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, 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
- ------------------------------- ------------------------------------
(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. [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.
25,520,590 shares of common stock outstanding as of June 30,1999
<PAGE>
ORTHOLOGIC CORP.
INDEX
Page No.
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Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30,1999 and December 31,1998 ............................ 2
Consolidated Statements of Operations and of
Comprehensive Income
Three months and six months ended June 30,1999 and 1998 ...... 3
Consolidated Statements of Cash Flows
Six months ended June 30,1999 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 4. Submission of Matters to Vote of Security Holders ............. 14
Item 5. Deadline for Shareholders Proposals ........................... 14
Item 6. Exhibits and Reports on Form 8-K .............................. 14
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
OrthoLogic, Corp.
Condensed Consolidated Balance Sheet
(in thousands)
Unaudited
June 30, December 31,
1999 1998
--------- ---------
ASSETS
Cash and cash equivalents $ 3,391 $ 1,714
Short term investments 501 6,053
Accounts receivable 29,349 27,031
Inventory 9,972 11,960
Prepaids and other current assets 1,383 799
Deferred income tax 2,637 2,643
--------- ---------
Total current assets 47,233 50,200
Furniture, rental fleet and equipment 24,664 21,962
Accumulated depreciation (11,035) (9,095)
--------- ---------
Furniture and equipment, net 13,629 12,867
Intangibles, net 29,747 30,568
Deposits and other assets 619 345
--------- ---------
Total assets $ 91,228 $ 93,980
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable $ 1,936 $ 3,039
Loan payable - current portion 125 500
Obligations under co-promotion agreement -- 1,000
Accrued liabilities 6,198 6,844
--------- ---------
Total current liabilities 8,259 11,383
Deferred rent and capital lease obligations 226 196
--------- ---------
Total liabilities 8,485 11,579
--------- ---------
Series B Convertible Preferred Stock 15,000 14,176
--------- ---------
Stockholders' Equity
Common stock 13 13
Additional paid-in capital 120,245 119,659
Accumulated deficit (52,265) (51,406)
Comprehensive income (loss) (250) (41)
--------- ---------
Total stockholders' equity 67,743 68,225
--------- ---------
Total liabilities and stockholders' equity $ 91,228 $ 93,980
========= =========
See notes to condensed consolidated financial statements
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OrthoLogic, Corp.
Condensed Consolidated Statement of Operations and of Comprehensive Income
(in thousands)
Unaudited
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 20,728 $ 17,501 $ 41,796 $ 36,610
Cost of revenues 4,609 4,203 9,327 8,619
-------- -------- -------- --------
Gross profit 16,119 13,298 32,469 27,991
Operating expenses
Selling, general and administrative 15,777 16,694 31,515 40,515
Research and development 556 545 1,076 1,043
Restructuring and other charges -- -- (399) --
-------- -------- -------- --------
Total operating expenses 16,333 17,239 32,591 41,159
Operating loss (214) (3,941) (122) (13,168)
Other income
Grant/other revenue -- -- 1 --
Interest income 46 40 102 137
-------- -------- -------- --------
Total other income 46 40 103 137
-------- -------- -------- --------
Loss before income taxes (168) (3,901) (19) (13,031)
Provision for income taxes -- -- 16 --
Net loss $ (168) $ (3,901) $ (35) $(13,031)
======== ======== ======== ========
Accretion of non-cash preferred stock dividend (206) -- (824) --
-------- -------- -------- --------
Net loss applicable to common shareholder $ (374) $ (3,901) $ (859) $(13,031)
======== ======== ======== ========
BASIC EARNINGS PER SHARE
Net loss per common share $ (0.01) $ (0.15) $ (0.03) $ (0.52)
-------- -------- -------- --------
Weighted average number of common
shares outstanding $ 25,492 $ 25,293 $ 25,436 $ 25,276
-------- -------- -------- --------
DILUTED EARNINGS PER SHARE
Net loss per common and equivalent shares $ (0.01) $ (0.15) $ (0.03) $ (0.52)
-------- -------- -------- --------
Weighted shares outstanding 25,492 25,293 25,436 25,276
-------- -------- -------- --------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Net loss applicable to common shareholders (374) (3,901) (859) (13,031)
Foreign translation adjustment (45) (22) (209) (35)
-------- -------- -------- --------
Comprehensive loss applicable to common
shareholders (419) (3,923) (1,068) (13,066)
</TABLE>
See notes to condensed consolidated financial statements
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<PAGE>
ORTHOLOGIC, CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
Six months ended June 30,
-------------------------
1999 1998
-------- --------
OPERATING ACTIVITIES
Net loss $ (35) $(13,031)
Noncash items:
Depreciation and amortization 3,062 3,913
Net change on other operating items:
Accounts receivable (2,319) 7,344
Inventory 1,988 (2,346)
Prepaids and other current assets (577) 75
Deposits and other assets (274) (297)
Accounts payable (1,102) 685
Accrued liabilities (646) (2,201)
-------- --------
Cash flows provided by (used in) operating
activities 97 (5,858)
-------- --------
INVESTING ACTIVITIES
Purchase of fixed assets, net (2,833) (5,167)
Cash paid for acquisition, net (171) (81)
Investment in Chrysalis -- (750)
Sales (Purchases) of short-term investments 5,552 4,568
-------- --------
Cash flows provided by (used in) investing
activities 2,548 (1,430)
-------- --------
FINANCING ACTIVITIES
Payments on capital leases 30 (402)
Payment on loan payable (375) 1,504
Payments under co-promotion agreement (1,000) (1,000)
Foreign exchange (209) (49)
Net proceeds from stock option exercises 586 240
-------- --------
Cash flows provided by (used in) financing
activities (968) 293
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,677 (6,995)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 1,714 7,783
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,391 $ 788
======== ========
Supplemental disclosure of cash flow information
Accretion of non-cash preferred stock dividend 824 0
Cash paid during the period for interest 56 30
See notes to condensed consolidated financial statements
Page 4
<PAGE>
ORTHOLOGIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION
The consolidated balance sheet as of June 30,1999, and the consolidated
statements of operations and comprehensive income for the three months ended
June 30, 1999 and 1998 and six months ended June 30, 1999 and 1998 and the
consolidated statements of cash flows for the six months ended June 30, 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. In the opinion of management, adequate
allowances have been provided for doubtful accounts and contractual
adjustments. However, these estimates are subject to adjustments in the near
term, which could be material. 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 $2.0 and $1.8 million was recognized during the second
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 has elected not to exercise its
option to license worldwide (excluding the US) development, marketing and
distribution rights for Chrysalin for fracture and orthopedic applications
which expired on June 30, 1999. 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.
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
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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. The Court denied the motion
in July 1999 and discovery is proceeding in the case.
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 has been stayed pending action in
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 June 30,1999, 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 proceedings
will not have a material effect on the financial position, 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 30, 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. 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 $15 million (prior
to costs). The Series B Convertible Preferred Stock will automatically
convert, to the extent not previously converted, into Common Stock four years
following the date of issuance. Each share of Series B Convertible Preferred
Stock is convertible into Common Stock at a per share price equal to the
lesser of the average of the 10 lowest closing bids during the 30 days prior
to conversion or, 103% of the average of the closing bids for the 10 days
prior to the 300th day following the issuance ($ 3.0353). In the event of
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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 up 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 were 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.
7. RELATED PARTIES
On June 15, 1999, the Company extended the maturity date on a loan of
$157,800 to an officer of the Company to February 15, 2000.
8. PRE-MARKET APPROVAL SUPPLEMENT
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.
9. LEGAL SETTLEMENT
The Company expensed funds in the second quarter of 1998 to settle a false
claims matter with the U.S. Department of Justice in a case that was filed in
December 1996 under qui tam provisions of the Federal False Claims Act. The
allegations included the submission of claims for reimbursement for a small
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number of custom medical devices to various federal care programs including
Medicare, TRICARE (formerly known as CHAMPUS) and various state Medicaid
programs.
OrthoLogic denies any wrongdoing or liability with respect to the allegations
in this matter. Nevertheless, in an effort to avoid the expense, burden and
uncertianty 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,
OrthoLogic paid and in the second quarter of 1998 expensed $1.0 million to
the U.S. Department of Justice, on behalf of several federal health care
programs including Medicare, TRICARE, and various state Medicaid programs. In
return, the U.S. Department of Justice released 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.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION 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 $20.7 million for the second quarter of 1999
representing an 18% increase over revenues of $17.5 million for the same quarter
of 1998. The increase in sales was attributable to increased demand for the
Continuous Passive Motion products and Hyalgan. Sales for the OL-1000 Bone
Growth Stimulator held consistent with prior quarters' sales. The Company's
revenues increased 14% to $41.8 million for the six months ended June 30, 1999
from $36.6 million for the six months ended June 30, 1998
GROSS PROFIT
Gross profits increased from $13.3 million for the three months ended June 30,
1998 to $16.1 million for the three months ended June 30, 1999, a 21% increase.
Gross profits as a percentage of revenues was 78% for the quarter compared to
76% for the same period last year. For the six months ended June 30, 1999, gross
profits was $32.5 million as compared to $28.0 million for the six months ended
June 30, 1998. The change in gross profit represents an increase of 16% for the
six months ended June 30, 1999 compared to June 30, 1998. Gross profits as a
percentage of revenues was 76% for the six month period ended June 30, 1998 and
increased to 78% for the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SGA") expenses for the three months ended
June 30, 1999 were $15.8 million, a decrease from $16.7 million for the three
months ended June 30, 1998. The most significant reason for the reduction in SGA
expenses was due to a legal settlement in the period ended June 30, 1998, a
reduction in other outside purchased services, and a reduction in advertising
expenses. SGA expenses for the six months ended June 30, 1999 were $31.5
million, a decrease from $40.5 million for the six months ended June 30, 1998, a
decrease of 22%. The decrease from 1998 is due to the fact that the 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
expenses. The charge was the 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.
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RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses remained relatively unchanged with
expenses of $556,000 in the period ended June 30, 1999 compared to $545,000 for
the same period last year. R&D expenses for the six months ended June 30, 1999
totaled $1.1 million, a slight increase over the $1.0 million expense for the
six months ended June 30, 1998.
OTHER INCOME AND EXPENSES
Other income, consisting of interest income, increased slightly from $40,000 to
$46,000 for the periods ended June 30, 1998 and 1999 respectively. For the six
month period ended June 30, 1999, other income declined to $103,000 from
$137,000 for the same period in the previous year.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 1999 the Company had cash and investments of $3.9 million compared
to $7.8 million as of 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 $2.3 million increase in accounts
receivable. Cash provided by operations amounted to $97,000 during the six month
period ended June 30, 1999. 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 and short-term investments on hand, cash
from operations and the funds available from the line of credit and revolving
term loan will be sufficient to meet the Company's presently projected cash and
working capital requirements for the next 12 months. There can be no assurances,
however, that this will prove to be the case. The timing and amounts of cash
used will depend on many factors, including the Company's ability to continue to
increase revenues, reduce and control its expenditures, become profitable and
collect amounts due from third party payors. Additional funds may be required if
the Company is not successful in any of these areas. The Company's ability to
continue funding its planned operations beyond the next 12 months is dependent
on its ability to generate sufficient cash flow to meet its obligations on a
timely basis, or to obtain additional funds through equity or debt financing, or
from other sources of financing, as may be required.
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 (the "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"
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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.
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 October 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
Page 12
<PAGE>
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 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.
Page 13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Note 4 - Litigation" of the Notes to Consolidated Financial Statements
above.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The annual meeting of the stockholders of the Company was held on May 4, 1999 to
vote on: the election of Class II Directors (Proposal 1); an amendment to the
Company's 1997 Stock Option Plan to increase the number of shares of Common
Stock available for grant thereunder by 275,000 shares (Proposal 2); to approve
the issuance and sale of Series B Convertible Preferred Shares and the
reservation for issuance and the issuance of Shares of Common Stock upon
conversion of the Series B Convertible Preferred Shares (Proposal 3); to amend
the Company's Certificate of Incorporation to increase the number of authorized
Shares of Common Stock from 40,000,000 to 50,000,000 shares (Proposal 4); and
the ratification of Deloitte & Touche LLP as independent accountant for the
fiscal year ending December 31,1999 (Proposal 5). The results are as follows:
Proposal 1
For Withheld Abstain Broker NonVotes
--- -------- ------- ---------------
John Holliman III 23,123,162 248,286 0 0
Augustus A. White III, M.D. 23,140,712 246,736 0 0
For Against Abstain Broker NonVotes
--- ------- ------- ---------------
Proposal 2 20,592,488 2,695,164 99,796
Proposal 3 14,992,620 903,603 97,056 0
Proposal 4 22,295,093 1,022,473 69,882 0
Proposal 5 23,239,227 106,030 42,191 0
A more detailed discussion of each proposal is included in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders.
The Company's directors continuing in office are: Stuart H. Altman, Ph.D.,
Elwood D. Howse, Jr., Frederic J. Feldman, Ph.D., and Thomas R Trotter.
ITEM 6. EXHIBITS AND REPORTS
(a) Exhibit Index
See Exhibit Index following the signature page which is incorporated
herein by reference.
(b) Reports on Form 8-K
None
Page 14
<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.
ORTHOLOGIC CORP.
(Registrant)
Signature Title Date
--------- ----- ----
/s/ Thomas R. Trotter President and Chief Executive July 30, 1999
- -------------------------- Officer (Principal Executive
Thomas R. Trotter Officer)
/s/ Terry D. Meier Sr. Vice-President and July 30, 1999
- -------------------------- Chief Financial Officer (Principal
Terry D. Meier Financial and Accounting Officer)
Page 15
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
<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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,390,846
<SECURITIES> 500,890
<RECEIVABLES> 46,237,178
<ALLOWANCES> 16,887,576
<INVENTORY> 9,972,400
<CURRENT-ASSETS> 47,233,257
<PP&E> 24,663,727
<DEPRECIATION> 11,034,884
<TOTAL-ASSETS> 91,227,934
<CURRENT-LIABILITIES> 8,259,289
<BONDS> 0
0
15,000,000
<COMMON> 12,759
<OTHER-SE> 67,729,534
<TOTAL-LIABILITY-AND-EQUITY> 91,227,934
<SALES> 9,520,900
<TOTAL-REVENUES> 41,796,302
<CGS> 9,326,922
<TOTAL-COSTS> 32,591,115
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (18,716)
<INCOME-TAX> 16,239
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 823,992
<CHANGES> 0
<NET-INCOME> (858,947)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
