10-Q 1 e-5675.txt QUARTERLY REPORT FOR THE QTR ENDED 9/30/00 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. ------------------------------------------------------ (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. 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 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 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 OrthoLogic Corp. Condensed Consolidated Statements of Operations and of Comprehensive Income (in thousands, except per share data) Unaudited
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2000 1999 2000 1999 -------- -------- -------- -------- 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) ======== ======== ======== ========
See notes to condensed consolidated financial statements 4 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 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 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 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 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 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 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 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 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 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 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 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