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 September 30, 1998
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-21214
ORTHOLOGIC CORP.
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(Exact name of registrant as specified in its charter)
Delaware 86-0585310
- ------------------------------- ------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1275 W. Washington Street, Tempe, Arizona 85281
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(602) 286-5520
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(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. Yes [X] 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.
25,300,190 shares of common stock outstanding as of October 30, 1998
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ORTHOLOGIC CORP.
INDEX
PAGE NO.
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997................... 1
Consolidated Statements of Operations
Three Months and Nine Months ended September 30, 1998
and 1997................................................... 2
Consolidated Statements of Cash Flows
Nine Months ended September 30, 1998 and 1997.............. 3
Notes to Consolidated Financial Statements................... 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 9
Part II Other Information
Item 1. Legal Proceedings...........................................12
Item 2. Changes in Securities and Use of Proceeds...................12
Item 6. Exhibits and Reports on Form 8-K............................13
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ORTHOLOGIC CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
UNAUDITED
September 30, December 31,
1998 1997
---- ----
ASSETS
Cash and cash equivalents $ 2,597 $ 7,783
Short-term investments 6,135 4,569
Accounts receivable 24,091 34,424
Inventory 12,411 10,548
Prepaids and other current assets 1,336 1,673
Deferred income taxes 2,646 2,596
--------- ---------
Total current assets 49,216 61,593
Furniture, rental fleet and equipment 20,058 16,455
Accumulated depreciation (7,332) (4,934)
--------- ---------
Furniture and equipment, net 12,726 11,521
Intangibles, net 30,467 29,898
Deposits and other assets 1,043 91
--------- ---------
TOTAL ASSETS $ 93,452 $ 103,103
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 2,049 $ 2,896
Loan payable - current portion 500 500
Obligations under co-promotion agreement 1,000 2,000
Accrued liabilities 7,704 11,340
--------- ---------
Total current liabilities 11,253 16,736
--------- ---------
Deferred rent and capital lease obligation -- 106
Loan payable - long term portion 110 524
Obligations under co-promotion agreement -- 1,000
--------- ---------
Total liabilities 11,363 18,366
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Series B convertible preferred stock 13,558
STOCKHOLDERS' EQUITY
Common stock 13 13
Additional paid-in capital 120,130 119,413
Accumulated deficit (51,612) (34,689)
--------- ---------
Total stockholders' equity 68,531 84,737
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 93,452 $ 103,103
========= =========
See notes to consolidated financial statements.
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ORTHOLOGIC CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
UNAUDITED
Three months ended Nine months ended
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues $17,739 $ 18,199 $ 54,350 $ 53,818
Cost of revenues 4,293 4,449 12,912 13,772
------- -------- -------- --------
Gross profit 13,446 13,750 41,438 40,046
Operating expenses
Selling, general and administrative 15,824 14,259 56,344 43,460
Research and development 1,425 632 2,468 1,821
Restructuring and other charges -- 13,844 (399) 13,844
------- -------- -------- --------
Total operating expenses 17,249 28,735 58,413 59,125
------- -------- -------- --------
Operating loss (3,803) (14,985) (16,975) (19,079)
Other income
Grant revenue 2 12 2 108
Interest income 130 231 267 1,182
------- -------- -------- --------
Total other income 132 243 269 1,290
------- -------- -------- --------
Loss before taxes (3,671) (14,742) (16,706) (17,789)
Provision for income taxes -- -- -- --
------- -------- -------- --------
Net loss (3,671) (14,742) (16,706) (17,789)
======= ======== ======== ========
Accretion of non-cash preferred
stock dividend (618) -- (618) --
------- -------- -------- --------
Net loss applicable to common
stockholders (4,289) (14,742) (17,324) (17,789)
======= ======== ======== ========
BASIC EARNINGS PER SHARE
Net loss per share (0.17) (0.59) (0.69) (0.71)
======= ======== ======== ========
Weighted average of common
shares outstanding 25,300 25,113 25,287 25,082
======= ======== ======== ========
DILUTED EARNINGS PER SHARE
Net loss per share (0.17) (0.59) (0.69) (0.71)
======= ======== ======== ========
Weighted average and common
shares outstanding 25,300 25,113 25,287 25,082
======= ======== ======== ========
See notes to consolidated financial statements
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ORTHOLOGIC CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
UNAUDITED
Nine Months Ending September 30,
--------------------------------
1998 1997
---- ----
OPERATING ACTIVITIES
Net Loss $(17,324) $(17,789)
Non cash items:
Depreciation and amortization 6,082 4,551
Restructuring charge 13,844
Other (433)
Net change in other operating items:
Accounts receivable 8,340 1,905
Inventory (1,863) (604)
Prepaids and other current assets 287 (1,430)
Deposits and other assets (203) 2
Accounts payable (847) (1,808)
Accrued liabilities (3,624) (807)
-------- --------
Cash flows used in operating activities (9,152) (2,569)
-------- --------
INVESTING ACTIVITIES
Purchase of fixed assets (5,186) (3,434)
Cash paid for acquisitions, net of cash acquired (81) (25,327)
Investment in Chrysalis (750) --
Sales (Purchases) of short term investments (1,567) 30,952
Collection of note receivable -- 200
Intangible from dealer transactions -- (705)
-------- --------
Cash flows used in investing activities (7,584) 1,686
-------- --------
FINANCING ACTIVITIES
Payments on capital leases (155) (75)
Payments on loan payable (375) (420)
Payments under co-promotion agreement (2,000) (1,000)
Proceeds from issuance of convertible preferred
stock and warrants (Net) 14,034 --
Net proceeds from stock option exercises 240 229
Foreign exchange (194) --
-------- --------
Cash flows used in financing activities 11,550 (1,266)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,186) (2,149)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,783 13,494
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,597 $ 11,345
======== ========
See notes to consolidated financial statements.
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ORTHOLOGIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
The consolidated balance sheet as of September 30, 1998, and the consolidated
statements of operations and cash flows for the nine months ended September
30, 1998 and 1997 are unaudited, however, in the opinion of management,
include all adjustments (consisting only of normal recurring adjustments)
necessary for the fair presentation of the 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. The Balance Sheet as of December 31, 1997 is derived from the
Company's audited financial statements included in the 1997 Annual Report. It
is suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's 1997 Annual
Report.
2. ACQUISITION
On March 3, 1997 and March 12, 1997, the Company acquired certain assets and
assumed certain liabilities of Toronto Medical Corp. ("Toronto") and
Danninger Medical Technology, Inc. ("DMTI"). After paying certain of the
assumed liabilities, the net cash outlay was approximately $7.2 million for
Toronto and $11 million for DMTI. Both acquisitions were accounted for as a
purchase which resulted in goodwill of $4 million for Toronto and $7.7
million for DMTI. The goodwill is being amortized over 20 years.
Had the Toronto and DMTI acquisitions occurred on January 1, 1997, combined
unaudited pro forma results for the nine months ended September 30,1997 would
have been $57.1 million net revenues, $17.8 million net loss and (.71) net
loss per common share. The operations were fully integrated in the Company's
financial statements for 1998.
3. CO-PROMOTION AGREEMENT
The Company entered into an exclusive, co-promotion agreement (the
"Co-Promotion Agreement') with Sanofi Pharmaceuticals, Inc. ("Sanofi") on
September 23, 1997 for the purpose of marketing Hyalgan, a hyaluronic acid
sodium salt, to orthopedic surgeons in the United States for the treatment of
pain in patients with osteoarthritis of the knee. The initial term of the
Co-Promotion Agreement ends on December 31, 2002. Upon the expiration of the
initial term, Sanofi may terminate the Co-Promotion Agreement, extend the
agreement for an additional one year period, or enter into a revised
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Co-Promotion Agreement with the Company. Upon termination of the Co-Promotion
Agreement, Sanofi must pay the Company an amount equal to 50% of the gross
compensation paid to the Company, pursuant to the Co-Promotion Agreement, for
the immediately preceding year.
The Company is paid a commission which is based upon the number of units sold
at the wholesale acquisition costs less amounts for distribution costs,
discounts, rebates and returns. In addition, the Company is obligated: to use
its best efforts to market and promote Hyalgan; to pay Sanofi a royalty of
10% of the net selling price, as defined; and to pay the manufacturer of
Hyalgan a product transfer price and a pro-rata portion of a 10% royalty on
combined annual net sales of Hyalgan by Sanofi and the Company in excess of
$30 million. In addition, the Company is obligated to pay a total of $4.0
million during the first eighteen months of the agreement. During 1997 and
the first nine months of 1998, the Company paid $3.0 million of this amount.
The Company has recorded the remaining $1.0 million as a liability in its
financial statements.
The Company's sales force began to promote Hyalgan in the third quarter of
1997.
4. LICENSING AGREEMENT
The Company announced in January 1998 that it had acquired a minority equity
interest in a biotech firm, Chrysalis BioTechnology, Inc. for $750,000. As
part of the transaction, the Company was awarded a nine-month world-wide
exclusive option to license the orthopedic applications of Chrysalin, a
patented 23-amino acid peptide that has shown promise in accelerating the
healing process. Chrysalis is currently developing the technology to
stimulate the skin-wound healing process and has completed an extensive
pre-clinical safety and efficacy profile of the product. In pre-clinical
animal studies, Chrysalin was also shown to double the rate of fracture
healing with a single injection into the fresh fracture gap. The Company's
agreement with Chrysalis contains provisions for the Company to continue and
expand its option to license Chrysalin contingent upon regulatory approvals,
successful pre-clinical trials, and certain trials and certain milestone
payments to Chrysalis by the Company. An additional fee of $750,000 for the
initial license was recognized in the third quarter. The agreement has been
extended to the earlier of January 1, 1999 or until the Company collects
sufficient additional preclinical data to complete its evaluation of the
Technology. The Company will pursue commercialization of Chrysalis, initially
seeking Food and Drug Administration (FDA) approval for the human clinical
trials for the fracture-healing indication. The Company projects that
Chrysalis could receive all the necessary FDA approvals and be introduced in
the market during 2000. There can be no assurance, however, that the clinical
trials will result in favorable data or that FDA approvals, if sought, will
be obtained.
5. LITIGATION
During 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.
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Plaintiffs in these actions allege that correspondence received by the
Company from the FDA regarding the Company's OrthoLogic 1000 Bone Growth
Stimulator was material and undisclosed, leading to an artificially inflated
stock price. Plaintiffs further alleged that practices referenced in the
correspondence operated as a fraud against plaintiffs and 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, all equitable and/or
injunctive relief as permitted by law. The actions were consolidated for the
purposes in the United States District court for the District of Arizona and
lead plaintiffs and counsel were appointed. The Company and its officers and
directors moved to dismiss the consolidated amendment complaint for failure
to state a claim. The Court dismissed the consolidated amended complaint in
its entirety against the Company and its officers and directors, but gave
plaintiffs leave to amend all claims to cure all deficiencies. An amended
complaint was filed in April 1998, and the Company has moved again to dismiss
the amended complaint on virtually the same grounds as it did before.
In addition, the Company has been served with a substantially similar action
filed in Arizona State Court alleging state law causes of action grounded in
the same set of facts. This action remains stayed pending further
developments in the Federal action.
In addition to the foregoing, a shareholder derivative complaint alleging,
among other things, breach of fiduciary duty in connection with the conduct
alleged in the aforesaid federal and state court class actions, have also
been filed in Arizona State Court. That action remains stayed pending further
developments in the Federal consolidated class action.
In March 1998, the former owner of the CPM assets acquired in the DMTI
acquisition filed a lawsuit in the Court of Common Pleas in Franklin County,
Ohio against the Company. The plaintiff alleges that the Company breached the
acquisition agreement by not satisfying certain liabilities it assumed in the
acquisition and that the Company breached an ancillary agreement for the
temporary provision of services following the acquisition. Plaintiff has also
demanded from the Court of Common Pleas a declaration that the Company is not
entitled to cash escrowed in the acquisition. The Company had previously
requested delivery to it of the escrowed cash and demanded indemnification
for the plaintiff's breaches of representations and warranties in the
acquisition agreement. 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.
Management believes that the allegations are without merit and will
vigorously defend them.
Page 6
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At September 30, 1998, the Company is involved in various other legal
proceedings that arose in the ordinary course of business. In management's
opinion, the ultimate resolution of these other legal proceedings will not
have a material affect on the financial position, results of operations, or
cash flow of the Company.
6. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130 "Reporting Comprehensive Income." For the nine
month period and the quarter ended September 30, 1998, net income
approximated comprehensive income.
7. DEBT
The Company has a revolving line of credit agreement with Silicon Valley bank
for $7.5 million.
8. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts was increased by approximately $9.3
million during the first quarter of 1998, over and above the normal quarterly
activity. The increase was a result of a management decision to focus
resources on collection of current sales and on re-engineering the overall
process of billing and collections. It is no longer considered to be cost
effective to expend significant resources on the collection of the older
receivables as had been done in the past. For the quarter ending September
30, 1998, total gross accounts receivable decreased by $281,881 while the
total allowances for bad debt increased $740,715. For the same quarter in
1997, gross accounts receivable decreased $1.1 million and the total
allowance for bad debt increased $250,701.
9. EQUITY PLACEMENT
In July 1998, the Company completed a private equity placement with two
investors, an affiliate of Credit Suisse First Boston Corp. and Capital
Ventures International. Under the terms of the Purchase Agreement, OrthoLogic
sold 15,000 shares of Series B Convertible Preferred Stock for $15 million
(prior to costs). The Series B Convertible Preferred Stock is convertible
into shares of Common Stock 300 days after issuance and will automatically
convert, to the extent not previously converted, into Common Stock four years
following the date of issuance. Each share of Series B Convertible Preferred
Stock is convertible into Common Stock at a per share price equal to the
lesser of the average of the 10 lowest closing bids during the 30 days prior
to conversion and 103% of the average of the closing bids for the 10 days
prior to the 300th day following the issuance. The Series B Convertible
Preferred Stock is convertible into Common Stock prior to the 300th day after
issuance upon the occurrence of certain events (in which case the conversion
price will be the average of the 10 lowest closing bids during the 30 days
prior to conversion). This Agreement contains strict covenants that protect
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against hedging and short-selling of OrthoLogic Common Stock while the
purchaser holds shares of the Series B Convertible Preferred Stock.
In connection with the private placement of the Series B Convertible
Preferred Stock, OrthoLogic issued to the purchasers warrants to purchase 40
shares of Common Stock for each share of Series B Convertible Preferred
Stock, exercisable at $5.50. The warrants are valued at $1,093,980. The cost
of the Equity Offering was approximately $966,000. Both the value of the
warrants and the cost of the equity offering will be recognized over the 10
month conversion period as an "accretion of non-cash Preferred Stock
Dividends" for the amount of $617,994 per quarter. The Company has filed a
registration statement covering the underlying Series B Convertible Preferred
Common Stock and Warrants.
Proceeds from the private placement will be used to fund new product
opportunities, including SpinaLogic, Chrysalin and Hyalgan, as well as to
complete the re-engineering of the Company's key business processes.
10. LEGAL SETTLEMENT
The Company settled a false claims matter with the U.S. Department of Justice
in a case that was filed under qui tam provisions of the Federal False Claims
Act. The allegations included the submission of claims for reimbursement for
a small number of custom medical devices to various federal care programs
including Medicare, TRICARE (formerly known as CHAMPUS) and various state
Medicaid programs.
The Company denies any wrongdoing or liability with respect to the
allegations in this matter. Nevertheless, in effort to avoid the expense,
burden and uncertainty of litigation in this case as well as the potential
distraction this case could have on the Company's management, the Company
agreed to settle this matter. Under the terms of the definitive settlement
agreement, the Company paid to the U.S. Department of Justice, on behalf of
several federal health care programs including Medicare, TRICARE, and various
state Medicaid programs, the amount of $1,000,000. In return, the U.S.
Department of Justice has agreed to release the Company's officers,
employees, and directors from any causes of actions for civil damages or
civil penalties for the various allegations being settled in this matter. The
original complaint was dismissed with prejudice.
The Company recognized the costs associated with this settlement agreement in
the second quarter of 1998.
11. PRE-MARKET APPROVAL SUBMISSION FOR SPINALOGIC-1000
In August 1998, the Company submitted a Pre-Market Approval (PMA) Supplement
to the U.S. Food and Drug Administration (FDA) for the SpinaLogic-1000, a new
product for the stimulation of spinal fusion. The FDA has accepted the
filing, with a filing date of August 20, 1998. Acceptance of the application
for filing means that the FDA has made a threshold determination that the
application is sufficiently complete to permit substantive review.
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MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
The following is management's discussion of significant factors that affected
the Company's interim financial condition and results of operations. This should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
RESULTS OF OPERATIONS
REVENUES
The Company reported revenues of $17.7 million for the third quarter,
representing a 2.5% decrease from revenues of $18.2 million for the third
quarter of 1997. The Company's revenues increased 1.0% to $54.3 million for the
nine months ending September 30, 1998 from $58.8 million for the nine months
ended September 30, 1997. Sales finished the quarter below expectations,
reflecting a larger than expected impact from the seasonal effect of the summer
holiday period.
GROSS PROFIT
Gross profit increased from $40.0 million for the nine months ended September
30, 1997 to $41.4 million for the nine months ended September 30, 1998. Gross
profit, as a percentage of revenue, was 76% for the nine months ended September
30, 1998 compared to 74% for the comparable period during 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the nine months ended
September 30, 1998 were $56.3 million, up $12.9 million from the comparable
period in 1997. The increase from 1997 is due in part to the variable costs
associated with the increased revenue. The first quarter of 1998 also included
an increase of $9.3 million in the allowance for doubtful accounts over the
normal quarterly provision. As part of a larger project to re-engineer the
sales, billings and collections process for enhanced efficiencies, the Company
obtained an independent evaluation of its billing files and collection
strategies in April of 1998. The information obtained from this study prompted
management to change its focus for future collection efforts to be primarily on
the more recent sales. The cost of continuing to manage the older accounts
receivable to the extent that had been done in the past was no longer considered
as cost effective for the Company. This shift in the emphasis for the
collections policy prompted the Company to increase the bad debt reserve for the
outstanding balances of the older receivables. In addition, a $1 million legal
settlement (see Note 10) was recognized in the second quarter of 1998.
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RESEARCH AND DEVELOPMENT
Research and Development (R&D) expenses were $2.5 million for the nine months
ended September 30, 1998 compared to $1.8 million for the comparable 1997
period. The increase was due to a $750,000 accrual for the initial license fee
for Chrysalin. This was partially offset due to the unveiling of a new, single
coil version of the OL-1000, no longer in R&D. The device extends the fracture
healing benefits of the OL-1000 to the thigh and the long bone of the upper arm,
extending from the shoulder to the elbow, and is suitable for treating non-union
fractures in most areas for larger individuals.
OTHER INCOME AND EXPENSES
Other income declined to $269,000 in the nine months ending September 30, 1998
from $1.3 million during the same period in 1997. This decrease is attributed
to: (1) the Company not participating in any research grant projects in the
current year; and (2) a reduction in cash and investments, which has yielded a
reduction in interest income earned to $267,000 in 1998, from $1.2 million in
1997.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1998, the Company had cash and investments of $8.7 million
compared to $12.3 million (including short-term investments) at December 31,
1997. The change in cash and investments is primarily the result of a $2 million
payment under the Co-Promotion Agreement, a $1.9 million increase in inventory,
and the $1 million legal settlement previously discussed. In addition, in
January 1998, the Company acquired a $750,000 equity stake in Chrysalis
BioTechnology, Inc., a biotech firm, in Galveston, Texas. Cash used for
operations amounted to $9.2 million during the nine month period. A portion of
operation costs included strengthening the senior management team, reorganizing
the field sales force, redesigning business processes and renewing emphasis on
product development. In July 1998, the Company completed a private equity
placement (see Note 9) providing net proceeds of $14 million. The outstanding
line of credit was paid off during the third quarter.
The Company anticipates that its cash on hand and the funds available from the
line of credit will be sufficient to meet the Company's presently projected cash
and working capital requirements for the next 12 months. There can be no
assurance, however, that this will prove to be the case. If the Company were
required to obtain additional financing in the future, there can be no assurance
that such sources of capital will be available on terms favorable to the
Company, if at all.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
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The Company has identified all significant applications that will require
modification to ensure Year 2000 Compliance. Internal and external resources are
being used to make the required modifications and test Year 2000 Compliance. The
modification process of all significant applications is substantially complete.
The Company plans on completing the testing process of all significant
applications by December 31, 1998.
In addition, the Company has communicated with others whom it does significant
business to determine their Year 2000 Compliance readiness and the extent to
which the Company is vulnerable to any third party Year 2000 issues. However,
there can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities has not
been and is not anticipated to be material to its financial position or results
of operations in any given year. These costs and the date on which the Company
plans to complete the Year 2000 modification and testing processes are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
from those plans.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this document that are not historical
facts, including, without limitation, statements of future expectations,
projections of results of operations and financial condition, statements and
future economic performance and other forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, involve risks
and uncertanties that may cause the actual results, performance or achievement
of the Company to differ materially from those contemplated in such
forward-looking statements. In addition to the specific matters referred to
herein, important factors which may cause actual results to differ from those
contemplated in such forward-looking statements include: (i) the results of the
Company's efforts to implement its Securities and Exchange business strategy;
(ii) actions of the Company's competitors and the Company's ability to respond
to such actions; (iii) changes in governmental regulation, tax rates and similar
matter; (iv) other risks detailed in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 and on the Company's other filings
with the Securities and Exchange Commission; (v) approval of new products by the
FDA and market acceptance of new products; (vi) dependence on third party
payors; and (vii) the costs and results of pending litigation.
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings
See "Note 5 - Litigation" of the Notes to Consolidated Financial
Statements above.
Item 2. Changes in Securities and Use of Proceeds
See "Note 9 - Equity Placement" of the Notes to Consolidated Financial
Statements above.
Item 6. Exhibits and Reports
(a) See Exhibit Index following the Signatures page, which is
incorporated herein by reference.
(b) Reports on Form 8-K
1. On July 13, 1998, the Company issued 15,000 shares of
its Series B Convertible Preferred Stock and related
Warrants in a private placement to two institutional
investors. The Company estimates the net proceeds of the
offering, after expenses, to be approximately $14
million. The Company has filed with the Securities and
Exchange Commission a registration statement covering
the resale of the shares of Common Stock issuable
pursuant to the terms of the Series B Convertible
Preferred Stock and related Warrants. The Securities
Purchase Agreement, Certificate of Designation,
Warrants, and Registration Rights Agreement were filed
as exhibits to the Form 8-K.
2. On July 13, 1998, the Company issued a press release
regarding the private placement of 15,000 shares of its
Series B Convertible Preferred Stock and related
Warrants. The press release was filed as an exhibit to a
report on Form 8-K.
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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.
ORTHOLOGIC CORP.
(Registrant)
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas R. Trotter President and Chief Executive Officer November 12, 1998
- ----------------------- (Principal Executive Officer)
Thomas R. Trotter
/s/ Terry D. Meier Sr. Vice-President and Chief Financial Officer November 12, 1998
- ----------------------- (Principal Financial and Accounting Officer)
Terry D. Meier
</TABLE>
Page 13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN ORTHOLOGIC CORPORATION'S REPORT ON FORM 10-Q FOR THE
QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,596,816
<SECURITIES> 6,134,624
<RECEIVABLES> 44,123,520
<ALLOWANCES> 20,032,463
<INVENTORY> 12,411,041
<CURRENT-ASSETS> 49,215,528
<PP&E> 12,726,360
<DEPRECIATION> 7,332,146
<TOTAL-ASSETS> 93,452,040
<CURRENT-LIABILITIES> 11,362,889
<BONDS> 0
0
13,558,014
<COMMON> 12,649
<OTHER-SE> 68,518,488
<TOTAL-LIABILITY-AND-EQUITY> 93,452,040
<SALES> 16,048,799
<TOTAL-REVENUES> 54,349,305
<CGS> 12,911,573
<TOTAL-COSTS> 58,413,073
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (16,706,353)
<INCOME-TAX> (196)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,706,157)
<EPS-PRIMARY> (0.69)
<EPS-DILUTED> (0.69)
</TABLE>
