-----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, GjPlwBoXlEH4mvrlTPVMTdvp4Rf9twtEhHmFLymC6fw1ekt1QqFc5XQPgmaLu/PN rgWTJ/V0aKggmiX+Jy2LvQ== 0000950147-97-000809.txt : 19971117 0000950147-97-000809.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950147-97-000809 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: 97721255 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 September 30, 1997 ---------------------------------------- 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 (I.R.S. Employer of incorporation or organization) Identification No.) 2850 S. 36th Street, #16, Phoenix, Arizona 85034 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (602) 437-5520 - -------------------------------------------------------------------------------- (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. Yes X 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. 25,192,846 shares of common stock outstanding as of October 31, 1997 ORTHOLOGIC CORP. INDEX Page No. Part I Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets September 30, 1997 and December 31, 1996-------------- 1 Consolidated Statements of Operations Three Months and Nine Months ended September 30, 1997 and 1996---------------------------------------------- 2 Consolidated Statements of Cash Flows Nine Months ended September 30, 1997 and 1996--------- 3 Notes to Consolidated Financial Statements --------------- 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk---------------------------- 10 Part II Other Information Item 1. Legal Proceedings-------------------------------- 11 Item 6. Exhibits and Reports on Form 8-K ---------------- 11 PART I FINANCIAL INFORMATION Item 1. Financial Statements OrthoLogic Corp. Condensed Consolidated Balance Sheets (in thousands) September 30, December 31, 1997 1996 --------- --------- ASSETS (Unaudited) Cash and cash equivalents $ 11,345 $ 13,494 Short-term investments 4,355 35,307 Accounts receivable 29,866 26,856 Inventory 9,659 6,551 Prepaids and other current assets 2,451 1,195 Deferred income taxes 2,678 2,401 --------- --------- Total current assets 60,354 85,804 Furniture, rental fleet and equipment 14,522 11,364 Accumulated depreciation (3,737) (2,282) --------- --------- Furniture and equipment, net 10,785 9,082 Intangibles, net 30,339 17,847 Deposits and other assets 91 93 Note receivable - Officer -- 200 --------- --------- Total Assets $ 101,569 $ 113,026 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Accounts payable $ 1,781 $ 2,042 Loan payable - current portion 500 -- Accrued liabilities 13,270 8,777 --------- --------- Total current liabilities 15,551 10,819 Deferred rent and capital lease obligation 143 280 Loan payable - long term portion 524 -- Obligations under co-promotion agreement 1,000 -- --------- --------- Total liabilities 17,218 11,099 --------- --------- Commitments -- -- Stockholders' Equity Common stock 13 13 Additional paid-in capital 119,061 118,832 Deficit (34,723) (16,918) --------- --------- Total stockholders' equity 84,351 101,927 Total Liabilities and Stockholders' Equity $ 101,569 $ 113,026 ========= ========= See notes to consolidated financial statements. Page 1 OrthoLogic Corp. Consolidated Statements of Operations Unaudited (in thousands, except per share data)
Three months ended September 30, Nine months ended September 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 --------------------------------- --------------------------------- REVENUES Net sales $ 8,220 $ 7,754 $ 27,169 $ 22,425 Net rentals 9,186 2,654 25,856 2,654 Fee Revenue 793 - 793 - --------------------------------- --------------------------------- Total Revenues 18,199 10,408 53,818 25,079 --------------------------------- --------------------------------- COST OF REVENUES Cost of goods sold 2,719 1,315 7,737 3,689 Cost of rentals 1,730 676 6,035 676 --------------------------------- --------------------------------- Total Cost of Revenue 4,449 1,991 13,772 4,365 --------------------------------- --------------------------------- GROSS PROFIT 13,750 8,417 40,046 20,714 OPERATING EXPENSES Selling, general and administrative 14,259 8,507 43,460 18,488 Research and development 632 530 1,821 1,627 Restructuring Charge 13,844 - 13,844 - --------------------------------- --------------------------------- Total Operating Expenses 28,735 9,037 59,125 20,115 --------------------------------- --------------------------------- OPERATING INCOME (LOSS) (14,985) (620) (19,079) 599 OTHER INCOME Grant revenue 9 37 108 131 Interest income 231 1,039 1,182 2,141 --------------------------------- --------------------------------- Total Other Income 240 1,076 1,290 2,272 --------------------------------- --------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (14,745) 456 (17,789) 2,871 Provision for income taxes - - - - --------------------------------- --------------------------------- NET INCOME (LOSS) $ (14,745) $ 456 $ (17,789) $ 2,871 ================================= ================================= NET INCOME (LOSS) PER COMMON AND EQUIVALENT SHARE $ (0.59) $ 0.02 $ (0.71) $ 0.12 ================================= ================================= WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING 25,113 25,801 25,082 23,759 ================================= =================================
See notes to consolidated financial statements. Page 2 OrthoLogic Corp. Consolidated Statements of Cash Flows Unaudited (in thousands)
Nine Months Ended September 30 ------------------------------ 1997 1996 -------- -------- OPERATING ACTIVITIES Net Income (Loss) $(17,789) $ 2,871 Noncash items: Depreciation and amortization 4,551 825 Restructuring charge and other 13,844 -- Other (433) -- Net change in Other Operating items: Accounts receivable 1,905 (6,718) Inventory (604) (2,218) Prepaids and other current assets (1,430) (812) Deposits and other assets 2 5 Accounts payable (1,808) 376 Accrued liabilities (807) 1,082 -------- -------- Cash Flows (used in) Operating Activities (2,569) (4,589) -------- -------- INVESTING ACTIVITIES Purchase of fixed assets (3,434) (829) Cash paid for acquisitions, net of cash acquired (25,327) (24,907) Sales (Purchases) of short term investments 30,952 (27,921) Collection of note receivable 200 125 Intangible from dealer transactions (705) (9,279) -------- -------- Cash Flows provided by (used in) Investing Activities 1,686 (62,811) -------- -------- FINANCING ACTIVITIES Payments on Capital Leases (75) -- Payments on Loan Payable (420) -- Payments under co-promotion agreement (1,000) -- Proceeds from issuance of common stock -- 74,952 Net proceeds from stock option exercises 229 -- -------- -------- Cash Flows (used in) provided by (1,266) 74,952 -------- -------- Financing Activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,149) 7,552 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,494 8,831 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,345 $ 16,383 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 81 $ 0 ======== ======== Income Taxes $ 317 $ 81 ======== ========
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 OrthoLogic Corp. and its subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated. The condensed consolidated balance sheet as of September 30, 1997, the consolidated statements of operations for the three months and nine months ended September 30, 1997 and 1996 and the consolidated statement of cash flows for the nine months ended September 30, 1997 and 1996 are unaudited; however, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the complete fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 1996 Annual Report on Form 10-K. 2. New Accounting Pronouncements ----------------------------- In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", effective for both interim and annual periods ending after December 15, 1997. This statement specifies the computation, presentation and disclosure of earnings per share for entities with publicly held common stock or potential common stock. The Company will provide the required disclosures in its year-end report. The effect on the Company's earnings per share disclosure is not material for the periods presented. The Financial Accounting Standards Board recently issued SFAS No. 130 on "Reporting Comprehensive Income" and SFAS No. 131 on "Disclosures about Segments of an Enterprise and Related Information." The "Reporting Comprehensive Income" standard is effective for fiscal years beginning after December 15, 1997. The standard changes the reporting of certain items currently reported in the stockholders' equity section of the balance sheet. The Company is currently evaluating what impact this standard will have on the Company's financial statements. The "Disclosures about Segments of an Enterprise and Related Information" standard is effective for fiscal years beginning after December 15, 1997. This standard requires that public companies report certain information about operating segments in their financial statements. It also establishes related disclosures about products and services, geographic areas, and major customers. The Company is currently evaluating what impact this standard will have on its disclosures. 3. Preferred Stock Purchase Rights ------------------------------- On February 25, 1997 the Company declared a dividend distribution of one Preferred Stock Purchase Right (the "Rights") for each outstanding share of the Company's common stock, payable March 12, 1997 to holders of record on that date. The Rights will expire on March 11, 2007. Page 4 ORTHOLOGIC CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Each Right will entitle shareholders to buy 1/100 of a share of Series A Preferred Stock at an exercise price of $25.00. Initially, no separate Rights certificates will be distributed; the Rights will trade with the Company's common stock and will not be exercisable until the earlier of 10 business days following the acquisition of 15% or more of the Company's common stock by a person or group or 15 business days following the commencement of a tender offer for 20% or more of the Company's common stock. At the discretion of the Board of Directors of the Company, the Rights can be redeemed at any time prior to the 10th day following the date the Rights become exercisable. If the Rights are not redeemed by the Board, and the Company is acquired, holders of the Rights (other than an "acquiring person") will be entitled to purchase additional shares of common stock of either the Company or the acquiring corporation (whichever survives) at one-half the market price. 4. Acquisitions ------------ 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 million for Toronto and $7.7 million for DMTI. The goodwill is being amortized over 20 years. The Company has substantially completed its restructuring of operations related to these acquisitions and the acquisition of Sutter Corporation (acquired in August 1996). The additional costs incurred related to the restructuring for all acquisitions, totaling $7.1 million, is reflected as additional acquisition costs in the allocation of purchase price. The goodwill is being amortized over the remaining goodwill period of 20 years. Had the Toronto and DMTI acquisitions occurred on January 1, 1996, combined unaudited pro forma results for the nine months ended September 30, 1997 and 1996, would have been: net revenues - $57.1 million and $37.8 million; net (loss) - $(17.8) million and $(114,000); net (loss) per common share - $(0.71) and $(0.00). The pro forma amounts disclosed above include revenue and net income derived from product sales to competing independent dealers of orthopaedic rehabilitation products. Subsequent to the acquisition, the Company discontinued selling products to these dealers. Excluding the dealer product sales, combined unaudited pro forma results for the nine months ended September 30, 1997 and 1996, would have been: net revenues - $55.7 million and $32.7 million; net (loss) - $(18.2) million and $(779,000); net (loss) per common share - $(0.72) and $(0.03). 5. 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 Page 5 ORTHOLOGIC CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 shall pay the Company an amount equal to 50% of the gross compensation paid to the Company, pursuant to the agreement, for the immediately preceding year. Under the terms of the agreement, 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 certain pre-determined amounts and a pro-rata portion of a 10% royalty on combined annual net sales of Hyalgan by Sanofi and the Company in excess of $30.0 million. In addition, the Company is obligated to pay a total of $4.0 million in payments during the first eighteen months of the agreement. During the second quarter, the Company incurred a $1.0 million payment of this amount. The Company has recorded the remaining $3.0 million in its financial statements. The Company's sales force began efforts to promote Hyalgan in the third quarter of 1997. Fee revenue of $793,000 recorded during the quarter represents the Company's estimate of its share of revenue in the quarter under the agreement. The final determination of the Company's fees recognized under this agreement is dependent upon Medicare's ultimate assignment of a billing code and a reimbursement amount. 6. Restructure Charge ------------------ During the third quarter of 1997, the Company restructured its sales, marketing and managed care groups. As a result of this restructuring and a second consecutive quarter of declining sales of the OrthoLogic 1000 bone growth stimulator, the Company determined that certain dealer intangibles acquired in the transition to a direct sales force have been impaired. The Company recorded a restructuring charge of $13.8 million in the third quarter, composed of a $10.0 million write-off of its dealer intangibles and $3.8 million in severance, facility closing and related costs. Page 6 ITEM 2. MANAGEMENTS'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, 1996. Results of Operations OrthoLogic has completed three recent acquisitions which affect the year-to-year comparability of its consolidated financial position and results of operations: the acquisition of Sutter Corporation (Sutter) on August 30, 1996 and the acquisition of certain assets and the assumption of certain liabilities of two other orthopaedic rehabilitation related companies in March 1997. Nine Months Ended September 30, 1997 and September 30, 1996 Revenues OrthoLogic's revenues increased 115% from $25.1 million for the nine months ended September 30, 1996 to $53.8 million for the nine months ended September 30, 1997. The increase in revenue was due primarily to revenues from its orthopaedic rehabilitation products ($34.6 million in 1997 compared to $3.3 million in 1996). The orthopaedic rehabilitation area is engaged primarily in the direct rental of continuous passive motion devices to patients. The Company entered this area upon the acquisition of Sutter Corporation (Sutter) on August 30, 1996 and the assets of Toronto Medical Corp. (Toronto) and Danninger Medical Technology, Inc. (Danninger) in March of 1997. The Company believes that revenues for its orthopaedic rehabilitation products may be seasonal, with the strongest sales occurring in the fourth quarter. Excluding the effects of the Company's acquisitions, revenues from the OrthoLogic 1000 were down 16.5% to $17.5 million for the nine months ended September 30, 1997 from $21.0 million for the comparable period in 1996. The Company does not believe that there is a single factor causing the decline in OrthoLogic 1000 sales. The Company attributes the decline to multiple factors, including the shift from a distribution network to a direct sales force, fewer total salespeople selling the OrthoLogic 1000 in 1997 compared to 1996, and the quality and effectiveness of sales management. During the second quarter of 1997, the Company changed its estimate for allowance for bad debt expense, increasing its allowance by $2.0 million related to Medicare receivables for the OrthoLogic 1000 which are outside Medicare's coverage definition. Prior to the second quarter, Medicare reimbursed for the OrthoLogic 1000 even when physicians prescribed use of the device outside Medicare's own definition of a non-union fracture. Prescriptions of that kind covered by Medicare typically accounted for 7 percent to 9 percent of OrthoLogic 1000 revenue. The Company no longer recognizes Medicare revenue from prescriptions outside the coverage definition. During the third quarter of 1997, the Company began marketing Hyalgan to orthopaedic surgeons in the United States. For the quarter ended September 30, 1997, the Company recognized fee revenue of $793,000 related to these efforts, with an associated approximate $700,000 in SG&A expenses. Page 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Gross Profit Gross profit increased from $20.7 million for the nine months ended September 30, 1996 to $40.0 million for the nine months ended September 30, 1997. The increase in gross profit was due primarily to the increase in gross profit of Sutter ($19.1 million) and the recently acquired operations ($2.8 million) of Toronto and Danninger. Gross profit as a percentage of revenue was 74.4% for the nine months ended September 30, 1997 compared to 82.6% for the comparable period during 1996. The overall gross profit percentage declined as a result of the recently acquired orthopaedic rehabilitation operations which have a lower gross profit percentage than the Company's fracture healing products. Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses for the nine months ended September 30, 1997 were $43.5 million, up $25.0 million from the comparable 1996 period. The 1997 period included the SG&A from the acquisitions, which comprise a significant portion of the Company's SG&A. Additionally, SG&A for the nine months ended September 30, 1997 includes $2.0 million in bad debt expense incurred in the second quarter of 1997 related to Medicare receivables for the OrthoLogic 1000 which are outside Medicare's coverage definition. During late 1996, the fixed component of SG&A increased due to the addition of employees, including salespeople added to support the Company's transition to a direct sales force, and other infrastructure required to support the growing and projected revenue volume. In the third quarter of 1997, the Company substantially completed its consolidation of duplicate facilities and eliminated expenses from redundant operations from within the three businesses that were recently acquired. Research and Development Research and Development (R&D) expenses were $1.8 million for the nine months ended September 30, 1997 compared to $1.6 million for the comparable 1996 period. The increase in R&D expenses was due to the acquisitions, while R&D for the remainder of the Company remained stable. Restructuring Charge The Company restructured and reduced the size of its sales, marketing and managed care groups in the third quarter of 1997 in an effort to gain efficiencies in the management and function of its salespeople. The Company also incurred costs relating to the restructuring of its operations, including consolidation of facilities and reorganization of management. Associated with this restructuring, the Company incurred a charge of $13.8 million, comprised primarily of a $10.0 million write-off of its dealer intangibles which have been impaired and a $3.8 million write-off related to management and sales force severance, facility closing and related costs. Page 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Other Income Other income of $1.3 million for the nine months ended September 30, 1997 consisted of interest income of $1.2 million and grant revenue of $108,000. Other income for the comparable 1996 period consisted of interest income of $2.1 million and grant revenue of $131,000. The decrease in interest income was due to cash used for acquisitions of $25.3 million and to cash used to fund operations. Three Months Ended September 30, 1997 and September 30, 1996 Revenues increased 75% to $18.2 million for the third quarter of fiscal 1997, as compared to $10.4 million for the same period in 1996. Gross profit rose 63% to $13.7 million for the third quarter of fiscal 1997 from $8.4 million for the third quarter of fiscal 1996. During the third quarter, SG&A expenses rose 68% to $14.3 million as compared to $8.5 million for the same period last year. The Company incurred a restructuring charge of $13.8 million in the third quarter of 1997. Other income fell 78% to $240,000 for the third quarter of fiscal 1997 compared to $1.1 million for the third quarter of fiscal 1996. The business factors resulting in these changes and relevant trends affecting the Company's business during the third quarters of 1997 and 1996 are comparable to those described in the preceding discussion for the nine-month period. Liquidity and Capital Resources At September 30, 1997, the Company had cash and investments of $15.7 million compared to $48.8 million at December 31, 1996. Working capital decreased from $75.0 million at December 31, 1996 to $44.8 million at September 30, 1997. The decrease in cash and investments is primarily the result of cash used for acquisitions and related costs of $25.3 million. Other uses of cash included $3.3 million for operating activities, $1.0 million in payments under the Hyalgan co-promotion agreement, and $3.4 million for the purchase of fixed assets, primarily rental assets for the Company's orthopedic rehabilitation division. The change in intangibles from $17.8 million at December 31, 1996 to $30.3 million at September 30, 1997 is primarily due to costs associated with the acquisitions of Toronto and DMTI, cost of the co-promotion agreement with Sanofi and offset by the write-off of dealer intangibles described under Restructuring Change. Accrued liabilities increased from $8.8 million at December 31, 1996 to $13.3 million at September 30, 1997 primarily from the accrual of a $2 million obligation to Sanofi payable in the next 12 months, and the accrual of management and sales force severance, facility closing and related costs from the restructuring charge. Under the terms of the co-promotion agreement with Sanofi, the Company is obligated to pay a total of $4 million in payments during the first eighteen months of the agreement. During the second quarter, the Company paid $1.0 million of the required payment under the co-promotion agreement for the right to market and promote Hyalgan. Because such required payments are paid every six months, no payment was made during the third quarter. Page 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company currently believes that cash generated from product sales and rentals and its available cash resources will be sufficient to meet its current operating requirements and internal development and integration initiatives for the foreseeable future. There can be no assurance, however, that the Company will not require additional financing in the future. If the Company were required to obtain additional financing in the future, there can be no assurance that such sources of capital will be available on terms favorable to the Company, if at all. The Company has signed a lease and will relocate its corporate offices in the fourth quarter of 1997 to a 100,000 square foot office/manufacturing facility in Tempe, Arizona. The terms of the lease are for a ten year period commencing December 1, 1997 with equal monthly rental payments. The Company is accounting for the lease as an operating lease. There are currently no other material definitive commitments for future use of the Company's available cash resources; however, management continually evaluates opportunities to expand its operations, which includes internal development of new products and may include additional acquisitions. 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 of revenue from Hyalgan sales, availability of cash, and projections of results of operations and financial condition, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which 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 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 such forward-looking statements include, but are not limited to: (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) dependence on reimbursement from third parties; (v) other risks detailed in the Company's other filings with the Securities and Exchange Commission; and (vi) the costs and results of pending litigation. Additional factors which might affect such forward-looking statements are discussed in 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, 1996. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Item not applicable. Page 10 PART II - OTHER INFORMATION Item 1. Legal Proceedings See the information under the caption "Item 3 Legal Proceedings" of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 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 1. On March 18, 1997, the Company filed a Current Report on Form 8-K dated March 3, 1997, to report in Item 2, the consummation of its acquisition of all the assets and business and the assumption of substantially all of the liabilities of Toronto Medical Corp., an Ontario corporation, pursuant to a Purchase and Sale Agreement dated as of December 30, 1996. The Form 8-K was amended on May 19, 1997 to include in Item 7 the following financial statements: Unaudited Pro-Forma Consolidated Statements of Income/(Loss) for the three month period ended March 31, 1997 and for the year ended December 31, 1996. Audited Consolidated Balance Sheet at May 31, 1996 and 1995; Consolidated Statements of Income/(Loss) and Consolidated Statements of Cash Flows for the years ended May 31, 1996 and 1995; and independent auditor's report. The Form 8-K was amended again on August 13, 1997 to include in Item 7 the following financial statements: Audited Consolidated Balance Sheet at February 28, 1997; Consolidated Statement of Income, Consolidated Statement of Shareholders' Equity, and Consolidated Statement of Cash Flows for the period June 1, 1996 to February 28, 1997; and independent auditor's report. 2. On August 22, 1997, the Company filed a Current Report on Form 8-K dated August 21, 1997 reporting in Item 5 the press release attached as an exhibit in Item 7 announcing changes in the Company's senior management. 3. On October 10, 1997, the Company filed a Current Report on Form 8-K dated October 10, 1997 reporting in Item 5 the appointment of Thomas R. Trotter as the Company's president and chief executive officer effective October 20, 1997. 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 November 14, 1997 - --------------------- (Principal Executive Officer) Thomas R. Trotter /s/ Allen R. Dunaway Vice-President and Chief Financial Officer November 14, 1997 - -------------------- (Principal Financial and Accounting Officer) Allen R. Dunaway
Page 12 ORTHOLOGIC CORP. EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
Exhibit Incorporated by Filed No. Description Reference to: Herewith - ---------------- --------------------------------------- ---------------------------------------- -------------- 2.1 Stock Purchase Agreement dated August Exhibit 2.1 to the Company's Current 30, 1996 by and among the Company, Report on Form 8-K filed on September Sutter Corporation and Smith 13, 1996 Laboratories, Inc. 2.2 Purchase and Sale Agreement dated as of Exhibit 2.1 to the Company's Current December 30, 1996 by and among the Report on Form 8-K filed on March 18, Company and Toronto Medical Corp., an 1997 ("March 18, 1997 8-K") Ontario corporation 2.3 Amendment to Purchase and Sale Exhibit 2.2 to March 18, 1997 8-K Agreement dated as of January 13, 1997 by and among the Company and Toronto Medical Corp., an Ontario corporation 2.4 Second Amendment to Purchase and Sale Exhibit 2.3 to March 18, 1997 8-K Agreement dated as of March 1, 1997 by and among the Company and Toronto Medical Corp., an Ontario corporation 2.5 Assignment of Purchase and Sale Exhibit 2.4 to March 18, 1997 8-K Agreement dated as of March 1, 1997 by and among the Company, Toronto Medical Orthopaedics Ltd., a Canada corporation and Toronto Medical Corp., an Ontario corporation 2.6 Asset Purchase Agreement dated March Exhibit 2.1 to the Company's Current 12, 1997 by and among the Report on Form 8-K filed on March 27, Company, Danninger Medical 1997 Technology, Inc., a Delaware corporation, and Danninger Healthcare, Inc., an Ohio corporation 3.1 Composite Certificate of Incorporation Exhibit 3.1 to the Company's Quarterly of the Company, as amended, including Report on Form 10-Q filed on May 15, Certificate of Designation in respect 1997 of Series A Preferred Stock 3.2 Bylaws of the Company Exhibit 3.4 to Company's Amendment No. 2 to Registration Statement on Form S-1 (No. 33-47569) filed with the SEC on January 25, 1993 ("January 1993 S-1")
ORTHOLOGIC CORP. EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 (continued)
Exhibit Incorporated by Filed No. Description Reference to: Herewith - ---------------- --------------------------------------- ---------------------------------------- -------------- 4.1 Articles 5, 9 and 11 of Certificate of Exhibit 3.1 above Incorporation of the Company 4.2 Articles II and III.2(c)(ii) of Bylaws Exhibit 3.4 to January 1993 S-1 of the Company 4.3 Specimen Common Stock Certificate Exhibit 4.1 to January 1993 S-1 4.4 1987 Stock Option Plan of the Company, Exhibit 4.4 to the Company's Current as amended and approved by stockholders Report on Form 10-Q filed on August 14, 1997 ("Second Quarter 1997 10-Q") 4.5 1997 Stock Option Plan of the Company Exhibit 4.5 to Second Quarter 1997 10-Q 4.6 Stock Purchase Warrant, dated August Exhibit 4.6 to the Company's Form 10-K 18, 1993, issued to CyberLogic, Inc. for the fiscal year ended December 31, 1994 4.7 Stock Purchase Warrant, dated September Exhibit 4.6 to Company's Registration 20, 1995, issued to Registered Statement on Form S-1 (No. 33-97438) Consulting Group, Inc. filed with the SEC on September 27, 1995 4.8 Stock Purchase Warrant, dated October Exhibit 4.7 to the Company's Form 10-K 15, 1996, issued to Registered for the fiscal year ended December 31, Consulting Group, Inc. 1996 ("1996 10-K") 4.9 Rights Agreement dated as of March 4, Exhibit 4.1 to the Company's 1997 between the Company and Bank of Registration Statement on Form 8-A New York, and Exhibits A, B and C filed with the SEC on March 6, 1997 thereto 10.1 Co-promotion Agreement dated June 23, Exhibit 10.1 to Second Quarter 1997 10-Q 1997 by and between the Company and Sanofi Pharmaceuticals, Inc. 10.2 Single-tenant Lease-net dated June 12, X 1997 by and between the Company and Chamberlain Development, L.L.C. 10.3 Employment Agreement dated October 20, X 1997 by and between the Company and Thomas R. Trotter, including Letter of Incentive Option Grant, OrthoLogic Corp. 1987 Stock Option Plan
ORTHOLOGIC CORP. EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 (continued)
10.4 Employment Agreement dated October 17, X 1997 by and between the Company and Frank P. Magee 10.5 Employment Agreement dated October 17, X 1997 by and between the Company and Allan M. Weinstein 10.6 Severance Agreement dated May 21, 1997 X between the Company and David E. Derminio 10.7 Severance Agreement dated September 19, X 1997 between the Company and Nicholas A. Skaff 11 Statement of Computation of Net Income X (Loss) per Weighted Average Number of Common Shares Outstanding 27 Financial Data Schedule X
EX-10.2 2 SINGLE-TENANT LEAST-NET SINGLE-TENANT LEASE-NET 1. Basic Provisions ("Basic Provisions") 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, June 12, 1997, is made by and between Chamberlain Development, L.L.C., ("Lessor") and Orthologic Corp. ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2 Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and described on the attached Exhibit "A" located in the County of Maricopa, State of Arizona, and generally described as 100,000 square foot office/manufacturing facility ("Premises"). (See Paragraph 2 for further provisions.) 1.3 Term: Ten (10) years and zero (0) months ("Original Term") commencing December 1, 1997 ("Commencement Date") and ending November 30, 2007 ("Expiration Date"). (See Paragraph 3 for further provisions.) 1.4 Early Possession: N/A ("Early Possession Date"). (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 Base Rent: $78,145.00 per month ("Base Rent"), plus applicable transaction privilege taxes, payable on the first day of each month commencing December 1, 1997 (See Paragraph 4 for further provisions.) : If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Base Rent Paid Upon Execution: $78,145.00 as Base Rent for the Period December 1, 1997 to December 31, 1997. 1.7 Security Deposit: $50,000.00 ("Security Deposit"). (See Paragraph 5 for further provisions.) 1.8 Permitted Use: General office and light manufacturing (See Paragraph 6 for further provisions.) 1.9 Insuring Party: Lessee is the "Insuring Party" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 Real Estate Brokers: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): N/A - -------------------------------------------------------------------------------- represents [_] Lessor exclusively ("Lessor's Broker")[_] both Lessor and Lessee, and Kit Tiedemann, CB Commercial - -------------------------------------------------------------------------------- represents [X] Lessee exclusively ("Lessee's Broker")[_] both Lessee and Lessor. (See Paragraph 15 for further provisions.) 1.11 Guarantor. Deleted. 1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of Paragraphs 49 through 63 and Exhibits "A" and "B" all of which constitute a part of this Lease. 2. Premises. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. The parties acknowledge that the improvements to be included in the Premises are to be conveyed by Lessor to the City of Tempe pursuant to the City Agreement described in Paragraph 62 below and leased back by Lessor pursuant to the City Lease described therein, such that for so long as the City Lease is in effect, the Premises include Lessor's leasehold interest in such improvements rather than fee title thereto. Upon request, Lessee will confirm in writing the 1 foregoing for the benefit of Lessor, the City or any other party as reasonably requested by Lessor. After the City Lease has expired or terminated, the Premises will include Lessor's fee interest in the improvements (subject to the Sublease described in Paragraph 62 below). 2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the Premises (including without limitation) existing plumbing, fire sprinkler system, lighting, air conditioning, heating, and loading doors, if any, in the Premises, other than improvements or alterations constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within one (1) year after the Commencement Date, (except for customary Apunch list@ items for which the period shall be thirty (30) days), correction of that non-compliance shall be the obligation of the Lessee at Lessee's sole cost and expense. 2.3 Compliance with Covenants, Restrictions and Building Code. Lessor warrants to Lessee that the Premises comply with all Applicable Law (including without limitation all covenants or restrictions of record and applicable building codes, regulations and ordinances) in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3 (a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within one (1) year following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigations it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 3. Term 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3 3.2 Early possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be prorated for the period of such early possession. All other terms of this Lease, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 Delay In Possession. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date 2 is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. 4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor; provided, however, that the Security Deposit shall apply to rent due after the Commencement Date, shall be applied to the first installment(s) of rent due on or following the Commencement Date prior to any out-of-pocket payment of rent by Lessee and the parties will execute a confirmation of such application, and Lessee will have no further right or claim for refund or return of the Security Deposit so applied. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. Use 6.1 Use. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes 3 damage to, neighboring premises or properties. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom to therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor or for which Lessor's consent is not required hereunder, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and reasonable attorneys' and consultants' fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control except as the same is caused by Lessor's gross negligence or willful misconduct. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of 4 investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 Lessee's Compliance with Law. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Law," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants', relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. Notwithstanding the foregoing, Lessor shall, at its sole cost and expense, fully, diligently and in a timely manner, comply with all Applicable Law as it relates to the specific obligations of Lessor found in Paragraph 7.2 below only. 6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants' in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance; Repairs; Utility Installations; Trade Fixtures and Alterations. (See Paragraph 57 for additional requirements) 7.1 Lessee's Obligations. (a) Subject to the Provisions of Paragraphs 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.), 6.3 (Compliance with Law), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, structural and non-structural (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality 5 of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of, the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. If Lessee occupies the Premises for seven (7) years or more, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 7.2 Lessor's Obligations. Except for the warranties and agreements of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof, except that Lessor shall, at its cost, maintain and repair the structural elements of the foundations, structural walls (excluding any interior or exterior decorative surfaces and utility equipment therein or thereon), structural pillars (excluding any interior or exterior decorative services and utility equipment therein or thereon) and the structural elements of the roof (expressly excluding the roof surface or coating and roof membrane), and expressly excluding any damage done or caused by Lessee or its agents, employees, contractors, licensees or invitees, whether or not the same involves negligence or misconduct. Lessor's obligations under the preceding sentence shall be to perform required maintenance, repair and/or replacements within a reasonable period after Lessor has actual notice of the need therefor. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with the respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of, any needed repairs. 7.3 Utility Installations; Trade Fixtures; Alterations. (a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and 6 fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this Lease as extended does not exceed $25,000. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon; (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. (c) Indemnification. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not Less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 Ownership; Removal; Surrender; and Restoration. (a) Ownership. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become 7 the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) Removal. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (c) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance and Indemnity. (See Paragraph 61 for additional requirements) 8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $5,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $5,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried By Lessor. In the event Lessor is the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above, in addition to, and not lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance-Building, Improvements and Rental Value. (a) Building and Improvements. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lender(s)"), insuring loss or damage to the 8 Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature of age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c). (b) Rental Value. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) Adjacent Premises. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) Tenant's Improvements. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be in companies duly licensed to transact business 9 in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor ("Waiving Party") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 Indemnity. Except for Lessor's negligence, willful misconduct and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving , or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessees business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default of Breach by Lessee in the performance in a timely manner of any obligation of Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Except as caused by Lessor's gross negligence, willful misconduct and/or breach of express warranties (which is not corrected within a reasonable time) and subject to Paragraph 8.6, Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results for conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction. 10 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "Insured Loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Partial Damage-Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either party. 9.3 Partial Damage-Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's 11 expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is a damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("Exercise Period"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of damage described in Paragraph 9.2 (Partial Damage-Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 12 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within sixty (60) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed twelve months. 9.8 Termination - Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. Real Property Taxes. 10.1 (a) Payment of Taxes. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this 13 Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. See Paragraph 58 for additional requirements. (b) Advance Payment. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. 10.2 Definition of "Real Property Taxes". As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, any lease excise tax (including but not limited to any government property lease excise tax due under A.R.S. '42-1901 et seq. because of the City Lease described in Paragraph 62 below and the City's ownership of improvements), and any commercial rental tax, (other than inheritance, personal, income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor or Lessee in the Premises or against Lessee's Alterations, Utility Improvements or Trade Fixtures, and any charge or assessment of any kind whatsoever resulting from the Premises inclusion in any property owners association. 10.3 Joint Assessment. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with the Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b). 11. Utilities. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other 14 utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively "assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more or the voting control of Lessee shall constitute a change in control for this purpose, except to the extent it results from the trading of securities on any national or regional stock exchange. (c) The involvement of Lessee or its assets in any transactions, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of the execution by Lessor of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a noncurable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair market value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction or depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by 15 Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval of disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent subletting and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the current monthly Base Rent, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurrence of a transaction described in Paragraph 12.1(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased to an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the amount required to establish such Security Deposit a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment structure of the rent payable under this Lease be adjusted to what is then the market value and/or adjustment structure for property similar to the Premises as then constituted. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating 16 that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach. A "Default" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where any such failure in this subparagraph continues for a period of three (3) business days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with applicable law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the recision of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than 17 those described in subparagraphs (a), (b) or (c) above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. '101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in the Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. 13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefore. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and 18 damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1 (b), (c) or (d) and under the unlawful detainer statue shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture In Event Of Breach. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions", shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed and observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no future force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a wavier by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee on the first day of each month then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, not prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding 19 Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion, and further provided that such period shall be shortened to the extent reasonably required in the event of a bona fide emergency which, if not addressed more quickly, may result in material injury or damage to persons or property. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "Condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. Deleted ------- 16. Tenancy Statement. 16.1. Each Party (as "Responding Party") shall within ten (10) days from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association , plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desire to finance, refinance, or sell the Premise, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as 20 may be reasonably required by such lender or purchaser and are reasonably available by Lessee, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinafter defined. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of another provision hereof. 19. Interest On Past-Due Obligations. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date of which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that is has made, and is relying solely upon, its owner investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. 23. Notices. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addressees noted adjacent to Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United State Express Mail or overnight courier 21 that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail in the manner expressly provided in this paragraph. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereto by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statement and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. In the event that Lessee holds over in violation of this Paragraph 26 then the Base Rent payable from and after the time of the expiration or earlier termination of this Lease shall be increased to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding such expiration or earlier termination. Nothing contained herein shall be construed as a consent by Lessor to any holding over by Lessee. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties, their personal representatives, successor and assigns and be governed by the Laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. Subject to the non-disturbance provision of Paragraph 30.3, this Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof, and the Ground Lease, Sublease, Declaration, Title Exceptions, Miscellaneous Exceptions, REA, City Agreement and City Lease described in Paragraph 62 below, including any amendments, additions or supplements thereto that are permitted under Paragraph 62 below. Lessee agrees that the lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of 22 Lessor's default with respect to any such obligation, Lessee will give any lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such lender thirty (30) days following receipt of such notice the cure of said default before invoking any remedies Lessee may have by reason thereof. If any lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2. Attornment. Subject to the non-disturbance provision of Paragraph 30.3, Lessee agrees to attorn to a lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 Non-Disturbance; Recognition of Lease by SRP and PPC. With respect to Security Devices other than the Ground Lease and the Sublease (both as defined in Paragraph 62 below), Lessee's subordination of this Lease shall be subject to receiving assurance (a "Non-Disturbance Agreement") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Lessor has obtained and provided to Lessee a Nondisturbance and Recognition Agreement from SRP (as defined in Paragraph 62) dated June 27, 1997 confirming that the Sublease is a "Permitted Sublease" pursuant to the terms of the Ground Lease. Lessor represents and warrants that if the Ground Lease is terminated for any reason, Lessor will promptly take all steps set forth in Section 6.04 of the Ground Lease to protect the Sublease as a Permitted Sublease with SRP, including obtaining the attornment and recognition of SRP with respect to the Sublease, subject to said Section 6.04. Lessor has obtained a Nondisturbance and Recognition Agreement from PPC (as defined in Paragraph 62 below) dated June 27, 1997 confirming that this Lease is a "Permitted Sublease" pursuant to Section 17.2 of the Sublease and containing PPC's agreement not to disturb Lessee's possession subject to Article 16 of the Sublease. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a lender, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as provided herein. 30.5 Provisions Relating to Sublease. With respect to the Sublease, as defined in Paragraph 62 below, and without limiting the generality of the foregoing, the parties expressly agree and acknowledge that (a) this Lease and the rights of Lessee hereunder are subject and subordinate to the Sublease and the rights of the Landlord thereunder; (b) if the Sublease is terminated prior to the expiration of the term thereof, Lessee will attorn to such Landlord and recognize such Landlord as the new Lessor hereunder; (c) in the event the Sublease is terminated and the Landlord under the Sublease is not then receiving rents under this Lease which result in such Landlord realizing the net amount of the annual Minimum Rent then due under the Sublease after considering all expenses of holding, operating and managing the building(s) within the Premises, then notwithstanding any agreement on the part of such Landlord to recognize this Lease, such Landlord shall have the right to terminate this Lease at any time by the giving of 365 days prior notice to Lessee and such Landlord's making a termination payment to Lessee in the amount equal to one year's Base Rent payable under this Lease calculated at the rental rate in effect at the time Landlord's written notice of termination is given. Such termination payment shall be paid by Landlord to Lessee within fifteen (15) days after the date that this Lease is terminated and Lessee and any other occupants of the Premises have vacated the Premises and left it in the condition required under Article 6 of the 23 Sublease. 31. Attorneys' Fees. If any Party brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "Prevailing Party" shall include, without limitation, a Party who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party of its claim or defense. The attorneys fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notice of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. Lessee shall not place any signs upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation of, such advertising signs on the Premises, including the roof, as do not unreasonably interfere with the conduct of Lessee's business. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises, provided; however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be 24 paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. Deleted 38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions, and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. Options. 39.1 Definition. As used in this Paragraph 39 the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 Options Personal to Original Lessee. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary; (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) 25 days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three or more notices of Default under Paragraph 13.1 during any twelve month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Multiple Buildings. If the Premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall survive the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Offer. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustment that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. Multiple Parties. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM 26 AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at Tempe, Arizona Executed at ------------------------- ----------------------------- on July 1, 1997 on ---------------------------------- -------------------------------------- By LESSOR: By LESSEE: CHAMBERLAIN DEVELOPMENT, L.L.C. ORTHOLOGIC CORP., a Delaware corporation By /s/ Jim Chamberlain By: /s/ Allen Dunaway ---------------------------------- ------------------------------------- Name Printed: JIM CHAMBERLAIN Name: ALLEN DUNAWAY ----------------------- ----------------------------------- Title: Member Title: CFO ------------------------------ ---------------------------------- By /s/ Patsy L. Chamberlain By: ---------------------------------- ------------------------------------- Name Printed: PATSY L. CHAMBERLAIN Name Printed: ----------------------- --------------------------- Title: Member Title: ------------------------------ ---------------------------------- Telephone: Telephone: -------------------------- ------------------------------ Facsimile: Facsimile: -------------------------- ------------------------------ 27 ADDENDUM TO STANDARD INDUSTRIAL LEASE/COMMERCIAL SINGLE-TENANT LEASE - NET 49. PREMISES. The Premises shall include the real property described in Exhibit "A" attached hereto, containing approximately 293,056 square feet, together with an industrial building (the "Building) to be erected thereon by Lessor. The Building shall be erected substantially in accordance with the plans and specifications prepared in conformity with the site plan, floor plan and elevations described in Exhibit "B" attached hereto (the "Approved Plans and Specifications") (subject to possible minor deviations therefrom), as they may be modified as hereinafter provided. 50. TERM; OPTION TO EXTEND. The term of this Lease (the "Term") shall be for ten (10) years (plus the partial month at the beginning of the Term if the Term Commencement Date is a day other than the first day of a calendar month), unless this Lease is sooner terminated as hereinafter provided. The Term shall commence on the date the Improvements are deemed completed in accordance with Paragraph 52 (the "Term Commencement Date"). Notwithstanding the foregoing, if Lessee takes possession of or begins to use the Premises or any part thereof prior to the Term Commencement Date (as defined herein), the Term of this Lease shall commence on the date such possession or use begins. Upon the commencement of the Term, Lessor and Lessee shall execute an amendment to this Lease specifying the commencement date and expiration date of the Term. Subject to compliance with the following provisions, if this Lease is in full force and effect as of the end of the scheduled original ten (10) year Term, Lessee shall have one (1) option to extend the Term (the "Option") for a period of five (5) years ("Option Term") upon the terms and provisions set forth in this Lease, except for the adjustment to Base Rent set forth below. The Option may only be exercised by a written, binding notice of exercise ("Notice") given by Lessee to Lessor at least six (6) months prior to the end of the original Term in accordance with Paragraph 23. The Notice shall not be effective or valid if a Breach exists when the notice is given or when the Option Term would otherwise commence, and if this Lease or Lessee's right to possession is terminated after a Notice is given, the Notice and the Option shall be null and void. The Base Rent for the Option Term shall be one hundred fifteen per cent (115%) of the Base Rent in effect as of the end of the original Term. 51. CONSTRUCTION OF THE IMPROVEMENTS. As soon as practicably possible, Lessor shall apply for all building permits and other governmental permits and approvals necessary for the improvements described in the Approved Plans and Specifications (the "Improvements"). Thereafter, Lessor at its sole expense shall proceed diligently with the construction and completion of the Improvements in accordance with the Approved Plans and Specifications and all applicable governmental permits and approvals and all applicable laws, ordinances, regulations and court 28 orders. Lessor shall complete the Improvements and they shall be ready for occupancy by Lessee not later than December 1, 1997, as such date may be extended by Force Majeure. As used in this Lease, the term "Force Majeure" shall mean war, fire, earthquake, flood, unavailability of materials and court orders (provided the court orders do not result from the conduct of the party claiming the delay). Lessor shall notify Lessee in writing of any Force Majeure event within fifteen (15) days after it occurs. Lessor hereby agrees to hold Lessee harmless from and against any liens filed in connection with the Improvements (other than liens caused by Lessee), including without limitation liens filed in connection with any repair or reconstruction of the Premises by Lessor. Lessor shall reimburse Lessee upon demand for any costs and expenses incurred in connection with any such lien, including without limitation attorneys' fees. Lessor shall provide the following allowances to Lessee: (a) $1,875,000 for Tenant Improvements. (b) $110,000 for architectural expenses for Tenant Improvements, for design work of Lessee's Tenant Improvements architect reasonably approved by Lessor. (c) $140,000 for covered parking. (d) $30,000 for an elevator. (e) $10,000 for signage. (f) $75,000 for moving. The work described in Items (a), (c), (d) and (e) will be constructed by Sun State Builders per its contract with Lessor, at cost plus ten per cent (10%), in accordance with plans and specifications approved by Lessor. Lessee will deliver such plans and specifications in sufficient time to not delay construction and if Lessee fails to do so, or makes changes thereto, the provisions of Paragraph 54 below relating to delay will apply thereto. Any cost in excess of the allowance for an item will be paid by Lessee per Paragraph 54 below. If an allowance is not fully utilized, the Base Rent will be reduced using the formula for adjustment set forth in Paragraph 54 below. There is no allowance for art work, as that budgeted amount is being used for improvement of the wash area. Further, provided there is then no Breach or Default in existence under this Lease by Lessee, Lessor agrees to provide an allowance of the lesser of (a) $15.00 per square foot of the Building that is not built out with the initial Tenant Improvements or (b) $375,000 (the "Future Allowance") for future Tenant Improvements of the area of the Building that will not be initially built out (the "Future Tenant Improvements") subject to the following provisions: (i) The Future Allowance must be utilized within three (3) years of the Commencement Date. To accommodate that requirement, Lessee must submit proposed plans and specifications for the Future Tenant Improvements for Landlord's review and approval at least ____ months prior to the third anniversary of the Commencement Date. The Future Tenant Improvements must be generic as reasonably determined by Lessor. (ii) As provided above, Sun State Builders will construct the Future Tenant Improvements at cost plus ten per cent (10%). (iii) The portion of the Future Allowance utilized for the Future Tenant Improvements will be amortized over the New Term of this Lease described in (iv) below with an interest factor of eleven per cent 29 (11%), with such amortizing amount to be included in Base Rent upon the Commencement Date of the New Term. If the Future Tenant Improvements cost more than the Future Allowance, the excess will be paid by Tenant in cash per Paragraph 54. (iv) Upon completion of the Future Tenant Improvements, as defined in Paragraph 52, the parties will execute an amendment to this Lease confirming the date of completion, and the Original Term will be extended to end ten (10) years from such completion date ("New Term"), with Base Rent after such completion date increased under (iii) above. If Lessee interferes with or delays completion, the date for completion shall be advanced by the period of delay, for purposes of the New Term and Base Rent adjustment. (v) No commissions will be paid with respect to the New Term or the increased Base Rent. 52. COMPLETION AND DELIVERY. The Improvements shall be deemed completed when: (a) All work of construction has been substantially completed in accordance with the Approved Plans and Specifications, subject to normal minor so-called "Punch-list Items" (defined below) agreed to after an inspection by Lessor and Lessee; (b) The architect or engineer in charge of construction of the Improvements has prepared, certified by his signature and delivered to Lessor and Lessee a written statement certifying that the Improvements have been completed in accordance with the Approved Plans and Specifications, the working drawings and any properly authorized construction changes, and certifying the date of such completion; and (c) A temporary or permanent certificate of occupancy for the Building has been delivered to Lessee. Notwithstanding the foregoing, if issuance of a certificate of occupancy is delayed by reason of Lessee's work, the Term of this Lease shall commence upon substantial completion of Lessor's work, as provided in subparagraphs (a) and (b) above, and the certificate of occupancy shall be obtained thereafter upon completion of Lessee's work. Lessor shall diligently complete any Punch-List Items as soon as reasonably possible, and within sixty (60) days after the inspection by Lessor and Lessee. "Punch-List Items," as used herein, shall refer to minor, non-structural repairs and/or minor, non-structural replacement of work not installed (i) in a workmanlike manner and/or (ii) in accordance with the Approved Plans and Specifications. "Minor, non-structural repairs and replacements" shall mean repairs and replacements that do not interfere with the occupancy of the Building and Premises or use of the Building and Premises for their intended purposes. If Lessor's work shall not be completed by the scheduled completion date stated above, Lessor shall not be subject to liability for failure to give possession by such date. Failure to complete the work as aforesaid shall not affect the validity of this Lease nor Lessee's obligations hereunder, but the Term of this Lease shall not commence until Lessor has completed such work. 53. LESSEE'S WORK. 30 Lessee, at its own cost and subject to all of the terms of this Lease (other than the obligation to pay the Net Rent and other charges hereunder prior to the commencement of the Term), may perform work in the Building concurrently with Lessor's work, to fit the Building for Lessee's occupancy, provided Lessee's work does not interfere with Lessor's work; Lessee's work may be performed through Lessor's contractor or, if no labor discord would be caused thereby, through Lessee's own contractor. Lessee shall not allow any liens or encumbrances of any kind to be attached to or placed upon the Premises as a result of Lessee's work and in the event such liens or encumbrances are discovered, Lessee agrees to promptly satisfy and remove same. Lessee hereby agrees to hold Lessor harmless from and against any liens caused by Lessee, and Lessee shall reimburse Lessor upon demand for any costs and expenses incurred in connection with any such lien, including without limitation attorneys' fees. 54. LESSEE REQUESTED CONSTRUCTION CHANGES. Lessee may, at any time, by a written request signed by one of Lessee's Change Representatives and delivered or mailed in accordance with this Lease to one of Lessor's Change Representatives at Lessor's address for notices, make any change in the work within the general scope of construction contemplated by the Approved Plans and Specifications, including, but not limited to changes: (a) in the plans, specifications or working drawings, including without limitation the Approved Plans and Specifications; provided, however, that no such request shall result in any major structural change to the Building or change the "footprint" of the Building as depicted in the Approved Plans and Specifications; or (b) in the method or manner of performance of the work. Lessee requested construction changes will be transmitted to Lessor only by means of written requests ("Construction Change Requests") given in accordance with this section. "Lessee's Change Representatives" will be those two (2) persons designated by Lessee to Lessor in writing who will be the only representatives of Lessee authorized to request construction changes. Until such designation is received by Lessor, Lessor may send requests for construction changes to Lessee's address for notices without reference to any Lessee Change Representative, and Lessee may not make any Construction Change Requests. Upon receipt of any Construction Change Request issued pursuant to this section, Lessor shall immediately proceed in accordance with the directions contained in the Requested Construction Change Request. Lessor shall have the right to (i) require Lessee to pay, in addition to any other payments due under this lease, all of the increase in costs caused by the change as such changes are completed or (ii) increase the annual rent payable under this Lease by One Hundred Ten and No/100 Dollars ($110.00) for every One Thousand and No/100 Dollars ($1,000.00) of increases in costs caused by the change; provided, however, that such costs payable by Lessee for the Construction Change Request or as increased rent shall be limited to Lessor's reasonable costs for labor and materials, brokerage commissions, interest and other carrying costs, and sales and excise taxes (excluding any and all overhead and administration costs and any profit margin in excess of ten percent (10%) of such costs) resulting from such Construction Change Request. 31 If Lessee shall have requested a construction change and Lessor elects to increase the annual rent, then within thirty (30) days after the Term Commencement Date, Lessor and Lessee shall execute an amendment to this lease setting forth the rent payable under this Lease, as adjusted pursuant to this Section. Lessee shall not be required to pay Lessor any increases in rent pursuant to this Section until such an amendment has been executed or any arbitration of the increase in rent has been concluded, but Lessee shall thereupon promptly pay any past due rent to Lessor. Except as provided in this Section, no order, statement, or conduct of Lessee's Change Representatives, or of any manager, inspector, engineer, architect, employee representative, or consultant of Lessee, shall be treated as a change order under this Section. The time period specified above for the completion of the Improvements shall be extended by delays caused by Construction Change Requests. Further, at Lessor's option, the Base Rent will commence to be payable at the later of December 1, 1997 or when construction would have been completed under Paragraph 52 above but for the Construction Change Request. 55. LESSOR REQUESTED CONSTRUCTION CHANGES. Lessor may, at any time, by a written request ("Lessor Change Request") signed by one of Lessor's Change Representatives which expressly refers to this paragraph and which is delivered or mailed in accordance with this Lease to Lessee's Change Representatives at Lessee's address for notices, request any reasonable change in the work within the general scope of the construction necessary to comply with law, to obtain required governmental permits or approvals, or to complete the Improvements in accordance with the Approved Plans and Specifications, including changes: a) in the plans, specifications or working drawings, including, without limitation the Approved Plans and Specifications; provided, however, that no such request shall result in any major structural change to the Building or change the "footprint" of the Building as depicted in the Approved Plans and Specifications; and b) in the method or manner of performance of the work or type of materials provided, however that no such change will degrade the quality of the Building and provided, further that no change in materials may be requested unless the change is necessary because of any inability to obtain the material or the new materials is necessary to comply with law or to obtain required governmental permits or approvals. "Lessor's Change Representatives" will be those two (2) persons designated by Lessor to Lessee in writing who will be the only representatives of Lessor authorized to make Lessor Change Requests. Until such designation is received by Lessee, Lessee may send Construction Change Requests to Lessor's address for notices without reference to any Lessor Change Representative, and Lessor may not make any Lessor Change Requests. Lessor Change Requests will be transmitted to Lessee by means of a written request describing in full the requested change, plus the reasons, effects and results of the change as compared to the original and/or existing working drawings or plans pertaining to the requested change. The Lessor Change Request will include drawings, documents, specifications, and all pertinent data relating to the requested change. 32 Upon receipt of any Lessor Change Request, Lessee shall immediately begin analysis of the Lessor Change Request. Lessee will unilaterally have the option to: (a) Accept the Lessor Change Request by issuing a Construction Change Request referencing the specific Lessor Change Request. (b) Enter into fact-finding or negotiations with Lessor pertaining to Lessor Change Request. (c) Reject the Lessor Change Request in writing and require the Lessor to perform the work in accordance with the Approved Plans and Specifications at no delay to Lessee in Building occupancy. Should Lessee not act within ten (10) business days after submittal of any Lessor Change Request, the requested change will be considered to be rejected by Lessee. Under no condition will the Lessor begin work on any Lessor Change Request until after receipt of a fully executed Construction Change Request from Lessee. Except as provided in this Section, no order, statement or conduct of Lessor's Change Representatives or of any manager, inspector, engineer, architect or other employee representative, or consultant of Lessor shall be treated as a change request under this Section. 56. RENTAL ADJUSTMENTS. Notwithstanding anything to the contrary contained in the Lease, the Base Rent commencing with the sixty-first (61st) month of the term of the Lease shall be increased to 115% of the Base Rent in the immediately preceding month. For example, if there are no changes in the Base Rent pursuant to Paragraph 54 or otherwise such that the Base Rent in the 60th month is $78,145.00, the Base Rent for the 61st month shall be increased to: $89,866.00. Applicable transaction privilege taxes will be added to all rental amounts. 57. ADDITIONAL MAINTENANCE REQUIREMENTS. Lessee shall maintain a contract with a fire sprinkler maintenance company that provides quarterly inspections of the fire sprinklers on the Premises. Lessee shall provide a copy of the contract and copies of the quarterly inspection reports to Lessor. Lessee shall maintain a contract with a roof maintenance company that provides for two (2) yearly inspections, the sealing of all roof protrusions, and any necessary repairs, including without limitation caulking or adhesive work. Lessee shall provide copies of the contract and copies of all inspection reports to Lessor. Lessee shall keep all roof drains and scuppers free of debris and shall promptly notify the roof warranty company and/or roof maintenance company of all additional protrusions made by Lessee. 33 58. PROPERTY TAXES. Lessee will receive a bill in October of each year for the year's property taxes to be paid to Lessor in two installments. This bill will include transaction privilege taxes on the property taxes as required by the State and City. Lessor shall have the option to appeal tax valuations each year. In the event the tax appeal service obtains a reduction in the assessor's value as originally published for that year, Lessee shall reimburse Lessor the fee paid to the tax service. If Lessor does not file an appeal for any year Lessee may appeal such taxes thru a tax appeal service reasonably approved by Lessor who shall follow reasonable instructions of Lessor to avoid impairing the long term tax position of the Premises. All costs shall be paid by Lessee and Lessee shall receive all benefits of such appeals applicable to the Term. EXAMPLE: Property tax before appeal: $10,000.00 Property tax after appeal: $9,000.00 --------- Tax savings: $1,000.00 Tax service fee: $350.00 ------- Total tax savings for Lessee: $650.00 59. BROKERS' COMMISSIONS. Section 15 of the Lease is hereby stricken in its entirety. Lessor agrees to pay a brokers' commission to Kit Tiedemann, CB Commercial (the "Broker") for brokerage services in connection with this Lease pursuant to the terms of a separate agreement between Lessor and said Broker and Lessor's indemnity below shall apply thereto. Lessor and Lessee hereby represent and warrant to one another that, except for the Broker named above, neither has dealt with any person in such a manner to give rise to a valid claim for a brokerage commission in connection with this Lease or in connection with the foregoing option to purchase. If any person other than the Broker named above shall assert a claim to a fee, commission or other compensation on account of alleged employment as a broker, finder, or intermediary in connection with this transaction, the party hereto under whom the broker, finder, or intermediary is claiming shall indemnify and hold harmless the other party against and from any such claim and all costs, expenses and liabilities incurred in connection with such claim or any action or proceeding brought thereon (including, but without limitation, counsel and witness fees and court costs in defending against such claim). 60. TAX ABATEMENT. Lessee intends to apply for tax abatement from the City of Tempe under A.R.S. ss.42-1901 et seq. Lessor 34 will reasonably cooperate with Lessee in Lessee applying for and seeking such tax abatement as Lessor's sole obligation with respect thereto. Lessor makes no representations or warranties concerning the availability or effect of tax abatement. 61. LESSOR INDEMNITY. Lessor shall indemnify, protect, defend and hold Lessee, its agent, employees and lenders, if any, harmless from and against any and all damages, liabilities, judgments, costs, liens, expenses, penalties, permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessor or under Lessor's control or existing on the Premises as of the earlier of the date Lessor tenders possession of the Premises to Lessee or the date Lessee begins work under Paragraph 53. Lessor's obligation under this paragraph shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessor and the cost of investigation, (including consultants' and attorneys' fees in testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessee and Lessor shall release Lessor from its obligations under this Lease with respect to Hazardous Substance or storage tanks, unless specifically so agreed by Lessee in writing at the time of such agreement. Lessor's indemnity shall not include consequential damages, including but not limited to damages for injury to reputation, reduction of leasehold value except to the extent of actual loss of use thereof, or future business or similar matters, or punitive damages. Further, Lessor shall have no obligation to take remedial or corrective action unless and to the extent such action is required of Lessor or Lessee under Applicable Laws. 62. PROPERTY DOCUMENTS. The parties agree and acknowledge that Lessor does not own the fee of the Premises. Rather, the fee to the Premises is owned by Salt River Project Agricultural Improvement and Power District, an agricultural improvement district organized under the laws of the State of Arizona (ASRP@) who ground leases the Premises and other property to Papago Park Center, Inc., an Arizona corporation (APapago@), an affiliate of SRP, under and pursuant to that Ground Lease dated March 6, 1989, as periodically amended (the AGround Lease@). In turn, Papago has subleased the Premises to Lessor pursuant to that Ground Sublease dated June 27, 1997 as periodically amended (the ASublease@), which is subordinate to the Ground Lease. Further, the Premises and other property are subject to that Declaration of Covenants, Conditions and Restrictions dated July 18, 1990 and recorded July 27, 1990 as Document No. 90-336258, as periodically amended thereafter and the Design Guidelines as periodically amended (collectively, the ADeclaration@). Lessor has provided a copy of a Commitment for Title Insurance dated March 24, 1997 and prepared by Security Title Agency (the ATitle Report@) to Lessee, disclosing various other title exceptions (collectively the ATitle Exceptions@). During the development of the Premises and/or construction of the Building and/or otherwise during the term of the Lease, Lessor may need to grant or execute other easements, declarations or other restrictions that will encumber the Premises as periodically amended (the AMiscellaneous Exceptions@), including but not limited to that Declaration of Reciprocal Easements and Maintenance Agreement dated June 12, 1997 and recorded August 22, 1997 as Document No. 35 97-0579636 as periodically amended (the AREA@). Lessee approves of the REA and approves of all such other Miscellaneous Exceptions to be created in the future expressly provided the same do not materially and adversely affect Lessee's use of the Premises. The foregoing shall be automatic but within ten (10) days of request, Lessee will acknowledge that it consents to and is bound by any such Miscellaneous Exceptions as provided above. In addition, Lessor has entered or will enter into that Agreement for the Conveyance of Improvements dated July 9, 1997 with the City of Tempe as periodically amended ("City Agreement") pursuant to which Lessor will convey the improvements included in the Premises to the City and receive back a leasehold interest therein pursuant to the Improvements Lease attached to the City Agreement as periodically amended ("City Lease"). Without limiting any other provision of this Lease, Lessee expressly agrees and acknowledges that during the term of the Lease, Lessee shall fully and timely comply with all terms and provisions of Sections 2.05 (Governmental Approvals), 2.09.01 (Compliance with Environmental Laws), 5 (Permitted Uses), 7.01 (Construction Permitted), 7.02 (Payment Bonds), 7.03 (Performance Bonds), 7.04 (Standard of Construction), 7.05 (Mechanics' Liens), 8.01 (Maintenance), 8.02 (Right to Make Alterations), 9.03, second sentence (Removal), 9.04 (Removal of Trade Fixtures and Personal Property), 12 (Insurance), 22.03 (Estoppel Certificates), and 22.05 (Lessor's Right to Enter, Inspect and Test) of the Ground Lease (and any amendments thereto which do not materially and adversely affect Lessee or which are consented to by Lessee under Paragraph 36 above), and Section 4.1 ("Additional Rent" and "Impositions" Defined), Article 5 (Insurance), Section 6.1 (Surrender - Removable Property), Section 6.2 (Waste) Article 8 (Use and Maintenance of Premises), Article 9 (Compliance), Article 10 (Construction of Buildings and Landscaping; Other Improvements), Article 11 (Impairment of Landlord's Title), Article 12 (Inspection), Article 22 (Estoppel Certificates), Article 24 (Adjoining Excavation) and Article 26 (Trade Fixtures, Machinery and Equipment) of the Ground Sublease (and any amendments thereto that do not materially and adversely affect Lessee, as well as any others consented to by Lessee under Paragraph 36)) to the extent they relate to the Premises and the Term (and any other period of Lessee's possession) and expressly subject to and excluding Lessor's construction and other obligations set forth in this Lease. Lessee shall also fully and timely comply with all terms and provisions of the following documents to the extent they apply to Lessee as the party in possession of the Premises (but not to the extent they apply to any property other than the Premises): Declaration (and any amendments thereto as permitted under Section 10.1 of the Sublease, as well as any others consented to by Lessee under Paragraph 36 above), Title Exceptions (and any amendments thereto that do not materially and adversely affect Lessee, as well as any others consented to by Lessee under Paragraph 36), REA (and any amendments thereto that do not materially and adversely affect Lessee, as well as any others consented to by Lessee under Paragraph 36), Miscellaneous Exceptions (and any amendments thereto that do not materially and adversely affect Lessee, as well as any others consented to by Lessee under Paragraph 36), City Agreement (and any amendments thereto approved by Lessee under Paragraph 36) and City Lease (and any amendments thereto approved by Lessee under Paragraph 36) (collectively the obligations of Lessee under the prior sentence and under this sentence are the AObligations@, as if they were set forth in this Lease). The Obligations shall not include any obligations regarding the payment of Base Rent under the Ground Lease or Sublease. Lessee shall indemnify and hold Lessor harmless from and against any and all liability, responsibility, obligations, costs, damages, expenses or attorneys' fees incurred or sustained by Lessor as a result of the failure of Lessee to timely and fully perform the Obligations under this Paragraph 62. 36 Without limiting the generality of the foregoing, Lessee shall pay and be solely responsible for (and the Obligations shall include) all assessments, charges, deposits, dues or other amounts payable with respect to the Premises, and relating to periods occurring within the Term, under the Declaration and the REA, as amended as permitted above. Lessor represents and warrants that it has constructed and covenants that it will construct all improvements which are Lessor's responsibility under this Lease in full compliance with the Obligations, and that the Premises (including such improvements) will be in full compliance with the Obligations upon tender of possession of the Premises to Lessee. Lessor will not agree to or consent to any amendment of the Obligations if and to the extent the same would materially and adversely affect Lessee's use of the Premises or its right under this Lease. Lessor will indemnify and hold Lessee harmless from any and all liability, claims, expenses and attorneys' fees incurred by Lessee if and to the extent the representations and warranties in the prior two sentences are materially incorrect or if Lessor materially fails to perform the covenants set forth therein. 63. SUBORDINATION OF LESSOR'S LIEN ON PERSONAL PROPERTY. At the request of Lessee, Lessor will subordinate its statutory Landlord's lien in Lessee's personal property in the Premises to purchase money financing (including equipment leases) for such specific personal property in an amount not exceeding the actual purchase price (or lease amount) thereof and/or to security for bank or other financial institution lines of credit obtained in the ordinary course of Lessee's business. Such subordination shall utilize a reasonable form of agreement reasonably approved by Lessor. 37 EX-10.3 3 EMPLOYMENT AGREEMENT - THOMAS R. TROTTER EMPLOYMENT AGREEMENT This Agreement is to be effective, as of October 20, 1997, by and between OrthoLogic Corp., a Delaware corporation (the "Company"), and Thomas R. Trotter ("Employee"). RECITALS: - --------- A. The Company wishes to employ Employee, and Employee wishes to be employed by the Company. B. The parties wish to set forth in this Agreement the terms and conditions of such 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 as a member of its Board of Directors (the "Board") 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 Board. Employee's title shall be President/CEO of the Company, with general responsibility for Company operations. Employee will report to the Board. During the term of Employee's employment pursuant to this Agreement, the Company shall use its best efforts to maintain Employee as a member of the Board. 2. Term. The term of this employment pursuant to this Agreement shall begin on the effective date, and shall terminate as provided herein. 3. Compensation. (a) Salary. The Company shall pay Employee a minimum base annual salary, before deducting all applicable withholdings, of $260,000 per year, payable at the times and in the manner dictated by the Company's standard payroll policies. The minimum base annual salary shall be reviewed annually, at the end of the Company's fiscal year, by the Compensation Committee of the Board. (b) Bonus. Employee shall be eligible to participate in an incentive bonus program as developed and adopted, and as revised from time to time, by the Board. Such program shall be based upon the achievement of individual goals by Employee and upon Company performance. Initially, the program shall provide for a target bonus of 50% of Employee's base salary for achievement of a Board-approved plan. Any 1997 bonus will be based on the Company's audited financial statements for all of 1997, but will be prorated as to amount of payment to reflect the actual number of months Employee is employed during the year. Within 90 days of the effective date of this Agreement, the Board and Employee will begin meeting for the purpose of negotiating in good faith the targets and objectives, and a formula, to be used in the bonus program. (c) Stock Options. 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 1987 Stock Option Plan, to purchase 350,000 shares of the Company's common stock, with an exercise price equal to the fair market value of the stock on the effective date of the grant, with such value determined as specified in the Company's 1987 Stock Option Plan. So long as Employee is still employed by the Company at each such time of vesting, options to purchase 87,500 shares shall vest on the first anniversary of Employee's employment by the Company, and additional options to purchase 7,292 shares shall vest on November 30, 1998 and on the last day of each calendar month thereafter, until such shares are fully vested; provided that the 87,500 shares which would ordinarily vest at the end of the first year shall vest immediately upon a termination of Employee without cause, or upon the death of Employee, if such termination or death occurs during the second six months of Employee's employment by the Company. On the first anniversary of Employee's employment by the Company, if Employee is still employed by the Company at such time, the Company shall grant to Employee additional incentive options, from the Company's 1997 Stock Option Plan, to purchase 100,000 shares of the Company's common stock, with an exercise price equal to the fair market value of the stock on such anniversary, with such value determined as specified in the Company's 1997 Stock Option Plan. So long as Employee is still employed by the Company at each such time of vesting, options to purchase 2,084 shares shall vest on November 30, 1998 and on the last day of each calendar month thereafter, until such shares are fully vested. 4. Fringe Benefits. In addition to the options for shares of the Company's common stock granted to Employee as part of this Agreement and any other employee benefit plans (including without limitation pension, savings, medical, dental and disability plans) generally available to employees, Employee shall be eligible for the grant of additional options as determined from time to time by the Board of Directors based upon Employee's performance hereunder. The manner of implementation of such benefits with respect to such items as procedures and amounts are discretionary with the Company but shall be commensurate with Employee's executive capacity. The Company agrees to maintain term life insurance during the term of this Agreement in an amount equal to two times Employee's base salary, as it may be adjusted from time to time, with the beneficiary to be designated by Employee. During 2 Employee's employment, the Company will also provide Employee with an automobile expense allowance of $450 per month. 5. Expenses. (a) Reimbursement. In addition to the compensation and benefits provided above, the Company shall, upon receipt of appropriate documentation, reimburse Employee each month for his reasonable travel, lodging, entertainment, promotion and other ordinary and necessary business expenses consistent with Company policies. (b) Moving. Employee shall be reimbursed for (i) the direct relocation costs of moving his household effects, cars and family from Missouri to the Phoenix Metropolitan Area; (ii) the brokerage commission and closing costs related to the sale of his existing home in Missouri; (iii) closing costs related to his new home in the Phoenix Metropolitan Area; and (iv) $2,500 per month for a period of not to exceed three months to cover temporary living expenses in the Phoenix Metropolitan Area. 6. Termination. (a) For Cause. The Company may terminate Employee's employment 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 gross or willful neglect of duty, willful failure to abide by instructions or policies from or set by the Board of Directors, or conviction of a felony or misdemeanor punishable by at least one year in prison, or pleading guilty or nolo contendere to same. (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, it shall pay to Employee, in a lump sum, one year's minimum base salary, as in effect at the time of termination, less applicable withholdings. Additionally, if the termination occurs during the first year of Employee's employment by the Company, the Company shall pay, in a lump sum, a displacement fee equal to Employee's base salary for the number of months remaining between the date of termination and the first anniversary of Employee's employment by the Company. At the election of Employee, which must be expressed by written notice to the Board within 30 days after the occurrence of an event as described in this sentence, a termination without cause shall also be deemed to occur if Employee's duties or job title are changed materially, if Employee's salary is reduced below $260,000 per year or if Employee's service as a director of the Company is terminated as a result of actions by the Board or the stockholders of the Company. 3 (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 60 consecutive days, or for 90 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 executive 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 executive employees. (e) Resignation. Employee may resign his employment by giving the Company written notice, which shall also include his resignations as an officer and as a director of the Company. 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 (any vested options will remain vested, and will expire as provided in the Company's Stock Option Plan and Employee's Letter of Grant). 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-the 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 4 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. 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 5 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. However, Employee shall be entitled to make a passive investment in a publicly traded stock of a competitor of the Company so long as he does not at any time own more than 5% of the total outstanding stock of such competitor. 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 Employee resigns pursuant to Section 6(e) or Employee's employment is terminated with cause as contemplated by Section 6(a), 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; 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 7, 8, and 9 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, 6 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 7, 8, and 9 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 7, 8, and 9 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 7 and 9 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. 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. 16. 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. 17. 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 7 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. To the Company: ORTHOLOGIC CORP. 2850 South 36th Street, Suite 16 Phoenix, AZ 85034 Attention: Chairman of the Board To Employee: Thomas R. Trotter 2300 North Ballas Road St. Louis, MO 63131 18. Entire Agreement. This Agreement and the Invention, Confidential information and Non-Competition Agreement bearing the same date as this Agreement constitute the final written expression of all of the agreements between the parties (except those relating to Employee's service as a director of the Company), 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 these two written Agreements 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 either of such Agreements 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. 19. 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. 20. 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. 8 21. 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. 22. 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 of October 20, 1997. ORTHOLOGIC CORP. (the "Company") By: /s/ Allan M. Weinstein Allan M. Weinstein Chief Executive Officer THOMAS R. TROTTER By: /s/ Thomas R. Trotter "EMPLOYEE" 9 LETTER OF INCENTIVE OPTION GRANT ORTHOLOGIC CORP. 1987 STOCK OPTION PLAN --------------------------------------- October 20, 1997 Thomas R. Trotter 2300 North Ballas Road St. Louis, MO 63131 RE: OrthoLogic Corp. 1987 Stock Option Plan Dear Mr. Trotter: In order to provide additional incentive to certain selected employees, OrthoLogic Corp. (the "Company") adopted the OrthoLogic 1987 Stock Option Plan (the "Stock Option Plan"). By means of this letter, the Company is offering you incentive stock options pursuant to the Stock Option Plan. The Company's sale of its common shares underlying the option granted to you hereby has been registered with the U.S. Securities and Exchange Commission. A copy of the prospectus, including a copy of the Stock Option Plan (the "Prospectus"), relating to that registration is also enclosed. The option granted to you hereunder shall be subject to all of the terms and conditions of the Stock Option Plan and you should review it carefully. In addition, such option is subject to the following terms and conditions: 1. Grant of Option. The Company hereby grants to you, pursuant to the Stock Option Plan, the option to purchase from the Company upon the terms and conditions and at the times hereinafter set forth, an aggregate of 350,000 shares of the common stock, $.0005 par value, of the Company (the "Shares") at a purchase price of $5.625 per share. The date of grant of this option is October 20, 1997 (hereinafter referred to as the "Option Date"). This Option is an incentive stock option within the meaning of the Internal Revenue Code of 1986, as amended, except if required by applicable tax rules, to the extent that the aggregate fair market value (determined as of the date these options are granted) of Shares exercisable for the first time by you during any calendar year (when aggregated, if appropriate, with shares subject to other incentive stock option grants made under the Stock Option Plan and another plan maintained by the Company or any ISO Group member as defined in the Stock Option Plan) exceeds $100,000 (or such other limit as is prescribed by the Internal Revenue Code, as amended), the option granted hereby as to such excess Shares shall be treated as a nonqualified stock option pursuant to Code Section 422(d). 2. Exercise Term of Option. Unless earlier terminated, Shares may be purchased between the time such shares are vested, as described below, and the date 10 years after the Option Date. Number of Shares Vesting Schedule ---------------- ---------------- 87,500 Shall vest on the first anniversary of your employment with the Company, pursuant to your Employment Agreement which is effective October 20, 1997. 7,292 Shall vest on November 30, 1998 and on the last day of each calendar month thereafter, until such shares are fully vested; Notwithstanding the vesting schedule set forth above, the 87,500 shares which would ordinarily vest at the end of the first year of employment shall vest immediately upon a termination of your employment without cause, as defined in your Employment Agreement, or upon your death, if such termination or death occurs during the second six months of your employment by the Company. 100% of the unvested options then held by you shall automatically become exercisable and vested upon the occurrence, before the expiration or termination of such option, of the acquisition by a third party of 100% of the Company's outstanding equity securities, a merger in which the Company is not the surviving corporation, a sale of all or substantially all of the Company's assets, or a similar reorganization of the Company. 3. Nontransferability. This option shall not be transferable otherwise than by will or by the laws of descent and distribution, and the options shall be exercisable only by (a) you, during your lifetime (except as contemplated by the next clause); or (b) your legal representative or a person who acquired the right to exercise these options by bequest or inheritance, during the one-year period referred to in Section 7(iv) hereof. Any attempted transfer in violation of this restriction shall be void. 4. Other Conditions and Limitations. (a) Any Shares issued upon exercise of the Option shall not be issued unless the issuance and delivery of Shares pursuant thereto shall comply with all relevant provisions of law including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, any applicable state securities or "Blue Sky" law or laws (or an exemption from such provision is available), and the requirements of any stock exchange upon which the 2 Shares may then be listed and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) No transfer of any Shares issued upon the exercise of these option will be permitted by the Company, unless any request for transfer is accompanied by evidence satisfactory to the Company that the proposed transfer will not result in a violation of any applicable law, rule or regulation, whether federal or state, including in the discretion of the Company an opinion of counsel reasonably acceptable to the Company. (c) Inability of the Company to obtain approval from any regulatory body having jurisdictional authority deemed by the Company's counsel to be necessary for the lawful issuance and sale of any Shares hereunder shall relieve the Company of any liability with respect to the nonissuance or sale of such Shares as to which such requisite authority shall not have been obtained. (d) Unless the Shares are subject to a then effective registration statement under the Securities Act of 1933, upon exercise of this option (in whole or in part) and the issuance of the Shares, the Company shall instruct its transfer agent to enter stop transfer orders with respect to Shares, and all certificates representing the Shares shall bear on the face thereof substantially the following legend: "The shares of common stock represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold, offered for sale, assigned, transferred or otherwise disposed of unless registered pursuant to the provisions of that Act or an opinion of counsel to the Company is obtained stating that such disposition is in compliance with an available exemption from such registration." 5. Exercise of Option. You may exercise the option only by giving to the Chairman of the Board of the Company written notice by personal hand delivery, or by registered or certified mail, postage prepaid, with return receipt requested, at the following address, of your exercise of the option including the number of Shares that you intend to acquire, accompanied by the full exercise price therefor: Chairman of the Board OrthoLogic Corp. 2850 South 36th Street Phoenix, Arizona 85034 3 Payment of the option price shall be made either in (i) cash or by check, or (ii) at your request and with the approval of the Company, by delivering shares of the Company's common stock which have been beneficially owned by you for a period of at least six months prior to the time of exercise ("Delivered Stock") or a combination of cash and Delivered Stock. Payment in the form of Delivered Stock shall be in the amount of the fair market value of the stock at the date of exercise, determined pursuant to the Stock Option Plan. In no event will Shares be transferred to you on exercise of the option until the full consideration therefor has been received by the Company. 6. Valuation and Withholding. If required by applicable regulations, the Company shall, at the time of issuance of any Shares purchased pursuant to the Stock Option Plan, provide you with a statement of valuation of the Shares issued. The Company shall be entitled to withhold amounts from your compensation or otherwise to receive an amount adequate to provide for any applicable federal, state and local income taxes (or require you to remit such amount as a condition of issuance). The Company may, in its discretion, satisfy any such withholding requirement, in whole or in part, by withholding form the shares to be issued the number of shares that would satisfy the withholding amount due. 7. Termination of Option. Notwithstanding anything to the contrary, this option can become exercisable only while you are an employee of the Company, and shall not be exercisable after the earliest of (i) the tenth anniversary of the Option Date; (ii) three months after the date your employment with the Company terminates, if such termination is for any reason other than permanent disability, death, or cause; (iii) the date your employment terminates, if such termination is for cause, as defined in your Employment Agreement with the Company dated as of October 20, 1997; or (iv) one year after the date your employment with the Company terminates, if such termination is the result of death or permanent disability. 8. Notice of Disposition of Shares. If you dispose of any Shares acquired on the exercise of this option within either (a) two years after the Option Date or (b) one year after the date of exercise of this option, you must notify the Company within seven days of such disposition. 9. Miscellaneous. You will have no rights as a stockholder with respect to the Shares until the exercise of option and payment of the full purchase price therefor in accordance with the terms of the Stock Option Plan and this Letter of Grant. Nothing herein contained shall impose any obligation on the Company or any parent or subsidiary of the Company. Nothing herein contained shall impose any obligation upon you to exercise this option. While the option granted hereunder is intended to qualify as an incentive stock option under Code Section 422A, the Company cannot assure you that such option will, in fact, qualify as an incentive stock option, and makes no representation as to the tax treatment to you upon receipt or exercise of the option or sale or other disposition of the shares covered by the option. 4 10. Governing Law. This Letter of Grant shall be subject to and construed in accordance with the law of the State of Arizona, except as may be required by the Delaware General Corporation Law or the federal securities laws. Venue for any action arising from or relating to this Agreement shall lie exclusively in Superior Court, Maricopa County, Arizona or the United States District Court for the District of Arizona, Phoenix, Division. 11. Relationship to the Stock Option Plan. The option contained in this Letter of Grant is subject to the terms, conditions and definitions of the Stock Option Plan. To the extent that the terms, conditions and definitions of this Letter of Grant are inconsistent with the terms, conditions and definitions of the Stock Option Plan, the terms, conditions and definitions of the Stock Option Plan shall govern. You acknowledge receipt of a copy of the Stock Option Plan and represent that you are familiar with the terms and provisions thereof. You hereby accept this option subject to all such terms and provisions. You agree to accept as binding, conclusive and final all decisions or interpretations of the Board or any committee appointed by the Board upon any questions arising under the Stock Option Plan. You agree to consult your independent tax advisors with respect to the income tax consequences to you, if any, of participating in the Stock Option Plan and authorize the Company to withhold in accordance with applicable law from any compensation otherwise payable to you any taxes required to be withheld by federal, state or local law as a result of your participation in this Plan. 12. Communication. No notice or other communication under this Letter of Grant shall be effective unless the same is in writing and is personally hand-delivered, or is sent by professional overnight delivery service or mailed by registered or certified mail, postage prepaid and with return receipt requested, addressed to: a) the Company at the address set forth in Section 5 above, or such other address as the Company has designated in writing to you, in accordance with the provisions hereof, or b) you at the address set forth at the beginning of this letter, or such other address as you have designated in writing to the Company, in accordance with the provisions hereof. You should execute the enclosed copy of this Letter of Grant and return it to the Company as soon as possible. The additional copy is for your records. Sincerely yours, /s/ Allan M. Weinstein Allan M. Weinstein Chief Executive Officer ACCEPTED AND AGREED TO: /s/ Thomas R. Trotter Thomas R. Trotter Optionee 5 Date: October 20, 1997 --------------------------- 6 ORTHOLOGIC CORP. NOTICE OF EXERCISE OF STOCK OPTION ISSUED UNDER THE 1987 STOCK OPTION PLAN To: OrthoLogic Corp. 2850 S. 36th St., Suite 16 Phoenix, AZ 85034 Attn: Chairman of the Board I hereby exercise my Option dated October 20, 1987 to purchase _____ shares of $.0005 par value per share common stock of OrthoLogic Corp. (the "Company") at the option exercise price of $______ per share. Enclosed is a certified or cashier's check in the total amount of $_______, or payment in such other form as the Company has specified or as permitted by the option grant letter. If such shares are not registered under the Securities Act of 1933, I represent to you that I am acquiring said shares for investment purposes and not with a view to any distribution thereof and understand that my stock certificate may bear an appropriate legend restricting the transfer of my shares and that a stop-transfer order may be placed with the Company's transfer agent with respect to such shares. I request that my shares be issued in my name as follows: ----------------------------------------------------------------------- (Print your name in the form in which you wish to have the shares registered) ----------------------------------------------------------------------- (Social Security Number) ----------------------------------------------------------------------- (Street and Number) ----------------------------------------------------------------------- (City, State and Zip) Dated: Signature: _______________________ 7 EX-10.4 4 EMPLOYMENT AGREEMENT - FRANK P. MAGEE EMPLOYMENT AGREEMENT This Agreement, which shall be effective as of October 17, 1997, is by and between OrthoLogic Corp., a Delaware corporation (the "Company"), and Frank P. Magee ("Employee"). RECITALS: - --------- A. Employee is presently employed by the Company and both parties wish to continue and redefine the nature of the employment relationship. B. The parties wish to set forth in this Agreement the terms and conditions of such continuing employment. AGREEMENT: - ---------- In consideration of the mutual covenants and agreements set forth herein, the parties agree as follows: 1. Employment. (a) Duties and Title. 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 Board of Directors (the "Board") or Chief Executive Officer (the "CEO"). Initially, Employee's title shall be Executive Vice President. Such title and duties may be changed from time to time by the Board of Directors. Employee will report to the Company's CEO. Unless and until an Election occurs, as defined in the next paragraph, Employee agrees to devote substantially all of this business time and efforts to the business of the Company. (b) At the election of either Employee or the CEO (an "Election"), Employee's title shall be changed to a title mutually acceptable to CEO and Employee and, thereafter, he will be involved in specific projects relating to the Company's technology, clinical or regulatory affairs and/or sales and marketing as may be assigned to him from time to time, by the CEO. After an Election, Employee shall not have set work hours. 2. Term. Unless an Election is made, the term of Employee's employment pursuant to this Agreement shall be for 24 months beginning on October 20, 1997. However, upon an Election as described in Section 1, the term of employment shall be extended to the date 24 months after such Election is made. After the expiration of the term of this Agreement, it may be extended only by mutual written agreement of the parties. 3. Compensation. (a) Salary. During Employee's employment term, the Company shall pay Employee a minimum base annual salary, before deducting all applicable withholdings, of $187,000 per year, payable at the times and in the manner dictated by the Company's standard payroll policies. (b) Bonus. Employee shall be eligible to receive discretionary bonuses based on his accomplishments and success, as determined from time to time by the Board. Any such bonuses shall be based upon the achievement of individual goals and Company performance and shall be granted solely in the discretion of the Board. (c) Stock Options. Employee currently has options to purchase shares of the Company's Common Stock. On October 17, 1997, the Company shall grant to Employee, from the Company's 1987 Stock Option Plan, options to purchase 50,000 shares of the Company's common stock with an exercise price equal to the fair market value of the stock on the effective date of the grant, with such value as determined as specified in the 1987 Stock Option Plan. So long as Employee is still employed by the Company at the time of vesting, 25,000 options from such 50,000-share grant shall vest on December 31, 1997 and 25,000 options from such grant shall vest on January 1, 1998. All unvested options including options from such 50,000-share grant shall vest immediately upon a termination of Employee's employment for any reason. 4. Fringe Benefits. In addition to the compensation, bonus and options 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 but shall be commensurate with Employee's executive capacity. The Company agrees to maintain term life insurance during the term of this Agreement in an amount equal to two times Employee's base salary, as it may be adjusted from time to time, with the beneficiary to be designated by Employee. 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. 5. Expenses. The Company shall, upon receipt of appropriate documentation, reimburse Employee each month for his reasonable travel, lodging, entertainment, promotion and other ordinary and necessary business expenses consistent with Company policies. 6. Termination. (a) 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 2 terminates Employee without cause, so long as Employee continues to comply with the requirements of this Agreement, including Sections 7 and 9, it shall continue to pay to Employee his minimum base salary in effect at the time of termination through the end of the term of the Agreement, as provided in Section 2, at the time and in the manner dictated by the Company's standard payroll policies. (b) 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 Employee's employment by giving notice to Employee. If the Company terminates Employee for disability, so long as Employee continues to comply with the requirements of this Agreement, including Sections 7 and 9, it shall continue to pay to Employee his minimum base salary in effect at the time of termination through the end of the term of the Agreement, as provided in Section 2, at the time and in the manner dictated by the Company's standard payroll policies. (c) 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, at a time and in a manner similar to when it would have been paid to Employee if he had survived, through the end of the term of the Agreement, as provided in Section 2, at the time and in the manner dictated by the Company's standard payroll policies, except for any change in withholding justified by the change in circumstances. 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-the 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 3 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. 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, before an Election is made, Employee will devote substantially all of Employee's business time and effort to the Company. Throughout the period of employment, he will also 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 4 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. However, Employee shall be entitled to make a passive investment in a publicly traded stock of a competitor of the Company so long as he does not at any time own more than 5% of the total outstanding stock of such competitor. 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, after the termination of Employee's employment and so long as he is receiving any payments from the Company pursuant to Section 6, 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; 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 7, 8, and 9 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, 5 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 7, 8, and 9 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 7, 8, and 9 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 7 and 9 of this Agreement shall survive any termination of this Agreement or any termination of the employment relationship created hereunder. 14. Indemnification. The Company will provide indemnification to Employee in accordance with the current Certificate and Bylaws of the Company. These obligations shall survive the termination of Employee's employment. 15. Testimony. If Employee has knowledge of or is alleged to have knowledge of any matters which are the subject of any pending, threatened or future litigation involving the Company (or any subsidiary), he will make himself available to testify if and as necessary. Employee will also make himself available to the attorneys representing the Company in connection with any such litigation or dispute for such purposes as they may deem necessary or appropriate, including but not limited to the review of documents, discussion of the case and preparation for any legal proceedings. This Agreement is not intended to and shall not be construed so as to in any way limit or affect the testimony which Employee gives in any such proceedings. Further, it is understood and agreed that Employee will at all times testify fully, truthfully and accurately, whether in deposition, hearing, trial or otherwise. 16. 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. 6 This Agreement shall be assigned automatically to any entity merging with or acquiring the Company. 17. 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. 18. 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. 19. 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. 20. 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. To the Company: ORTHOLOGIC CORP. 2850 South 36th Street, Suite 16 Phoenix, AZ 85034 Attention: Chief Executive Officer To Employee: Frank P. Magee 602 Woodriver Drive Ketchum, ID 83340 21. Entire Agreement. This Agreement, and the Invention, Confidential information and Non-Competition Agreement previously executed by Employee constitute the final written expression of all of the agreements between the parties (except those relating to Employee's service as a director of the Company), 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 7 from the terms of these two written Agreements 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 either of such Agreements 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. 22. 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. 23. 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. 24. 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. 25. 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." 26. Headings. Headings in this Agreement are for informational purposes only and shall not be used to construe the intent of this Agreement. 27. 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. 28. 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. 8 This Agreement has been executed by the parties as of October 20, 1997. ORTHOLOGIC CORP. ("Company") By: /s/ John M. Holliman, III Chairman of Board FRANK P. MAGEE ("Employee") By: /s/ Frank P. Magee 9 EX-10.5 5 EMPLOYMENT AGREEMENT - ALLAN M. WEINSTEIN EMPLOYMENT AGREEMENT This Agreement, which shall be effective as of October 17, 1997, is by and between OrthoLogic Corp., a Delaware corporation (the "Company"), and Allan M. Weinstein ("Employee"). RECITALS: - --------- A. Employee is presently employed by the Company and both parties wish to continue and redefine the nature of the employment relationship. B. The parties wish to set forth in this Agreement the terms and conditions of such continuing 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 Board of Directors (the "Board"). Initially, Employee's title shall be Board Member, with responsibility for strategic product alliances and acquisitions. Such title and duties may be changed from time to time by the Board or the Company's Chief Executive Officer (the "CEO"). Employee will report to the Company's CEO. Employee shall not have set work hours, and while various projects may require more or less time within any given month, it is contemplated that he will commit to working on Company matters for up to five days per month. Until October 19, 1999, the Company shall use its best efforts to maintain Employee as a member of the Board. Employee understands that from and after October 20, 1997, the Company will not provide him with an office, but will provide reasonable secretarial and other staff support and will provide ancillary office equipment such as a fax machine, dictating equipment and a computer. 2. Term. The term of Employee's employment pursuant to this Agreement shall be for two years beginning on October 20, 1997 and ending on October 19, 1999. 3. Compensation. (a) Salary. During the term of employment, the Company shall pay Employee a minimum base annual salary, before deducting all applicable withholdings, of $218,000 per year, payable at the times and in the manner dictated by the Company's standard payroll policies. (b) Bonus. Employee shall be eligible to receive discretionary bonuses based on his accomplishments and success, as determined from time to time by the CEO and Board. Any such bonuses shall be based upon the achievement of individual goals and Company performance and shall be granted solely in the discretion of the Board. (c) Stock Options. Employee currently has options to purchase shares of the Company's Common Stock. On October 17, 1997, the Company shall grant to Employee, from the Company's 1987 Stock Option Plan, options to purchase 25,000 shares of the Company's common stock, with an exercise price equal to the fair market value of the stock on the effective date of the grant, with such value determined as specified in the 1987 Stock Option Plan. So long as Employee is still employed by the Company at each such time of vesting, options to purchase 1,042 shares shall vest on November 19, 1997 and on the 19th day of each calendar month thereafter, until such shares are fully vested; provided that all options from such 25,000-option grant and all other unvested options shall vest immediately upon a termination of Employee's employment for any reason. 4. Fringe Benefits. In addition to the compensation, bonus and options as 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 but shall be commensurate with Employee's executive capacity. The Company agrees to maintain term life insurance during the term of this Agreement in an amount equal to two times Employee's base salary, as it may be adjusted from time to time, with the beneficiary to be designated by Employee. 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. 5. Expenses and Automobile. The Company shall, upon receipt of appropriate documentation, reimburse Employee each month for his reasonable travel, lodging, entertainment, promotion and other ordinary and necessary business expenses consistent with Company policies. Employee shall also be entitled to an automobile allowance of $450 per month while he is an Employee. 6. Termination. (a) 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, so long as Employee continues to comply with the requirements of this Agreement, including Sections 7 and 9, it shall continue to pay to Employee his minimum base salary in effect at the time of termination through October 19, 1999, at the time and in the manner dictated by the Company's standard payroll policies. 2 (b) 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 Employee's employment by giving notice to Employee. If the Company terminates Employee for disability, so long as Employee continues to comply with the requirements of this Agreement, including Sections 7 and 9, it shall continue to pay to Employee his minimum base salary in effect at the time of termination through October 19, 1999, at the time and in the manner dictated by the Company's standard payroll policies. (c) 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 until October 19, 1999, at a time and in a manner similar to when it would have been paid to Employee if he had survived, except for any change in withholding justified by the change in circumstances. 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-the 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 3 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. 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 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. However, Employee shall be entitled to make a passive investment in a publicly traded stock of a competitor of the Company so long as he does not at any time own more than 5% of the total outstanding stock of such competitor. 9. Non-competition; Non-solicitation. The parties acknowledge that Employee will acquire much knowledge and information concerning the business of the Company and its 4 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, between the termination of his Employment for any reason, and October 20, 1999, 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; 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 7, 8, and 9 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 7, 8, and 9 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. 5 12. Time and Territory Reduction. If any of the periods of time and/or territories described in Sections 7, 8, and 9 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 7 and 9 of this Agreement shall survive any termination of this Agreement or any termination of the employment relationship created hereunder. 14. Indemnification. The Company will provide indemnification to Employee in accordance with the current Certificate and Bylaws of the Company. These obligations shall survive the termination of Employee's employment. 15. Testimony. If Employee has knowledge of or is alleged to have knowledge of any matters which are the subject of any pending, threatened or future litigation involving the Company (or any subsidiary), he will make himself available to testify if and as necessary. Employee will also make himself available to the attorneys representing the Company in connection with any such litigation or dispute for such purposes as they may deem necessary or appropriate, including but not limited to the review of documents, discussion of the case and preparation for any legal proceedings. This Agreement is not intended to and shall not be construed so as to in any way limit or affect the testimony which Employee gives in any such proceedings. Further, it is understood and agreed that Employee will at all times testify fully, truthfully and accurately, whether in deposition, hearing, trial or otherwise. 16. 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. 17. 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. 18. 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. 6 19. 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. 20. 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. To the Company: ORTHOLOGIC CORP. 2850 South 36th Street, Suite 16 Phoenix, AZ 85034 Attention: Chief Executive Officer To Employee: Allan M. Weinstein 3177 E. Sierra Vista Drive Phoenix, AZ 85016 21. Entire Agreement. This Agreement and the Invention, Confidential information and Non-Competition Agreement previously executed by Employee constitute the final written expression of all of the agreements between the parties (except those relating to Employee's service as a director of the Company), 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 these two written Agreements 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 either of such Agreements 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. 22. 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. 23. 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 7 provisions hereof, but the same shall remain in full force and effect as if such invalid or unenforceable provisions were omitted. 24. 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. 25. 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." 26. Headings. Headings in this Agreement are for informational purposes only and shall not be used to construe the intent of this Agreement. 27. 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. 28. 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 of October 20, 1997. ORTHOLOGIC CORP. ("Company") By: /s/ John M. Holliman, III Chairman of Board ALLAN M. WEINSTEIN ("Employee") By: /s/ Allan M. Weinstein 8 EX-10.6 6 SEVERANCE AGREEMENT - DAVID E. DERMINIO SEVERANCE AGREEMENT This Severance Agreement, which shall be effective as of May 21, 1997 is by and between David E. Derminio ("Derminio") and OrthoLogic Corp., a Delaware corporation, ("OrthoLogic"). RECITALS A. Derminio is currently employed as a Vice President of OrthoLogic. B. The parties mutually desire to provide for an orderly termination of Derminio's employment by OrthoLogic, all on terms satisfactory to both Derminio and OrthoLogic, as further set forth in this Agreement. AGREEMENTS In Consideration of the acts, payments, covenants and mutual agreements contained herein, OrthoLogic and Derminio agree as follows: 1. Modification of Current Relationship. Effective as of May 21, 1997 (the "Date of Termination"), Derminio shall resign as a Vice President of OrthoLogic. From and after the Date of Termination, Derminio shall have no further rights or duties as an employee or officer for or on behalf of OrthoLogic. Derminio acknowledges that OrthoLogic has no obligation to recall or reemploy Derminio in the future. Derminio acknowledges that OrthoLogic was not obligated to provide all consideration described in this Agreement and that a portion of such consideration constitutes an additional benefit that is being provided to Derminio in exchange for and in consideration for his promises, covenants and releases contained in this Agreement. 2. Severance Payment. OrthoLogic agrees to pay to Derminio an amount equal to 12 months base salary, over a 12-month period beginning May 21, 1997, at the times and in the amounts that are presently paid to Derminio in accordance with the normal payroll procedures of OrthoLogic. 3. Additional Benefits. So long as Derminio continues to comply with all requirements of this Agreement, and provided Derminio does not cancel this Agreement as provided in Paragraph 6, Derminio shall also be entitled to the benefits described in Paragraphs 3.1 through 3.6. 3.1 If Derminio elects continued coverage under COBRA, OrthoLogic agrees to pay an amount equal to Derminio's current medical insurance premiums for medical benefits, after the Date of Termination, until the earlier to occur of 12 months following the Date of Termination or the time when other coverage becomes available to Derminio in connection with other employment. 3.2 OrthoLogic agrees to pay up to $10,000 for out-placement counseling and assistance provided by a mutually acceptable out-placement firm; provided that such payment will only be available if such service is engaged within 90 days of the Date of Termination. 3.3 OrthoLogic will provide a single lump-sum payment in the gross amount of $18,953.57 in lieu of club dues (which had previously been paid monthly). 3.4 OrthoLogic will provide a mutually acceptable letter of reference. 3.5 OrthoLogic will accelerate the vesting of options to acquire a total of 10,000 shares of OrthoLogic's common stock, which would not otherwise vest, so that such options will be exercisable on the Date of Termination. 3.6 OrthoLogic will extend the time in which Derminio can exercise all options that have vested as of the Date of Termination until November 30, 1997. 4. Car Phone Payments. OrthoLogic will only pay Derminio charges for the mobile telephone in his automobile through May 31, 1997. 5. Release and Covenant Not to Sue. Except as provided in this Agreement, Derminio hereby releases, acquits and forever discharges OrthoLogic, its subsidiaries, affiliates, directors, officers, employees and agents of and from any and all actions, claims, damages, expenses or costs of whatever nature arising out of Derminio's employment and the termination of such relationship, including, but not limited to, any rights or claims to any vacation, sick leave, severance, medical, dental or any other benefits under the Company's internal policies, under any federal, state or local statute or regulation, or under common law. By way of example only and without limiting the immediately preceding paragraph, this release is applicable to any cause of action, right, claim or liability under Title VII of the 1964 Civil Rights Act, Section 1981 of the 1866 Civil Rights Act, the Equal Pay Act of 1963, the Americans with Disabilities Act, the Arizona Civil Rights Act, the Age Discrimination in Employment Act of 1967, all as amended, and any other equal employment opportunity law or statute, or of wrongful discharge, breach of implied or express contract, breach of the covenant of good faith and fair dealing, intentional or negligent infliction of emotional distress, defamation and any other claim in contract or tort. Derminio further covenants and agrees not to join in or commence any action, suit or proceeding, in law or in equity, or before any administrative agency, or to incite, encourage, or participate in any such action, suit or proceedings, against OrthoLogic, its subsidiaries, affiliates, directors, officers, employees or agents in any way pertaining to or arising out of the termination 2 of his employment by or service as an employee, consultant, officer or director of OrthoLogic, or any subsidiary of OrthoLogic. Derminio acknowledges that the consideration afforded him under this Agreement is in full and complete satisfaction of any claims Derminio may have, or may have had, arising out of or relating to the Employment Agreement, his employment with OrthoLogic (or any subsidiary) or the termination thereof. 6. Time Period for Considering or Canceling this Agreement. Derminio acknowledges that OrthoLogic has encouraged him to consult with an attorney of his choice with respect to this Agreement. Derminio further acknowledges that he has been offered a period of time of at least 21 days to consider whether to sign this Agreement, and OrthoLogic agrees that Derminio may cancel this Agreement at any time during the seven days following the date on which this Agreement has been signed by him. In order to cancel or revoke this Agreement, Derminio must deliver to OrthoLogic 2850 South 36th Street, Suite 16, Phoenix, Arizona 85034, Attention: Chief Executive Officer, written notice stating that Derminio is canceling or revoking this Agreement. If this Agreement is canceled or revoked by Derminio within such time period, none of the provisions of this Agreement shall be effective or enforceable and OrthoLogic shall not be obligated to make the payments described in this Agreement except as may be required by any other agreement. 7. Confidentiality of Agreement. Derminio agrees to maintain in confidence the terms and existence of this Agreement and the discussions that led to its creation and execution, with the exception that Derminio may disclose such matters to any attorney who is providing advice to Derminio, to any accountant or federal or state tax agency for purposes of complying with any tax laws, or as otherwise required by law. Further, Derminio acknowledges that any duties of confidentiality imposed upon Derminio by agreement or by law, including without limitation those imposed by Paragraphs 7 and 9 of this Agreement, shall survive the termination of Derminio's employment. 8. Reliance. Derminio warrants and represents that (i) he has relied on his own judgment regarding the consideration for and language of this Agreement; that (ii) OrthoLogic has not in any way coerced or unduly influenced him to execute this Agreement; and (iii) that this Agreement is written in a manner that is understandable to him and he has read and understood all paragraphs of this Agreement. 9. Confidential Information. Derminio acknowledges that, during his employment by OrthoLogic, Derminio has received and also contributed to the production of, Confidential Information. For purposes of this Agreement, Derminio agrees that "Confidential Information" shall mean information or material proprietary to OrthoLogic or designated as Confidential Information by OrthoLogic and not generally known by non-OrthoLogic personnel, which Derminio developed or to which Derminio obtained knowledge or access through or as a result 3 of Derminio's relationship with OrthoLogic (including information conceived, originated, discovered or developed in whole or in part by Derminio). Derminio further agrees: 9.1 To furnish OrthoLogic on demand, a complete list of the names and addresses of all present, former and potential customers and other contacts gained while an employee of OrthoLogic, whether or not in the possession or within the knowledge of OrthoLogic. 9.2 That all notes, memoranda, documentation and records in any way incorporating or reflecting any Confidential Information shall belong exclusively to OrthoLogic, and Derminio agrees promptly to turn over all copies of such materials in Derminio's control to OrthoLogic. 9.3 That Derminio 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 Derminio's work for OrthoLogic. 9.4 That any ideas in whole or in part conceived of or made by Derminio during the term of his employment or relationship with OrthoLogic which were made through the use of any of the Confidential Information of OrthoLogic or any of OrthoLogic's equipment, facilities, trade secrets or time, or which result from any work performed by Derminio for OrthoLogic, belong exclusively to OrthoLogic and shall be deemed a part of the Confidential Information for purposes of this Agreement. Derminio hereby assigns and agrees to assign to OrthoLogic all rights in and to such Confidential Information whether for purposes of obtaining patent or copyright protection or otherwise. Derminio shall acknowledge and deliver to OrthoLogic, without charge to OrthoLogic (but at its expense) such written instruments and do such other acts, including giving testimony in support of Derminio's authorship or inventorship, as the case may be, necessary in the opinion of OrthoLogic to obtain patents or copyrights or to otherwise protect or vest in Derminio the entire right and title in and to the Confidential Information. 10. Non-Compete After Employment Term. The parties acknowledge that Derminio has acquired much knowledge and information concerning the business of OrthoLogic and its affiliates as the result of Derminio's employment. The parties further acknowledge that the scope of business in which OrthoLogic 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. Competition by Derminio in that business would severely injure OrthoLogic. Accordingly, until one year after the Date of Termination, Derminio will not: 4 10.1 Within any jurisdiction or marketing area in which OrthoLogic or any of its affiliates is doing business or is qualified to do business, directly or indirectly own, manage, operate, control, be employed by or participate in the ownership, management, operation or control of, or be connected in any manner with, any business of the type and character engaged in and competitive with that conducted by OrthoLogic or any of its affiliates. For these purposes, ownership of securities of not in excess of 1% of any class of securities of a public company shall not be considered to be competition with OrthoLogic or any of its affiliates; 10.2 Persuade or attempt to persuade any potential customer or client to which OrthoLogic or any of its affiliates has made a proposal or sale, or with which OrthoLogic or any of its affiliates has been having discussions, not to transact business with OrthoLogic or such affiliate, or instead to transact business with another person or organization; 10.3 Solicit the business of any company which is a customer or client of OrthoLogic or any of its affiliates at any time during Derminio's employment by the OrthoLogic, provided, however, if Derminio 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 OrthoLogic, such contact shall be permissible; or 10.4 Solicit, endeavor to entice away from OrthoLogic or any of its affiliates, or otherwise interfere with the relationship of OrthoLogic or any of its affiliates with, any person who is employed by or otherwise engaged to perform services for OrthoLogic or any of its affiliates, whether for Derminio's account or for the account of any other person or organization. 11. Common Law of Torts or Trade Secrets. Nothing in this Agreement shall be construed to limit or negate the common law of torts or trade secrets where such common law provides OrthoLogic with broader protection than the protection provided by this Agreement. 12. Nature of the Agreement. This Agreement and all provisions hereof, including all representations and promises contained herein, are contractual and not a mere recital and shall continue in permanent force and effect. This Agreement and all attachments constitute the sole and entire agreement of the parties with respect to the subject matter hereof, superseding all prior agreements and understandings between the parties, and there are no agreements of any nature whatsoever between the parties hereto except as expressly stated herein. This Agreement may not be modified or changed except by means of a written instrument signed by both parties. If any portion of this Agreement is found to be unenforceable for any reason whatsoever, the unenforceable provision shall be considered to be severable, and the remainder of the Agreement 5 shall continue to be in full force and effect. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Arizona. 13. No Admission of Liability. Nothing contained in this Agreement shall be construed in any manner as an admission by OrthoLogic or Derminio that he or it has violated any statute, law or regulation, or breached any contract or agreement. 14. Remedies. Any and all remedies set forth herein are intended to be nonexclusive and either party may, in addition to such remedies, seek any additional remedies available either in law or in equity in the event of default or breach by the other party. 15. Injunctive Relief. Derminio agrees that it would be difficult to measure the damage to OrthoLogic from any breach by Derminio of the covenants set forth herein, that injury to OrthoLogic from any such breach would be impossible to calculate, and that money damages would therefore be an inadequate remedy for any such breach. Accordingly, Derminio agrees that if Derminio should breach any term of this Agreement, OrthoLogic shall be entitled, in addition to and without limitation of all other remedies it may have, to offset payments to Derminio required by this Agreement and/or to injunctions or other appropriate orders to restrain any such breach without showing or proving any actual damage to OrthoLogic. This paragraph shall survive termination of Derminio's employment. 16. Indemnification. OrthoLogic will provide indemnification to Derminio in accordance with the current Certificate and Bylaws of OrthoLogic. These obligations shall survive the termination of Derminio's employment. 17. Testimony. If Derminio has knowledge of or is alleged to have knowledge of any matters which are the subject of any pending, threatened or future litigation involving OrthoLogic (or any subsidiary), he will make himself available to testify if and as necessary. Derminio will also make himself available to the attorneys representing OrthoLogic in connection with any such litigation or dispute for such purposes as they may deem necessary or appropriate, including but not limited to the review of documents, discussion of the case and preparation for any legal proceedings. This Agreement is not intended to and shall not be construed so as to in any way limit or affect the testimony which Derminio gives in any such proceedings. Further, it is understood and agreed that Derminio will at all times testify fully, truthfully and accurately, whether in deposition, hearing, trial or otherwise. 18. Publicity. Derminio agrees that he will not, without the prior consent of OrthoLogic, either (i) make any announcements or public statements regarding this Agreement or the termination of his employment; or (ii) mention or discuss this Agreement or the termination of his employment to or with any past or present employee or consultant of OrthoLogic, or any other person whatsoever. The parties understand that a form of press release acceptable to OrthoLogic was issued on or about May 21, 1997. 6 19. No Disparagement. Derminio agrees that as part of the consideration for this Agreement, he will not make disparaging or derogatory remarks, whether oral or written, about OrthoLogic or about its subsidiaries, affiliates, officers, directors, employees or agents. OrthoLogic agrees that it will not make any disparaging or derogatory remarks, whether oral or written, about Derminio and agrees to instruct its officers to behave in the same manner. Dated this ___ day of May, 1997. /s/ David E. Derminio DAVID E. DERMINIO ORTHOLOGIC CORP. By: /s/ Allan M. Weinstein Allan M. Weinstein, Ph.D. Its: Chairman and CEO 7 EX-10.7 7 SEVERANCE AGREEMENT - NICHOLAS A. SKAFF SEVERANCE AGREEMENT This Severance Agreement, which shall be effective as of September 19, 1997 is by and between Nicholas A. Skaff ("Skaff") and OrthoLogic Corp., a Delaware corporation, ("OrthoLogic"). RECITALS A. Skaff is currently employed as a Vice President of OrthoLogic. B. The parties mutually desire to provide for an orderly termination of Skaff's employment by OrthoLogic, all on terms satisfactory to both Skaff and OrthoLogic, as further set forth in this Agreement. AGREEMENTS In Consideration of the acts, payments, covenants and mutual agreements contained herein, OrthoLogic and Skaff agree as follows: 1. Modification of Current Relationship. Effective as of September 19, 1997 (the "Date of Termination"), Skaff shall resign as a Vice President of OrthoLogic. From and after the Date of Termination, Skaff shall have no further rights or duties as an employee or officer for or on behalf of OrthoLogic. Skaff acknowledges that OrthoLogic has no obligation to recall or reemploy Skaff in the future. Skaff acknowledges that OrthoLogic was not obligated to provide the consideration described in this Agreement and that such consideration constitutes a benefit that is being provided to Skaff in exchange for and in consideration for his promises, covenants and releases contained in this Agreement. 2. Severance Payment. So long as Skaff continues to comply with all requirements of this Agreement, and provided Skaff does not cancel this Agreement as provided in Paragraph 6, Skaff shall also be entitled to the benefits described in Paragraphs 2 and 3. OrthoLogic agrees to pay to Skaff an amount equal to 12 months base salary ($135,000 less applicable withholdings), over a 12-month period beginning September 19, 1997, at the times and in the amounts that are presently paid to Skaff in accordance with the normal payroll procedures of OrthoLogic. 3. Additional Benefits. OrthoLogic agrees to pay Skaff's standard premium for health benefits through September 30, 1997 and acknowledges that he is entitled to be paid for two weeks of accrued vacation. OrthoLogic will continue to pay the employer portion of Skaff's COBRA premiums for medical and dental coverage through December 31, 1997. OrthoLogic hereby transfers ownership to Skaff of the used Zaurus 5800 used by him in connection with his employment. OrthoLogic agrees to pay $9,400 for expenses incurred by Skaff in seeking new employment, $7,500 of which may be paid to an out-placement firm designated by Skaff, and the balance of which shall be reimbursed to Skaff upon proper documentation of such expenses. OrthoLogic shall extend the date on which Skaff's vested options expire until March 31, 1998; and Skaff agrees to consult with his own advisors concerning the tax effect of such extension and any exercise of such options and sale of the underlying stock. 4. Release and Covenant Not to Sue. Except as provided in this Agreement, Skaff hereby releases, acquits and forever discharges OrthoLogic, and its subsidiaries, affiliates, directors, officers, employees and agents of and from any and all actions, claims, damages, expenses or costs of whatever nature arising out of Skaff's employment and the termination of such relationship, including, but not limited to, any rights or claims to any vacation, sick leave, severance, medical, dental or any other benefits under the Company's internal policies, under any federal, state or local statute or regulation, or under common law. Except as provided in this Agreement, OrthoLogic hereby releases, acquits and forever discharges Skaff and his heirs and successors from any and all actions, claims, damages, expenses or costs of whatever nature arising out of Skaff's employment and the termination of such relationship. By way of example only and without limiting the immediately preceding paragraph, this release is applicable to any 2 cause of action, right, claim or liability under Title VII of the 1964 Civil Rights Act, Section 1981 of the 1866 Civil Rights Act, the Equal Pay Act of 1963, the Americans with Disabilities Act, the Arizona Civil Rights Act, the Age Discrimination in Employment Act of 1967, all as amended, and any other equal employment opportunity law or statute, or of wrongful discharge, breach of implied or express contract, breach of the covenant of good faith and fair dealing, intentional or negligent infliction of emotional distress, defamation and any other claim in contract or tort. Skaff further covenants and agrees not to join in or commence any action, suit or proceeding, in law or in equity, or before any administrative agency, or to incite, encourage, or participate in any such action, suit or proceedings, against OrthoLogic, its subsidiaries, affiliates, directors, officers, employees or agents in any way pertaining to or arising out of the termination of his employment by or service as an employee, consultant, officer or director of OrthoLogic, or any subsidiary of OrthoLogic. Skaff acknowledges that the consideration afforded him under this Agreement is in full and complete satisfaction of any claims Skaff may have, or may have had, arising out of or relating to the Employment Agreement, his employment with OrthoLogic (or any subsidiary) or the termination thereof. 5. Time Period for Considering or Canceling this Agreement. Skaff acknowledges that OrthoLogic has encouraged him to consult with an attorney of his choice with respect to this Agreement. Skaff further acknowledges that he has been offered a period of time of at least 21 days to consider whether to sign this Agreement, and OrthoLogic agrees that Skaff may cancel this Agreement at any time during the seven days following the date on which this Agreement has been signed by him. In order to cancel or revoke this Agreement, Skaff must deliver to OrthoLogic 2850 South 36th Street, Suite 16, Phoenix, Arizona 85034, Attention: Chief Executive Officer, written notice stating that Skaff is canceling or revoking this Agreement. If this Agreement is canceled or 3 revoked by Skaff within such time period, none of the provisions of this Agreement shall be effective or enforceable and OrthoLogic shall not be obligated to make the payments described in this Agreement. 6. Confidentiality of Agreement. Skaff agrees to maintain in confidence the terms and existence of this Agreement and the discussions that led to its creation and execution, with the exception that Skaff may disclose such matters to any attorney who is providing advice to Skaff, to any accountant or federal or state tax agency for purposes of complying with any tax laws, or as otherwise required by law or by an order of a court of competent jurisdiction. OrthoLogic agrees to maintain in confidence the terms and existence of this Agreement and the discussions that led to its creation and execution, with the exception that OrthoLogic may disclose such matters to any attorney who is providing advice to OrthoLogic, to any accountant or federal or state tax agency for purposes of complying with any tax laws, or as otherwise required by law or by an order of a court of competent jurisdiction. Further, the parties acknowledge that any duties of confidentiality imposed by agreement or by law, including without limitation those imposed by Paragraphs 6, 7 and 9 of this Agreement, shall survive the termination of Skaff's employment. 7. Reliance. Skaff warrants and represents that (i) he has relied on his own judgment regarding the consideration for and language of this Agreement; that (ii) OrthoLogic has not in any way coerced or unduly influenced him to execute this Agreement; and (iii) that this Agreement is written in a manner that is understandable to him and he has read and understood all paragraphs of this Agreement. 8. Confidential Information. Skaff acknowledges that, during his employment by OrthoLogic, Skaff has received and also contributed to the production of, Confidential Information. For purposes of this Agreement, Skaff agrees that "Confidential Information" shall mean information or material proprietary to 4 OrthoLogic or designated as Confidential Information by OrthoLogic and not generally known by non-OrthoLogic personnel, which Skaff developed or of or to which Skaff obtained knowledge or access through or as a result of Skaff's relationship with OrthoLogic (including information conceived, originated, discovered or developed in whole or in part by Skaff). Skaff further agrees: 8.1 To furnish OrthoLogic on demand, a complete list of the names and addresses of all present, former and potential customers and other contacts gained while an employee of OrthoLogic, whether or not in the possession or within the knowledge of OrthoLogic. 8.2 That all notes, memoranda, documentation and records in any way incorporating or reflecting any Confidential Information shall belong exclusively to OrthoLogic, and Skaff agrees promptly to turn over all copies of such materials in Skaff's control to OrthoLogic. 8.3 That Skaff 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 Skaff's work for OrthoLogic. 8.4 That any ideas in whole or in part conceived of or made by Skaff during the term of his employment or relationship with OrthoLogic which were made through the use of any of the Confidential Information of OrthoLogic or any of OrthoLogic's equipment, facilities, trade secrets or time, or which result from any work performed by Skaff for OrthoLogic, belong exclusively to OrthoLogic and shall be deemed a part of the Confidential Information for purposes of this Agreement. Skaff hereby assigns and agrees to assign to OrthoLogic all rights in 5 and to such Confidential Information whether for purposes of obtaining patent or copyright protection or otherwise. Skaff shall acknowledge and deliver to OrthoLogic, without charge to OrthoLogic (but at its expense) such written instruments and do such other acts, including giving testimony in support of Skaff's authorship or inventorship, as the case may be, necessary in the opinion of OrthoLogic to obtain patents or copyrights or to otherwise protect or vest in Skaff the entire right and title in and to the Confidential Information. 9. Non-Compete After Employment Term. The parties acknowledge that Skaff has acquired much knowledge and information concerning the business of OrthoLogic and its affiliates as the result of Skaff's employment. The parties further acknowledge that the scope of business in which OrthoLogic 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. Competition by Skaff in that business would severely injure OrthoLogic. Accordingly, until one year after the Date of Termination, Skaff will not: 9.1 Within any jurisdiction or marketing area in which OrthoLogic or any of its affiliates is doing business or is qualified to do business, directly or indirectly own, manage, operate, control, be employed by or participate in the ownership, management, operation or control of, or be connected in any manner with, any business of the type and character engaged in and competitive with that conducted by OrthoLogic or any of its affiliates in areas of or related to bone-growth stimulation, external fixation of bones, continuous passive motion devices, or Hyalgen or any similar product. For these purposes, ownership of securities of not in excess of 5% of any class of securities of a public company shall not be considered to be competition with OrthoLogic or any of its affiliates; 6 9.2 Persuade or attempt to persuade any potential customer or client to which OrthoLogic or any of its affiliates has made a proposal or sale, or with which OrthoLogic or any of its affiliates has been having discussions, not to transact business with OrthoLogic or such affiliate, or instead to transact business with another person or organization; 9.3 Solicit the business of any company which is a customer or client of OrthoLogic or any of its affiliates at any time during Skaff's employment by the OrthoLogic, provided, however, if Skaff 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 OrthoLogic, such contact shall be permissible; or 9.4 Solicit, endeavor to entice away from OrthoLogic or any of its affiliates, or otherwise interfere with the relationship of OrthoLogic or any of its affiliates with, any person who is employed by or otherwise engaged to perform services for OrthoLogic or any of its affiliates, whether for Skaff's account or for the account of any other person or organization. 10. Common Law of Torts or Trade Secrets. Nothing in this Agreement shall be construed to limit or negate the common law of torts or trade secrets where such common law provides OrthoLogic with broader protection than the protection provided by this Agreement. 11. Nature of the Agreement. This Agreement and all provisions hereof, including all representations and promises contained herein, are contractual and not a mere recital and shall continue in permanent force and effect. This Agreement and all attachments constitute the sole and entire agreement of the parties 7 with respect to the subject matter hereof, superseding all prior agreements and understandings between the parties, and there are no agreements of any nature whatsoever between the parties hereto except as expressly stated herein. This Agreement may not be modified or changed except by means of a written instrument signed by both parties. If any portion of this Agreement is found to be unenforceable for any reason whatsoever, the unenforceable provision shall be considered to be severable, and the remainder of the Agreement shall continue to be in full force and effect. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Arizona. 12. No Admission of Liability. Nothing contained in this Agreement shall be construed in any manner as an admission by OrthoLogic or Skaff that he or it has violated any statute, law or regulation, or breached any contract or agreement. 13. Remedies. Any and all remedies set forth herein are intended to be nonexclusive and either party may, in addition to such remedies, seek any additional remedies available either in law or in equity in the event of default or breach by the other party. 14. Injunctive Relief. Skaff agrees that it would be difficult to measure the damage to OrthoLogic from any breach by Skaff of the covenants set forth herein, that injury to OrthoLogic from any such breach would be impossible to calculate, and that money damages would therefore be an inadequate remedy for any such breach. Accordingly, Skaff agrees that if Skaff should breach any term of this Agreement, OrthoLogic shall be entitled, in addition to and without limitation of all other remedies it may have, to offset payments to Skaff required by this Agreement and/or to injunctions or other appropriate orders to restrain any such breach without showing or proving any actual damage to OrthoLogic. This paragraph shall survive termination of Skaff's employment. 15. Indemnification. OrthoLogic will provide indemnification 8 to Skaff in accordance with the Certificate and Bylaws of OrthoLogic in effect as of the date of this Agreement. These obligations shall survive the termination of Skaff's employment. 16. Testimony. If Skaff has knowledge of or is alleged to have knowledge of any matters which are the subject of any pending, threatened or future litigation or proceedings involving OrthoLogic (or any subsidiary), he will make himself available to testify if and as necessary. Skaff will also make himself available to the attorneys representing OrthoLogic in connection with any such litigation, dispute or proceedings for such purposes as they may deem necessary or appropriate, including but not limited to the review of documents, discussion of the case and preparation for any legal proceedings. This Agreement is not intended to and shall not be construed so as to in any way limit or affect the testimony which Skaff gives in any such proceedings. Further, it is understood and agreed that Skaff will at all times testify fully, truthfully and accurately, whether in deposition, hearing, trial or otherwise. To the extent not prohibited by conflicts between the interests of Skaff and OrthoLogic, OrthoLogic will make its attorneys available to advise Skaff in connection with any such proceedings. If there is a conflict, at the sole discretion of OrthoLogic, OrthoLogic will pay for separate counsel selected by Skaff. 17. No Disparagement. Skaff agrees that as part of the consideration for this Agreement, he will not make disparaging or derogatory remarks, whether oral or written, about OrthoLogic or about its subsidiaries, affiliates, officers, directors, employees or agents. OrthoLogic agrees that it will not make any disparaging or derogatory remarks, whether oral or written, about Skaff and agrees to instruct its officers to behave in the same manner. 9 Dated this 31st day of October, 1997. /s/ Nicholas A. Skaff NICHOLAS A. SKAFF ORTHOLOGIC CORP. By: /s/ MaryAnn G. Miller MaryAnn G. Miller Its: Vice President, Human Resources 10 EX-11 8 STATEMENT OF COMPUTATION Exhibit 11 ORTHOLOGIC CORP. STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (in thousands, except per share data)
Three months ended September 30, Nine months ended September 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 ----------------- -------------- ---------------- -------------- Net income (loss) $ (14,745) $ 456 $ (17,789) $ 2,871 ================= ============== ================ ============== Common shares outstanding at end of period 25,144 25,022 25,144 25,022 Adjustment to reflect weighted average for shares issued during the period (31) (3) (62) (2,335) Adjustment to reflect assumed exercise of outstanding stock options - 782 - 1,072 ----------------- -------------- ---------------- -------------- Weighted average number of common shares outstanding 25,113 25,801 25,082 23,759 ================= ============== ================ ============== Net income (loss) per weighted average number of common shares outstanding $ (0.59) $ 0.02 $ (0.71) $ 0.12 ================= ============== ================ ==============
EX-27 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from financial statements in OrthoLogic Corp.'s Form 10-Q for the quarterly period ended September 30, 1997 and is qualified in its entirety by reference to such Form 10-Q. 1,000 U.S. DOLLARS 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 11,345 4,355 40,295 (10,429) 9,659 66,354 14,522 (3,737) 101,569 15,551 0 0 0 13 84,338 101,569 27,169 53,818 7,737 13,772 51,465 7,579 81 (17,789) 0 (17,789) 0 0 0 (17,789) (0.71) (0.71)
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