devices and with
various surgical treatments. In the United States there are four companies that
currently market electrical stimulation devices for the treatment of
slow-healing fractures, in direct competition with the SAFHS device. We believe
that some of these companies are conducting preclinical or clinical research
relating to the use of electrical stimulation for the treatment of fresh
fractures. If our mechanical-stress device is developed, approved by the FDA,
and commercialized, it will compete with drug therapies, growth factors,
bone-graft substitutes, and exercise/physical therapy equipment. Many of our
competitors have substantially greater financial, technical, marketing, sales,
and distribution resources than we do. They also have more experience in
research and development, clinical trials, and regulatory matters than us. In
addition, most of our competitors have established third-party reimbursement for
their products. We cannot assure you that our competitors will not develop
products that are superior to ours, achieve greater market acceptance, or render
our technology and products obsolete or noncompetitive, in which case our
business, financial condition, results of operations, and cash flows will be
materially and adversely affected.
Risks Associated with Rapid Technological Change
The medical device industry is characterized by rapid product
development and technological change. We expect that the technologies associated
with medical devices will continue to develop rapidly. As a result, our future
success will depend in large part upon our ability to maintain a competitive
position with respect to those technologies. Technological developments by
<PAGE>
others may result in our products' obsolescence or becoming too expensive before
they are marketed or before we recover a significant portion of expenses
incurred in connection with developing and commercializing those products, in
which case our business, financial condition, results of operations, and cash
flows will be materially and adversely affected.
Limited Protection of Patents, Copyrights, and Proprietary Rights; Risk of
Patent Infringement
Our success will depend in part on our ability to obtain and maintain
United States and foreign patent protection, preserve our copyrights and trade
secrets, and operate without infringing the proprietary rights of third parties.
We place considerable importance on obtaining patent protection for significant
new technologies, products, and processes. With respect to our SAFHS technology,
we hold title to 11 issued United States patents, one issued Canadian patent,
one issued Taiwanese patent, one issued New Zealand patent, one issued Japanese
patent, 14 pending United States patent applications, and corresponding Patent
Cooperation Treaty and foreign patent applications. The original United States
ultrasound patent that is the basis of the SAFHS device expires in 2007. Our 10
other issued United States patents relating to SAFHS technology will expire
between 2008 and 2014.
With respect to our mechanical-stress technology, we are the exclusive
licensee of four issued United States patents, two issued foreign patents, one
pending United States patent application, and four pending foreign patent
applications. The four issued United States patents will expire between 2010 and
2011. The exclusive license agreement relating to the mechanical-stress
technology provides for royalty payments on sales of products using the patented
technology. Under the license agreement, our exclusive license may revert to a
nonexclusive license if we do not use good faith efforts to commercially exploit
the patented technology. The license agreement expires on the later of March
2022 or the expiration of the final patent licensed to us.
We believe we own or have the right to use all the proprietary
technology necessary to manufacture and market our products. Under current law,
patent applications in the United States are maintained in secrecy until patents
issue, 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, rather than the first to file a
patent application, while in foreign countries, ownership of a patent is
typically determined by priority of patent filing, not invention. Consequently,
we cannot be certain that we were the first to invent certain technology covered
by pending patent applications or that we were the first to file patent
applications for such inventions. In addition, the patent positions of medical
device companies, including ours, are generally uncertain partly because the
positions involve complex legal and factual questions.
Legal standards relating to the validity of patents covering medical
devices and biotechnological inventions and the scope of claims made under such
patents are still developing. Our patent position is highly uncertain and
involves complex legal and factual questions. We cannot be certain that the
applicants or inventors of subject matter covered by patent applications or
patents owned by or licensed to us were the first to invent or the first to file
patent applications for such inventions. In addition, we cannot guarantee that:
<PAGE>
o patent applications to which we hold rights will result in the
issuance of patents;
o any patents issued or licensed to us will be free from challenge
and that if challenged, they would be held to be valid;
o any such patents will provide commercially significant protection
to our technology, products, and processes;
o others will not independently develop substantially equivalent
proprietary information that is not covered by patents to which we
own rights or obtain access to our know-how; or
o others will not be issued patents that may prevent the sale of one
or more of our products, or require a license and the payment of
significant fees or royalties by us to third parties to enable us
to conduct our business.
We have not received any notices alleging, and we are not aware of, any
infringement by us of any other entity's patents. However, because of the volume
of patents issued and patents applications filed relating to medical devices, we
cannot assure you that current and potential competitors and other third parties
have not filed or will not file patent applications, or have not received or
will not receive patents, relating to materials or processes we use or propose
to use. Accordingly, we cannot assure you our products do not infringe any
patents or proprietary rights of third parties.
If another party claims the same or overlapping subject matter with
subject matter we have claimed in a United States patent application or patent,
we may decide or be required to participate in interference proceedings in the
United States Patent and Trademark Office to determine priority of invention.
Loss of such an interference proceeding would deprive us of patent protection
sought or previously obtained. Participating in such proceedings could result in
substantial costs, whether or not the eventual outcome is favorable.
In addition to patent protection, we rely on trademarks, copyrights,
trade secrets, proprietary know-how, and confidentiality and assignment of
invention agreements with our employees, consultants, distributors, sales
agents, and marketing partners to protect our intellectual property. We hold
United States federal trademark registrations for the marks: SAFHS(R),
EXOGEN(R), SAFHS 2000(R), and EXOGEN 2000(R). We also hold registrations for the
SAFHS(R) mark in Japan, Canada, and Mexico. Trademark applications for the
EXOGEN and SAFHS 2000 marks are pending in foreign countries. We hold rights to
copyrights on text and software we develop in connection with the SAFHS device.
We cannot assure you that any issued patents or copyrights we own will
provide us with a competitive advantage or will not be challenged or
circumvented by our competitors. We also cannot assure you that our
confidentiality and assignment of invention agreements will not be breached or
that we would have adequate remedies for any such breach. Finally, we cannot
assure you that our copyrights, trade secrets, proprietary know-how, and
intellectual property will not become known or be independently discovered by
others.
Litigation may be necessary to defend against claims of infringement,
to enforce patents and copyrights issued or licensed to us, or to protect trade
secrets. If we must litigate such issues, we may be forced to incur substantial
costs and to devote substantial resources and time. We cannot assure you that we
would prevail in such litigation. In addition, if any relevant claims of
<PAGE>
third-party patents are upheld as valid and enforceable, we could be prevented
from selling our products or could be required to obtain licenses from the
owners of such patents. We cannot guarantee that such licenses would be
available or, even if available, would be on acceptable terms to us. If we are
forced to incur substantial costs in litigation or fail to obtain a license, our
business, financial condition, results of operations, and cash flows will be
materially and adversely affected.
Manufacturing and Related Risks
We have developed in-house manufacturing and refurbishing capability
for the SAFHS 2000 device. Although we are able to manufacture our entire SAFHS
2000 production in-house, previous purchase commitments to a contract
manufacturer and our belief that it is prudent to have a second source to
support our in-house manufacturing require our use of a contract manufacturer.
We anticipate that approximately one third of our fiscal 1999 SAFHS 2000
production will be supplied by the contract manufacturer.
The FDA regulates manufacturers of medical devices that have received
FDA approval. We are required to adhere to FDA regulations setting forth GMP
requirements relating to tests, control, and documentation. State and federal
agencies monitor ongoing compliance with GMP and other applicable regulatory
requirements through periodic inspections. The FDA has inspected and approved
our facilities and those of our contract manufacturer under the FDA's Quality
System Regulations. If we or the contract manufacturer fail to maintain our
facilities in accordance with the FDA's GMP requirements, the noncomplying party
could lose the ability to manufacture the SAFHS device on a commercial scale.
Loss of this manufacturing capability could limit our ability to deliver the
SAFHS device to physicians or patients. If this occurs, our business, financial
condition, results of operations, and cash flows will be materially and
adversely affected.
The manufacture of the SAFHS device involves an assembly process with a
number of significant components. Each device is tested and released by us in
accordance with FDA requirements. Most purchased components are available from
more than one vendor. However, two key components currently are manufactured by
single-source vendors. For these components, there are relatively few
alternative sources of supply. However, we are actively in the process of
qualifying alternative vendors for these components. If the supply of these
components is interrupted, and we are unable to establish additional or
replacement suppliers for such components, our business, financial condition,
results of operations, and cash flows will be materially and adversely affected.
Royalty Payment Obligations; Potential Loss of Exclusive License
If we successfully develop the mechanical-stress device, we will be
required to pay a royalty on any net revenues from sales of this product. We
have an exclusive license to the mechanical-stress technology, which we will
lose if we do not commercially exploit the technology underlying the license. We
cannot assure you that we will be able to commercially exploit this technology.
If we lose the exclusive license, our business, financial condition, results of
operations, and cash flows could be materially and adversely affected.
<PAGE>
Reliance on Key Personnel
Our success depends to a significant extent upon our executive officers
and other key technical personnel. If we lose the services of an executive
officer or one or more key employees or our ability to attract and retain such
personnel, our business, financial condition, results of operations, and cash
flows will be materially and adversely affected. Except for Patrick McBrayer,
none of our executive officers or key employees is a party to an employment
agreement with Exogen. We do not have "key person" life insurance policies
covering any of our employees.
Possible Volatility of Stock Price
The trading price of our common stock has been subject to wide
fluctuations in the past. Our common stock's trading price could continue to
fluctuate in response to variations in quarterly operating results,
announcements of technological innovations or new products by us or our
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 significant price and volume fluctuations that
have affected the market prices of equity securities of many companies in
industries similar to ours. This volatility has often been unrelated to the
operating performance of these companies. These market fluctuations may
adversely affect the market price of our common stock. In the past, companies
that have experienced volatility in the market price of their stock have been
the object of securities class action litigation. If we were the subject of
securities class action litigation, it could result in substantial costs and a
diversion of management's attention and resources.
Risks Associated With Low-Priced Stocks
Continued inclusion of our common stock on the Nasdaq National Market
will require the following:
o that the public float consist of at least 750,000 shares of common
stock, valued in the aggregate at more than $5 million;
o that we maintain at least $4 million in net tangible assets;
o that our common stock be held by at least 400 holders; and
o that the minimum bid price for our common stock be at least $1.00
per share.
If we are unable to satisfy such maintenance requirements, our common
stock may be removed to the Nasdaq SmallCap Market or delisted from the Nasdaq
Stock Market. In the event our common stock is delisted from the Nasdaq Stock
Market, trading, if any, in the securities would thereafter be conducted in the
over-the-counter market in the "pink sheets" or the National Association of
Securities Dealers' "Electronic Bulletin Board." Consequently, the liquidity of
our common stock could be materially impaired, not only in the number of
securities that can be bought and sold at a given price, but also through delays
in the timing of transactions and reduction in security analysts' and the
media's coverage of us. This could result in lower prices for our common stock
than might otherwise be attained, and could also result in a larger spread
between the bid and asked prices for our common stock.
<PAGE>
In addition, if our common stock is delisted from trading on the Nasdaq
Stock Market and the trading price of our common stock is less than $5.00 per
share, trading in the common stock would also be subject to the requirements of
Rule 15g-9 promulgated under the Exchange Act. Under such rule, broker/dealers
who recommend low-priced securities to persons other than established customers
and accredited investors must satisfy special sales practice requirements,
including a requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally any equity security
not traded on an exchange or quoted on the Nasdaq Stock Market that has a market
price of less than $5.00 per share, subject to certain exceptions), including
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the associated risks. Such requirements
could severely limit the market liquidity of our common stock. We cannot assure
you that our common stock will not be delisted or treated as a penny stock.
Year 2000 Risks
The Year 2000 compliance issue results from the inability of systems
that utilize computer programs to differentiate between the year 1900 and the
year 2000. This issue arises because many such programs were developed using two
digits rather than four digits to identify the applicable year. As a result,
programs that use time-sensitive calculations may not function correctly in the
year 2000. Those programs developed using four-digit years are probably Year
2000 compliant, however, all other programs will likely require modification
and/or replacement to be compliant. The Year 2000 issue not only affects
computer hardware and software, but also can affect equipment used in our
operations, and extends to the systems of outside suppliers and customers, upon
which we rely. Failure to address the Year 2000 issue on a timely basis, or at
all, for critical programs used by us could result in system failures or
miscalculations, which could have material adverse effect on our business,
results of operations, financial condition, and cash flows.
In fiscal 1998, we performed an initial assessment of our Year 2000
compliance relating to the following:
o the SAFHS devices;
o our information systems' hardware and software;
o our custom-developed business applications;
o third-party business software; and
o other equipment using computer programs.
We do not believe that any of these areas will have a material adverse effect on
our business, results of operations, financial condition, and cash flows. We
cannot assure you that we will not find Year 2000 issues in these areas as
further compliance testing occurs, or that such issues, if found, can be
corrected on a timely basis.
We also performed an initial assessment of Year 2000 compliance on our
suppliers, customers, and marketing partners. We rely on, and will continue to
rely on, these third parties to provide the following:
o equipment, goods, and services;
o reimbursement for the SAFHS devices; and
o marketing and distributing support for the SAFHS device.
There can be no assurance that these third parties will adequately address Year
2000 compliance issues or that contingency plans in certain areas are possible
or practical. As a result, there could be a material adverse effect on our
business, results of operations, financial conditions, and cash flows.
Possible Adverse Effect of the Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing currencies and a new
common currency called the "euro." This represents an initial step in a process
<PAGE>
expected to culminate in the replacement of the existing currencies with the
euro. The conversion to the euro may have operational and legal implications for
some of our international business activities. We have begun consideration of
the effects of the euro conversion on our operations, but we are currently
unsure of the potential impact that the euro conversion will have on our
business, financial condition, results of operations, and cash flows,
particularly as the euro conversion relates to our European operations.
Certain Anti-takeover Provisions
Certain provisions of our Certificate of Incorporation could make it
more difficult for a third party to acquire control of our business, even if
such change in control would be beneficial to our stockholders. Our Certificate
of Incorporation allows our Board of Directors to issue preferred stock without
stockholder approval. In addition, we entered into a Rights Agreement in
December 1996 that allows our Board of Directors to declare a dividend of one
right to purchase, under certain circumstances, one one-hundredth of a share of
preferred stock for each share of common stock outstanding. Although we do not
have any current plans to issue any preferred stock, the issuance of preferred
stock in the future could make it more difficult for a third party to acquire
our business.
In addition, certain provisions of Delaware law and our bylaws could
discourage a third party from attempting to acquire control of our business.
Section 203 of the Delaware General Corporation Law prohibits us from engaging
in any business combination with an interested stockholder (generally a
stockholder who, together with its affiliates, owns 15% or more of our
outstanding stock) for a period of three years unless certain conditions are
met. Section 203 may also have the effect of discouraging a proxy contest or
tender offer. In addition, certain provisions of our bylaws contain specific
procedures stockholders must follow in making director nominations and
submitting proposals for consideration at stockholder meetings. These provisions
could make it more difficult for a third party to acquire our business.
Product Liability and Insurance
Our business exposes us to potential product liability risks in the
event that the use of our products is alleged to have resulted in physical harm
or other adverse effect. Product liability insurance for the medical device
industry is expensive. We currently carry product liability coverage of $3
million per occurrence, with coverage in the aggregate of $3 million for all
claims made in any policy year. In addition, we maintain umbrella liability
insurance, including product liability coverage, of $10 million per occurrence,
with coverage in the aggregate of $10 million for all claims made in any policy
year. Although to date we have not been the subject of any product liability
claims, we cannot assure you that our insurance will provide adequate coverage
against potential claims or that we will be able to maintain product liability
insurance on acceptable terms, or at all. If a product liability claim exceeds
the coverage of our insurance policy, our business, financial condition, results
of operations, and cash flows will be materially and adversely affected.
Shares Eligible for Future Sale
If our stockholders sell substantial amounts of our common stock
(including shares issued upon the exercise of outstanding options and warrants)
in the public market, the market price of our common stock could fall. Such
<PAGE>
sales also might make it difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate. As of
January 31, 1999, there were 12,738,650 shares of common stock outstanding as
follows:
o 820,000 shares of common stock, which are held by Smith & Nephew
and are covered by a registration statement that has been filed
with the SEC but not declared effective;
o approximately 2.7 million shares, which are held by affiliates and
are subject to the volume restrictions of Rule 144; and
o the remaining outstanding shares of common stock, which are freely
tradeable.
The possible sale of a significant number of the above shares of common stock
may cause the price of our common stock to fall.
We have registered for resale 1,350,000 shares of common stock reserved
for issuance under our 1995 Stock Option/Stock Issuance Plan, as amended. As of
January 31, 1999, options to purchase 1,090,860 shares of common stock were
outstanding and will be eligible for sale in the public market from time to
time, subject to vesting. In addition, 159,632 shares of common stock are
available under Exogen's employee stock purchase plan, as amended. Also, there
are 125,000 shares of common stock issuable upon exercise of warrants, which may
be sold in accordance with Rule 144 one year after their date of issuance. The
possible sale of a significant number of the shares issuable upon exercise of
stock options and warrants, or under the employee stock purchase plan, may cause
the price of our common stock to fall.
Smith & Nephew has Certain Rights to Purchase Shares of Common Stock
Under the August 1998 agreements between Smith & Nephew and us, Smith &
Nephew has an option to acquire exclusive worldwide distribution rights (except
Japan) to the SAFHS device. This worldwide distribution option is limited to a
three-year period. If Smith & Nephew exercises this option, it has a one-time
right to purchase from us additional shares of our common stock, up to 19%
(including the shares already acquired by Smith & Nephew) of the outstanding
shares of our common stock, after giving effect to the shares issuable upon
exercise of the right. The price per share to be paid would equal the stock's
average fair market value over a 20-day period preceding the date Smith & Nephew
announces, to Exogen, its election to exercise the stock purchase option. Any of
these additional shares of our common stock sold to Smith & Nephew under these
agreements would require that we file a registration statement with the
Securities and Exchange Commission to register the shares. The possible sale of
a significant number of these shares may cause the price of our common stock to
fall.
No Intention to Pay Dividends
We have never declared or paid any cash dividends on our capital stock.
We currently intend to retain any future earnings for funding growth, and
therefore do not expect to pay any dividends in the foreseeable future.
<PAGE>
EXOGEN, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
----------------------------------------
The following discussion about Exogen's risk management includes
forward-looking statements that involve risks and uncertainties. Actual results
could differ materially from the results discussed in the forward-looking
statements.
Currency Rate Fluctuations
Since 6% of Exogen's fiscal 1998 net product revenues, and 7% of those
for the three months ended December 31, 1998, were derived from a European
subsidiary operating in a local currency environment, and 3% of Exogen's total
assets as of December 31, 1998, were European, Exogen's results of operations,
financial position, and cash flows are affected by changes in the relative
values of non-U.S. currencies to the U.S. dollar. The principal non-U.S.
currency used for valuation by Exogen's subsidiary is the German mark. Exogen
does not limit its risk in this area by using any financial tools, such as
currency hedge contracts. Therefore, volatility in currency exchange rates could
have a material adverse effect on those revenues and assets denominated in
non-U.S. currencies.
Market Risk
Exogen's accounts receivables are subject, in the normal course of
business, to collection risks. Exogen regularly assesses these risks, and has
established policies and business practices to protect against the adverse
effects of collection risks. As a result, Exogen does not anticipate any
material losses in this area.
Interest Rate Risk
Exogen's investments are held to maturity and are stated at amortized
cost. Therefore, changes in the market's interest rates do not affect the value
of the investments as recorded by Exogen.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities and Use of Proceeds
None.
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 Exogen. Incorporated by reference to
Exhibit 3.1 to Exogen's Form 10-Q for the third
quarter ended June 30, 1995.
3.2 Amended and Restated Bylaws of Exogen. Incorporated
by reference to Exhibit 3.3 to Exogen'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 Exogen
defining rights of holders of common stock of Exogen.
10.1 Amended and Restated Investors' Rights Agreement
dated as of November 14, 1994, among Exogen, the
investors listed on Schedule A thereto, and the
individuals listed on Schedule B thereto.
Incorporated by reference to Exhibit 10.1 to Exogen'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 Exogen's
Form S-1 Registration Statement (Registration No. 33-
92740).
<PAGE>
10.3 [RESERVED]
10.4 [RESERVED]
10.5 Form of Consulting Agreements between Exogen and each
of Drs. McLeod and Rubin, as amended. Incorporated by
reference to Exhibit 10.5 to Exogen's Form S-1
Registration Statement (Registration No. 33-92740).
10.6 Form of Stock Restriction Agreement between Exogen
and each of Drs. McLeod and Rubin and Messrs.
Reisner, Ryaby, Talish, McBrayer, and Bohan.
Incorporated by reference to Exhibit 10.6 to Exogen's
Form S-1 Registration Statement (Registration No.
33-92740).
10.7 Form of Stock Purchase Agreement between Exogen and
each of Messrs. Reisner, Ryaby, and Talish.
Incorporated by reference to Exhibit 10.7 to Exogen's
Form S-1 Registration Statement (Registration No.
33-92740).
10.8 Manufacturing Agreement dated January 20, 1994,
between Exogen and Hi-Tronics Designs, Inc.
Incorporated by reference to Exhibit 10.8 to Exogen'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 Exogen'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 Exogen and Siemens Medical Systems, Inc.
Incorporated by reference to Exhibit 10.13 to
Exogen'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 Exogen's Form S-1 Registration
Statement (Registration No. 33-92740).
10.14 SAFHS Agreement dated November 30, 1995, between
Exogen and Teijin Limited. Incorporated by reference
to Exhibit 10.14 to Exogen's Form 10-K for the year
ended September 30, 1995.
10.15+ Mechanical-Stress Agreement dated November 30, 1995,
between Exogen and Teijin Limited. Incorporated by
reference to Exhibit 10.15 to Exogen's Form 10-K for
the year ended September 30, 1995.
10.16 Employment Agreement dated March 1, 1997, between
Exogen and Patrick A. McBrayer. Incorporated by
reference to Exhibit 10.16 to Exogen's Form 10-Q for
the second quarter ended March 31, 1997.
10.17 Severance Agreement, dated May 27, 1997, between
Exogen and John Bohan. Incorporated by reference to
Exhibit 10.17 to Exogen's Form 10-K for the year
ended September 30, 1997.
<PAGE>
10.18 Common Stock Purchase Agreement, dated October 20,
1997, between Exogen and certain investors listed on
Schedule 1 thereto. Incorporated by reference to
Exhibit 10.18 to Exogen's Form 10-K for the year
ended September 30, 1997.
10.19 Registration Rights Agreement, dated October 20,
1997, between Exogen and certain investors listed on
Schedule 1 thereto. Incorporated by reference to
Exhibit 10.19 to Exogen'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 Exogen'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 Exogen's Form S-8 Registration
Statement (Registration No. 333-51731).
10.22++ Master Agreement, dated August 10, 1998, between
Exogen and Smith & Nephew, Inc. Incorporated by
reference to Exhibit 10.22 to Exogen's Form 10-K for
the year ended September 30, 1998.
10.23 Common Stock Purchase Agreement, dated August 10,
1998, between Exogen and Smith & Nephew Holdings,
Inc. Incorporated by reference to Exhibit 10.23 to
Exogen's Form 10-K for the year ended September 30,
1998.
10.24* United States Sales Representative Agreement, dated
August 10, 1998, between Exogen and Smith & Nephew,
Inc. Incorporated by reference to Exhibit 10.24 to
Exogen's Current Report on Form 8-K, dated August 10,
1998.
10.25* License Agreement, dated August 10, 1998, between
Exogen and Smith & Nephew, Inc. Incorporated by
reference to Exhibit 10.25 to Exogen's Current Report
on Form 8-K, dated August 10, 1998.
10.26 Promissory Note, dated October 6, 1998, issued by
Exogen to Jonathan J. Kaufman. Incorporated by
reference to Exhibit 10.1 to Exogen's Current Report
on Form 8-K, dated September 30, 1998.
10.27 Promissory Note, dated October 6, 1998, issued by
Exogen to Alessandro Chiabrera. Incorporated by
reference to Exhibit 10.2 to Exogen's Current Report
on Form 8-K, dated September 30, 1998.
10.28 Warrant to Purchase Common Stock, dated October 9,
1998, issued by Exogen to Alessandro Chiabrera.
Incorporated by reference to Exhibit 10.3 to Exogen's
Current Report on Form 8-K, dated September 30, 1998.
10.29 Registration Rights Agreement, dated October 9, 1998,
by and between Exogen and Alessandro Chiabrera.
Incorporated by reference to Exhibit 10.4 to Exogen's
Current Report on Form 8-K, dated September 30, 1998.
10.30 Promissory Note, dated September 30, 1998, issued by
Exogen to Pilla Consulting, Inc. Incorporated by
reference to Exhibit 10.5 to Exogen's Current Report
on Form 8-K, dated September 30, 1998.
<PAGE>
10.31 Warrant to Purchase Common Stock, dated September 30,
1998, issued by Exogen to Arthur A. Pilla.
Incorporated by reference to Exhibit 10.6 to Exogen's
Current Report on Form 8-K, dated September 30, 1998.
10.32 Registration Rights Agreement, dated September 30,
1998, by and between Exogen and Arthur A. Pilla.
Incorporated by reference to Exhibit 10.7 to Exogen's
Current Report on Form 8-K, dated September 30, 1998.
10.33 Amendment to Employment Agreement, dated October 1,
1998, between Exogen and Patrick A. McBrayer.
Incorporated by reference to Exhibit 10.33 to
Exogen's Form 10-K for the year ended September 30,
1998.
21.1 List of Subsidiary. Incorporated by reference to
Exhibit 21.1 to Exogen'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 Exogen 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 Exogen's Form 10-K for the year ended
September 30, 1996.
-------------
+ Confidential treatment has been granted.
++ Exogen has applied for confidential treatment of this
exhibit.
* Exogen has applied for confidential treatment of
portions of this exhibit pursuant to Rule 24b-2 under
the Securities Exchange Act of 1934, as amended.
** This exhibit is filed herewith.
(b) Reports on Form 8-K:
On October 19, 1998, Exogen filed a report on Form
8-K to report under Item 5 the settlement of all
outstanding litigation in connection with claims by
certain consultants to royalties from the sale of
Exogen's SAFHS devices. Exogen filed under Item 7 as
Exhibits 10.1 through 10.7 certain promissory notes,
warrants, and registration rights agreements between
Exogen and the former consultants.
<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 26, 1999 By: /s/ Patrick A. McBrayer
-------------------------
Patrick A. McBrayer, President and
Chief Executive Officer
May 26, 1999 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 Exogen. Incorporated by reference to
Exhibit 3.1 to Exogen's Form 10-Q for the third
quarter ending June 30, 1995.
3.2 Amended and Restated Bylaws of Exogen. Incorporated
by reference to Exhibit 3.3 to Exogen'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 Exogen
defining rights of holders of common stock of Exogen.
10.1 Amended and Restated Investors' Rights Agreement
dated as of November 14, 1994, among Exogen, the
investors listed on Schedule A thereto, and the
individuals listed on Schedule B thereto.
Incorporated by reference to Exhibit 10.1 to Exogen'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 Exogen's
Form S-1 Registration Statement (Registration No. 33-
92740).
10.3 [RESERVED]
10.4 [RESERVED]
10.5 Form of Consulting Agreements between Exogen and each
of Drs. McLeod and Rubin, as amended. Incorporated by
reference to Exhibit 10.5 to Exogen's Form S-1
Registration Statement (Registration No. 33-92740).
10.6 Form of Stock Restriction Agreement between Exogen
and each of Drs. McLeod and Rubin and Messrs.
Reisner, Ryaby, Talish, McBrayer, and Bohan.
Incorporated by reference to Exhibit 10.6 to Exogen's
Form S-1 Registration Statement (Registration No.
33-92740).
10.7 Form of Stock Purchase Agreement between Exogen and
each of Messrs. Reisner, Ryaby, and Talish.
Incorporated by reference to Exhibit 10.7 to Exogen's
Form S-1 Registration Statement (Registration No.
33-92740).
10.8 Manufacturing Agreement dated January 20, 1994,
between Exogen and Hi-Tronics Designs, Inc.
Incorporated by reference to Exhibit 10.8 to Exogen's
Form S-1 Registration Statement (Registration No.
33-92740).
<PAGE>
10.9 Form of 1993 Stock Option Plan Option Agreement.
Incorporated by reference to Exhibit 10.9 to Exogen'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 Exogen and Siemens Medical Systems, Inc.
Incorporated by reference to Exhibit 10.13 to
Exogen'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 Exogen's Form S-1 Registration
Statement (Registration No. 33-92740).
10.14 SAFHS Agreement dated November 30, 1995, between
Exogen and Teijin Limited. Incorporated by reference
to Exhibit 10.14 to Exogen's Form 10-K for the year
ended September 30, 1995.
10.15+ Mechanical-Stress Agreement dated November 30, 1995,
between Exogen and Teijin Limited. Incorporated by
reference to Exhibit 10.15 to Exogen's Form 10-K for
the year ended September 30, 1995.
10.16 Employment Agreement dated March 1, 1997, between
Exogen and Patrick A. McBrayer. Incorporated by
reference to Exhibit 10.16 to Exogen's Form 10-Q for
the second quarter ended March 31, 1997.
10.17 Severance Agreement, dated May 27, 1997, between
Exogen and John Bohan. Incorporated by reference to
Exhibit 10.17 to Exogen's Form 10-K for the year
ended September 30, 1997.
10.18 Common Stock Purchase Agreement, dated October 20,
1997, between Exogen and certain investors listed on
Schedule 1 thereto. Incorporated by reference to
Exhibit 10.18 to Exogen's Form 10-K for the year
ended September 30, 1997.
10.19 Registration Rights Agreement, dated October 20,
1997, between Exogen and certain investors listed on
Schedule 1 thereto. Incorporated by reference to
Exhibit 10.19 to Exogen'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 Exogen'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 Exogen's Form S-8 Registration
Statement (Registration No. 333-51731).
10.22++ Master Agreement, dated August 10, 1998, between
Exogen and Smith & Nephew, Inc. Incorporated by
reference to Exhibit 10.22 to Exogen's Form 10-K for
the year ended September 30, 1998.
10.23 Common Stock Purchase Agreement, dated August 10,
1998, between Exogen and Smith & Nephew Holdings,
Inc. Incorporated by reference to Exhibit 10.23 to
Exogen's Form 10-K for the year ended September 30,
1998.
<PAGE>
10.24* United States Sales Representative Agreement, dated
August 10, 1998, between Exogen and Smith & Nephew,
Inc. Incorporated by reference to Exhibit 10.24 to
Exogen's Current Report on Form 8-K, dated August 10,
1998.
10.25* License Agreement, dated August 10, 1998, between
Exogen and Smith & Nephew, Inc. Incorporated by
reference to Exhibit 10.25 to Exogen's Current Report
on Form 8-K, dated August 10, 1998.
10.26 Promissory Note, dated October 6, 1998, issued by
Exogen to Jonathan J. Kaufman. Incorporated by
reference to Exhibit 10.1 to Exogen's Current Report
on Form 8-K, dated September 30, 1998.
10.27 Promissory Note, dated October 6, 1998, issued by
Exogen to Alessandro Chiabrera. Incorporated by
reference to Exhibit 10.2 to Exogen's Current Report
on Form 8-K, dated September 30, 1998.
10.28 Warrant to Purchase Common Stock, dated October 9,
1998, issued by Exogen to Alessandro Chiabrera.
Incorporated by reference to Exhibit 10.3 to Exogen's
Current Report on Form 8- K, dated September 30,
1998.
10.29 Registration Rights Agreement, dated October 9, 1998,
by and between Exogen and Alessandro Chiabrera.
Incorporated by reference to Exhibit 10.4 to Exogen's
Current Report on Form 8-K, dated September 30, 1998.
10.30 Promissory Note, dated September 30, 1998, issued by
Exogen to Pilla Consulting, Inc. Incorporated by
reference to Exhibit 10.5 to Exogen's Current Report
on Form 8-K, dated September 30, 1998.
10.31 Warrant to Purchase Common Stock, dated September 30,
1998, issued by Exogen to Arthur A. Pilla.
Incorporated by reference to Exhibit 10.6 to Exogen's
Current Report on Form 8-K, dated September 30, 1998.
10.32 Registration Rights Agreement, dated September 30,
1998, by and between Exogen and Arthur A. Pilla.
Incorporated by reference to Exhibit 10.7 to Exogen's
Current Report on Form 8-K, dated September 30, 1998.
10.33 Amendment to Employment Agreement, dated October 1,
1998, between Exogen and Patrick A. McBrayer.
Incorporated by reference to Exhibit 10.33 to
Exogen's Form 10-K for the year ended September 30,
1998.
21.1 List of Subsidiary. Incorporated by reference to
Exhibit 21.1 to Exogen'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 Exogen 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 Exogen's Form 10-K for the year ended
September 30, 1996.
<PAGE>
+ Confidential treatment has been granted.
++ Exogen has applied for confidential treatment of
this exhibit.
* Exogen has applied for confidential treatment of
portions of this exhibit pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as
amended.
** This exhibit is filed herewith.
