<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>e-7721.txt
<DESCRIPTION>QUARTERLY REPORT FOR QUARTER ENDED 09/30/2001
<TEXT>
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, 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)
N/A
(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.
31,831,980 shares of common stock outstanding as of October 31, 2001
<PAGE>
ORTHOLOGIC CORP.
INDEX
Page No.
--------
Part I -- Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Operations and of
Comprehensive Income for the Three months and Nine months
ended September 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the Nine
months ended September 30, 2001 and 2000 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of the Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk 13
Part II -- Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORTHOLOGIC CORP.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
September 30, 2001 December 31, 2000
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSET
Cash and cash equivalents $ 12,872 $ 6,753
Short term investments 15,055 2,492
Accounts receivable, net 11,371 29,951
Inventory, net 2,303 10,007
Prepaids and other current assets 824 1,019
Deferred income tax 2,631 2,631
--------- ---------
Total current assets 45,056 52,853
Furniture, rental fleet and equipment 8,332 28,891
Accumulated depreciation (6,282) (17,797)
--------- ---------
Furniture, rental fleet and equipment, net 2,050 11,094
Investments 750 750
Deposits and other assets 178 338
--------- ---------
Total assets $ 48,034 $ 65,035
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities
Accounts payable $ 721 $ 3,030
Accrued liabilities 5,810 6,767
--------- ---------
Total current liabilities 6,531 9,797
Deferred rent and capital lease obligations 176 88
--------- ---------
Total liabilities 6,707 9,885
--------- ---------
SERIES B CONVERTIBLE PREFERRED STOCK 600 3,240
STOCKHOLDERS' EQUITY
Common stock 16 15
Additional paid-in capital 135,101 132,332
Common stock to be used for legal settlement 2,969 2,969
Accumulated deficit (97,359) (83,183)
Other comprehensive loss -- (223)
--------- ---------
Total stockholders' equity 40,727 51,910
--------- ---------
Total liabilities and stockholders' equity $ 48,034 $ 65,035
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
ORTHOLOGIC CORP.
Condensed Consolidated Statements of Operations and of Comprehensive Income
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues 9,553 21,011 53,330 66,041
Cost of Revenues 1,254 4,302 9,885 13,406
-------- -------- -------- --------
Gross Profit 8,299 16,709 43,445 52,635
Operating expenses
Selling, general and administrative 7,430 16,943 40,621 50,446
CPM divestiture and non-recurring charges -- 14,327 --
Legal settlement 3,552 3,552
Research and development 486 2,645 3,147 3,859
-------- -------- -------- --------
Total operating expenses 7,916 23,140 58,095 57,857
Operating income (loss) 383 (6,431) (14,650) (5,222)
Other income 223 112 482 298
-------- -------- -------- --------
Income (loss) before income taxes 606 (6,319) (14,168) (4,924)
Provision (benefit) for income taxes -- (112) 8 39
Net income (loss) $ 606 $ (6,207) $(14,176) $ (4,963)
======== ======== ======== ========
BASIC EARNINGS PER SHARE
Net income (loss) per common Share $ 0.02 $ (0.21) $ (0.45) $ (0.17)
-------- -------- -------- --------
Weighted average number of Common
share outstanding 31,467 30,163 31,352 29,730
-------- -------- -------- --------
DILUTED EARNINGS PER SHARE
Net income (loss) per common
and equivalent share $ 0.02 $ (0.21) $ (0.45) $ (0.17)
-------- -------- -------- --------
Weighted shares outstanding 31,942 30,163 31,352 29,730
-------- -------- -------- --------
Consolidated Statement of Comprehensive Income
Net income (loss) $ 606 $ (6,207) $(14,176) $ (4,963)
-------- -------- -------- --------
Foreign translation adjustment 53 223 (21)
-------- -------- -------- --------
Comprehensive income (loss) $ 606 $ (6,154) $(13,953) $ (4,984)
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
ORTHOLOGIC CORP.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine months ended
September 30,
--------------------
2001 2000
-------- --------
OPERATING ACTIVITIES
Net loss $(14,176) $ (4,963)
Non-cash items:
Depreciation and amortization 798 4,275
Common stock to be used for legal settlement 2,969
Loss on sale of CPM assets and non-recurring charges 14,327 0
Net change on other operating items:
Accounts receivable 10,719 849
Inventory 1,422 (1,020)
Prepaids and other current assets (215) 153
Deposits and other assets 160 93
Accounts payable (897) 976
Accrued liabilities (5,114) (978)
-------- --------
Cash flows provided by operating activities 7,024 2,354
-------- --------
INVESTING ACTIVITIES
Purchase of fixed assets, net (783) (1,619)
Proceeds from sale of CPM assets 12,000
Sales (purchases) of short-term investments (12,563) 250
-------- --------
Cash flows used in investing activities (1,346) (1,369)
-------- --------
FINANCING ACTIVITIES
Payments on capital leases 88 (42)
Proceeds from stock option exercises and other 353 166
-------- --------
Cash flows provided by financing activities 441 124
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,119 1,109
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,753 6,023
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,872 $ 7,132
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 70 $ 100
Cash paid during the period for income taxes $ 0 $ (32)
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
ORTHOLOGIC CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION
The Condensed Consolidated Balance Sheet as of September 30, 2001 and the
Condensed Consolidated Statements of Operations and Comprehensive Income for the
three months and nine months ended September 30, 2001 and 2000 and the Condensed
Consolidated Statements of Cash Flows for the nine months ended September 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 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. 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.
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 returned the
rights to sell Hyalgan back to Sanofi. The Company received $4.0 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 $4.0 million cash
received, $1.0 million was received in the quarter ended March 31, 2001. Royalty
revenues for Hyalgan were $972,000 in the quarter ended September 30, 2001
compared to Hyalgan sales revenues of $2.2 million in the same period in 2000.
6
<PAGE>
3. LOSS ON SALE OF ASSETS 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 2001 second quarter
financial statements to write down the sold CPM assets to their fair value, less
the direct costs of selling the assets. 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 may be some negative effect to the efficiency of
the collection team as the Company has hired contractors to replace the previous
collection personnel. As a result, a charge of $2.8 million was included in "CPM
divestiture and non-recurring charges" 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 the sale of the CPM business, in June 2001 the Company
notified approximately 331 of the Company's 505 employees that their positions
were 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 September 30, 2001
are as follows:
Total Amount Charged Cash Reserves
Charges Against Assets Paid @ 9/30/01
------- -------------- ------- ---------
Severance and stay-on bonus $ 3,300 0 ($2,058) $ 1,242
Other exit costs 1,387 ($ 245) (963) 179
------- ------- ------- -------
Total non-recurring charges $ 4,687 ($ 245) ($3,021) $ 1,421
7
<PAGE>
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 September 30,
--------------------------------
2001 2000
------- -------
Revenues $ 845 $14,078
Cost of revenues (134) 3,371
------- -------
Gross profit $ 979 $10,707
Nine months ended September 30,
--------------------------------
2001 2000
------- -------
Revenues $28,860 $44,752
Cost of revenues 5,809 10,518
------- -------
Gross profit $23,051 $34,234
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 BioTechnology, 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. The Company has completed 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 to 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. A
fee of $750,000 for the initial license was expensed in the third quarter of
1998 and the license 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 $2.0 million to Chrysalis
and announced it was expanding its license agreement to include all Chrysalin
orthopedic indications worldwide. In July 2001, the Company paid $1.0 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, based 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
<PAGE>
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. 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, 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 court
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 $1.0 million in cash and one
million shares of newly issued OrthoLogic common stock valued at $2,969,00. The
settlement was approved and the Norman Cooper lawsuits dismissed with prejudice
by the Arizona Supreme Court on August 13, 2001. Subsequently, the parties
submitted a request for dismissal of the federal class action suit which was
granted. The federal class action suit was dismissed with prejudice.
A significant portion of the cash payment was funded from the Company's
directors' and officers' liability insurance policy. The Company recorded a $3.6
million charge, including legal expenses, for settlement of the litigation.
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 settlement 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
<PAGE>
At September 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
The Company reduced its revolving line of credit with a lending institution
from $10 million to $4 million after completing the sale of the CPM business.
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
$30 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 September 30, 2001, 14,400 shares of Series B Convertible Preferred
Stock had been converted into 5,746,584 Shares of common stock.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS.
The following is management's discussion of significant factors that
affected the Company's interim financial condition and results of operations.
This should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.
RESULTS OF OPERATIONS
For the quarter ended September 30, 2001, the Company reported a net profit
of $606,000, or $0.02 cents per diluted share, on sales of $9.6 million compared
with a net loss of $6.2 million, or ($0.21) cents per diluted share, on sales of
$21.0 million for the third quarter of 2000. Revenues for the third quarter of
2000 included a full quarter of sales from the Continuous Passive Motion ("CPM")
business, which was sold July 2001. Financial results from the third quarter of
2000 included a research and development charge of $2.0 million for an extended
license for Chrysalin.
For the first nine months ended September 30, 2001, the Company reported a
net loss of $14.2 million, or ($0.45) per diluted share, on sales of $53.3
million compared with the net loss of $5.0 million, or ($0.17) per diluted
share, on sales of $66.0 million for the first nine months of 2000. The loss for
the first nine months of 2001 included $14.3 million in costs associated with
the sale of the CPM business as well as a $1.0 million research and development
charge to obtain certain additional rights for Chrysalis.
REVENUES
The Company reported revenues of $9.6 million for the third quarter of 2001
representing a 55% decrease from revenues of $21.0 million for the same quarter
of 2000. The Company's revenues decreased 19% to $53.3 million for the nine
months ended September 30, 2001 from $66.0 million for the nine months ended
September 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 the
sale of the CPM business. This decrease was partially off set by increased sales
of the OL1000 and sales of SpinaLogic for the three months ended September 30,
2001 over the same period in 2000.
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 September 30,
--------------------------------
2001 2000
------- -------
Revenues $ 845 $14,078
Cost of revenues (134) 3,371
------- -------
Gross profit $ 979 $10,707
Nine months ended September 30,
--------------------------------
2001 2000
------- -------
Revenues $28,860 $44,752
Cost of revenues 5,809 10,518
------- -------
Gross profit $23,051 $34,234
11
<PAGE>
GROSS PROFIT
Gross profit decreased from $16.7 million for the three months ended
September 30, 2000 to $8.3 million for the three months ended September 30,
2001. Gross profit, as a percentage of revenues was 86.9% for the quarter
compared to 79.5% for the same period last year. For the nine months ended
September 30, 2001, gross profit was $43.4 million as compared to $52.6 million
for the nine months ended September 30, 2000. Gross profit as a percentage of
revenues were 79.7% for the nine-month period ended September 30, 2000 and
increased to 81.5% for the same period in 2001. Gross profit percentages
improved due to increased sales of the Company's higher margin products, the
OL-1000 and SpinaLogic, and the sale of the CPM business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses for the three months
ended September 30, 2001 were $7.4 million, a decrease from $20.5 million for
the three months ended September 30, 2000. SG&A expenses for the nine months
ended September 30, 2001 were $40.6 million, a decrease from $54.0 million for
the nine months ended September 30, 2000. SG&A costs between the two periods are
not comparable due to the sale of the CPM business.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") decreased to $486,000 in the three-month
period ended September 30, 2001 compared to $2.6 million for the same period
last year. R&D expenses for the nine months ended September 30, 2001 totaled
$3.1 million, a decrease from the $3.9 million for the nine months ended
September 30, 2000. The 2001 and 2000 expenses reflect continued costs
associated with the Chrysalin clinical trials and payments 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
$112,000 to $223,000 for the three-month periods ended September 30, 2000 and
2001, respectively. For the nine-month period ended September 30, 2001, other
income increased to $482,000 from $298,000 for the same period in the previous
year.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2001 the Company had cash and equivalents of $12.9 million
compared to $6.8 million as of December 31, 2000. The Company had $15.1 million
of short-term investments as of September 30, 2001. In addition, the Company has
an available $4.0 million accounts receivable revolving line of credit with a
bank. The Company received a cash payment of $12 million in conjunction with the
CPM divestiture in the quarter ended September 30, 2001.
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. 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.
12
<PAGE>
ITEM 3. MARKET RISKS
The Company has no debt and no derivative instruments at September 30,
2001.
The Company's Canadian operations were sold as part of the CPM sale, and
the Company has no exposure to foreign exchange rates at September 30, 2001.
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 of 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.
13
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Note 4 - Litigation" of the Notes to the Condensed Consolidated Financial
Statements above.
ITEM 6. EXHIBITS AND REPORTS
(a) Exhibit Index
None
(b) Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORTHOLOGIC CORP.
(Registrant)
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Thomas R. Trotter President and Chief Executive Officer November 9, 2001
------------------------------ (Principal Executive Officer)
Thomas R. Trotter
/s/ Sherry A. Sturman Vice-President and Chief Financial Officer November 9, 2001
------------------------------ (Principal Financial and Accounting Officer)
Sherry A. Sturman
</TABLE>
15
<PAGE>
ORTHOLOGIC CORP.
Exhibit Index to Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 2001
Incorporated by Filed
Exhibit No Description Reference to: Herewith
---------- ----------- ------------- --------
None
</TEXT>
</DOCUMENT>