-----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, CDC00fdT0SgeKpFbEm4hoG/r7u8qGlJbT3Y8olzfVmixNsb+UwU3/pw7McmovdoE huZdaLROnqY3ZtxeEVmD/g== 0000950147-01-501428.txt : 20010815 0000950147-01-501428.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950147-01-501428 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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: 1934 Act SEC FILE NUMBER: 000-21214 FILM NUMBER: 1711756 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 e-7298.txt QUARTERLY REPORT FOR THE QTR ENDED 06/30/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 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 (IRS 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. 31,463,664 shares of common stock outstanding as of July 31, 2001 ORTHOLOGIC CORP. INDEX Page No. Part I Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets June 30, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Operations and of Comprehensive Income Three months and Six months ended June 30, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosure about Market Risk 12 Part II Other Information Item 1. Legal Proceedings 14 Item 4. Submission of Matters to Vote of Security Holders 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 Sheet (in thousands) June 30, December 31, 2001 2000 --------- --------- ASSET (Unaudited) Cash and cash equivalents $ 11,610 $ 6,753 Short term investments 3,630 2,492 Accounts receivable, net 19,119 29,951 Inventory, net 2,530 10,007 Prepaids and other current assets 994 1,019 Net assets of CPM business held for sale 12,000 -- Deferred income tax 2,631 2,631 --------- --------- Total current assets 52,514 52,853 Furniture, rental fleet and equipment 8,162 28,891 Accumulated depreciation (6,070) (17,797) --------- --------- Furniture and equipment, net 2,092 11,094 Investments 750 750 Deposits and other assets 191 338 --------- --------- Total assets $ 55,547 $ 65,035 ========= ========= LIABILITIES & STOCKHOLDERS' EQUITY Liabilities Accounts payable $ 2,973 $ 3,030 Accrued liabilities 11,746 6,767 --------- --------- Total current liabilities 14,719 9,797 Deferred rent and capital lease obligations 141 88 --------- --------- Total liabilities 14,860 9,885 --------- --------- SERIES B CONVERTIBLE PREFERRED STOCK 600 3,240 STOCKHOLDERS' EQUITY Common stock 16 15 Additional paid-in capital 135,067 132,332 Common stock to be used for legal settlement 2,969 2,969 Accumulated deficit (97,965) (83,183) Other comprehensive loss -- (223) --------- --------- Total stockholders' equity 40,087 51,910 --------- --------- Total liabilities and stockholders' equity $ 55,547 $ 65,035 ========= ========= See notes to Condensed Consolidated Financial Statements 3 OrthoLogic Corp. Condensed Consolidated Statement of Operations and of Comprehensive Income (in thousands, except per share data) Unaudited
Three months ended June 30 Six months ended June 30, -------------------------- ------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues 22,094 22,540 43,776 45,031 Cost of Revenues 3,899 4,295 8,631 9,104 -------- -------- -------- -------- Gross Profit 18,195 18,245 35,145 35,927 Operating expenses Selling, general and administrative 17,087 17,188 33,190 33,503 CPM divestiture and non-recurring charges 14,327 -- 14,327 -- Research and development 1,957 548 2,661 1,214 -------- -------- -------- -------- Total operating expenses 33,371 17,736 50,178 34,717 Operating income (loss) (15,176) 509 (15,033) 1,210 Other income 130 101 259 186 -------- -------- -------- -------- Income (loss) before income taxes (15,046) 610 (14,774) 1,396 Provision for income taxes (60) 61 8 151 -------- -------- -------- -------- Net Income (loss) $(14,986) $ 549 $(14,782) $ 1,245 ======== ======== ======== ======== BASIC EARNINGS PER SHARE Net income (loss) per common share $ (0.48) $ 0.02 $ (0.47) $ 0.04 -------- -------- -------- -------- Weighted average number of common share outstanding 31,444 29,962 31,293 29,511 -------- -------- -------- -------- DILUTED EARNINGS PER SHARE Net income (loss) per common and equivalent share $ (0.48) $ 0.02 $ (0.47) $ 0.04 -------- -------- -------- -------- Weighted shares outstanding 31,444 31,057 31,293 30,849 -------- -------- -------- -------- Consolidated Statement of Comprehensive Income Net income applicable to common shareholders $(14,986) $ 549 $(14,782) $ 1,245 -------- -------- -------- -------- Foreign translation adjustment 236 (61) 223 (74) -------- -------- -------- -------- Comprehensive income (loss) applicable to common shareholders $(14,750) $ 488 $(14,559) $ 1,171 ======== ======== ======== ========
See notes to Condensed Consolidated Financial Statements. 4 OrthoLogic Corp. Condensed Consolidated Statements of Cash Flows (in thousands) Unaudited Six months ended June 30 ------------------------ 2001 2000 -------- -------- OPERATING ACTIVITIES Net income (loss) $(14,782) $ 1,245 Non-cash items: Depreciation and amortization 586 2,741 Loss on sale of assets and non-recurring charges 14,327 0 Net change on other operating items: Accounts receivable 2,970 (418) Inventory 1,195 (188) Prepaids and other current assets (385) (247) Deposits and other assets 147 104 Accounts payable 1,355 75 Accrued liabilities 822 (327) -------- -------- Cash flows provided by (used in) operating activities 6,235 2,985 -------- -------- INVESTING ACTIVITIES Sale (Purchase) of fixed assets, net (612) (1,103) Sales (Purchases) of short-term investments (1,138) 250 -------- -------- Cash flows used in investing activities (1,750) (853) -------- -------- FINANCING ACTIVITIES Payments on capital leases 53 (24) Foreign exchange 223 (74) Net proceeds from stock option exercises 96 185 -------- -------- Cash flows provided by financing activities 372 87 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,857 2,219 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,753 6,023 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,610 $ 8,242 ======== ======== Supplemental disclosure of cash flow information Cash paid during the period for interest $ 47 $ 77 Cash paid during the period for income taxes -- 1 See notes to Condensed Consolidated Financial Statements 5 ORTHOLOGIC CORP. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. FINANCIAL STATEMENT PRESENTATION The Condensed Consolidated Balance Sheet as of June 30, 2001 and the Condensed Consolidated Statements of Operations and Comprehensive Income for the six months ended June 30, 2001 and 2000 and the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000 are unaudited. However, in the opinion of management, the unaudited interim financial statements include all adjustments necessary for the fair presentation of the Company's financial position, results of operations, and cash flows, including adjustments to write-down the carrying value of net assets of the CPM business held for sale to the fair value less costs to sell and accrue for costs of exiting the CPM business (See Note 3). The results of operations for the interim periods are not indicative of the results to be expected for the complete fiscal year primarily because the Company exited the CPM business in July 2001, and the CPM business accounted for approximately two-thirds of the Company's revenues . The Balance Sheet as of December 31, 2000 is derived from the Company's audited financial statements included in the 2000 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 2000 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 those estimates. A significant estimate in the accompanying financial statements is 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 year 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. The Company's sales force began to promote Hyalgan in the third quarter of 1997. Fee revenue of $9.3, $8.3, and $8.7 million was recognized during 2000, 1999, and 1998 respectively. In the fourth quarter of 2000, the Company and Sanofi mutually agreed to terminate this Agreement. The Company has returned the rights to sell Hyalgan back to Sanofi. The Company received $4 million cash during the fourth quarter of 2000 and the first quarter of 2001 for the return of the rights and successful transition of the business back to Sanofi, and will receive continuing royalties for the next two years. Of the $4 million cash received, $1 million was received in the quarter ended March 31, 2001. Royalty revenues for Hyalgan were $578,000 in the quarter ended June 30, 2001 compared to Hyalgan sales revenues of $2.3 million in the same period in 2000. 6 3. LOSS OF CPM BUSINESS AND OTHER NON-RECURRING CHARGES On July 13, 2001, the Company announced the sale of its Continuous Passive Motion ("CPM") business. In early July 2001, the company received $12.0 million in cash, with the purchaser assuming approximately $2.0 million in liabilities in connection with the sale of certain CPM related assets that had been recorded in the Company's financial statements at a carrying value of approximately $20.7 million. The Company recorded a $6.9 million charge in the accompanying 2001 second quarter financial statements to write down the sold CPM assets to their fair value, less direct costs of selling the assets, with such costs totalling approximately $757,000. The Company may receive up to an additional $2.5 million of cash if certain objectives are achieved by the purchaser of the business. Because there is no reasonable basis for estimating the degree of certainty that these objectives will be reached, the additional contingent consideration has not and will not be recorded in the accompanying financial statements until the cash is actually received by the Company. The Company retained all the billed account receivable related to the CPM business, with a net carrying value of approximately $10.8 million. (Net of a $5.2 million allowance for doubtful accounts). The collection staff and supervisor previously responsible for the collection of these receivables are part of the employee team hired by the purchaser of the CPM business. Company management believes that there will initially be some negative effect to the efficiency of the collection team as the Company hires contractors to replace the previous collection personnel. As a result, a charge of $2.8 million has been included in the "CPM divestiture and non-recurring charges" total in the accompanying 2001 Statement of Operations. Actual collection results could differ materially from these estimates. Any difference between estimated reimbursement and final determinations will be reflected in the period finalized. In connection with exiting the CPM business, in June 2001, the Company notified approximately 331 of the Company's 505 employees that their positions would be eliminated. The accompanying Statement of Operations includes a charge of approximately $3.3 million included in "CPM divestiture and non-recurring charges" for severance and stay-on bonuses that will be paid to individuals during the next year. The Company also recorded additional exit charges of approximately $1.4 million for various costs relating to the CPM divestiture. A summary of the severance and other reserve balances at June 30, 2001 are as follows: Total Applied Cash Reserve Charges to Assets Paid @ 6/30/01 ------- --------- ------ --------- Severance and stay-on bonus $3,300 0 $ (177) $3,123 Other exit costs 1,387 $ (245) 0 1,142 ------ ------ ------ ------ Total non-recurring charges $4,687 $ (245) $ (177) $4,265 ====== ====== ====== ====== 7 As noted above, the CPM business and related assets were sold in early July 2001. Subsequent to the sale, the Company is no longer in the CPM business. The revenues and cost of revenues attributable to the CPM business were: Three months ended June 30, --------------------------- 2001 2000 ------- ------- Revenues $13,963 $15,059 Cost of revenues 2,497 3,352 ------- ------- Gross profit $11,466 $11,707 ======= ======= Six months ended June 30, ------------------------- 2001 2000 ------- ------- Revenues $28,015 $30,674 Cost of revenues 5,943 7,147 ------- ------- Gross profit $22,072 $23,527 ======= ======= Most operating expenses were not directly allocated between the Company's various lines of business. Cash requirements for the severance and exit costs are currently estimated to be funded from the Company's current cash balances. 4. LICENSING AGREEMENT FOR CHRYSALIN The Company announced in January 1998 that it had acquired a minority interest in a Biotech firm, Chrysalis Bio Technology, Inc. ("Chrysalis") for $750,000. As part of the transaction, the Company was awarded a nine-month worldwide 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 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 options 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 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 of Chrysalin, for fracture indications. As part of the license agreement, and in conjunction to the U.S. Food and Drug Administration (the "FDA") clearance to begin human clinical trials, OrthoLogic made a $500,000 milestone payment to Chrysalis 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 Company is preparing to file an application for a Phase III human clinical trial. In July 2000, the Company paid $2 million to Chrysalis and announced it was expanding its license agreement to include all Chrysalin orthopedic indications worldwide. In July 2001, the Company paid $1 million to Chrysalis to extend its worldwide license for Chrysalin to include the rights for orthopedic "soft tissue" indications - including cartilage, tendon, and ligament repair. In addition, the agreement calls for the Company to pay certain other milestone payments and royalty fees, bases upon products developed and achievement of commercial services. Except for the $750,000 minority equity interest, all payments made to Chrysalis have been expensed as research and development expenses. 8 5. Litigation During 1996, certain class action 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-6 promulgated thereunder and to other defendants Section 20(a) of the Exchange Act. Plaintiffs in these actions alleged generally that information concerning the May 31, 1996 letter received by the Company from the FDA regarding the Company's OrthoLogic 1000 Bone Growth Stimulator, and the matters set forth therein, were material and undisclosed, leading to an artificially inflated stock price Plaintiffs further allege that the Company's non-disclosure of the FDA correspondence and of the alleged practices referenced in that correspondence operated as a fraud against plaintiffs, in that the Company allegedly made untrue statements of material facts or omitted to state material facts in order to make the statement not misleading. 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. All plaintiffs sought class action status, unspecified compensatory damages, fees and costs. Plaintiffs also sought extraordinary, equitable and/or injunctive relief as permitted by law. The actions were consolidated for all 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 Motion to Dismiss and entered an order dismissing all claims in the suite 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. On December 21, 1999, the District Court granted plaintiffs' motion for class certification to include purchasers of common stock between June 4 through June 18, 1996, inclusive. On or about June 20, 1996, a lawsuit entitled Norman Cooper, et. al. v. OrthoLogic, Corp., et. al, and Case No. CV 96-10799 was filed in the Superior Court, Maricopa County, and Arizona. The plaintiffs allege violations of Arizona Revised Statutes Sections 44-1991 (state securities fraud) and 44-1522 (consumer fraud) and common-law fraud based upon factual allegations substantially similar to those alleged in the federal court class action complaints. Plaintiffs' sought class action status, unspecified compensatory and punitive damages, fees and costs. Plaintiffs also sought injunction and/ or equitable relief. The Company filed a Motion to Dismiss the Complaint in the Arizona State Court in May 1999. The Court denied the motion in July 1999, and granted the plaintiffs' motion for the class certification on November 24, 1999. In October 2000, the Company announced that it had entered a Memorandum of Understanding regarding settlement of the remaining class action claims and the Norman Cooper lawsuits. The settlement consists of $1 million in cash and one million shares of newly issued OrthoLogic Common Stock valued at $2,969,00. A significant portion of the cash payment was funded from its directors' and officers' liability insurance policy. The Company recorded a $3.6 million charge, including legal expense for settlement of the litigation. The settlement is subject to approval by the lead plaintiffs and defendants; the preparation, exertion and filing of the formal Stipulation of Settlement; notice to the settlement 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 the 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 or acted wrongfully in any way with respect to the plaintiffs or any other person. 9 At June 30, 2001, 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 of the Company. 6. LINE OF CREDIT Prior to the CPM divestiture, the Company had available a $10.0 million account receivable revolving line of credit with a lending institution. The Company is currently negotiating with the bank regarding a revised lower credit facility amount. The Company may borrow up to 75% of the eligible account receivable, as defined in the agreement. The interest rate is at prime rate. Interest accruing on the outstanding balance and a monthly administration fee is due in arrears on the first day of each month. The line of credit expires 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 than $43 million, (2) a quick ratio of not less than 2.0 to 1.0, (3) a debt to tangible net worth ratio of not less than 0.50 to 1.0, and (4) capital expenditures will not exceed more than $7.0 million during any fiscal year. The Company has not utilized this line of credit. 7. SERIES B CONVERTIBLE PREFERRED STOCK As of June 30, 2001 14,400 shares of series B Convertible Preferred Stock had been converted into 5,746,584 Shares of Common Stock. 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, 2000. 10 RESULTS OF OPERATIONS For the quarter ended June 30, 2001, the Company reported a net loss of $15 million or $0.48 cents per diluted share, on sales of $22.1 million compared with a net profit of $549,000, or $0.02 cents per diluted share, on sales of $22.5, million for the second quarter of 2000. Excluding the one-time costs of $14.3 million associated with the sale of OrthoLogic's CPM business, and the $1.0 million charge for the license extension for Chrysalin, the Company would have earned $341,000, or $0.01 per diluted share, for the second quarter of 2001. For the six months ended June 30, 2001, the Company reported a net loss of $14.8 million, or $0.47 per diluted share, on sales of $43.8 million compared with the net profit of $1.2 million, or $0.04 per diluted share, on sales of $45.0 million for the six months of 2000. Excluding the one-time costs associated with the sale of the CPM business and the charge for the license extension for Chrysalin, the Company would have earned $545,000, or $0.02 per diluted share, for the first six months of 2001. REVENUES The Company reported revenues of $22.1 million for the second quarter of 2001 representing a 1.8% decrease from revenues of $22.5 million for the same quarter of 2000. The Company's revenues decrease 2.6% to $43.8 million for the six months ended June 30, 2001 from $45 million for the six months ended June 30, 2000. The decline in sales was primarily attributable to the loss of sales due to the termination of Company's distribution of Hyalgan and a decline in revenue from the sale of the Continuous Passive Motion ("CPM") products. Revenue from the CPM products declined 6.6% from $15.0 million for the three months ended June 30, 2000 to $14.0 million for the same period in 2001. Revenue for the CPM products declined 8.8% from $30.7 million for the six months ended June 30, 2000 to $28.0 million for the same period in 2001. This decrease was off set by increased sales of the fracture healing and spine products which increased 47% from $5.1 million for the three months ended June 30, 2000 to $7.5 million for the same period in 2001. The fracture healing and spine product sales increased 41% from $10.3 million for the six months ended June 30, 2000 to $14.5 million for the same period in 2001. As noted above, the CPM business and related assets were sold in early July 2001. Subsequent to the sale, the Company is no longer in the CPM business. The revenues and cost of revenues attributable to the CPM business were: Three months ended June 30, --------------------------- 2001 2000 ------- ------- Revenues $13,963 $15,059 Cost of revenues 2,497 3,352 ------- ------- Gross profit $11,466 $11,707 ======= ======= Six months ended June 30, ------------------------- 2001 2000 ------- ------- Revenues $28,015 $30,674 Cost of revenues 5,943 7,147 ------- ------- Gross profit $22,072 $23,527 ======= ======= GROSS PROFIT Gross profits decreased from $18.2 million for the three months ended June 30, 2000 to $18.1 million for the three months ended June 30, 2001, a 0.5% decrease. Gross profits, as a percentage of revenues was 82.3% for the quarter compared to 80.9% for the same period last year. For the six months ended June 30, 2001, gross profits was $35.1 million as compared to $35.9 million for the six months ended June 30, 2000. Gross profits as a percentage of revenues were 79.8% for the six-month period ended June 30, 2000 and increased to 80.3% for the same period in 2001. Gross profits 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 ("SG&A") expenses for the three months ended June 30, 2001 were $17.1 million, a decrease from $17.2 million for the three months ended June 30, 2000. SGA expenses for the six months ended June 30, 2001 were $33.2 million, an increase from $33.5 million for the six months ended June 30, 2000. 11 RESEARCH AND DEVELOPMENT Research and development ("R&D") expenses increased to $1.9, million in the three-month period ended June 30, 2001 compared to $548,000 for the same period last year. R&D expenses for the six months ended June 30, 2000 totaled 2.7 million, an increase from the $1.2 million for the six months ended June 30, 2000. The increase reflects expenses associated with the Chrysalin clinical trials and the $1 million payment to Chrysalis to extend the Company's worldwide license for soft tissue indications for Chrysalin. OTHER INCOME AND EXPENSES Other income, consisting primarily of interest income, increased from $101,000 to $130,000 for the three-month periods ended June 30, 2001 and 2000 respectively. For six-month period ended June 30, 2001, other income increased to 259,000 from $186,000 for the same period in the previous year. LIQUIDITY AND CAPITAL RESOURCES On June 30, 2001 the Company had cash and equivalents of $15.2 million compared to $9.2 million as of December 31, 2000. Prior to the CPM divestiture, the Company had an available $10.0 million accounts receivable revolving line of credit with a bank. The Company is negotiating with the bank regarding a revised, lower credit facility amount. Subsequent to June 30, 2001 the Company received a cash payment of $12 million in conjunction with the CPM divestiture. 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, 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 fund's through equity or debt financing, or from other sources of financing, as may be required. Cash requirements to fund the severance and costs of exiting the CPM businesses are currently estimated to be funded from the Company's current cash balances. Item 3. Market Risks The Company has no debt and no derivative instruments at June 30, 2001. The Company has very limited exposure to foreign exchange rates at June 30, 2001. 12 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 2000 fiscal year. The Company has recently sold its CPM division in the United States and Canada. There will be costs to the Company associated with the smooth transition of this business and the related employees to the buyer. Some of these costs will be directly monetary; others will involve the costs associated with the time and effort of the Company's executives involved in the transition and the time it takes to reposition the Company's direction after the sale. In addition, the Company will be moving portions or its operations within its current principal office to make room to sublet space to the buyers of the CPM business. Although the Company does not expect these transition costs to have a materially adverse effect on the Company, there can be no assurance how long the transition will take and what the total cost will be. To the extent that the Company presently enjoys perceived technological advantages over competitors, technological innovation by present or future competitors many of whom are larger than the Company 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, as it is currently doing with the human trials of Chrysalin; however, there can be no assurance that the Company will be able to do so or that the market or FDA regulators will accept any such new products or applications or will do so in a timely manner. 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 securities litigation initiated against the Company is without merit and the Company has entered into a Memorandum of Understanding with the plaintiffs to settle the litigation. The settlement must still be approved by the class of plaintiffs and the court. Further, members of the class have the option to opt out of the settlement and pursue claims on their own. If the class or court rejects the settlement, the litigation could continue. An adverse outcome of such litigation could have a material adverse effect on the Company's business, financial condition and results of operation. 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. 13 Part II - Other information Item 1. Legal Proceedings See "Note 4 - Litigation" of the Notes to the Condensed Consolidated Financial Statements above. Item 4. Submission of Matters to Vote of Security Holders The annual meeting of the stockholders of the Company was help on May 18, 2001 to vote on: the election of Class I Directors (Proposal 1); an amendment to the Company's 1997 Stock Option Plan (Proposal 2) ; and the ratification of Deloitte & Touche LLP as independent accountant for the fiscal year ending December 31, 2000 (Proposal 3). The results are as follow: Broker For Against Abstain Non-Votes ---------- --------- --------- --------- Proposal 1 Frederich J. Feldman, Ph.D. 29,735,864 365,850 1,252,996 0 Thomas R. Trotter 28,496,768 1,604,946 1,252,996 0 Proposal 2 28,518,779 1,536,775 46,160 0 Proposal 3 29,833,522 233,474 34,718 0 A more detailed discussion of each proposal is included in the Company's Proxy Statement for the 2001 Annual Meeting of Stockholders. The Company's directors continuing in office are John Holliman III, Augustus A. White III, M.D., Stuart H. Altman, Ph.D., and Elwood D. Howse, Jr. Item 6. Exhibits and Reports (a) Exhibit Index None (b) Reports on Form 8-K Form 8-K filed July 26, 2001 announcing an Item 2 disposition of assets. 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 August 13, 2001 - ----------------------------- Executive Officer Thomas R. Trotter (Principal Executive Officer) /s/ Sherry A. Sturman Vice-President and Chief August 13, 2001 - ----------------------------- Financial Officer Sherry A. Sturman (Principal Financial and Accounting Officer) 15 OrthoLogic Corp. Exhibit Index to Quarterly Report on Form 10-Q For the Quarterly Period Ended March 31, 2001 Incorporated by Filed Exhibit No Description Reference to: Herewith - ---------- ----------- --------------- -------- None -----END PRIVACY-ENHANCED MESSAGE-----