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, 1999
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
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. [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.
27,280,058 shares of common stock outstanding as of September 30,1999
<PAGE>
ORTHOLOGIC CORP.
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30,1999 and December 31,1998 3
Consolidated Statements of Operations and of
Comprehensive Income Three months and nine months
ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows
Nine months ended September 30,1999 and 1998 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OrthoLogic, Corp.
Condensed Consolidated Balance Sheet
(in thousands)
Unaudited
September 30, December 31,
1999 1998
--------- ---------
ASSETS
Cash and cash equivalents $ 5,056 $ 1,714
Short term investments 488 6,053
Accounts receivable 29,541 27,031
Inventory 10,111 11,960
Prepaids and other current assets 1,145 799
Deferred income tax 2,634 2,643
--------- ---------
Total current assets 48,975 50,200
Furniture, rental fleet and equipment 25,472 21,962
Accumulated depreciation (12,093) (9,095)
--------- ---------
Furniture and equipment, net 13,379 12,867
Intangibles, net 29,248 30,568
Deposits and other assets 637 345
--------- ---------
Total assets $ 92,239 $ 93,980
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable $ 2,597 $ 3,039
Loan payable - current portion -- 500
Obligations under co-promotion agreement -- 1,000
Accrued liabilities 6,647 6,844
--------- ---------
Total current liabilities 9,244 11,383
Deferred rent and capital lease obligations 185 196
--------- ---------
Total liabilities 9,429 11,579
--------- ---------
Series B Convertible Preferred Stock 10,950 14,176
--------- ---------
Stockholders' Equity
Common stock 14 13
Additional paid-in capital 124,372 119,659
Accumulated deficit (52,213) (51,406)
Comprehensive income (loss) (313) (41)
--------- ---------
Total stockholders' equity 71,860 68,225
--------- ---------
Total liabilities and stockholders' equity $ 92,239 $ 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, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 20,258 $ 17,739 $ 62,054 $ 54,350
Cost of revenues 4,672 4,293 13,999 12,912
-------- -------- -------- --------
Gross profit 15,586 13,446 48,055 41,438
Operating expenses
Selling, general and administrative 14,937 15,824 46,452 56,344
Research and development 625 1,425 1,701 2,468
Restructuring and other charges -- -- -- (399)
-------- -------- -------- --------
Total operating expenses 15,562 17,249 48,153 58,413
Operating income (loss) 24 (3,803) (98) (16,975)
-------- -------- -------- --------
Other income
Grant/other revenue 1 2 2 2
Interest income 51 130 153 267
-------- -------- -------- --------
Total other income 52 132 155 269
-------- -------- -------- --------
Income (loss) before income taxes 76 (3,671) 57 (16,706)
-------- -------- -------- --------
Provision for income taxes 24 -- 40 --
-------- -------- -------- --------
Net income (loss) $ 52 $ (3,671) $ 17 $(16,706)
======== ======== ======== ========
Accretion of non-cash preferred stock dividend -- (618) (824) (618)
-------- -------- -------- --------
Net loss applicable to common shareholder $ 52 $ (4,289) $ (807) $(17,324)
======== ======== ======== ========
BASIC EARNINGS PER SHARE
Net loss per common share $ 0.00 $ (0.17) $ (0.03) $ (0.69)
-------- -------- -------- --------
Weighted average number of common shares
outstanding 25,860 25,300 25,579 25,287
-------- -------- -------- --------
DILUTED EARNINGS PER SHARE
Net loss per common and equivalent shares $ 0.00 $ (0.17) $ (0.03) $ (0.69)
-------- -------- -------- --------
Weighted shares outstanding 30,516 25,300 25,579 25,287
-------- -------- -------- --------
Consolidated Statement of Comprehensive Income
Net income (loss) applicable to common
shareholders $ 52 $ (4,289) $ (807) $(17,324)
Foreign translation adjustment (63) (145) (272) (180)
======== ======== ======== ========
Comprehensive loss applicable to common
shareholders $ (11) $ (4,433) $ (1,080) $(17,504)
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements
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ORTHOLOGIC, CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
Nine months ended
Sept. 30,
---------------------
1999 1998
-------- --------
OPERATING ACTIVITIES
Net loss $ 17 $(16,706)
Noncash items:
Depreciation and amortization 4,654 5,464
Net change on other operating items:
Accounts receivable (2,510) 8,340
Inventory 1,849 (1,863)
Prepaids and other current assets (337) 287
Deposits and other assets (292) (203)
Accounts payable (442) (847)
Accrued liabilities (197) (3,624)
-------- --------
Cash flows provided by (used in)
operating activities 2,742 (9,152)
-------- --------
INVESTING ACTIVITIES
Purchase of fixed assets, net (3,675) (5,186)
Cash paid for acquisition, net (171) (81)
Investment in Chrysalis -- (750)
Sales (Purchases) of short-term investments 5,565 (1,567)
-------- --------
Cash flows provided by (used in)
investing activities 1,719 (7,584)
-------- --------
FINANCING ACTIVITIES
Payments on capital leases (11) (155)
Payment on loan payable (500) (375)
Payments under co-promotion agreement (1,000) (2,000)
Foreign exchange (272) (194)
Proceeds from issuance of convertible
preferred stock and warrants (net) 14,034
Net proceeds from stock option exercises 664 240
-------- --------
Cash flows provided by (used in)
financing activities (1,119) 11,550
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,342 (5,186)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 1,714 7,783
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,056 $ 2,597
======== ========
Supplemental disclosure of cash flow information
Accretion of non-cash preferred stock dividend $ 824 $ 618
Cash paid during the period for interest 70 70
Cash paid during the period for income taxes -- --
See notes to condensed consolidated financial statements
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ORTHOLOGIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION
The consolidated balance sheet as of September 30, 1999, and the
consolidated statements of operations and comprehensive income for the
three months ended September 30, 1999 and 1998 and nine months ended
September 30, 1999 and 1998 and the consolidated statements of cash flows
for the nine months ended September 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.
The Company's sales force began to promote Hyalgan in the third quarter of
1997.
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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 facts. The Company filed a Motion to Dismiss the Complaint in
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Arizona State Court in May 1999. The Court denied the motion in July 1999
and discovery is proceeding in the case. Plaintiffs' Motion for the Class
Certification is currently pending before the 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 is also
pending in the United States District Court for the District of Arizona.
The Company filed a Motion to Dismiss the Complaint, which is still
pending.
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 September 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 $5.75. 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 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
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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.
As of September 30, 1999, 4,050 shares of Series B Convertible Preferred
Stock had been converted into 1,727,468 shares of Common Stock.
7. RELATED PARTIES
In the second quarter of 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.
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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.
OrthoLogic denies any wrongdoing or liability with respect to the
allegations in this matter. Nevertheless, in an 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, 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.
10. SUBSEQUENT EVENTS
As part of the license agreement (See Note 3), and in conjunction with FDA
clearance to begin human trials on Chrysalin, the Company will make and
expense a $500,000 milestone payment to Chrysalis BioTechnology, Inc. in
the last quarter of 1999.
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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 $20.3 million for the third quarter of 1999
representing a 14% increase over revenues of $17.7 million for the same quarter
of 1998. Sales for both Fracture Healing and Hyalgan increased over the previous
two quarters. The Company's revenues increased 14% to $62.1 million for the nine
months ended September 30, 1999 from $54.4 million for the nine months ended
September 30, 1998.
GROSS PROFIT
Gross profits increased from $13.4 million for the three months ended September
30, 1998 to $15.6 million for the three months ended September 30, 1999, a 16%
increase. Gross profits as a percentage of revenues was 77% for the quarter
compared to 76% for the same period last year. For the nine months ended
September 30, 1999, gross profits was $48.1 million as compared to $41.4 million
for the nine months ended September 30, 1998. Gross profits as a percentage of
revenues was 76% for the nine month period ended September 30, 1998 and
increased to 77% for the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SGA") expenses for the three months ended
September 30, 1999 were $14.9 million, a decrease from $15.8 million for the
three months ended September 30, 1998. SGA expenses for the nine months ended
September 30, 1999 were $46.5 million, a decrease from $56.3 million for the
nine months ended September 30, 1998, a decrease of 18%. 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. This reduction
in bad debt was partially offset by standard additional reserves which relate to
the sales increases previously discussed. SGA expenses for the nine month period
also decreased due to the reduction in outside consulting fees by $1.8 million
in 1999 compared to 1998.
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RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses declined with expenses of $625,000 in
the three month period ended September 30, 1999 compared to $1.4 million for the
same period last year. R&D expenses for the nine months ended September 30, 1999
totaled $1.7 million, a decrease from the $2.5 million expense for the nine
months ended September 30, 1998. This decline was caused by a $750,000 accrued
expense in the third quarter of 1998 for the initial license fee for Chrysalin.
In addition, 1998 R&D expenses include costs associated with the new single coil
version of the OL-1000 to the thigh and long bone of the upper arms which was
introduced in 1998 and no longer in R&D.
OTHER INCOME AND EXPENSES
Other income, consisting primarily of interest income, decreased from $132,000
to $52,000 for the three month periods ended September 30, 1999 and 1998
respectively. For the nine month period ended September 30, 1999, other income
declined to $155,000 from $269,000 for the same period in the previous year.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1999 the Company had cash and investments of $5.5 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 $2.5 million
increase in accounts receivable, primarily as a result of increased revenues.
Cash provided by operations amounted to $2.7 million during the nine month
period ended September 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 payers. 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
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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 believes that its
software replacements and planned modifications of certain existing computer
equipment and software was completed on a timely basis 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: As part of its continuous assessment process, the Company is
developing contingency plans as necessary. These plans 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.
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.
Page 13
<PAGE>
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 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 14
<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
None
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 15
<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 November 10, 1999
- ------------------------- Officer (Principal Executive
Thomas R. Trotter Officer)
/s/ Terry D. Meier Sr. Vice-President and Chief November 10, 1999
- ------------------------- Financial Officer (Principal
Terry D. Meier Financial and Accounting
Officer)
Page 16
<PAGE>
OrthoLogic Corp.
Exhibit Index to Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 1999
Incorporated by Filed
Exhibit No Description Reference to: Herewith
- ---------- ----------- --------------- --------
27 Financial Data Schedule X
Page 17
<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>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 5,055,773
<SECURITIES> 488,300
<RECEIVABLES> 46,936,043
<ALLOWANCES> 17,395,520
<INVENTORY> 10,110,740
<CURRENT-ASSETS> 48,974,279
<PP&E> 25,472,307
<DEPRECIATION> 12,092,739
<TOTAL-ASSETS> 92,238,778
<CURRENT-LIABILITIES> 9,244,717
<BONDS> 0
0
10,950,000
<COMMON> 13,639
<OTHER-SE> 71,845,121
<TOTAL-LIABILITY-AND-EQUITY> 92,238,778
<SALES> 15,213,070
<TOTAL-REVENUES> 62,054,661
<CGS> 13,998,973
<TOTAL-COSTS> 48,153,356
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 56,806
<INCOME-TAX> 40,239
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 823,992
<CHANGES> 0
<NET-INCOME> (807,425)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
