-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WJwpTFuZDvY4pzMrRjWG5WGU4zGbua/YjMwyXslv0FHc+y0B1gldUYInhNxcN0/N 5TBOxUEVICUsZYYOjr9dTw== 0000950147-98-000396.txt : 19980518 0000950147-98-000396.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950147-98-000396 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORTHOLOGIC CORP CENTRAL INDEX KEY: 0000887151 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 860585310 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21214 FILM NUMBER: 98624590 BUSINESS ADDRESS: STREET 1: 2850 S 36TH ST #16 CITY: PHOENIX STATE: AZ ZIP: 85034 BUSINESS PHONE: 6024375520 MAIL ADDRESS: STREET 1: 2850 S 36TH ST STREET 2: SUITE 16 CITY: PHOENIX STATE: AZ ZIP: 85034 10-Q 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 -------------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to _______________________ Commission File Number: 0-21214 ORTHOLOGIC CORP. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 86-0585310 - ------------------------------------------------------------------------------------------------------- (State of other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1275 W. Washington Street, Tempe, Arizona 85281 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (602) 437-5520 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) 2850 S. 36th Street, #16, Phoenix, Arizona, 85034 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 25,291,690 shares of common stock outstanding as of April 30, 1998 ORTHOLOGIC CORP. INDEX Page No. Part I Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets March 31, 1998 and December 31, 1997----------------------- 1 Consolidated Statements of Operations Three Months ended March 31, 1998 and 1997----------------- 2 Consolidated Statements of Cash Flows Three Months ended March 31, 1998 and 1997----------------- 3 Notes to Consolidated Financial Statements ------------------ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations------- 8 Part II Other Information Item 1. Legal Proceedings----------------------------------- 11 Item 6. Exhibits and Reports on Form 8-K ------------------- 11 OrthoLogic Corp. Condensed Consolidated Balance Sheets (in thousands) Unaudited March 31, December 31, 1998 1997 --------- --------- ASSETS Cash and cash equivalents $ 1,386 $ 7,783 Short-term investments 3,495 4,569 Accounts receivable 25,491 34,424 Inventory 11,733 10,548 Prepaids and other current assets 1,868 1,673 Deferred income taxes 2,592 2,596 --------- --------- Total current assets 46,565 61,593 Furniture, rental fleet and equipment 19,280 16,455 Accumulated depreciation (6,117) (4,934) --------- --------- Furniture and equipment, net 13,163 11,521 Intangibles, net 31,464 29,898 Deposits and other assets 911 91 --------- --------- Total Assets $ 92,103 $ 103,103 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Accounts payable $ 3,859 $ 2,896 Loan payable - current portion 500 500 Obligations under co-promotion agreement 1,000 2,000 Accrued liabilities 9,737 11,340 --------- --------- Total current liabilities 15,096 16,736 --------- --------- Deferred rent and capital lease obligation 92 106 Loan payable - long term portion 274 524 Obligations under co-promotion agreement 1,000 1,000 --------- --------- Total liabilities 16,462 18,366 --------- --------- Committments and contingencies [Notes 3 & 5] Stockholders' Equity Common stock 13 13 Additional paid-in capital 119,475 119,413 Accumlated deficit (43,847) (34,689) --------- --------- Total stockholders' equity 75,641 84,737 --------- --------- Total Liabilities and Stockholders' Equity $ 92,103 $ 103,103 ========= ========= See notes to consolidated financial statements. Page 1 OrthoLogic Corp. Consolidated Statement of Operations (in thousands, except per share data) Unaudited Three months ended March 31 --------------------------- 1998 1997 -------- -------- REVENUES Net sales $ 8,763 $ 9,572 Net rentals 10,346 7,730 -------- -------- Total Revenues 19,109 17,302 -------- -------- COST OF REVENUES Cost of goods sold 2,452 2,714 Cost of rentals 1,964 2,032 -------- -------- Total Cost of Revenue 4,416 4,746 -------- -------- GROSS PROFIT 14,693 12,556 OPERATING EXPENSES Selling, general and administrative 23,821 12,889 Research and development 498 576 Restructuring and other charges (399) -- -------- -------- Total Operating Expenses 23,920 13,465 -------- -------- OPERATING LOSS (9,227) (909) OTHER INCOME Grant/Other revenue -- 74 Interest income 97 562 -------- -------- Total Other Income 97 636 -------- -------- LOSS BEFORE INCOME TAXES (9,130) (273) Provision for income taxes -- -- -------- -------- NET LOSS $ (9,130) $ (273) ======== ======== BASIC EARNINGS PER SHARE - ------------------------ NET LOSS PER COMMON WEIGHTED SHARES OUTSTANDING $ (0.36) $ (0.01) ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 25,267 25,038 ======== ======== DILUTED EARNINGS PER SHARE - -------------------------- NET LOSS PER COMMON AND DILUTIVE SHARES $ (0.36) $ (0.01) ======== ======== WEIGHTED SHARES OUTSTANDING $ 25,277 $ 25,038 ======== ======== See notes to consolidated financial statements Page 2 OrthoLogic Corp. Consolidated Statements of Cash Flows (in thousands) Unaudited
Three Months Ended March 31 --------------------------- 1998 1997 ---- ---- OPERATING ACTIVITIES Net Loss $ (9,130) $ (273) Noncash items: Depreciation and amortization 2,181 1,321 Other -- (11) Net change in Other Operating items: Accounts receivable (3,757) (85) Inventory (1,184) (419) Allowance for bad debts 10,723 (741) Prepaids and other current assets (191) (835) Deposits and other assets (70) 2 Accounts payable 963 40 Accrued liabilities (1,591) (335) -------- -------- Cash flows used in operating activities (2,056) (1,336) -------- -------- INVESTING ACTIVITIES Purchase of fixed assets, net (3,342) (532) Cash paid for acquisitions, net of other effects (81) (18,210) Investment in Chrysalis (750) -- Sales (Purchases) of short term investments 1,073 18,664 Collection of note receivable -- -- Intangible from dealer transactions -- (463) -------- -------- Cash flows used in investing activities (3,100) (541) -------- -------- FINANCING ACTIVITIES Payments on Capital Leases (274) -- Payments on Loan Payable -- -- Payments under co-promotion agreement (1,000) -- Proceeds from issuance of common stock -- -- Foreign exchange (28) -- Net proceeds from stock option exercises 61 113 -------- -------- Cash flows used in financing activities (1,241) 113 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,397) (1,764) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,783 13,494 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,386 $ 11,730 ======== ========
See notes to consolidated financial statements Page 3 ORTHOLOGIC CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Financial Statement Presentation -------------------------------- The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of the OrthoLogic Corp. and its subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated. The consolidated balance sheet as of March 31, 1998, and the consolidated statements of operations and cash flows for the three months ended March 31, 1998 and 1997 are unaudited, however, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the financial position, results of operations and cash flows. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the complete fiscal year. The Balance Sheet as of December 31, 1997 is derived from the Company's audited financial statements included in the 1997 annual report. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 1997 Annual Report. 2. Acquisition ----------- On March 3, 1997 and March 12, 1997, the Company acquired certain assets and assumed certain liabilities of Toronto Medical Corp. ("Toronto") and Danninger Medical Technology, Inc. ("DMTI"). After paying certain of the assumed liabilities, the net cash outlay was approximately $7.5 million for Toronto and $10.7 million for DMTI. Both acquisitions were accounted for as a purchase which resulted in goodwill of $4.5 million for Toronto and $9.5 million for DMTI. The goodwill is being amortized over 20 years. Had the Toronto and DMTI acquisitions occurred on January 1, 1997, combined unaudited pro forma results for the three months ended March 31, 1997 would have been $19.2 million net revenues, ($764,000) net earnings (loss), and (0.3) net earnings (loss) per common share. The operations were fully integrated in the Company's financial statements for the first quarter of 1998. 3. Co-promotion Agreement ---------------------- The Company entered into an exclusive, co-promotion agreement (the "Agreement") with Sanofi Pharmaceuticals, Inc. ("Sanofi") on June 23, 1997 for the purpose of marketing Hyalgan, a hyaluronic acid sodium salt, to orthopaedic surgeons in the United States for the treatment of pain in patients with osteoarthritis of the knee. The initial term of the agreement ends on December 31, 2002. Upon the expiration of the initial term, Sanofi may terminate the agreement, extend the agreement for an additional one-year period, or enter into a revised agreement with the Company. Upon termination of the Agreement, Sanofi Page 4 must pay the Company an equal to 50% of the gross compensation paid to the Company, pursuant to the Agreement, for the immediately preceding year. The Company is paid a commission which is based upon the number of units sold at the wholesale acquisition costs less amounts for distribution costs, discounts, rebates and returns. In addition, the Company is obligated: to use its best efforts to market and promote Hyalgan; to pay Sanofi a royalty of 10% of the net selling price, as defined; and to pay the manufacturer of Hyalgan a product transfer price and a pro-rata portion of a 10% royalty on combined annual net sales of Hyalgan by Sanofi and the Company in excess of $30 million. In addition, the Company is obligated to pay a total of $4.0 million during the first eighteen months of the agreements. During 1997 and the first quarter of 1998, the Company paid $2.0 million of this amount. The Company has recorded the remaining $2.0 million as a liability in its financial statements. The Company's sales force began to promote Hyalgan in the third quarter of 1997. 4. Licensing Agreement ------------------- The Company announced in January 1998 that it has acquired a minority equity interest in a biotech firm, Chrysalis BioTechnology, Inc. for $750,000. As part of the transaction, the Company has been awarded a nine-month world-wide exclusive option to license the orthopaedic applications of Chrysalin, a patented 23-amino acid peptide that has shown promise in accelerating the healing process. Chrysalis is currently developing the technology to stimulate the skin-wound healing process and has completed an extensive pre-clinical safety and efficiency profile of the product. In pre-clinical animal studies, Chrysalin was also shown to double the rate of fracture healing with a single injection into the fresh fracture gap. The Company's agreement with Chrysalis contains provisions for the Company to continue and expand its option to license Chrysalin contingent upon regulatory approvals, successful pre-clinical trials, and certain trials and certain milestone payments to Chrysalis by the Company. The cost of performing the pre-clinical and clinical trials will be funded by the Company. The Company will pursue commercialization of Chrysalin, initially seeking Food and Drug Administration approval for the human clinical trials for the fracture-healing indication. The Company projects that Chrysalin could receive all the necessary FDA approvals and be introduced in the market during 2000. There can be no assurance, however, that the clinical trials will result in favorable data or that FDA approvals, if sought, will be obtained. 5. Litigation ---------- During 1996 certain lawsuits were filed in the United States District Court for the District of Arizona against the Company and certain officers and directors alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder. Plaintiffs in these actions allege that correspondence received by the Company from the U.S. Food and Drug Administration (the "FDA") pertaining principally to the promotion of Page 5 the Company's OrthoLogic Bone Growth Stimulator was material and undisclosed, leading to an artificially inflated stock price. Plaintiffs further alleged practices referenced in that correspondence operated as a fraud against plaintiffs. Plaintiffs further allege that once the FDA letter became known, a material decline in the stock price of the Company occurred, causing damage to the plaintiffs. All plaintiffs seek class action status, unspecified compensatory damages, fees and costs. Plaintiffs also seek extraordinary, equitable and/or injunctive relief as permitted by law. The actions were consolidated for all purposes in the United States District Court for the District of Arizona and lead plaintiffs and counsel were appointed. The Company and its officers and directors moved to dismiss the consolidated amendment complaint for failure to state a claim. The Court dismissed the consolidated amended complaint in its entirety against the Company and its officers and directors but gave plaintiffs leave to amend all claims to cure all deficiencies. An amended complaint was filed in April, 1998 and the Company plans to move again to dismiss the complaint on virtually the same grounds as it did before. In addition, the Company has been served with a substantially similar action filed in Arizona state court alleging state law causes of action grounded in the same set of facts. This action remains stayed pending further developments in the Federal consolidated class action. In addition to the foregoing, a shareholder derivative complaint alleging among other things, breach of fiduciary duty in connection with the conduct alleged in the aforesaid federal and state court class actions have also been filed in Arizona state court. That action remains stayed pending further developments in the Federal consolidated class action. In March 1998, the former owner of the CPM assets acquired in the DMTI acquisition filed a lawsuit in the Court of Common Pleas in Franklin County, Ohio against the Company. The plaintiff alleges that the Company breached the acquisition agreement by not satisfying certain liabilities it assumed in the acquisition and that the Company breached an ancillary agreement for the temporary provision of services following the acquisition. Plaintiff has also demanded from the Court of Common Pleas a declaration that the Company is not entitled to cash escrowed in the acquisition. The Company had previously requested delivery to it of the escrowed cash and demanded indemnification for the plaintiff's breaches of representations and warranties in the acquisition agreement. The costs associated with defending these allegations and the potential outcome cannot be determined at this time and accordingly, no estimate for such costs have been included in these financial statements. Management believes that the allegations are without merit and will vigorously defend them. At March 31, 1998, the Company is involved in various other legal proceedings that arose in the ordinary course of business. In management's opinion, the ultimate resolution of Page 6 these other legal proceedings will not have a material affect on the financial position, results of operations, or cash flow of the Company. 6. New Accounting Pronouncements ----------------------------- Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income." For the quarter ended March 31, 1998, net income approximated comprehensive income. 7. Debt ---- Subsequent to quarter end, the Company signed an addendum to an accounts receivable revolving line of credit agreement reducing the line of credit balance from $10 million to $7.5 million. 8. Allowance For Doubtful Accounts ------------------------------- The allowance for doubtful accounts was increased by approximately $9.3 million during the first quarter of 1998 over and above the normal quarterly activity. The increase was a result of a management decision to focus resources on collection of current sales and on re-engineering the overall process of billing and collections. It is no longer considered to be as cost effective to expend significant resources on the collection of the older receivables as had been done in the past. Page 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion of significant factors that affected the Company's interim financial condition and results of operations. This should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Results of Operations Revenues OrthoLogic's revenues increased 10% to $19.1 million from $17.3 million for the same period a year ago. The increase is primarily the result of revenue for Hyalgan which was launched in July 1997. Revenue from the Continuous Passive Motion rentals was greater than expected during the quarter, offsetting declining sales of fracture fixation devices. Gross Profit Gross profit increased from $12.6 million in the first quarter of 1997 to $14.7 million in the first quarter of 1998. Gross profit as a percentage of revenue was 77% for the three months ended March 31, 1998 compared to 73% for the comparable period during 1997. Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses for the first quarter of 1998 were $23.8 million, up $10.9 million from the comparable period in 1997. The increase from 1997 is due in part to the variable costs associated with the increased revenue. The first quarter of 1998 also included the costs associated with the acquisition previously discussed. The SG&A expenses include an increase of $9.3 million in the allowance for uncollectable accounts over the normal quarterly provision. As part of a larger project to re-engineer the sales, billings and collection process for enhanced efficiencies, the Company obtained independent evaluation of its billing files and collection strategies in April of 1998. The information obtained from this study prompted management to change its focus for future collection efforts to be primarily on the more recent sales. The cost of continuing to manage the older accounts receivable balances to the extent that had been done in the past is no longer considered as cost effective for the Company. This shift in the emphasis for the collections policy prompted the Company to increase the bad debt reserve for the outstanding balances of the older receivables. Excluding bad debt, total SG&A expenses decreased to 66% of total sales in the first quarter of 1998, from 68% in 1997. Page 8 Research and Development Research and development (R&D) expenses were $498,000 for the first quarter of 1998 compared to $576,000 for the comparable 1997 period. The decrease was due to the unveiling of a new, single coil version of the OL-1000, no longer in R&D. The device extends the fracture healing benefits of the OL-1000 to the thigh and the long bone of the upper arm, extending from the shoulder to the elbow, and is suitable for the treating non-union fractures in most areas for larger individuals. Other Income and Expenses There was a reversal of expenses charged to restructuring in a prior period for $399,000. Other income declined to $97,000 in the first quarter of 1998 from $636,000 during the same period in 1997. This decrease is attributed to (1) the Company has not participated in any research grant projects in the current year and (2) the reduction in the amount in cash and investments has yielded a reduction in the interest income earned in the quarter to $97,000 in 1998 from $562,000 in 1997. Liquidity and Capital Resources On March 31, 1998, the Company had cash and investments of $4.9 million compared to $12.3 million at December 31, 1997. The decrease in cash and investments is primarily the result of a $1 million payment under a co-promotion agreement, a $1.2 million increase in inventory, and a $1.6 million increase in fixed assets, mostly for the Ortho Rehab rental fleet business. In addition, in January, OrthoLogic acquired a $750,000 equity interest in a biotech firm, Chrysalis BioTechnology, Inc., located in Galveston, Texas. Subsequent to quarter end, the Company signed an addendum to an accounts receivable revolving line of credit agreement reducing the line of credit balance from $10 million to $7.5 million and removing the equipment advance of $2.5 million. The Company anticipates that its cash on hand and the funds available from this line of credit will be sufficient to meet the Company's projected cash and working capital requirements for the next 12 months. There can be no assurance, however, that this will prove to be the case. If the Company were required to obtain additional financing in the future, there can be assurance that such sources of capital will be available on terms favorable to the Company, if at all. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain of the statements, contained in this document that are not historical facts, including, without limitation, statements of future expectations, projections of results of operations and financial condition, statements and future economic performance and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, are subject to know and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievement of the Company to differ materially from those contemplated in such forward-looking statements. In addition to the specific matters referred to herein, important factors which may cause actual results to differ from those contemplated in Page 9 such forward-looking statements include: (i) the results of the Company's efforts to implement its business strategy; (ii) actions of the Company's competitors and the Company's ability to respond to such actions; (iii) changes in governmental regulation, tax rates and similar matters; (iv) other risks detailed in the Company's other filings with the Commission; and (v) the costs and results of pending litigation. Page 10 PART II - OTHER INFORMATION Item 1. Legal Proceedings See the information under the caption "Item 5 - Litigation" in the notes to consolidated financial statements above. Item 6. Exhibits and Reports on Form 8-K (a) See Exhibit Index following the Signatures page which is incorporated herein by reference. (b) Reports on Form 8-K None Page 11 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ORTHOLOGIC CORP. - ---------------- (Registrant)
Signature Title Date - --------- ----- ---- /s/ Thomas R. Trotter President and Chief Executive Officer May 15, 1997 - --------------------- (Principal Executive Officer) Thomas R. Trotter /s/ Terry D. Meier Sr. Vice-President and Chief Financial Officer May 15, 1997 - ---------------------- (Principal Financial and Accounting Officer) Terry D. Meier
Page 12 ORTHOLOGIC CORP. EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
Exhibit Incorporated by Filed No. Description Reference to: Herewith ---------- ----------------------------------------- ------------------ ------------ 4.1 Amendment to Stock Purchase Warrant dated May 12, 1998 issued to Silicon Valley Bank X 10.1 Licensing agreement with Chrysalis BioTechnology, Inc. X 10.2 1998 Management Bonus Program X 10.3 Loan Modification agreement dated May 12, 1998 by and between the Company and Silicon Valley Bank X 27 Financial Data Schedule X
Page 13 EX-4.1 2 AMENDMENT TO WARRANT AGREEMENT AMENDMENT TO WARRANT AGREEMENT This Amendment to Warrant Agreement (the "Agreement") is made as of May 5, 1998, by and between Silicon Valley Bank ("Holder) and Orthologic Corp. ("Company") RECITALS A. Company and Holder are parties to a Warrant to Purchase Stock dated March 2, 1998, together with all schedules and exhibits thereto (the "Warrant Agreement"). Pursuant to the Warrant Agreement, among other things, the Warrant does not state an Initial Exercise Price and has an Expiration Date of March 1, 2003. B. Company and Holder both desire to amend the Warrant to set forth the Initial Exercise Price and extend the Expiration Date. NOW, THEREFORE, the parties agree as follows: 1. The Initial Exercise Price is hereby amended to be the lowest closing price between April 22, 1998 and the date hereof, which is May 12, 1998. 2. The Expiration Date is hereby extended to May 5, 2003. 2. LEGAL EFFECT; INTERPRETATION. This Agreement amends certain terms of the Warrant Agreement. Company confirms that, except as amended by this Agreement, the Warrant Agreement remain in full force and effect. Unless otherwise defined, all terms capitalized in this Agreement shall have the meanings assigned in the Warrant Agreement. This Agreement, together with the Warrant Agreement, constitutes the entire agreement of the parties with respect to the subject matter hereof, and supersedes all prior agreements and negotiations. 3. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same instrument. 4. TIME OF ESSENCE. Time is of the essence for the performance of all obligations set forth in this Agreement. 1 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. COMPANY: HOLDER: ORTHOLOGIC CORP. SILICON VALLEY BANK By: /s/ Terry D. Meier By: /s/ Amy Lou Blunt --------------------------------- ------------------------------------- Name: Terry D. Meier Name: Amy Lou Blunt ------------------------------- ----------------------------------- Title: Sr. V.P. and CFO Title: Asst. to V.P. ------------------------------ ---------------------------------- 2 EX-10.1 3 LICENSING AGREEMENT WITH CHRYSALIS BIOTECHNOLOGY AGREEMENT This Agreement, which shall be effective as of December 31, 1997, is between OrthoLogic Corp. And Chrysalis BioTechnology, Inc. Based on the mutual consideration between the parties recited below, the parties agree as follows: I. BACKGROUND AND PARTIES 1.1 Chrysalis. Chrysalis BioTechnology, Inc. ("Chrysalis") is a Texas corporation, having a principal place of business at 2200 Market, Suite 600, Galveston, TX 77550. 1.2 OrthoLogic. OrthoLogic Corp. ("OrthoLogic") is a Delaware corporation, having a principal place of business at 2850 South 36th Street, Phoenix AZ 85034. 1.3 The Technology. Chrysalis owns or holds comprehensive license rights relating to a technology known as the "Chrysalis Technology," as defined below. 1.4 Options and Licenses. OrthoLogic desires to acquire from Chrysalis and Chrysalis desires to grant to OrthoLogic options to license the Chrysalis Technology and related patents which are owned by or licensed to Chrysalis for end-product development, manufacture, and sales of products for "Orthopaedic Applications," as defined below, under the terms and conditions contained in this Agreement. 1.5 The LOI. Chrysalis and OrthoLogic are parties to a Letter of Intent (the "LOI") dated December 3, 1997 which addresses the transactions contemplated by this Agreement. This Agreement is the "Definitive Agreement" contemplated by the LOI, and replaces and supersedes the LOI for all purposes. II. ADDITIONAL DEFINITIONS 2.1 "Affiliate" means any corporation or other business entity owned or controlled by or under common ownership with OrthoLogic. For this purpose, "controlled by" means direct or indirect beneficial ownership of at least 50% of the voting stock or ownership interest in the income of such corporation or other business entity. 2.2 "Chrysalis Technology" means the core technologies related to the Patents, including the TP508 Peptide. 2.3 "Chrysalis Product" means TP508 or any related peptides, or any other materials or products manufactured by or for Chrysalis and sold to OrthoLogic for research, treatment of patients or resale. 2.4 "Commercialization" shall refer to the date of FDA market approval for the first product application in any specific Orthopaedic Application.. 2.5 "Licensed Products" means devices or materials, including but not limited to TP508 and related peptides, all products using any of such materials, Chrysalis Technology or any of the Technology Rights, and all other products which, in the course of their manufacture, use, or sale would, in the absence of this license, infringe one or more claims of any of the Patent Rights which have not been finally adjudicated to be invalid by a court of competent jurisdiction. 2.6 "Net Sales" means gross sales, royalties or fees invoiced to customers less only: returns and allowances actually granted, packing, insurance, freight out, taxes or excise duties imposed on the transactions, wholesale and cash discounts actually granted, and charges or portions of charges disallowed by third party payors or care managers. 2.7 "Orthopaedic Applications" shall include, and be limited to, the use of the Technology Rights in connection with: Treatment of fractures, osteoarthritis or osteoporosis, treatment of damage to meniscus, ligament, cartilage or tendon, preparation or application of segmental bone filling, coating or preparation of bone or joint implants, and spinal fusion (bone related). 2.8 "Patent Rights" means the ownership of or comprehensive license rights to the Patents. 2.9 "Patents" means U.S. patents Number 5,352,664 and 5,500,412, all related foreign patents, including patents issued in Europe, Canada and Japan, and any divisional, continuation, and continuation-in-part applications and patents based thereon, any reissues or extensions thereof, and any corresponding or additional United States and foreign patent applications. 2.10 "Technology Rights" means the Patent Rights, plus the Chrysalis Technology, and all related know-how, trade secrets and trademarks. III. SHARE PURCHASE AND EVALUATION PERIOD 3.1 Preferred Stock. At the time this Agreement is executed, OrthoLogic shall pay to Chrysalis, via direct wire transfer of funds into an account specified by Chrysalis, $750,000 for 136,364 shares of the Series B Convertible Preferred Stock of Chrysalis, at a purchase price of $5.50 per share, which will constitute approximately 7.0% of the equity of Chrysalis upon the completion of the current Series B Preferred offering. The rights of these shares are defined in the Series B Private Placement Memorandum dated August 1997. 3.2 Evaluation Period. Beginning on the date of this Agreement, OrthoLogic shall have a nine-month exclusive evaluation period for the Chrysalis Technology with respect to all Orthopaedic Applications including pre-clinical trials, FDA discussions and clinical trial planning. -2- IV. OPTION GRANTS AND PAYMENTS Chrysalis hereby grants to OrthoLogic a series of options to acquire exclusive United States and worldwide licenses, as set forth below, to make or have made, use, sell and sublicense Licensed Products under the Technology Rights for Orthopaedic Applications of the type described. Each such license shall run for the lives of all Patents and other patents owned by or licensed to Chrysalis, and related to any Licensed Product, which are appropriate for the territory licensed. In exchange, OrthoLogic shall make the payments described in this Article IV. Such payments shall not be credited against royalties due pursuant to Article V. Promptly after OrthoLogic gives Chrysalis notice of its determination to proceed and exercise its option to secure any license described below, the parties shall complete and execute a Patent License Agreement containing all provisions contemplated by this Agreement and which otherwise is in a form that is commercially reasonable for similar licenses. All payments described herein shall be payable via wire transfer into an account specified by Chrysalis. a. At or before September 30, 1998, if OrthoLogic determines to proceed, it shall pay an additional $750,000 to secure the exclusive United States license for fracture applications. b. On or before December 31, 1998, if OrthoLogic determines to proceed, it shall pay an additional $250,000 to continue its option to expand its exclusive United States license for fracture applications into an exclusive worldwide license and to continue its option to license all other Orthopaedic Applications. c. On or before June 30, 1999, if OrthoLogic determines to proceed, it shall pay an additional $500,000 to secure the exclusive United States license for all Orthopaedic Applications (except for fracture applications, which would already have been licensed). d. On or before June 30, 1999, if OrthoLogic determines to proceed, it shall pay an additional $1,000,000 to secure the exclusive worldwide license for all Orthopaedic Applications, including fracture applications. The parties agree to negotiate in good faith with respect to reasonable additional payments that will be based on commercialization of TP508 outside the United States. e. OrthoLogic shall pursue the following milestones on a best efforts basis and make the following additional payments to Chrysalis upon the occurrence of the events or at the required time noted in item (v), so long as OrthoLogic, one of its Affiliates, or a sublicensing partner, is still proceeding with the license or licenses contemplated by each such payment: (i) $500,000 upon FDA approval of the IDE or IND to initiate a fracture healing clinical trial. (ii) $500,000 upon submission to the FDA of a PMA, NDA, or equivalent application for the fracture healing indication. -3- (iii) $3,500,000 upon FDA approval for the fracture healing indication. (iv) $500,000 upon initiation of an FDA-approved clinical trial for each new orthopaedic indication. (v) If an FDA-approved clinical trial for the first additional Orthopedic application has not been made by June 30, 2000, the $500,000 payment will be made in advance for the FDA approved clinical trial for the first additional Orthopedic application. (vi) $2,000,000 upon FDA approval of each new orthopaedic indication. f. If OrthoLogic fails to meet the milestones or does not use reasonable efforts to commercialize Chrysalis Products in the United States, provided that the conditions described in (h) below are met, (i) at any time, Chrysalis shall have the option to convert the United States license to a non-exclusive license, or (ii) at any time after June 30, 1999, Chrysalis shall have the option to terminate the United States license completely. g. If OrthoLogic exercises its right to secure the exclusive worldwide license for all Orthopaedic Applications, and if OrthoLogic fails to meet the milestones or does not use reasonable efforts to commercialize Chrysalis Products internationally, provided that the conditions described in (h) below are met, (i) at any time, Chrysalis shall have the option to convert the worldwide license to a non-exclusive license, or (ii) at any time after June 30, 2000, Chrysalis shall have the option to terminate the worldwide license completely. h. In order to exercise the options described in (f) and (g) above, Chrysalis shall give OrthoLogic 75 days written notice of the proposed conversion or termination, provided that, in either case, the termination or conversion shall not become effective if within the 75 days following the effective date of the notice, OrthoLogic provides written evidence that it has commercialized or is actively attempting to commercialize a Licensed Product within the US or internationally as appropriate. Evidence provided by OrthoLogic that it has an ongoing and active research, development, regulatory compliance, manufacturing, marketing or licensing program as appropriate, directed toward production and sale of Licensed Products within the US or internationally as appropriate shall be deemed satisfactory evidence of using best efforts. i. In the event that either the US or the World-wide license for a specific application is forfeited by OrthoLogic, Chrysalis will have access to all data collected specifically related to that application. V. ROYALTIES 5.1 Percentages. After the parties have executed the first patent license contemplated by this Agreement, OrthoLogic shall pay to Chrysalis for such license and all other the licenses to the Technology Rights subsequently granted hereunder, royalties for sales of Licensed Products calculated pursuant to the table which follows this paragraph. For purposes of these calculations -4- all sales under all licenses granted pursuant to this Agreement shall be cumulated and treated as a single amount. Incremental Sales Royalty Rate First $20 million 8.0% Next $30 million 6.0% Next $50 million 5.0% Next $100 million 4.0% Over $200 million 2.5% 5.2 Minimums. For each year after Commercialization, regardless of actual sales, OrthoLogic shall pay (for all licenses to all technology or patent rights licensed from Chrysalis pursuant to this Agreement), during the first 12 months after Commercialization of at least $250,000, royalties of at least $500,000 during the second 12 months after Commercialization, and royalties of at least $750,000 during the third 12 months after Commercialization. In that regard, OrthoLogic shall pay to Chrysalis a sufficient amount in its last quarterly payment for each calendar year to reach the minimum annual royalty. VI. PAYMENTS AND REPORTS 6.1 Reports. OrthoLogic shall provide to Chrysalis, on a quarterly basis, a written report of all sales of Licensed Products for which a royalty is due or payable under this Agreement. Such report shall be due within 45 days at the end of each calendar quarter, whether or not royalties are due, and shall be accompanied by a remittance from OrthoLogic to Chrysalis of all earned royalties specified by Sections 5.1 and 5.2. 6.2 Records. OrthoLogic shall keep suitable books of records of all manufacture, use, or sale of Licensed Products for which a royalty is due hereunder for at least three years, unless in dispute, in which event they shall be kept until such dispute is settled, and shall make such records available for inspection by Chrysalis, or its designee, upon reasonable notice and during normal hours of operation of OrthoLogic. 6.3 Third Party Contest. If a third party contests the validity of any of the Patent Rights granted hereunder, OrthoLogic shall continue to pay royalties with respect to that patent as if such contest were not underway until the patent is adjudicated invalid or unenforceable by a court of last resort. VII. TRANSFERS AND SUBLICENSES OrthoLogic may transfer any Licensed Products to any Affiliates or sublicensees without any such transfers being considered as sales of the Licensed Products. OrthoLogic may also sublicense any of the license rights granted hereunder provided that: (1) each Affiliate or sublicensee to which OrthoLogic sublicenses agrees in writing to honor the terms of this -5- Agreement and (2) OrthoLogic agrees to pay to Chrysalis milestone payments described in Article IV and the earned royalty due under Section 4.2 for all Net Sales of Licensed Products by any Affiliate or sublicensee just as if such Net Sales were made directly by OrthoLogic. VIII. PURCHASES OF CHRYSALIS PRODUCTS 8.1 Chrysalis to Manufacture. Except as provided in Article IX, Chrysalis will retain all exclusive rights to manufacture TP508 or related peptides to be used in Licensed Products, and in product development, for Orthopaedic Applications, and OrthoLogic agrees to purchase such peptides exclusively from Chrysalis for all preclinical studies, clinical trials, and final end-product sales. 8.2 Materials Transfer Agreement. Promptly after the execution of this Agreement, the parties will prepare and execute a materials transfer agreement, with commercially reasonable terms, whereby, until the expiration of all patent license agreements contemplated by this Agreement, Chrysalis will agree to provide TP508 or related peptides for preclinical studies (GLP or equivalent, lot verified) in 1 milligram vials (not sterile) for $150 per milligram or in 5 milligram vials (not sterilized) for $80 per milligram ($400 per vial). During the term of any patent license agreement contemplated by this Agreement, Chrysalis will also supply TP508 or related peptides for end-product manufacture and commercial use, as follows: Small quantity vials (up to 3 micrograms per vial), sterile, delivered, $15.00 each; and 5-10 gram bulk, non-sterile, delivered $3.00 per microgram. 8.3 Payment. The purchase price for each Chrysalis Product purchased by OrthoLogic shall be due and payable 30 days after the date of receipt by OrthoLogic 8.4 Forecasts. During the first 90 days of 1998, with respect to 1998, and no later than 30 days prior to the start of the year with respect to 1999 and later years, OrthoLogic and Chrysalis will agree to a reasonable forecast of the number of Chrysalis Products, by type, that will be purchased from Chrysalis by OrthoLogic during the appropriate calendar year and during each quarter thereof. OrthoLogic will be required to purchase at least 100% of the quarterly amounts as forecasted. However, OrthoLogic may revise each quarterly forecast plus or minus 50% of the original forecasted amount, provided that changes to the forecast for a quarter must be made no later than the first day of the preceding quarter. 8.5 Shipment and Risk. Chrysalis will ship to OrthoLogic, at Chrysalis's expense, the Chrysalis Products that are actually ordered as specified in the appropriate binding purchase order. Title and risk of loss shall pass to OrthoLogic when the Chrysalis Product is delivered to OrthoLogic. 8.6 Chrysalis' Obligation. To the extent that the amount of Chrysalis Products ordered by OrthoLogic with respect to any quarter does not exceed 125% of the higher of (i) the forecast made pursuant to Section 8.4, or (ii) the average amount ordered during the prior three months, Chrysalis agrees to use its best efforts to manufacture and ship the Chrysalis Products ordered by OrthoLogic within 30 days after receipt of the appropriate purchase order. -6- IX. ORTHOLOGIC'S RIGHT TO MANUFACTURE 9.1 OrthoLogic Right. OrthoLogic shall have the right to manufacture Chrysalis Products for exclusive use in areas granted to OrthoLogic by Chrysalis if Chrysalis fails to deliver Chrysalis Products as specified in Section 9.2, or upon the occurrence of any of the events described in Section 9.3. In any such event, the contents of the escrow described in Section 9.4 shall be delivered to OrthoLogic promptly. If the contents of the escrow are delivered to OrthoLogic, OrthoLogic shall take reasonable steps to protect the confidentiality of the escrowed materials. 9.2 Grace Period. Chrysalis shall have a minimum of four months following any applicable date for the delivery of Chrysalis Products in which to deliver at least 90% of the Chrysalis Products due on such date, as contemplated by Section 8.6. 9.3 Other Events. OrthoLogic shall also have the right to manufacture Chrysalis Products upon the occurrence of any of the following events: a. Chrysalis has ceased its on-going business operations, or the sale, licensing, proper maintenance or other reasonable support of the Technology Rights; or either cannot manufacture or elects to discontinue the manufacture of Chrysalis Products. b. Chrysalis has availed itself of, or been subjected by a third party to, a proceeding in bankruptcy in which Chrysalis is the named debtor; there is an assignment by Chrysalis for the benefit of its creditors the appointment of a receiver for Chrysalis or any other proceeding involving the insolvency of Chrysalis or the protection of or from its creditors, and the same has not been discharged or terminated without any prejudice to OrthoLogic's rights or interests under this License Agreement within 60 days (unless reasonable alternative provisions have been made to protect the rights of OrthoLogic). c. Any other event or circumstance occurs which demonstrates with reasonable certainty the inability or unwillingness of Chrysalis to fulfill its obligations to OrthoLogic, including, without limitation, the maintenance of and the correction of defects in the Chrysalis Products. 9.4 Escrow. Chrysalis agrees that it will enter into an escrow agreement with a third party acceptable to Chrysalis and OrthoLogic and will deposit with the escrow agent all formulae and specifications relating to the Chrysalis Products and their production, including all relevant commentary, explanations and other documentation, as well as instructions sufficient for the production of such products, and will name OrthoLogic as the beneficiary of the escrow agreement. The cost of the escrow agent's services pertaining to this Agreement will be split equally between OrthoLogic and Chrysalis. 9.5 Expiration of OrthoLogic Limited Manufacturing Right. Chrysalis can regain the right to manufacture products for OrthoLogic (thereby ending OrthoLogic's Limited Right to Manufacture) if it can provide satisfactory written evidence that it can meet OrthoLogic's supply -7- needs for a period of at least one year. Sufficient evidence shall include having a sufficient inventory of Chrysalis Products for OrthoLogic to meet OrthoLogic's needs, or other written documentation that demonstrates Chrysalis' ability to provide products to OrthoLogic in a timely matter as described in this Agreement. OrthoLogic will still retain the right to regain manufacturing rights whenever Chrysalis fails to perform as described in Section 9.1. X. PRODUCT CHANGES 10.1 Improvements. From time to time, OrthoLogic or Chrysalis may identify possible improvements or change opportunities with respect to Chrysalis Products for Orthopedic Applications. Chrysalis and OrthoLogic agree to work together to determine whether appropriate and cost-effective changes can be engineered and cleared through applicable regulatory agencies. 10.2 Pricing. After the occurrence of a situation of the type described in paragraph 10.1, Chrysalis will work with OrthoLogic to design an orderly plan for the introduction and pricing of such modifications, with particular concern for the prior pricing structure, the benefits to the treatment of patients using or potentially using the Chrysalis Products and the efficient and profitable operation of the businesses of Chrysalis and OrthoLogic. XI. TERM 11.1 The term of this agreement shall extend from the effective date of execution until the expiration of the last to expire of any licensed Patent Rights granted hereunder. 11.2 During the term of this agreement OrthoLogic agrees not to contest the validity of any patent or the technology rights of Chrysalis relative to any Chrysalis Technology. XII. WARRANTY AND INDEMNITY 12.1 Patent Warranty. Chrysalis warrants (i) that it owns or holds comprehensive license rights to all of the Patents and to the Chrysalis Technology, (ii) that it has the power to enter into this Agreement with respect to the Patents and Chrysalis Technology, (iii) that no other party is or shall be entitled to use technology licensed exclusively to OrthoLogic hereunder by virtue of invention or funding claims or otherwise for the Orthopedic Applications granted to OrthoLogic, except for limited rights granted to the National Institutes of Health to use Chrysalis Products for research purposes, (iv) that Chrysalis is and shall remain in good standing and in full compliance under its Patent License Agreement dated November 10, 1995, with the Board of Regents of the University of Texas System, and (v) that it shall maintain all of the Patents. 12.2 Standard Warranty. Chrysalis' standard warranty will be provided prior to the commencement of clinical trials conducted by OrthoLogic. This warranty shall apply to all Chrysalis Products, and shall run to OrthoLogic, the ultimate user and any intermediate owners of the Chrysalis Products. Such warranty shall include, at least, warranty of title and assurances that the Chrysalis Products are free from defects in workmanship or materials. -8- 12.3 Approvals. All applicable filings, consents and expirations of waiting periods required by law, regulatory authorities, existing licenses or contracts with respect to the execution of this Agreement have been obtained, or expired. 12.4 Limitation of Liability. Neither party shall be liable to the other party or any third party for any special or consequential damages whatsoever, however arising, in connection with the performance or breach of this Agreement. 12.5 Patents, Trademarks, Marketing and Products Liability. Chrysalis agrees, to defend, indemnify and hold harmless OrthoLogic and its affiliates, and their officers, directors, shareholders, employees, agents, successors, assigns and customers, from and against all actions, proceedings, judgments, claims, liabilities, losses or expenses whatsoever (including reasonable attorneys' fees) in connection with: (i) allegations that any Licensed Product or Chrysalis Product sold infringes any intellectual property, contract or license rights, or any U.S. or foreign patents, patents pending, or trademarks; (ii) allegations that any advertising or marketing conducted by Chrysalis violates any state or federal law or regulation; (iii) allegations of any liability, loss, cost or damage arising from an alleged defect in or breach of warranty with respect to any Chrysalis Product; and (iv) allegations of any liability, loss, cost or damages arising from any safety claim with any respect to any Chrysalis Product. 12.6 Insurance. Chrysalis will add OrthoLogic, and OrthoLogic's Affiliates (if requested), as additional insureds with Chrysalis's insurance carrier for liability limited to claims made due to deficiencies of Chrysalis Products, and a certificate of insurance shall be provided to OrthoLogic upon its request. The amount of insurance and the carrier will be of an amount, quality and rating reasonably acceptable to OrthoLogic. Likewise, OrthoLogic will add Chrysalis as additional insureds with OrthoLogic's insurance carrier limited to claims made as a result of modifications made to Chrysalis Products, conduct of clinical trials, and marketing of Chrysalis Products. 12.7 FDA Recalls. Chrysalis shall be responsible for all costs and replacements directly resulting from the recall of any Chrysalis Products as required by the FDA or any successor agency or by Chrysalis, so long as the recall is not a result of modifications or further manufacturing of Chrysalis Products conducted by OrthoLogic. XIII. REPRESENTATIONS AND WARRANTIES OF ORTHOLOGIC 13.1 Duly Organized. OrthoLogic is duly organized, validly existing and in good standing under the laws of the State of Delaware. 13.2 Power and Authority. OrthoLogic has full power and authority to own its properties and assets and to carry on its business as now being conducted. 13.3 Fully Authorized. OrthoLogic is fully authorized and permitted to enter into this Agreement, to execute any and all documentation required herein and to perform the terms of this -9- Agreement. This Agreement and each of the other documents contemplated herein are valid and binding legal obligations of OrthoLogic and each is enforceable in accordance with its terms. 13.4 No Breach or Default. The execution, delivery and performance by OrthoLogic of this Agreement and any other documents contemplated hereby will not conflict with or result in a default under: (i) any provision of the organizational documents of OrthoLogic, (ii) any law or regulation applicable to OrthoLogic, or (iii) the terms, conditions or provisions of any agreement, license or other instrument to which OrthoLogic is a party or, by which it is bound. OrthoLogic is not in default in the performance or observance of any covenants, conditions or provisions of any such agreement license or instrument. 13.5 No Adverse Proceedings. No actions, suits or proceedings are pending or threatened against OrthoLogic that could result in a Material OrthoLogic Adverse Effect. OrthoLogic is not in default with respect to any order, writ, injunction or decree, of any court, governmental department, commission, board, agency or official, which default could result in a Material OrthoLogic Adverse Effect. "Material OrthoLogic Adverse Effect" as used in this Agreement shall mean any event or condition, in the reasonable business judgment of Chrysalis that either (i) would have a material adverse effect upon the validity, performance or enforceability of this Agreement, or any document contemplated hereby, (ii) is material and adverse to the properties, financial condition, credit, business operations or prospects of OrthoLogic, (iii) would impair the ability of OrthoLogic to fulfill its obligations under this Agreement, or any other document contemplated hereby, or (iv) causes a breach of this Agreement or an event or condition that with notice or lapse of time or both, would become a breach of this Agreement. 13.6 Financial Statements Correct. All financial statements, profit and loss statements, statements as to ownership and other statements or reports previously or hereafter given to Chrysalis by or on behalf of OrthoLogic are and shall be true, complete and correct as of the date thereof. There has been no change since the latest financial statements of OrthoLogic given to Chrysalis that could have a Material OrthoLogic Adverse Effect. XIV. REPRESENTATIONS AND WARRANTIES OF CHRYSALIS 14.1 Duly Organized. Chrysalis is duly organized, validly existing and in good standing under the laws of the State of Texas. 14.2 Power and Authority. Chrysalis has full power and authority to own its properties and assets and to carry on its business as now being conducted. 14.3 Fully Authorized. Chrysalis is fully authorized and permitted to enter into this Agreement, to execute any and all documentation required herein and to perform the terms of this Agreement. This Agreement and each of the other documents contemplated herein are valid and binding legal obligations of Chrysalis and each is enforceable in accordance with its terms. 14.4 No Breach or Default. The execution, delivery and performance by Chrysalis of this Agreement and any other documents contemplated hereby will not conflict with or result in a -10- default under: (i) any provision of the organizational documents of Chrysalis, (ii) any law or regulation applicable to Chrysalis, or (iii) the terms, conditions or provisions of any agreement, license or other instrument to which Chrysalis is a party or, by which it is bound. Chrysalis is not in default in the performance or observance of any covenants, conditions or provisions of any such agreement license or instrument. 14.5 No Adverse Proceedings. No actions, suits or proceedings are pending or threatened against Chrysalis that could result in a Material Chrysalis Adverse Effect. Chrysalis is not in default with respect to any order, writ, injunction or decree, of any court, governmental department, commission, board, agency or official, which default could result in a Material Chrysalis Adverse Effect. "Material Chrysalis Adverse Effect" as used in this Agreement shall mean any event or condition, in the reasonable business judgment of OrthoLogic, that either (i) would have a material adverse effect upon the validity, performance or enforceability of this Agreement, or any document contemplated hereby, (ii) is material and adverse to the properties, financial condition, credit, business operations or prospects of Chrysalis, (iii) would impair the ability of Chrysalis to fulfill its obligations under this Agreement, or any other document contemplated hereby, or (iv) causes a breach of this Agreement or an event or condition that with notice or lapse of time or both, would become a breach of this Agreement. 14.6 Financial Statements Correct. All financial statements, profit and loss statements, statements as to ownership and other statements or reports previously or hereafter given to OrthoLogic by or on behalf of Chrysalis are and shall be true, complete and correct as of the date thereof. There has been no change since the latest financial statements of Chrysalis given to OrthoLogic that could have a Material Chrysalis Adverse Effect. XV. AFFIRMATIVE COVENANTS So long as OrthoLogic has an option or license hereunder: 15.1 Maintain Contracts and Licenses. Chrysalis shall maintain in full force and effect all agreements, rights and licenses necessary for OrthoLogic to market and sell Licensed Products, without any costs, royalties, fees or burdens except those stated in this Agreement or resulting from OrthoLogic's operations in the ordinary course of business. 15.2 Comply With Laws. Chrysalis will comply in all material respects with all applicable laws. 15.3 Maintain Insurance. Chrysalis and OrthoLogic shall maintain in full force and effect at all times all insurance required by this Agreement. 15.4 Statements and Reports. Chrysalis shall maintain a standard, modern system of accounting that reflects the application of generally accepted accounting principles, consistently applied, and Chrysalis shall furnish to OrthoLogic, all in a form acceptable to OrthoLogic, the following: -11- 15.4.1 Within 90 days after the end of each fiscal year of Chrysalis, financial statements of Chrysalis for that fiscal year signed by an officer, including without limitation, a balance sheet, profit and loss statement and statement of cash flows. 15.4.2 Within 15 days after the end of each calendar quarter, internally prepared financial statements of Chrysalis, prepared on a basis consistent with Chrysalis's year-end financial statements, certified as true and correct by the president or principal financial officer of Chrysalis. 15.4.3 A statement of litigation matters involving Chrysalis that could cause a Material Chrysalis Adverse Effect, such statement to be furnished within five days after date of service of such litigation or the occurrence of any significant change. 15.4.4 Promptly, from time to time, such other information regarding the operations, business affairs and financial condition of Chrysalis as OrthoLogic may reasonably request. 15.5 Records. Chrysalis shall maintain, in a safe place, proper and accurate books, ledgers, correspondence and other records relating to its operations and business affairs. OrthoLogic shall have the right from time to time to examine and audit and to make abstracts from and photocopies of Chrysalis's books, ledgers, correspondence and other records relevant to the subject matter of this Agreement. OrthoLogic shall maintain, in a safe place, proper and accurate books, ledgers, correspondence and other records relating to its operations and business affairs. Chrysalis shall have the right from time to time to examine and audit and to make abstracts from and photocopies of OrthoLogic's books, ledgers, correspondence and other records relative to the subject matter of this Agreement. 15.6 Further Assurances. Chrysalis shall execute and deliver such additional documents and do such other acts as OrthoLogic may reasonably require in connection with this Agreement. XVI. GENERAL 16.1 Attachments. All Exhibits, schedules or other attachments to this Agreement are incorporated herein by this reference as though fully set forth herein. In the event of any conflict, contradiction or ambiguity between the terms and conditions in this Agreement and any of its Exhibits, schedules or attachments, the terms of this Agreement shall prevail. 16.2 Attorneys Fees. If any litigation or arbitration is commenced between the parties hereto or their successors in interest, concerning any provisions of this Agreement, or the rights and duties of any person in relation thereto, the party prevailing in such litigation or arbitration shall be entitled, in addition to such other relief as may be granted, to a reasonable sum for its attorney's fees and litigation costs as determined by the court or arbitrator, and not by a jury, or in a separate action brought for that purpose. 16.3 Authorization and Signatures. By signing below, each party represents that this Agreement has been duly authorized by its Board of Directors and constitutes an agreement by which it is bound. -12- 16.4 Binding Effect; Benefits. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, successors, executors, administrators and assigns. Notwithstanding anything contained in this Agreement to the contrary, nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective heirs, successors, executors, administrators and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. 16.5 Construction. The language in all parts of this Agreement shall in all cases be construed as a whole according to its fair meaning and not strictly for or against either party. The Article and Section headings contained in this Agreement are for reference purposes only and will not affect the meaning or interpretation of this Agreement in any way. All terms used in one number or gender shall be construed to include any other number or gender as the context may require. The parties agree that each party has reviewed this Agreement and has had the opportunity to have counsel review the same and that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in the interpretation of this Agreement or any amendment or any exhibits thereto. Except in the definition of "Orthopaedic Application," whenever the words "include," "includes," or "including" are used in the Agreement, they shall be deemed to be followed by the words "without limitation." 16.6 Legal and Brokerage Fees. Each party shall pay and be responsible for its legal fees, accounting fees, and related expense incurred in connection with the preparation and execution of this Agreement. Chrysalis shall be solely responsible for any fee payable to any broker of finder claiming as a result of an agreement with Chrysalis or because of Chrysalis' actions. OrthoLogic shall be solely responsible for any fee payable to any broker or finder claiming as a result of an agreement with OrthoLogic or because of OrthoLogic's actions. 16.7. Publicity. Each of the parties agrees that it will not make any public statements regarding this Agreement without first consulting the other party hereto in order that such public statement shall be jointly issued by the parties, except to the extent required by law, provided that in any such situation, the party seeking to make the disclosure agrees to use its best efforts to provide the other party with advance notice of any such request for disclosure as promptly as feasible in order that the other party may seek a protective order or such other appropriate remedy as the other party deems necessary. 16.8 Continuing Cooperation. Each party to this Agreement shall be obligated hereunder to perform such other and further acts, including without limitation the execution of any documents or instruments, which are reasonable and may be necessary or convenient in carrying out the purpose and intent of this Agreement. 16.9 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same agreement. 16.10 Entire Agreement. This Agreement, plus the Confidentiality Agreement executed by the parties in December 1997 constitute the final written expression of all of the agreements -13- between the parties with respect to the Chrysalin Technology and the Technology Rights and are a complete and exclusive statement of those terms. They supersede all understandings and negotiations concerning the matters specified herein, and shall take precedence over all inconsistent provisions in any purchase orders or any other documents unless agreed to in writing by both parties. Any oral representations, promises, warranties or statements made by either party that relate to the license granted hereunder and differ in any way from the terms of this written Agreement and the Confidentiality Agreement shall be given no force or effect. The parties specifically represent, each to the other, that there are no additional or supplemental agreements between them related in any way to the Chrysalin Technology or the Technology Rights unless specifically included or referred to herein. No addition to or modification of any provision of this Agreement shall be binding upon any party unless made in writing and signed by all parties. 16.11 Force Majeure. Neither party shall be in default hereunder by reason of its delay in the performance of or failure to perform any of its obligations hereunder, if such delay or failure is caused by strikes, acts of God or a public enemy, riots, fire, interference by civil or military authorities, compliance with governmental laws, rules, regulations or orders, delays in transit or delivery, inability to secure necessary governmental priorities or materials, or any fault beyond its control or without its fault or negligence. 16.12 Indemnification and Attorney's Fees. Each of OrthoLogic and Chrysalis shall defend, indemnify and hold harmless the other and its affiliates, employees, officers, directors and agents from and against all fines, suits, proceedings, claims, demands, debts, obligations, liabilities and actions of any kind by anyone (including reasonable attorney's fees and costs) allegedly arising from or connected with (i) violations by the indemnifying party of any law, ordinance, rule or regulation of the United States or any state or city or other international or domestic governmental body, (ii) the indemnifying party's actions or omissions in furtherance of this Agreement, (iii) any breach of a representation or warranty by or any breach or default in the performance of any obligation of the indemnifying party, or (v) any other activities or operations of the indemnifying party, its employees, officers, directors or agents. 16.13 Notice. All notices, demands, instructions, or requests relating to this Agreement shall be in writing and, except as otherwise provided herein, shall be deemed to have been given for all purposes (i) upon personal delivery, (ii) one day after being sent, when sent by professional overnight courier service from and to locations within the continental United States, (iii) five days after posting when sent by United States registered or certified mail, with postage paid, or (iv) on the date of transmission when sent by facsimile with evidence of transmission and hard copy mailed, if directed to the person or entity to which notice is to be given at his or its address set forth in this Agreement or at any other address such person or entity has designated by notice. 16.14 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule or law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby are not affected in any manner materially adverse to either party. Upon such determination that any term or other provisions is invalid, illegal or incapable of being enforced, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a -14- mutually acceptable manner in order that the transactions be consummated as originally contemplated to the fullest extent possible. 16.15 Survival. The rights and obligations of those Sections of this Agreement that by their nature survive and continue after any expiration or termination of this Agreement, shall bind the parties and their legal representatives, successors, heirs and assigns after expiration or termination. 16.16 Waiver. The failure of either party to insist on strict performance of any term or condition hereof or to exercise any option contained herein, shall not be construed as a waiver of that party's right to enforce that term of condition in the future or any other term or condition to this Agreement in any other instance. 16.17 Independent Entities. Chrysalis and OrthoLogic each have separate and independent rights and obligations under this Agreement. Nothing contained herein shall be construed as creating, forming or constituting any partnership, joint venture, merger or consolidation of Chrysalis and OrthoLogic for any purpose or in any respect. 16.18 Signature. This Definitive Agreement may be executed by facsimile or manual signatures. IN WITNESS WHEREOF, OrthoLogic and Chrysalis have executed this Agreement as of the day and year first written above. CHRYSALIS BIOTECHNOLOGY, INC. By /s/ Darrell H. Carney, Ph.D. ------------------------------- Darrell H. Carney, Ph.D. President ORTHOLOGIC CORP. By /s/ Thomas R. Trotter ------------------------------- Thomas R. Trotter President EX-10.2 4 1998 MANAGEMENT BONUS PROGRAM OrthoLogic Corp. Tempe, Arizona 1998 Management Bonus Program The 1998 Management Bonus Program is intended to motivate and reward senior managers for Company performance and personal performance. The bonus eligibility for 1998 is as follows: President/CEO 50% Executive Vice President 45% Vice President (CMC) 40% Vice President 25% Director 15% Manager 10% The bonus criteria is weighted thirty percent for personal performance and seventy percent for Company performance. The Board will determine the overall Company performance and the individual performance of the President/CEO. The President/CEO will determine the individual performance of the Executive Vice President, Vice Presidents, Directors and Managers, subject to review by the Board. EX-10.3 5 LOAN MODIFICATION AGREEMENT LOAN MODIFICATION AGREEMENT This Loan Modification Agreement is entered into as of May 5, 1998, by and between Orthologic Corp. ("Borrower") whose address is 1275 West Washington Street, Tempe, AZ 85281 and Silicon Valley Bank ("Bank") whose chief executive office is located at 3003 Tasman Drive, Santa Clara, CA 95054, with a loan production office located at 4455 East Camelback Road, Suite E-290, Phoenix, AZ 85018. 1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other documents, a Loan and Security Agreement, dated March 2, 1998, as may be amended from time to time, (the "Loan Agreement"). The Loan Agreement provided for, among other things, a Committed Equipment Line in the original principal amount of Two Million Five Hundred Thousand and 00/100 Dollars ($2,500,000) and a Committed Revolving Line in the original principal amount of Ten Million and 00/100 Dollars ($10,000,000). Defined terms used but not otherwise defined herein shall have the same meanings as in the Loan Agreement. Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the "Indebtedness." 2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement. In addition, Borrower has agreed not to sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber any of Borrower's Intellectual Property pursuant to that certain Negative Pledge Agreement, dated March 2, 1998. Hereinafter, the above-described security documents and guaranties, together with all other documents securing repayment of the Indebtedness shall be referred to as the "Security Documents". Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. A. Modification(s) to Loan Agreement --------------------------------- 1. Section 2.3 (a) entitled "Interest Rate" is hereby amended in its entirety to read as follows: (a) Interest Rate. (i) Advances accrue interest on the outstanding principal balance at a per annum rate of .650 of a percentage point above the Prime Rate; and (ii) Equipment Advances accrue interest on the outstanding principal balance at a per annum rate of .450 of a percentage point above the Prime Rate. Upon Borrower achieving 2 consecutive quarters of profitability, the interest rate on the Committed Revolving Line and the Committed Equipment Line will reduce by .10% and will further reduce by .10% upon Borrower achieving 4 consecutive quarters of profitability. In addition, upon improvement of Borrower's balance sheet sufficient to meet the Original Covenants (as amended herein), the interest rate for the Advances under the Committed Revolving Line will decrease to the original interest rate of .200 of a percentage point above the Prime Rate. Such interest rate change shall be effective as of the first day of the month following Bank's receipt of Borrower's financial statements indicating Borrower has met the above-described criteria. After an Event of Default, Obligations accrue interest at 5.00 percentage points above the rate effective immediately before the Event of Default. The interest rate increases or decreases when the Prime Rate changes. Interest is computed on a 360 day year for the actual number of days elapsed. 1 2. Sub-sections ( c) and (d) of Section 6.2 entitled "Financial Statements, Reports, Certificates" are hereby amended in their entirety to read as follows (c) Within 30 days after the last day of each month, Borrower will deliver to Bank with the monthly financial statements; cash flow reports covering the three previous months and the three future months; and a Compliance Certificate signed by a Responsible Officer in the form of Exhibit D. (d) Bank has the right to audit Borrower's Accounts at Borrower's expense, but the audits will be conducted on a semi-annual basis unless an Event of Default has occurred and is continuing. 3. Section 6.7 entitled "Financial Covenants" is hereby amended in its entirety to read as follows: Borrower will maintain as of the last day of each month: (i) Quick Ratio. A ratio of Quick Assets to Current Liabilities of at least 1.50 to 1.00. (Original Covenant is 2.00 to 1.00). (ii) Debt/Tangible Net Worth Ratio. A ratio of Total Liabilities less Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than 0.50 to 1.00. (Original Covenant is 0.50 to 1.00). (iii) Tangible Net Worth. A Tangible Net Worth of at least $41,000,000, excluding any scheduled expense incurred or accounting treatment for option payments to Chrysalis. (Original Covenant is $50,000,000). (iv) Profitability. Borrower will not suffer aggregate losses in excess of $3,000,000 for any two (2) consecutive quarters, beginning with the quarter ending June 30, 1998. (Original Covenant is Borrower will be profitable each quarter, except that Borrower may suffer losses, provided such losses do not exceed $5,000,000 in aggregate for the quarters ending March 31, 1998 and June 30, 1998 excluding any scheduled expense incurred or accounting treatment for option payments to Chrysalis). 4. The following defined terms are hereby amended and or added to Section 13 entitled "Definitions" to read as follows: "Borrowing Base" is 50% of Eligible Accounts as determined by Bank from Borrower's most recent Borrowing Base Certificate. "Committed Revolving Line" is an Advance of up to $7,500,000. "Copyrights" are all copyright rights, applications or registrations and like protections in each work or authorship or derivative work, whether published or not (whether or not it is a trade secret) now or later existing, created, acquired or held. Sub-sections (a), (b) and (c ) of the defined term "Eligible Accounts" are hereby amended in part to remove the number 120 reference therein and replace it with the number 90. 2 "Equipment Advance" is defined in Section 2.1.2, however, effective as of the hereof, all Equipment Advances available under Section 2.1.2 are hereby suspended. Accordingly, Borrower is no longer entitled to further Equipment Advances until it receives approval from Bank, in its sole discretion. "Intellectual Property" is: (a) Copyrights, Trademarks, Patents, and Mask Works including amendments, renewals, extensions, and all licenses or other rights to use and all license fees and royalties from the use; (b) Any trade secrets and any Intellectual Property Rights in computer software and computer software products now or later existing, created, acquired or held; (c) All design rights which may be available to Borrower now or later created, acquired or held; (d) Any claims for damages (past, present or future) for infringement of any of the rights above, with the right, but not the obligation, to sue and collect damages for use or infringement of the intellectual property rights above; All proceeds and products of the foregoing, including all insurance, indemnity or warranty payments. "Mask Works" are all mask works or similar rights available for the protection of semiconductor chips, now owned or later acquired. "Patents" are patents, patent applications and like protections, including improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same. "Trademarks" are trademark and service mark rights, registered or not, applications to register and registrations and like protections, and the entire goodwill of the business of Assignor connected with the trademarks. 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 5. PAYMENT OF LOAN FEE. Borrower shall pay to Bank a fee in the amount of One Thousand and 00/100 Dollars ($1,000) (the "Loan Fee") plus all out-of-pocket expenses. 6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing below) agrees that, as of the date hereof, it has no defenses against the obligations to pay any amounts under the Indebtedness. 7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below) understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrower's representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by 3 Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. The terms of this paragraph apply not only to this Loan Modification Agreement, but also to all subsequent loan modification agreements. 8. CONDITIONS. The effectiveness of this Loan Modification Agreement is conditioned upon (1) Borrower's payment of the Loan Fee, (2) and Bank's receipt of the Amendment to Warrant Agreement executed by Borrower. This Loan Modification Agreement is executed as of the date first written above. BORROWER: BANK: ORTHOLOGIC CORP. SILICON VALLEY BANK By: /s/ Terry D. Meier By: /s/ Amy Lou Blunt --------------------------------- ------------------------------------- Name: Terry D. Meier Name: Amy Lou Blunt ------------------------------- ----------------------------------- Title: Sr. V.P. and CFO Title: Asst. to V.P. ------------------------------ ---------------------------------- 4 EX-27 6 FDS --
5 This schedule contains summary financial information extracted from the financial statements in OrthoLogic Corporation's report Form 10-Q for the three month period ended March 31, 1998 and is qualified in its entirety by reference to such financial statements. 1 U.S. Dollars 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1 1,385,746 3,495,470 47,584,980 22,093,657 11,732,694 46,565,163 13,163,467 6,117,203 92,103,139 15,095,961 0 0 0 12,637 75,628,351 92,103,139 6,926,955 19,108,860 2,856,695 23,920,120 0 0 0 (9,130,201) 196 (9,130,005) 0 0 0 (9,130,005) (0.36) (0.36)
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