Capstone Holding Corp. — Interim / Quarterly Report 2001

May 15, 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 March 31, 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 (I.R.S. Employer incorporation or organization) Identification No.) 1275 W. Washington Street, Tempe, Arizona 85281 (Address of principal executive offices) (Zip Code) (602) 286-5520 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 31,437,001 shares of common stock outstanding as of April 30, 2001 ORTHOLOGIC CORP. INDEX PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000............................................. 3 Condensed Consolidated Statements of Operations and of Comprehensive Income for the Three months ended March 31, 2001 and 2000..................................................... 4 Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2001 and 2000........................ 5 Notes to Condensed Consolidated Financial Statements................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 10 Item 3. Quantitative & Qualitative Disclosures about Market Risk................................................. 11 Special Note Regarding Forward-Looking Statements................... 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 14 Item 6. Exhibits and Reports on Form 8-K............................ 16 2 PART I - Financial Information Item 1. Financial Statements OrthoLogic Corp. Condensed Consolidated Balance Sheet (in thousands) March 31, December 31, 2001 2000 --------- --------- (Unaudited) ASSETS Cash and cash equivalents $ 9,829 $ 6,753 Short term investments 1,159 2,492 Accounts receivable, net 27,449 29,951 Inventory, net 8,594 10,007 Prepaids and other current assets 1,536 1,019 Deferred income tax 2,631 2,631 --------- --------- Total current assets 51,198 52,853 Rental fleet, furniture, and equipment 29,305 28,891 Accumulated depreciation (18,062) (17,797) --------- --------- Fleet, furniture and equipment, net 11,243 11,094 Intangibles, net 750 750 Deposits and other assets 257 338 --------- --------- Total assets $ 63,448 $ 65,035 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Accounts payable $ 2,189 $ 3,030 Accrued liabilities 5,773 6,767 --------- --------- Total current liabilities 7,962 9,797 Deferred rent and capital lease obligations 105 88 --------- --------- Total liabilities 8,067 9,885 --------- --------- Series B Convertible Preferred Stock 600 3,240 --------- --------- Stockholders' Equity Common stock 16 15 Additional paid-in capital 135,011 132,332 Common stock to be used for legal settlement 2,969 2,969 Accumulated deficit (82,979) (83,183) Other comprehensive loss (236) (223) --------- --------- Total stockholders' equity 54,781 51,910 --------- --------- Total liabilities and stockholders' equity $ 63,448 $ 65,035 ========= ========= See Notes to Condensed Consolidated Financial Statements 3 OrthoLogic Corp. Condensed Consolidated Statement of Operations and of Comprehensive Income (in thousands, except per share data) Unaudited Three months ended March 31, -------------------- 2001 2000 -------- -------- Revenues $ 21,682 $ 22,490 Cost of revenues 4,733 4,808 -------- -------- Gross profit 16,949 17,682 Operating expenses Selling, general and administrative 16,103 16,316 Research and development 704 666 -------- -------- Total operating expenses 16,807 16,982 Operating income 142 700 Other income 129 85 -------- -------- Income before income taxes 271 785 Provision for income taxes 67 91 -------- -------- Net income $ 204 $ 694 ======== ======== BASIC EARNINGS PER SHARE Net income per common share $ 0.01 $ 0.02 -------- -------- Weighted average number of common shares outstanding 31,140 29,060 -------- -------- DILUTED EARNINGS PER SHARE Net income per common and equivalent shares $ 0.01 $ 0.02 -------- -------- Weighted shares outstanding 31,649 30,628 -------- -------- Consolidated Statement of Comprehensive Income Net income applicable to common shareholders $ 204 $ 694 Foreign translation adjustment (13) (13) -------- -------- Comprehensive income applicable to common shareholders $ 191 $ 681 ======== ======== See Notes to Condensed Consolidated Financial Statements 4 ORTHOLOGIC, CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) UNAUDITED Three months ended March 31, -------------------- 2001 2000 ------- ------- OPERATING ACTIVITIES Net income $ 204 $ 694 Noncash items: Depreciation and amortization 281 1,441 Net change on other operating items: Accounts receivable 2,502 (557) Inventory 1,413 362 Prepaids and other current assets (517) (147) Deposits and other assets 81 128 Accounts payable (841) (126) Accrued liabilities (994) (596) ------- ------- Cash flows provided by operating activities 2,129 1,199 ------- ------- INVESTING ACTIVITIES Purchase of fixed assets (430) (702) Officer note receivable, net -- 158 Sales of short-term investments 1,333 250 ------- ------- Cash flows provided by (used in) investing activities 903 (294) ------- ------- FINANCING ACTIVITIES Payments on capital leases 17 (19) Foreign exchange (13) (13) Net proceeds from stock option exercises 40 157 ------- ------- Cash flows provided by financing activities 44 125 ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 3,076 1,030 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,753 6,023 ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,829 $ 7,053 ======= ======= Supplemental disclosure of cash flow information Cash paid during the period for interest 20 44 Cash paid during the period for income taxes -- 1 See Notes to Condensed Consolidated Financial Statements 5 ORTHOLOGIC CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. FINANCIAL STATEMENT PRESENTATION The Condensed Consolidated Balance Sheet as of March 31, 2001, and the Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2001 and 2000 and the Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000 are unaudited. However, in the opinion of management, such financial statements 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, 2000 is derived from the Company's audited financial statements included in the 2000 Annual Report on Form 10-K. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's 2000 Annual Report on Form 10-K. The preparation of financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. A significant estimate in the accompanying financial statements is the allowance for doubtful accounts and sales discounts and adjustments, which are based primarily on trends in historical collection statistics, consideration of current events, payer mix and other considerations. The Company derives a significant amount of its revenues in the United States from third-party health insurance plans, including Medicare. Amounts paid under these plans are generally based on fixed or allowable reimbursement rates. Another significant estimate includes the carrying value of the Continuous Passive Motion ("CPM") business (See Note 7). In the opinion of management, adequate allowances have been provided for doubtful accounts and contractual adjustments. However, these estimates are subject to adjustments in the near term, which could be material. Any differences between estimated reimbursement and final determinations are reflected in the year finalized. 2. CO-PROMOTION AGREEMENT FOR HYALGAN The Company entered into an exclusive Co-Promotion agreement (the "Agreement") with Sanofi Pharmaceuticals Inc. ("Sanofi") at a cost of $4.0 million on June 23, 1997 for the purpose of marketing Hyalgan, a hyaluronic acid sodium salt, to orthopedic surgeons in the United States for the treatment of pain in patients with osteoarthritis of the knee. The Company's sales force began to promote Hyalgan in the third quarter of 1997. Fee revenue of $9.3, $8.3 and $8.7 million was recognized during 2000, 1999, and 1998 respectively. In the fourth quarter of 2000, the Company and Sanofi mutually agreed to terminate this Agreement. The Company has returned the rights to sell Hyalgan back to Sanofi. Royalty revenue for Hyalgan were $716,000 in the quarter ended March 31, 2001 compared to Hyalgan sales revenues of $1.8 million in the same period in 2000. The Company received $4 million over the fourth quarter of 2000 and the first quarter of 2001 for the return of the rights and a successful transition of the business back to Sanofi, and will receive continuing royalties for the next two years. Of the $4 million cash received, $1 million was received the quarter ended March 31, 2001. 6 3. LICENSING AGREEMENT FOR CHRYSALIN The Company announced in January 1998 that it had acquired a minority interest in a biotech firm, Chrysalis Bio Technology, Inc. ("Chrysalis") for $750,000. As part of the transaction, the Company was awarded a nine-month world-wide exclusive option to license the orthopedic applications of Chrysalin, a patented 23-amino acid peptide that has shown promise in accelerating the healing process and has completed an extensive pre-clinical safety and efficacy profile of the product. In pre-clinical animal studies, Chrysalin was also shown to double the rate of fracture healing with a single injection into the fresh fracture gap. The Company's agreement with Chrysalis contains provisions for the Company to continue and expand its options to license Chrysalin contingent upon regulatory approvals, successful preclinical trials, and certain milestone payments to Chrysalis by the Company. As part of the equity investment, OrthoLogic acquired options to license Chrysalin for orthopedic applications. An additional fee of $750,000 for the initial license was expensed in the third quarter of 1998 and the Agreement was extended to January 1999. In January 1999, the Company exercised its option to license the U.S. development, marketing and distribution rights of Chrysalin, for fresh 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. In July 2000, the Company paid $2 million to Chrysalis and announced it was expanding its license agreement to include all Chrysalin orthopedic indications worldwide. In addition, the agreement calls for the Company to pay certain 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. 4. 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 OL 1000 Bone Growth Stimulator, and the matters set forth therein, were material and undisclosed, leading to an artificially inflated stock price. Plaintiffs further allege that the Company's non-disclosure of the FDA correspondence and of the alleged practices referenced in that correspondence operated as a fraud against plaintiffs, in that the Company allegedly made untrue statements of material facts or omitted to state material facts in order to make the statement not misleading. Plaintiffs further alleged that once the FDA letter became known, a material decline in the stock price of the Company occurred, causing damage to the plaintiffs. All plaintiffs sought class action status, unspecified compensatory damages, fees and costs. Plaintiffs also sought extraordinary, equitable and/or injunctive relief as permitted by law. The actions were consolidated for all purposes in the United States District Court for the District of Arizona. On March 31, 1999, the judge in the consolidated case before the United States District Court granted the Company's Motion to Dismiss and entered an order dismissing all claims in the suit against the 7 Company and two individual officers/directors. The judge allowed certain narrow claims based on insider trading theories to proceed against certain individual defendants. On December 21, 1999, the District Court granted plaintiffs' motion for class certification to include purchasers of common stock between June 4 through June 18, 1996, inclusive. On or about June 20, 1996, a lawsuit entitled Norman Cooper, et. al. v. OrthoLogic, Corp., et. al, and Case No. CV 96-10799 was filed in the Superior Court, Maricopa County, and Arizona. The plaintiffs allege violations of Arizona Revised Statutes Sections 44-1991 (state securities fraud) and 44-1522 (consumer fraud) and common law fraud based upon factual allegations substantially similar to those alleged in the federal court class action complaints. Plaintiffs sought class action status, unspecified compensatory and punitive damages, fees and costs. Plaintiffs also sought injunctive and/or equitable relief. The Company filed a Motion to Dismiss the Complaint in the Arizona State Court in May 1999. The Court denied the motion in July 1999, and granted the plaintiffs' motion for the class certification on November 24, 1999. In October 2000, the Company announced that it had entered into a Memorandum of Understanding regarding settlement of the remaining class action claims and the Norman Cooper lawsuits. The settlement consists of $1 million in cash and one million shares of newly issued OrthoLogic Common Stock valued at $2,969,000. A significant portion of the cash payment was funded from its directors' and officers' liability insurance policy. The Company recorded a $3.6 million charge, including legal expenses, for settlement of the litigation. The settlement is subject to approval by the lead plaintiffs and defendants; the preparation, execution and filing of the formal Stipulation of Settlement; notice to the settlement members; and final approval of the settlement by the courts at a hearing. Management believes the settlement is in the best interests of the Company and its shareholders as it frees the Company from the cost and significant distraction of the ongoing litigation. The agreement to the Memorandum of Understanding does not constitute, and should not be construed as, an admission that the defendants have any liability or acted wrongfully in any way with respect to the plaintiffs or any other person. At March 31, 2001, in addition to the matters disclosed above, the Company is involved in other various legal proceedings and product liability claims that arose in the ordinary course of business. The costs associated with defending these other matters cannot be determined at this time and accordingly, no estimates for such costs have been included in these financial statements. In management's opinion, the ultimate resolution of these legal proceedings will not have a material effect on the financial position, results of operations, or liquidity of the Company. 5. LINE OF CREDIT The Company has secured a $10.0 million accounts receivable revolving line of credit with a lending institution. The Company may borrow up to 75% of the eligible accounts receivable, as defined in the agreement. The interest rate is at prime rate. Interest accruing on the outstanding balance and a monthly administration fee is due in arrears on the first day of each month. The line of credit expires February 28, 2003. There are certain financial covenants and reporting requirements associated with the loan. Included in the financial covenants are (1) tangible net worth of not less than $43 million, (2) a quick ratio of not less than 2.0 to 1.0, (3) a debt to tangible net worth ratio of not less than 0.50 to 1.0, and (4) capital expenditures will not exceed more than $7.0 million during any fiscal year. The Company has not utilized this line of credit. 8 6. SERIES B CONVERTIBLE PREFERRED STOCK As of March 31, 2001, 14,400 shares of Series B Convertible Preferred Stock had been converted into 5,746,584 shares of Common Stock. 7. PLANS TO DIVEST THE CONTINUOUS PASSIVE MOTION BUSINESS In January 2001, the Company announced plans to divest its CPM business to refocus the Company on its core business of fracture healing and spinal repair. After careful consideration, the Board felt the emphasis on the rehabilitation segment of the orthopedic business no longer fit the Company's long-term strategic plan. As a result of the decision to divest this business in the fourth quarter of 2000, the Company wrote off the remaining $23.3 million of Goodwill related to the CPM business. The goodwill was assessed to be impaired in accordance with Statement of Financial Standards ("SFAS") No. 121. The Company announced on May 9, 2001 that it signed an Asset Purchase Agreement to sell the assets of the CPM business to OrthoRehab, Inc. The structure of the transaction calls for the purchaser to make a cash payment at closing, additional contingent payment at a later date based on performance, and the assumption of certain liabilities. In addition, OrthoLogic would retain certain accounts receivable. The total cash to be received from the sale could be as much as $15 million, assuming the full amount of contingent payment is received by OrthoLogic. In accordance with SFAS No. 121, the Company has assessed the carrying value of the net assets to be sold, considering the terms and conditions of the Definitive Agreement signed with OrthoRehab, Inc. and currently believes that the carrying value of the net assets will be recovered from cash proceeds expected to be received from the sale to OrthoRehab, Inc. and cash expected to be generated from continuing to operate the CPM business through the expected close date in June 2001. Adjustments to the carrying value of the CPM net assets to be sold may be necessary in the future if expected cash flows from the CPM business are not realized. Once the closing of the transaction occurs, management anticipates that the Company would record a one-time charge, currently estimated to be $7 million to $10 million for costs, primarily severance and other exit costs, associated with the final divestiture of the CPM business. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS. The following is management's discussion of significant factors that affected the Company's interim financial condition and results of operations. This should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. RESULTS OF OPERATIONS REVENUES The Company reported revenues of $21.7 million for the first quarter of 2001 representing a 3.6% decrease from revenues of $22.5 million for the same quarter of 2000. The decrease in sales is attributable to a decline in CPM sales due to the Company's decision to increase efficiency and improve profitability as well as the loss of Hyalgan sales due to the termination of the Company's distribution of Hyalgan. Sales from the CPM products were $14.1 million in the quarter ended March 31, 2001 compared to $15.5 million in the same period last year. The revenue decline was partially offset by increased sales of the OL 1000 and SpinaLogic in the quarter ended March 31, 2001, as compared to the same quarter last year. GROSS PROFIT Gross profits decreased from $17.7 million for the three months ended March 31, 2000 to $16.9 million for the three months ended March 31, 2001, a 4.5% decrease. Gross profits as a percentage of revenues was 77.8% for the quarter compared to 78.6% for the same period last year. The decline in the gross profit is primarily attributable to the loss of Hyalgan distribution revenue, which had no associated cost of goods expense. Gross profits for the CPM business was $10.6 million for the quarter ended March 31, 2001, compared to $11.8 million for the same period in 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A")for the three months ended March 31, 2001 were $16.1 million, a decrease from $16.3 million for the three months ended March 31, 2000. Most operating expenses are not directly allocated between the Company's various lines of business. The decline in 2001 SG&A expenses is primarily attributed to reductions in marketing and other expenses compared to the same period in 2000 which were partially offset by an increase in commission expenses paid to a third-party distributor due to increased SpinaLogic sales. RESEARCH AND DEVELOPMENT Research and development expenses increased with expenses of $704,000 in the three-month period ended March 31, 2001 compared to $666,000 for the same period last year. This increase is primarily attributable to costs associated with the combined Phase I/II human clinical trials for Chrysalin. 10 OTHER INCOME AND EXPENSES Other income, consisting primarily of interest income, increased from $85,000 to $129,000 for the three-month periods ended March 31, 2000 and 2001 respectively. LIQUIDITY AND CAPITAL RESOURCES On March 31, 2001 the Company had cash and cash equivalents of $9.8 million compared to $6.8 million as of December 31, 2000. Cash provided by operations amounted to $2.1 million for the three-month period ended March 31, 2001, compared to $1.2 million for the same period in the previous year. Cash provided from investing activities amounted to $900,000 compared to cash needed for investing activities of $294,000 for the same period last year. Cash provided by the sales of securities in the normal course of investment activities more than offset the purchase of fixed assets in the period ended March 31, 2001. Cash provided by financing activities amounted to $44,000 during the three-month period ended March 31, 2001 compared to cash used for financing of $125,000 for the same period last year. The Company has an available $10.0 million accounts receivable revolving line of credit with a bank. The Company anticipates that its cash and short-term investments on hand, cash from operations and the funds available from the line of credit will be sufficient to meet the Company's presently projected cash and working capital requirements for the next 12 months. There can be no assurances, however, that this will prove to be the case. The timing and amounts of cash used will depend on many factors, including the Company's ability to continue to increase revenues, reduce and control its expenditures, continue profitability and collect amounts due from third party payers. Additional funds may be required if the Company is not successful in any of these areas. The Company's ability to continue funding its planned operations beyond the next 12 months is dependent on its ability to generate sufficient cash flow to meet its obligations on a timely basis, or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required. On May 9, 2001, the Company announced it had signed an agreement to sell assets of the CPM business to another company (See Note 7). It is anticipated that the sale will have an affect on the collateral of the existing $10 million line of credit, and therefore the terms of the line of credit will be changed. While the final disposition of this sale and subsequent affects on the cash position of the Company have not been determined, the Company anticipates that its cash and short-term investments on hand, cash from operations, funds generated from the asset sale, and the funds available from the renegotiated line of credit will be sufficient to meet the Company's projected cash and working capital requirements for the next 12 months. ITEM 3. MARKET RISKS. The Company has no debt and no derivative instruments at March 31, 2001. The Company has exposure to foreign exchange rates through its manufacturing subsidiary in Canada. The Company does not use foreign currency forward contracts or commodity contracts to limit this exposure. The Company is not currently vulnerable to a material extent to fluctuations in interest rates and commodity prices. 11 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections of results of operations and financial condition, statements of future economic performance, and general or specific statements of future expectations and beliefs. The matters covered by such forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to differ materially from those contemplated or implied by such forward-looking statements. Important factors which may cause actual results to differ include, but are not limited to, the following matters, which are discussed in more detail in the Company's Form 10-K for the 2000 fiscal year. The Company has periodically discussed with third parties the possible acquisition or disposition of technology, product lines, and businesses in the orthopedic health care market. Additionally, the Company continues to evaluate strategies and alternatives that will position the Company to compete effectively in the future. Any change in future operating strategies of the Company could result in an adjustment to the carrying values of current recorded assets. In particular, upon closing the divestiture of the CPM business, the Company's balance sheet will reflect the loss of the sold assets (particularly in inventory and accounts receivable) and the corresponding increase in cash. In addition, the Company plans to record a $3 million to $5 million loss on the sale of the assets, as well as recognize a one-time charge of $7 million to $10 million to cover ongoing costs associated with the sale. If the closing occurs as planned in June, the charges and losses will appear in the second quarter financial statements. Further, the sale of the CPM business, which historically was one of the Company's core businesses, could have an effect in the long-term results of the operations as the Company concentrates its efforts on the sales of the OL 1000 (and related products) and SpinaLogic. The loss of product diversification and the CPM sales force will make the Company To the extent that the Company presently enjoys perceived technological advantages over competitiors, 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. 12 Although the company believes that existing securities litigation initiated against the Company is without merit and the Company has entered into a Memorandum of Understanding with the plaintiffs to settle the litigation. The settlement must still be approved by the class of plaintiffs and the court. Further, members of the class have the option to opt out of the settlement and pursue claims on their own. If the class or court rejects the settlement, the litigation could continue. An adverse outcome of such litigation could have a material adverse effect on the Company's business, financial condition and results of operation. The Company intends to pursue sales in international markets. The Company, however, has had little experience in such markets. Expanded efforts at pursuing new markets necessarily involves expenditures to develop such markets and there can be no assurance that the results of those efforts will be profitable. There can be no assurance that the Company's estimates of the market will not cause the nature and extent of that market to deviate materially from the Company's expectations. 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See "Note 4 - Litigation" of the Notes to the Condensed Consolidated Financial Statements above. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None ITEM 6. EXHIBITS AND REPORTS (a) Exhibit Index See Exhibit Index following the signature page which is incorporated herein by reference. (b) Reports on Form 8-K None 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ORTHOLOGIC CORP. (Registrant) Signature Title Date --------- ----- ---- /s/ Thomas R. Trotter President and Chief Executive May 11, 2001 - --------------------- Officer (Principal Executive Thomas R. Trotter Officer) /s/ Terry D. Meier Sr. Vice-President and Chief May 11, 2001 - --------------------- Financial Officer (Principal Terry D. Meier Financial and Accounting Officer) 15 OrthoLogic Corp. Exhibit Index to Quarterly Report on Form 10-Q For the Quarterly Period Ended March 31, 2001 Exhibit No Description Filed Herewith - ---------- ----------- -------------- 10-22 Employment Agreement effective As of December 4, 2000 between The Company and Shane Kelly X 10-23 Employment Agreement effective As of January 2, 2001 between The Company and Donna Lucchesi X