10-Q 1 e-7721.txt QUARTERLY REPORT FOR QUARTER ENDED 09/30/2001 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 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 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 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ORTHOLOGIC CORP. Condensed Consolidated Balance Sheets (in thousands)
September 30, 2001 December 31, 2000 ------------------ ----------------- (Unaudited) 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 ========= =========
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, ----------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- 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) ======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements. 4 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 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 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 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 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 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 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 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 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 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 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 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
15 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