-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KBAoBSb0lsZxjJKMPgmrq6FYfHdtKmZ30nwrji1lCok+XRDOt8J/MkQyoqrCWtWy CzkbGrnxomZYXj5EUBfrsw== 0000950147-99-001234.txt : 19991115 0000950147-99-001234.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950147-99-001234 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORTHOLOGIC CORP CENTRAL INDEX KEY: 0000887151 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 860585310 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21214 FILM NUMBER: 99748253 BUSINESS ADDRESS: STREET 1: 1275 WEST WASHINGTON STREET CITY: TEMPE STATE: AZ ZIP: 85281 BUSINESS PHONE: 6024375520 MAIL ADDRESS: STREET 1: 1275 WEST WASHINGTON STREET CITY: TEMPE STATE: AZ ZIP: 85281 10-Q 1 QUARTERLY REPORT FOR THE QTR ENDED 9/30/99 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. ------------------------------------------------------ (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 ---------------------------------------------------- (Registrant's telephone number, including area code) ---------------------------------------------------- (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 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 Page 2 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 Page 3 OrthoLogic, Corp. Condensed Consolidated Statement of Operations and of Comprehensive Income (in thousands, except per share data) Unaudited
Three months ended Nine months ended September 30, September 30, -------------------- -------------------- 1999 1998 1999 1998 -------- -------- -------- -------- 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) ======== ======== ======== ========
See notes to condensed consolidated financial statements Page 4 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 Page 5 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. Page 6 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 Page 7 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 Page 8 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. Page 9 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. Page 10 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. Page 11 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 Page 12 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 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 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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 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. U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 5,055,773 488,300 46,936,043 17,395,520 10,110,740 48,974,279 25,472,307 12,092,739 92,238,778 9,244,717 0 0 10,950,000 13,639 71,845,121 92,238,778 15,213,070 62,054,661 13,998,973 48,153,356 0 0 0 56,806 40,239 0 0 823,992 0 (807,425) (0.03) (0.03)
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