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 March 31,1999
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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 _______________________
Commission File Number: 0-21214
ORTHOLOGIC CORP.
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(Exact name of registrant as specified in its charter)
Delaware 86-0585310
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(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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.
25,455,590 shares of common stock outstanding as of April 30,1999
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ORTHOLOGIC CORP.
INDEX
PAGE NO.
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31,1999 and December 31,1998 ...........................2
Consolidated Statements of Operations and of
Comprehensive Income
Three Months ended March 31,1999 and 1998 ....................3
Consolidated Statements of Cash Flows
Three Months ended March 31,1999 and 1998 ....................4
Notes to Consolidated Financial Statements .......................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........10
Part II Other Information
Item 1. Legal Proceedings ......................................14
Item 6. Exhibits and Reports on Form 8 K .......................14
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ORTHOLOGIC CORP.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
UNAUDITED
March 31, December 31,
ASSETS 1999 1998
--------- ---------
Cash and cash equivalents $ 3,698 $ 1,714
Short-term investments 1,248 6,053
Accounts receivable 28,501 27,031
Inventory 11,075 11,960
Prepaids and other current assets 1,576 799
Deferred income taxes 2,640 2,643
--------- ---------
Total Current assets 48,738 50,200
Furniture, rental fleet and equipment 23,515 21,962
Accumulated depreciation (9,975) (9,095)
--------- ---------
Furniture and equipment, net 13,540 12,867
--------- ---------
Goodwill and other intangibles 30,245 30,568
Deposits and other assets 717 345
--------- ---------
Total Assets $ 93,240 $ 93,980
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 2,934 $ 3,039
Loan payable-current portion 250 500
Obligations under co-promotion agreement - 1,000
Accrued liabilities 7,050 6,844
--------- ---------
Total current liabilities 10,234 11,383
--------- ---------
Deferred rent and capital lease obligation 270 196
--------- ---------
Total liabilities 10,504 11,579
--------- ---------
Series B Convertible Preferred Stock 14,794 14,176
Stockholders' Equity
Common Stock 13 13
Additional paid in capital 120,026 119,659
Accumulated deficit (51,932) (51,419)
Comprehensive Income (loss) (165) (28)
--------- ---------
Total stockholders' equity 67,942 68,225
--------- ---------
Total Liabilities and Stockholders' Equity $ 93,240 $ 93,980
========= =========
See notes to consolidated financial statements
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ORTHOLOGIC CORP.
CONSOLIDATED STATEMENT OF OPERATIONS AND OF COMPREHENSIVE INCOME
(in thousands, except per share data)
UNAUDITED
Three months ended March 31,
----------------------------
1999 1998
-------- --------
Revenues $ 21,068 $ 19,109
Cost of revenues 4,718 4,416
-------- --------
Gross profit 16,350 14,693
Operating expenses
Selling, general and administrative 15,738 23,821
Research and development 520 498
Restructuring and other charges -- (399)
-------- --------
Total operating expenses 16,258 23,920
-------- --------
Operating income (loss) 92 (9,227)
Other income
Grant revenue 1 --
Interest income 56 97
-------- --------
Total other income 57 97
-------- --------
Income (loss) before income taxes 149 (9,130)
Provision for income taxes 16 0
-------- --------
Net income (loss) 133 (9,130)
-------- --------
Accretion on non cash preferred stock dividend (618) --
-------- --------
Net loss applicable to common stockholders $ (485) $ (9,130)
======== ========
BASIC EARNINGS PER SHARE
Net loss per common share $ (0.02) $ (0.36)
======== ========
Weighted average number of common and equivalent
shares outstanding 25,379 25,267
======== ========
DILUTED EARNINGS PER SHARE
Net loss per common and equivalent shares $ (0.02) $ (0.36)
======== ========
Weighted average number of common and diluted
shares outstanding 25,379 25,267
======== ========
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Net loss applicable to common stockholders $ (485) $ (9,130)
Foreign translation adjustment (165) (13)
-------- --------
Comprehensive loss applicable to common
stockholders $ (650) $ (9,143)
======== ========
See notes to consolidated financial statements
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ORTHOLOGIC CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
UNAUDITED
Three months ended March 31,
----------------------------
1999 1998
------- -------
OPERATING ACTIVITIES
Net profit (loss) $ 133 $(9,130)
Non cash items:
Depreciation and amortization 1,441 2,181
Net change in other operating items:
Accounts receivable (1,470) 6,966
Inventories 855 (1,184)
Prepaids and other current assets (744) (191)
Deposits and other assets (372) (70)
Accounts payable (105) 963
Accrued and other current liabilities 206 (1,591)
------- -------
Cash flows used in operating activities (56) (2,056)
------- -------
INVESTING ACTIVITIES
Purchase of fixed assets (1,614) (3,342)
Acquisitions, net of cash acquired (176) (81)
Investments in Chrysalis -- (750)
Sales of short-term investments 4,804 1,073
------- -------
Cash flows provided by (used in) investing
activities 3,014 (3,100)
------- -------
FINANCING ACTIVITIES
Payments on capital leases & long term debt 73 (274)
Payments on loan payable (250) --
Payments under co-promotion agreement (1,000) (1,000)
Foreign Exchange (165) (28)
Net proceeds from stock option exercises 368 61
------- -------
Cash flows used in financing activities (974) (1,241)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,984 (6,397)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,714 7,783
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,698 $ 1,386
======= =======
Supplemental disclosure of cash flow information
Accretion of non cash preferred stock dividend $ 618 --
Cash paid during the period for interest $ 35 $ 10
Cash paid during the period for income taxes $ 80 --
See notes to consolidated financial statements
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ORTHOLOGIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION
The consolidated balance sheet as of March 31,1999, and the consolidated
statements of operations and cash flows for the three months ended March
31, 1999 and 1998 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, 1998 is
derived from the Company's audited financial statements included in the
1998 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 1998 Annual Report.
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Significant estimates include the
allowance for doubtful accounts, which is based primarily on trends in
historical collection statistics, consideration of current events, payer
mix and other considerations. The Company derives a significant amount of
its revenues in the United States from third-party health insurance plans,
including Medicare. Amounts paid under these plans are generally based on
fixed or allowable reimbursement rates. Revenues are recorded at the
expected or preauthorized reimbursement rates when billed. Some billings
are subject to adjustments. In the opinion of management, adequate
allowances have been provided for doubtful accounts and contractual
adjustments. Any differences between estimated reimbursement and final
determinations are reflected in the year finalized.
2. CO-PROMOTION AGREEMENT
The Company entered into an exclusive co-promotion agreement (the
"Agreement") with Sanofi Pharmaceuticals Inc. ("Sanofi") at a cost of $4.0
million on June 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. During 1997
and 1998 the Company paid $3.0 million of this amount. The remaining $1.0
million was paid in the first quarter of 1999. The initial term of the
agreement ends on December 31, 2002. Upon the expiration of the initial
term, Sanofi may terminate the agreement, extend the agreement for up to
ten additional one year periods or enter into a revised agreement with the
Company. Management believes it is mutually beneficial for both parties to
extend the agreement beyond the initial period. Upon termination of the
agreement, Sanofi must pay the Company the amount equal to 50% of the gross
compensation paid to the Company, pursuant to the Agreement, for the
immediately preceding year.
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The Company's sales force began to promote Hyalgan in the third quarter of
1997. Fee revenue of $1.6 and $1.8 million was recognized during the first
quarters of 1999 and 1998 respectively.
3. 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 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. As part of the equity
investment OrthoLogic acquired options to license Chrysalin for orthopedic
applications. An additional fee of $750,000 for the initial license was
expensed in the third quarter of 1998 and the Agreement was extended to
January 1999. In January 1999, the Company exercised its option to license
the U.S. development, marketing and distribution rights for Chrysalin, for
fresh fracture indications. The Company will pursue commercialization of
Chrysalin, initially seeking Food and Drug Administration ("FDA") approval
for the human clinical trials for the fracture-healing indication. The
Company projects that Chrysalin could receive all the necessary FDA
approvals and be introduced in the market during 2003. There can be no
assurance, however, that the clinical trials will result in favorable data
or that FDA approvals, if sought, will be obtained. Significant additional
costs will be necessary to compete development of this product.
4. 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.
Plaintiffs in these actions alleged 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. Plaintiffs
further alleged that once the FDA letter became known, a material decline
in the stock price of the Company occurred, causing damage to the
plaintiffs.
The actions were consolidated for the purposes in the United States
District court for the District of Arizona. On March 31, 1999, the judge in
the consolidated case before the United States District Court granted the
Company's Motion to Dismiss and entered an order dismissing all claims in
the suit against the Company and two individual officers/directors. The
judge allowed certain narrow claims based on insider trading theories to
proceed against certain individual defendants.
Page 6
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In addition to the case proceeding in the United States District Court, the
Company had 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. By agreement between the parties this action was stayed
while the federal actions proceeded. In early May 1999, the Company filed a
Motion to Dismiss this case with the Arizona State Court.
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 was stayed pending action on
the federal court proceedings.
Management believes that the remaining allegations in the federal court
case and the state court case are without merit and will vigorously defend
against them.
At March 31,1999, in addition to the matters disclosed above, the Company
is involved in various other legal proceedings that arose in the ordinary
course of business.
The costs associated with defending the above allegations and the potential
outcome cannot be determined at this time and accordingly, no estimate for
such costs have been included in the accompanying Financial Statements. In
management's opinion, the ultimate resolution of the above legal proceeding
will not have a material effect on the financial positions, results of
operations, or cash flow of the Company.
5. COMMITMENTS
The Company has secured a $7.5 million accounts receivable revolving line
of credit and a $2.5 million revolving term loan from a bank. The maximum
amount that may be borrowed under this agreement is $10 million. The
Company may borrow up to 80% of eligible accounts receivable under the
accounts receivable revolving line of credit and 50% of the net book value
of the Continuous Passive Motion ("CPM") fleet under the revolving term
loan. The accounts receivable revolving line of credit matures May 1, 2000,
and the revolving term loan on November 31, 1999. Interest is payable
monthly on the accounts receivable revolving line of credit and amortized
principal and interest are due monthly on the revolving term loan. The
interest rate is prime plus 1.05% for the accounts receivable line of
credit, and prime plus .65% for the revolving term loan. There are certain
financial convenants and reporting requirements associated with the loans.
In connection with these loans the Company issued a warrant in 1998 to
purchase 10,000 shares of Common Stock at a price of $6.13. These warrants
expire in 2003.
6. ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the first quarter of 1998, the Company recorded a charge of
approximately $9.3 million for additional bad debt expense. The charge was
a result of a management decision during the first quarter of 1998 to focus
proportionately more resources on collection of current sales and on
re-engineering the overall process of billing and collections. Management
determined it was no longer
Page 7
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considered to be cost effective to expend significant resources on the
collection of the older receivables as had been done in the past
7. SERIES B CONVERTIBLE PREFERRED STOCK
In July 1998, the Company completed a private 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 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 or, 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). In the event of
certain Mandatory Redemption Events, each holder of Series B Preferred
Shares will have the right to require the Company to redeem those shares
for cash at the Mandatory Redemption Price. Mandatory Redemption Events
include, but are not limited to: the failure of the Company to timely
deliver Common Shares as required under the terms of the Series B Preferred
Shares or Warrants; the Company's failure to satisfy registration
requirements applicable to such securities; the failure by the Company's
stockholders to approve the transactions contemplated by the Securities
Purchase Agreement relating to the issuance of the Series B Preferred
Shares; the failure by the company to maintain the listing of its Common
Stock on NASDAQ or another national securities exchange; and certain
transactions involving the sale of assets or business combinations
involving the Company. In the event of any liquidation, dissolution or
winding of the Company, holders of the Series B Preferred Shares are
entitled to receive, prior and in preference to any distribution of any
assets of the Company to the holders of Common Stock, the Stated Value for
each Series B Preferred Share outstanding at that time. The Purchase
Agreement contains strict covenants that protect against hedging and
short-selling of OrthoLogic Common Stock while the purchasers hold 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 per share. These warrants expire in 2008. The
warrants were valued at $1,093,980. Additional costs of the private
placement were approximately $966,000. Both the value of the warrants and
the cost of the private placement 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 filed a registration
statement covering the underlying Common Stock.
Proceeds from the private placement are being 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.
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8. RELATED PARTIES
On February 9,1999, the Company loaned $157,800 to an officer of the
Company. The note plus accrued interest is payable on June 15,1999.
9. SUBSEQUENT EVENTS
The U.S. Food and Drug Administration ("FDA") on April 21,1999 approved, as
a pre-market approval ("PMA") supplement, an updated post-marketing Patient
Registry information sheet for the OrthoLogic (R) Bone Growth Stimulator.
This data reflects the new non-union definition approved by the FDA in June
1998 which states that a fracture is considered non-union when the fracture
site shows no visible progress signs of healing.
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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, 1998.
RESULTS OF OPERATIONS
REVENUES
The Company reported revenues of $21.0 million for the first quarter,
representing a 10.2% increase from revenues of $19.1 million for the first
quarter of 1998. Sales for the first quarter exceeded expectations.
GROSS PROFIT
Gross profit increased from $14.7 million for the three months ended March
31,1998 to $16.3 million for the three months ended March 31,1999. Gross profit
for the period, as a percentage of revenue, was 78% compared to 77% for the
comparable period during 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses for the three months ended
March 31, 1999 were $16.3 million, down $7.6 million from the comparable period
in 1998. The decrease from 1998 is due to the fact that first quarter of 1998
included an increase in the allowance for doubtful accounts over the normal
quarterly provision. During the first quarter of 1998, the Company recorded a
charge of approximately $9.3 million for additional bad debt expense. The charge
was a result of a management decision during the first quarter of 1998 to focus
proportionately more resources on collection of current sales and on
re-engineering the overall process of billing and collections. Management
determined it was 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.
The bad debt charge during the quarter ended March 31, 1999 was $8.2 million
less than the bad debt expense for the comparable period in 1998. The decrease
was partially offset by an increase in commission expense. Commission expenses
for the quarter ending March 31, 1999 were $1.6 million as compared to $1.2
million for the quarter ending March 31,1998. The increase in commission expense
is directly related to the increase in sales.
RESEARCH AND DEVELOPMENT
Research and Development ("R&D") expenses were $520,000 for the three months
ending March 31,1999 compared to $498,000 for the comparable 1998 period. There
are no significant variances between the two years.
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OTHER INCOME AND EXPENSES
Other income declined to $57,000 in the three months ending March 31, 1999 from
$97,000 during the same period in 1998. This decrease is attributed to a
reduction in cash and investments, which has yielded a reduction in interest
income earned.
LIQUIDITY AND CAPITAL RESOURCES
On March 31,1999, the Company had cash and investments of $4.9 million compared
to $7.8 million (including short-term investments) at December 31, 1998. The
change in cash and investments is primarily the result of a $1 million payment
under the Co-Promotion Agreement, a payment of $750,000 to Chrysalin and a $1.5
million increase in accounts receivable. Cash used by operations amounted to
$56,000 during the three month period. The Company has an available $7.5 million
accounts receivable revolving line of credit and a $2.5 million revolving term
line of credit with a bank.
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.
STATE OF READINESS: The Company has implemented a Year 2000 Corporate Compliance
Plan for coordinating and evaluating compliance activities in all business
activities. The Company's Plan includes a series of initiatives to ensure that
all the Company's computer equipment and software will function properly in the
next millennium. "Computer equipment (or hardware) and software" includes
systems generally thought of as IT dependent, as well as systems not obviously
IT dependent, such as manufacturing equipment, telecopier machines, and security
systems.
The Company began the implementation of this plan in fiscal year 1998. All
internal IT systems and non-IT systems were inventoried during the assessment
phase of the plan. The first execution of the plan occurred in June 1998 when
the Company transferred all internal processing systems for accounting,
manufacturing, third party billing, inventory and other operational processes to
Year 2000 compliant software. In addition, in the ordinary course of business,
as the Company periodically replaces computer equipment and software, it will
acquire only year 2000 compliant products. The Company presently believes that
its software replacements and planned modifications of certain existing computer
equipment and software will be completed on a timely basis so as to avoid any of
the potential Year 2000 related disruptions or malfunctions of its computer
equipment and software.
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The Company has completed its compliance review of virtually all of its products
and has not learned of any products that it manufactures that will cease
functioning or experience an interruption in operations as a result of the
transition to the year 2000.
COSTS: The Company has used both internal and external resources to reprogram or
replace, test and implement its IT and non-IT systems for Year 2000
modifications. The Company does not separately track the internal costs incurred
to date on the Year 2000 compliance. Such costs are principally payroll and
related costs for internal IT personnel. The cost to date have been less than
$100,000. Future costs related to Year 2000 compliance is anticipated to be less
than $100,000 for fiscal year 1999. External costs have been incurred for the
normal system upgrades and software conversions related to other operational
requirements.
RISKS: The Company believes it has an effective Plan in place to anticipate and
resolve any potential Year 2000 issues in a timely manner. In the event,
however, that the Company does not properly identify Year 2000 issues or that
compliance testing is not conducted on a timely basis, there can be no assurance
that Year 2000 issues will not materially and adversely affect the Company's
results of operations or relationships with third parties. In addition,
disruptions in the economy generally resulting from Year 2000 issues also could
materially and adversely affect the Company. The amount of potential liability
and lost revenue that would be reasonably likely to result from the failure by
the Company and certain key parties to achieve Year 2000 compliance on a timely
basis cannot be reasonably estimated at this time.
The Company currently believes that the most likely worst case scenario with
respect to the Year 2000 issue is the failure of third party insurance payors to
become compliant, which could result in the temporary interruption of the
payments received for services and products purchased. This could interrupt cash
payments received by the Company, which in turn would have a negative impact on
the Company.
CONTINGENCY PLAN: A contingency plan has not yet been developed for dealing with
the most likely worst case scenarios. As part of its continuous assessment
process, the Company is developing contingency plans as necessary. These plans
could include, but are not limited to, use of alternative suppliers and vendors,
substitutes for banking institutions, and the development of alternative
payments solutions in dealing with third party payors. The Company currently
plans to complete such contingency planning by December 1999.
These plans 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
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including projections of
results of operations and financial condition, statements of future economic
performance, and general or specific statements of future expectations and
beliefs. The matters covered by such forward-looking statements are subject to
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the
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Company to differ materially from those contemplated or implied by such
forward-looking statements. Important factors which may cause actual results to
differ include, but are not limited to, the following matters, which are
discussed in more detail in the Company's Form 10-K for the 1998 fiscal year:
The Company's lack of experience with respect to newly acquired technologies and
products may reduce the Company's ability to exploit the opportunites offered by
the acquisitions discussed in the annual report. Potential difficulties in
integrating the operations of newly acquired businesses may impact negatively on
the Company's ability to realize benefits from the acquisitions. The Company
intends to pursue sales in international markets. The Company, however, has had
little experience in such markets. Expanded efforts at pursuing new markets
necessarily involves expenditures to develop such markets and there can be no
assurance that the results of those efforts will be profitable. There can be no
assurance that the Company's estimates of the market will not cause the nature
and extent of that market to deviate materially from the Company's expectations.
To the extent that the Company presently enjoys perceived technological
advantages over competitiors, technological innovation by present or future
competitors may erode the Company's position in the market. To sustain long-term
growth, the Company must develop and introduce new products and expand
applications of existing products; however, there can be no assurance that the
Company will be able to do so or that the market will accept any such new
products or applications. The Company operates in a highly regulated environment
and cannot predict the actions of regulatory authorities. The action or
non-action of regulatory authorities may impede the development and introduction
of new products and new applications for existing products, and may have
temporary or permanent effects on the Company's marketing of its existing or
planned products. There can be no assurance that the influence of managed care
will continue to grow either in the United States or abroad, or that such growth
will result in greater acceptance or sales of the Company's products. In
particular, there can be no assurance that existing or future decision makers
and third party payors within the medical community will be receptive to the use
of the Company's products or replace or supplement existing or future
treatments. Moreover, the transition to managed care and the increasing
consolidation underway in the managed care industry may concentrate economic
power among buyers of the Company's products, which concentration could
foreseeable adversely affect the Company's margins. Although the company
believes that existing litigation initiated against the Company is without merit
and the Company intends to defend such litigation vigorously, an adverse outcome
of such litigation could have a material adverse effect on the Company's
business, financial condition and results of operation.
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Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Note 4 - Litigation" 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
None
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 May 10, 1999
- --------------------- (Principal Executive Officer)
Thomas R. Trotter
/s/ Terry D. Meier Sr. Vice-President and Chief Financial Officer May 10, 1999
- --------------------- (Principal Financial and Accounting Officer)
Terry D. Meier
</TABLE>
Page 14
<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-K FOR THE
YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 3,698,020
<SECURITIES> 1,248,270
<RECEIVABLES> 48,037,487
<ALLOWANCES> 19,536,927
<INVENTORY> 11,075,192
<CURRENT-ASSETS> 48,738,359
<PP&E> 23,514,591
<DEPRECIATION> 9,975,358
<TOTAL-ASSETS> 93,239,817
<CURRENT-LIABILITIES> 10,234,054
<BONDS> 0
0
14,794,002
<COMMON> 12,720
<OTHER-SE> 67,929,599
<TOTAL-LIABILITY-AND-EQUITY> 93,239,817
<SALES> 4,747,376
<TOTAL-REVENUES> 21,068,345
<CGS> 4,717,939
<TOTAL-COSTS> 16,258,590
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 149,014
<INCOME-TAX> 16,239
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 617,994
<CHANGES> 0
<NET-INCOME> (485,219)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
