-----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, Wf2ZNrwnLWUJlOAsPF2TiDmV0XJ8oVQbENgt6sc+tlDxMPBzuN1Ijxy8CduWbGku QcxWWXbTDnLNZt0zTJVt9g== 0000950147-01-500906.txt : 20010516 0000950147-01-500906.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950147-01-500906 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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: 1637956 BUSINESS ADDRESS: STREET 1: 1275 WEST WASHINGTON STREET CITY: TEMPE STATE: AZ ZIP: 85281 BUSINESS PHONE: 6024375520 MAIL ADDRESS: STREET 1: 1275 WEST WASHINGTON STREET CITY: TEMPE STATE: AZ ZIP: 85281 10-Q 1 e-6843.txt QUARTERLY REPORT FOR THE QTR ENDED 3/31/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _________________ Commission File Number: 0-21214 ORTHOLOGIC CORP. (Exact name of registrant as specified in its charter) Delaware 86-0585310 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1275 W. Washington Street, Tempe, Arizona 85281 (Address of principal executive offices) (Zip Code) (602) 286-5520 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 31,437,001 shares of common stock outstanding as of April 30, 2001 ORTHOLOGIC CORP. INDEX PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000............................................. 3 Condensed Consolidated Statements of Operations and of Comprehensive Income for the Three months ended March 31, 2001 and 2000..................................................... 4 Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2001 and 2000........................ 5 Notes to Condensed Consolidated Financial Statements................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 10 Item 3. Quantitative & Qualitative Disclosures about Market Risk................................................. 11 Special Note Regarding Forward-Looking Statements................... 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 14 Item 6. Exhibits and Reports on Form 8-K............................ 16 2 PART I - Financial Information Item 1. Financial Statements OrthoLogic Corp. Condensed Consolidated Balance Sheet (in thousands) March 31, December 31, 2001 2000 --------- --------- (Unaudited) ASSETS Cash and cash equivalents $ 9,829 $ 6,753 Short term investments 1,159 2,492 Accounts receivable, net 27,449 29,951 Inventory, net 8,594 10,007 Prepaids and other current assets 1,536 1,019 Deferred income tax 2,631 2,631 --------- --------- Total current assets 51,198 52,853 Rental fleet, furniture, and equipment 29,305 28,891 Accumulated depreciation (18,062) (17,797) --------- --------- Fleet, furniture and equipment, net 11,243 11,094 Intangibles, net 750 750 Deposits and other assets 257 338 --------- --------- Total assets $ 63,448 $ 65,035 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Accounts payable $ 2,189 $ 3,030 Accrued liabilities 5,773 6,767 --------- --------- Total current liabilities 7,962 9,797 Deferred rent and capital lease obligations 105 88 --------- --------- Total liabilities 8,067 9,885 --------- --------- Series B Convertible Preferred Stock 600 3,240 --------- --------- Stockholders' Equity Common stock 16 15 Additional paid-in capital 135,011 132,332 Common stock to be used for legal settlement 2,969 2,969 Accumulated deficit (82,979) (83,183) Other comprehensive loss (236) (223) --------- --------- Total stockholders' equity 54,781 51,910 --------- --------- Total liabilities and stockholders' equity $ 63,448 $ 65,035 ========= ========= See Notes to Condensed Consolidated Financial Statements 3 OrthoLogic Corp. Condensed Consolidated Statement of Operations and of Comprehensive Income (in thousands, except per share data) Unaudited Three months ended March 31, -------------------- 2001 2000 -------- -------- Revenues $ 21,682 $ 22,490 Cost of revenues 4,733 4,808 -------- -------- Gross profit 16,949 17,682 Operating expenses Selling, general and administrative 16,103 16,316 Research and development 704 666 -------- -------- Total operating expenses 16,807 16,982 Operating income 142 700 Other income 129 85 -------- -------- Income before income taxes 271 785 Provision for income taxes 67 91 -------- -------- Net income $ 204 $ 694 ======== ======== BASIC EARNINGS PER SHARE Net income per common share $ 0.01 $ 0.02 -------- -------- Weighted average number of common shares outstanding 31,140 29,060 -------- -------- DILUTED EARNINGS PER SHARE Net income per common and equivalent shares $ 0.01 $ 0.02 -------- -------- Weighted shares outstanding 31,649 30,628 -------- -------- Consolidated Statement of Comprehensive Income Net income applicable to common shareholders $ 204 $ 694 Foreign translation adjustment (13) (13) -------- -------- Comprehensive income applicable to common shareholders $ 191 $ 681 ======== ======== See Notes to Condensed Consolidated Financial Statements 4 ORTHOLOGIC, CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) UNAUDITED Three months ended March 31, -------------------- 2001 2000 ------- ------- OPERATING ACTIVITIES Net income $ 204 $ 694 Noncash items: Depreciation and amortization 281 1,441 Net change on other operating items: Accounts receivable 2,502 (557) Inventory 1,413 362 Prepaids and other current assets (517) (147) Deposits and other assets 81 128 Accounts payable (841) (126) Accrued liabilities (994) (596) ------- ------- Cash flows provided by operating activities 2,129 1,199 ------- ------- INVESTING ACTIVITIES Purchase of fixed assets (430) (702) Officer note receivable, net -- 158 Sales of short-term investments 1,333 250 ------- ------- Cash flows provided by (used in) investing activities 903 (294) ------- ------- FINANCING ACTIVITIES Payments on capital leases 17 (19) Foreign exchange (13) (13) Net proceeds from stock option exercises 40 157 ------- ------- Cash flows provided by financing activities 44 125 ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 3,076 1,030 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,753 6,023 ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,829 $ 7,053 ======= ======= Supplemental disclosure of cash flow information Cash paid during the period for interest 20 44 Cash paid during the period for income taxes -- 1 See Notes to Condensed Consolidated Financial Statements 5 ORTHOLOGIC CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. FINANCIAL STATEMENT PRESENTATION The Condensed Consolidated Balance Sheet as of March 31, 2001, and the Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2001 and 2000 and the Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000 are unaudited. However, in the opinion of management, such financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the financial position, results of operations and cash flows. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the complete fiscal year. The Balance Sheet as of December 31, 2000 is derived from the Company's audited financial statements included in the 2000 Annual Report on Form 10-K. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's 2000 Annual Report on Form 10-K. The preparation of financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. A significant estimate in the accompanying financial statements is the allowance for doubtful accounts and sales discounts and adjustments, which are based primarily on trends in historical collection statistics, consideration of current events, payer mix and other considerations. The Company derives a significant amount of its revenues in the United States from third-party health insurance plans, including Medicare. Amounts paid under these plans are generally based on fixed or allowable reimbursement rates. Another significant estimate includes the carrying value of the Continuous Passive Motion ("CPM") business (See Note 7). In the opinion of management, adequate allowances have been provided for doubtful accounts and contractual adjustments. However, these estimates are subject to adjustments in the near term, which could be material. Any differences between estimated reimbursement and final determinations are reflected in the year finalized. 2. CO-PROMOTION AGREEMENT FOR HYALGAN The Company entered into an exclusive Co-Promotion agreement (the "Agreement") with Sanofi Pharmaceuticals Inc. ("Sanofi") at a cost of $4.0 million on June 23, 1997 for the purpose of marketing Hyalgan, a hyaluronic acid sodium salt, to orthopedic surgeons in the United States for the treatment of pain in patients with osteoarthritis of the knee. The Company's sales force began to promote Hyalgan in the third quarter of 1997. Fee revenue of $9.3, $8.3 and $8.7 million was recognized during 2000, 1999, and 1998 respectively. In the fourth quarter of 2000, the Company and Sanofi mutually agreed to terminate this Agreement. The Company has returned the rights to sell Hyalgan back to Sanofi. Royalty revenue for Hyalgan were $716,000 in the quarter ended March 31, 2001 compared to Hyalgan sales revenues of $1.8 million in the same period in 2000. The Company received $4 million over the fourth quarter of 2000 and the first quarter of 2001 for the return of the rights and a successful transition of the business back to Sanofi, and will receive continuing royalties for the next two years. Of the $4 million cash received, $1 million was received the quarter ended March 31, 2001. 6 3. LICENSING AGREEMENT FOR CHRYSALIN The Company announced in January 1998 that it had acquired a minority interest in a biotech firm, Chrysalis Bio Technology, Inc. ("Chrysalis") for $750,000. As part of the transaction, the Company was awarded a nine-month world-wide exclusive option to license the orthopedic applications of Chrysalin, a patented 23-amino acid peptide that has shown promise in accelerating the healing process and has completed an extensive pre-clinical safety and efficacy profile of the product. In pre-clinical animal studies, Chrysalin was also shown to double the rate of fracture healing with a single injection into the fresh fracture gap. The Company's agreement with Chrysalis contains provisions for the Company to continue and expand its options to license Chrysalin contingent upon regulatory approvals, successful preclinical trials, and certain milestone payments to Chrysalis by the Company. As part of the equity investment, OrthoLogic acquired options to license Chrysalin for orthopedic applications. An additional fee of $750,000 for the initial license was expensed in the third quarter of 1998 and the Agreement was extended to January 1999. In January 1999, the Company exercised its option to license the U.S. development, marketing and distribution rights of Chrysalin, for fresh fracture indications. As part of the license agreement, and in conjunction to the U.S. Food and Drug Administration (the "FDA") clearance to begin human clinical trials, OrthoLogic made a $500,000 milestone payment to Chrysalis in the fourth quarter of 1999. In January 2000, the Company began enrolling patients in the combined Phase I/II clinical trial for Chrysalin. In July 2000, the Company paid $2 million to Chrysalis and announced it was expanding its license agreement to include all Chrysalin orthopedic indications worldwide. In addition, the agreement calls for the Company to pay certain milestone payments and royalty fees, based upon products developed and achievement of commercial services. Except for the $750,000 minority equity interest, all payments made to Chrysalis have been expensed as research and development expenses. 4. LITIGATION During 1996, certain class action lawsuits were filed in the United States District Court for the District of Arizona against the Company and certain officers and directors, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-6 promulgated thereunder, and to other defendants Section 20(a) of the Exchange Act. Plaintiffs in these actions alleged generally that information concerning the May 31, 1996 letter received by the Company from the FDA regarding the Company's OL 1000 Bone Growth Stimulator, and the matters set forth therein, were material and undisclosed, leading to an artificially inflated stock price. Plaintiffs further allege that the Company's non-disclosure of the FDA correspondence and of the alleged practices referenced in that correspondence operated as a fraud against plaintiffs, in that the Company allegedly made untrue statements of material facts or omitted to state material facts in order to make the statement not misleading. Plaintiffs further alleged that once the FDA letter became known, a material decline in the stock price of the Company occurred, causing damage to the plaintiffs. All plaintiffs sought class action status, unspecified compensatory damages, fees and costs. Plaintiffs also sought extraordinary, equitable and/or injunctive relief as permitted by law. The actions were consolidated for all purposes in the United States District Court for the District of Arizona. On March 31, 1999, the judge in the consolidated case before the United States District Court granted the Company's Motion to Dismiss and entered an order dismissing all claims in the suit against the 7 Company and two individual officers/directors. The judge allowed certain narrow claims based on insider trading theories to proceed against certain individual defendants. On December 21, 1999, the District Court granted plaintiffs' motion for class certification to include purchasers of common stock between June 4 through June 18, 1996, inclusive. On or about June 20, 1996, a lawsuit entitled Norman Cooper, et. al. v. OrthoLogic, Corp., et. al, and Case No. CV 96-10799 was filed in the Superior Court, Maricopa County, and Arizona. The plaintiffs allege violations of Arizona Revised Statutes Sections 44-1991 (state securities fraud) and 44-1522 (consumer fraud) and common law fraud based upon factual allegations substantially similar to those alleged in the federal court class action complaints. Plaintiffs sought class action status, unspecified compensatory and punitive damages, fees and costs. Plaintiffs also sought injunctive and/or equitable relief. The Company filed a Motion to Dismiss the Complaint in the Arizona State Court in May 1999. The Court denied the motion in July 1999, and granted the plaintiffs' motion for the class certification on November 24, 1999. In October 2000, the Company announced that it had entered into a Memorandum of Understanding regarding settlement of the remaining class action claims and the Norman Cooper lawsuits. The settlement consists of $1 million in cash and one million shares of newly issued OrthoLogic Common Stock valued at $2,969,000. A significant portion of the cash payment was funded from its directors' and officers' liability insurance policy. The Company recorded a $3.6 million charge, including legal expenses, for settlement of the litigation. The settlement is subject to approval by the lead plaintiffs and defendants; the preparation, execution and filing of the formal Stipulation of Settlement; notice to the settlement members; and final approval of the settlement by the courts at a hearing. Management believes the settlement is in the best interests of the Company and its shareholders as it frees the Company from the cost and significant distraction of the ongoing litigation. The agreement to the Memorandum of Understanding does not constitute, and should not be construed as, an admission that the defendants have any liability or acted wrongfully in any way with respect to the plaintiffs or any other person. At March 31, 2001, in addition to the matters disclosed above, the Company is involved in other various legal proceedings and product liability claims that arose in the ordinary course of business. The costs associated with defending these other matters cannot be determined at this time and accordingly, no estimates for such costs have been included in these financial statements. In management's opinion, the ultimate resolution of these legal proceedings will not have a material effect on the financial position, results of operations, or liquidity of the Company. 5. LINE OF CREDIT The Company has secured a $10.0 million accounts receivable revolving line of credit with a lending institution. The Company may borrow up to 75% of the eligible accounts receivable, as defined in the agreement. The interest rate is at prime rate. Interest accruing on the outstanding balance and a monthly administration fee is due in arrears on the first day of each month. The line of credit expires February 28, 2003. There are certain financial covenants and reporting requirements associated with the loan. Included in the financial covenants are (1) tangible net worth of not less than $43 million, (2) a quick ratio of not less than 2.0 to 1.0, (3) a debt to tangible net worth ratio of not less than 0.50 to 1.0, and (4) capital expenditures will not exceed more than $7.0 million during any fiscal year. The Company has not utilized this line of credit. 8 6. SERIES B CONVERTIBLE PREFERRED STOCK As of March 31, 2001, 14,400 shares of Series B Convertible Preferred Stock had been converted into 5,746,584 shares of Common Stock. 7. PLANS TO DIVEST THE CONTINUOUS PASSIVE MOTION BUSINESS In January 2001, the Company announced plans to divest its CPM business to refocus the Company on its core business of fracture healing and spinal repair. After careful consideration, the Board felt the emphasis on the rehabilitation segment of the orthopedic business no longer fit the Company's long-term strategic plan. As a result of the decision to divest this business in the fourth quarter of 2000, the Company wrote off the remaining $23.3 million of Goodwill related to the CPM business. The goodwill was assessed to be impaired in accordance with Statement of Financial Standards ("SFAS") No. 121. The Company announced on May 9, 2001 that it signed an Asset Purchase Agreement to sell the assets of the CPM business to OrthoRehab, Inc. The structure of the transaction calls for the purchaser to make a cash payment at closing, additional contingent payment at a later date based on performance, and the assumption of certain liabilities. In addition, OrthoLogic would retain certain accounts receivable. The total cash to be received from the sale could be as much as $15 million, assuming the full amount of contingent payment is received by OrthoLogic. In accordance with SFAS No. 121, the Company has assessed the carrying value of the net assets to be sold, considering the terms and conditions of the Definitive Agreement signed with OrthoRehab, Inc. and currently believes that the carrying value of the net assets will be recovered from cash proceeds expected to be received from the sale to OrthoRehab, Inc. and cash expected to be generated from continuing to operate the CPM business through the expected close date in June 2001. Adjustments to the carrying value of the CPM net assets to be sold may be necessary in the future if expected cash flows from the CPM business are not realized. Once the closing of the transaction occurs, management anticipates that the Company would record a one-time charge, currently estimated to be $7 million to $10 million for costs, primarily severance and other exit costs, associated with the final divestiture of the CPM business. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS. The following is management's discussion of significant factors that affected the Company's interim financial condition and results of operations. This should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. RESULTS OF OPERATIONS REVENUES The Company reported revenues of $21.7 million for the first quarter of 2001 representing a 3.6% decrease from revenues of $22.5 million for the same quarter of 2000. The decrease in sales is attributable to a decline in CPM sales due to the Company's decision to increase efficiency and improve profitability as well as the loss of Hyalgan sales due to the termination of the Company's distribution of Hyalgan. Sales from the CPM products were $14.1 million in the quarter ended March 31, 2001 compared to $15.5 million in the same period last year. The revenue decline was partially offset by increased sales of the OL 1000 and SpinaLogic in the quarter ended March 31, 2001, as compared to the same quarter last year. GROSS PROFIT Gross profits decreased from $17.7 million for the three months ended March 31, 2000 to $16.9 million for the three months ended March 31, 2001, a 4.5% decrease. Gross profits as a percentage of revenues was 77.8% for the quarter compared to 78.6% for the same period last year. The decline in the gross profit is primarily attributable to the loss of Hyalgan distribution revenue, which had no associated cost of goods expense. Gross profits for the CPM business was $10.6 million for the quarter ended March 31, 2001, compared to $11.8 million for the same period in 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A")for the three months ended March 31, 2001 were $16.1 million, a decrease from $16.3 million for the three months ended March 31, 2000. Most operating expenses are not directly allocated between the Company's various lines of business. The decline in 2001 SG&A expenses is primarily attributed to reductions in marketing and other expenses compared to the same period in 2000 which were partially offset by an increase in commission expenses paid to a third-party distributor due to increased SpinaLogic sales. RESEARCH AND DEVELOPMENT Research and development expenses increased with expenses of $704,000 in the three-month period ended March 31, 2001 compared to $666,000 for the same period last year. This increase is primarily attributable to costs associated with the combined Phase I/II human clinical trials for Chrysalin. 10 OTHER INCOME AND EXPENSES Other income, consisting primarily of interest income, increased from $85,000 to $129,000 for the three-month periods ended March 31, 2000 and 2001 respectively. LIQUIDITY AND CAPITAL RESOURCES On March 31, 2001 the Company had cash and cash equivalents of $9.8 million compared to $6.8 million as of December 31, 2000. Cash provided by operations amounted to $2.1 million for the three-month period ended March 31, 2001, compared to $1.2 million for the same period in the previous year. Cash provided from investing activities amounted to $900,000 compared to cash needed for investing activities of $294,000 for the same period last year. Cash provided by the sales of securities in the normal course of investment activities more than offset the purchase of fixed assets in the period ended March 31, 2001. Cash provided by financing activities amounted to $44,000 during the three-month period ended March 31, 2001 compared to cash used for financing of $125,000 for the same period last year. The Company has an available $10.0 million accounts receivable revolving line of credit with a bank. The Company anticipates that its cash and short-term investments on hand, cash from operations and the funds available from the line of credit will be sufficient to meet the Company's presently projected cash and working capital requirements for the next 12 months. There can be no assurances, however, that this will prove to be the case. The timing and amounts of cash used will depend on many factors, including the Company's ability to continue to increase revenues, reduce and control its expenditures, continue profitability and collect amounts due from third party payers. Additional funds may be required if the Company is not successful in any of these areas. The Company's ability to continue funding its planned operations beyond the next 12 months is dependent on its ability to generate sufficient cash flow to meet its obligations on a timely basis, or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required. On May 9, 2001, the Company announced it had signed an agreement to sell assets of the CPM business to another company (See Note 7). It is anticipated that the sale will have an affect on the collateral of the existing $10 million line of credit, and therefore the terms of the line of credit will be changed. While the final disposition of this sale and subsequent affects on the cash position of the Company have not been determined, the Company anticipates that its cash and short-term investments on hand, cash from operations, funds generated from the asset sale, and the funds available from the renegotiated line of credit will be sufficient to meet the Company's projected cash and working capital requirements for the next 12 months. ITEM 3. MARKET RISKS. The Company has no debt and no derivative instruments at March 31, 2001. The Company has exposure to foreign exchange rates through its manufacturing subsidiary in Canada. The Company does not use foreign currency forward contracts or commodity contracts to limit this exposure. The Company is not currently vulnerable to a material extent to fluctuations in interest rates and commodity prices. 11 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections of results of operations and financial condition, statements of future economic performance, and general or specific statements of future expectations and beliefs. The matters covered by such forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to differ materially from those contemplated or implied by such forward-looking statements. Important factors which may cause actual results to differ include, but are not limited to, the following matters, which are discussed in more detail in the Company's Form 10-K for the 2000 fiscal year. The Company has periodically discussed with third parties the possible acquisition or disposition of technology, product lines, and businesses in the orthopedic health care market. Additionally, the Company continues to evaluate strategies and alternatives that will position the Company to compete effectively in the future. Any change in future operating strategies of the Company could result in an adjustment to the carrying values of current recorded assets. In particular, upon closing the divestiture of the CPM business, the Company's balance sheet will reflect the loss of the sold assets (particularly in inventory and accounts receivable) and the corresponding increase in cash. In addition, the Company plans to record a $3 million to $5 million loss on the sale of the assets, as well as recognize a one-time charge of $7 million to $10 million to cover ongoing costs associated with the sale. If the closing occurs as planned in June, the charges and losses will appear in the second quarter financial statements. Further, the sale of the CPM business, which historically was one of the Company's core businesses, could have an effect in the long-term results of the operations as the Company concentrates its efforts on the sales of the OL 1000 (and related products) and SpinaLogic. The loss of product diversification and the CPM sales force will make the Company To the extent that the Company presently enjoys perceived technological advantages over competitiors, technological innovation by present or future competitors many of whom are larger than the Company may erode the Company's position in the market. To sustain long-term growth, the Company must develop and introduce new products and expand applications of existing products, as it is currently doing with the human trials of Chrysalin; however, there can be no assurance that the Company will be able to do so or that the market or FDA regulators will accept any such new products or applications or will do so in a timely manner. The Company operates in a highly regulated environment and cannot predict the actions of regulatory authorities. The action or non-action of regulatory authorities may impede the development and introduction of new products and new applications for existing products, and may have temporary or permanent effects on the Company's marketing of its existing or planned products. There can be no assurance that the influence of managed care will continue to grow either in the United States or abroad, or that such growth will result in greater acceptance or sales of the Company's products. In particular, there can be no assurance that existing or future decision makers and third party payors within the medical community will be receptive to the use of the Company's products or replace or supplement existing or future treatments. Moreover, the transition to managed care and the increasing consolidation underway in the managed care industry may concentrate economic power among buyers of the Company's products, which concentration could foreseeable adversely affect the Company's margins. 12 Although the company believes that existing securities litigation initiated against the Company is without merit and the Company has entered into a Memorandum of Understanding with the plaintiffs to settle the litigation. The settlement must still be approved by the class of plaintiffs and the court. Further, members of the class have the option to opt out of the settlement and pursue claims on their own. If the class or court rejects the settlement, the litigation could continue. An adverse outcome of such litigation could have a material adverse effect on the Company's business, financial condition and results of operation. The Company intends to pursue sales in international markets. The Company, however, has had little experience in such markets. Expanded efforts at pursuing new markets necessarily involves expenditures to develop such markets and there can be no assurance that the results of those efforts will be profitable. There can be no assurance that the Company's estimates of the market will not cause the nature and extent of that market to deviate materially from the Company's expectations. 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See "Note 4 - Litigation" of the Notes to the Condensed Consolidated Financial Statements above. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None ITEM 6. EXHIBITS AND REPORTS (a) Exhibit Index See Exhibit Index following the signature page which is incorporated herein by reference. (b) Reports on Form 8-K None 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ORTHOLOGIC CORP. (Registrant) Signature Title Date --------- ----- ---- /s/ Thomas R. Trotter President and Chief Executive May 11, 2001 - --------------------- Officer (Principal Executive Thomas R. Trotter Officer) /s/ Terry D. Meier Sr. Vice-President and Chief May 11, 2001 - --------------------- Financial Officer (Principal Terry D. Meier Financial and Accounting Officer) 15 OrthoLogic Corp. Exhibit Index to Quarterly Report on Form 10-Q For the Quarterly Period Ended March 31, 2001 Exhibit No Description Filed Herewith - ---------- ----------- -------------- 10-22 Employment Agreement effective As of December 4, 2000 between The Company and Shane Kelly X 10-23 Employment Agreement effective As of January 2, 2001 between The Company and Donna Lucchesi X EX-10.22 2 ex10-22.txt EMPLOYMENT AGREEMENT - KELLY Exhibit 10-22 EMPLOYMENT AGREEMENT This Agreement is to be effective, as of December 4, 2000, by and between OrthoLogic Corp., a Delaware corporation (the "Company"), and Shane Kelly ("Employee"). RECITALS: A. The parties wish to set forth in this Agreement the terms and conditions of employment. AGREEMENT: In consideration of the mutual covenants and agreements set forth herein, the parties agree as follows: 1. EMPLOYMENT AND DUTIES. Subject to the terms and conditions of this Agreement, the Company employs Employee to serve in a managerial capacity and Employee accepts such employment and agrees to perform such reasonable responsibilities and duties as may be assigned to him from time to time by the Company's Chief Executive Officer (the "CEO"). Employee's title shall be Vice President, with general responsibility for Sales. Such title and duties may be changed from time to time by the CEO. Employee will initially report to the CEO. 2. TERM. The initial term of this Agreement shall expire on December 31, 2001. Thereafter this Agreement shall renew automatically for additional terms of one-year each unless it is terminated pursuant to Section 6. 3. COMPENSATION. (a) SALARY. From the effective date of this Agreement, the Company shall pay Employee a minimum base annual salary, before deducting all applicable withholdings, of $155,000 per year, payable at the times and in the manner dictated by the Company's standard payroll policies. Effective March 2002, and annually thereafter, the minimum base annual salary shall be reviewed in accordance with the Company's compensation policy. For 2001, the Company shall provide a bonus opportunity as outlined in the promotion letter dated December 4, 2000. (b) STOCK OPTIONS. Subject to Board approval, the Company shall grant to Employee incentive options (the parties understand that only a portion of such options will qualify as incentive options for tax purposes), from the Company's 1997 Stock Option Plan, to purchase 50,000 shares of the Company's common stock, with an exercise price equal to the fair market value of the stock at the close of business on December 4, 2000, with such value determined as specified in the Company's 1997 Stock Option Plan. Such options shall vest over 4 years in accordance with the Company's normal vesting practices. 1 4. FRINGE BENEFITS. In addition to the compensation described in Section 3, and any other employee benefit plans (including without limitation pension, savings and disability plans) generally available to employees, the Company shall include Employee in any group health insurance plan and, if eligible, any group retirement plan instituted by the Company. The manner of implementation of such benefits with respect to such items as procedures and amounts are discretionary with the Company. 5. VACATION. Employee shall be entitled to vacation with pay in accordance with the Company's vacation policy as in effect from time to time. In addition, Employee shall be entitled to such holidays as the Company may approve from time to time. 6. TERMINATION. (a) FOR CAUSE. The Company may terminate this Agreement for cause upon written notice to Employee stating the facts constituting such cause, provided that Employee shall have 30 days following such notice to cure any conduct or act, if curable, alleged to provide grounds for termination for cause hereunder. In the event of termination for cause, the Company shall be obligated to pay Employee only the minimum base salary due him through the date of termination. The written notice shall state the cause for termination. Cause shall include neglect of duties, willful failure to abide by instructions or policies from or set by the Board of Directors, commission of a felony or serious misdemeanor offense or pleading guilty or nolo contendere to same, Employee's breach of this Agreement or Employee's breach of any other material obligation to the Company. (b) WITHOUT CAUSE. The Company may terminate Employee's Employment at any time, immediately and without cause, by giving written notice to Employee. If the Company terminates Employee without cause, provided Employee first executes a Severance Agreement in the form then used by the Company, the Company shall continue to pay to Employee his minimum base salary in effect at the time of termination for a period of one year following the date of termination, at the time and in the manner dictated by the Company's standard payroll policies. The Company will also pay any remaining relocation costs, as outlined in the promotion letter dated December 4, 2000. (c) DISABILITY. If during the term of this Agreement, Employee fails to perform his duties hereunder on account of illness or other incapacity for a period of 45 consecutive days, or for 60 days during any six-month period, the Company shall have the right to terminate this Agreement without further obligation hereunder except as otherwise provided in disability plans generally applicable to employees. (d) DEATH. If Employee dies during the term of this Agreement, this Agreement shall terminate immediately, and Employee's legal representatives shall be entitled to receive the base salary due Employee through the last day of the calendar month in which his death shall have occurred and any other death benefits generally applicable to employees. 2 (e) RESIGNATION. Employee may resign his employment by giving the Company written notice. In the event of such a resignation, the Company shall be obligated to pay Employee only the minimum base salary due him through the effective date of the resignation. 7. CONFIDENTIAL INFORMATION. Employee acknowledges that Employee may receive, or contribute to the production of, Confidential Information. For purposes of this Agreement, Employee agrees that "Confidential Information" shall mean any and all information or material proprietary to the Company or designated as Confidential Information by the Company and not generally known by non-Company personnel, which Employee develops or of or to which Employee may obtain knowledge or access through or as a result of Employee's relationship with the Company (including information conceived, originated, discovered or developed in whole or in part by Employee). Confidential Information includes, but is not limited to, the following types of information and other information of a similar nature (whether or not reduced to writing) related to the Company's business: discoveries, inventions, ideas, concepts, research, development, processes, procedures, "know-how", formulae, marketing or manufacturing techniques and materials, marketing and development plans, business plans, customer names and other information related to customers, price lists, pricing policies, methods of operation, financial information, employee compensation, and computer programs and systems. Confidential Information also includes any information described above which the Company obtains from another party and which the Company treats as proprietary or designates as Confidential Information, whether or not owned by or developed by the Company, including Confidential Information acquired by the Company from any of its affiliates. Employee acknowledges that the Confidential Information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use. Information publicly known without breach of this Agreement that is generally employed by the trade at or after the time Employee first learns of such information, or generic information or knowledge which Employee would have learned in the course of similar employment or work elsewhere in the trade, shall not be deemed part of the Confidential Information. Employee further agrees: a. To furnish the Company on demand, at any time during or after employment, a complete list of the names and addresses of all present, former and potential suppliers, financing sources, clients, customers and other contacts gained while an employee of the Company in Employee's possession, whether or not in the possession or within the knowledge of the Company. b. That all notes, memoranda, electronic storage, documentation and records in any way incorporating or reflecting any Confidential Information shall belong exclusively to the Company, and Employee agrees to turn over all copies of such materials in Employee's control to the Company upon request or upon termination of Employee's employment with the Company. 3 c. That while employed by the Company and thereafter Employee will hold in confidence and not directly or indirectly reveal, report, publish, disclose or transfer any of the Confidential Information to any person or entity, or utilize any of the Confidential Information for any purpose, except in the course of Employee's work for the Company. d. That any idea in whole or in part conceived of or made by Employee during the term of his employment, consulting, or similar relationship with the Company which relates directly or indirectly to the Company's current or planned lines of business and is made through the use of any of the Confidential Information of the Company or any of the Company's equipment, facilities, trade secrets or time, or which results from any work performed by Employee for the Company, shall belong exclusively to the Company and shall be deemed a part of the Confidential Information for purposes of this Agreement. Employee hereby assigns and agrees to assign to the Company all rights in and to such Confidential Information whether for purposes of obtaining patent or copyright protection or otherwise. Employee shall acknowledge and deliver to the Company, without charge to the Company (but at its expense) such written instruments and do such other acts, including giving testimony in support of Employee's authorship or inventorship, as the case may be, necessary in the opinion of the Company to obtain patents or copyrights or to otherwise protect or vest in the Company the entire right and title in and to the Confidential Information. 8. LOYALTY DURING EMPLOYMENT TERM. Employee agrees that during the term of Employee's employment by the Company, Employee will devote substantially all of Employee's business time and effort to and give undivided loyalty to the Company, and will not engage in any way whatsoever, directly or indirectly, in any business that is competitive with the Company or its affiliates, nor solicit, or in any other manner work for or assist any business which is competitive with the Company or its affiliates. During the term of Employee's employment by the Company, Employee will undertake no planning for or organization of any business activity competitive with the Company or its affiliates, and Employee will not combine or conspire with any other employee of the Company or any other person for the purpose of organizing any such competitive business activity. 9. NON-COMPETITION; NON-SOLICITATION. The parties acknowledge that Employee will acquire much knowledge and information concerning the business of the Company and its affiliates as the result of Employee's employment. The parties further acknowledge that the scope of business in which the Company is engaged as of the date of execution of this Agreement is world-wide and very competitive and one in which few companies can successfully compete. Certain activities by Employee after this Agreement is terminated would severely injure the Company. Accordingly, until one year after this Agreement is terminated or Employee leaves the employment of the Company for any reason, Employee will not: a. Engage in any work activity for or in conjunction with any business or entity that is in competition with or is preparing to compete with the Company; 4 b. Persuade or attempt to persuade any potential customer or client to which the Company or any of its affiliates has made a proposal or sale, or with which the Company or any of its affiliates has been having discussions, not to transact business with the Company or such affiliate, or instead to transact business with another person or organization; c. Solicit the business of any customers, financing sources, clients, suppliers, or business patrons of the Company or any of its predecessors or affiliates which were customers, financing sources, clients, suppliers, or business patrons of the Company at any time during Employee's employment by the Company, or within three years prior to the Effective Date of Employee's employment, provided, however, that if Employee becomes employed by or represents a business that exclusively sells products that do not compete with products then marketed or intended to be marketed by the Company, such contact shall be permissible; or d. Solicit, endeavor to entice away from the Company or any of its affiliates, or otherwise interfere with the relationship of the Company or any of its affiliates with, any person who is employed by or otherwise engaged to perform services for the Company or any of its affiliates, whether for Employee's account or for the account of any other person or organization. 10. INJUNCTIVE RELIEF. It is agreed that the restrictions contained in Sections 8, 9 and 10 of this Agreement are reasonable, but it is recognized that damages in the event of the breach of any of those restrictions will be difficult or impossible to ascertain; and, therefore, Employee agrees that, in addition to and without limiting any other right or remedy the Company may have, the Company shall have the right to an injunction against Employee issued by a court of competent jurisdiction enjoining any such breach without showing or proving any actual damage to the Company. This paragraph shall survive the termination of Employee's employment. 11. PART OF CONSIDERATION. Employee also agrees, acknowledges, covenants, represents and warrants that he is fully and completely aware that, and further understands that, the restrictive covenants contained in Sections 8, 9, and 10 of this Agreement are an essential part of the consideration for the Company entering into this Agreement and that the Company is entering into this Agreement in full reliance on these acknowledgments, covenants, representations and warranties. 12. TIME AND TERRITORY REDUCTION. If any of the periods of time and/or territories described in Sections 8, 9 and 10 of this Agreement are held to be in any respect an unreasonable restriction, it is agreed that the court so holding may reduce the territory to which the restriction pertains or the period of time in which it operates or may reduce both such territory and such period, to the minimum extent necessary to render such provision enforceable. 13. SURVIVAL. The obligations described in Sections 8 and 10 of this Agreement shall survive any termination of this Agreement or any termination of the employment relationship created hereunder. 5 14. NONDELEGABILITY OF EMPLOYEE'S RIGHTS AND COMPANY ASSIGNMENT RIGHTS. The obligations, rights and benefits of Employee hereunder are personal and may not be delegated, assigned or transferred in any manner whatsoever, nor are such obligations, rights or benefits subject to involuntary alienation, assignment or transfer. Upon mutual agreement of the parties, the Company upon reasonable notice to Employee may transfer Employee to an affiliate of the Company, which affiliate shall assume the obligations of the Company under this Agreement. This Agreement shall be assigned automatically to any entity merging with or acquiring the Company. 15. AMENDMENT. Except for documents regarding the grant of stock options and an Invention, Confidential Information and Non-Competition Agreement, this Agreement contains, and its terms constitute, the entire agreement of the parties and supersedes any prior agreements, including any Employment Agreements, and it may be amended only by a written document signed by both parties to this Agreement. 16. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Arizona, exclusive of the conflict of law provisions thereof, and the parties agree that any litigation pertaining to this Agreement shall be in courts located in Maricopa County, Arizona. 17. ATTORNEYS' FEES. If any party finds it necessary to employ legal counsel or to bring an action at law or other proceeding against the other party to enforce any of the terms hereof, the party prevailing in any such action or other proceeding shall be paid by the other party its reasonable attorneys' fees as well as court costs all as determined by the court and not a jury. 18. NOTICES. 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 return receipt requested and postage paid, or (iv) on the date of transmission when sent by facsimile with a hard-copy confirmation; 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. 6 To the Company: ORTHOLOGIC CORP. 1275 West Washington Street Tempe, AZ 85281 Attention: Chief Executive Officer To Employee: Shane Kelly 8352 East Amherst Circle Denver, CO 80231 19. ENTIRE AGREEMENT. This Agreement, the Invention, Confidential Information and Non-Competition Agreement dated February 8, 1999, the promotion letter dated December 4, 2000 and documents regarding the grant of stock options constitute the final written expression of all of the agreements between the parties and are a complete and exclusive statement of those terms. They supersede all understandings and negotiations concerning the matters specified herein. Any representations, promises, warranties or statements made by either party that differ in any way from the terms of this written 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 matters herein contained 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. To the extent that there is any conflict between this Agreement and the Invention, Confidential Information and Non-Competition Agreement, the provisions of this Agreement shall govern. 20. WAIVER. The waiver by either party of the breach of any covenant or provision in this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party. 21. INVALIDITY OF ANY PROVISION. The provisions of this Agreement are severable, it being the intention of the parties hereto that should any provisions hereof be invalid or unenforceable, such invalidity or unenforceability of any provision shall not affect the remaining provisions hereof, but the same shall remain in full force and effect as if such invalid or unenforceable provisions were omitted. 22. ATTACHMENTS. All attachments or exhibits 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 attachments, the terms of this Agreement shall prevail. 23. INTERPRETATION OF AGREEMENT. When a reference is made in this Agreement to an article or section, such reference shall be to an article or section of this Agreement unless otherwise indicated. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes," or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." 7 24. HEADINGS. Headings in this Agreement are for informational purposes only and shall not be used to construe the intent of this Agreement. 25. 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. 26. 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. This Agreement has been executed by the parties as the date first written above. ORTHOLOGIC CORP. ("Company") By: ------------------------------------- Thomas R. Trotter President/Chief Executive Officer SHANE KELLY ("Employee") By: ------------------------------------- 8 EX-10.23 3 ex10-23.txt EMPLOYMENT AGREEMENT - LUCCHESI Exhibit 10-23 EMPLOYMENT AGREEMENT This Agreement is to be effective, as of January 2, 2001, by and between OrthoLogic Corp., a Delaware corporation (the "Company"), and Donna Lucchesi ("Employee"). RECITALS: A. The parties wish to set forth in this Agreement the terms and conditions of employment. AGREEMENT: In consideration of the mutual covenants and agreements set forth herein, the parties agree as follows: 1. EMPLOYMENT AND DUTIES. Subject to the terms and conditions of this Agreement, the Company employs Employee to serve in a managerial capacity and Employee accepts such employment and agrees to perform such reasonable responsibilities and duties as may be assigned to her from time to time by the Chief Executive Officer (CEO). Employee's title shall be Vice President, with general responsibility for Marketing. Such title and duties may be changed from time to time by the CEO. Employee will initially report to the CEO. 2. TERM. The initial term of this Agreement shall expire on December 31, 2001. Thereafter this Agreement shall renew automatically for additional terms of one-year each unless it is terminated pursuant to Section 6. 3. COMPENSATION. (a) SALARY. From the effective date of this Agreement, the Company shall pay Employee a minimum base annual salary, before deducting all applicable withholdings, of $145,000 per year, payable at the times and in the manner dictated by the Company's standard payroll policies. Effective March 2002, and annually thereafter, the minimum base annual salary shall be reviewed in accordance with the Company's compensation policy. (b) BONUS. Employee shall be eligible to participate in such bonus and incentive programs as determined from time to time by the Board. Any bonuses shall be based upon the achievement of individual goals and Company performance. With respect to the year ending December 31, 2001, Employee will be eligible for a target bonus of 40% of Employee's base salary for achievement of the Board-approved plan (c) STOCK OPTIONS. Subject to Board approval, the Company shall grant to Employee incentive options (the parties understand that only a portion of such options will qualify as incentive options for tax purposes), from the Company's 1997 Stock Option Plan, to purchase 60,000 shares of the Company's 1 common stock, with an exercise price equal to the fair market value of the stock at the close of business on January 2, 2001, with such value determined as specified in the Company's 1997 Stock Option Plan. Such options shall vest over 4 years in accordance with the Company's normal vesting practices. 4. FRINGE BENEFITS. In addition to the compensation described in Section 3, and any other employee benefit plans (including without limitation pension, savings and disability plans) generally available to employees, the Company shall include Employee in any group health insurance plan and, if eligible, any group retirement plan instituted by the Company. The manner of implementation of such benefits with respect to such items as procedures and amounts are discretionary with the Company. 5. VACATION. Employee shall be entitled to vacation with pay in accordance with the Company's vacation policy as in effect from time to time. In addition, Employee shall be entitled to such holidays as the Company may approve from time to time. 6. TERMINATION. (a) FOR CAUSE. The Company may terminate this Agreement for cause upon written notice to Employee stating the facts constituting such cause, provided that Employee shall have 30 days following such notice to cure any conduct or act, if curable, alleged to provide grounds for termination for cause hereunder. In the event of termination for cause, the Company shall be obligated to pay Employee only the minimum base salary due her through the date of termination. The written notice shall state the cause for termination. Cause shall include neglect of duties, willful failure to abide by instructions or policies from or set by the Board of Directors, commission of a felony or serious misdemeanor offense or pleading guilty or NOLO CONTENDERE to same, Employee's breach of this Agreement or Employee's breach of any other material obligation to the Company. (b) WITHOUT CAUSE. The Company may terminate Employee's Employment at any time, immediately and without cause, by giving written notice to Employee. If the Company terminates Employee without cause, provided Employee first executes a Severance Agreement in the form then used by the Company, the Company shall continue to pay to Employee her minimum base salary in effect at the time of termination for a period of one year following the date of termination, at the time and in the manner dictated by the Company's standard payroll policies. Should such termination occur as a result of a change in control, the Company shall also pay Employee a pro-rata share of her bonus at the time of termination. (c) DISABILITY. If during the term of this Agreement, Employee fails to perform her duties hereunder on account of illness or other incapacity for a period of 45 consecutive days, or for 60 days during any six-month period, the Company shall have the right to terminate this Agreement without further obligation hereunder except as otherwise provided in disability plans generally applicable to employees. 2 (d) DEATH. If Employee dies during the term of this Agreement, this Agreement shall terminate immediately, and Employee's legal representatives shall be entitled to receive the base salary due Employee through the last day of the calendar month in which her death shall have occurred and any other death benefits generally applicable to employees. (e) RESIGNATION. Employee may resign her employment by giving the Company written notice. In the event of such a resignation, the Company shall be obligated to pay Employee only the minimum base salary due her. 7. CONFIDENTIAL INFORMATION. Employee acknowledges that Employee may receive, or contribute to the production of, Confidential Information. For purposes of this Agreement, Employee agrees that "Confidential Information" shall mean any and all information or material proprietary to the Company or designated as Confidential Information by the Company and not generally known by non-Company personnel, which Employee develops or of or to which Employee may obtain knowledge or access through or as a result of Employee's relationship with the Company (including information conceived, originated, discovered or developed in whole or in part by Employee). Confidential Information includes, but is not limited to, the following types of information and other information of a similar nature (whether or not reduced to writing) related to the Company's business: discoveries, inventions, ideas, concepts, research, development, processes, procedures, "know-how", formulae, marketing or manufacturing techniques and materials, marketing and development plans, business plans, customer names and other information related to customers, price lists, pricing policies, methods of operation, financial information, employee compensation, and computer programs and systems. Confidential Information also includes any information described above which the Company obtains from another party and which the Company treats as proprietary or designates as Confidential Information, whether or not owned by or developed by the Company, including Confidential Information acquired by the Company from any of its affiliates. Employee acknowledges that the Confidential Information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use. Information publicly known without breach of this Agreement that is generally employed by the trade at or after the time Employee first learns of such information, or generic information or knowledge which Employee would have learned in the course of similar employment or work elsewhere in the trade, shall not be deemed part of the Confidential Information. Employee further agrees: a. To furnish the Company on demand, at any time during or after employment, a complete list of the names and addresses of all present, former and potential suppliers, financing sources, clients, customers and other contacts gained while an employee of the Company in Employee's possession, whether or not in the possession or within the knowledge of the Company. 3 b. That all notes, memoranda, electronic storage, documentation and records in any way incorporating or reflecting any Confidential Information shall belong exclusively to the Company, and Employee agrees to turn over all copies of such materials in Employee's control to the Company upon request or upon termination of Employee's employment with the Company. c. That while employed by the Company and thereafter Employee will hold in confidence and not directly or indirectly reveal, report, publish, disclose or transfer any of the Confidential Information to any person or entity, or utilize any of the Confidential Information for any purpose, except in the course of Employee's work for the Company. d. That any idea in whole or in part conceived of or made by Employee during the term of his employment, consulting, or similar relationship with the Company which relates directly or indirectly to the Company's current or planned lines of business and is made through the use of any of the Confidential Information of the Company or any of the Company's equipment, facilities, trade secrets or time, or which results from any work performed by Employee for the Company, shall belong exclusively to the Company and shall be deemed a part of the Confidential Information for purposes of this Agreement. Employee hereby assigns and agrees to assign to the Company all rights in and to such Confidential Information whether for purposes of obtaining patent or copyright protection or otherwise. Employee shall acknowledge and deliver to the Company, without charge to the Company (but at its expense) such written instruments and do such other acts, including giving testimony in support of Employee's authorship or inventorship, as the case may be, necessary in the opinion of the Company to obtain patents or copyrights or to otherwise protect or vest in the Company the entire right and title in and to the Confidential Information. 8. LOYALTY DURING EMPLOYMENT TERM. Employee agrees that during the term of Employee's employment by the Company, Employee will devote substantially all of Employee's business time and effort to and give undivided loyalty to the Company, and will not engage in any way whatsoever, directly or indirectly, in any business that is competitive with the Company or its affiliates, nor solicit, or in any other manner work for or assist any business which is competitive with the Company or its affiliates. During the term of Employee's employment by the Company, Employee will undertake no planning for or organization of any business activity competitive with the Company or its affiliates, and Employee will not combine or conspire with any other employee of the Company or any other person for the purpose of organizing any such competitive business activity. 9. NON-COMPETITION; NON-SOLICITATION. The parties acknowledge that Employee will acquire much knowledge and information concerning the business of the Company and its affiliates as the result of Employee's employment. The parties further acknowledge that the scope of business in which the Company is engaged as of the date of execution of this Agreement is world-wide and very competitive and one in which few companies can successfully compete. Certain activities by Employee after this Agreement is terminated would severely injure the Company. Accordingly, until one year after this Agreement is terminated or Employee leaves the employment of the Company for any reason, Employee will not: 4 a. Engage in any work activity for or in conjunction with any business or entity that is in competition with or is preparing to compete with the Company; b. Persuade or attempt to persuade any potential customer or client to which the Company or any of its affiliates has made a proposal or sale, or with which the Company or any of its affiliates has been having discussions, not to transact business with the Company or such affiliate, or instead to transact business with another person or organization; c. Solicit the business of any customers, financing sources, clients, suppliers, or business patrons of the Company or any of its predecessors or affiliates which were customers, financing sources, clients, suppliers, or business patrons of the Company at any time during Employee's employment by the Company, or within three years prior to the Effective Date of Employee's employment, provided, however, that if Employee becomes employed by or represents a business that exclusively sells products that do not compete with products then marketed or intended to be marketed by the Company, such contact shall be permissible; or d. Solicit, endeavor to entice away from the Company or any of its affiliates, or otherwise interfere with the relationship of the Company or any of its affiliates with, any person who is employed by or otherwise engaged to perform services for the Company or any of its affiliates, whether for Employee's account or for the account of any other person or organization. 10. INJUNCTIVE RELIEF. It is agreed that the restrictions contained in Sections 8, 9 and 10 of this Agreement are reasonable, but it is recognized that damages in the event of the breach of any of those restrictions will be difficult or impossible to ascertain; and, therefore, Employee agrees that, in addition to and without limiting any other right or remedy the Company may have, the Company shall have the right to an injunction against Employee issued by a court of competent jurisdiction enjoining any such breach without showing or proving any actual damage to the Company. This paragraph shall survive the termination of Employee's employment. 11. PART OF CONSIDERATION. Employee also agrees, acknowledges, covenants, represents and warrants that he is fully and completely aware that, and further understands that, the restrictive covenants contained in Sections 8, 9, and 10 of this Agreement are an essential part of the consideration for the Company entering into this Agreement and that the Company is entering into this Agreement in full reliance on these acknowledgments, covenants, representations and warranties. 12. TIME AND TERRITORY REDUCTION. If any of the periods of time and/or territories described in Sections 8, 9 and 10 of this Agreement are held to be in any respect an unreasonable restriction, it is agreed that the court so holding may reduce the territory to which the restriction pertains or the period of time in which it operates or may reduce both such territory and such period, to the minimum extent necessary to render such provision enforceable. 5 13. SURVIVAL. The obligations described in Sections 8 and 10 of this Agreement shall survive any termination of this Agreement or any termination of the employment relationship created hereunder. 14. NONDELEGABILITY OF EMPLOYEE'S RIGHTS AND COMPANY ASSIGNMENT RIGHTS. The obligations, rights and benefits of Employee hereunder are personal and may not be delegated, assigned or transferred in any manner whatsoever, nor are such obligations, rights or benefits subject to involuntary alienation, assignment or transfer. Upon mutual agreement of the parties, the Company upon reasonable notice to Employee may transfer Employee to an affiliate of the Company, which affiliate shall assume the obligations of the Company under this Agreement. This Agreement shall be assigned automatically to any entity merging with or acquiring the Company. 15. AMENDMENT. Except for documents regarding the grant of stock options and an Invention, Confidential Information and Non-Competition Agreement, this Agreement contains, and its terms constitute, the entire agreement of the parties and supersedes any prior agreements, including any Employment Agreements, and it may be amended only by a written document signed by both parties to this Agreement. 16. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Arizona, exclusive of the conflict of law provisions thereof, and the parties agree that any litigation pertaining to this Agreement shall be in courts located in Maricopa County, Arizona. 17. ATTORNEYS' FEES. If any party finds it necessary to employ legal counsel or to bring an action at law or other proceeding against the other party to enforce any of the terms hereof, the party prevailing in any such action or other proceeding shall be paid by the other party its reasonable attorneys' fees as well as court costs all as determined by the court and not a jury. 18. NOTICES. 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 return receipt requested and postage paid, or (iv) on the date of transmission when sent by facsimile with a hard-copy confirmation; if directed to the person or entity to which notice is to be given at her or its address set forth in this Agreement or at any other address such person or entity has designated by notice. 6 To the Company: ORTHOLOGIC CORP. 1275 West Washington Street Tempe, AZ 85281 Attention: Chief Executive Officer To Employee: Donna Lucchesi 14328 E. Thoroughbred Trail Scottsdale, AZ 85259 19. ENTIRE AGREEMENT. This Agreement, the Invention, Confidential Information and Non-Competition Agreement dated February 8, 1999, and documents regarding the grant of stock options constitute the final written expression of all of the agreements between the parties and are a complete and exclusive statement of those terms. They supersede all understandings and negotiations concerning the matters specified herein. Any representations, promises, warranties or statements made by either party that differ in any way from the terms of this written 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 matters herein contained 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. To the extent that there is any conflict between this Agreement and the Invention, Confidential Information and Non-Competition Agreement, the provisions of this Agreement shall govern. 20. WAIVER. The waiver by either party of the breach of any covenant or provision in this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party. 21. INVALIDITY OF ANY PROVISION. The provisions of this Agreement are severable, it being the intention of the parties hereto that should any provisions hereof be invalid or unenforceable, such invalidity or unenforceability of any provision shall not affect the remaining provisions hereof, but the same shall remain in full force and effect as if such invalid or unenforceable provisions were omitted. 22. ATTACHMENTS. All attachments or exhibits 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 attachments, the terms of this Agreement shall prevail. 23. INTERPRETATION OF AGREEMENT. When a reference is made in this Agreement to an article or section, such reference shall be to an article or section of this Agreement unless otherwise indicated. The headings contained in this 7 Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes," or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." 24. HEADINGS. Headings in this Agreement are for informational purposes only and shall not be used to construe the intent of this Agreement. 25. 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. 26. 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. This Agreement has been executed by the parties as the date first written above. ORTHOLOGIC CORP. ("Company") By: ------------------------------------- Thomas R. Trotter President/Chief Executive Officer DONNA LUCCHESI ("Employee") By: ------------------------------------- 8 -----END PRIVACY-ENHANCED MESSAGE-----