-----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, JXcxF2jvH5IO9+BoietoyEta3uD+LIrUiegLPL69aZ8pbUeuCDTTpTHGD/byhaXh xpcBWfdlOCXgd0wsa+8tdg== 0000950147-98-000914.txt : 19981116 0000950147-98-000914.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950147-98-000914 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORTHOLOGIC CORP CENTRAL INDEX KEY: 0000887151 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 860585310 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21214 FILM NUMBER: 98747049 BUSINESS ADDRESS: STREET 1: 1275 WEST WASHINGTON STREET CITY: TEMPE STATE: AZ ZIP: 85281 BUSINESS PHONE: 6024375520 MAIL ADDRESS: STREET 1: 1275 WEST WASHINGTON STREET CITY: TEMPE STATE: AZ ZIP: 85281 10-Q 1 QUARTERLY REPORT FOR THE QTR ENDED 9/30/98 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, 1998 ------------------ or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- -------------- Commission File Number: 0-21214 ORTHOLOGIC CORP. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 86-0585310 - ------------------------------- ------------------------------------ (State of other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1275 W. Washington Street, Tempe, Arizona 85281 - ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (602) 286-5520 ---------------------------------------------------- (Registrant's telephone number, including area code) ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 25,300,190 shares of common stock outstanding as of October 30, 1998 ORTHOLOGIC CORP. INDEX PAGE NO. Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheets September 30, 1998 and December 31, 1997................... 1 Consolidated Statements of Operations Three Months and Nine Months ended September 30, 1998 and 1997................................................... 2 Consolidated Statements of Cash Flows Nine Months ended September 30, 1998 and 1997.............. 3 Notes to Consolidated Financial Statements................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 9 Part II Other Information Item 1. Legal Proceedings...........................................12 Item 2. Changes in Securities and Use of Proceeds...................12 Item 6. Exhibits and Reports on Form 8-K............................13 ORTHOLOGIC CORP. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) UNAUDITED September 30, December 31, 1998 1997 ---- ---- ASSETS Cash and cash equivalents $ 2,597 $ 7,783 Short-term investments 6,135 4,569 Accounts receivable 24,091 34,424 Inventory 12,411 10,548 Prepaids and other current assets 1,336 1,673 Deferred income taxes 2,646 2,596 --------- --------- Total current assets 49,216 61,593 Furniture, rental fleet and equipment 20,058 16,455 Accumulated depreciation (7,332) (4,934) --------- --------- Furniture and equipment, net 12,726 11,521 Intangibles, net 30,467 29,898 Deposits and other assets 1,043 91 --------- --------- TOTAL ASSETS $ 93,452 $ 103,103 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts payable $ 2,049 $ 2,896 Loan payable - current portion 500 500 Obligations under co-promotion agreement 1,000 2,000 Accrued liabilities 7,704 11,340 --------- --------- Total current liabilities 11,253 16,736 --------- --------- Deferred rent and capital lease obligation -- 106 Loan payable - long term portion 110 524 Obligations under co-promotion agreement -- 1,000 --------- --------- Total liabilities 11,363 18,366 --------- --------- Series B convertible preferred stock 13,558 STOCKHOLDERS' EQUITY Common stock 13 13 Additional paid-in capital 120,130 119,413 Accumulated deficit (51,612) (34,689) --------- --------- Total stockholders' equity 68,531 84,737 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 93,452 $ 103,103 ========= ========= See notes to consolidated financial statements. Page 1 ORTHOLOGIC CORP. CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data) UNAUDITED Three months ended Nine months ended ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues $17,739 $ 18,199 $ 54,350 $ 53,818 Cost of revenues 4,293 4,449 12,912 13,772 ------- -------- -------- -------- Gross profit 13,446 13,750 41,438 40,046 Operating expenses Selling, general and administrative 15,824 14,259 56,344 43,460 Research and development 1,425 632 2,468 1,821 Restructuring and other charges -- 13,844 (399) 13,844 ------- -------- -------- -------- Total operating expenses 17,249 28,735 58,413 59,125 ------- -------- -------- -------- Operating loss (3,803) (14,985) (16,975) (19,079) Other income Grant revenue 2 12 2 108 Interest income 130 231 267 1,182 ------- -------- -------- -------- Total other income 132 243 269 1,290 ------- -------- -------- -------- Loss before taxes (3,671) (14,742) (16,706) (17,789) Provision for income taxes -- -- -- -- ------- -------- -------- -------- Net loss (3,671) (14,742) (16,706) (17,789) ======= ======== ======== ======== Accretion of non-cash preferred stock dividend (618) -- (618) -- ------- -------- -------- -------- Net loss applicable to common stockholders (4,289) (14,742) (17,324) (17,789) ======= ======== ======== ======== BASIC EARNINGS PER SHARE Net loss per share (0.17) (0.59) (0.69) (0.71) ======= ======== ======== ======== Weighted average of common shares outstanding 25,300 25,113 25,287 25,082 ======= ======== ======== ======== DILUTED EARNINGS PER SHARE Net loss per share (0.17) (0.59) (0.69) (0.71) ======= ======== ======== ======== Weighted average and common shares outstanding 25,300 25,113 25,287 25,082 ======= ======== ======== ======== See notes to consolidated financial statements Page 2 ORTHOLOGIC CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) UNAUDITED Nine Months Ending September 30, -------------------------------- 1998 1997 ---- ---- OPERATING ACTIVITIES Net Loss $(17,324) $(17,789) Non cash items: Depreciation and amortization 6,082 4,551 Restructuring charge 13,844 Other (433) Net change in other operating items: Accounts receivable 8,340 1,905 Inventory (1,863) (604) Prepaids and other current assets 287 (1,430) Deposits and other assets (203) 2 Accounts payable (847) (1,808) Accrued liabilities (3,624) (807) -------- -------- Cash flows used in operating activities (9,152) (2,569) -------- -------- INVESTING ACTIVITIES Purchase of fixed assets (5,186) (3,434) Cash paid for acquisitions, net of cash acquired (81) (25,327) Investment in Chrysalis (750) -- Sales (Purchases) of short term investments (1,567) 30,952 Collection of note receivable -- 200 Intangible from dealer transactions -- (705) -------- -------- Cash flows used in investing activities (7,584) 1,686 -------- -------- FINANCING ACTIVITIES Payments on capital leases (155) (75) Payments on loan payable (375) (420) Payments under co-promotion agreement (2,000) (1,000) Proceeds from issuance of convertible preferred stock and warrants (Net) 14,034 -- Net proceeds from stock option exercises 240 229 Foreign exchange (194) -- -------- -------- Cash flows used in financing activities 11,550 (1,266) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (5,186) (2,149) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,783 13,494 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,597 $ 11,345 ======== ======== See notes to consolidated financial statements. Page 3 ORTHOLOGIC CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. FINANCIAL STATEMENT PRESENTATION The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The consolidated balance sheet as of September 30, 1998, and the consolidated statements of operations and cash flows for the nine months ended September 30, 1998 and 1997 are unaudited, however, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the financial position, results of operations and cash flows. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the complete fiscal year. The Balance Sheet as of December 31, 1997 is derived from the Company's audited financial statements included in the 1997 Annual Report. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 1997 Annual Report. 2. ACQUISITION On March 3, 1997 and March 12, 1997, the Company acquired certain assets and assumed certain liabilities of Toronto Medical Corp. ("Toronto") and Danninger Medical Technology, Inc. ("DMTI"). After paying certain of the assumed liabilities, the net cash outlay was approximately $7.2 million for Toronto and $11 million for DMTI. Both acquisitions were accounted for as a purchase which resulted in goodwill of $4 million for Toronto and $7.7 million for DMTI. The goodwill is being amortized over 20 years. Had the Toronto and DMTI acquisitions occurred on January 1, 1997, combined unaudited pro forma results for the nine months ended September 30,1997 would have been $57.1 million net revenues, $17.8 million net loss and (.71) net loss per common share. The operations were fully integrated in the Company's financial statements for 1998. 3. CO-PROMOTION AGREEMENT The Company entered into an exclusive, co-promotion agreement (the "Co-Promotion Agreement') with Sanofi Pharmaceuticals, Inc. ("Sanofi") on September 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 initial term of the Co-Promotion Agreement ends on December 31, 2002. Upon the expiration of the initial term, Sanofi may terminate the Co-Promotion Agreement, extend the agreement for an additional one year period, or enter into a revised Page 4 Co-Promotion Agreement with the Company. Upon termination of the Co-Promotion Agreement, Sanofi must pay the Company an amount equal to 50% of the gross compensation paid to the Company, pursuant to the Co-Promotion Agreement, for the immediately preceding year. The Company is paid a commission which is based upon the number of units sold at the wholesale acquisition costs less amounts for distribution costs, discounts, rebates and returns. In addition, the Company is obligated: to use its best efforts to market and promote Hyalgan; to pay Sanofi a royalty of 10% of the net selling price, as defined; and to pay the manufacturer of Hyalgan a product transfer price and a pro-rata portion of a 10% royalty on combined annual net sales of Hyalgan by Sanofi and the Company in excess of $30 million. In addition, the Company is obligated to pay a total of $4.0 million during the first eighteen months of the agreement. During 1997 and the first nine months of 1998, the Company paid $3.0 million of this amount. The Company has recorded the remaining $1.0 million as a liability in its financial statements. The Company's sales force began to promote Hyalgan in the third quarter of 1997. 4. LICENSING AGREEMENT The Company announced in January 1998 that it had acquired a minority equity interest in a biotech firm, Chrysalis BioTechnology, Inc. for $750,000. As part of the transaction, the Company was awarded a nine-month world-wide exclusive option to license the orthopedic applications of Chrysalin, a patented 23-amino acid peptide that has shown promise in accelerating the healing process. Chrysalis is currently developing the technology to stimulate the skin-wound healing process and has completed an extensive pre-clinical safety and efficacy profile of the product. In pre-clinical animal studies, Chrysalin was also shown to double the rate of fracture healing with a single injection into the fresh fracture gap. The Company's agreement with Chrysalis contains provisions for the Company to continue and expand its option to license Chrysalin contingent upon regulatory approvals, successful pre-clinical trials, and certain trials and certain milestone payments to Chrysalis by the Company. An additional fee of $750,000 for the initial license was recognized in the third quarter. The agreement has been extended to the earlier of January 1, 1999 or until the Company collects sufficient additional preclinical data to complete its evaluation of the Technology. The Company will pursue commercialization of Chrysalis, initially seeking Food and Drug Administration (FDA) approval for the human clinical trials for the fracture-healing indication. The Company projects that Chrysalis could receive all the necessary FDA approvals and be introduced in the market during 2000. There can be no assurance, however, that the clinical trials will result in favorable data or that FDA approvals, if sought, will be obtained. 5. LITIGATION During 1996, certain lawsuits were filed in the United States District Court for the District of Arizona against the Company and certain officers and directors, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder. Page 5 Plaintiffs in these actions allege that correspondence received by the Company from the FDA regarding the Company's OrthoLogic 1000 Bone Growth Stimulator was material and undisclosed, leading to an artificially inflated stock price. Plaintiffs further alleged that practices referenced in the correspondence operated as a fraud against plaintiffs and 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 seek class action status, unspecified compensatory damages, fees and costs. Plaintiffs also seek extraordinary, all equitable and/or injunctive relief as permitted by law. The actions were consolidated for the purposes in the United States District court for the District of Arizona and lead plaintiffs and counsel were appointed. The Company and its officers and directors moved to dismiss the consolidated amendment complaint for failure to state a claim. The Court dismissed the consolidated amended complaint in its entirety against the Company and its officers and directors, but gave plaintiffs leave to amend all claims to cure all deficiencies. An amended complaint was filed in April 1998, and the Company has moved again to dismiss the amended complaint on virtually the same grounds as it did before. In addition, the Company has been served with a substantially similar action filed in Arizona State Court alleging state law causes of action grounded in the same set of facts. This action remains stayed pending further developments in the Federal action. In addition to the foregoing, a shareholder derivative complaint alleging, among other things, breach of fiduciary duty in connection with the conduct alleged in the aforesaid federal and state court class actions, have also been filed in Arizona State Court. That action remains stayed pending further developments in the Federal consolidated class action. In March 1998, the former owner of the CPM assets acquired in the DMTI acquisition filed a lawsuit in the Court of Common Pleas in Franklin County, Ohio against the Company. The plaintiff alleges that the Company breached the acquisition agreement by not satisfying certain liabilities it assumed in the acquisition and that the Company breached an ancillary agreement for the temporary provision of services following the acquisition. Plaintiff has also demanded from the Court of Common Pleas a declaration that the Company is not entitled to cash escrowed in the acquisition. The Company had previously requested delivery to it of the escrowed cash and demanded indemnification for the plaintiff's breaches of representations and warranties in the acquisition agreement. The costs associated with defending these allegations and the potential outcome cannot be determined at this time and, accordingly, no estimate for such costs have been included in these financial statements. Management believes that the allegations are without merit and will vigorously defend them. Page 6 At September 30, 1998, the Company is involved in various other legal proceedings that arose in the ordinary course of business. In management's opinion, the ultimate resolution of these other legal proceedings will not have a material affect on the financial position, results of operations, or cash flow of the Company. 6. NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income." For the nine month period and the quarter ended September 30, 1998, net income approximated comprehensive income. 7. DEBT The Company has a revolving line of credit agreement with Silicon Valley bank for $7.5 million. 8. ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for doubtful accounts was increased by approximately $9.3 million during the first quarter of 1998, over and above the normal quarterly activity. The increase was a result of a management decision to focus resources on collection of current sales and on re-engineering the overall process of billing and collections. It is no longer considered to be cost effective to expend significant resources on the collection of the older receivables as had been done in the past. For the quarter ending September 30, 1998, total gross accounts receivable decreased by $281,881 while the total allowances for bad debt increased $740,715. For the same quarter in 1997, gross accounts receivable decreased $1.1 million and the total allowance for bad debt increased $250,701. 9. EQUITY PLACEMENT In July 1998, the Company completed a private equity placement with two investors, an affiliate of Credit Suisse First Boston Corp. and Capital Ventures International. Under the terms of the Purchase Agreement, OrthoLogic sold 15,000 shares of Series B Convertible Preferred Stock for $15 million (prior to costs). The Series B Convertible Preferred Stock is convertible into shares of Common Stock 300 days after issuance and will automatically convert, to the extent not previously converted, into Common Stock four years following the date of issuance. Each share of Series B Convertible Preferred Stock is convertible into Common Stock at a per share price equal to the lesser of the average of the 10 lowest closing bids during the 30 days prior to conversion and 103% of the average of the closing bids for the 10 days prior to the 300th day following the issuance. The Series B Convertible Preferred Stock is convertible into Common Stock prior to the 300th day after issuance upon the occurrence of certain events (in which case the conversion price will be the average of the 10 lowest closing bids during the 30 days prior to conversion). This Agreement contains strict covenants that protect Page 7 against hedging and short-selling of OrthoLogic Common Stock while the purchaser holds shares of the Series B Convertible Preferred Stock. In connection with the private placement of the Series B Convertible Preferred Stock, OrthoLogic issued to the purchasers warrants to purchase 40 shares of Common Stock for each share of Series B Convertible Preferred Stock, exercisable at $5.50. The warrants are valued at $1,093,980. The cost of the Equity Offering was approximately $966,000. Both the value of the warrants and the cost of the equity offering will be recognized over the 10 month conversion period as an "accretion of non-cash Preferred Stock Dividends" for the amount of $617,994 per quarter. The Company has filed a registration statement covering the underlying Series B Convertible Preferred Common Stock and Warrants. Proceeds from the private placement will be used to fund new product opportunities, including SpinaLogic, Chrysalin and Hyalgan, as well as to complete the re-engineering of the Company's key business processes. 10. LEGAL SETTLEMENT The Company settled a false claims matter with the U.S. Department of Justice in a case that was filed under qui tam provisions of the Federal False Claims Act. The allegations included the submission of claims for reimbursement for a small number of custom medical devices to various federal care programs including Medicare, TRICARE (formerly known as CHAMPUS) and various state Medicaid programs. The Company denies any wrongdoing or liability with respect to the allegations in this matter. Nevertheless, in effort to avoid the expense, burden and uncertainty of litigation in this case as well as the potential distraction this case could have on the Company's management, the Company agreed to settle this matter. Under the terms of the definitive settlement agreement, the Company paid to the U.S. Department of Justice, on behalf of several federal health care programs including Medicare, TRICARE, and various state Medicaid programs, the amount of $1,000,000. In return, the U.S. Department of Justice has agreed to release the Company's officers, employees, and directors from any causes of actions for civil damages or civil penalties for the various allegations being settled in this matter. The original complaint was dismissed with prejudice. The Company recognized the costs associated with this settlement agreement in the second quarter of 1998. 11. PRE-MARKET APPROVAL SUBMISSION FOR SPINALOGIC-1000 In August 1998, the Company submitted a Pre-Market Approval (PMA) Supplement to the U.S. Food and Drug Administration (FDA) for the SpinaLogic-1000, a new product for the stimulation of spinal fusion. The FDA has accepted the filing, with a filing date of August 20, 1998. Acceptance of the application for filing means that the FDA has made a threshold determination that the application is sufficiently complete to permit substantive review. Page 8 MANAGEMENT'S DISCUSSIONS 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, 1997. RESULTS OF OPERATIONS REVENUES The Company reported revenues of $17.7 million for the third quarter, representing a 2.5% decrease from revenues of $18.2 million for the third quarter of 1997. The Company's revenues increased 1.0% to $54.3 million for the nine months ending September 30, 1998 from $58.8 million for the nine months ended September 30, 1997. Sales finished the quarter below expectations, reflecting a larger than expected impact from the seasonal effect of the summer holiday period. GROSS PROFIT Gross profit increased from $40.0 million for the nine months ended September 30, 1997 to $41.4 million for the nine months ended September 30, 1998. Gross profit, as a percentage of revenue, was 76% for the nine months ended September 30, 1998 compared to 74% for the comparable period during 1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative (SG&A) expenses for the nine months ended September 30, 1998 were $56.3 million, up $12.9 million from the comparable period in 1997. The increase from 1997 is due in part to the variable costs associated with the increased revenue. The first quarter of 1998 also included an increase of $9.3 million in the allowance for doubtful accounts over the normal quarterly provision. As part of a larger project to re-engineer the sales, billings and collections process for enhanced efficiencies, the Company obtained an independent evaluation of its billing files and collection strategies in April of 1998. The information obtained from this study prompted management to change its focus for future collection efforts to be primarily on the more recent sales. The cost of continuing to manage the older accounts receivable to the extent that had been done in the past was no longer considered as cost effective for the Company. This shift in the emphasis for the collections policy prompted the Company to increase the bad debt reserve for the outstanding balances of the older receivables. In addition, a $1 million legal settlement (see Note 10) was recognized in the second quarter of 1998. Page 9 RESEARCH AND DEVELOPMENT Research and Development (R&D) expenses were $2.5 million for the nine months ended September 30, 1998 compared to $1.8 million for the comparable 1997 period. The increase was due to a $750,000 accrual for the initial license fee for Chrysalin. This was partially offset due to the unveiling of a new, single coil version of the OL-1000, no longer in R&D. The device extends the fracture healing benefits of the OL-1000 to the thigh and the long bone of the upper arm, extending from the shoulder to the elbow, and is suitable for treating non-union fractures in most areas for larger individuals. OTHER INCOME AND EXPENSES Other income declined to $269,000 in the nine months ending September 30, 1998 from $1.3 million during the same period in 1997. This decrease is attributed to: (1) the Company not participating in any research grant projects in the current year; and (2) a reduction in cash and investments, which has yielded a reduction in interest income earned to $267,000 in 1998, from $1.2 million in 1997. LIQUIDITY AND CAPITAL RESOURCES On September 30, 1998, the Company had cash and investments of $8.7 million compared to $12.3 million (including short-term investments) at December 31, 1997. The change in cash and investments is primarily the result of a $2 million payment under the Co-Promotion Agreement, a $1.9 million increase in inventory, and the $1 million legal settlement previously discussed. In addition, in January 1998, the Company acquired a $750,000 equity stake in Chrysalis BioTechnology, Inc., a biotech firm, in Galveston, Texas. Cash used for operations amounted to $9.2 million during the nine month period. A portion of operation costs included strengthening the senior management team, reorganizing the field sales force, redesigning business processes and renewing emphasis on product development. In July 1998, the Company completed a private equity placement (see Note 9) providing net proceeds of $14 million. The outstanding line of credit was paid off during the third quarter. The Company anticipates that its cash on hand 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 assurance, however, that this will prove to be the case. If the Company were required to obtain additional financing in the future, there can be no assurance that such sources of capital will be available on terms favorable to the Company, if at all. YEAR 2000 COMPLIANCE The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a 2 digit year is commonly referred to as the Year 2000 Compliance issue. As the year 2000 approaches, such systems may be unable to accurately process certain date-based information. Page 10 The Company has identified all significant applications that will require modification to ensure Year 2000 Compliance. Internal and external resources are being used to make the required modifications and test Year 2000 Compliance. The modification process of all significant applications is substantially complete. The Company plans on completing the testing process of all significant applications by December 31, 1998. In addition, the Company has communicated with others whom it does significant business to determine their Year 2000 Compliance readiness and the extent to which the Company is vulnerable to any third party Year 2000 issues. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. The total cost to the Company of these Year 2000 Compliance activities has not been and is not anticipated to be material to its financial position or results of operations in any given year. These costs and the date on which the Company plans to complete the Year 2000 modification and testing processes are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ from those plans. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain of the statements contained in this document that are not historical facts, including, without limitation, statements of future expectations, projections of results of operations and financial condition, statements and future economic performance and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, involve risks and uncertanties that may cause the actual results, performance or achievement of the Company to differ materially from those contemplated in such forward-looking statements. In addition to the specific matters referred to herein, important factors which may cause actual results to differ from those contemplated in such forward-looking statements include: (i) the results of the Company's efforts to implement its Securities and Exchange business strategy; (ii) actions of the Company's competitors and the Company's ability to respond to such actions; (iii) changes in governmental regulation, tax rates and similar matter; (iv) other risks detailed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and on the Company's other filings with the Securities and Exchange Commission; (v) approval of new products by the FDA and market acceptance of new products; (vi) dependence on third party payors; and (vii) the costs and results of pending litigation. Page 11 Part II - OTHER INFORMATION Item 1. Legal Proceedings See "Note 5 - Litigation" of the Notes to Consolidated Financial Statements above. Item 2. Changes in Securities and Use of Proceeds See "Note 9 - Equity Placement" of the Notes to Consolidated Financial Statements above. Item 6. Exhibits and Reports (a) See Exhibit Index following the Signatures page, which is incorporated herein by reference. (b) Reports on Form 8-K 1. On July 13, 1998, the Company issued 15,000 shares of its Series B Convertible Preferred Stock and related Warrants in a private placement to two institutional investors. The Company estimates the net proceeds of the offering, after expenses, to be approximately $14 million. The Company has filed with the Securities and Exchange Commission a registration statement covering the resale of the shares of Common Stock issuable pursuant to the terms of the Series B Convertible Preferred Stock and related Warrants. The Securities Purchase Agreement, Certificate of Designation, Warrants, and Registration Rights Agreement were filed as exhibits to the Form 8-K. 2. On July 13, 1998, the Company issued a press release regarding the private placement of 15,000 shares of its Series B Convertible Preferred Stock and related Warrants. The press release was filed as an exhibit to a report on Form 8-K. Page 12 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 12, 1998 - ----------------------- (Principal Executive Officer) Thomas R. Trotter /s/ Terry D. Meier Sr. Vice-President and Chief Financial Officer November 12, 1998 - ----------------------- (Principal Financial and Accounting Officer) Terry D. Meier
Page 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS IN ORTHOLOGIC CORPORATION'S REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 2,596,816 6,134,624 44,123,520 20,032,463 12,411,041 49,215,528 12,726,360 7,332,146 93,452,040 11,362,889 0 0 13,558,014 12,649 68,518,488 93,452,040 16,048,799 54,349,305 12,911,573 58,413,073 0 0 0 (16,706,353) (196) 0 0 0 0 (16,706,157) (0.69) (0.69)
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