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, 2000
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. 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.
30,163,224 shares of common stock outstanding as of October 31, 2000
<PAGE>
ORTHOLOGIC CORP.
INDEX
PAGE NO.
--------
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 ......................3
Condensed Consolidated Statements of Operations and of
Comprehensive Income Three months and nine months ended
September 30, 2000 and 1999 ...................................4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999 .................5
Notes to Consolidated Financial Statements ......................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................10
Item 3. Quantitative and Qualitative Disclosures About Market Risks ....13
Part II Other Information
Item 1. Legal Proceedings ..............................................14
Item 6. Exhibits and Reports on Form 8-K ...............................14
2
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
OrthoLogic Corp.
Condensed Consolidated Balance Sheets
(in thousands)
Unaudited
September 30, December 31,
2000 1999
--------- ---------
ASSETS
Cash and cash equivalents $ 7,132 $ 6,023
Short term investments -- 250
Accounts receivable, net 29,580 30,429
Inventory, net 10,326 9,306
Prepaids and other current assets 843 987
Deferred income tax 2,622 2,631
--------- ---------
Total current assets 50,503 49,626
Rental fleet, furniture and equipment 28,648 26,361
Accumulated depreciation (16,748) (13,300)
--------- ---------
Fleet, furniture and equipment, net 11,900 13,061
Intangibles, net 27,254 28,749
Deposits and other assets 674 767
--------- ---------
Total assets $ 90,331 $ 92,203
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable $ 3,545 $ 2,569
Accrued liabilities 5,214 6,192
--------- ---------
Total current liabilities 8,759 8,761
Deferred rent and capital lease obligations 167 209
--------- ---------
Total liabilities 8,926 8,970
--------- ---------
Series B Convertible Preferred Stock 3,690 10,180
--------- ---------
Stockholders' Equity
Common stock 15 14
Additional paid-in capital 131,882 125,206
Common stock to be used for legal settlement 2,969
Accumulated deficit (56,955) (51,992)
Comprehensive loss (196) (175)
--------- ---------
Total stockholders' equity 77,715 73,053
--------- ---------
Total liabilities and stockholders' equity $ 90,331 $ 92,203
========= =========
See notes to condensed consolidated financial statements
3
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OrthoLogic Corp.
Condensed Consolidated Statements 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,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 21,011 $ 20,258 $ 66,041 $ 62,054
Cost of revenues 4,302 4,672 13,406 13,999
-------- -------- -------- --------
Gross profit 16,709 15,586 52,635 48,055
Operating expenses
Selling, general and administrative 16,943 14,937 50,446 46,452
Research and development 2,645 625 3,859 1,701
Legal settlement 3,552 0 3,552
-------- -------- -------- --------
Total operating expenses 23,140 15,562 57,857 48,153
Operating income (loss) (6,431) 24 (5,222) (98)
-------- -------- -------- --------
Other income
Grant/other revenue 0 0 0 2
Interest income 112 52 298 153
-------- -------- -------- --------
Total other income 112 52 298 155
-------- -------- -------- --------
Income (loss) before income taxes (6,319) 76 (4,924) 57
-------- -------- -------- --------
Provision for income taxes (112) 24 39 40
-------- -------- -------- --------
Net income (loss) $ (6,207) $ 52 $ (4,963) $ 17
======== ======== ======== ========
Accretion of non-cash preferred stock dividend 0 0 0 (824)
-------- -------- -------- --------
Net income (loss) applicable to common
shareholders $ (6,207) $ 52 $ (4,963) $ (807)
======== ======== ======== ========
BASIC EARNINGS PER SHARE
Net income (loss) per common share $ (0.21) $ 0.00 $ (0.17) $ (0.03)
-------- -------- -------- --------
Weighted average number of common shares
outstanding 30,163 25,860 29,730 25,579
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Net income (loss) per common and equivalent shares $ (0.21) $ 0.00 $ (0.17) $ (0.03)
-------- -------- -------- --------
Weighted shares outstanding 30,163 30,516 29,730 25,579
-------- -------- -------- --------
Consolidated Statement of Comprehensive Income
Net income (loss) applicable to common
shareholders $ (6,207) $ 52 $ (4,963) $ (807)
Foreign translation adjustment 53 (63) (21) (272)
-------- -------- -------- --------
Comprehensive loss applicable to common
shareholders $ (6,154) $ (11) $ (4,984) $ (1,079)
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements
4
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ORTHOLOGIC CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
Nine months ended
September 30,
--------------------
2000 1999
------- -------
OPERATING ACTIVITIES
Net income (loss) $(4,963) $ 17
Noncash items:
Depreciation and amortization 4,275 4,654
Common stock to be used for legal settlement 2,969 0
Net change on other operating items:
Accounts receivable 849 (2,510)
Inventory (1,020) 1,849
Prepaids and other current assets 153 (337)
Deposits and other assets 93 (292)
Accounts payable 976 (442)
Accrued liabilities (978) (197)
------- -------
Cash flows provided by operating activities 2,354 2,742
------- -------
INVESTING ACTIVITIES
Purchase of fixed assets (1,619) (3,675)
Cash paid for acquisition -- (171)
Sales of short-term investments 250 5,565
------- -------
Cash flows provided by (used in)
investing activities (1,369) 1,719
------- -------
FINANCING ACTIVITIES
Payments on capital leases (42) (11)
Payment on loan payable -- (500)
Payments under co-promotion agreement -- (1,000)
Foreign exchange (21) (272)
Net proceeds from stock option exercises 187 664
------- -------
Cash flows provided by (used in)
financing activities 124 (1,119)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,109 3,342
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,023 1,714
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,132 $ 5,056
======= =======
Supplemental disclosure of cash flow information
Accretion of non-cash preferred stock dividend $ 0 $ 824
Cash paid during the period for interest 100 70
See notes to condensed consolidated financial statements
5
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ORTHOLOGIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statement Presentation
The condensed consolidated balance sheet as of September 30, 2000, and the
condensed consolidated statements of operations and comprehensive income
for the three months ended September 30, 2000 and 1999 and nine months
ended September 30, 2000 and 1999 and the condensed consolidated statements
of cash flows for the nine months ended September 30, 2000 and 1999 are
unaudited. However, in the opinion of management, such financial statements
include all adjustments (consisting only of normal recurring adjustments,
except for the legal settlement recorded in the three months ended
September 30, 2000) 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,
1999 is derived from the Company's audited financial statements included in
the 1999 Annual Report on Form 10-K. These financial statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's 1999 Annual Report on Form 10-K.
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. Actual results could differ from
these estimates. Significant estimates in the accompanying financial
statements include the allowance for doubtful accounts and sales discounts
and adjustments, which are 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 period
finalized.
2. Co-Promotion Agreement for Hyalgan
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. Subsequent to September 30,
2000, it was announced that the Company and Sanofi had mutually agreed to
terminate this agreement. The Company will return the rights to sell
Hyalgan back to Sanofi. The Company will receive in the fourth quarter an
up-front cash payment, financial incentives to complete a successful
transition of the business by January 1, 2001, and continuing royalties for
the next two years. Hyalgan revenues were $2.1 million and 6.2 million in
the quarter ended and the nine months ended September 30, 2000,
respectively.
6
<PAGE>
3. Licensing Agreement for Chrysalin
The Company announced in January 1998 that it had acquired a minority
equity interest in a biotech firm, Chrysalis BioTechnology, Inc.
("Chrysalis") 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 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 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 fracture indications. As part of the
license agreement, and in conjunction with the U.S. Food and Drug
Administration (the "FDA") clearance to begin human clinical trials,
OrthoLogic made a $500,000 milestone payment to Chrysalis which was
expensed in the fourth quarter of 1999. In January 2000, the Company began
enrolling patients in the combined Phase I/II clinical trial for Chrysalin.
The clinical trial is ongoing and is expected to be completed by the end of
2000.
In July 2000, the Company announced it was extending its license agreement
with Chrysalis to include all Chrysalin orthopedic indications worldwide.
Under the terms of the agreement, OrthoLogic paid Chrysalis a license fee
of $2 million. This fee resulted in a one-time charge to earnings during
the third quarter ended September 30, 2000. In addition, the agreement
calls for the Company to pay certain milestone payments and royalty fees,
based upon products developed and achievement of commercial success.
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.
Subsequent to September 30, 2000, the Company announced that it had entered
into a Memorandum of Understanding regarding settlement of the lawsuit. The
settlement consists of $1 million in cash and one million shares of newly
issued OrthoLogic Common Stock valued at $2,969,000. The Company
anticipates that a significant portion (approximately $800,000) of the cash
payment will be funded from its directors' and officers' liability
insurance policy. During the quarter-ended September 30, 2000, the Company
recorded a $3.6 million charge, including legal expenses, for the
settlement of the litigation. The settlement is subject to approval by the
lead plaintiffs and the defendants; the preparation, execution and filing
of a formal Stipulation of Settlement; notice to settlement class members;
and final approval of the settlement by the courts at a hearing. Management
believes the settlement is in the best interests of the Company and its
shareholders as it frees the Company from the cost and significant
distraction of ongoing litigation. The agreement to the Memorandum of
Understanding does not constitute, and should not be construed as, an
admission that the defendants have any liability to or acted wrongfully in
any way with respect to the plaintiffs or any other person.
7
<PAGE>
At September 30, 2000, 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 the allegations and
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 any current
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 a $10 million accounts receivable revolving line of credit
with a bank. The Company may borrow up to 75% of the eligible accounts
receivable. The interest rate on the note is at prime. Interest accruing on
the note and a monthly administration fee is due in arrears on the first
day of each month. The revolving note matures February 28, 2003. There are
certain financial covenants and reporting requirements associated with the
loan. Included in the financial covenants are (1) tangible net worth of not
less that $43 million, (2) the ratio of current assets to current
liabilities of not less than 2.0 to 1.0, (3) a debt to tangible net worth
ratio of not less that .50 to 1.0, and (4) capital expenditures not to
exceed more than $7.0 million during any fiscal year. There were no
outstanding borrowings at September 30, 2000.
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, $ 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 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 to
maintain the listing of its Common Stock on NASDAQ or a 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 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 ended April 1999 as an "accretion of non-cash Preferred
8
<PAGE>
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 and Chrysalin as well as to complete
the re-engineering of the Company's key business processes.
As of September 30, 2000, 11,310 shares of Series B Convertible Preferred
Stock had been converted into 4,486,997 shares of Common Stock.
7. Exclusive Sales Agreement for SpinaLogic
The Company signed an exclusive worldwide sales agreement for a 10-year
period, beginning August 18, 2000 with DePuy AcroMed, Inc. ("DePuy"), a
unit of Johnson & Johnson whereby DePuy will assume sales responsibility
for SpinaLogic, the Company's device used as an adjunctive treatment after
lumbar spinal fusion surgeries. This sales transition began in the third
quarter with expected full implementation by the end of 2000.
8. New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133 (SFAS No. 133), Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 was amended by SFAS No. 137 and 138. SFAS No. 133,
as amended, requires that an enterprise recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. The statement is effective in the first
quarter of 2001. The Company has substantially completed the process of
evaluating the impact of adopting SFAS No. 133 and does not believe that
the effect will be material to the financial statements.
9
<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,
1999.
RESULTS OF OPERATIONS
REVENUES
The Company reported revenues of $21.0 million for the third quarter of
2000 representing a 3.4% increase over revenues of $20.3 million for the
same quarter of 1999. The Company's revenues increased 6.4% to $66.0
million for the nine months ended September 30, 2000 from $62.0 million for
the nine months ended September 30, 1999. The growth in sales was primarily
driven by increased sales of SpinaLogic and the OL-1000. The Company had
anticipated that SpinaLogic sales would be adversely affected by the start
of the new sales agreement with its new distributor, however, sales in the
third quarter were better than projected. OL-1000 sales were positively
affected by the introduction of the Single Coil Size 2 unit and residual
benefits from the changes in Medicare guidelines for reimbursement of bone
growth stimulators enacted earlier this year. Sales for Continuous Passive
Motion ("CPM") devices declined for both the third quarter and first nine
months of the year compared with comparable periods in 1999. The Company
has focused attention on improving profitability of the CPM business and is
exploring alternatives.
GROSS PROFIT
Gross profit increased from $15.6 million for the three months ended
September 30, 1999 to $16.7 million for the three months ended September
30, 2000, a 7.0% increase. Gross profit as a percentage of revenues was
79.5% for the quarter compared to 76.9% for the same period last year. For
the nine months ended September 30, 2000, gross profit was $52.6 million as
compared to $48.1 million for the nine months ended September 30, 1999.
Gross profit as a percentage of revenues was 77.4% for the nine-month
period ended September 30, 1999 and increased to 79.7% for the same period
in 2000. Gross profit improved due to increased sales of the Company's
higher margin products: the OL-1000 and SpinaLogic.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SGA") expenses (including legal
settlement) for the three months ended September 30, 2000 were $20.5
million, an increase from $14.9 million for the three months ended
September 30, 1999. SGA expenses for the nine months ended September 30,
2000 were $54.0 million, an increase from $46.4 million for the nine months
ended September 30, 1999. These increases occurred due to higher sales
volume, the launch and transition to a new distributor of SpinaLogic sales,
and the settlement of the lawsuit.
The settlement of the lawsuit is discussed in "Part II Item 1, Legal
Proceedings" and Note 4 of the Financial Statements. The settlement,
including legal expenses of approximately $400,000, totaled $3.6 million in
the quarter-ended September 30, 2000.
10
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses increased to $2.6 million in the
three-month period ended September 30, 2000 compared to $625,000 for the
same period last year. R&D expenses for the nine months ended September 30,
2000 totaled $3.9 million, an increase from the $1.7 million for the nine
months ended September 30, 1999. This increase reflects expenses associated
with the Chrysalin clinical trials and, as discussed in Note 3 of the Notes
to Condensed Consolidated Financial Statements, a $2 million payment to
extend the licensing rights for all orthopedic implications worldwide for
Chrysalin.
OTHER INCOME AND EXPENSES
Other income, consisting primarily of interest income, increased from
$52,000 to $112,000 for the three-month periods ended September 30, 1999
and 2000 respectively. For the nine-month period ended September 30, 2000,
other income increased to $298,000 from $153,000 for the same period in the
previous year.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2000 the Company had cash and investments of $7.1 million
compared to $6.3 million as of December 31, 1999. Cash provided by
operations amounted to $2.4 million during the nine-month period ended
September 30, 2000, compared to $2.7 million for the same period in the
previous year. Cash used for investing amounted to $1.4 million during the
nine-month period ended September 30, 2000, primarily for the purchase of
fixed assets, compared to cash provided by investments of $1.7 million for
the same period last year. Cash provided by financing activities amounted
to $124,000 during the nine-month period ended September 30, 2000 compared
to cash used for financing of $1.1 million for the same period last year.
The Company has an available $10 million accounts receivable revolving line
of credit with a bank. There are certain financial covenants and reporting
requirements associated with the loan. Included in the financial covenants
are (1) tangible net worth of not less that $43 million, (2) the ratio of
current assets to current liabilities of not less than 2.0 to 1.0, (3) a
debt to tangible net worth ratio of not less that .50 to 1.0, and (4)
capital expenditures not to exceed more than $7.0 million during any fiscal
year. There were no outstanding borrowings at September 30, 2000.
The Company anticipates that its cash and short-term investments on hand,
cash from operations 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 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,
continue profitability 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.
11
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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, matters discussed below.
OrthoLogic has periodically discussed with third parties the possible
acquisition of technology, product lines, and businesses in the orthopedic
health care market. Additionally, the Company continues to evaluate
strategies and alternatives that will position the Company to compete
effectively in the future. Any change in the future operating strategies of
the Company could result in an adjustment to the carrying values of current
recorded assets.
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 operations.
12
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has exposure to foreign exchange rates through its
manufacturing subsidiary in Canada. The Company does not use foreign
currency exchange forward contracts or commodity contracts to limit its
exposure. The Company is not currently vulnerable to a material extent to
fluctuations in interest rates and commodity prices.
13
<PAGE>
Part II - Other information
Item 1. Legal Proceedings
On October 2, 2000, the Company entered into a Memorandum of Understanding
with plaintiffs describing the terms of the settlement of the consolidated
class action lawsuits in United States District Court for the District of
Arizona alleging violations of Sections 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder. The terms and conditions
of such settlement are described in more detail in "Note 4 - Litigation" of
the Notes to Consolidated Financial Statements above.
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
14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORTHOLOGIC CORP.
(Registrant)
Signature Title Date
/s/ Thomas R. Trotter President and Chief Executive November 13, 2000
--------------------- Officer (Principal
Thomas R. Trotter Executive Officer)
/s/ Terry D. Meier Sr. Vice-President and Chief November 13, 2000
--------------------- Financial Officer (Principal
Terry D. Meier Financial and Accounting Officer)
15
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OrthoLogic Corp.
Exhibit Index to Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 2000
Incorporated by Filed
Exhibit No Description Reference to: Herewith
---------- ----------- ------------- --------
10.2 September 28, 2000 Agreement
terminating Hyalgan Co-Promotion
Agreement X
27 Financial Data Schedule X
