UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
--------------------------------------------
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: 0-21214
ORTHOLOGIC CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 86-0585310
- --------------------------------------------------------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2850 S. 36th Street, #16, Phoenix, Arizona 85034
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(602) 437-5520
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
25,008,346 shares of common stock outstanding as of July 31, 1996
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORTHOLOGIC CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------------ ------------------
<S> <C> <C>
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $63,128,560 $8,830,514
Short-term investments 22,777,045 9,149,360
Accounts receivable, net 11,596,784 6,488,203
Inventory 2,865,150 1,829,865
Prepaids and other current assets 940,801 273,237
------------------ ------------------
Total current assets 101,308,340 26,571,179
FURNITURE AND EQUIPMENT:
Furniture and equipment 2,249,824 1,891,987
Less accumulated depreciation and amortization (1,363,844) (1,196,055)
------------------ ------------------
Furniture and equipment - net 885,980 695,932
INTANGIBLES, net 3,620,472 ---
DEPOSITS AND OTHER ASSETS 93,113 97,748
NOTE RECEIVABLE - Officer --- 125,000
------------------ ------------------
$105,907,905 $27,489,859
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,307,210 $1,053,323
Accrued expenses 2,881,721 1,999,924
------------------ ------------------
Total current liabilities 4,188,931 3,053,247
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value - authorized, 40,000,000 shares;
24,980,846 and 19,251,728 shares issued 12,491 9,626
Additional paid-in capital 118,747,555 43,882,991
Retained deficit (17,041,072) (19,456,005)
------------------ ------------------
Total stockholders' equity 101,718,974 24,436,612
------------------ ------------------
$105,907,905 $27,489,859
================== ==================
</TABLE>
See notes to financial statements.
<PAGE>
ORTHOLOGIC CORP.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------------- ----------------- -----------------
1996 1995 1996 1995
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
NET SALES $7,911,929 $3,073,503 $14,671,661 $5,590,586
COST OF GOODS SOLD 1,252,095 642,090 2,374,374 1,202,394
------------------ -------------- ----------------- -----------------
GROSS PROFIT 6,659,834 2,431,413 12,297,287 4,388,192
OPERATING EXPENSES:
Selling, general and administrative 5,526,632 2,603,233 9,950,780 4,940,583
Research and development 546,009 534,501 1,097,620 1,156,231
------------------ -------------- ----------------- -----------------
Total operating expenses 6,072,641 3,137,734 11,048,400 6,096,814
------------------ -------------- ----------------- -----------------
Operating income (loss) 587,193 ( 706,321) 1,248,887 (1,708,622)
------------------ -------------- ----------------- -----------------
OTHER INCOME (EXPENSE):
Grant revenue 44,747 37,561 94,147 73,377
Interest income 863,366 49,544 1,101,899 100,607
Interest expense --- (13,046) --- (33,438)
------------------ -------------- ----------------- -----------------
Total other income 908,113 74,059 1,196,046 140,546
------------------ -------------- ----------------- -----------------
Income (loss) before taxes 1,495,306 (632,262) 2,444,933 (1,568,076)
Income tax expense 15,000 --- 30,000 ---
------------------ -------------- ----------------- -----------------
Net income (loss) $1,480,306 ($632,262) $2,414,933 ($1,568,076)
================== ============== ================= =================
NET INCOME (LOSS) PER WEIGHTED
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING $0.06 ($0.04) $0.11 ($0.11)
================== ============== ================= =================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 24,768,690 14,976,564 22,733,854 14,636,764
================== ============== ================= =================
</TABLE>
See notes to financial statements.
<PAGE>
ORTHOLOGIC CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------------------------
1996 1995
------------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $2,414,933 ($1,568,076)
Adjustment to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 183,443 151,206
Change in operating assets and liabilities:
Accounts receivable (5,108,581) (1,438,974)
Inventory (1,035,285) (411,455)
Prepaids and other current assets (667,565) (15,122)
Deposits and other assets 4,635 (1,866)
Accounts payable 253,887 17,188
Accrued expenses 881,797 279,404
------------------- ------------------
Net cash used in operating activities (3,072,736) (2,987,695)
INVESTING ACTIVITIES:
Intangibles (3,675,939) ---
Expenditures for furniture and equipment (318,023) (73,513)
Purchase of short-term investments, net (13,627,685) ---
Repayment of note receivable 125,000 ---
------------------- ------------------
Net cash used in investing activities (17,496,647) (73,513)
FINANCING ACTIVITIES:
Payments under long term debt --- (19,706)
Proceeds from issuance of common stock 74,867,429 1,973,270
------------------- ------------------
Net cash provided by financing activities 74,867,429 1,953,564
------------------- ------------------
NET INCREASE (DECREASE) IN CASH AND 54,298,046 (1,107,644)
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 8,830,514 3,265,350
=================== ==================
CASH AND CASH EQUIVALENTS, END OF PERIOD $63,128,560 $2,157,706
=================== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during the period for interest --- $33,438
=================== ==================
</TABLE>
See notes to financial statements.
<PAGE>
ORTHOLOGIC CORP.
NOTES TO FINANCIAL STATEMENTS
1. Financial Statement Presentation
--------------------------------
The balance sheet as of June 30, 1996, and the statements of operations
for the three and six months ended June 30, 1996 and 1995 and the
statements of cash flows for the six months ended June 30, 1996 and 1995
are unaudited but, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of financial position, results of operations and cash flows.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the complete fiscal year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's 1995 Annual Report
and Form 10-K.
2. Net Income (Loss) per Common Share
----------------------------------
Net income (loss) per common share is computed on the weighted average
number of common and common equivalent shares outstanding during each
period after giving effect to the stock split as described in Note 6.
Common equivalent shares represent the dilutive effect of the assumed
exercise of outstanding stock options.
3. Inventory
---------
Inventory is stated at the lower of cost (FIFO method) or market and
consists of the following:
June 30, 1996
----------------------
Raw materials $2,130,076
Work-in process 99,236
Finished goods 635,838
======================
$2,865,150
======================
4. Intangibles
-----------
The Company is in the process of converting from a dealer network to a
network of direct salespeople. In connection with this conversion the
Company had paid $3.7 million as of June 30, 1996, to certain former
independent dealers for the return of territory rights,
covenants-not-to-compete with varying terms and the right to hire former
independent dealer sales representatives as Company employees. This amount
is being amortized over seven years.
<PAGE>
ORTHOLOGIC CORP.
NOTES TO FINANCIAL STATEMENTS (continued)
5. Income Taxes
------------
The Company has recorded a deferred tax asset of $7.5 million relating to
its NOL carry forward. This amount is completely offset by a valuation
allowance. For the six months ended June 30, 1996, the Company has
recognized the estimated alternative minimum tax which will be due.
6. Equity
------
On April 30, 1996 the Company issued 2,530,000 shares of common stock upon
the closing of a public offering of its common stock. Gross proceeds to
the Company were $78.4 million. The net proceeds to the Company after
deducting costs of the offering were approximately $73.5 million. The
common stock was sold at $31 per share. During the first quarter of 1996
the Company amended its Articles of Incorporation to authorize 40,000,000
shares of common stock, $.0005 par value. In addition, the Board of
Directors approved a 2 for 1 stock split in the form of a 100 percent
common share dividend which was paid on June 25, 1996, to stockholders of
record as of June 4, 1996. The accompanying financial statements have been
restated to give effect to the split.
7. Litigation
----------
During June and July 1996 certain lawsuits were filed in the United States
District Court for the District of Arizona against the Company and certain
officers and directors alleging violations of Section 10(b) of the
Securities Exchange Act of 1934, and SEC Rule 10b-5 promulgated
thereunder.
Plaintiffs in these actions allege that correspondence received by the
Company from the Food and Drug Administration (the "FDA") regarding the
promotion and custom configurations of the Company's OrthoLogic 1000 Bone
Growth Stimulator was material and undisclosed, leading to an artificially
inflated stock price. Plaintiffs further allege that the Company's
non-disclosure of the FDA correspondence and of the alleged practices
referenced in that correspondence operated as a fraud against plaintiffs,
in that the Company made untrue statements of material facts or omitted to
state material facts necessary in order to make the statements not
misleading. Plaintiffs further allege that once the FDA letter became
known, a material decline in the stock price of the Company occurred,
causing damage to the Plaintiffs.
All plaintiffs seek class action status, unspecified compensatory damages,
fees and costs. Plaintiffs also seek extraordinary, equitable and/or
injunctive relief as permitted by law. Management believes that the
allegations are without merit and will vigorously defend them. The costs
associated with defending these allegations and the potential outcome
cannot be determined at this time and accordingly, no estimate for such
costs have been included in these financial statements.
<PAGE>
ORTHOLOGIC CORP.
NOTES TO FINANCIAL STATEMENTS (continued)
8. Subsequent Event
----------------
On July 22, 1996 the Company signed a Letter Agreement to acquire all of
the outstanding stock of Sutter Corporation, a subsidiary of Columbia/HCA
Healthcare Corporation for approximately $25 million cash. The transaction
is subject to regulatory approval, normal due diligence and the completion
of a definitive purchase agreement.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Since receiving approval of its PMA (pre-market approval
application) from the Food and Drug Administration ("FDA") in
March 1994 of its OrthoLogic 1000 Bone Growth Stimulator, the
Company has marketed its products primarily through a network of
independent orthopaedic specialty dealers and a small number of
direct sales representatives. During May and June of 1996, the
Company initiated a plan to convert the primary marketing channel
from an independent dealer network to a direct sales force. As of
June 30, 1996, the Company had paid approximately $3.7 million to
certain former independent dealers for the return of territory
rights, covenants-not-to-compete with varying terms and the right
to hire former independent dealer sales representatives as
Company employees. These expenditures are classified on the
balance sheet as intangibles and are being amortized over seven
years. The Company expects to continue negotiating additional
similar transactions with remaining independent dealers.
Results of Operations
Net Sales. Total net sales during the three and six months ended
June 30, 1996, were $7.9 million and $14.7 million, respectively,
compared to $3.1 million and $5.6 million during the comparable
periods in 1995, respectively, reflecting an increase of 157% and
162%, respectively. The increase in the net sales was primarily
attributable to higher sales levels of the OrthoLogic 1000.
Gross Profit. The increased sales levels generated gross profit of
$6.7 million and $12.3 million for the three and six months ended
June 30, 1996, which was an increase of 174% and 180% over the
comparable periods in 1995, respectively. Gross profit as a
percentage of net sales increased from 79.1% to 84.2% for the
three months ended June 30, 1995 and 1996, respectively and from
78.5% to 83.8% for the six months ended June 30, 1995 and 1996,
respectively. The gross profit percentage improved as a result of
the fixed manufacturing costs being absorbed over a higher volume
of manufactured product and from a change in product sales mix to
a higher gross profit product in 1996 compared to 1995.
Selling, General and Administrative. Total selling, general, and
administrative expenses ("SG&A") increased 112% and 101% for the
three and six months ended June 30, 1996 versus the same periods
during 1995, respectively. As a percentage of sales, SG&A went
from 84.7% to 69.9% for the three months ended June 30, 1995
versus 1996, respectively, and from 88.4% to 67.8% for the six
months ended June 30, 1995 versus 1996, respectively. The
increased SG&A dollars are due primarily to the variable component
of SG&A (commissions, bad debts, royalties) associated with the
increased sales. The fixed component of SG&A has also increased
due to the additional personnel and other infrastructure required
to support the growing sales volume. As a result SG&A is expected
to be higher throughout 1996 compared to 1995.
Research and Development. Research and development expenses during
the six months ended June 30, 1996 were down approximately 5%
compared to the same period during 1995. The decreased expenses
are primarily attributable to a lower number of patients enrolled
in one of the Company's clinical trials during 1996 than in 1995.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Other Income. Other income increased substantially during 1996 due
primarily to interest income which was $863,000 and $1.1 million
for the three and six months ended June 30, 1996, respectively,
versus $50,000 and $101,000 in the comparable periods during 1995,
respectively. This increase is due primarily to an increased level
of cash and short-term investments resulting from the sale of
common stock.
Liquidity and Capital Resources
As discussed in Note 6 to the financial statements, the Company
issued 2,530,000 shares of its common stock at $31 per share
through a public offering, generating net proceeds of
approximately $73.5 million.
At June 30, 1996, the Company had cash, cash equivalents and
short-term investments of $85.9 million. Working capital increased
over 300% from $23.5 million at December 31, 1995 to $97.1 million
at June 30, 1996, primarily due to proceeds from the stock
offering.
As discussed in Note 8 to the financial statements, the Company
signed a Letter Agreement to acquire all of the outstanding stock
of Sutter Corporation for approximately $25 million cash. This
transaction is subject to regulatory approval, normal due
diligence and the completion of a definitive purchase agreement.
In addition, the Company is in the process of converting from a
dealer network to a network of direct salespeople. In connection
with this conversion, the Company had paid approximately $3.7
million as of June 30, 1996, to certain former independent dealers
for the return of territory rights, covenants-not-to-compete with
varying terms and the right to hire former independent dealer
sales representatives as Company employees. It is anticipated that
approximately $5 million will be paid for similar transactions
during 1996.
The Company anticipates that the cash generated from the proceeds
of the stock offering (Note 6), product sales and current cash
balances will be sufficient to meet the Company's capital
requirements for the foreseeable future. There can be no assurance
however, that the Company will not require additional financing in
the future, or that such sources of capital will be available on
terms favorable to the Company, if at all.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Commencing on June 24, 1996, certain lawsuits were filed in the United
States District Court for the District Court of Arizona against the
Company and certain officers and directors alleging violations of Sections
10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and SEC Rule
10b-5 promulgated thereunder, and, as to other defendants, Sections 20(a)
of the Exchange Act. These lawsuits are:
Mark Silveria v. Allan M. Weinstein, Allen R. Dunaway, David
E. Derminio and OrthoLogic Corporation, Cause No. CIV 96-1563 PHX EHC,
filed in the United States District Court for the District of Arizona
(Phoenix Division) on July 1, 1996.
Derric C. Chan and Anna Chan as attorney in fact for Moon-Yung
Chow, on behalf of themselves and all others similarly situated v.
OrthoLogic Corporation, Allan M. Weinstein, Frank P. Magee and David E.
Derminio, Cause No. CIV 96-1514 PHX RCB, filed in the United States
District Court for the District of Arizona (Phoenix Division) on June 27,
1996.
Jeffrey M. Boren and Charles E. Peterson, Jr., on behalf of
themselves and all others similarly situated v. Allan M. Weinstein and
OrthoLogic Corp., Cause No. CIV 96-1520 PHX RCB, filed in the United
States District Court for the District of Arizona (Phoenix Division) on
June 24, 1996.
Dorothy Cohen, on behalf of herself and all others similarly
situated v. OrthoLogic Corp. and Allan M. Weinstein, Cause No. CIV 96-1615
PHX SMM, filed in the United States District Court for the District of
Arizona (Phoenix Division) on July 9, 1996.
Joseph C. Barton, on behalf of himself and all others
similarly situated v. OrthoLogic Corp. and Allan M. Weinstein, Cause No.
CIV 96-1643 PHX ROS, filed in the United States District Court for the
District of Arizona (Phoenix Division) on July 12, 1996.
Jeffrey Draker, on behalf of himself and all others similarly
situated v. Allan M. Weinstein, and OrthoLogic Corp., Cause No. CIV
96-1667 PHX RCB, filed in the United States District Court for the
District of Arizona (Phoenix Division) on July 16, 1996.
Edward and Eleanor Katz v. OrthoLogic Corp. and Allan M.
Weinstein, Cause No. CIV 96-1668 PHX RGS, filed in the United States
District Court for the District of Arizona (Phoenix Division) on July 17,
1996.
Mark J. Rutkin, Paul A. Wallace, Malcolm E. Brathwaite, Elaine
K. Davies and David G. Davies, Larry E. Carder, and Carl Hust, on behalf
of themselves and all others similarly situated v. Allan M. Weinstein,
Allen R. Dunaway, David E. Derminio, Frank P. Magee and OrthoLogic Corp.,
Cause No. CIV 96-1678 PHX EHC, filed in the United States District Court
for the District of Arizona (Phoenix Division) on July 17, 1996.
Frank J. DeFelice, on behalf of himself and all others
similarly situated v. OrthoLogic Corp. and Allan M. Weinstein, Cause No
CIV 96-1713 PHX EHC, filed in the United States District Court for the
District of Arizona (Phoenix Division) on July 23, 1996.
<PAGE>
PART II - OTHER INFORMATION (continued)
Item 1. Legal Proceedings (continued)
Plaintiffs in these actions allege the correspondence received
by the Company from the FDA regarding the promotion and custom
configuration of the Company's OrthoLogic 1000 Bone Growth Stimulator was
material and undisclosed, leading to an artificially inflated stock price.
Plaintiffs further allege that the Company's non-disclosure of the FDA
correspondence and of the alleged practices referenced in that
correspondence operated as a fraud against plaintiffs, in that the Company
made untrue statements of material facts or omitted to state material
facts necessary in order to make the statements not misleading. Plaintiffs
further allege that once the FDA letter became known, a material decline
in the stock price of the Company occurred, causing damage to plaintiffs.
All plaintiffs seek class action status, unspecified
compensatory damages, fees and costs. Plaintiffs also seek extraordinary,
equitable and /or injunctive relief as permitted by law.
On or about June 20, 1996, a lawsuit entitled Norman Cooper
et. al. v. OrthoLogic Corp., et al., Cause No. CV 96-10799, was filed in
the Superior Court, Maricopa County, Arizona. The plaintiffs allege
violations of Arizona Revised Statutes Sections 44-1991 (state securities
fraud) and 44-1522 (consumer fraud) and common law fraud and factual
allegations substantially similar to those alleged in the federal court
class action complaints. Plaintiffs also seek class action status,
unspecified compensatory and punitive damages, fees and costs. Plaintiffs
also seek injunctive and/or equitable relief.
On July 10, 1996, a complaint was filed by Randall Hutchens in
the California Superior Court, Small Claims Division (No. SSB1415) against
Allan M. Weinstein, supposedly based on the same legal and factual issues
as the class action cases. Plaintiff seeks damages of $5,000.
On June 24, 1996, the Company received notice that the
National Association of Securities Dealers, Inc. ("NASD") is conducting a
routine review of the trading activity in the Company's stock. The Company
responded to this inquiry on July 17, 1996.
On August 7, 1996, the Company received a subpoena from the
Arizona Corporation Commission Securities Division for the production of
records regarding the above lawsuits and NASD review.
<PAGE>
PART II - OTHER INFORMATION (continued)
Item 4. Submission of Matters to a Vote of Security Holders
The reconvened annual meeting of stockholders of the Company was held
on May 17, 1996 to vote on an amendment to the Company's Stock Option Plan to
increase the number of shares of common stock available for grant thereunder by
600,000 shares. The results are as follows:
BROKER
------
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
5,055,889 1,741,914 43,360 2,275,894
Results of votes on other matters submitted to the stockholders during
the annual meeting are reported in Item 4 of the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996.
Item 5. Other Information
A. The Company received a warning letter from the FDA dated May
31, 1996 regarding the promotion and custom configurations of
the Company's OrthoLogic 1000 Bone Growth Stimulator. The FDA
letter expressed concerns regarding representations with
respect to using patient registry data, promotion of the
OrthoLogic 1000 for new indications without an approved
supplemental application and changes in design or physical
layout of the device for these new indications and using the
FDA name in promotional literature. Through subsequent
correspondence and conversations with the FDA, the Company
believes that the issues raised in the warning letter have
been resolved.
B. On July 22, 1996, the Company issued a press release, filed as
Exhibit 99.1 hereto, announcing that it has signed a Letter
Agreement to acquire all of the outstanding stock of Sutter
Corporation, a subsidiary of Columbia/HCA Healthcare
Corporation for approximately $25 million cash. The
transaction is subject to regulatory approval, normal due
diligence and the completion of a definitive purchase
agreement.
<PAGE>
PART II - OTHER INFORMATION (continued)
Item 6. Exhibits and Reports on Form 8-K
A. See Exhibit Index following the Signatures page which is
incorporated herein by reference.
B. Reports on Form 8-K.
On July 1, 1996, the Company filed a current report on Form
8-K dated June 28, 1996, to report in Item 5 receipt of an FDA
warning letter, shareholder lawsuits and the NASD inquiry and
the Company's appointment of a new President and Chief
Operating Officer.
<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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Allan M. Weinstein Chairman of the Board of Directors and August 13, 1996
Allan M. Weinstein Chief Executive Officer
(Principal Executive Officer)
/s/ Allen R. Dunaway Vice-President and Chief Financial Officer August 13, 1996
Allen R. Dunaway (Principal Financial and Accounting Officer)
</TABLE>
<PAGE>
ORTHOLOGIC CORP.
EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Exhibit Incorporated by Filed
No. Description Reference to: Herewith
--- ----------- ------------- --------
<S> <C> <C> <C>
3.1 Amended and Compiled Certificate of Exhibit 3.1 to the Company's Quarterly
Incorporation of the Company Report on Form
10-Q for the period ended March 31, 1996
3.2 Bylaws of the Company Exhibit 3.4 to the Company's Amendment
No. 2 to Registration Statement on Form
S-1 (No. 33-47569) filed with the SEC
on January 25, 1993
10.1 Addendum to Lease between the Company Exhibit 10.8.1 to the Company's
and Cook Inlet Region, Inc. commencing Registration Statement on Form S-3 (No.
April 1, 1996 333-3082) filed with the SEC on April
2, 1996 ("April 1996 S-3")
10.2 Underwriting Agreement between the Exhibit 1.1 to April 1996 S-3
Company and Volpe, Welty & Company,
Hambrecht & Quist and Dain Bosworth
Inc., as Representatives of the
Underwriters
10.3 Maturity Modification Letter dated Exhibit 10.21 for April 1996 S-3
March 29, 1996, by Silicon Valley Bank
</TABLE>
<PAGE>
EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 (continued)
<TABLE>
<CAPTION>
Exhibit Incorporated by Filed
No. Description Reference to: Herewith
--- ----------- ------------- --------
<S> <C> <C> <C> <C>
10.4 Employment Agreement dated March 28, Exhibit 10.28 to April 1993
1996, between the Company and Nicholas S-3
A. Skaff
10.5 Employment Agreement dated July 1, X
1996, between the Company and George A.
Oram, Jr.
11.1 Statement of Computation of Net Income X
(Loss) per Weighted Average Number of
Common Shares Outstanding
27 Financial Data Schedule X
99.1 Press release announcing intent to X
acquire Sutter Corporation from
Columbia/HCA Healthcare Corporation
</TABLE>
Exhibit 10.5
EMPLOYMENT AGREEMENT
This Agreement is to be effective, as of July 1, 1996, by and
between OrthoLogic Corp., a Delaware corporation (the "Company"), and George A.
Oram, Jr. ("Employee").
RECITALS:
- ---------
A. The Company wishes to employ Employee, and Employee wishes to be
employed by the Company.
B. The parties wish to set forth in this Agreement the terms and
conditions of such employment.
AGREEMENT:
In consideration of the mutual covenants and agreements set forth
herein, the parties agree as follows:
1. Employment and Duties. Subject to the terms and conditions of this
Agreement, the Company employs Employee to serve in a managerial capacity and
Employee accepts such employment and agrees to perform such reasonable
responsibilities and duties as may be assigned to him from time to time by the
Company's Board of Directors. Employee's title shall be President of the
Company, with general responsibility for Company operations. Such title and
duties may be changed from time to time by the Board of Directors (the "Board").
Initially, Employee will report to the Company's Chief Executive Officer, but on
January 1, 1997 Employee will commence reporting directly to the Board. During
the term of Employee's employment pursuant to this Agreement, the Company shall
use its best efforts to maintain Employee as a member of the Board.
2. Term. The term of this Agreement shall be for two years beginning on
the effective date. Thereafter this Agreement may be renewed only by a written
agreement signed by both parties.
3. Compensation.
(a) Salary. From the effective date of this Agreement through
to December 31, 1996, the Company shall pay Employee a minimum base annual
salary, before deducting all applicable withholdings, of $200,000 per year,
payable at the times and in the manner dictated by the Company's standard
payroll policies. On January 1, 1997 the annual base salary will be increased to
$250,000. Thereafter, the minimum base annual salary shall be reviewed annually
by the Compensation Committee of the Board.
<PAGE>
(b) Bonus. Employee shall be eligible to participate in such
bonus and incentive programs as determined from time to time by the Board. Any
such bonuses shall be based upon the achievement of individual goals and Company
performance. Beginning January 1, 1997, the Company shall implement a bonus plan
providing a bonus of up to 50% of Employee's base salary for achievement of the
Board-approved plan and up to 100% of Employee's base salary for achievement of
specified Board approved goals exceeding such plan.
(c) Stock Options. On July 1,1996, the Company shall grant to
Employee options to purchase 175,000 shares of the Company's common stock at the
fair market value of such stock on the date of grant. Additionally, on July 1 of
each of 1997, 1998 and 1999 so long as Employee is still employed by the Company
on the applicable date, the Company shall grant to Employee options to purchase
50,000 shares of the Company's common stock at the then market price. After each
such grant, so long as Employee is still employed by the Company on the date of
each such partial vesting, the options in each grant shall vest monthly over 48
months, on a straight-line basis. Thus, 1/48th of each option grant shall vest
on the first day of the first calendar month that is at least one month after
the date of such grant, and on the first day of each calendar month thereafter,
until all options in such grant have been vested. Once each option has vested,
it shall be exercisable until the date 10 years after such option was granted.
4. Fringe Benefits. In addition to the options for shares of the
Company's common stock granted to Employee as part of this Agreement and any
other employee benefit plans (including without limitation pension, savings and
disability plans) generally available to employees, the Company shall include
Employee in any group health insurance plan and, if eligible, any group
retirement plan instituted by the Company. Employee shall be eligible for the
grant of additional options as determined from time to time by the Board of
Directors based upon Employee's performance hereunder. The manner of
implementation of such benefits with respect to such items as procedures and
amounts are discretionary with the Company but shall be commensurate with
Employee's executive capacity. The Company agrees to maintain term life
insurance during the term of this Agreement in an amount equal to two times
Employee's base salary, as it may be adjusted from time to time, with the
beneficiary to be designated by Employee.
5. Vacation. Employee shall be entitled to vacation with pay in
accordance with the Company's vacation policy as in effect from time to time. In
addition, Employee shall be entitled to such holidays as the Company may
approve.
2
<PAGE>
6. Expenses.
(a) Reimbursement. In addition to the compensation and
benefits provided above, the Company shall, upon receipt of appropriate
documentation, reimburse Employee each month for his reasonable travel, lodging,
entertainment, promotion and other ordinary and necessary business expenses
consistent with Company policies. Employee shall also be entitled to a
automobile allowance of $450 per month.
(b) Moving. Employee shall be reimbursed for the direct
relocation cost of moving his household effects, cars and family from New Jersey
to the Phoenix Metropolitan Area. In addition, Employee will be reimbursed, up
to a maximum of $15,000, for non-deductible costs related to the purchase of a
new home in the Phoenix Metropolitan Area.
(c) Home Equity Loan. The Company will lend up to $200,000 to
Employee, at prime rate, for the purchase of a new home in the Phoenix
Metropolitan Area. Interest and principal on such loan shall be paid in full at
the earlier to occur of the time of the sale of Employee's New Jersey home or
the date three years after the funding of such loan.
7. Termination.
(a) For Cause. The Company may terminate this Agreement for
cause upon written notice to Employee stating the facts constituting such cause,
provided that Employee shall have 30 days following such notice to cure any
conduct or act, if curable, alleged to provide grounds for termination for cause
hereunder. In the event of termination for cause, the Company shall be obligated
to pay Employee only the minimum base salary due him through the date of
termination. The written notice shall state the cause for termination. Cause
shall include neglect of duties, willful failure to abide by instructions or
policies from or set by the Board of Directors, commission of a felony or
serious misdemeanor offense or pleading guilty or nolo contendere to same,
Employee's breach of this Agreement or Employee's breach of any other material
obligation to the Company.
(b) Without Cause. The Company may terminate this Agreement at
any time, immediately and without cause, by giving written notice to Employee.
If the Company terminates under this Section 7(b) during the first year of this
Agreement, it shall continue to pay to Employee (at the time and in the manner
dictated by the Company's standard payroll policies) the base salary in effect
at the time of termination for a period equal to the greater of six months or
the time remaining in the first year of this
3
<PAGE>
Agreement. If the Company terminates Employee under this Section 7(b) after the
first anniversary of this Agreement, it shall continue to pay to Employee his
minimum base salary in effect at the time of termination for a period of one
year following the date of termination, at the time and in the manner dictated
by the Company's standard payroll policies.
(c) Disability. If during the term of this Agreement, Employee
fails to perform his duties hereunder on account of illness or other incapacity
for a period of three consecutive months, or for 120 days during any nine-month
period, the Company shall have the right to terminate this Agreement without
further obligation hereunder except as otherwise provided in disability plans
generally applicable to executive employees.
(d) Death. If Employee dies during the term of this Agreement,
this Agreement shall terminate immediately, and Employee's legal representatives
shall be entitled to receive the base salary due Employee through the last day
of the calendar month in which his death shall have occurred and any other death
benefits generally applicable to executive employees.
8. Nondelegability of Employee's Rights and Company Assignment Rights.
The obligations, rights and benefits of Employee hereunder are personal and may
not be delegated, assigned or transferred in any manner whatsoever, nor are such
obligations, rights or benefits subject to involuntary alienation, assignment or
transfer. Upon mutual agreement of the parties, the Company upon reasonable
notice to Employee may transfer Employee to an affiliate of the Company, which
affiliate shall assume the obligations of the Company under this Agreement. This
Agreement shall be assigned automatically to any entity merging with or
acquiring the Company.
9. Amendment. Except for documents regarding the grant of stock options
and an Invention, Confidential Information and Non-Competition Agreement, this
Agreement contains, and its terms constitute, the entire agreement of the
parties and supersedes any prior agreements, and it may be amended only by a
written document signed by both parties to this Agreement.
10. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of Arizona, exclusive
of the conflict of law provisions thereof, and the parties agree that any
litigation pertaining to this Agreement shall be in courts located in Maricopa
County, Arizona.
4
<PAGE>
11. Attorneys' Fees. If any party finds it necessary to employ legal
counsel or to bring an action at law or other proceeding against the other party
to enforce any of the terms hereof, the party prevailing in any such action or
other proceeding shall be paid by the other party its reasonable attorneys' fees
as well as court costs all as determined by the court and not a jury.
12. Notices. All notices, demands, instructions, or requests relating
to this Agreement shall be in writing and, except as otherwise provided herein,
shall be deemed to have been given for all purposes (i) upon personal delivery,
(ii) one day after being sent, when sent by professional overnight courier
service from and to locations within the Continental United States, (iii) five
days after posting when sent by United States registered or certified mail, with
return receipt requested and postage paid, or (iv) on the date of transmission
when sent by facsimile with a hard-copy confirmation; if directed to the person
or entity to which notice is to be given at his or its address set forth in this
Agreement or at any other address such person or entity has designated by
notice.
To the Company: ORTHOLOGIC CORP.
2850 South 36th Street, Suite 16
Phoenix, AZ 85034
Attention: President
To Employee: GEORGE A. ORAM, JR.
324 Kelly Drive
Neshanic Station, NJ 08853
Fax: 908-369-0620
13. Entire Agreement. This Agreement constitutes the final written
expression of all of the agreements between the parties (except those relating
to Employee's service as a director of the Company), and is a complete and
exclusive statement of those terms. It supersedes all understandings and
negotiations concerning the matters specified herein. Any representations,
promises, warranties or statements made by either party that differ in any way
from the terms of this written Agreement shall be given no force or effect. The
parties specifically represent, each to the other, that there are no additional
or supplemental agreements between them related in any way to the matters herein
contained unless specifically included or referred to herein. No addition to or
modification of any provision of this Agreement shall be binding upon any party
unless made in writing and signed by all parties.
14. Waiver. The waiver by either party of the breach of any covenant or
provision in this Agreement shall not operate or be construed as a waiver of any
subsequent breach by either party.
5
<PAGE>
15. Invalidity of Any Provision. The provisions of this Agreement are
severable, it being the intention of the parties hereto that should any
provisions hereof be invalid or unenforceable, such invalidity or
unenforceability of any provision shall not affect the remaining provisions
hereof, but the same shall remain in full force and effect as if such invalid or
unenforceable provisions were omitted.
16. Headings. Headings in this Agreement are for informational purposes
only and shall not be used to construe the intent of this Agreement.
17. Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same agreement.
18. Binding Effect; Benefits. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
successors, executors, administrators and assigns. Notwithstanding anything
contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective heirs, successors, executors, administrators and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
This Agreement has been executed by the parties as of July 1, 1996.
ORTHOLOGIC CORP.
(the "Company")
By: ___________________________________
Allan M. Weinstein
Chief Executive Officer
GEORGE A. ORAM, JR.
By: __________________________
"EMPLOYEE"
6
Exhibit 11.1
ORTHOLOGIC CORP
STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING (1)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $1,480 ($632) $2,415 ($1,568)
============== ============== ============== ==============
Common shares outstanding at end of period 24,981 14,978 24,981 14,978
Adjustment to reflect weighted average for
shares issued during the period (1,588) (2) (3,472) (342)
Assuming conversion of stock options and warrants
1,376 --- 1,225 ---
-------------- -------------- -------------- --------------
Weighted average number of common shares
outstanding, as adjusted 24,769 14,976 22,734 14,636
============== ============== ============== ==============
Net loss per weighted average number of
common shares outstanding $0.06 ($0.04) $0.11 ($0.11)
============== ============== ============== ==============
</TABLE>
(1) The common shares outstanding have been adjusted for a 2 for 1 stock
split in the form of a 100 percent common share dividend for all periods
presented.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 63,128,560
<SECURITIES> 22,777,045
<RECEIVABLES> 14,540,111
<ALLOWANCES> 2,943,327
<INVENTORY> 2,865,150
<CURRENT-ASSETS> 101,308,340
<PP&E> 2,249,824
<DEPRECIATION> 1,363,844
<TOTAL-ASSETS> 105,907,905
<CURRENT-LIABILITIES> 4,188,931
<BONDS> 0
0
0
<COMMON> 12,491
<OTHER-SE> 101,706,483
<TOTAL-LIABILITY-AND-EQUITY> 105,907,905
<SALES> 7,911,929
<TOTAL-REVENUES> 7,911,929
<CGS> 1,252,095
<TOTAL-COSTS> 1,252,095
<OTHER-EXPENSES> 5,068,621
<LOSS-PROVISION> 1,004,020
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,495,306
<INCOME-TAX> 15,000
<INCOME-CONTINUING> 1,480,306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,480,306
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
Exhibit 99.1
NEWS BULLETIN
-------------
For Further Information:
AT THE COMPANY: RCG Capital Markets Group
Allan M. Weinstein Max Ramras or Jim Estrada
Chairman and CEO or 7373 N. Scottsdale Road
Richard R. Cartwright Scottsdale, AZ 85253
Director, Investor Relations 602.998.7555
602.437.5520
FOR IMMEDIATE RELEASE
July 22, 1996
ORTHOLOGIC CORP. TO ACQUIRE SUTTER CORPORATION
----------------------------------------------
Phoenix, Arizona, July 22, 1996 -- OrthoLogic (NASDAQ/OLGC) today announced that
it has concluded a binding letter of intent to acquire Sutter Corporation for
approximately $25.0 million in cash from Columbia/HCA Healthcare Corporation.
Subject to the negotiation and satisfaction of terms and conditions, OrthoLogic
expects to complete the acquisition on or before September 30.
Sutter's principal business is the manufacturing, marketing and distribution of
orthopaedic rehabilitation products and is a leading supplier of continuous
passive motion ("CPM") devices. The Company is headquartered in San Diego, CA.
Sutter's 1995 sales were approximately $30.0 million.
According to Allan M. Weinstein, Chairman of the Board and CEO of OrthoLogic: "
We believe that the acquisition of Sutter positions OrthoLogic to become a
leading supplier of orthopaedic products. OrthoLogic and Sutter have a
complementary fit. The acquisition brings together two companies whose direct
sales forces call on orthopaedic surgeons in their offices. Additionally, both
companies focus on managed care providers and obtain third party reimbursement
for their orthopaedic home healthcare products. The combined companies will
employ approximately 400 individuals, with a direct sales force of over 150
salespeople."
OrthoLogic develops, manufacturers and markets proprietary technologically
advanced orthopaedic devices designed to promote the healing of musculoskeletal
tissue. Founded in 1987, the Company is headquartered in Phoenix, Arizona.
This release may contain forward-looking statements which are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Important factors that could cause actual results to differ materially
include the risk that integrating the sales forces and/or the managements and
operating and information systems of both companies will prove to be difficult
and costly; costs incurred in eliminating redundancies and achieving a common
vision for the combined companies; the ability of the Company's executives to
manage growth; and/or the risk that one or more of the conditions to close may
not be satisfied.
# # #
