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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
|_| TRANSITION REPORT UNDER 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2850 South 36th Street, Suite 16, Phoenix, Arizona 85034
(Address of principal executive offices)
Issuer's telephone number: (602) 437-5520
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
None N/A
- -------------------- ------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0005 per share;
Rights to purchase 1/100 of a share of Series A Preferred Stock
---------------------------------------------------------------
(Title of Class)
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 report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10- K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing bid price of the registrant's Common
Stock as reported on the Nasdaq National Market on February 21, 1997 was
approximately $146,117,400. Shares of Common Stock held by each officer and
director and by each person who owns 10% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive.
The number of outstanding shares of the registrant's Common Stock on
February 21, 1997 was 25,031,846.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1996 are incorporated by reference in Part II
hereof and portions of the Registrant's Proxy Statement for the Annual Meeting
of Stockholders to be held on May 16, 1997 are incorporated by reference in Part
III hereof.
ORTHOLOGIC CORP.
FORM 10-K ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PART I
Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 11
Item 3. Legal Proceedings............................................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 13
Executive Officers of the Registrant.................................................................. 13
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters..................... 15
Item 6. Selected Financial Data...................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 15
Item 8. Financial Statements and Supplementary Data.................................................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 21
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 22
Item 11. Executive Compensation....................................................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 22
Item 13. Certain Relationships and Related Transactions............................................... 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 22
SIGNATURES............................................................................................S-1
PART I
------
Item 1. Business
General
The Company was incorporated as a Delaware corporation in July 1987 as
IatroMed, Inc. and changed its name to OrthoLogic Corp. in July 1991. Unless the
context otherwise requires, the "Company" or "OrthoLogic" as used herein refers
to Orthologic Corp. and its subsidiaries. The Company's executive offices are
located at 2850 South 36th Street, Phoenix, Arizona 85034, and its telephone
number is (602) 437-5520.
OrthoLogic develops, manufactures and markets proprietary, technologically
advanced orthopaedic devices for the orthopaedic healthcare market including
bone growth stimulation, Continuous Passive Motion ("CPM") devices and ancillary
orthopaedic recovery products. OrthoLogic's devices and other rehabilitation
products are designed to enhance the healing of diseased, damaged, degenerated
or recently repaired musculoskeletal tissue. The Company's products focus on
improving the clinical outcomes and cost-effectiveness of orthopaedic procedures
that are characterized by compromised healing, high-cost, potential for
complication and long recuperation time.
The Company entered the CPM business with its acquisition of Sutter
Corporation ("Sutter") in August 1996. Sutter manufactures and markets CPM
devices. Sutter also offers ancillary orthopaedic products such as bracing and
cryotherapy through its CarePlan. CarePlan is a product and service concept that
enables a sales representative to offer surgeons a range of ancillary
orthopaedic products. The Company has included Sutter's operations in its
consolidated financial statements since August 30, 1996. The Company continued
to develop its CPM business when its newly formed subsidiary, Toronto Medical
Orthopaedics Ltd., a Canada corporation, acquired substantially all of the
assets and business of Toronto Medical Corp, an Ontario corporation, and its
United States subsidiaries in March 1997. The Company also acquired Danninger
Medical Technology, Inc.'s CPM product line in March 1997.
OrthoLogic periodically discusses with third parties the possible
acquisition of technology, product lines and businesses in the orthopaedic
healthcare market and from time to time enters into letters of intent that
provide OrthoLogic with an exclusivity period during which it considers possible
acquisitions.
Products
OrthoLogic's primary products include bone growth stimulation
and fracture fixation devices ("Fracture Healing Products") and CPM devices and
related products ("Orthopaedic Rehabilitation Products"). These products are
sold primarily through the Company's direct sales force. For 1996, 1995 and
1994, revenues from Fracture Healing Products and Orthopaedic Rehabilitation
Products as a percentage of total revenues were as follows:
Percentage of Total Net Revenues,
Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Fracture Healing Products 68% 100% 100%
Orthopaedic Rehabilitation Products 32% -0- -0-
Fracture Healing
OrthoLogic(R) 1000. OrthoLogic's bone growth stimulation product is the
OrthoLogic 1000. Prescribed by a physician, the OrthoLogic 1000 is a portable,
noninvasive magnetic field bone growth stimulator designed for home treatment of
patients who have a non-healing fracture. The OrthoLogic 1000 comprises two
magnetic field treatment transducers (coils) and a microprocessor-controlled
signal generator that delivers highly specific, low energy combined static and
alternating magnetic fields.
In 1989, the Company received U.S. Food and Drug Administration ("FDA")
clearance of an Investigational Device Exemption ("IDE") to conduct a clinical
trial of the OrthoLogic 1000 for the treatment of patients with a specific
variety of non-healing fracture called a nonunion fracture of certain long
bones. A nonunion fracture was defined for the purposes of this study as a
fracture that remains unhealed for at least nine months post-
injury. The patients enrolled in the Company's clinical trial had very severe
nonunion fractures; the average fracture remained non-healing for 2.4 years
post-injury and had an average of 2.5 unsuccessful surgical procedures performed
prior to enrollment. Based on the data submitted to the FDA in the Company's
Pre-Market Approval ("PMA") application, 60.7% of these non-healing fractures
healed. In March 1994, the FDA granted the Company PMA approval to market this
product for treatment of nonunion fractures of certain long bones. As a
condition of the March 1994 PMA approval for the OrthoLogic 1000, the FDA
required the Company to maintain a registry of all patients using the device.
Based on an initial review of the approximately 400 patients who had nonunion
fractures (as defined above) and then completed treatment at the time the
Company submitted registry data in July 1996, approximately 72% of the patients
have healed.
In 1990, the Company received supplemental IDE clearance to conduct
human clinical trials of the OrthoLogic 1000 on patients with another type of
non-healing fracture called a delayed union fracture. For purposes of this
study, a delayed union fracture was defined as a non-healing fracture five to
nine months post-injury. This clinical trial was designed as a double-blind,
placebo-controlled, randomized study. An analysis of the data has been completed
by the Company, and this analysis indicates the benefit of the OrthoLogic 1000
in the treatment of delayed union fractures. However, the Company believes that
a larger number of patients is necessary to establish statistical significance.
Although the data on the active OrthoLogic 1000 units showed a positive effect,
the healing rate in the placebo group was greater than originally anticipated.
The Company recently combined the existing data from the study with delayed
union data collected in the Company's Post Marketing Clinical Registry. This
combined data set has been analyzed and submitted to the FDA to support the
Company's request to expand the non-union definition to include patients five
months post-injury. There can be no assurance that this data will result in
regulatory approval.
SpinaLogic(R) 1000. The SpinaLogic 1000 is a portable, noninvasive
magnetic field bone growth stimulator being developed to enhance the healing
process as either an adjunct to spinal fusion surgery or as treatment for a
failed spinal fusion surgery. The Company believes that the SpinaLogic 1000
offers benefits similar to those of the OrthoLogic 1000 in that it is relatively
easy to use, requires a small power supply and requires only 30 minutes of
treatment per day. The SpinaLogic 1000 consists of one magnetic field treatment
transducer and a microprocessor-controlled signal generator, both of which are
positioned near the spine through use of an adjustable belt which the patient
places around the torso. The Company received approval of an IDE from the FDA in
August 1992 and commenced clinical trials for the SpinaLogic 1000 as an adjunct
to spinal fusion surgery in February 1993. The Company received approval of an
IDE supplement from the FDA in September of 1995 to conduct a clinical trial of
the SpinaLogic 1000 as a noninvasive treatment for a failed spinal fusion
surgery. The Company commenced this on-going clinical trial in the fourth
quarter of 1995. The Company has not yet applied for FDA approval to market the
SpinaLogic 1000, and there can be no assurance that the Company will receive
such approval if sought.
BioLogic(R) Magnetic Field Technology. The natural process of
musculoskeletal tissue healing involves a complex interaction of several
physiological processes, which include the stimulation of specific cells such as
osteoblasts, fibroblasts and endothelial cells. When an injury occurs, growth
factors are produced at the healing site which stimulate selected cells to
initiate the healing cascade. In most cases, these cells are able to initiate
repair in response to an injury and restore the musculoskeletal tissue to its
original strength and structure. Cell stimulation is a necessary component of
tissue regeneration and is dependent upon certain triggering events that
activate the production of connective tissue. The BioLogic technology is a
second generation magnetic field technology licensed to the Company and used in
the OrthoLogic 1000 and SpinaLogic 1000. The technology utilizes a specific
combination of a low energy static magnetic field with a low-energy alternating
magnetic field, which the Company believes increases cell stimulation. The
technologies employed in first generation electromagnetic bone growth
stimulators produce only an alternating magnetic field. The Company believes the
use of combined static and alternating magnetic fields in its BioLogic
technology increases the potency of the treatment and therefore reduces the
required daily treatment time. The BioLogic technology is also a low-energy
technology. The strength of the BioLogic magnetic fields are in the range of the
earth's magnetic field. By comparison, the strength of the magnetic fields
produced by competitive technologies is many times greater than that of the
earth's magnetic field.
In addition to the OrthoLogic 1000 and the SpinaLogic 1000, the Company
is also engaged in research of additional applications of the proprietary
BioLogic technology, including cartilage regeneration and osteoporosis
treatment.
2
Fracture Fixation. The Company's fracture fixation products consist of
the OrthoFrame(R) External Fixator, the OrthoFrame/Mayo Wrist Fixator and the
OrthoNail(TM), an intramedullary rod for humeral and tibial fractures.
OrthoFrame products are external fixation devices constructed of non-metallic
carbon fiber-epoxy composite material. The OrthoFrame offers a versatile design
which can be utilized for immobilization of a wide array of fracture types,
including tibia, femur, ankle, elbow and pelvic fractures. The OrthoFrame/Mayo
Wrist Fixator is a specialized device developed in cooperation with the
Orthopaedic Department of the Mayo Clinic, Rochester, Minnesota, for the
treatment of complex wrist (Colles) fractures. The Orthopaedic Department of the
Mayo Clinic has agreed to provide ongoing clinical input on future design
enhancements for the OrthoFrame/Mayo Wrist Fixator. Both products utilize
non-metallic carbon fiber-epoxy materials to reduce device weight and are
radiolucent (i.e., eliminate the blocking of x-rays caused by metallic devices).
The Company believes that the patented fracture alignment mechanism of the
OrthoFrame products allows for simpler application, and the radiolucency and
light weight composite materials of the OrthoFrame products provide benefits to
both surgeon and patient. OrthoFrame products are shipped pre-assembled in
sterile packaging to increase ease-of-use for the surgeon and to reduce handling
and inventory expenses for the hospital. The OrthoNail is an internal fixation
device used to treat fractures of the humerus and tibia. The Company received
510(k) marketing clearance from the FDA in September 1995 and commenced selling
the product for humerus fractures in December 1995. In March 1996, the Company
received 510(k) marketing clearance from the FDA for the version of the
OrthoNail to be used in connection with fractures of the tibia. The Company does
not actively market the OrthoNail.
Orthopaedic Rehabilitation
Continuous Passive Motion. The Company began manufacturing and leasing
CPM products upon its acquisition of Sutter in August 1996. CPM devices provide
controlled, continuous movement of joints and limbs without requiring the
patient to exert muscular effort and are intended to be applied immediately
following trauma or surgery to repair or replace joints. The products are
designed to reduce pain and swelling, accelerate recovery of joint movement,
reduce the length of a hospital stay, and reduce the incidence of complications.
The major market for CPM devices is for use immediately following knee and hip
joint replacement surgeries. CPM devices are used primarily by post-surgery
orthopaedic patients in hospitals and in their homes. CPM devices are also used
in nursing homes, sports medicine clinics and private practice physical therapy
clinics.
The Company's Sutter Legasus Sport CPM(R) and SportLite(R)PB are
designed for knee rehabilitation. The Legasus Sport CPM(R) facilitates full
extension after knee surgery and has an optional patella mobilizer to prevent
scarring. The SportLite(R)PB is an adjustable post-operative knee brace. The
Company also offers a LiteLift(R) CPM specifically designed for hospital use.
The Company's other CPM products include the WaveFlex(TM)C.F.T. hand CPM device
for post-surgical hand rehabilitation and the CPM 9000AT(TM) for ankle
rehabilitation. Sutter recently began marketing its Sutter CarePlan(TM) and
Sutter CarePlan(TM)II to offer physicians a single source for products required
for a patient's rehabilitation and to allow physicians to customize procedures
and streamline rehabilitation protocols. The Sutter CarePlan(TM) and Sutter
CarePlan(TM)II include the Company's Sutter products as well as products that
Sutter purchases from third party suppliers. While the majority of Sutter's
products are designed for the lower extremity, the Company's other CPM products
acquired in 1997 include a wide range of CPM devices for most human joints on
which CPM is used.
Ancillary Orthopaedic Products. The Company offers a line of both
postoperative and functional braces and ancillary orthopaedic products such as
cryotherapy through its CarePlan. Postoperative braces are used in the period
immediately following surgery to provide stability, within a controlled range of
motion, to the operative site. Functional braces are used in the long-term
rehabilitation phase after a patient begins to participate in sporting
activities and can be used for a year or longer after surgery/injury.
Cryotherapy is a treatment modality that cools the operative site to reduce pain
and swelling. There are several types of cryotherapy devices, ranging from ice
packs to clinical units. In 1996, Sutter introduced a new cryotherapy device
called the Blue Arctic. The device provides temperature-controlled cold therapy
using a reservoir of ice water and a pump that circulates the water through a
pad placed over the injury/surgical site.
3
Other Product Development
OrthoSound(TM). The Company currently is conducting preclinical and a
pilot clinical trial relating to the design, development and testing of
diagnostic and therapeutic devices utilizing its nonthermal ultrasound
technology ("OrthoSound") for use in medical applications that relate to bone,
cartilage, ligament or tendon diagnostics and healing. In the area of
diagnostics, the OrthoSound research projects address the potential use of
ultrasound for the assessment of bone strength and fracture risk in osteoporotic
patients and the assessment of fracture healing. In therapeutic applications,
the focus of the OrthoSound research is on the potential use of ultrasound for
the treatment of at-risk fractures to increase the healing rate and reduce the
need for subsequent surgical procedures. The Company has not yet applied for FDA
approval to market the OrthoSound, and there can be no assurance that the
Company will do so or that it would receive such approval if sought.
Marketing and Sales
Fracture Healing Products are prescribed by orthopaedic surgeons and
podiatrists practicing in private practices, hospitals and orthopaedic and
podiatric treatment centers. The Company is focusing its marketing and sales
efforts on these groups, with particular emphasis on those clinicians who treat
bone healing problems. CPM products are prescribed by orthopaedic surgeons,
hospitals, orthopaedic trauma centers and allied health professionals. CPM
devices are leased to the patient, typically for a period of one to three weeks.
Additionally, the Company utilizes physician-to-physician selling via
presentations and scientific and clinical articles published in medical
journals.
As a result of the Company's transition during 1996 to an internal
salesforce, the Company's sales and marketing efforts now are primarily
conducted directly through the Company's own sales people. The Company also has
retained selling agreements with two orthopaedic specialty dealers. Of the
Company's approximately 500 employees at December 31, 1996, approximately 290
are involved in sales and marketing. The Company employs 19 area vice presidents
to manage regional sales, each of whom has responsibility for the Company's
direct sales and marketing efforts and the activities of the Company's specialty
dealers in a designated geographic area. See "Item 7. - Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Dependence on
Sales force."
Through the efforts of the Company's specialized direct sales force
servicing third party payors, the Company has contracted with over 320 third
party payors, including various Blue Cross/Blue Shield organizations, and the
Department of Veteran Affairs. In addition, the Company is an approved Medicare
provider and is also an approved Medicaid provider for a majority of states.
OrthoFrame and OrthoFrame/Mayo products are sold internationally
through distributors located in European and South American countries.
Currently, the OrthoLogic 1000 is not marketed internationally. However, the
Company has entered into a cooperative business development arrangement with
Tokyo-based Mitsubishi Chemical Corporation to collaborate in seeking approval
from Japan's Ministry of Health and Welfare for reimbursement and the use of the
OrthoLogic 1000 by Japanese national insurance. The Company's March 1997 Toronto
acquisition may also increase the Company's access to international markets.
Historically, the Company's export sales as a percentage of net sales have been
less than 1%. The Company believes that this percentage may increase due to its
recent acquisitions of businesses with more significant international sales. See
"Item 1 -- Business -- General."
While OrthoLogic has not experienced seasonality of revenues for its
fracture healing products, the Company believes that revenues of its newly
acquired CPM Products may be seasonal. CPM devices are used as adjuncts to
surgery and historically the strongest quarter tends to be the fourth quarter of
the calendar year. The Company believes this trend may be because (i)
individuals tend to put off elective surgical intervention until later in the
year when their insurance deductibles have been met, and (ii) sports-related
injuries tend to increase in the fall and winter months. OrthoLogic recently
entered the CPM business, and it is possible that the Company's future results
may be subject to more seasonality.
4
Research and Development
The Company's research and development staff presently includes 18
individuals, of whom four hold doctoral (Ph.D. or D.V.M.) degrees. Individuals
within the research and development organization have extensive experience in
the areas of biomaterials, bioengineering, animal modeling and cell biology.
Research and development efforts emphasize product engineering, activities
related to the clinical trials conducted by the Company and basic research. With
regard to basic research, the research and development staff conducts in-house
research projects in the area of fracture healing. The staff also supports and
monitors external research projects in biophysical stimulation of growth factors
and the potential use of ultrasound technology in diagnostic and therapeutic
applications relating to bone, cartilage, ligament or tendon. Both the in-house
and external research and development projects also provide technical marketing
support for the Company's products and explore the development of new products
and also additional therapeutic applications for existing products. Product
engineering activities are primarily related to improvements in the CPM devices.
The Company also has a clinical regulatory group that initiates and monitors
clinical trials at approximately 30 clinical centers in the United States. The
Company's research and development expenditures totaled $2.8 million, $2.1
million and $2.2 million in the years ended December 31, 1994, 1995 and 1996,
respectively. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Manufacturing
The Company assembles the OrthoLogic 1000 from parts supplied by third
parties, performs tests on both the components and assembled product and
calibrates the assembled product to specifications. The Company currently
purchases the microprocessor used in the OrthoLogic 1000 from a sole source
supplier. The OrthoLogic 1000 is not dependent on this microprocessor and the
Company believes that it could be redesigned to incorporate another
microprocessor. At any point in time, the Company maintains a supply of the
microprocessor on hand to meet its sales forecast for at least one year. In
addition, the magnetic field sensor employed in the OrthoLogic 1000 is available
from two sources. Establishment of additional or replacement suppliers for these
components cannot be accomplished quickly. Other components and materials used
in the manufacture and assembly of the OrthoLogic 1000 are available from
multiple sources.
The Company assembles the OrthoFrame and OrthoNail products from parts
supplied by third parties. These products are packaged and sterilized by outside
sources and shipped by the Company from its facilities. The composite material
components of the OrthoFrame products are currently sourced from two vendors.
Establishment of additional or replacement suppliers for these components cannot
be accomplished quickly. The Company maintains a supply of these components on
hand to meet its sales forecast for at least six months. Other components and
materials used in the manufacture and assembly of the OrthoFrame products are
readily available from multiple sources. See "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Dependence on
Key Suppliers."
The Company assembles CPM devices from parts supplied by third parties.
These parts are assembled, calibrated and tested at the Company's facilities.
The Company purchases several CPM components, including microprocessors, motors
and custom key panels, from sole-source suppliers. The Company believes that
these products are not dependent on those components and could be redesigned to
incorporate comparable components. The Company places orders for these
components to meet its sales forecast for the current year. Other components and
materials used in the manufacture and assembly of CPM products are available
from multiple sources.
The Company purchases its other Orthopaedic Rehabilitation Products
fully assembled from third-party suppliers. These products are available from
multiple sources.
Competition
The orthopaedic industry is characterized by rapidly evolving
technology and intense competition. With respect to the treatment of bone
fractures, the Company believes that patients with non-healing fractures are
5
primarily treated with surgery, and this represents its primary competition
although other manufacturers of noninvasive bone growth stimulators also
represent competition for the OrthoLogic 1000. The Company's main competitors
for these products are Electro-Biology, Inc. ("EBI"), a subsidiary of Biomet,
Inc., OrthoFix International N.V. ("OrthoFix") and Biolectron Inc. Exogen, Inc.
markets a nonthermal ultrasound device for the acceleration of the time to a
healed fracture for closed, cast immobilized, fresh fractures of the tibia and
distal radius. With respect to the adjunctive treatment of spinal fusion
surgery, the Company expects its primary competitors for its products to be EBI
and OrthoFix. With respect to external fixation devices, the Company's primary
competitors are OrthoFix, Howmedica, Inc. (a subsidiary of Pfizer, Inc.), EBI,
Smith & Nephew Richards, Inc., Synthes, Inc. and ACE Orthopedic Manufacturing (a
division of Depuy, Inc.). The same group of companies and Applied OsteoSystems,
Inc. represent its primary competition in the internal fixation market. The
Company believes that it may now be the largest domestic CPM device provider.
The Company's primary competitors in the United States for CPM devices are
privately held Thera-Kinetics, Inc., many independent owners/lessors of CPM
devices, and suppliers of traditional orthopaedic rehabilitation services
including orthopaedic immobilization and follow up physical therapy. The Company
also believes that there are several foreign CPM device manufacturers and
providers that it will encounter if it expands international sales or as those
competitors sell in the United States.
Many of the Company's competitors have substantially greater resources
and experience in research and development, obtaining regulatory approvals,
manufacturing, and marketing and sales of medical devices, and therefore
represent significant competition for the Company. The Company is aware that its
competitors are conducting clinical trials for other medical applications of
their respective technologies. In addition, other companies are developing or
may develop a variety of other products and technologies to be used in CPM
devices, the treatment of fractures and spinal fusions, including growth
factors, bone graft substitutes combined with growth factors, and nonthermal
ultrasound. The Company believes that competition is based on, among other
factors, the safety and efficacy of products in the marketplace, physician
familiarity with the product, ease of patient use, product reliability,
reputation, price, sales and marketing capability and reimbursement.
Any product developed by the Company that gains any necessary
regulatory approval will have to compete for market acceptance and market share
in an intensely competitive market. An important factor in such competition may
be the timing of market introduction of competitive products. Accordingly, the
relative speed with which the Company can develop products, complete clinical
testing as well as any necessary regulatory approval processes, and supply
commercial quantities of the product to the market will be critical to its
competitive success. There can be no assurance the Company can successfully
compete on these bases. See "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Intense Competition" and "--
Rapid Technological Change."
Patents, Licenses and Proprietary Rights
The Company's practice is to require its employees, consultants and
advisors to execute a confidentiality agreement upon the commencement of an
employment or consulting relationship with the Company. The agreements provide
that all confidential information developed by or made known to an individual
during the course of the employment or consulting relationship will be kept
confidential and not disclosed to third parties except in specified
circumstances. In the case of employees, the agreements provide that all
inventions conceived by the individual relating to the Company's business while
employed by the Company shall be the exclusive property of the Company. There
can be no assurance, however, that these agreements will provide meaningful
protection for the Company's trade secrets in the event of unauthorized use or
disclosure of such information.
It is also the Company's policy to protect its owned and licensed
technology by, among other things, filing patent applications for the
technologies that it considers important to the development of its business. The
Company uses the Biologic(R) technology through a worldwide exclusive license
granted by a corporation owned by university professors who discovered the
technology. With respect to the BioLogic technology, the delivery of such
technology to the patient and specific applications of such technology, the
Company holds title to four United States patents and to patents issued in
Australia, Switzerland, Germany, France, and the United Kingdom, as well as to a
pending patent application in Japan, and holds an exclusive worldwide license to
28 United States patents, eight Australian
6
patents, five Canadian patents, and one Japanese patent. Currently there are
five pending United States patent applications and multiple pending patent
applications in Canada, Japan, and Europe. The Company's license for the
BioLogic technology extends for the life of the underlying patents (which are
due to expire over a period of years beginning in 2006 and extending through
2014) and covers all improvements and applies to the use of the technology for
all medical applications in man and animals. The license provides for payment of
royalties by the Company from the net sales revenues of products using the
BioLogic technology. The license agreement can be terminated for breach of any
material provision of the license. See Note 4 of Notes to Consolidated Financial
Statements.
The Company holds an exclusive worldwide license to four United States
patents covering OrthoFrame products. The license, which extends for the life of
the underlying patents (the earliest of which was issued in 1986) and covers all
improvements, provides for payment of royalties by the Company from the sales
revenues of OrthoFrame products. The license provides for minimum royalties of
$100,000 per calendar year. The license agreement can be terminated for breach
of any material provision of the license and, at the Company's option, upon 60
days' notice to the licensor.
The Company has been assigned four United States patents covering
methods for ultrasonic bone assessment by noninvasively and quantitatively
evaluating the status of bone tissue in vivo through measurement of bone mineral
density, strength and fracture risk. Additionally, patent applications are
pending for this technology in the United States, Canada, Japan, and Europe as
well as two pending international applications.
With respect to CPM technology, the Company currently owns sixteen
United States patents, three pending United States patent applications, two
Canadian patents, three Canadian patent applications, two Japanese patents, and
a European patent. The issued United States patents on this technology are due
to expire over a period of years beginning in the year 2001 and extending
through 2013. These patents could expire at an earlier date if the patents are
not maintained by paying certain fees and/or annuities to the United States
Patent and Trademark Office and/or appropriate foreign patent offices at certain
intervals over the life of the patents. The pending United States patents, if
issued, would begin to expire over a period of time beginning around 2015, and
could expire at an earlier date, if not maintained as noted in the previous
sentence.
OrthoLogic(R), OrthoLogic & Design(R), OrthoFrame(R), BioLogic(R),
SpinaLogic(R), Tomorrow's Technology Today(R), CaseLog(R), OrthoSonic(R),
Legasus Sport CPM(R), LiteLift(R), Sportlite(R), Sutter(R), Danninger
Medical(R), Mobilimb(R), and Totalcare(R) are federally registered trademarks of
the Company. Additionally, the Company claims trademark rights in
PerioLogic(TM), OsteoLogic(TM), OrthoNail(TM), OrthoSound(TM), Quickfix(TM), CPM
9000AT(TM), Legasus CPM(TM), WaveFlex(TM), Sutter CarePlan(TM), Home Rehab
System(TM) and Danniflex(TM).
The Company has become aware of an assertion in Germany against one of
its recently acquired CPM patents. The Company is in the early stages of
investigating the assertion, but it does not currently believe that it will have
a material effect on the Company. The Company is not aware of any other claims
that have been asserted against the Company for infringement of proprietary
rights of third parties. There can be no assurance, however, that third parties
will not assert infringement claims against the Company in the future.
Government Regulation
The activities of the Company are regulated by foreign, federal, state
and local governments. Government regulation in the United States and other
countries is a significant factor in the development and marketing of the
Company's products and in the Company's ongoing manufacturing and research and
development activities. The Company and its products are regulated by the FDA
under a number of statutes, including the Medical Device Amendments Act of 1976
to the Federal Food, Drug and Cosmetic Act and the Safe Medical Devices Act of
1990 (collectively, the "FDC Act"). The Company's current BioLogic
technology-based products are classified as Class III Significant Risk Devices,
which are subject to the most stringent FDA review, and are required to be
tested under an IDE clinical trial and approved for marketing under a PMA.
7
To begin human clinical studies the Company must apply to the FDA for
an IDE. Generally, preclinical laboratory and animal tests are required to
establish a scientific basis for granting of an IDE. Once an IDE is granted,
clinical trials can commence which involve rigorous data collection as specified
in the IDE protocol. After the clinical trial is completed, the data are
compiled and submitted to the FDA in a PMA application. FDA approval of a PMA
application occurs after the applicant has established safety and efficacy to
the satisfaction of the FDA. The FDA approval process may include review by an
FDA advisory panel. Approval of a PMA application includes specific requirements
for labeling of the medical device with regard to appropriate indications for
use. Among the conditions for PMA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures comply
with the FDA regulations setting forth Good Manufacturing Practices ("GMP"). The
FDA monitors compliance with these requirements by requiring manufacturers to
register with the FDA, which subjects them to periodic FDA inspections of
manufacturing facilities. In addition, the Company must comply with
post-approval reporting requirements of the FDA. If violations of applicable
regulations are noted during FDA inspections, the continued marketing of any
products manufactured by the Company may be adversely affected. No significant
deficiencies have been noted in FDA inspections of manufacturing facilities
under the Company's operation.
The Company's external fixation devices, the OrthoFrame and the
OrthoFrame/Mayo Wrist Fixator, and the Company's internal fixation product,
OrthoNail, are Class II devices. If a medical device manufacturer can establish
that a newly developed device is "substantially equivalent" to a device that was
legally marketed prior to May 28, 1976, the date on which the Medical Device
Amendments Act of 1976 was enacted, the manufacturer may seek marketing
clearance from the FDA to market the device by filing a 510(k) pre-market
notification with the agency. The Company obtained 510(k) pre-market
notification clearances from the FDA for the OrthoFrame and OrthoNail product
lines.
The Company's CPM devices are Class I devices which do not require
510(k) pre-market notification. However, CPM manufacturers must comply with GMP
regulations. The devices must also meet Underwriters Laboratories standards for
electrical safety. For sales to the European Community, CPM devices must meet
established electromechanical safety and electromagnetic emissions regulations.
The Company also expects that the European Community will soon require
compliance with quality control standards. The Company believes that it
currently complies with these regulations.
Manufacturers outside the United States that export devices to the
United States may be subject to FDA inspection. The FDA generally inspects
companies every few years. The frequency of inspection depends upon the
company's status with respect to regulatory compliance. To date, the Company's
foreign operations have not been the subject of any inspections conducted by the
FDA.
Under Canada's Food and Drugs Act and the rules and regulations
thereunder (the "Food and Drugs Act"), the CPM devices sold by the Company do
not require any Canadian regulatory approvals prior to their introduction to the
market. However, the Company must provide Health and Welfare Canada with notice
concerning the sale of a device. Notice for all of the CPM devices currently
manufactured by the Company in Canada has been provided to Health and Welfare
Canada. Subsequent to such notification, Health and Welfare Canada may request
the Company to provide it with the results of the testing conducted on the
device. If the results of such testing do not substantiate the nature of the
benefits claimed to be obtainable from the use of the device or the performance
characteristics claimed for such device to the satisfaction of Health and
Welfare Canada, the sale of the device in Canada would be prohibited until
appropriate results had been submitted. The Company has not been asked to
provide such testing results to the Canadian authorities.
CPM devices must comply with the applicable provincial regulations
regarding the sale of electrical products by receiving the prior approval of
either the Canadian Standards Association ("CSA") or the provincial
hydro-electric authority, unless the device is otherwise exempt from such
requirement. To date, the Company believes that its CPM devices have, unless
otherwise exempt, obtained such necessary approvals prior to introduction to the
market.
8
The FDC Act regulates the labeling of medical devices to indicate the
uses for which they are approved, both in connection with PMA approval and
thereafter, including any sponsored promotional activities or marketing
materials distributed by or on behalf of the manufacturer or seller. A
determination by the FDA that a manufacturer or seller is engaged in marketing
of a product for other than its approved use may result in administrative, civil
or criminal actions against the manufacturer or seller. In a warning letter
issued May 31, 1996, the FDA raised various issues regarding certain promotional
literature covering the OrthoLogic 1000 and other issues regarding the marketing
and alleged custom configuration of the device. Primarily, the FDA questioned
the use in the Company's literature of the patient success rate reflected in the
patient registry data for the OrthoLogic 1000, focusing on differences between
the patient populations in the original PMA and the subsequent patient registry
data with respect to the time from injury to treatment. The FDA did not question
the accuracy of the information reported in the patient registry data or the
patient success rate reflected in that data. In its May 31, 1996 letter, the FDA
also questioned whether changes had been made in the signal frequency of the
OrthoLogic 1000, and raised issues with respect to use of the FDA's name in
promotional materials, the promotion of the device as having the ability to
stimulate the human growth factor IGF-II pathway, as well as an independent
distributor's promotion of the device for treatment of the non-appendicular
skeleton. The Company responded to the issues addressed in the FDA's letter,
including the submission of a PMA supplement that included only registry data
for patients who met the original PMA criteria. The Company has agreed not to
refer to the IGF-II growth factor data or use the FDA name in its promotional
literature, agreed not to promote or inventory devices for indications beyond
those currently approved, and instituted a policy covering individual
promotional correspondence between sales representatives and customers. The
Company also reaffirmed that at no time had the Company modified the signal
frequency of the OrthoLogic 1000, and agreed not to promote or inventory
reconfigured devices until supplementary PMA approval is received. The Company
and the FDA have resolved all of the issues raised in the May 31, 1996 letter.
The previous owners of certain of the Company's CPM businesses received
correspondence from the FDA regarding operating procedures and deviations from
GMP practices. The Company believes that those issues were resolved before it
acquired the businesses.
Regulations governing human clinical studies outside the United States
vary widely from country to country. Historically, some countries have permitted
human studies earlier in the product development cycle than the United States.
This disparity in regulation of medical devices may result in more rapid product
approvals in certain foreign countries than the United States, while approvals
in countries such as Japan may require longer periods than in the United States.
In addition, although certain of the Company's products have undergone clinical
trials in the United States and Canada, such products have not undergone
clinical studies in any other foreign country and the Company does not currently
have any arrangements to begin any such foreign studies.
The process of obtaining necessary government approvals is
time-consuming and expensive. There can be no assurance that the necessary
approvals for new products or applications will be obtained by the Company or,
if they are obtained, that they will be obtained on a timely basis. Furthermore,
the Company or the FDA must suspend clinical trials upon a determination that
the subjects or patients are being exposed to an unreasonable health risk. The
FDA may also require post-approval testing and surveillance programs to monitor
the effects of the Company's products. In addition to regulations enforced by
the FDA, the Company is also subject to regulations under the Occupational
Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act and other present and
potential future federal, state and local regulations. The ability of the
Company to operate profitably will depend in part upon the Company obtaining and
maintaining all necessary certificates, permits, approvals and clearances from
the United States and foreign and other regulatory authorities and operating in
compliance with applicable regulations. Failure to comply with regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. Regulations regarding the
manufacture and sale of the Company's current products or other products that
may be developed or acquired by the Company are subject to change. The Company
cannot predict what impact, if any, such changes might have on its business. See
"Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Government Regulation" and " -- Condition of Acquired
facilities."
9
Third Party Payment
Most medical procedures are reimbursed by a variety of third party
payors, including Medicare and private insurers. The Company's strategy for
obtaining reimbursement authorization for its products is to establish their
safety, efficacy and cost effectiveness as compared to other treatments. The
Company is an approved Medicare provider and is also an approved Medicaid
provider for a majority of states. The Company contracts with over 320 third
party payors as an approved provider, including the Department of Veterans
Affairs and various Blue Cross/Blue Shield organizations. Because the process of
obtaining reimbursement for products through third-party payors is longer than
through direct invoicing of patients, the Company must maintain sufficient
working capital to support operations during the collection cycle. In addition,
third party payors as an industry have undergone consolidation and that trend
appears to be continuing. The concentration of such economic power may result in
third party payors obtaining additional leverage and thus negatively affecting
the Company's margins.
As part of the Company's efforts to establish its primary products as
treatments of choice among third party payors, the Company has entered into two
consulting agreements with practicing physicians. These physicians were retained
by the Company to increase product acceptance, respond to inquiries from other
clinicians regarding the Company's products or to assist the Company in seeking
third party payor endorsement of practice pattern changes. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products such as of those that may be offered by the Company, and there can be
no assurance that adequate third party coverage will continue to be available
for the Company's products at current levels. See "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Limitations on Third Party Payment; Uncertain Effects of Managed Care."
Product Liability Insurance
The business of the Company entails the risk of product liability
claims. The Company maintains a product liability and general liability
insurance policy and an umbrella excess liability policy. There can be no
assurance that liability claims will not exceed the coverage limit of such
policies or that such insurance will continue to be available on commercially
reasonable terms or at all. Consequently, product liability claims could have a
material adverse effect on the business, financial condition and results of
operations of the Company. The Company has not experienced any product liability
claims to date resulting from its Fracture Healing Products. To date, liability
claims resulting from the Company's CPM Products have not had a material adverse
effect on business. Additionally, the agreements by which the Company acquired
its CPM businesses generally require the seller to retain liability for claims
arising before the acquisition. See "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Risk of Product
Liability Claims."
Employees
As of December 31, 1996, the Company had 512 employees, including 290
in sales and marketing, 18 in research and development and clinical and
regulatory affairs, 15 in managed care, approximately 71 in reimbursement and
118 in manufacturing, finance and administration. The managed care staff is
charged with changing the practice patterns of the orthopaedic community through
the influence of third party payors on treatment regimes. The Company believes
that the success of its business will depend, in part, on its ability to
identify, attract and retain qualified personnel. In the future, the Company
will need to add additional skilled personnel or retain consultants in such
areas as research and development, manufacturing and marketing and sales. The
Company considers its relationship with its employees to be good. See "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Dependence on Key Personnel; Recent Management Change."
10
Item 2. Properties
The Company leases facilities in Arizona and CPM facilities in
California, Toronto (Canada) and Ohio. These facilities are designed and
constructed for industrial purposes and are located in industrial districts.
Each facility is suitable for the Company's purposes and is effectively
utilized. The table below sets forth certain information about the Company's
principal facilities.
Approx.
Location Square Feet Lease Expires Description Principal Activity
- -------- ----------- ------------- ----------- ------------------
Phoenix, Arizona 22,500 12/97 2-story Fracture Healing
building in Products operations and
industrial park executive offices
San Diego, California 18,766 8/98 1-story in Sutter CPM Products
industrial park assembly
26,970 9/98 2-story in CPM Product
industrial park administration
Toronto, Ontario, Canada 28,547 2/28/99 1-story in CPM assembly
industrial park
The Company believes that each facility is well maintained, except for
damage due to excess moisture from water leaking into its San Diego facilities.
The Company is currently taking steps to repair the source of the leaks and
resulting damage. The Company is working with both the landlord and Sutter's
prior owner to allocate the expenses of such repair.
In March 1997, the Company began a restructuring plan to consolidate
all CPM manufacturing in its Toronto facility and all CPM administrative and
service functions in Phoenix. The Company intends to close all of its other CPM
facilities. The Company also intends to move its Phoenix operations to a new
leased facility in Phoenix before the Company's lease on its current Phoenix
facility expires.
Item 3. Legal Proceedings
On June 24, 1996, and on several days thereafter, 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 Sections 10(b)
of the Securities Exchange Act of 1934 ("Exchange Act") and SEC Rule 10b-5
promulgated thereunder, and, as to other defendants, Section 20(a) of the
Exchange Act. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition Results of Operations -- Potential Adverse Outcome of Litigation."
These lawsuits are:
Mark Silveria v. Allan M. Weinstein, Allen R. Dunaway, David E.
Derminio and OrthoLogic Corporation, Cause No. CIV 96-1563 PHX EHC, filed in the
United States District Court for the District of Arizona (Phoenix Division) on
July 1, 1996.
Derric C. Chan and Anna Chan as attorney in fact for Moon-Yung Chow, on
behalf of themselves and all others similarly situated v. OrthoLogic
Corporation, Allan M. Weinstein, Frank P. Magee and David E. Derminio, Cause No.
CIV 96-1514 PHX RCB, filed in the United States District Court for the District
of Arizona (Phoenix Division) on June 21, 1996.
11
Jeffrey M. Boren and Charles E. Peterson, Jr., on behalf of themselves
and all other similarly situated v. Allan M. Weinstein and OrthoLogic Corp.,
Cause No. CIV 96-1520 PHX RCB, filed in the United States District Court for the
District of Arizona on June 24, 1996.
Dorothy Cohen, on behalf of herself and all others similarly situated
v. OrthoLogic Corp. and Allan M. Weinstein, Cause No. CIV 96-1615 PHX SMM, filed
in the United States District Court for the District of Arizona (Phoenix
Division) on July 9, 1996.
Joseph C. Barton, on behalf of himself and all others similarly
situated v. OrthoLogic Corp. and Allan M. Weinstein, Cause No. CIV 96-1643 PHX
ROS, filed in the United States District Court for the District of Arizona
(Phoenix Division) on July 12, 1996.
Jeffrey Draker, on behalf of himself and all others similarly situated
v. Allan M. Weinstein and OrthoLogic Corp., Cause No. CIV 96-1667 PHX RCB, filed
in the United States District Court for the District of Arizona (Phoenix
Division) on July 16, 1996.
Edward and Eleanor Katz v. OrthoLogic Corp. and Allan M. Weinstein,
Cause No. CIV 96-1668 PHX RGS, filed in the United States District Court for the
District of Arizona (Phoenix Division) on July 17, 1996.
Mark J. Rutkin, Paul A. Wallace, Malcolm E. Brathwaite, Elaine K.
Davies and David G. Davies, Larry E. Carder and Carl Hust, on behalf of
themselves and all others similarly situated v. Allan M. Weinstein, Allen R.
Dunaway, David E. Derminio and OrthoLogic Corp., Cause No. CIV 96-1678 PHX EHC,
filed in the United States District Court for the District of Arizona (Phoenix
Division), on July 17, 1996.
Frank J. DeFelice, on behalf of himself and all others similarly
situated v. OrthoLogic Corp. and Allan M. Weinstein, Cause No. CIV 96-1713 PHX
EHC, filed in the United States District Court for the District of Arizona
(Phoenix Division), on July 23, 1996.
Scott Longacre, Joseph E. Sheedy, Trustee, Rickie Trainor, W. Preston
Battle, III, Taylor D. Shepherd, Dianna Lynn Shepherd, Gordon H. Hogan, Trustee,
and Dallas Warehouse Corp., Inc., on behalf of themselves and all others
similarly situated v. Allan M. Weinstein, Allen R. Dunaway, David E. Derminio,
Frank P. Magee and OrthoLogic Corp., Cause No. CIV 96-1891 PHX PGR, filed in the
United States District Court for the District of Arizona (Phoenix Division) on
August 16, 1996.
Jeffrey D. Bailey, Milton Berg, Bryan Boatwright, Charles R. Campbell,
Mark and Cathy Daniel, Tom Drotar, Rudy Gonnella, David Gross, Janet Gustafson,
Willa P. Koretz, Dr. Richard Lewis, John Maynard, Margaret Milosh, Michelle
Milosh, Theresa L. Onn, Ward B. Perry, William Schillings, Darwin and Merle Sen,
Nestor Serrano and Larry E. and Gloria M. Swanson v. Allan M. Weinstein, Allen
R. Dunaway, David E. Derminio and OrthoLogic Corporation, Cause No. CIV 96-1910
PHX PGR, filed in the United States District Court for the District of Arizona
(Phoenix Division) on August 19, 1996.
Nancy Z. Kyser and Mark L. Nichols, on behalf of themselves and all
others similarly situated v. OrthoLogic Corporation, Allan M. Weinstein, Frank
P. Magee and David E. Derminio, Cause No. CIV 96-1937 PHX ROS, filed in the
United States District Court for the District of Arizona (Phoenix Division) on
August 22, 1996.
Plaintiffs in these actions allege 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, was 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 necessary in order to make the statements not misleading.
Plaintiffs further allege that once the FDA letter became known, a material
decline in the stock price of the Company
12
occurred, causing damage to plaintiffs. All plaintiffs seek class action status,
unspecified compensatory damages, fees and costs. Plaintiffs also seek
extraordinary, equitable and/or injunctive relief as permitted by law. Pursuant
to court orders dated December 17, 1996 and January 19, 1997, the preceding
actions have been consolidated for all purposes, and lead plaintiffs and counsel
have been appointed. A consolidated complaint has yet to be filed.
On or about June 20, 1996, a lawsuit entitled Norman Cooper, et al. v.
OrthoLogic Corp., et al., Cause 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 also
seek class action status, unspecified compensatory and punitive damages, fees
and costs. Plaintiffs also seek injunctive and/or equitable relief. By agreement
of the parties, that action has been stayed while the federal actions proceed.
On or about July 16, 1996, Jacob B. Rapoport filed a Shareholder
Derivative Complaint for Breach of Fiduciary Duty and Misappropriation of
Confidential Corporation Information (based on similar factual issues underlying
the above lawsuits) in the Superior Court of the State of Arizona, Maricopa
County, No. CV 96-12406 against Allan M. Weinstein, John M. Holliman, Augustus
A. White, Fredric J. Feldman, Elwood D. Howse, George A. Oram, Frank P. Magee
and David E. Derminio, Defendants and OrthoLogic Corp., Nominal Defendant. On
October 29, 1996 the defendants removed the case to the United States District
Court for the District of Arizona (Phoenix Division) No. CIV 96-2451 PHX RCB on
grounds of diversity pursuant to 28 U.S.C. ss. 1332. Defendants filed a motion
to dismiss the complaint. By agreement of the parties, the case has been stayed
pending a decision on defendants' anticipated motion to dismiss the consolidated
federal class action lawsuits.
The Company denies the substantive allegations in the aforesaid
lawsuits and plans to defend the actions vigorously.
In February 1997, the Company received a letter from the California
Department of Industrial Relations Division of Occupational Safety and Health
regarding an informal complaint involving certain physical problems with one of
Sutter's facilities. The Company responded to the letter in March 1997 and
believes that it has addressed or is in the process of addressing the issues
raised. See "Item 2 -- Properties" and "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Condition of
Acquired Facilities."
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
The following table sets forth information regarding the executive
officers of the Company:
Name Age Title
- ---- --- -----
Allan M. Weinstein, Ph.D. 51 Chairman of the Board, Chief Executive Officer, President and Director
Frank P. Magee, D.V.M. 40 Executive Vice President, Research and Development
David E. Derminio 44 Vice President, Marketing and Sales
Allen R. Dunaway 42 Vice President, Chief Financial Officer and Secretary
James B. Koeneman, Ph.D. 60 Vice President, Engineering
MaryAnn G. Miller 39 Vice President, Human Resources
Nicholas A. Skaff 41 Vice President, Managed Care
13
Allan M. Weinstein, Ph.D. has been the Chairman of the Board, President
and Chief Executive Officer and a Director of the Company since its inception in
1987. Dr. Weinstein is a member of the Board of Directors of the Health Industry
Manufacturers Association and Raymedica, Inc., a privately held spinal implant
company.
Frank P. Magee, D.V.M. joined the Company as a Vice President in
November 1989 and became Executive Vice President, Research and Development in
1991.
David E. Derminio joined the Company in March 1993 as Vice President,
Marketing and Sales. From 1984 to 1993 he served as the Vice President of Sales
for Med-Tech West, Inc., a distributor of orthopaedic and neurosurgical
products.
Allen R. Dunaway joined the Company in February 1992 as its Vice
President and Chief Financial Officer. From 1991 to 1992, he served as
Operations Manager and Chief Financial Officer for Gentron Corporation, an
electronics manufacturer.
James B. Koeneman, Ph.D. joined OrthoLogic as Director of Engineering
in May 1994 and became Vice President, Engineering in September 1994. From 1984
to 1994, Dr. Koeneman was the Head of the Bioengineering Division at Harrington
Arthritis Research Center.
MaryAnn G. Miller joined the Company as Vice President of Human
Resources in October 1996. From November 1995 to June 1996, Ms. Miller was Human
Resources Director for Southwestco Wireless, Inc. doing business as CellularOne,
a subsidiary of Bell Atlantic Nynex Mobile, a provider of wireless
telecommunications services in the Southwest. From October 1992 to July 1995,
Ms. Miller was a human resources officer with Firstar Corporation, a
Wisconsin-based bank holding company. She was most recently First Vice President
and Regional Human Resources Director of Firstar from January 1994 to July 1995.
Nicholas A. Skaff joined the Company as Vice President, Managed Care in
April 1996. From January 1996 to April 1996, Mr. Skaff was the Southwest Region
Area Vice President for Olsten Corp., a home care company, and President of
Children's HomeCare, a pediatric home care joint venture between Olsten Corp.
and Phoenix Children's Hospital. From January 1995 to December 1995, he was the
Area Vice President of Olsten Corp.'s neuro rehabilitation group. From January
1994 to December 1994, he was the President and Chief Executive Officer of RWW
Associates, Inc., a neurologic rehabilitation company. From August 1987 to
December 1993, Mr. Skaff was the Chief Financial Officer of NeuroCare, a
neurologic rehabilitation home care company.
14
PART II
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Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The information under the heading "Stockholder Information" on page 15
of the Company's Annual Report to Stockholders for the year ended December 31,
1996 (the "Annual Report") is incorporated herein by reference.
On October 15, 1996, the Company issued a warrant to purchase 5,000
shares of the Company's Stock at $2.41 per share to an investor relations
consultant in exchange for a previously issued warrant to purchase 50,000 shares
at $2.41 per share and as part of the termination of the consultant's services
for the Company. The October 1996 warrant is exercisable at any time until March
14, 2001. Exemption for this transaction was claimed pursuant to Section 4(2) of
the Securities Act of 1933, as the purchaser was familiar with and capable of
evaluating the financial condition and business activities of the Company.
Item 6. Selected Financial Data
The information on page 15 of the Annual Report under the heading
"Selected Financial Data" is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information on pages 13 and 14 of the Annual Report under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations" is incorporated herein by reference.
The Company may from time to time make written or oral forward-looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission and its reports to stockholders. This Report
contains forward-looking statements made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. In
connection with these "safe harbor" provisions, the Company identifies important
factors that could cause actual results to differ materially from those
contained in any forward-looking statements made by or on behalf of the Company.
Any such forward-looking statement is qualified by reference to the following
cautionary statements.
Limited History of Profitability; Quarterly Fluctuations in Operating
Results. The Company was founded in 1987 and only began generating revenues from
the sale of its primary product in 1994. The Company has experienced significant
operating losses since its inception and had an accumulated deficit of
approximately $16.9 million at December 31, 1996. While the Company was first
profitable in the fourth quarter of 1995, there can be no assurance that the
Company will ever generate sufficient revenues to attain operating profitability
or retain net profitability on an on-going annual basis. In addition, the
Company may experience fluctuations in revenues and operating results based on
such factors as demand for the Company's products, the timing, cost and
acceptance of product introductions and enhancements made by the Company or
others, levels of third party payment, alternative treatments which currently
exist or may be introduced in the future, completion of acquisitions, changes in
practice patterns, competitive conditions, regulatory announcements and changes
affecting the Company's products in the industry and general economic
conditions. The development and commercialization by the Company of additional
products will require substantial product development, and regulatory, clinical
and other expenditures. See "Item 1 -- Business -- Competition."
Potential Adverse Outcome of Litigation. The Company is a defendant in
a number of investor lawsuits relating generally to correspondence received by
the Company from the FDA in mid-1996 regarding the promotion and configuration
of the Company's OrthoLogic 1000 Bone Growth Stimulator. See "Item 1 -- Business
- -- Governmental Regulation" and "Item 3 -- Legal Proceedings." The Company
intends to defend these lawsuits
15
vigorously. However, an adverse outcome in this litigation could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Salesforce. A substantial portion of the Company's sales
are generated through the Company's internal salesforce of approximately 290
employees. During 1996, the Company shifted its primary focus from sales through
independent orthopaedic specialty dealers to an internal salesforce. This
internal salesforce requires the Company to devote greater resources to sales
training and management. In addition, the Company is faced with the challenge of
managing and effectively motivating a much larger sales force than it has ever
had. Moreover, many of those new salespeople are inexperienced in selling the
Company's products, and salespeople historically experience a learning curve
before they become efficient, if at all. There can be no assurance that the
internal salesforce will be able to maintain or exceed the Company's historic
sales through independent specialty dealers. The Company's marketing success
depends in large part upon the ability of sales and marketing personnel to
demonstrate to potential customers the benefits of the Company's products and
their advantages over competing products and surgical procedures. See "Item 1 --
Business -- Marketing and Sales."
Dependence on Key Personnel; Recent Management Change. The success of
the Company is dependent in large part on the ability of the Company to attract
and retain its key management, operating, technical, marketing and sales
personnel as well as clinical investigators who are not employees of the
Company. Such individuals are in high demand, and the identification, attraction
and retention of such personnel could be lengthy, difficult and costly. The
Company competes for its employees and clinical investigators with other
companies in the orthopaedic industry and research and academic institutions.
There can be no assurance that the Company will be able to attract and retain
the qualified personnel necessary for the expansion of its business. In 1996,
the Company hired a new President and Chief Operating Officer who subsequently
resigned in February 1997. Such loss of services of one or more members of the
senior management group or the Company's inability to hire additional personnel
as necessary could have an adverse effect on the Company's business, financial
condition and results of operations. See "Item 1 -- Business -- Employees."
Dependence on Primary Product and Future Products. Over two-thirds of
the Company's 1996 revenues were derived from the sales of the OrthoLogic 1000
for the treatment of non-healing fractures. While the Company believes that
revenues from CPM devices will reduce the Company's dependence on revenues from
the OrthoLogic 1000, the Company believes that, to sustain long-term growth, it
must develop and introduce additional products and expand approved indications
for its existing products. The development and commercialization by the Company
of additional products will require substantial product development, regulatory,
clinical and other expenditures. There can be no assurance that the Company's
technologies will allow it to develop new products and/or expand indications for
existing products in the future or that the Company will be able to manufacture
or market such products successfully. Any failure by the Company to develop new
products and/or expand indications could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Item 1
- -- Business -- Products" and "Item 1 -- Business -- Competition."
Uncertainty of Market Acceptance. The Company believes that the demand
for bone growth stimulators is still developing, and the Company's success will
depend in part upon the continued growth of this demand. There can be no
assurance that this demand will develop. The long-term commercial success of the
OrthoLogic 1000 will also depend in significant part upon its widespread
acceptance by a significant portion of the medical community as a safe,
efficacious and cost-effective alternative to invasive procedures. The Company
is unable to predict how quickly, if at all, its products may be accepted by
members of the orthopaedic medical community. The widespread acceptance of the
Company's primary products represents a significant change in practice patterns
for the orthopaedic medical community and in reimbursement policy for third
party payors. Historically, some orthopaedic medical professionals have
indicated hesitancy in prescribing bone growth stimulator products such as those
manufactured by the Company. Failure of the Company's products to achieve
widespread market acceptance by the orthopaedic medical community and third
party payors would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Item 1 -- Business -- Third
Party Payment."
16
Selection and Integration of Acquisitions. A key element of the
Company's strategy is expansion through acquisitions of products, technologies
and businesses. The Company acquired Sutter Corporation in August 1996, and
certain assets of Toronto Medical Corp. and Danninger Medical Technology, Inc.
in March 1997. See "Item 1 -- Business - General." There can be no assurance,
however, that the Company will be successful in identifying additional
appropriate opportunities or negotiating favorable terms. In addition,
successful integration of such acquisitions is critical to the future financial
performance of the combined Company. Complete integration of any acquisition
could take several quarters or more to accomplish and will require, among other
things, integration of the companies' respective product offerings and
coordination of their sales and marketing, manufacturing and research and
development efforts. There can be no assurance that present and potential
customers of the Company and any acquired entity would continue their historic
buying patterns without regard to the acquisition, and any significant delay or
reduction in orders could have an adverse effect on the Company's business,
financial condition and results of operations. The process of integrating
companies may also cause management's attention to be diverted from operating
the Company, and any difficulties encountered in the transition process could
have an adverse impact on the business, financial condition and operating
results of the Company. In addition, the process of combining two organizations
could cause the interruption of, or a loss of momentum in, the activities of
either or both of the companies' businesses, which could have an adverse effect
on their combined operations.
The difficulty of combining companies is increased by the need to
integrate the personnel and the geographic distance between companies. Changes
brought about by any acquisition may cause key employees or distributors to
terminate their relationship with the Company. There can be no assurance that
the combined Company will retain the employees and dealer relationships or that
the Company will realize any potential benefits of any acquisitions. In
addition, the Company might incur significant integration or additional
operating costs associated with an acquisition. There can be no assurance that
such costs will not have an adverse effect upon the Company's operating results,
particularly in the fiscal quarters following the consummation of any
acquisition, while the operations of the acquired business are being integrated
into the Company's operations. There can be no assurance that, following any
acquisition, the Company will be able to operate any acquired business on a
profitable basis.
Limited Combined Operating History and Results. In August 1996, the
Company entered the CPM business with its acquisition of Sutter. Financial
results of Sutter before August 1996 reflect operations when Sutter was not
under current control or management and as such may not be indicative of future
operating results. Although the Company does not anticipate incurring
significant additional operating costs associated with Sutter, there can be no
assurance that such costs will not be incurred or that the purchase, or any
other acquisition, will not have an adverse effect upon the Company's operating
results, while the operations of the purchased business are being integrated
into the Company's operations. There can be no assurance that, following any
acquisition, the Company will be able to operate the purchased business on a
profitable basis or that the Company will be able to recover any excess of the
purchase price of the business acquired over its tangible book value.
Condition of Acquired Facilities. In connection with the Company's
recent acquisition of Sutter, it determined that the acquired facilities had
several physical problems primarily resulting from excess moisture from water
leaking into the facility. The Company is currently taking steps to correct the
resulting damage. Certain Sutter employees have also reported adverse personal
effects resulting from these problems. The Company has notified both the
landlord and prior owner of Sutter concerning these claims and the Company is
working with the landlord and prior owner to resolve these issues. As the
Company seeks to resolve these issues, these damages and claims and any future
discoveries regarding the facilities' management under past ownership could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Item 3 -- Legal Proceedings" and "Item 2 --
Properties."
Management of Growth. The Company has experienced a period of rapid
growth that has placed, and could continue to place, a significant strain on the
Company's financial, management and other resources. The Company's future
performance will depend in part on its ability to manage change in its
operations, including integration of acquired businesses. In addition, the
Company's ability to manage its growth effectively will require it to continue
to improve its manufacturing, operational and financial control systems and
infrastructure and management information systems, and to attract, train,
motivate, manage and retain key employees. If the Company's
17
management were to become unable to manage growth effectively, the Company's
business, financial condition, and results of operations could be adversely
affected.
Limitations on Third Party Payment; Uncertain Effects of Managed Care.
The Company's ability to commercialize its products successfully in the United
States and in other countries will depend in part on the extent to which
acceptance of payment for such products and related treatment will continue to
be available from government health administration authorities, private health
insurers and other payors. Cost control measures adopted by third party payors
in recent years have had and may continue to have a significant effect on the
purchasing and practice patterns of many health care providers, generally
causing them to be more selective in the purchase of medical products. In
addition, payors are increasingly challenging the prices and clinical efficacy
of medical products and services. Payors may deny reimbursement if they
determine that the product used in a procedure was experimental, was used for a
nonapproved indication or was unnecessary, inappropriate, not cost-effective,
unsafe, or ineffective. Significant uncertainty exists as to the reimbursement
status of newly approved health care products, and there can be no assurance
that adequate third party coverage will continue to be available to the Company
at current levels. Failure to continue to obtain reimbursement from payors at
levels acceptable to the Company could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Item 1
- -- Business -- Third Party Payment."
Uncertainty and Potential Negative Effects of Health Care Reform. The
health care industry is undergoing fundamental changes resulting from political,
economic and regulatory influences. In the United States, comprehensive programs
have been proposed that seek to (i) increase access to health care for the
uninsured, (ii) control the escalation of health care expenditures within the
economy, and (iii) use health care reimbursement policies to help control the
federal deficit. The Company anticipates that Congress and state legislatures
will continue to review and assess alternative health care delivery systems and
methods of payment, and public debate of these issues will likely continue. Due
to uncertainties regarding the outcome of reform initiatives and their enactment
and implementation, the Company cannot predict which, if any, of such reform
proposals will be adopted and when they might be adopted. Other countries also
are considering health care reform. The Company's plans for increased
international sales are largely dependent upon other countries' adoption of
managed care systems and their acceptance of the potential benefits of the
Company's products and the belief that managed care plans will have a positive
effect on sales. For the reasons identified in this and in the preceding
paragraph, however, those assumptions may be incorrect. Significant changes in
health care systems are likely to have a substantial impact over time on the
manner in which the Company conducts its business and could have a material
adverse effect on the Company's business, financial condition and results of
operations, and ability to market its products as currently contemplated.
Intense Competition. The orthopaedic industry is characterized by
intense competition. Currently, there are three major competitors other than the
Company selling electromagnetic bone growth stimulation products approved by the
FDA for the treatment of nonunion fractures and one large domestic and several
foreign manufacturers of CPM devices. The Company also competes with many
independent owners/lessors of CPM devices in addition to the providers of
traditional orthopaedic immobilization products and rehabilitation services. The
Company estimates that one of its competitors has a dominant share of the market
for electromagnetic bone growth stimulation products for non-healing fractures
in the United States, and another has a dominant share of the market for use of
their device as an adjunct to spinal fusion surgery. In addition, there are
several large, well-established companies that sell fracture fixation devices
similar in function to those sold by the Company. Many participants in the
medical technology industry, including the Company's competitors, have
substantially greater capital resources, research and development staffs and
facilities than the Company. Such participants have developed or are developing
products that may be competitive with the products that have been or are being
developed or researched by the Company. Other companies are developing a variety
of other products and technologies to be used in CPM devices, the treatment of
fractures and spinal fusions, including growth factors, bone graft substitutes
combined with growth factors, and nonthermal ultrasound. One company has
received FDA approval for a nonthermal ultrasound device to treat nonsevere
fresh fractures of the lower leg and lower forearm. There can be no assurance
that products marketed by these or other companies will not be sold for use in
treating non-healing fractures or spinal fusions, even in the absence of
regulatory approval to do so. Any such sales could have a
18
material adverse effect on the Company. Many of the Company's competitors have
substantially greater experience than the Company in conducting research and
development, obtaining regulatory approvals, manufacturing and marketing and
selling medical devices. Any failure by the Company to develop products that
compete favorably in the marketplace would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Item 1
- -- Business -- Research and Development" and "Item 1 -- Business --
Competition."
Rapid Technological Change. The medical device industry is
characterized by rapid and significant technological change. There can be no
assurance that the Company's competitors will not succeed in developing or
marketing products or technologies that are more effective and/or less costly
and which render the Company's products obsolete or non-competitive. In
addition, new technologies, procedures and medications could be developed that
replace or reduce the value of the Company's products. The Company's success
will depend in part on its ability to respond quickly to medical and
technological changes through the development and introduction of new products.
There can be no assurance that the Company's new product development efforts
will result in any commercially successful products. A failure to develop new
products could have a material adverse effect on the company's business,
financial condition and results of operations. See "Item 1 -- Business --
Research and Develop ment."
Government Regulation. The Company's current and future products and
manufacturing activities are and will be regulated under the Medical Device
Amendments Act of 1976 to the Food, Drug and Cosmetic Act and the 1990 Safe
Medical Devices Act. The Company's current BioLogic technology-based products
are classified as Class III Significant Risk Devices, which are subject to the
most stringent level of FDA review for medical devices and are required to be
tested under IDE clinical trials and approved for marketing under a PMA. The
Company's fracture fixation devices are Class II devices that are marketed
pursuant to 510(k) clearance from the FDA. The Company received PMA approval
from the FDA in March 1994 and commenced marketing the OrthoLogic 1000 for the
treatment of nonunion fractures. The Company has completed a data analysis of a
clinical trial of the OrthoLogic 1000 for the treatment of delayed union
fractures, and based on this analysis, the Company believes that a larger number
of patients is required to establish statistical significance before it submits
a supplement to its existing PMA for such indication. There can be no assurance
that the FDA will allow expansion of the study without requiring a new clinical
trial. If a new trial is required, there can be no assurance that it will
establish statistical significance leading to product approval. However, the
Company recently combined the existing data from the study with delayed union
data collected in the Company's Post Marketing Clinical Registry. This combined
data set has been analyzed and submitted to the FDA to support the Company's
request to expand the non-union definition to include patients five months
post-injury. There can be no assurance that this data will result in regulatory
approval.
The Company received approval of an IDE for the SpinaLogic 1000 for use
as an adjunct to spinal fusion surgery in August 1992 and commenced clinical
trials for this product in February 1993. In September 1995, the Company
received an approval of an IDE supplement for the SpinaLogic 1000 for treatment
of failed spinal fusions. The Company commenced this study in the fourth quarter
of 1995. There can be no assurance that any such clinical trials will be
successfully completed or that, if completed, the results of such studies will
demonstrate clinical benefits or that the Company will receive regulatory
approval for the OrthoLogic 1000 for the treatment of delayed union fractures or
other broader indications or for the SpinaLogic 1000 or for any other products.
Any significant delay in receiving or failure to receive regulatory approval of
the Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 1 -- Business
- -- Products" and "Item 1 -- Business -- Government Regulation."
The FDA and comparable agencies in many foreign countries and in
state and local governments impose substantial limitations on the introduction
of medical devices through costly and time-consuming laboratory and clinical
testing and other procedures. The process of obtaining FDA and other required
regulatory approvals is lengthy, expensive and uncertain. Moreover, regulatory
approvals, if granted, typically include significant limitations on the
indicated uses for which a product may be marketed. In addition, approved
products may be subject to additional testing and surveillance programs required
by regulatory agencies, and product approvals could be withdrawn and labelling
restrictions may be imposed for failure to comply with regulatory standards or
upon the occurrence of unforeseen problems following initial marketing.
19
The Company is also required to adhere to applicable requirements for
FDA Good Manufacturing Practices and to engage in extensive record keeping and
reporting and to make available its manufacturing facilities for periodic
inspections by governmental agencies, including the FDA, and comparable agencies
in other countries. Failure to comply with these and other applicable regulatory
requirements could result in, among other things, significant fines, suspension
of approvals, seizures or recalls of products, or operating restrictions and
criminal prosecutions. The Company has received letters from the FDA regarding
its regulatory compliance. The Company believes that all issues raised in the
letters have been resolved. See "Item 1 -- Business - Government Regulation."
Changes in existing regulations or interpretations of existing
regulations or adoption of new or additional restrictive regulations could
prevent the Company from obtaining, or affect the timing of, future regulatory
approvals. If the Company experiences a delay in receiving or fails to obtain
any governmental approval for any of its current or future products or fails to
comply with any regulatory requirements, the Company's business, financial
condition and results of operations could be materially adversely affected. See
"Item 1 -- Business -- Products" and "Item 1 -- Business -- Government
Regulation."
Dependence on Key Suppliers. The Company purchases the microprocessor
used in the OrthoLogic 1000 from a sole source supplier, Phillips N.V. In
addition, there are two suppliers for another component used in the OrthoLogic
1000 and two suppliers for the composite material components of the OrthoFrame
products. Establishment of additional or replacement suppliers for the
components cannot be accomplished quickly. While the Company maintains a supply
of certain OrthoLogic 1000 components to meet sales forecasts for one year and
OrthoFrame components to meet sales forecasts for six months, any delay or
interruption in supply of these components could significantly impair the
Company's ability to manufacture its products in sufficient quantities, and
therefore, could have a material adverse effect on its business, financial
condition and results of operations. See "Item 1 -- Business--Manufacturing."
Dependence on Patents, Licenses and Proprietary Rights. The Company's
success will depend in significant part on its ability to obtain and maintain
patent protection for products and processes, to preserve its trade secrets and
proprietary know-how and to operate without infringing the proprietary rights of
third parties. While the Company holds title to numerous United States and
foreign patents and patent applications, as well as licenses to numerous United
States and foreign patents (see "Item 1 -- Business -- Patents, Licenses and
Proprietary Rights"), no assurance can be given that any additional patents will
be issued or that the scope of any patent protection will exclude competitors or
that any of the patents held by or licensed to the Company will be held valid if
subsequently challenged. The validity and breadth of claims covered in medical
technology patents involves complex legal and factual questions and therefore
may be highly uncertain. In addition, although the Company holds or licenses
patents for its technologies, others may hold or receive patents which contain
claims having a scope that covers products developed by the Company. There can
be no assurance that licensing rights to the patents of others, if required for
the Company's products, will be available at all or at a cost acceptable to the
Company.
The Company licenses covering the BioLogic and OrthoFrame technologies
provide for payment by the Company of royalties. Each license may be terminated
if the Company breaches any material provision of such license. The termination
of any license would have a material adverse effect on the Company's business,
financial condition and results of operations. See Note 4 of Notes to
Consolidated Financial Statements.
The Company also relies on unpatented trade secrets and know-how. The
Company generally requires its employees, consultants, advisors and
investigators to enter into confidentiality agreements which include, among
other things, an agreement to assign to the Company all inventions that were
developed by the employee while employed by the Company that are related to its
business. There can be no assurance, however, that these agreements will protect
the Company's proprietary information or that others will not gain access to, or
independently develop similar trade secrets or know-how.
There has been substantial litigation regarding patent and other
intellectual property rights in the orthopaedic industry. Litigation, which
could result in substantial cost to, and diversion of effort by, the Company may
be necessary to enforce patents issued or licensed to the Company, to protect
trade secrets or know-how owned by the
20
Company or to defend the Company against claimed infringement of the rights of
others and to determine the scope and validity of the proprietary rights of
others. There can be no assurance that the results of such litigation would be
favorable to the Company. In addition, competitors may employ litigation to gain
a competitive advantage. Adverse determinations in litigation could subject the
Company to significant liabilities, and could require the Company to seek
licenses from third parties or prevent the Company from manufacturing, selling
or using its products, any of which determinations could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Item 1 -- Business -- Patents, Licenses and Proprietary Rights."
Risk of Product Liability Claims. The Company faces an inherent
business risk of exposure to product liability claims in the event that the use
of its technology or products is alleged to have resulted in adverse effects. To
date, no product liability claims have been asserted against the Company. The
Company maintains a product liability and general liability insurance policy
with coverage of an annual aggregate maximum of $2.0 million. The Company's
product liability and general liability policy is provided on an occurrence
basis. The policy is subject to annual renewal. In addition, the Company
maintains an umbrella excess liability policy which covers product and general
liability with coverage of an additional annual aggregate maximum of $10.0
million. There can be no assurance that liability claims will not exceed the
coverage limits of such policies or that such insurance will continue to be
available on commercially reasonable terms or at all. If the Company does not or
cannot maintain sufficient liability insurance, its ability to market its
products may be significantly impaired. In addition, product liability claims
could have a material adverse effect on the business, financial condition and
results of operations of the Company. See "Item 1 -- Business -- Product
Liability Insurance."
Possible Volatility of Stock Price. The market price of the Company's
Common Stock is likely to be highly volatile. Factors such as fluctuations in
the Company's operating results, announcements and timing of potential
acquisitions, announcements of technological innovations or new products by the
Company or its competitors, FDA and international regulatory actions, actions
with respect to reimbursement matters, developments with respect to patents or
proprietary rights, public concern as to the safety of products developed by the
Company or others, changes in health care policy in the United States and
internationally, changes in stock market analyst recommendations regarding the
Company, other medical device companies or the medical device industry generally
and general market conditions may have a significant effect on the market price
of the Common Stock. In addition, the stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock.
Developments in any of these areas, which are more fully described
elsewhere in "Item 1 -- Business," "Item 3 -- Legal Proceedings," and "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 13 and 14 of the Company's 1996 Annual Report to
stockholders, each of which is incorporated into this section by reference,
could cause the Company's results to differ materially from results that have
been or may be projected by or on behalf of the Company.
The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
Item 8. Financial Statements and Supplementary Data
The information on pages 16 through 27 of the Annual Report is
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
21
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
Information in response to this Item is incorporated by reference to
(i) the information relating to the Company's directors under the caption
"Election of Directors" and the information relating to Section 16 under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive Proxy Statement for its Annual Meeting of Stockholders to
be held May 16, 1997 (the "Proxy Statement"), and (ii) the information under the
caption "Executive Officers of the Registrant" in Part I hereof. The Company
anticipates filing the Proxy Statement within 120 days after December 31, 1996.
Item 11. Executive Compensation
The information under the heading "Executive Compensation" and
"Compensation of Directors" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the heading "Voting Securities and Principal
Holders Thereof - Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the heading "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
---------------------------------------------------------
1. Financial Statements
The following financial statements of OrthoLogic Corp. and Independent
Auditors' Report are incorporated by reference from pages 16 through 27
of the Annual Report:
Balance Sheets - December 31, 1996 and 1995.
Statements of Operations - Each of the three years in the period
ended December 31, 1996.
Statements of Stockholders' Equity - Each of the three years in the
period ended December 31, 1996.
Statements of Cash Flows - Each of the three years in the period
ended December 31, 1996.
Notes to Financial Statements
2. Financial Statement Schedules
Schedules have been omitted because they are not applicable or are not
required or the information required to be set forth therein is included in
the Financial Statements or notes thereto.
22
3. Exhibits and Management Contracts, and Compensatory Plans and
Arrangements
All management contracts and compensatory plans and arrangements are
identified by footnote after the Exhibit Descriptions on the attached
Exhibit Index.
(b) Reports on Form 8-K.
--------------------
On September 13, 1996, the Company filed a current report on Form 8-K dated
August 30, 1996, to report in Item 2 the consummation of its acquisition of
the capital stock of Sutter Corporation. The Form 8-K was amended on
November 14, 1996 to include the following financial statements:
-- Unaudited Pro-Forma Balance Sheet as of June 30, 1996.
-- Unaudited Pro-Forma Statement of Income for the six-month
period ended June 30, 1996
-- Unaudited Pro-Forma Consolidated Statement of Operations
for the year ended December 31, 1995.
-- Audited financial statements of Sutter Corporation for the
years ended December 31, 1995, 1994 and 1993 and
independent auditor's report.
-- Unaudited balance sheet of Sutter Corporation as of June
30, 1996.
-- Unaudited statements of income of Sutter for the six-month
periods ended June 30, 1996 and 1995.
(c) Exhibits
--------
See the Exhibit Index immediately following the signature page of this
report, which Index is incorporated herein by reference.
(d) Financial Statements and Schedules
----------------------------------
See Item 14(a)(1) and (2) above.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 28 , 1997 By /s/ Allan M. Weinstein
------- ------------------------
Allan M. Weinstein
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Allan M. Weinstein Chairman of the Board of Directors, March 28, 1997
- --------------------------------- President and Chief Executive Officer
Allan M. Weinstein (Principal Executive Officer)
March 28, 1997
/s/ Fredric J. Feldman Director
- ---------------------------------
Fredric J. Feldman
March 28, 1997
/s/ John M. Holliman III Director
- ---------------------------------
John M. Holliman III
/s/ Elwood D. Howse, Jr. Director March 28, 1997
- ---------------------------------
Elwood D. Howse, Jr.
/s/ George A. Oram, Jr. Director March 28, 1997
- ---------------------------------
George A. Oram, Jr.
/s/ Augustus A. White III, M.D. Director March 28, 1997
- ---------------------------------
Augustus A. White III, M.D.
/s/ Allen R. Dunaway Vice President and Chief Financial Officer March 28, 1997
- --------------------------------- (Principal Financial and Accounting
Allen R. Dunaway Officer)
S-1
ORTHOLOGIC CORP.
EXHIBIT INDEX TO REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
2.1 Stock Purchase Agreement dated Exhibit 2.1 to the Company's Current
August 30, 1996 by and among the Report on Form 8-K filed on
Company, Sutter Corporation and September 13, 1996
Smith Laboratories, Inc.
2.2 Purchase and Sale Agreement dated as Exhibit 2.1 to the Company's
Current of December 30, 1996 by and among Report on Form 8-K filed
on March the Company and Toronto Medical 18, 1997 ("March 1997 8-K")
Corp., an Ontario corporation
2.3 Amendment to Purchase and Sale Exhibit 2.2 to March 1997 8-K
Agreement dated as of January 13,
1997 by and among the Company and
Toronto Medical Corp., an Ontario
corporation
2.4 Second Amendment to Purchase and Exhibit 2.3 to March 1997 8-K
Sale Agreement dated as of March 1,
1997 by and among the Company and
Toronto Medical Corp., an Ontario
corporation
2.5 Assignment of Purchase and Sale Exhibit 2.4 to March 1997 8-K
Agreement dated as of March 1, 1997
by and among the Company, Toronto
Medical Orthopaedics Ltd., a Canada
corporation and Toronto Medical
Corp., an Ontario corporation
2.6 Asset Purchase Agreement dated March Exhibit 2.1 to the Company's Current
12, 1997 by and among the Company, Report on Form 8-K filed on March
Danninger Medical Technology, Inc., a 27, 1997
Delaware corporation, and Danninger
Healthcare, Inc., an Ohio corporation
3.1 Composite Certificate of Incorporation Exhibit 3.1 to Company's Form 10-Q
of the Company, as amended for the quarter ended March 31, 1996
(File No. 0-21214)
3.2 Bylaws of the Company Exhibit 3.4 to Company's
Amendment No. 2 to Registration
Statement on Form S-1 (No. 33-
47569) filed with the SEC on January
25, 1993 ("January 1993 S-1")
4.1 Articles 5, 9 and 11 of Amended Form Exhibit 3.2 to January 1993 S-1
of Amendment to Certificate of
Incorporation of the Company
4.2 Articles II and III.2(c)(ii) of Bylaws of Exhibit 3.4 to January 1993 S-1
the Company
EX-1
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
4.3 Specimen Common Stock Certificate Exhibit 4.1 to January 1993 S-1
4.4 Stock Option Plan of the Company, as Incorporated by reference to Exhibit
amended and approved by stockholders 99.1 to the Company's Registration
(1) Statement on Form S-8 (No. 333-
09785) filed with the SEC on August
8, 1996
4.5 Stock Purchase Warrant, dated August Exhibit 4.6 to the Company's Form
18, 1993, issued to CyberLogic, Inc. 10-K for the fiscal year ended
December 31, 1994 ("1994 10-K")
4.6 Stock Purchase Warrant, dated Exhibit 4.6 to Company's
September 20, 1995, issued to Registration Statement on Form S-1
Registered Consulting Group, Inc. (No. 33-97438) filed with the SEC on
September 27, 1995 ("1995 S-1")
4.7 Stock Purchase Warrant, dated October
15, 1996, issued to Registered X
Consulting Group, Inc.
4.8 Rights Agreement dated as of March 4, Exhibit 4.1 to the Company's
1997 between the Company and Bank Registration Statement on Form 8-A
of New York, and Exhibits A, B and C filed with the SEC on March 6, 1997
thereto
10.1 License Agreement dated September 3, Exhibit 10.6 to January 1993 S-1
1987 between the Company and Life
Resonances, Inc.
10.2 Invention, Confidential Information and Exhibit 10.7 to January 1993 S-1
Non-Competition Agreement dated
September 18, 1987 between the
Company and Weinstein
10.3 Lease between the Company and Exhibit 10.8 to January 1993 S-1
MeraBank dated January 26, 1989
10.4 First Amendment to Lease, dated Exhibit 10.8.1 to January 1993 S-1
March 15, 1989 between the Company
and MeraBank
10.5 Second Amendment to Lease, dated Exhibit 10.8.2 to January 1993 S-1
September 17, 1990 between the
Company and MeraBank
10.6 Third Amendment to Lease, dated Exhibit 10.8.3 to January 1993 S-1
November 4, 1991 between the
Company and Cook Inlet Region,
Incorporated
10.7 Fourth Amendment to Lease, dated Exhibit 10.9 to the Company's Form
March 24, 1992 between the Company 10-Q for the quarter ended September
and Cook Inlet Region, Incorporated 30, 1994, File No. 0-21214
("September 30, 1994 10-Q")
EX-2
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
10.8 Fifth Amendment to Lease, dated Exhibit 10.10 to the Company's
September 14, 1993 between the September 30, 1994 10-Q
Company and Cook Inlet Region,
Incorporated
10.9 Invention, Confidential Information and Exhibit 10.11 to January 1993 S-1
Non-Competition Agreement dated
January 10, 1989 between the Company
and Frank P. Magee
10.10 Addendum to Lease between the Exhibit 10.8.1 to the Registration
Company and Cook Inlet Region, Inc. Statement on Form S-3 (No. 333-
commencing April 1, 1996 3082) filed with the SEC on April 2,
1996 ("April 1996 S-3")
10.11 1995 Officer Bonus Plan(1) Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the
year ended December 31, 1995
("1995 10-K")
10.12 1996 Officer Bonus Plan(1) Exhibit 10.11 to 1995 10-K
10.13 1997 Officer Bonus Plan(1) X
10.14 Form of Indemnification Agreement* Exhibit 10.16 to January 1993 S-1
10.15 License Agreement dated December 2, Exhibit 10.22 to January 1993 S-1
1992 between Orthotic Limited
Partnership and Company
10.16 Consulting Agreement dated May 1, Exhibit 10.11 to the Company's
1990 between Augustus A. White III September 30, 1994 Form 10-Q
and the Company(1)
10.17 Letter of employment dated March 5, Exhibit 10.29 to the Company's Form
1993 between the Company and David 10-K for the year ended December
E. Derminio(1) 31, 1992, File No.
0-21214
10.18 Amendment to Employment Agreement Exhibit 10.18 to 1995 10-K
between the Company and David E.
Derminio dated July 12, 1995(1)
10.19 Loan Modification Agreement dated Exhibit 10.22 to 1995 S-1
March 23, 1995 between Company and
Silicon Valley Bank
10.20 Employment Agreement dated Exhibit 10.9 to January 1993 S-1
December 17, 1992 between Allan M.
Weinstein and the Company(1)
10.21 Renewal of Employment Agreement of Exhibit 10.22.1 to 1994 10-K
Allan M. Weinstein dated March 28,
1995(1)
10.22 Employment Agreement dated Exhibit 10.10 to January 1993 S-1
December 17, 1992 between Frank P.
Magee and the Company(1)
EX-3
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
10.23 Renewal of Employment Agreement of Exhibit 10.23 to 1994 10-K
Frank P. Magee dated March 28,
1995(1)
10.24 Employment Agreement dated Exhibit 10.24 to 1995 10-K
February 27, 1992 between Allen R.
Dunaway and the Company(1)
10.25 Amendment to Employment Agreement Exhibit 10.25 to 1995 10-K
between the Company and Allen R.
Dunaway dated February 14, 1996(1)
10.26 Underwriting Agreement between the Exhibit 1.1 to 1995 S-1
Company and Volpe, Welty & Co. and
Dain Bosworth, Inc., as Representa
tives of the Underwriters
10.27 Underwriting Agreement between the Exhibit 1.1 to April 1996 S-3
Company and Volpe, Welty &
Company Hambrecht & Quist and Dain
Bosworth, Inc., as Representatives of
the Underwriters
10.28 Maturity Modification Letter dated Exhibit 10.21 to April 1996 S-3
March 29, 1996, by Silicon Valley
Bank
10.29 Employment Agreement dated March Exhibit 10.28 to April 1996 S-3
28, 1996 between the Company and
Nicholas A. Skaff(1)
10.30 Employment Agreement dated July 1, Exhibit 10.5 to Company's Quarterly
1996 between the Company and Report on Form 10-Q for the quarter
George A. Oram, Jr.(1) ended June 30, 1996
10.34 Lease made March 1997 between X
Toronto Medical Corp. and Toronto
Medical Orthopaedics Ltd.
10.35 Lease dated September 4, 1991 by and X
between Greystone Realty Corporation
and Sutter Corporation
10.36 Lease dated February 10, 1988 X
between MIC Four Points and Sutter
Biomedical, Inc.
10.37 First Addendum to Lease dated X
February 15, 1988 by and between
MIC Four Points and Sutter
Biomedical, Inc.
10.38 October 7, 1988 Second Addendum to X
Lease dated February 10, 1988 between
MIC Four Points and Sutter
Biomedical, Inc.
EX-4
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
10.39 Severance Agreement effective February X
18, 1997 by and between George A.
Oram, Jr. and the Company (1)
10.40 Promissory Note dated November 15, X
1996 made by George A. Oram, Jr. in
favor of the Company (1)
11.1 Statement of Computation of Net X
Income (Loss) per Weighted Average
Number of Common and Common Equivalent
Shares Outstanding
13.1 Portions of 1996 Annual Report to X
Stockholders
21.1 Subsidiaries of Registrant X
23.1 Consent of Deloitte & Touche LLP
27 Financial Data Schedule X
- --------------------------------------
(1) Management contract or compensatory plan or arrangement
* The Company has entered into a separate indemnification agreement with
each of its current direct and executive officers that differ only in
party names and dates. Pursuant to the instructions accompanying Item
601 of Regulation S-K, the Company has filed the form of such
indemnification agreement.
EX-5