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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, 1997
[ ] 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.)
1275 West Washington Street, Tempe, Arizona
85281 (Address of principal executive
offices)
Issuer's telephone number: (602) 286-5520
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0005 per share
(Title of Class)
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 and non-voting common equity
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 March
1, 1998 was approximately $153,066,000. 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
March 1, 1998 was 25,274,290.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1997 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 15, 1998 are incorporated by reference in Part
III hereof.
ORTHOLOGIC CORP.
FORM 10-K ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1997
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 Equity 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 7A. Quantitative and Qualitative Disclosures About Market Risk......................................21
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 1275 West Washington Street, Tempe, Arizona 85281, and its telephone
number is (602) 286-5520.
OrthoLogic develops, manufactures and markets proprietary, technologically
advanced orthopaedic products and packaged services for the orthopaedic health
care market including bone growth stimulation devices, continuous passive motion
("CPM") devices and ancillary orthopaedic recovery products. OrthoLogic's
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 extended its product line in August 1996 with its acquisition of
Sutter Corporation ("Sutter"), a manufacturer and marketer of CPM devices, and
enhanced its offering of CPM devices in March 1997 through the acquisition of
the CPM assets of Toronto Medical Corp. ("TMC") and of Danninger Medical
Technology, Inc. ("DMTI"). The Company also offers ancillary orthopaedic
products such as bracing and cryotherapy through its CarePlan, a product and
service concept that enables CPM sales representatives to offer surgeons a range
of ancillary orthopaedic products. In June 1997, the Company further extended
its product line by entering into a co-promotion agreement (the "Co-Promotion
Agreement") with Sanofi Pharmaceuticals, Inc. The Co-Promotion Agreement allows
the Company to market Hyalgan (sodium hyaluronate) to orthopedic surgeons in the
United States for the relief of pain from osteoarthritis of the knee. The
Company commenced marketing of Hyalgan in July 1997.
OrthoLogic periodically discusses with third parties the possible
acquisition of technology, product lines and businesses in the orthopaedic
health care 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 and Other Product Development
OrthoLogic's product line includes bone growth stimulation and fracture
fixation devices, CPM devices and related products and Hyalgan. The Company's
product line is sold primarily through the Company's direct sales force.
OrthoLogic(R) 1000. The OrthoLogic 1000 is a portable, noninvasive physician
prescribed 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. 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 was completed by
the
Company in September 1995, and this analysis indicated 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 has combined the existing data from the
study with delayed union data collected in the Company's Post Marketing Clinical
Registry. This combined data 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.
In July 1997, the Company received a PMA supplement from the FDA for a
single-coil model of the OrthoLogic 1000. The single-coil device, the OL-1000
SC, will utilize the same magnetic fields as the OrthoLogic 1000 but should be
more comfortable for patients with fractures of some long bones, such as the
upper femur or the scaphoid. The Company plans to release the product in the
first quarter of 1998.
Continuous Passive Motion. CPM devices provide controlled, continuous
movement to joints and limbs without requiring the patient to exert muscular
effort and are intended to be applied immediately following orthopaedic trauma
or surgery. The products are designed to reduce swelling, increase joint range
of motion, reduce the length of hospital stay and reduce the incidence of
post-trauma and post-surgical complication. The primary use of CPM devices
occurs in the hospital and home environments, but they are also utilized in
skilled nursing facilities, sports medicine and rehabilitation centers.
The Company has several flagship CPM devices. The Legasus and Litelift knee
CPMs, are designed with a patented anterior plate system to facilitate true full
knee extension. The Legasus device is used primarily in the home while the
LiteLift is specifically designed for the hospital environment. The WaveFlex
C*F*T hand CPM is the only CPM device that moves each finger through an
individual arc of motion and creates a full composite fist. The PS-1 pronation-
supination forearm CPM, with its patented torque-isolating technology, drives
pronation and supination at the distal forearm, and the model 600 shoulder unit
has exclusive pause, warm-up, and compliance timer features that differentiate
it from other shoulder CPM devices.
Ancillary Orthopaedic Products. The Company offers a complete line of
bracing, electrotherapy, cryotherapy and dynamic splinting products. The bracing
line incudes post-operative, custom and pre-sized functional and osteoarthritis
models. Post-operative braces are used in the early phases of post-surgical
rehabilitation while functional braces are applied as the patient returns to
work or sports activities. The electrotherapy line consists of TENS, NMES, high
volt pulsed current, interferential, and biofeedback units. Cryotherapy is used
to cool the operative or injured site in order to prevent pain and swelling.
OrthoLogic produces its own motorized cryotherapy device, the Blue Artic, which
provides temperature-controlled cold therapy using a reservoir of ice water and
a pump that circulates the water through a pad over the injury/surgical site.
Hyalgan. The Company began marketing Hyalgan during July 1997 under the
Co-Promotion Agreement. Hyalgan is used for relief of pain from osteoarthritis
of the knee for those patients who have failed to respond adequately to
conservative non-pharmacological therapy and to simple analgesics, such as
acetaminophen. Orthopeadic surgeons administer Hyalgan in their offices, with
each patient receiving five injections over a period of four weeks. Hyalgan is a
preparation of highly purified sodium hyaluronate, a chemical found in the body
and present in high amounts in joints and synovial fluid. The body's own
hyaluronate plays a number of key roles in normal joint function, and in
osteoarthritis, the quality and quantity of hyaluronate in the joint fluid and
tissues may be deficient.
OrthoFrame(R); OrthoNail(TM). 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
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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.
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 is in the process of evaluating the results of the clinical trial for
use of the SpinaLogic 1000 as an adjunct to spinal fusion surgery. 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. The Company is engaged in research of additional
applications of the proprietary BioLogic technology, including cartilage
regeneration and osteoporosis treatment.
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 OrthoSound based products, and there can be no assurance that the
Company will do so or that it would receive such approval if sought.
Chrysalin. In January 1998 the Company announced it had made a minority
equity investment in Chrysalis BioTechnology, Inc. As part of the transaction,
the Company has been awarded a nine-month, world-wide exclusive option to
license the orthopedic applications of Chrysalin, a patented 23-amino acid
peptide that has shown promise in accelerating the healing process of fractured
bones. In pre-clinical animal studies, Chrysalin was shown to double the rate of
fracture healing with a single injection into the fracture gap. The Company
intends to conduct pre-clinical studies during 1998, and, depending on the
results, an application may be filed with the FDA to conduct human clinical
trials. However, there can be no assurance that the Company will do so or that
it would receive such approval if sought.
3
Marketing and Sales
The OrthoLogic 1000, the OrthoFrame and the OrthoNail 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. Orthopaedic surgeons purchase Hyalyan from an exclusive
distributor who sells Hyalgan under an agreement with Sanofi Pharmaceuticals,
Inc. The Company's sales force calls on orthopeadic surgeons to provide them
with product information relative to Hyalgan. 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 sales
force, the Company's sales and marketing efforts now are primarily conducted
directly through the Company's own sales people. Of the Company's approximately
565 employees at December 31, 1997, approximately 300 are involved in sales and
marketing. The Company employs 12 area vice presidents to manage territory
sales, each of whom has responsibility for the Company's sales and marketing
efforts in a designated geographic area. During the year the Company
restructured its sales force to reduce the number of area vice presidents and
direct sales people. In late 1997, the Company created a single sales management
structure to oversee the entire sales force. Prior to this change there was
separate management for the fracture healing and orthopedic rehabilitation sales
forces. 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 400 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 acquisition of the
assets of a Canadian CPM manufacturer 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 from sales of
the OrthoLogic 1000, OrthoFrame and OrthoNail, revenues from leasing CPM
equipment are seasonal. CPM devices are used most commonly 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. The Company does not
believe that revenues for Hyalgan will be seasonal.
Research and Development
The Company's research and development staff presently includes 21
individuals, of whom 4 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. The Company's research and
4
development expenditures totaled $2.1 million, $2.2 million and $2.3 million in
the years ended December 31, 1995, 1996 and 1997, 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 that it manufactures in-house
or purchases from third parties. These parts are assembled, calibrated and
tested at the Company's facilities in Pickering (outside of Toronto), Canada.
The Company purchases several CPM components, including microprocessors, motors
and custom key panels from sole-source suppliers. The Company believes that its
CPM products are not dependent on these components and could be redesigned to
incorporate comparable components. The Company places orders for these
components to meet sales forecast for six months. Other components and materials
used in the manufacture and assembly of CPM products are available from multiple
sources.
The Company purchases other orthopaedic products fully assembled from
third-party suppliers. These products are available from multiple sources.
Fidia S.p.A., an Italian corporation, manufactures Hyalgan under an
agreement with Sanofi Pharmaceuticals, Inc. Future revenues of the Company could
be adversely affected in the event Fidia S.p.A. experiences disruptions in the
manufacture of Hyalgan.
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 primarily treated
with surgery, and this represents the Company's 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'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
5
believes that there are several foreign CPM device manufacturers and providers
with whom the Company will compete if it increases international sales efforts
or as those competitors sell in the United States. The Company's primary
competitor for Hyalgan is Biomatrix, Inc. which introduced a competing product
in late 1997.
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 services, 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, nonthermal
ultrasound and the treatment of pain associated with osteoarthritis of the knee.
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 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 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.
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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 17 United States
patents, one pending United States patent application, 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 2016. 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), TALON(R), CaseLog(R),
OrthoSonic(R), Legasus Sport CPM(R), LiteLift(R), Sportlite(R), Sutter(R),
Danninger Medical(R), Mobilimb(R), WaveFlex(R) and Totalcare(R) are federally
registered trademarks of the Company. Additionally, the Company claims trademark
rights in PerioLogicTM, OsteoLogicTM, OrthoNailTM, OrthoSoundTM, QuickfixTM, CPM
9000ATTM, Legasus CPMTM, Sutter CarePlanTM, Home Rehab SystemTM and DanniflexTM.
The Company has become aware of an assertion in Germany against one of its
recently acquired CPM patents. The Company does not 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. 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 the Company's
manufacturing facilities.
The OrthoFrame, OrthoFrame/Mayo Wrist Fixator and the 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
7
notification with the agency. The Company obtained 510(k) pre-market
notification clearances from the FDA for the OrthoFrame and OrthoNail products.
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 the new standards.
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.
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
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 FDA approved this PMA
supplement with respect to patient registry date in January 1997. The Company
has agreed not to 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 FDA approved the use of pre-clinical research data in
the marketing of the OrthoLogic 1000 in May 1997 by granting a pre-market
approval supplement for a brochure, titled "Biophysical Stimulation of
Fracture-Healing Mediated by IGF-II."
8
In 1992, 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.
Hyalgan is considered a Class III Significant Risk Device and is subject to
the same clinical trial and GMP reviews as described for the BioLogic
technology-based products. The product is manufactured by Fidia S.p.A. in Italy
and is imported into the United States. As a result each shipment of the product
into the United States is subject to inspections, including by the United States
Department of Agriculture. The import of Hyalgan could be delayed or denied for
numerous reasons, and if this occurs, it could have a material adverse affect on
sales of the product. To the Company's knowledge, no significant deficiencies
have been noted in the FDA inspections of Fidia S.p.A.'s manufacturing facility.
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."
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 400 third party payors as an
approved provider for its fracture healing and orthopedic rehabilitation
products, 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
profitability and cash flows.
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
9
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."
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code fields. These date code fields
will need to accept four digit entries to distinguish twenty-first century dates
from twentieth century dates. The Company is in the process of consolidating its
software and hardware systems to a single integrated system from the multiple
systems maintained from the acquisitions completed in late 1996 and early 1997.
The new integrated system is certified to be Year 2000 compliant. The Company
believes that payment systems of third party payors may not yet be Year 2000
compliant. In the event that such systems are not made compliant in a timely
manner, claims processing and reimbursement payments could have a material
adverse effect on the Company's operations.
Employees
As of December 31, 1997, the Company had 567 employees, including 298 in
sales and marketing, 21 in research and development and clinical and regulatory
affairs, approximately 11 in managed care, 83 in reimbursement and 154 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 Changes."
10
Item 2. Properties
The Company leases facilities in Tempe, Arizona and Pickering, Ontario,
Canada. 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
- -------- ----------- ------------- ----------- ------------------
Tempe 80,000 11/07 2-story, in industrial Fracture healing
park products and executive
offices
Pickering 28,500 2/99 1-story, in CPM assembly
industrial park
The Company believes that each facility is well maintained.
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 consolidation was complete at the end of 1997. The
Company has ceased operations at facilities in San Diego, California in
connection with the consolidation. See "Item 7 -- Management's Discussion and
Analysis of Financial Condition Results of Operations -- Condition of Acquired
Facilities."
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.
Jeffrey M. Boren and Charles E. Peterson, Jr., on behalf of themselves and
all others 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.
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
11
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 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 were consolidated for all purposes before Judge Broomfield in Arizona
federal district court, and lead plaintiffs and counsel were appointed.
Thereafter, the Company and its officers and directors moved to dismiss the
consolidated amended complaint for failure to state a claim. On February 5,
1998, Judge Broomfield dismissed the consolidated amended complaint in its
entirety against the Company and its officers and directors, giving plaintiffs
leave to amend all claims to cure all deficiencies. If any deficiencies with a
claim are not cured by plaintiffs, that claim will be dismissed with prejudice
as against the Company and its officers and directors.
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 had been stayed pending a
decision on defendants' motion to dismiss
12
the consolidated amended class action complaint. The case continues to be stayed
pending plaintiffs' amendment of their consolidated amended class action
complaint in compliance with the Court's Order of Dismissal.
The Company continues to deny the substantive allegations in the aforesaid
lawsuits and will continue to defend the action vigorously.
In March 1998, the former owner of the CPM assets acquired in the DMTI
acquisition filed a lawsuit in the Court of Common Pleas in Franklin County,
Ohio against the Company. The plaintiff alleges that the Company breached the
acquisition agreement by not satisfying certain liabilities it assumed in the
acquisition and that the Company breached an ancillary agreement for the
temporary provision of services following the acquisition. Plaintiff has also
demanded from the Court of Common Pleas a declaration that the Company is not
entitled to cash escrowed in the acquisition. The Company had previously
demanded indemnification from this plaintiff and had asked the escrow agent to
deliver escrowed cash to it as a result of plaintiff's breaches of
representations and warranties in the acquisition agreement. The Company denies
these allegations and will defend the action 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
the facilities leased by Sutter prior to its acquisition by the Company. The
Company responded to the letter in March 1997 and believes that it has addressed
the issues raised in that letter. 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
- ---- --- -----
Thomas R. Trotter 50 Chief Executive Officer, President and Director
Frank P. Magee, D.V.M. 41 Executive Vice President, Research and Development
William C. Rieger 48 Vice President, Marketing and Sales
Terry D. Meier 59 Senior Vice President
Allen R. Dunaway 43 Vice President, Chief Financial Officer and Secretary
MaryAnn G. Miller 40 Vice President, Human Resources
Thomas R. Trotter joined the Company as President and Chief Executive
Officer and a Director in October 1997. From 1988 to October 1997, Mr. Trotter
held various positions at Mallinckrodt, Inc. in St. Louis, Missouri, most
recently as President of the Critical Care Division and a member of the
Corporate Management Committee. From 1984 to 1988, he was President and Chief
Executive Officer of Diamond Sensor Systems, a medical device company in Ann
Arbor, Michigan. From 1976 to 1984, he held various senior management positions
at Shiley, Inc. (a division of Pfizer, Inc.) in Irvine, California.
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. Mr.
Magee served as President between August 1997 and October 1997. From 1984 to
1989, Dr. Magee was head of Experimental Surgery at Harrington Arthritis
Research Center, a not-for-profit independent research and development
organization.
William C. Rieger joined the Company in January 1998 as Vice President,
Marketing and Sales. From 1994 to 1997, Mr. Rieger held the position of Vice
President of Sales and Marketing at Hollister Inc., a privately held
manufacturer
13
of medical products. From 1985-1994, he held several positions as Vice President
at Miles Inc. Diagnostic Division, a manufacturer of diagnostic products.
Terry D. Meier joined the Company in March 1998 as Senior Vice President and
beginning April 1, 1998, will serve as its Vice President and Chief Financial
Officer. From 1974 to 1997, Mr. Meier held several positions at Mallinckrodt,
Inc., a healthcare and specialty chemicals company. Most recently, he served as
their Vice President and Corporate Controller and from 1989 to 1996, as the
Senior Vice President and Chief Financial Officer.
Allen R. Dunaway joined the Company in February 1992 as its Vice President
and Chief Financial Officer. Mr. Dunaway has entered into a Transitional
Employment Agreement with the Company. Pursuant to that agreement, Mr. Dunaway
will serve as Chief Financial Officer through March 31, 1998 and will serve at
the direction of the Chief Executive Officer thereafter.
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 previously First Vice President
and Regional Human Resources Director of Firstar from January 1994 to July 1995.
14
PART II
-------
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information under the heading "Stockholder Information" on page 17 of
the Company's Annual Report to Stockholders for the year ended December 31, 1997
(the "Annual Report") is incorporated herein by reference.
Item 6. Selected Financial Data
The information on pages 16 and 17 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 12 through 15 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 $34.7 million at December 31, 1997. While the Company was first
profitable in the fourth quarter of 1997, 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 OrthoLogic 1000. See "Item 1 -- Business -- Governmental Regulation" and
"Item 3 -- Legal Proceedings." The Company intends to defend these lawsuits
vigorously. However, an adverse litigation outcome would have a material adverse
effect on the Company's business, financial condition and results of operations.
Dependence on Sales Force. A substantial portion of the Company's sales are
generated through the Company's internal sales force of approximately 165
employees. During 1996, the Company shifted its primary focus from sales through
independent orthopaedic specialty dealers to an internal sales force. This
internal sales force 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 sales force 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. In January
1998 the sales management was restructured so that territories are determined
based only on geography and not on geography and devices. As a result, certain
members of sales management are now responsible for devices not
15
previously within their area of responsibility. There can be no assurance that
these individuals will be able to manage their new responsibilities
successfully. See "Item 1 -- Business -- Marketing and Sales."
Dependence on Key Personnel; Recent Management Changes. 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 who subsequently resigned in February 1997. In October
1997, the Company hired a new President and Chief Executive Officer and in
December 1997, the Company filled the newly created position of Vice President,
Marketing Worldwide. A loss of the 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."
Historical Dependence on Primary Product; Future Products. During 1997
revenues from CPM devices reduced the Company's dependence on revenues from the
OrthoLogic 1000. However, 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 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 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 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. The use of CPM is more widely accepted, however the
Company must continue to prove that the products are safe, efficacious and
cost-effective in order to maintain and grow its market share. Hyalgan is a new
therapeutic treatment for relief of pain from osteoarthritis of the knee. The
long-term commercial success of the product will depend upon its widespread
acceptance by a significant portion of the medical community and third party
payors as a safe, efficacious and cost-effective alternative to other treatment
options such as simple analgesics. 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."
Integration of Acquisitions. The Company acquired Sutter Corporation in
August 1996, and certain assets of each of TMC and DMTI in March 1997. See "Item
1 -- Business -- General." 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, reimbursement,
manufacturing and research and development efforts. 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 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.
16
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 to terminate their
relationship with the Company. There can be no assurance that the combined
Company will retain the employees and 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.
In the first quarter of 1997, the Company commenced the consolidation of the
recent acquisitions. The administrative operations, manufacturing and servicing
operations were consolidated by the end of 1997. The sales force management was
consolidated in early 1998 and computer hardware and software systems are
expected to be completed in mid 1998.
Limited Combined Operating History and Results. The Company acquired Sutter
in August 1996 and certain assets of each of TMC and DMTI in March 1997.
Financial results of Sutter, TMC and DMTI before August 1996, March 1997 and
March 1997, respectively, reflect operations when those businesses were not
under the Company's 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 the acquisitions, 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 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. The Company has determined that the
facilities acquired in the acquisition of Sutter had several physical problems,
primarily resulting from excessive moisture and water leaks. Two Sutter
employees have filed related worker's compensation claims, and these two claims
are being processed by Sutter's worker's compensation carrier. In addition, the
lack of maintenance has allegedly caused some structural problems at one
facility, and employee complaints based upon these problems have led to two
informal complaints by the California Department of Industrial Relations and
Division of Occupational Safety and Health. Sutter has responded to both
complaints and continues to work with its landlord to correct the problems. In
addition, Sutter has notified the prior owners of Sutter of the problems because
the prior owners may be the responsible party under the acquisition agreement
for any required remedies. Sutter has vacated the leasehold premises of both
Sutter facilities. Sutter vacated a manufacturing facility in conjunction with a
negotiated lease termination. Sutter also vacated a mixed use facility and
notified that landlord of its termination of the lease due to acts and omissions
of the landlord. That landlord claims that rent remains unpaid but has not yet
responded to Sutter's claim that the lease has been terminated. Damages, claims
and future discoveries regarding the maintenance of the facilities by prior
occupants 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
in the expansion of its product line with the CPM devices and Hyalgan. This
growth 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 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
17
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. The Company's
products are reimbursed by most payors, however there are generally specific
product usage requirements or documentation requirements in order for the
Company to receive reimbursement. In certain circumstances the Company is
successful in appealing reimbursement coverage for those applications which are
not in compliance with the payor requirements. Medicare has very strict
guidelines for reimbursement, and until the second quarter 1997, the Company had
some success in appealing claims for applications of the OrthoLogic 1000 which
were outside the coverage guidelines. During the second quarter of 1997 the
Company determined that Medicare would no longer reimburse for such cases, and
the Company wrote off all Medicare receivables which did not meet their
guidelines. Significant uncertainty exists as to the reimbursement status of
newly approved health care products, such as Hyalgan, and there can be no
assurance that adequate third party coverage will continue to be available to
the Company at current levels. Although the Company has recognized some fee
revenue under the Co-Promotion Agreement for Hyalgan, the level of fees
recognized under the Co-Promotion Agreement will ultimately be dependent on
Medicare's assigned billing code and reimbursement amount. 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, one large domestic and several foreign
manufacturers of CPM devices and one competitor selling a therapeutic injectable
for treatment of osteoarthritis of the knee. 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 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
18
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 or less costly, or both, and which render
the Company's products obsolete or noncompetitive. 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 Development."
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
and Hyalgan 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 expansion of this study will establish statistical
significance. In addition, 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 submission 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. The Company is in the process of evaluating
the results of the clinical trial for use of the SpinaLogic 1000 as an adjunct
to spinal fusion surgery. 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 labeling restrictions may be
imposed for failure to comply with regulatory standards or upon the occurrence
of unforeseen problems following initial marketing.
The Company is also required to adhere to applicable requirements for FDA
Good Manufacturing Practices, 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
19
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. In addition, Hyalgan is manufactured by a single
company, Fidia S.p.A. Fidia has been manufacturing Hyalgan for sale in Europe
since 1987. The Company purchases several CPM components, including
microprocessors, motors and custom key panels from sole-source suppliers. The
Company believes that its CPM products are not dependent on these components and
could be redesigned to incorporate comparable components. 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 three months
and the distributor of Hyalgan maintains a supply of product to last several
months, any delay or interruption in supply of these components or products
could significantly impair the Company's ability to deliver 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 certain of 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. The Co-Promotion Agreement
provides the Company with exclusive marketing rights for Hyalgan to orthopedic
surgeons in the United States. The Company is paid a commission which is based
upon the number of units sold at the wholesale acquisition cost less amounts for
distribution costs, discounts, rebates, returns, product transfer price,
overhead factor and a royalty factor. 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 Company or
20
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 for its
fracture healing and Hyalgan products and only limited claims for its CPM
products. 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
$25.0 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, developments in litigation to which the Company is
subject, 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 12 through 15 of the Company's 1997 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 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The information on pages 18 through 31 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
biographical information relating to the Company's directors under the caption
"Election of Directors" and the information relating to Section 16 compliance
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 15, 1998 (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, 1997.
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 18 through 31 of
the Annual Report:
Balance Sheets - December 31, 1997 and 1996.
Statements of Operations - Each of the three years in the period
ended December 31, 1997.
Statements of Stockholders' Equity - Each of the three years in the
period ended December 31, 1997.
Statements of Cash Flows - Each of the three years in the period
ended December 31, 1997.
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.
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.
22
(b) Reports on Form 8-K.
- ------------------------
The Company filed a Current Report on Form 8-K dated October 10, 1997 to
report in Item 5 the appointment of Thomas R. Trotter to the position of
President and Chief Executive Officer of the Company.
(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 27, 1998 By /s/ Thomas R. Trotter
--------------------------------------
Thomas R. Trotter
President and 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/ Thomas R. Trotter President, Chief Executive Officer and March 27, 1998
- ----------------------------------------------------- Director (Principal Executive Officer)
Thomas R. Trotter
March 27, 1998
/s/ John M. Holliman III Chairman of the Board of Directors
- ----------------------------------------------------- and Director
John M. Holliman III
March 27, 1998
/s/ Fredric J. Feldman Director
- -----------------------------------------------------
Fredric J. Feldman
/s/ Elwood D. Howse, Jr. Director March 27, 1998
- -----------------------------------------------------
Elwood D. Howse, Jr.
/s/ Stuart H. Altman Director March 27, 1998
- -----------------------------------------------------
Stuart H. Altman
/s/ Augustus A. White III
- -----------------------------------------------------
Augustus A. White III, M.D. Director March 27, 1998
/s/ Allen R. Dunaway Vice President and Chief Financial Officer March 27, 1998
- ----------------------------------------------------- (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, 1997
(File No. 0-21214)
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
2.1 Stock Purchase Agreement dated August Exhibit 2.1 to the Company's Current
30, 1996 by and among the Company, Report on Form 8-K filed on
Sutter Corporation and Smith September 13, 1996
Laboratories, Inc.
2.2 Purchase and Sale Agreement dated as of Exhibit 2.1 to the Company's Current
December 30, 1996 by and among the Report on Form 8-K filed on March 18,
Company and Toronto Medical Corp., an 1997 ("March 18, 1997 8-K")
Ontario corporation
2.3 Amendment to Purchase and Sale Exhibit 2.2 to March 18, 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 18, 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 27,
Danninger Medical Technology, Inc., a 1997
Delaware corporation, and Danninger
Health care, Inc., an Ohio corporation
3.1 Composite Certificate of Incorporation Exhibit 3.1 to Company's Form 10-Q
of the Company, as amended, including for the quarter ended March 31, 1997
Certificate of Designation in respect of ("March 1997 10-Q")
Series A Preferred Stock
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 the Certificate of Exhibit 3.1 to March 1997 10-Q
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
4.3 Specimen Common Stock Certificate Exhibit 4.1 to January 1993 S-1
EX-1
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
4.4 Stock Purchase Warrant, dated August Exhibit 4.6 to the Company's Form 10-
18, 1993, issued to CyberLogic, Inc. K for the fiscal year ended December
31, 1994 ("1994 10-K")
4.5 Stock Purchase Warrant, dated Exhibit 4.6 to Company's Registration
September 20, 1995, issued to Statement on Form S-1 (No. 33-97438)
Registered Consulting Group, Inc. filed with the SEC on September 27,
1995 ("1995 S-1")
4.6 Stock Purchase Warrant, dated October Exhibit 4.7 to the Company's Annual
15, 1996, issued to Registered Report on Form 10-K for the year
Consulting Group, Inc. ended December 31, 1996 ("1996
10-K")
4.7 Rights Agreement dated as of March 4, Exhibit 4.1 to the Company's
1997 between the Company and Bank of Registration Statement on Form 8-A
New York, and Exhibits A, B and C filed with the SEC on March 6, 1997
thereto
4.8 1987 Stock Option Plan of the Company, Exhibit 4.4 to the Company's Form
as amended and approved by 10-Q for the quarter ended June 30,
stockholders (1) 1997 ("June 1997 10-Q")
4.9 1997 Stock Option Plan of the Company(1) Exhibit 4.5 to the Company's June
1997 10-Q
4.10 Stock Purchase Warrant dated March X
2, 1998 issued to Silicon Valley Bank
4.11 Antidilution Agreement dated March 2, X
1998 by and between the Company and
Silicon Valley Bank
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 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
10.4 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
10.5 Addendum to Lease between the Exhibit 10.8.1 to the Registration
Company and Cook Inlet Region, Inc. Statement on Form S-3 (No. 333-3082)
commencing April 1, 1996 filed with the SEC on April 2, 1996
("April 1996 S-3")
10.6 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")
10.7 1996 Officer Bonus Plan(1) Exhibit 10.11 to 1995 10-K
10.8 1997 Officer Bonus Plan(1) Exhibit 10.13 to the Company's 1996
10-K
EX-2
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
10.9 Form of Indemnification Agreement* Exhibit 10.16 to January 1993 S-1
10.10 License Agreement dated December 2, Exhibit 10.22 to January 1993 S-1
1992 between Orthotic Limited
Partnership and Company
10.11 Consulting Agreement dated May 1, Exhibit 10.11 to the Company's
1990 between Augustus A. White III and September 30, 1994 Form 10-Q
the Company(1)
10.12 Loan Modification Agreement dated Exhibit 10.22 to 1995 S-1
March 23, 1995 between Company and
Silicon Valley Bank
10.13 Renewal of Employment Agreement of Exhibit 10.23 to 1994 10-K
Frank P. Magee dated March 28,
1995(1)
10.14 Employment Agreement dated February Exhibit 10.24 to 1995 10-K
27, 1992 between Allen R. Dunaway and
the Company(1)
10.15 Amendment to Employment Agreement Exhibit 10.25 to 1995 10-K
between the Company and Allen R.
Dunaway dated February 14, 1996(1)
10.16 Underwriting Agreement between the Exhibit 1.1 to 1995 S-1
Company and Volpe, Welty & Co. and
Dain Bosworth, Inc., as Representatives
of the Underwriters
10.17 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
10.18 Maturity Modification Letter dated Exhibit 10.21 to April 1996 S-3
March 29, 1996, by Silicon Valley Bank
10.19 Lease made March 1997 between Exhibit 10.34 to the Company's 1996
Toronto Medical Corp. and Toronto 10-K
Medical Orthopaedics Ltd.
10.20 Lease dated September 4, 1991 by and Exhibit 10.35 to the Company's
between Greystone Realty Corporation Annual Report on Form 10-K/A
and Sutter Corporation (Amendment No. 1) for the year ended
December 31, 1996 ("1996 10-K/A")
10.21 Lease dated February 10, 1988 between Exhibit 10.36 to 1996 10-K/A
MIC Four Points and Sutter Biomedical,
Inc.
10.22 First Addendum to Lease dated February Exhibit 10.37 to 1996 10-K/A
15, 1988 by and between MIC Four
Points and Sutter Biomedical, Inc.
EX-3
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
10.23 October 7, 1988 Second Addendum to Exhibit 10.38 to 1996 10-K/A
Lease dated February 10, 1988 between MIC Four Points and Sutter
Biomedical, Inc.
10.24 Severance Agreement dated February Exhibit 10.39 to the Company's 1996
18, 1997 by and between George A. 10-K
Oram, Jr. and the Company (1)
10.25 Promissory Note dated November 15, Exhibit 10.40 to the Company's 1996
1996 made by George A. Oram, Jr. in 10-K
favor of the Company (1)
10.26 [Intentionally Omitted.]
10.27 Employment Agreement by and between Exhibit 10.4 to the Company's March
Allan M. Weinstein and the Company 1997 10-Q
effective as of December 1, 1996 (1)
10.28 Employment Agreement by and between Exhibit 10.5 to the Company's March
Frank P. Magee and the Company 1997 10-Q
effective as of December 1, 1996 (1)
10.29 Employment Agreement by and between Exhibit 10.6 to the Company's March
Allen R. Dunaway and the Company 1997 10-Q
effective as of December 1, 1996 (1)
10.30 Employment Agreement by and between Exhibit 10.7 to the Company's March
James B. Koeneman and the Company 1997 10-Q
effective as of December 1, 1996 (1)
10.31 Employment Agreement by and between Exhibit 10.8 to the Company's March
MaryAnn G. Miller and the Company 1997 10-Q
effective as of December 1, 1996 (1)
10.32 Employment Agreement by and between Exhibit 10.9 to the Company's March
Nicholas A. Skaff and the Company 1997 10-Q
effective as of December 1, 1996 (1)
10.33 Co-promotion Agreement dated June 23, Exhibit 10.1 to the Company's June
1997 by and between the Company and 1997 10-Q
Sanofi Pharmaceuticals, Inc.
10.34 Single-tenant Lease-net dated June 12, Exhibit 10.2 to the Company's Form
1997 by and between the Company and 10-Q for the quarter ended
Chamberlain Development, L.L.C. September 30, 1997 ("September 1997
10-Q")
10.35 Employment Agreement dated October Exhibit 10.3 to the Company's
20, 1997 by and between the Company September 1997 10-Q
and Thomas R. Trotter, including Letter
of Incentive Option Grant, OrthoLogic
Corp. 1987 Stock Option Plan (1)
EX-4
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
10.36 Employment Agreement dated October Exhibit 10.4 to the Company's
17, 1997 by and between the Company September 1997 10-Q
and Frank P. Magee (1)
10.37 Employment Agreement dated Exhibit 10.5 to the Company's
October 17, 1997 by and between the September 1997 10-Q
Company and Allan M. Weinstein (1)
10.38 Severance Agreement dated May 21, Exhibit 10.6 to the Company's
1997 by and between the Company and September 1997 10-Q
David E. Derminio (1)
10.39 Severance Agreement dated September Exhibit 10.7 to the Company's
19, 1997 by and between the Company September 1997 10-Q
and Nicholas A. Skaff (1)
10.40 Employment Agreement effective as of X
December 15, 1997 by and between the
Company and William C. Rieger (1)
10.41 Transitional Employment Agreement X
dated February 2, 1998 by and between
the Company and Allen R. Dunaway (1)
10.42 Employment Agreement effective as of X
March 16, 1998 by and between the
Company and Terry D. Meier (1)
10.43 Revised and Restated Employment X
Agreement effective as of March 16,
1998 by and between the Company and
Allan M. Weinstein(1)
10.44 Loan and Security Agreement dated X
March 2, 1998 by and between the
Company and Silicon Valley Bank
10.45 Registration Rights Agreement dated X
March 2, 1998 by and between the
Company and Silicon Valley Bank
11.1 Statement of Computation of Net X
Income (Loss) per Weighted Average
Number of Common Shares Outstanding
13.1 Portions of 1997 Annual Report to X
Stockholders
21.1 Subsidiaries of Registrant X
23.1 Consent of Deloitte & Touche LLP X
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