-----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, E0OBUU45blX15hT9e/0QHTf+pHJB58goSLjFJI2a5SiN7SCDz7ndaZ6e9SHUYCbc obfzEk1jX3+O6PrIg6HyBw== 0000950147-98-000240.txt : 19980401 0000950147-98-000240.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950147-98-000240 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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-K SEC ACT: SEC FILE NUMBER: 000-21214 FILM NUMBER: 98580105 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-K 1 ANNUAL REPORT U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _________________ Commission file number: 0-21214 ORTHOLOGIC CORP. (Exact name of registrant as specified in its charter) Delaware 86-0585310 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1275 West Washington Street, Tempe, Arizona 85281 (Address of principal executive offices) Issuer's telephone number: (602) 286-5520 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.0005 per share (Title of Class) Rights to purchase 1/100 of a share of Series A Preferred Stock (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the closing bid price of the registrant's Common Stock as reported on the Nasdaq National Market on March 1, 1998 was approximately $153,066,000. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive. The number of outstanding shares of the registrant's Common Stock on March 1, 1998 was 25,274,290. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1997 are incorporated by reference in Part II hereof and portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 15, 1998 are incorporated by reference in Part III hereof. ORTHOLOGIC CORP. FORM 10-K ANNUAL REPORT YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS
PART I Item 1. Business....................................................................................... 1 Item 2. Properties..................................................................................... 11 Item 3. Legal Proceedings.............................................................................. 11 Item 4. Submission of Matters to a Vote of Security Holders............................................ 13 Executive Officers of the Registrant........................................................... 13 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................... 15 Item 6. Selected Financial Data........................................................................ 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................................ 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................................21 Item 8. Financial Statements and Supplementary Data.................................................... 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................................ 21 PART III Item 10. Directors and Executive Officers of the Registrant............................................. 22 Item 11. Executive Compensation......................................................................... 22 Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 22 Item 13. Certain Relationships and Related Transactions................................................. 22 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 22 SIGNATURES..................................................................................................S-1
PART I ------ Item 1. Business General The Company was incorporated as a Delaware corporation in July 1987 as IatroMed, Inc. and changed its name to OrthoLogic Corp. in July 1991. Unless the context otherwise requires, the "Company" or "OrthoLogic" as used herein refers to OrthoLogic Corp. and its subsidiaries. The Company's executive offices are located at 1275 West Washington Street, Tempe, Arizona 85281, and its telephone number is (602) 286-5520. OrthoLogic develops, manufactures and markets proprietary, technologically advanced orthopaedic products and packaged services for the orthopaedic health care market including bone growth stimulation devices, continuous passive motion ("CPM") devices and ancillary orthopaedic recovery products. OrthoLogic's products are designed to enhance the healing of diseased, damaged, degenerated or recently repaired musculoskeletal tissue. The Company's products focus on improving the clinical outcomes and cost-effectiveness of orthopaedic procedures that are characterized by compromised healing, high-cost, potential for complication and long recuperation time. The Company extended its product line in August 1996 with its acquisition of Sutter Corporation ("Sutter"), a manufacturer and marketer of CPM devices, and enhanced its offering of CPM devices in March 1997 through the acquisition of the CPM assets of Toronto Medical Corp. ("TMC") and of Danninger Medical Technology, Inc. ("DMTI"). The Company also offers ancillary orthopaedic products such as bracing and cryotherapy through its CarePlan, a product and service concept that enables CPM sales representatives to offer surgeons a range of ancillary orthopaedic products. In June 1997, the Company further extended its product line by entering into a co-promotion agreement (the "Co-Promotion Agreement") with Sanofi Pharmaceuticals, Inc. The Co-Promotion Agreement allows the Company to market Hyalgan (sodium hyaluronate) to orthopedic surgeons in the United States for the relief of pain from osteoarthritis of the knee. The Company commenced marketing of Hyalgan in July 1997. OrthoLogic periodically discusses with third parties the possible acquisition of technology, product lines and businesses in the orthopaedic health care market and from time to time enters into letters of intent that provide OrthoLogic with an exclusivity period during which it considers possible acquisitions. Products and Other Product Development OrthoLogic's product line includes bone growth stimulation and fracture fixation devices, CPM devices and related products and Hyalgan. The Company's product line is sold primarily through the Company's direct sales force. OrthoLogic(R) 1000. The OrthoLogic 1000 is a portable, noninvasive physician prescribed magnetic field bone growth stimulator designed for home treatment of patients who have a non-healing fracture. The OrthoLogic 1000 comprises two magnetic field treatment transducers (coils) and a microprocessor-controlled signal generator that delivers highly specific, low energy combined static and alternating magnetic fields. In 1989, the Company received U.S. Food and Drug Administration ("FDA") clearance of an Investigational Device Exemption ("IDE") to conduct a clinical trial of the OrthoLogic 1000 for the treatment of patients with a specific variety of non-healing fracture, called a nonunion fracture, of certain long bones. A nonunion fracture was defined for the purposes of this study as a fracture that remains unhealed for at least nine months post-injury. The patients enrolled in the Company's clinical trial had very severe nonunion fractures; the average fracture remained non-healing for 2.4 years post-injury and had an average of 2.5 unsuccessful surgical procedures performed prior to enrollment. Based on the data submitted to the FDA in the Company's Pre-Market Approval ("PMA") application, 60.7% of these non-healing fractures healed. In March 1994, the FDA granted the Company PMA approval to market this product for treatment of nonunion fractures. As a condition of the March 1994 PMA approval for the OrthoLogic 1000, the FDA required the Company to maintain a registry of all patients using the device. Based on an initial review of the approximately 400 patients who had nonunion fractures (as defined above) and then completed treatment at the time the Company submitted registry data in July 1996, approximately 72% of the patients have healed. In 1990, the Company received supplemental IDE clearance to conduct human clinical trials of the OrthoLogic 1000 on patients with another type of non-healing fracture called a delayed union fracture. For purposes of this study, a delayed union fracture was defined as a non-healing fracture five to nine months post-injury. This clinical trial was designed as a double-blind, placebo-controlled, randomized study. An analysis of the data was completed by the Company in September 1995, and this analysis indicated the benefit of the OrthoLogic 1000 in the treatment of delayed union fractures. However, the Company believes that a larger number of patients is necessary to establish statistical significance. Although the data on the active OrthoLogic 1000 units showed a positive effect, the healing rate in the placebo group was greater than originally anticipated. The Company has combined the existing data from the study with delayed union data collected in the Company's Post Marketing Clinical Registry. This combined data has been analyzed and submitted to the FDA to support the Company's request to expand the non-union definition to include patients five months post-injury. There can be no assurance that this data will result in regulatory approval. In July 1997, the Company received a PMA supplement from the FDA for a single-coil model of the OrthoLogic 1000. The single-coil device, the OL-1000 SC, will utilize the same magnetic fields as the OrthoLogic 1000 but should be more comfortable for patients with fractures of some long bones, such as the upper femur or the scaphoid. The Company plans to release the product in the first quarter of 1998. Continuous Passive Motion. CPM devices provide controlled, continuous movement to joints and limbs without requiring the patient to exert muscular effort and are intended to be applied immediately following orthopaedic trauma or surgery. The products are designed to reduce swelling, increase joint range of motion, reduce the length of hospital stay and reduce the incidence of post-trauma and post-surgical complication. The primary use of CPM devices occurs in the hospital and home environments, but they are also utilized in skilled nursing facilities, sports medicine and rehabilitation centers. The Company has several flagship CPM devices. The Legasus and Litelift knee CPMs, are designed with a patented anterior plate system to facilitate true full knee extension. The Legasus device is used primarily in the home while the LiteLift is specifically designed for the hospital environment. The WaveFlex C*F*T hand CPM is the only CPM device that moves each finger through an individual arc of motion and creates a full composite fist. The PS-1 pronation- supination forearm CPM, with its patented torque-isolating technology, drives pronation and supination at the distal forearm, and the model 600 shoulder unit has exclusive pause, warm-up, and compliance timer features that differentiate it from other shoulder CPM devices. Ancillary Orthopaedic Products. The Company offers a complete line of bracing, electrotherapy, cryotherapy and dynamic splinting products. The bracing line incudes post-operative, custom and pre-sized functional and osteoarthritis models. Post-operative braces are used in the early phases of post-surgical rehabilitation while functional braces are applied as the patient returns to work or sports activities. The electrotherapy line consists of TENS, NMES, high volt pulsed current, interferential, and biofeedback units. Cryotherapy is used to cool the operative or injured site in order to prevent pain and swelling. OrthoLogic produces its own motorized cryotherapy device, the Blue Artic, which provides temperature-controlled cold therapy using a reservoir of ice water and a pump that circulates the water through a pad over the injury/surgical site. Hyalgan. The Company began marketing Hyalgan during July 1997 under the Co-Promotion Agreement. Hyalgan is used for relief of pain from osteoarthritis of the knee for those patients who have failed to respond adequately to conservative non-pharmacological therapy and to simple analgesics, such as acetaminophen. Orthopeadic surgeons administer Hyalgan in their offices, with each patient receiving five injections over a period of four weeks. Hyalgan is a preparation of highly purified sodium hyaluronate, a chemical found in the body and present in high amounts in joints and synovial fluid. The body's own hyaluronate plays a number of key roles in normal joint function, and in osteoarthritis, the quality and quantity of hyaluronate in the joint fluid and tissues may be deficient. OrthoFrame(R); OrthoNail(TM). OrthoFrame products are external fixation devices constructed of non-metallic carbon fiber-epoxy composite material. The OrthoFrame offers a versatile design which can be utilized for immobilization of a wide array of fracture types, including tibia, femur, ankle, elbow and pelvic fractures. The OrthoFrame/Mayo Wrist Fixator is a specialized device developed in cooperation with the Orthopaedic Department of the Mayo Clinic, Rochester, Minnesota, for the treatment of complex wrist (Colles) fractures. The Orthopaedic Department of the Mayo Clinic has agreed to provide ongoing clinical input on future design enhancements for the OrthoFrame/Mayo Wrist Fixator. Both products utilize non-metallic carbon fiber-epoxy materials to reduce device weight and are radiolucent (i.e., eliminate the blocking of x-rays caused by metallic devices). The Company believes that the patented fracture alignment mechanism of the OrthoFrame products allows for simpler application, and the radiolucency and light weight composite materials of the OrthoFrame products provide benefits to both surgeon and patient. OrthoFrame products are shipped pre-assembled in sterile packaging to increase ease-of-use for the surgeon 2 and to reduce handling and inventory expenses for the hospital. The OrthoNail is an internal fixation device used to treat fractures of the humerus and tibia. The Company received 510(k) marketing clearance from the FDA in September 1995 and commenced selling the product for humerus fractures in December 1995. In March 1996, the Company received 510(k) marketing clearance from the FDA for the version of the OrthoNail to be used in connection with fractures of the tibia. The Company does not actively market the OrthoNail. SpinaLogic(R) 1000. The SpinaLogic 1000 is a portable, noninvasive magnetic field bone growth stimulator being developed to enhance the healing process as either an adjunct to spinal fusion surgery or as treatment for a failed spinal fusion surgery. The Company believes that the SpinaLogic 1000 offers benefits similar to those of the OrthoLogic 1000 in that it is relatively easy to use, requires a small power supply and requires only 30 minutes of treatment per day. The SpinaLogic 1000 consists of one magnetic field treatment transducer and a microprocessor-controlled signal generator, both of which are positioned near the spine through use of an adjustable belt which the patient places around the torso. The Company received approval of an IDE from the FDA in August 1992 and commenced clinical trials for the SpinaLogic 1000 as an adjunct to spinal fusion surgery in February 1993. The Company received approval of an IDE supplement from the FDA in September of 1995 to conduct a clinical trial of the SpinaLogic 1000 as a noninvasive treatment for a failed spinal fusion surgery. The Company commenced this on-going clinical trial in the fourth quarter of 1995. The Company is in the process of evaluating the results of the clinical trial for use of the SpinaLogic 1000 as an adjunct to spinal fusion surgery. The Company has not yet applied for FDA approval to market the SpinaLogic 1000, and there can be no assurance that the Company will receive such approval if sought. BioLogic(R) Magnetic Field Technology. The natural process of musculoskeletal tissue healing involves a complex interaction of several physiological processes, which include the stimulation of specific cells such as osteoblasts, fibroblasts and endothelial cells. When an injury occurs, growth factors are produced at the healing site which stimulate selected cells to initiate the healing cascade. In most cases, these cells are able to initiate repair in response to an injury and restore the musculoskeletal tissue to its original strength and structure. Cell stimulation is a necessary component of tissue regeneration and is dependent upon certain triggering events that activate the production of connective tissue. The BioLogic technology is a second generation magnetic field technology licensed to the Company and used in the OrthoLogic 1000 and SpinaLogic 1000. The technology utilizes a specific combination of a low energy static magnetic field with a low-energy alternating magnetic field, which the Company believes increases cell stimulation. The technologies employed in first generation electromagnetic bone growth stimulators produce only an alternating magnetic field. The Company believes the use of combined static and alternating magnetic fields in its BioLogic technology increases the potency of the treatment and therefore reduces the required daily treatment time. The BioLogic technology is also a low-energy technology. The strength of the BioLogic magnetic fields are in the range of the earth's magnetic field. By comparison, the strength of the magnetic fields produced by competitive technologies is many times greater than that of the earth's magnetic field. The Company is engaged in research of additional applications of the proprietary BioLogic technology, including cartilage regeneration and osteoporosis treatment. OrthoSound(TM). The Company currently is conducting preclinical and a pilot clinical trial relating to the design, development and testing of diagnostic and therapeutic devices utilizing its nonthermal ultrasound technology ("OrthoSound") for use in medical applications that relate to bone, cartilage, ligament or tendon diagnostics and healing. In the area of diagnostics, the OrthoSound research projects address the potential use of ultrasound for the assessment of bone strength and fracture risk in osteoporotic patients and the assessment of fracture healing. In therapeutic applications, the focus of the OrthoSound research is on the potential use of ultrasound for the treatment of at-risk fractures to increase the healing rate and reduce the need for subsequent surgical procedures. The Company has not yet applied for FDA approval to market OrthoSound based products, and there can be no assurance that the Company will do so or that it would receive such approval if sought. Chrysalin. In January 1998 the Company announced it had made a minority equity investment in Chrysalis BioTechnology, Inc. As part of the transaction, the Company has been awarded a nine-month, world-wide exclusive option to license the orthopedic applications of Chrysalin, a patented 23-amino acid peptide that has shown promise in accelerating the healing process of fractured bones. In pre-clinical animal studies, Chrysalin was shown to double the rate of fracture healing with a single injection into the fracture gap. The Company intends to conduct pre-clinical studies during 1998, and, depending on the results, an application may be filed with the FDA to conduct human clinical trials. However, there can be no assurance that the Company will do so or that it would receive such approval if sought. 3 Marketing and Sales The OrthoLogic 1000, the OrthoFrame and the OrthoNail are prescribed by orthopaedic surgeons and podiatrists practicing in private practices, hospitals and orthopaedic and podiatric treatment centers. The Company is focusing its marketing and sales efforts on these groups, with particular emphasis on those clinicians who treat bone healing problems. CPM products are prescribed by orthopaedic surgeons, hospitals, orthopaedic trauma centers and allied health professionals. CPM devices are leased to the patient, typically for a period of one to three weeks. Orthopaedic surgeons purchase Hyalyan from an exclusive distributor who sells Hyalgan under an agreement with Sanofi Pharmaceuticals, Inc. The Company's sales force calls on orthopeadic surgeons to provide them with product information relative to Hyalgan. Additionally, the Company utilizes physician-to-physician selling via presentations and scientific and clinical articles published in medical journals. As a result of the Company's transition during 1996 to an internal sales force, the Company's sales and marketing efforts now are primarily conducted directly through the Company's own sales people. Of the Company's approximately 565 employees at December 31, 1997, approximately 300 are involved in sales and marketing. The Company employs 12 area vice presidents to manage territory sales, each of whom has responsibility for the Company's sales and marketing efforts in a designated geographic area. During the year the Company restructured its sales force to reduce the number of area vice presidents and direct sales people. In late 1997, the Company created a single sales management structure to oversee the entire sales force. Prior to this change there was separate management for the fracture healing and orthopedic rehabilitation sales forces. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Dependence on Sales Force." Through the efforts of the Company's specialized direct sales force servicing third party payors, the Company has contracted with over 400 third party payors, including various Blue Cross/Blue Shield organizations, and the Department of Veteran Affairs. In addition, the Company is an approved Medicare provider and is also an approved Medicaid provider for a majority of states. OrthoFrame and OrthoFrame/Mayo products are sold internationally through distributors located in European and South American countries. Currently, the OrthoLogic 1000 is not marketed internationally. However, the Company has entered into a cooperative business development arrangement with Tokyo-based Mitsubishi Chemical Corporation to collaborate in seeking approval from Japan's Ministry of Health and Welfare for reimbursement and the use of the OrthoLogic 1000 by Japanese national insurance. The Company's March 1997 acquisition of the assets of a Canadian CPM manufacturer may also increase the Company's access to international markets. Historically, the Company's export sales as a percentage of net sales have been less than 1%. The Company believes that this percentage may increase due to its recent acquisitions of businesses with more significant international sales. See "Item 1 -- Business -- General." While OrthoLogic has not experienced seasonality of revenues from sales of the OrthoLogic 1000, OrthoFrame and OrthoNail, revenues from leasing CPM equipment are seasonal. CPM devices are used most commonly as adjuncts to surgery and historically the strongest quarter tends to be the fourth quarter of the calendar year. The Company believes this trend may be because (i) individuals tend to put off elective surgical intervention until later in the year when their insurance deductibles have been met, and (ii) sports-related injuries tend to increase in the fall and winter months. The Company does not believe that revenues for Hyalgan will be seasonal. Research and Development The Company's research and development staff presently includes 21 individuals, of whom 4 hold doctoral (Ph.D. or D.V.M.) degrees. Individuals within the research and development organization have extensive experience in the areas of biomaterials, bioengineering, animal modeling and cell biology. Research and development efforts emphasize product engineering, activities related to the clinical trials conducted by the Company and basic research. With regard to basic research, the research and development staff conducts in-house research projects in the area of fracture healing. The staff also supports and monitors external research projects in biophysical stimulation of growth factors and the potential use of ultrasound technology in diagnostic and therapeutic applications relating to bone, cartilage, ligament or tendon. Both the in-house and external research and development projects also provide technical marketing support for the Company's products and explore the development of new products and also additional therapeutic applications for existing products. Product engineering activities are primarily related to improvements in the CPM devices. The Company also has a clinical regulatory group that initiates and monitors clinical trials. The Company's research and 4 development expenditures totaled $2.1 million, $2.2 million and $2.3 million in the years ended December 31, 1995, 1996 and 1997, respectively. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations." Manufacturing The Company assembles the OrthoLogic 1000 from parts supplied by third parties, performs tests on both the components and assembled product and calibrates the assembled product to specifications. The Company currently purchases the microprocessor used in the OrthoLogic 1000 from a sole source supplier. The OrthoLogic 1000 is not dependent on this microprocessor and the Company believes that it could be redesigned to incorporate another microprocessor. At any point in time, the Company maintains a supply of the microprocessor on hand to meet its sales forecast for at least one year. In addition, the magnetic field sensor employed in the OrthoLogic 1000 is available from two sources. Establishment of additional or replacement suppliers for these components cannot be accomplished quickly. Other components and materials used in the manufacture and assembly of the OrthoLogic 1000 are available from multiple sources. The Company assembles the OrthoFrame and OrthoNail products from parts supplied by third parties. These products are packaged and sterilized by outside sources and shipped by the Company from its facilities. The composite material components of the OrthoFrame products are currently sourced from two vendors. Establishment of additional or replacement suppliers for these components cannot be accomplished quickly. The Company maintains a supply of these components on hand to meet its sales forecast for at least six months. Other components and materials used in the manufacture and assembly of the OrthoFrame products are readily available from multiple sources. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Dependence on Key Suppliers." The Company assembles CPM devices from parts that it manufactures in-house or purchases from third parties. These parts are assembled, calibrated and tested at the Company's facilities in Pickering (outside of Toronto), Canada. The Company purchases several CPM components, including microprocessors, motors and custom key panels from sole-source suppliers. The Company believes that its CPM products are not dependent on these components and could be redesigned to incorporate comparable components. The Company places orders for these components to meet sales forecast for six months. Other components and materials used in the manufacture and assembly of CPM products are available from multiple sources. The Company purchases other orthopaedic products fully assembled from third-party suppliers. These products are available from multiple sources. Fidia S.p.A., an Italian corporation, manufactures Hyalgan under an agreement with Sanofi Pharmaceuticals, Inc. Future revenues of the Company could be adversely affected in the event Fidia S.p.A. experiences disruptions in the manufacture of Hyalgan. Competition The orthopaedic industry is characterized by rapidly evolving technology and intense competition. With respect to the treatment of bone fractures, the Company believes that patients with non-healing fractures are primarily treated with surgery, and this represents the Company's primary competition, although other manufacturers of noninvasive bone growth stimulators also represent competition for the OrthoLogic 1000. The Company's main competitors for these products are Electro-Biology, Inc. ("EBI"), a subsidiary of Biomet, Inc., OrthoFix International N.V. ("OrthoFix") and Biolectron Inc. Exogen, Inc. markets a nonthermal ultrasound device for the acceleration of the time to a healed fracture for closed, cast immobilized, fresh fractures of the tibia and distal radius. With respect to the adjunctive treatment of spinal fusion surgery, the Company expects its primary competitors for its products to be EBI and OrthoFix. With respect to external fixation devices, the Company's primary competitors are OrthoFix, Howmedica, Inc. (a subsidiary of Pfizer, Inc.), EBI, Smith & Nephew Richards, Inc., Synthes, Inc. and ACE Orthopedic Manufacturing (a division of Depuy, Inc.). The same group of companies and Applied OsteoSystems, Inc. represent its primary competition in the internal fixation market. The Company's primary competitors in the United States for CPM devices are privately held Thera-Kinetics, Inc., many independent owners/lessors of CPM devices and suppliers of traditional orthopaedic rehabilitation services including orthopaedic immobilization and follow up physical therapy. The Company also 5 believes that there are several foreign CPM device manufacturers and providers with whom the Company will compete if it increases international sales efforts or as those competitors sell in the United States. The Company's primary competitor for Hyalgan is Biomatrix, Inc. which introduced a competing product in late 1997. Many of the Company's competitors have substantially greater resources and experience in research and development, obtaining regulatory approvals, manufacturing, and marketing and sales of medical devices and services, and therefore represent significant competition for the Company. The Company is aware that its competitors are conducting clinical trials for other medical applications of their respective technologies. In addition, other companies are developing or may develop a variety of other products and technologies to be used in CPM devices, the treatment of fractures and spinal fusions, including growth factors, bone graft substitutes combined with growth factors, nonthermal ultrasound and the treatment of pain associated with osteoarthritis of the knee. The Company believes that competition is based on, among other factors, the safety and efficacy of products in the marketplace, physician familiarity with the product, ease of patient use, product reliability, reputation, price, sales and marketing capability and reimbursement. Any product developed by the Company that gains any necessary regulatory approval will have to compete for market acceptance and market share in an intensely competitive market. An important factor in such competition may be the timing of market introduction of competitive products. Accordingly, the relative speed with which the Company can develop products, complete clinical testing as well as any necessary regulatory approval processes and supply commercial quantities of the product to the market will be critical to its competitive success. There can be no assurance the Company can successfully compete on these bases. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Intense Competition" and "-- Rapid Technological Change." Patents, Licenses and Proprietary Rights The Company's practice is to require its employees, consultants and advisors to execute a confidentiality agreement upon the commencement of an employment or consulting relationship with the Company. The agreements provide that all confidential information developed by or made known to an individual during the course of the employment or consulting relationship will be kept confidential and not disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual relating to the Company's business while employed by the Company shall be the exclusive property of the Company. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets in the event of unauthorized use or disclosure of such information. It is also the Company's policy to protect its owned and licensed technology by, among other things, filing patent applications for the technologies that it considers important to the development of its business. The Company uses the BioLogic(R) technology through a worldwide exclusive license granted by a corporation owned by university professors who discovered the technology. With respect to the BioLogic technology, the delivery of such technology to the patient and specific applications of such technology, the Company holds title to four United States patents and to patents issued in Australia, Switzerland, Germany, France, and the United Kingdom, as well as to a pending patent application in Japan, and holds an exclusive worldwide license to 28 United States patents, eight Australian patents, five Canadian patents and one Japanese patent. Currently there are five pending United States patent applications and multiple pending patent applications in Canada, Japan, and Europe. The Company's license for the BioLogic technology extends for the life of the underlying patents (which are due to expire over a period of years beginning in 2006 and extending through 2014) and covers all improvements and applies to the use of the technology for all medical applications in man and animals. The license provides for payment of royalties by the Company from the net sales revenues of products using the BioLogic technology. The license agreement can be terminated for breach of any material provision of the license. See Note 4 of Notes to Consolidated Financial Statements. The Company holds an exclusive worldwide license to four United States patents covering OrthoFrame products. The license, which extends for the life of the underlying patents (the earliest of which issued in 1986) and covers all improvements, provides for payment of royalties by the Company from the sales revenues of OrthoFrame products. The license provides for minimum royalties of $100,000 per calendar year. The license agreement can be terminated for breach of any material provision of the license and, at the Company's option, upon 60 days' notice to the licensor. 6 The Company has been assigned four United States patents covering methods for ultrasonic bone assessment by noninvasively and quantitatively evaluating the status of bone tissue in vivo through measurement of bone mineral density, strength and fracture risk. Additionally, patent applications are pending for this technology in the United States, Canada, Japan, and Europe as well as two pending international applications. With respect to CPM technology, the Company currently owns 17 United States patents, one pending United States patent application, two Canadian patents, three Canadian patent applications, two Japanese patents, and a European patent. The issued United States patents on this technology are due to expire over a period of years beginning in the year 2001 and extending through 2016. These patents could expire at an earlier date if the patents are not maintained by paying certain fees and/or annuities to the United States Patent and Trademark Office and/or appropriate foreign patent offices at certain intervals over the life of the patents. The pending United States patents, if issued, would begin to expire over a period of time beginning around 2015, and could expire at an earlier date, if not maintained as noted in the previous sentence. OrthoLogic(R), OrthoLogic & Design(R), OrthoFrame(R), BioLogic(R), SpinaLogic(R), Tomorrow's Technology Today(R), TALON(R), CaseLog(R), OrthoSonic(R), Legasus Sport CPM(R), LiteLift(R), Sportlite(R), Sutter(R), Danninger Medical(R), Mobilimb(R), WaveFlex(R) and Totalcare(R) are federally registered trademarks of the Company. Additionally, the Company claims trademark rights in PerioLogicTM, OsteoLogicTM, OrthoNailTM, OrthoSoundTM, QuickfixTM, CPM 9000ATTM, Legasus CPMTM, Sutter CarePlanTM, Home Rehab SystemTM and DanniflexTM. The Company has become aware of an assertion in Germany against one of its recently acquired CPM patents. The Company does not believe that it will have a material effect on the Company. The Company is not aware of any other claims that have been asserted against the Company for infringement of proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims against the Company in the future. Government Regulation The activities of the Company are regulated by foreign, federal, state and local governments. Government regulation in the United States and other countries is a significant factor in the development and marketing of the Company's products and in the Company's ongoing manufacturing and research and development activities. The Company and its products are regulated by the FDA under a number of statutes, including the Medical Device Amendments Act of 1976 to the Federal Food, Drug and Cosmetic Act and the Safe Medical Devices Act of 1990 (collectively, the "FDC Act"). The Company's current BioLogic technology-based products are classified as Class III Significant Risk Devices, which are subject to the most stringent FDA review, and are required to be tested under an IDE clinical trial and approved for marketing under a PMA. To begin human clinical studies the Company must apply to the FDA for an IDE. Generally, preclinical laboratory and animal tests are required to establish a scientific basis for granting of an IDE. Once an IDE is granted, clinical trials can commence which involve rigorous data collection as specified in the IDE protocol. After the clinical trial is completed, the data are compiled and submitted to the FDA in a PMA application. FDA approval of a PMA application occurs after the applicant has established safety and efficacy to the satisfaction of the FDA. The FDA approval process may include review by an FDA advisory panel. Approval of a PMA application includes specific requirements for labeling of the medical device with regard to appropriate indications for use. Among the conditions for PMA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures comply with the FDA regulations setting forth Good Manufacturing Practices ("GMP"). The FDA monitors compliance with these requirements by requiring manufacturers to register with the FDA, which subjects them to periodic FDA inspections of manufacturing facilities. In addition, the Company must comply with post-approval reporting requirements of the FDA. If violations of applicable regulations are noted during FDA inspections, the continued marketing of any products manufactured by the Company may be adversely affected. No significant deficiencies have been noted in FDA inspections of the Company's manufacturing facilities. The OrthoFrame, OrthoFrame/Mayo Wrist Fixator and the OrthoNail are Class II devices. If a medical device manufacturer can establish that a newly developed device is "substantially equivalent" to a device that was legally marketed prior to May 28, 1976, the date on which the Medical Device Amendments Act of 1976 was enacted, the manufacturer may seek marketing clearance from the FDA to market the device by filing a 510(k) pre-market 7 notification with the agency. The Company obtained 510(k) pre-market notification clearances from the FDA for the OrthoFrame and OrthoNail products. The Company's CPM devices are Class I devices which do not require 510(k) pre-market notification. However, CPM manufacturers must comply with GMP regulations. The devices must also meet Underwriters Laboratories standards for electrical safety. For sales to the European Community, CPM devices must meet established electromechanical safety and electromagnetic emissions regulations. The Company also expects that the European Community will soon require compliance with quality control standards. The Company believes that it currently complies with the new standards. Manufacturers outside the United States that export devices to the United States may be subject to FDA inspection. The FDA generally inspects companies every few years. The frequency of inspection depends upon the Company's status with respect to regulatory compliance. To date, the Company's foreign operations have not been the subject of any inspections conducted by the FDA. Under Canada's Food and Drugs Act and the rules and regulations thereunder (the "Food and Drugs Act"), the CPM devices sold by the Company do not require any Canadian regulatory approvals prior to their introduction to the market. However, the Company must provide Health and Welfare Canada with notice concerning the sale of a device. Notice for all of the CPM devices currently manufactured by the Company in Canada has been provided to Health and Welfare Canada. Subsequent to such notification, Health and Welfare Canada may request the Company to provide it with the results of the testing conducted on the device. If the results of such testing do not substantiate the nature of the benefits claimed to be obtainable from the use of the device or the performance characteristics claimed for such device to the satisfaction of Health and Welfare Canada, the sale of the device in Canada would be prohibited until appropriate results had been submitted. The Company has not been asked to provide such testing results to the Canadian authorities. CPM devices must comply with the applicable provincial regulations regarding the sale of electrical products by receiving the prior approval of either the Canadian Standards Association ("CSA") or the provincial hydro-electric authority, unless the device is otherwise exempt from such requirement. To date, the Company believes that its CPM devices have, unless otherwise exempt, obtained such necessary approvals prior to introduction to the market. The FDC Act regulates the labeling of medical devices to indicate the uses for which they are approved, both in connection with PMA approval and thereafter, including any sponsored promotional activities or marketing materials distributed by or on behalf of the manufacturer or seller. A determination by the FDA that a manufacturer or seller is engaged in marketing of a product for other than its approved use may result in administrative, civil or criminal actions against the manufacturer or seller. In a warning letter issued May 31, 1996, the FDA raised various issues regarding certain promotional literature covering the OrthoLogic 1000 and other issues regarding the marketing and alleged custom configuration of the device. Primarily, the FDA questioned the use in the Company's literature of the patient success rate reflected in the patient registry data for the OrthoLogic 1000, focusing on differences between the patient populations in the original PMA and the subsequent patient registry with respect to the time from injury to treatment. The FDA did not question the accuracy of the information reported in the patient registry data or the patient success rate reflected in that data. In its May 31, 1996 letter, the FDA also questioned whether changes had been made in the signal frequency of the OrthoLogic 1000, and raised issues with respect to use of the FDA's name in promotional materials, the promotion of the device as having the ability to stimulate the human growth factor IGF-II pathway, as well as an independent distributor's promotion of the device for treatment of the non-appendicular skeleton. The Company responded to the issues addressed in the FDA's letter, including the submission of a PMA supplement that included only registry data for patients who met the original PMA criteria. The FDA approved this PMA supplement with respect to patient registry date in January 1997. The Company has agreed not to use the FDA name in its promotional literature, agreed not to promote or inventory devices for indications beyond those currently approved and instituted a policy covering individual promotional correspondence between sales representatives and customers. The Company also reaffirmed that at no time had the Company modified the signal frequency of the OrthoLogic 1000 and agreed not to promote or inventory reconfigured devices until supplementary PMA approval is received. The Company and the FDA have resolved all of the issues raised in the May 31, 1996 letter. The FDA approved the use of pre-clinical research data in the marketing of the OrthoLogic 1000 in May 1997 by granting a pre-market approval supplement for a brochure, titled "Biophysical Stimulation of Fracture-Healing Mediated by IGF-II." 8 In 1992, the previous owners of certain of the Company's CPM businesses received correspondence from the FDA regarding operating procedures and deviations from GMP practices. The Company believes that those issues were resolved before it acquired the businesses. Regulations governing human clinical studies outside the United States vary widely from country to country. Historically, some countries have permitted human studies earlier in the product development cycle than the United States. This disparity in regulation of medical devices may result in more rapid product approvals in certain foreign countries than the United States, while approvals in countries such as Japan may require longer periods than in the United States. In addition, although certain of the Company's products have undergone clinical trials in the United States and Canada, such products have not undergone clinical studies in any other foreign country and the Company does not currently have any arrangements to begin any such foreign studies. Hyalgan is considered a Class III Significant Risk Device and is subject to the same clinical trial and GMP reviews as described for the BioLogic technology-based products. The product is manufactured by Fidia S.p.A. in Italy and is imported into the United States. As a result each shipment of the product into the United States is subject to inspections, including by the United States Department of Agriculture. The import of Hyalgan could be delayed or denied for numerous reasons, and if this occurs, it could have a material adverse affect on sales of the product. To the Company's knowledge, no significant deficiencies have been noted in the FDA inspections of Fidia S.p.A.'s manufacturing facility. The process of obtaining necessary government approvals is time-consuming and expensive. There can be no assurance that the necessary approvals for new products or applications will be obtained by the Company or, if they are obtained, that they will be obtained on a timely basis. Furthermore, the Company or the FDA must suspend clinical trials upon a determination that the subjects or patients are being exposed to an unreasonable health risk. The FDA may also require post-approval testing and surveillance programs to monitor the effects of the Company's products. In addition to regulations enforced by the FDA, the Company is also subject to regulations under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state and local regulations. The ability of the Company to operate profitably will depend in part upon the Company obtaining and maintaining all necessary certificates, permits, approvals and clearances from the United States and foreign and other regulatory authorities and operating in compliance with applicable regulations. Failure to comply with regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. Regulations regarding the manufacture and sale of the Company's current products or other products that may be developed or acquired by the Company are subject to change. The Company cannot predict what impact, if any, such changes might have on its business. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Government Regulation" and "-- Condition of Acquired Facilities." Third Party Payment Most medical procedures are reimbursed by a variety of third party payors, including Medicare and private insurers. The Company's strategy for obtaining reimbursement authorization for its products is to establish their safety, efficacy and cost effectiveness as compared to other treatments. The Company is an approved Medicare provider and is also an approved Medicaid provider for a majority of states. The Company contracts with over 400 third party payors as an approved provider for its fracture healing and orthopedic rehabilitation products, including the Department of Veterans Affairs and various Blue Cross/Blue Shield organizations. Because the process of obtaining reimbursement for products through third-party payors is longer than through direct invoicing of patients, the Company must maintain sufficient working capital to support operations during the collection cycle. In addition, third party payors as an industry have undergone consolidation and that trend appears to be continuing. The concentration of such economic power may result in third party payors obtaining additional leverage and thus negatively affecting the Company's profitability and cash flows. As part of the Company's efforts to establish its primary products as treatments of choice among third party payors, the Company has entered into two consulting agreements with practicing physicians. These physicians were retained by the Company to increase product acceptance, respond to inquiries from other clinicians regarding the Company's products or to assist the Company in seeking third party payor endorsement of practice pattern changes. Significant uncertainty exists as to the reimbursement status of newly approved health care products such as of those that may be 9 offered by the Company, and there can be no assurance that adequate third party coverage will continue to be available for the Company's products at current levels. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Limitations on Third Party Payment; Uncertain Effects of Managed Care." Product Liability Insurance The business of the Company entails the risk of product liability claims. The Company maintains a product liability and general liability insurance policy and an umbrella excess liability policy. There can be no assurance that liability claims will not exceed the coverage limit of such policies or that such insurance will continue to be available on commercially reasonable terms or at all. Consequently, product liability claims could have a material adverse effect on the business, financial condition and results of operations of the Company. The Company has not experienced any product liability claims to date resulting from its Fracture Healing Products. To date, liability claims resulting from the Company's CPM Products have not had a material adverse effect on business. Additionally, the agreements by which the Company acquired its CPM businesses generally require the seller to retain liability for claims arising before the acquisition. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk of Product Liability Claims." Year 2000 Compliance Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code fields. These date code fields will need to accept four digit entries to distinguish twenty-first century dates from twentieth century dates. The Company is in the process of consolidating its software and hardware systems to a single integrated system from the multiple systems maintained from the acquisitions completed in late 1996 and early 1997. The new integrated system is certified to be Year 2000 compliant. The Company believes that payment systems of third party payors may not yet be Year 2000 compliant. In the event that such systems are not made compliant in a timely manner, claims processing and reimbursement payments could have a material adverse effect on the Company's operations. Employees As of December 31, 1997, the Company had 567 employees, including 298 in sales and marketing, 21 in research and development and clinical and regulatory affairs, approximately 11 in managed care, 83 in reimbursement and 154 in manufacturing, finance and administration. The managed care staff is charged with changing the practice patterns of the orthopaedic community through the influence of third party payors on treatment regimes. The Company believes that the success of its business will depend, in part, on its ability to identify, attract and retain qualified personnel. In the future, the Company will need to add additional skilled personnel or retain consultants in such areas as research and development, manufacturing and marketing and sales. The Company considers its relationship with its employees to be good. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Dependence on Key Personnel; Recent Management Changes." 10 Item 2. Properties The Company leases facilities in Tempe, Arizona and Pickering, Ontario, Canada. These facilities are designed and constructed for industrial purposes and are located in industrial districts. Each facility is suitable for the Company's purposes and is effectively utilized. The table below sets forth certain information about the Company's principal facilities.
Approx. Location Square Feet Lease Expires Description Principal Activity - -------- ----------- ------------- ----------- ------------------ Tempe 80,000 11/07 2-story, in industrial Fracture healing park products and executive offices Pickering 28,500 2/99 1-story, in CPM assembly industrial park
The Company believes that each facility is well maintained. In March 1997, the Company began a restructuring plan to consolidate all CPM manufacturing in its Toronto facility and all CPM administrative and service functions in Phoenix. The consolidation was complete at the end of 1997. The Company has ceased operations at facilities in San Diego, California in connection with the consolidation. See "Item 7 -- Management's Discussion and Analysis of Financial Condition Results of Operations -- Condition of Acquired Facilities." Item 3. Legal Proceedings On June 24, 1996, and on several days thereafter, lawsuits were filed in the United States District Court for the District of Arizona against the Company and certain officers and directors alleging violations of Sections 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and SEC Rule 10b-5 promulgated thereunder, and, as to other defendants, Section 20(a) of the Exchange Act. See "Item 7 -- Management's Discussion and Analysis of Financial Condition Results of Operations -- Potential Adverse Outcome of Litigation." These lawsuits are: Mark Silveria v. Allan M. Weinstein, Allen R. Dunaway, David E. Derminio and OrthoLogic Corporation, Cause No. CIV 96-1563 PHX EHC, filed in the United States District Court for the District of Arizona (Phoenix Division) on July 1, 1996. Derric C. Chan and Anna Chan as attorney in fact for Moon-Yung Chow, on behalf of themselves and all others similarly situated v. OrthoLogic Corporation, Allan M. Weinstein, Frank P. Magee and David E. Derminio, Cause No. CIV 96-1514 PHX RCB, filed in the United States District Court for the District of Arizona (Phoenix Division) on June 21, 1996. Jeffrey M. Boren and Charles E. Peterson, Jr., on behalf of themselves and all others similarly situated v. Allan M. Weinstein and OrthoLogic Corp., Cause No. CIV 96-1520 PHX RCB, filed in the United States District Court for the District of Arizona on June 24, 1996. Jeffrey Draker, on behalf of himself and all others similarly situated v. Allan M. Weinstein and OrthoLogic Corp., Cause No. CIV 96-1667 PHX RCB, filed in the United States District Court for the District of Arizona (Phoenix Division) on July 16, 1996. Edward and Eleanor Katz v. OrthoLogic Corp. and Allan M. Weinstein, Cause No. CIV 96-1668 PHX RGS, filed in the United States District Court for the District of Arizona (Phoenix Division) on July 17, 1996. Mark J. Rutkin, Paul A. Wallace, Malcolm E. Brathwaite, Elaine K. Davies and David G. Davies, Larry E. Carder and Carl Hust, on behalf of themselves and all others similarly situated v. Allan M. Weinstein, Allen R. Dunaway, David 11 E. Derminio and OrthoLogic Corp., Cause No. CIV 96-1678 PHX EHC, filed in the United States District Court for the District of Arizona (Phoenix Division), on July 17, 1996. Frank J. DeFelice, on behalf of himself and all others similarly situated v. OrthoLogic Corp. and Allan M. Weinstein, Cause No. CIV 96-1713 PHX EHC, filed in the United States District Court for the District of Arizona (Phoenix Division), on July 23, 1996. Scott Longacre, Joseph E. Sheedy, Trustee, Rickie Trainor, W. Preston Battle, III, Taylor D. Shepherd, Dianna Lynn Shepherd, Gordon H. Hogan, Trustee, and Dallas Warehouse Corp., Inc., on behalf of themselves and all others similarly situated v. Allan M. Weinstein, Allen R. Dunaway, David E. Derminio, Frank P. Magee and OrthoLogic Corp., Cause No. CIV 96-1891 PHX PGR, filed in the United States District Court for the District of Arizona (Phoenix Division) on August 16, 1996. Jeffrey D. Bailey, Milton Berg, Bryan Boatwright, Charles R. Campbell, Mark and Cathy Daniel, Tom Drotar, Rudy Gonnella, David Gross, Janet Gustafson, Willa P. Koretz, Dr. Richard Lewis, John Maynard, Margaret Milosh, Michelle Milosh, Theresa L. Onn, Ward B. Perry, William Schillings, Darwin and Merle Sen, Nestor Serrano and Larry E. and Gloria M. Swanson v. Allan M. Weinstein, Allen R. Dunaway, David E. Derminio and OrthoLogic Corporation, Cause No. CIV 96-1910 PHX PGR, filed in the United States District Court for the District of Arizona (Phoenix Division) on August 19, 1996. Nancy Z. Kyser and Mark L. Nichols, on behalf of themselves and all others similarly situated v. OrthoLogic Corporation, Allan M. Weinstein, Frank P. Magee and David E. Derminio, Cause No. CIV 96-1937 PHX ROS, filed in the United States District Court for the District of Arizona (Phoenix Division) on August 22, 1996. Plaintiffs in these actions allege generally that information concerning the May 31, 1996 letter received by the Company from the FDA regarding the Company's OrthoLogic 1000 Bone Growth Stimulator, and the matters set forth therein, was material and undisclosed, leading to an artificially inflated stock price. Plaintiffs further allege that the Company's non-disclosure of the FDA correspondence and of the alleged practices referenced in that correspondence operated as a fraud against plaintiffs, in that the Company allegedly made untrue statements of material facts or omitted to state material facts necessary in order to make the statements not misleading. Plaintiffs further allege that once the FDA letter became known, a material decline in the stock price of the Company occurred, causing damage to plaintiffs. All plaintiffs seek class action status, unspecified compensatory damages, fees and costs. Plaintiffs also seek extraordinary, equitable and/or injunctive relief as permitted by law. Pursuant to court orders dated December 17, 1996 and January 19, 1997, the preceding actions were consolidated for all purposes before Judge Broomfield in Arizona federal district court, and lead plaintiffs and counsel were appointed. Thereafter, the Company and its officers and directors moved to dismiss the consolidated amended complaint for failure to state a claim. On February 5, 1998, Judge Broomfield dismissed the consolidated amended complaint in its entirety against the Company and its officers and directors, giving plaintiffs leave to amend all claims to cure all deficiencies. If any deficiencies with a claim are not cured by plaintiffs, that claim will be dismissed with prejudice as against the Company and its officers and directors. On or about June 20, 1996, a lawsuit entitled Norman Cooper, et al. v. OrthoLogic Corp., et al., Cause No. CV 96- 10799, was filed in the Superior Court, Maricopa County, Arizona. The plaintiffs allege violations of Arizona Revised Statutes Sections 44-1991 (state securities fraud) and 44-1522 (consumer fraud) and common law fraud based upon factual allegations substantially similar to those alleged in the federal court class action complaints. Plaintiffs also seek class action status, unspecified compensatory and punitive damages, fees and costs. Plaintiffs also seek injunctive and/or equitable relief. By agreement of the parties, that action has been stayed while the federal actions proceed. On or about July 16, 1996, Jacob B. Rapoport filed a Shareholder Derivative Complaint for Breach of Fiduciary Duty and Misappropriation of Confidential Corporation Information (based on similar factual issues underlying the above lawsuits) in the Superior Court of the State of Arizona, Maricopa County, No. CV 96-12406 against Allan M. Weinstein, John M. Holliman, Augustus A. White, Fredric J. Feldman, Elwood D. Howse, George A. Oram, Frank P. Magee and David E. Derminio, Defendants and OrthoLogic Corp., Nominal Defendant. On October 29, 1996 the defendants removed the case to the United States District Court for the District of Arizona (Phoenix Division) No. CIV 96-2451 PHX RCB on grounds of diversity pursuant to 28 U.S.C. ss. 1332. Defendants filed a motion to dismiss the complaint. By agreement of the parties, the case had been stayed pending a decision on defendants' motion to dismiss 12 the consolidated amended class action complaint. The case continues to be stayed pending plaintiffs' amendment of their consolidated amended class action complaint in compliance with the Court's Order of Dismissal. The Company continues to deny the substantive allegations in the aforesaid lawsuits and will continue to defend the action vigorously. In March 1998, the former owner of the CPM assets acquired in the DMTI acquisition filed a lawsuit in the Court of Common Pleas in Franklin County, Ohio against the Company. The plaintiff alleges that the Company breached the acquisition agreement by not satisfying certain liabilities it assumed in the acquisition and that the Company breached an ancillary agreement for the temporary provision of services following the acquisition. Plaintiff has also demanded from the Court of Common Pleas a declaration that the Company is not entitled to cash escrowed in the acquisition. The Company had previously demanded indemnification from this plaintiff and had asked the escrow agent to deliver escrowed cash to it as a result of plaintiff's breaches of representations and warranties in the acquisition agreement. The Company denies these allegations and will defend the action vigorously. In February 1997, the Company received a letter from the California Department of Industrial Relations Division of Occupational Safety and Health regarding an informal complaint involving certain physical problems with one of the facilities leased by Sutter prior to its acquisition by the Company. The Company responded to the letter in March 1997 and believes that it has addressed the issues raised in that letter. See "Item 2 -- Properties" and "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Condition of Acquired Facilities." Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Executive Officers of the Registrant The following table sets forth information regarding the executive officers of the Company:
Name Age Title - ---- --- ----- Thomas R. Trotter 50 Chief Executive Officer, President and Director Frank P. Magee, D.V.M. 41 Executive Vice President, Research and Development William C. Rieger 48 Vice President, Marketing and Sales Terry D. Meier 59 Senior Vice President Allen R. Dunaway 43 Vice President, Chief Financial Officer and Secretary MaryAnn G. Miller 40 Vice President, Human Resources
Thomas R. Trotter joined the Company as President and Chief Executive Officer and a Director in October 1997. From 1988 to October 1997, Mr. Trotter held various positions at Mallinckrodt, Inc. in St. Louis, Missouri, most recently as President of the Critical Care Division and a member of the Corporate Management Committee. From 1984 to 1988, he was President and Chief Executive Officer of Diamond Sensor Systems, a medical device company in Ann Arbor, Michigan. From 1976 to 1984, he held various senior management positions at Shiley, Inc. (a division of Pfizer, Inc.) in Irvine, California. Frank P. Magee, D.V.M. joined the Company as a Vice President in November 1989 and became Executive Vice President, Research and Development in 1991. Mr. Magee served as President between August 1997 and October 1997. From 1984 to 1989, Dr. Magee was head of Experimental Surgery at Harrington Arthritis Research Center, a not-for-profit independent research and development organization. William C. Rieger joined the Company in January 1998 as Vice President, Marketing and Sales. From 1994 to 1997, Mr. Rieger held the position of Vice President of Sales and Marketing at Hollister Inc., a privately held manufacturer 13 of medical products. From 1985-1994, he held several positions as Vice President at Miles Inc. Diagnostic Division, a manufacturer of diagnostic products. Terry D. Meier joined the Company in March 1998 as Senior Vice President and beginning April 1, 1998, will serve as its Vice President and Chief Financial Officer. From 1974 to 1997, Mr. Meier held several positions at Mallinckrodt, Inc., a healthcare and specialty chemicals company. Most recently, he served as their Vice President and Corporate Controller and from 1989 to 1996, as the Senior Vice President and Chief Financial Officer. Allen R. Dunaway joined the Company in February 1992 as its Vice President and Chief Financial Officer. Mr. Dunaway has entered into a Transitional Employment Agreement with the Company. Pursuant to that agreement, Mr. Dunaway will serve as Chief Financial Officer through March 31, 1998 and will serve at the direction of the Chief Executive Officer thereafter. MaryAnn G. Miller joined the Company as Vice President of Human Resources in October 1996. From November 1995 to June 1996, Ms. Miller was Human Resources Director for Southwestco Wireless, Inc. doing business as CellularOne, a subsidiary of Bell Atlantic Nynex Mobile, a provider of wireless telecommunications services in the Southwest. From October 1992 to July 1995, Ms. Miller was a human resources officer with Firstar Corporation, a Wisconsin-based bank holding company. She was previously First Vice President and Regional Human Resources Director of Firstar from January 1994 to July 1995. 14 PART II ------- Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The information under the heading "Stockholder Information" on page 17 of the Company's Annual Report to Stockholders for the year ended December 31, 1997 (the "Annual Report") is incorporated herein by reference. Item 6. Selected Financial Data The information on pages 16 and 17 of the Annual Report under the heading "Selected Financial Data" is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information on pages 12 through 15 of the Annual Report under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by reference. The Company may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission and its reports to stockholders. This Report contains forward-looking statements made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. In connection with these "safe harbor" provisions, the Company identifies important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by or on behalf of the Company. Any such forward-looking statement is qualified by reference to the following cautionary statements. Limited History of Profitability; Quarterly Fluctuations in Operating Results. The Company was founded in 1987 and only began generating revenues from the sale of its primary product in 1994. The Company has experienced significant operating losses since its inception and had an accumulated deficit of approximately $34.7 million at December 31, 1997. While the Company was first profitable in the fourth quarter of 1997, there can be no assurance that the Company will ever generate sufficient revenues to attain operating profitability or retain net profitability on an on-going annual basis. In addition, the Company may experience fluctuations in revenues and operating results based on such factors as demand for the Company's products, the timing, cost and acceptance of product introductions and enhancements made by the Company or others, levels of third party payment, alternative treatments which currently exist or may be introduced in the future, completion of acquisitions, changes in practice patterns, competitive conditions, regulatory announcements and changes affecting the Company's products in the industry and general economic conditions. The development and commercialization by the Company of additional products will require substantial product development and regulatory, clinical and other expenditures. See "Item 1 -- Business -- Competition." Potential Adverse Outcome of Litigation. The Company is a defendant in a number of investor lawsuits relating generally to correspondence received by the Company from the FDA in mid-1996 regarding the promotion and configuration of the OrthoLogic 1000. See "Item 1 -- Business -- Governmental Regulation" and "Item 3 -- Legal Proceedings." The Company intends to defend these lawsuits vigorously. However, an adverse litigation outcome would have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Sales Force. A substantial portion of the Company's sales are generated through the Company's internal sales force of approximately 165 employees. During 1996, the Company shifted its primary focus from sales through independent orthopaedic specialty dealers to an internal sales force. This internal sales force requires the Company to devote greater resources to sales training and management. In addition, the Company is faced with the challenge of managing and effectively motivating a much larger sales force than it has ever had. Moreover, many of those new salespeople are inexperienced in selling the Company's products, and salespeople historically experience a learning curve before they become efficient, if at all. There can be no assurance that the internal sales force will be able to maintain or exceed the Company's historic sales through independent specialty dealers. The Company's marketing success depends in large part upon the ability of sales and marketing personnel to demonstrate to potential customers the benefits of the Company's products and their advantages over competing products and surgical procedures. In January 1998 the sales management was restructured so that territories are determined based only on geography and not on geography and devices. As a result, certain members of sales management are now responsible for devices not 15 previously within their area of responsibility. There can be no assurance that these individuals will be able to manage their new responsibilities successfully. See "Item 1 -- Business -- Marketing and Sales." Dependence on Key Personnel; Recent Management Changes. The success of the Company is dependent in large part on the ability of the Company to attract and retain its key management, operating, technical, marketing and sales personnel as well as clinical investigators who are not employees of the Company. Such individuals are in high demand, and the identification, attraction and retention of such personnel could be lengthy, difficult and costly. The Company competes for its employees and clinical investigators with other companies in the orthopaedic industry and research and academic institutions. There can be no assurance that the Company will be able to attract and retain the qualified personnel necessary for the expansion of its business. In 1996, the Company hired a new President who subsequently resigned in February 1997. In October 1997, the Company hired a new President and Chief Executive Officer and in December 1997, the Company filled the newly created position of Vice President, Marketing Worldwide. A loss of the services of one or more members of the senior management group, or the Company's inability to hire additional personnel as necessary, could have an adverse effect on the Company's business, financial condition and results of operations. See "Item 1 -- Business -- Employees." Historical Dependence on Primary Product; Future Products. During 1997 revenues from CPM devices reduced the Company's dependence on revenues from the OrthoLogic 1000. However, the Company believes that, to sustain long-term growth, it must develop and introduce additional products and expand approved indications for its existing products. The development and commercialization by the Company of additional products will require substantial product development, regulatory, clinical and other expenditures. There can be no assurance that the Company's technologies will allow it to develop new products or expand indications for existing products in the future or that the Company will be able to manufacture or market such products successfully. Any failure by the Company to develop new products or expand indications could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1 -- Business -- Products" and "Item 1 -- Business -- Competition." Uncertainty of Market Acceptance. The Company believes that the demand for bone growth stimulators is still developing and the Company's success will depend in part upon the growth of this demand. There can be no assurance that this demand will develop. The long-term commercial success of the OrthoLogic 1000 will also depend in significant part upon its widespread acceptance by a significant portion of the medical community as a safe, efficacious and cost-effective alternative to invasive procedures. The Company is unable to predict how quickly, if at all, its products may be accepted by members of the orthopaedic medical community. The widespread acceptance of the Company's primary products represents a significant change in practice patterns for the orthopaedic medical community and in reimbursement policy for third party payors. Historically, some orthopaedic medical professionals have indicated hesitancy in prescribing bone growth stimulator products such as those manufactured by the Company. The use of CPM is more widely accepted, however the Company must continue to prove that the products are safe, efficacious and cost-effective in order to maintain and grow its market share. Hyalgan is a new therapeutic treatment for relief of pain from osteoarthritis of the knee. The long-term commercial success of the product will depend upon its widespread acceptance by a significant portion of the medical community and third party payors as a safe, efficacious and cost-effective alternative to other treatment options such as simple analgesics. Failure of the Company's products to achieve widespread market acceptance by the orthopaedic medical community and third party payors would have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1 -- Business -- Third Party Payment." Integration of Acquisitions. The Company acquired Sutter Corporation in August 1996, and certain assets of each of TMC and DMTI in March 1997. See "Item 1 -- Business -- General." Successful integration of such acquisitions is critical to the future financial performance of the combined Company. Complete integration of any acquisition could take several quarters or more to accomplish and will require, among other things, integration of the companies' respective product offerings and coordination of their sales and marketing, reimbursement, manufacturing and research and development efforts. The process of integrating companies may also cause management's attention to be diverted from operating the Company, and any difficulties encountered in the transition process could have an adverse impact on the business, financial condition and operating results of the Company. In addition, the process of combining organizations could cause the interruption of, or a loss of momentum in, the activities of either or both of the companies' businesses, which could have an adverse effect on their combined operations. 16 The difficulty of combining companies is increased by the need to integrate the personnel and the geographic distance between companies. Changes brought about by any acquisition may cause key employees or to terminate their relationship with the Company. There can be no assurance that the combined Company will retain the employees and or that the Company will realize any potential benefits of any acquisitions. In addition, the Company might incur significant integration or additional operating costs associated with an acquisition. There can be no assurance that such costs will not have an adverse effect upon the Company's operating results, particularly in the fiscal quarters following the consummation of any acquisition, while the operations of the acquired business are being integrated into the Company's operations. There can be no assurance that, following any acquisition, the Company will be able to operate any acquired business on a profitable basis. In the first quarter of 1997, the Company commenced the consolidation of the recent acquisitions. The administrative operations, manufacturing and servicing operations were consolidated by the end of 1997. The sales force management was consolidated in early 1998 and computer hardware and software systems are expected to be completed in mid 1998. Limited Combined Operating History and Results. The Company acquired Sutter in August 1996 and certain assets of each of TMC and DMTI in March 1997. Financial results of Sutter, TMC and DMTI before August 1996, March 1997 and March 1997, respectively, reflect operations when those businesses were not under the Company's management and, as such, may not be indicative of future operating results. Although the Company does not anticipate incurring significant additional operating costs associated with the acquisitions, there can be no assurance that such costs will not be incurred or that the purchase, or any other acquisition, will not have an adverse effect upon the Company's operating results while the operations are being integrated into the Company's operations. There can be no assurance that, following any acquisition, the Company will be able to operate the purchased business on a profitable basis or that the Company will be able to recover any excess of the purchase price of the business acquired over its tangible book value. Condition of Acquired Facilities. The Company has determined that the facilities acquired in the acquisition of Sutter had several physical problems, primarily resulting from excessive moisture and water leaks. Two Sutter employees have filed related worker's compensation claims, and these two claims are being processed by Sutter's worker's compensation carrier. In addition, the lack of maintenance has allegedly caused some structural problems at one facility, and employee complaints based upon these problems have led to two informal complaints by the California Department of Industrial Relations and Division of Occupational Safety and Health. Sutter has responded to both complaints and continues to work with its landlord to correct the problems. In addition, Sutter has notified the prior owners of Sutter of the problems because the prior owners may be the responsible party under the acquisition agreement for any required remedies. Sutter has vacated the leasehold premises of both Sutter facilities. Sutter vacated a manufacturing facility in conjunction with a negotiated lease termination. Sutter also vacated a mixed use facility and notified that landlord of its termination of the lease due to acts and omissions of the landlord. That landlord claims that rent remains unpaid but has not yet responded to Sutter's claim that the lease has been terminated. Damages, claims and future discoveries regarding the maintenance of the facilities by prior occupants could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 3 -- Legal Proceedings" and "Item 2 -- Properties." Management of Growth. The Company has experienced a period of rapid growth in the expansion of its product line with the CPM devices and Hyalgan. This growth has placed, and could continue to place, a significant strain on the Company's financial, management and other resources. The Company's future performance will depend in part on its ability to manage change in its operations, including integration of acquired businesses. In addition, the Company's ability to manage its growth effectively will require it to continue to improve its manufacturing, operational and financial control systems and infrastructure and management information systems, and to attract, train, motivate, manage and retain key employees. If the Company's management were to become unable to manage growth effectively, the Company's business, financial condition, and results of operations could be adversely affected. Limitations on Third Party Payment; Uncertain Effects of Managed Care. The Company's ability to commercialize its products successfully in the United States and in other countries will depend in part on the extent to which acceptance of payment for such products and related treatment will continue to be available from government health administration authorities, private health insurers and other payors. Cost control measures adopted by third party payors in recent years have had and may continue to have a significant effect on the purchasing and practice patterns of many health care 17 providers, generally causing them to be more selective in the purchase of medical products. In addition, payors are increasingly challenging the prices and clinical efficacy of medical products and services. Payors may deny reimbursement if they determine that the product used in a procedure was experimental, was used for a nonapproved indication or was unnecessary, inappropriate, not cost-effective, unsafe, or ineffective. The Company's products are reimbursed by most payors, however there are generally specific product usage requirements or documentation requirements in order for the Company to receive reimbursement. In certain circumstances the Company is successful in appealing reimbursement coverage for those applications which are not in compliance with the payor requirements. Medicare has very strict guidelines for reimbursement, and until the second quarter 1997, the Company had some success in appealing claims for applications of the OrthoLogic 1000 which were outside the coverage guidelines. During the second quarter of 1997 the Company determined that Medicare would no longer reimburse for such cases, and the Company wrote off all Medicare receivables which did not meet their guidelines. Significant uncertainty exists as to the reimbursement status of newly approved health care products, such as Hyalgan, and there can be no assurance that adequate third party coverage will continue to be available to the Company at current levels. Although the Company has recognized some fee revenue under the Co-Promotion Agreement for Hyalgan, the level of fees recognized under the Co-Promotion Agreement will ultimately be dependent on Medicare's assigned billing code and reimbursement amount. Failure to continue to obtain reimbursement from payors at levels acceptable to the Company could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1 -- Business -- Third Party Payment." Uncertainty and Potential Negative Effects of Health Care Reform. The health care industry is undergoing fundamental changes resulting from political, economic and regulatory influences. In the United States, comprehensive programs have been proposed that seek to (i) increase access to health care for the uninsured, (ii) control the escalation of health care expenditures within the economy and (iii) use health care reimbursement policies to help control the federal deficit. The Company anticipates that Congress and state legislatures will continue to review and assess alternative health care delivery systems and methods of payment, and public debate of these issues will likely continue. Due to uncertainties regarding the outcome of reform initiatives and their enactment and implementation, the Company cannot predict which, if any, of such reform proposals will be adopted and when they might be adopted. Other countries also are considering health care reform. The Company's plans for increased international sales are largely dependent upon other countries' adoption of managed care systems and their acceptance of the potential benefits of the Company's products and the belief that managed care plans will have a positive effect on sales. For the reasons identified in this and in the preceding paragraph, however, those assumptions may be incorrect. Significant changes in health care systems are likely to have a substantial impact over time on the manner in which the Company conducts its business and could have a material adverse effect on the Company's business, financial condition and results of operations and ability to market its products as currently contemplated. Intense Competition. The orthopaedic industry is characterized by intense competition. Currently, there are three major competitors other than the Company selling electromagnetic bone growth stimulation products approved by the FDA for the treatment of nonunion fractures, one large domestic and several foreign manufacturers of CPM devices and one competitor selling a therapeutic injectable for treatment of osteoarthritis of the knee. The Company also competes with many independent owners/lessors of CPM devices in addition to the providers of traditional orthopaedic immobilization products and rehabilitation services. The Company estimates that one of its competitors has a dominant share of the market for electromagnetic bone growth stimulation products for non-healing fractures in the United States, and another has a dominant share of the market for use of their device as an adjunct to spinal fusion surgery. In addition, there are several large, well-established companies that sell fracture fixation devices similar in function to those sold by the Company. Many participants in the medical technology industry, including the Company's competitors, have substantially greater capital resources, research and development staffs and facilities than the Company. Such participants have developed or are developing products that may be competitive with the products that have been or are being developed or researched by the Company. Other companies are developing a variety of other products and technologies to be used in CPM devices, the treatment of fractures and spinal fusions, including growth factors, bone graft substitutes combined with growth factors, and nonthermal ultrasound. One company has received FDA approval for a nonthermal ultrasound device to treat nonsevere fresh fractures of the lower leg and lower forearm. There can be no assurance that products marketed by these or other companies will not be sold for use in treating non-healing fractures or spinal fusions, even in the absence of regulatory approval to do so. Any such sales could have a material adverse effect on the Company. Many of the Company's competitors have substantially greater experience than the Company in conducting research and development, obtaining regulatory approvals, manufacturing and marketing and selling medical devices. Any failure by the Company to develop products that compete favorably in the marketplace 18 would have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1 -- Business -- Research and Development" and "Item 1 -- Business -- Competition." Rapid Technological Change. The medical device industry is characterized by rapid and significant technological change. There can be no assurance that the Company's competitors will not succeed in developing or marketing products or technologies that are more effective or less costly, or both, and which render the Company's products obsolete or noncompetitive. In addition, new technologies, procedures and medications could be developed that replace or reduce the value of the Company's products. The Company's success will depend in part on its ability to respond quickly to medical and technological changes through the development and introduction of new products. There can be no assurance that the Company's new product development efforts will result in any commercially successful products. A failure to develop new products could have a material adverse effect on the company's business, financial condition and results of operations. See "Item 1 -- Business -- Research and Development." Government Regulation. The Company's current and future products and manufacturing activities are and will be regulated under the Medical Device Amendments Act of 1976 to the Food, Drug and Cosmetic Act and the 1990 Safe Medical Devices Act. The Company's current BioLogic technology-based products and Hyalgan are classified as Class III Significant Risk Devices, which are subject to the most stringent level of FDA review for medical devices and are required to be tested under IDE clinical trials and approved for marketing under a PMA. The Company's fracture fixation devices are Class II devices that are marketed pursuant to 510(k) clearance from the FDA. The Company received PMA approval from the FDA in March 1994 and commenced marketing the OrthoLogic 1000 for the treatment of nonunion fractures. The Company has completed a data analysis of a clinical trial of the OrthoLogic 1000 for the treatment of delayed union fractures, and based on this analysis, the Company believes that a larger number of patients is required to establish statistical significance before it submits a supplement to its existing PMA for such indication. There can be no assurance that the expansion of this study will establish statistical significance. In addition, there can be no assurance that the FDA will allow expansion of the study without requiring a new clinical trial. If a new trial is required, there can be no assurance that it will establish statistical significance leading to product approval. However, the Company recently combined the existing data from the study with delayed union data collected in the Company's Post Marketing Clinical Registry. This combined data set has been analyzed and submitted to the FDA to support the Company's request to expand the non-union definition to include patients five months post-injury. There can be no assurance that this submission will result in regulatory approval. The Company received approval of an IDE for the SpinaLogic 1000 for use as an adjunct to spinal fusion surgery in August 1992 and commenced clinical trials for this product in February 1993. The Company is in the process of evaluating the results of the clinical trial for use of the SpinaLogic 1000 as an adjunct to spinal fusion surgery. In September 1995, the Company received an approval of an IDE supplement for the SpinaLogic 1000 for treatment of failed spinal fusions. The Company commenced this study in the fourth quarter of 1995. There can be no assurance that any such clinical trials will be successfully completed or that, if completed, the results of such studies will demonstrate clinical benefits or that the Company will receive regulatory approval for the OrthoLogic 1000 for the treatment of delayed union fractures or other broader indications or for the SpinaLogic 1000 or for any other products. Any significant delay in receiving or failure to receive regulatory approval of the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1 -- Business -- Products" and "Item 1 -- Business -- Government Regulation." The FDA and comparable agencies in many foreign countries and in state and local governments impose substantial limitations on the introduction of medical devices through costly and time-consuming laboratory and clinical testing and other procedures. The process of obtaining FDA and other required regulatory approvals is lengthy, expensive and uncertain. Moreover, regulatory approvals, if granted, typically include significant limitations on the indicated uses for which a product may be marketed. In addition, approved products may be subject to additional testing and surveillance programs required by regulatory agencies, and product approvals could be withdrawn and labeling restrictions may be imposed for failure to comply with regulatory standards or upon the occurrence of unforeseen problems following initial marketing. The Company is also required to adhere to applicable requirements for FDA Good Manufacturing Practices, to engage in extensive record keeping and reporting and to make available its manufacturing facilities for periodic inspections by governmental agencies, including the FDA and comparable agencies in other countries. Failure to comply with these and other applicable regulatory requirements could result in, among other things, significant fines, suspension 19 of approvals, seizures or recalls of products, or operating restrictions and criminal prosecutions. The Company has received letters from the FDA regarding its regulatory compliance. The Company believes that all issues raised in the letters have been resolved. See "Item 1 -- Business -- Government Regulation." Changes in existing regulations or interpretations of existing regulations or adoption of new or additional restrictive regulations could prevent the Company from obtaining, or affect the timing of, future regulatory approvals. If the Company experiences a delay in receiving or fails to obtain any governmental approval for any of its current or future products or fails to comply with any regulatory requirements, the Company's business, financial condition and results of operations could be materially adversely affected. See "Item 1 -- Business -- Products" and "Item 1 -- Business -- Government Regulation." Dependence on Key Suppliers. The Company purchases the microprocessor used in the OrthoLogic 1000 from a sole source supplier, Phillips N.V. In addition, there are two suppliers for another component used in the OrthoLogic 1000 and two suppliers for the composite material components of the OrthoFrame products. Establishment of additional or replacement suppliers for the components cannot be accomplished quickly. In addition, Hyalgan is manufactured by a single company, Fidia S.p.A. Fidia has been manufacturing Hyalgan for sale in Europe since 1987. The Company purchases several CPM components, including microprocessors, motors and custom key panels from sole-source suppliers. The Company believes that its CPM products are not dependent on these components and could be redesigned to incorporate comparable components. While the Company maintains a supply of certain OrthoLogic 1000 components to meet sales forecasts for one year and OrthoFrame components to meet sales forecasts for three months and the distributor of Hyalgan maintains a supply of product to last several months, any delay or interruption in supply of these components or products could significantly impair the Company's ability to deliver its products in sufficient quantities, and therefore, could have a material adverse effect on its business, financial condition and results of operations. See "Item 1 -- Business -- Manufacturing." Dependence on Patents, Licenses and Proprietary Rights. The Company's success will depend in significant part on its ability to obtain and maintain patent protection for products and processes, to preserve its trade secrets and proprietary know-how and to operate without infringing the proprietary rights of third parties. While the Company holds title to numerous United States and foreign patents and patent applications, as well as licenses to numerous United States and foreign patents (see "Item 1 -- Business -- Patents, Licenses and Proprietary Rights"), no assurance can be given that any additional patents will be issued or that the scope of any patent protection will exclude competitors or that any of the patents held by or licensed to the Company will be held valid if subsequently challenged. The validity and breadth of claims covered in medical technology patents involves complex legal and factual questions and therefore may be highly uncertain. In addition, although the Company holds or licenses patents for certain of its technologies, others may hold or receive patents which contain claims having a scope that covers products developed by the Company. There can be no assurance that licensing rights to the patents of others, if required for the Company's products, will be available at all or at a cost acceptable to the Company. The Company licenses covering the BioLogic and OrthoFrame technologies provide for payment by the Company of royalties. The Co-Promotion Agreement provides the Company with exclusive marketing rights for Hyalgan to orthopedic surgeons in the United States. The Company is paid a commission which is based upon the number of units sold at the wholesale acquisition cost less amounts for distribution costs, discounts, rebates, returns, product transfer price, overhead factor and a royalty factor. Each license may be terminated if the Company breaches any material provision of such license. The termination of any license would have a material adverse effect on the Company's business, financial condition and results of operations. See Note 4 of Notes to Consolidated Financial Statements. The Company also relies on unpatented trade secrets and know-how. The Company generally requires its employees, consultants, advisors and investigators to enter into confidentiality agreements which include, among other things, an agreement to assign to the Company all inventions that were developed by the employee while employed by the Company that are related to its business. There can be no assurance, however, that these agreements will protect the Company's proprietary information or that others will not gain access to, or independently develop similar trade secrets or know-how. There has been substantial litigation regarding patent and other intellectual property rights in the orthopaedic industry. Litigation, which could result in substantial cost to, and diversion of effort by, the Company may be necessary to enforce patents issued or licensed to the Company, to protect trade secrets or know-how owned by the Company or 20 to defend the Company against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. There can be no assurance that the results of such litigation would be favorable to the Company. In addition, competitors may employ litigation to gain a competitive advantage. Adverse determinations in litigation could subject the Company to significant liabilities, and could require the Company to seek licenses from third parties or prevent the Company from manufacturing, selling or using its products, any of which determinations could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1 -- Business -- Patents, Licenses and Proprietary Rights." Risk of Product Liability Claims. The Company faces an inherent business risk of exposure to product liability claims in the event that the use of its technology or products is alleged to have resulted in adverse effects. To date, no product liability claims have been asserted against the Company for its fracture healing and Hyalgan products and only limited claims for its CPM products. The Company maintains a product liability and general liability insurance policy with coverage of an annual aggregate maximum of $2.0 million. The Company's product liability and general liability policy is provided on an occurrence basis. The policy is subject to annual renewal. In addition, the Company maintains an umbrella excess liability policy which covers product and general liability with coverage of an additional annual aggregate maximum of $25.0 million. There can be no assurance that liability claims will not exceed the coverage limits of such policies or that such insurance will continue to be available on commercially reasonable terms or at all. If the Company does not or cannot maintain sufficient liability insurance, its ability to market its products may be significantly impaired. In addition, product liability claims could have a material adverse effect on the business, financial condition and results of operations of the Company. See "Item 1 -- Business -- Product Liability Insurance." Possible Volatility of Stock Price. The market price of the Company's Common Stock is likely to be highly volatile. Factors such as fluctuations in the Company's operating results, developments in litigation to which the Company is subject, announcements and timing of potential acquisitions, announcements of technological innovations or new products by the Company or its competitors, FDA and international regulatory actions, actions with respect to reimbursement matters, developments with respect to patents or proprietary rights, public concern as to the safety of products developed by the Company or others, changes in health care policy in the United States and internationally, changes in stock market analyst recommendations regarding the Company, other medical device companies or the medical device industry generally and general market conditions may have a significant effect on the market price of the Common Stock. In addition, the stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. Developments in any of these areas, which are more fully described elsewhere in "Item 1 -- Business," "Item 3 -- Legal Proceedings," and "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 12 through 15 of the Company's 1997 Annual Report to stockholders, each of which is incorporated into this section by reference, could cause the Company's results to differ materially from results that have been or may be projected by or on behalf of the Company. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data The information on pages 18 through 31 of the Annual Report is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 21 PART III -------- Item 10. Directors and Executive Officers of the Registrant Information in response to this Item is incorporated by reference to (i) the biographical information relating to the Company's directors under the caption "Election of Directors" and the information relating to Section 16 compliance under the caption, "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for its Annual Meeting of Stockholders to be held May 15, 1998 (the "Proxy Statement"), and (ii) the information under the caption "Executive Officers of the Registrant" in Part I hereof. The Company anticipates filing the Proxy Statement within 120 days after December 31, 1997. Item 11. Executive Compensation The information under the heading "Executive Compensation" and "Compensation of Directors" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information under the heading "Voting Securities and Principal Holders Thereof - Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information under the heading "Certain Transactions" in the Proxy Statement is incorporated herein by reference. PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report: - ------------------------------------------------------------- 1. Financial Statements -------------------- The following financial statements of OrthoLogic Corp. and Independent Auditors' Report are incorporated by reference from pages 18 through 31 of the Annual Report: Balance Sheets - December 31, 1997 and 1996. Statements of Operations - Each of the three years in the period ended December 31, 1997. Statements of Stockholders' Equity - Each of the three years in the period ended December 31, 1997. Statements of Cash Flows - Each of the three years in the period ended December 31, 1997. Notes to Financial Statements 2. Financial Statement Schedules ----------------------------- Schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Financial Statements or notes thereto. 3. Exhibits and Management Contracts, and Compensatory Plans and ------------------------------------------------------------------- Arrangements ------------ All management contracts and compensatory plans and arrangements are identified by footnote after the Exhibit Descriptions on the attached Exhibit Index. 22 (b) Reports on Form 8-K. - ------------------------ The Company filed a Current Report on Form 8-K dated October 10, 1997 to report in Item 5 the appointment of Thomas R. Trotter to the position of President and Chief Executive Officer of the Company. (c) Exhibits - ------------ See the Exhibit Index immediately following the signature page of this report, which Index is incorporated herein by reference. (d) Financial Statements and Schedules - -------------------------------------- See Item 14(a)(1) and (2) above. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ORTHOLOGIC CORP. Date: March 27, 1998 By /s/ Thomas R. Trotter -------------------------------------- Thomas R. Trotter President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Thomas R. Trotter President, Chief Executive Officer and March 27, 1998 - ----------------------------------------------------- Director (Principal Executive Officer) Thomas R. Trotter March 27, 1998 /s/ John M. Holliman III Chairman of the Board of Directors - ----------------------------------------------------- and Director John M. Holliman III March 27, 1998 /s/ Fredric J. Feldman Director - ----------------------------------------------------- Fredric J. Feldman /s/ Elwood D. Howse, Jr. Director March 27, 1998 - ----------------------------------------------------- Elwood D. Howse, Jr. /s/ Stuart H. Altman Director March 27, 1998 - ----------------------------------------------------- Stuart H. Altman /s/ Augustus A. White III - ----------------------------------------------------- Augustus A. White III, M.D. Director March 27, 1998 /s/ Allen R. Dunaway Vice President and Chief Financial Officer March 27, 1998 - ----------------------------------------------------- (Principal Financial and Accounting Allen R. Dunaway Officer)
S-1 ORTHOLOGIC CORP. EXHIBIT INDEX TO REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (File No. 0-21214)
Exhibit Filed No. Description Incorporated by Reference To: Herewith --- ----------- ----------------------------- -------- 2.1 Stock Purchase Agreement dated August Exhibit 2.1 to the Company's Current 30, 1996 by and among the Company, Report on Form 8-K filed on Sutter Corporation and Smith September 13, 1996 Laboratories, Inc. 2.2 Purchase and Sale Agreement dated as of Exhibit 2.1 to the Company's Current December 30, 1996 by and among the Report on Form 8-K filed on March 18, Company and Toronto Medical Corp., an 1997 ("March 18, 1997 8-K") Ontario corporation 2.3 Amendment to Purchase and Sale Exhibit 2.2 to March 18, 1997 8-K Agreement dated as of January 13, 1997 by and among the Company and Toronto Medical Corp., an Ontario corporation 2.4 Second Amendment to Purchase and Exhibit 2.3 to March 18, 1997 8-K Sale Agreement dated as of March 1, 1997 by and among the Company and Toronto Medical Corp., an Ontario corporation 2.5 Assignment of Purchase and Sale Exhibit 2.4 to March 1997 8-K Agreement dated as of March 1, 1997 by and among the Company, Toronto Medical Orthopaedics Ltd., a Canada corporation and Toronto Medical Corp., an Ontario corporation 2.6 Asset Purchase Agreement dated March Exhibit 2.1 to the Company's Current 12, 1997 by and among the Company, Report on Form 8-K filed on March 27, Danninger Medical Technology, Inc., a 1997 Delaware corporation, and Danninger Health care, Inc., an Ohio corporation 3.1 Composite Certificate of Incorporation Exhibit 3.1 to Company's Form 10-Q of the Company, as amended, including for the quarter ended March 31, 1997 Certificate of Designation in respect of ("March 1997 10-Q") Series A Preferred Stock 3.2 Bylaws of the Company Exhibit 3.4 to Company's Amendment No. 2 to Registration Statement on Form S-1 (No. 33-47569) filed with the SEC on January 25, 1993 ("January 1993 S-1") 4.1 Articles 5, 9 and 11 of the Certificate of Exhibit 3.1 to March 1997 10-Q Incorporation of the Company 4.2 Articles II and III.2(c)(ii) of Bylaws of Exhibit 3.4 to January 1993 S-1 the Company 4.3 Specimen Common Stock Certificate Exhibit 4.1 to January 1993 S-1
EX-1
Exhibit Filed No. Description Incorporated by Reference To: Herewith --- ----------- ----------------------------- -------- 4.4 Stock Purchase Warrant, dated August Exhibit 4.6 to the Company's Form 10- 18, 1993, issued to CyberLogic, Inc. K for the fiscal year ended December 31, 1994 ("1994 10-K") 4.5 Stock Purchase Warrant, dated Exhibit 4.6 to Company's Registration September 20, 1995, issued to Statement on Form S-1 (No. 33-97438) Registered Consulting Group, Inc. filed with the SEC on September 27, 1995 ("1995 S-1") 4.6 Stock Purchase Warrant, dated October Exhibit 4.7 to the Company's Annual 15, 1996, issued to Registered Report on Form 10-K for the year Consulting Group, Inc. ended December 31, 1996 ("1996 10-K") 4.7 Rights Agreement dated as of March 4, Exhibit 4.1 to the Company's 1997 between the Company and Bank of Registration Statement on Form 8-A New York, and Exhibits A, B and C filed with the SEC on March 6, 1997 thereto 4.8 1987 Stock Option Plan of the Company, Exhibit 4.4 to the Company's Form as amended and approved by 10-Q for the quarter ended June 30, stockholders (1) 1997 ("June 1997 10-Q") 4.9 1997 Stock Option Plan of the Company(1) Exhibit 4.5 to the Company's June 1997 10-Q 4.10 Stock Purchase Warrant dated March X 2, 1998 issued to Silicon Valley Bank 4.11 Antidilution Agreement dated March 2, X 1998 by and between the Company and Silicon Valley Bank 10.1 License Agreement dated September 3, Exhibit 10.6 to January 1993 S-1 1987 between the Company and Life Resonances, Inc. 10.2 Invention, Confidential Information and Exhibit 10.7 to January 1993 S-1 Non-Competition Agreement dated September 18, 1987 between the Company and Weinstein 10.3 Fifth Amendment to Lease, dated Exhibit 10.10 to the Company's September 14, 1993 between the September 30, 1994 10-Q Company and Cook Inlet Region, Incorporated 10.4 Invention, Confidential Information and Exhibit 10.11 to January 1993 S-1 Non-Competition Agreement dated January 10, 1989 between the Company and Frank P. Magee 10.5 Addendum to Lease between the Exhibit 10.8.1 to the Registration Company and Cook Inlet Region, Inc. Statement on Form S-3 (No. 333-3082) commencing April 1, 1996 filed with the SEC on April 2, 1996 ("April 1996 S-3") 10.6 1995 Officer Bonus Plan(1) Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 ("1995 10- K") 10.7 1996 Officer Bonus Plan(1) Exhibit 10.11 to 1995 10-K 10.8 1997 Officer Bonus Plan(1) Exhibit 10.13 to the Company's 1996 10-K
EX-2
Exhibit Filed No. Description Incorporated by Reference To: Herewith --- ----------- ----------------------------- -------- 10.9 Form of Indemnification Agreement* Exhibit 10.16 to January 1993 S-1 10.10 License Agreement dated December 2, Exhibit 10.22 to January 1993 S-1 1992 between Orthotic Limited Partnership and Company 10.11 Consulting Agreement dated May 1, Exhibit 10.11 to the Company's 1990 between Augustus A. White III and September 30, 1994 Form 10-Q the Company(1) 10.12 Loan Modification Agreement dated Exhibit 10.22 to 1995 S-1 March 23, 1995 between Company and Silicon Valley Bank 10.13 Renewal of Employment Agreement of Exhibit 10.23 to 1994 10-K Frank P. Magee dated March 28, 1995(1) 10.14 Employment Agreement dated February Exhibit 10.24 to 1995 10-K 27, 1992 between Allen R. Dunaway and the Company(1) 10.15 Amendment to Employment Agreement Exhibit 10.25 to 1995 10-K between the Company and Allen R. Dunaway dated February 14, 1996(1) 10.16 Underwriting Agreement between the Exhibit 1.1 to 1995 S-1 Company and Volpe, Welty & Co. and Dain Bosworth, Inc., as Representatives of the Underwriters 10.17 Underwriting Agreement between the Exhibit 1.1 to April 1996 S-3 Company and Volpe, Welty & Company Hambrecht & Quist and Dain Bosworth, Inc., as Representatives of the Underwriters 10.18 Maturity Modification Letter dated Exhibit 10.21 to April 1996 S-3 March 29, 1996, by Silicon Valley Bank 10.19 Lease made March 1997 between Exhibit 10.34 to the Company's 1996 Toronto Medical Corp. and Toronto 10-K Medical Orthopaedics Ltd. 10.20 Lease dated September 4, 1991 by and Exhibit 10.35 to the Company's between Greystone Realty Corporation Annual Report on Form 10-K/A and Sutter Corporation (Amendment No. 1) for the year ended December 31, 1996 ("1996 10-K/A") 10.21 Lease dated February 10, 1988 between Exhibit 10.36 to 1996 10-K/A MIC Four Points and Sutter Biomedical, Inc. 10.22 First Addendum to Lease dated February Exhibit 10.37 to 1996 10-K/A 15, 1988 by and between MIC Four Points and Sutter Biomedical, Inc.
EX-3
Exhibit Filed No. Description Incorporated by Reference To: Herewith --- ----------- ----------------------------- -------- 10.23 October 7, 1988 Second Addendum to Exhibit 10.38 to 1996 10-K/A Lease dated February 10, 1988 between MIC Four Points and Sutter Biomedical, Inc. 10.24 Severance Agreement dated February Exhibit 10.39 to the Company's 1996 18, 1997 by and between George A. 10-K Oram, Jr. and the Company (1) 10.25 Promissory Note dated November 15, Exhibit 10.40 to the Company's 1996 1996 made by George A. Oram, Jr. in 10-K favor of the Company (1) 10.26 [Intentionally Omitted.] 10.27 Employment Agreement by and between Exhibit 10.4 to the Company's March Allan M. Weinstein and the Company 1997 10-Q effective as of December 1, 1996 (1) 10.28 Employment Agreement by and between Exhibit 10.5 to the Company's March Frank P. Magee and the Company 1997 10-Q effective as of December 1, 1996 (1) 10.29 Employment Agreement by and between Exhibit 10.6 to the Company's March Allen R. Dunaway and the Company 1997 10-Q effective as of December 1, 1996 (1) 10.30 Employment Agreement by and between Exhibit 10.7 to the Company's March James B. Koeneman and the Company 1997 10-Q effective as of December 1, 1996 (1) 10.31 Employment Agreement by and between Exhibit 10.8 to the Company's March MaryAnn G. Miller and the Company 1997 10-Q effective as of December 1, 1996 (1) 10.32 Employment Agreement by and between Exhibit 10.9 to the Company's March Nicholas A. Skaff and the Company 1997 10-Q effective as of December 1, 1996 (1) 10.33 Co-promotion Agreement dated June 23, Exhibit 10.1 to the Company's June 1997 by and between the Company and 1997 10-Q Sanofi Pharmaceuticals, Inc. 10.34 Single-tenant Lease-net dated June 12, Exhibit 10.2 to the Company's Form 1997 by and between the Company and 10-Q for the quarter ended Chamberlain Development, L.L.C. September 30, 1997 ("September 1997 10-Q") 10.35 Employment Agreement dated October Exhibit 10.3 to the Company's 20, 1997 by and between the Company September 1997 10-Q and Thomas R. Trotter, including Letter of Incentive Option Grant, OrthoLogic Corp. 1987 Stock Option Plan (1)
EX-4
Exhibit Filed No. Description Incorporated by Reference To: Herewith --- ----------- ----------------------------- -------- 10.36 Employment Agreement dated October Exhibit 10.4 to the Company's 17, 1997 by and between the Company September 1997 10-Q and Frank P. Magee (1) 10.37 Employment Agreement dated Exhibit 10.5 to the Company's October 17, 1997 by and between the September 1997 10-Q Company and Allan M. Weinstein (1) 10.38 Severance Agreement dated May 21, Exhibit 10.6 to the Company's 1997 by and between the Company and September 1997 10-Q David E. Derminio (1) 10.39 Severance Agreement dated September Exhibit 10.7 to the Company's 19, 1997 by and between the Company September 1997 10-Q and Nicholas A. Skaff (1) 10.40 Employment Agreement effective as of X December 15, 1997 by and between the Company and William C. Rieger (1) 10.41 Transitional Employment Agreement X dated February 2, 1998 by and between the Company and Allen R. Dunaway (1) 10.42 Employment Agreement effective as of X March 16, 1998 by and between the Company and Terry D. Meier (1) 10.43 Revised and Restated Employment X Agreement effective as of March 16, 1998 by and between the Company and Allan M. Weinstein(1) 10.44 Loan and Security Agreement dated X March 2, 1998 by and between the Company and Silicon Valley Bank 10.45 Registration Rights Agreement dated X March 2, 1998 by and between the Company and Silicon Valley Bank 11.1 Statement of Computation of Net X Income (Loss) per Weighted Average Number of Common Shares Outstanding 13.1 Portions of 1997 Annual Report to X Stockholders 21.1 Subsidiaries of Registrant X 23.1 Consent of Deloitte & Touche LLP X 27 Financial Data Schedule X - ---------------------------------------
(1) Management contract or compensatory plan or arrangement * The Company has entered into a separate indemnification agreement with each of its current direct and executive officers that differ only in party names and dates. Pursuant to the instructions accompanying Item 601 of Regulation S-K, the Company has filed the form of such indemnification agreement. EX-5 EX-4.10 2 WARRANT TO PURCHASE STOCK THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT TO PURCHASE STOCK Corporation: OrthoLogic Corp., a Delaware corporation Number of Shares: 10,000 Class of Stock: Common Initial Exercise Price: $7.20 per share Issue Date: March 2, 1998 Expiration Date: March 1, 2003 THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, SILICON VALLEY BANK ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the "Shares") of the corporation (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant. ARTICLE 1. EXERCISE. -------- 1.1 Method of Exercise. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 1.2 Conversion Right. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.4. 1.3 Intentionally Omitted 1.4 Fair Market Value. If the Shares are traded in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company's stock into which the Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.5 Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.6 Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.7 Repurchase on Sale, Merger, or Consolidation of the Company. 1.7.1. "Acquisition". For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.7.2. Assumption of Warrant. Upon the closing of any Acquisition the successor entity shall assume the obligations of this Warrant, and this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. 1.7.3. Purchase Right. Notwithstanding the foregoing, at the election of Holder, the Company shall purchase the unexercised portion of this Warrant for cash upon the closing of any Acquisition for an amount equal to (a) the fair market value of any consideration that would have been received by Holder in consideration of the Shares had Holder exercised the unexercised portion of this Warrant immediately before the record date for determining the shareholders entitled to participate in the proceeds of the Acquisition, less (b) the aggregate Warrant Price of the Shares, but in no event less than zero. ARTICLE 2. ADJUSTMENTS TO THE SHARES. ------------------------- 2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on its common stock (or the Shares if the Shares are securities other than common stock) payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, or, if the Shares are securities other than common stock, subdivides the Shares in a transaction that increases the amount of common stock into which the Shares are convertible, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2.2 Reclassification, Exchange or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Articles of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2 2.3 Adjustments for Combinations, Etc. If the outstanding Shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased. 2.4 Adjustments for Diluting Issuances. The Warrant Price and the number of Shares issuable upon exercise of this Warrant or, if the Shares are Preferred Stock, the number of shares of common stock issuable upon conversion of the Shares, shall be subject to adjustment, from time to time in the manner set forth on Exhibit A in the event of Diluting Issuances (as defined on Exhibit A). 2.5 No Impairment. The Company shall not, by amendment of its Articles of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this Warrant is unchanged. 2.6 Fractional Shares. No fractional Shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder amount computed by multiplying the fractional interest by the fair market value of a full Share. 2.7 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. -------------------------------------------- 3.1 Representations and Warranties. The Company hereby represents and warrants to the Holder as follows: (a) The initial Warrant Price referenced on the first page of this Warrant is not greater than the fair market value of the Shares as of the date of this Warrant. (b) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. 3.2 Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common 3 stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 Information Rights. So long as the Holder holds this Warrant and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all notices or other written communications to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) such other financial statements required under and in accordance with any loan documents between Holder and the Company (or if there are no such requirements [or if the subject loan(s) no longer are outstanding]), then within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements. 3.4 Registration Under Securities Act of 1933, as amended. The Company agrees that the Shares or, if the Shares are convertible into common stock of the Company, such common stock, shall be subject to the registration rights set forth on Exhibit B, if attached. ARTICLE 4. MISCELLANEOUS. ------------- 4.1 Term; Notice of Expiration. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above. The Company shall give Holder written notice of Holder's right to exercise this Warrant in the form attached as Appendix 2 not more than 90 days and not less than 30 days before the Expiration Date. If the notice is not so given, the Expiration Date shall automatically be extended until 30 days after the date the Company delivers the notice to Holder. 4.2 Legends. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder's notice of proposed sale. 4.4 Transfer Procedure. Subject to the provisions of Section 4.3 Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) at any time to Silicon Valley Bancshares or The Silicon Valley Bank Foundation, or, to any other transferree by giving the Company notice of the 4 portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Unless the Company is filing financial information with the SEC pursuant to the Securities Exchange Act of 1934, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. Nothing in the foregoing paragraph shall permit Holder to sell this Warrant in a Secondary Market. 4.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such holder from time to time. 4.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.7 Attorneys Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees. 4.8 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law. "COMPANY" OrthoLogic Corp. By: /s/ Thomas R. Trotter ------------------------------ Name: Thomas R. Trotter ------------------------------ (Print) Title: Chairman of the Board, [President] or Vice President By: /s/ Allen Dunaway ------------------------------ Name: ------------------------------ (Print) Title: Chief Financial Officer, Secretary, Assistant Treasurer or Assistant Secretary EX-4.11 3 ANTIDILUTION AGREEMENT SILICON VALLEY BANK ANTIDILUTION AGREEMENT THIS ANTIDILUTION AGREEMENT is entered into as of March 2, 1998, by and between Silicon Valley Bank ("Purchaser") and the Company whose name appears on the last page of this Antidilution Agreement. RECITALS -------- A. Concurrently with the execution of this Antidilution Agreement, the Purchaser is purchasing from the Company a Warrant to Purchase Stock (the "Warrant') pursuant to which Purchaser has the right to acquire from the Company the Shares (as defined in the Warrant). B. By this Antidilution Agreement, the Purchaser and the Company desire to set forth the adjustment in the number of Shares issuable upon exercise of the Warrant as a result of a Diluting Issuance (as defined in Exhibit A to the Warrant). C. Capitalized terms used herein shall have the same meaning as set forth in the Warrant. NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. Definitions. As used in this Antidilution Agreement, the following terms have the following respective meanings: (a) "Option" means any right, option, or warrant to subscribe for, purchase, or otherwise acquire common stock or Convertible Securities. (b) "Convertible Securities" means any evidences of indebtedness, shares of stock, or other securities directly or indirectly convertible into or exchangeable for common stock. (c) "Issue" means to grant, issue, sell, assume, or fix a record date for determining persons entitled to receive, any security (including Options), whichever of the foregoing is the first to occur. (d) "Additional Common Shares" means all common stock (including reissued shares) issued (or deemed to be issued pursuant to Section 2) after the date of the Warrant. Additional Common Shares does not include, however, any common stock issued in a transaction described in Sections 2.1 and 2.2 of the Warrant; any common stock Issued upon conversion of preferred stock outstanding on the date of the Warrant; the Shares; or common stock Issued as incentive or in a nonfinancing transaction to employees, officers, directors, or consultants to the Company. (e) The shares of common stock ultimately Issuable upon exercise of an Option (including the shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security Issuable pursuant to an Option) are deemed to be Issued when the Option is Issued. The shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security (other than a Convertible Security Issued pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible Security. 2. Deemed Issuance of Additional Common Shares. The shares of common stock ultimately Issuable upon exercise of an Option (including the shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security Issuable pursuant to an Option) are deemed to be Issued when the Option is Issued. The shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security (other than a Convertible Security Issued pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible Security. The maximum amount of common stock Issuable is determined without regard to any future adjustments permitted under the instrument creating the Options or Convertible Securities. 3. Adjustment of Warrant Price for Diluting Issuances. 3.1 Ratchet Adjustment. If the Company issues Additional Common Shares after the date of the Warrant and the consideration per Additional Common Share (determined pursuant to Section 9) is less than the Warrant Price in effect immediately before such Issue, the Warrant Price shall be reduced to the lesser of: (a) the amount of such consideration per Additional Common Share; or (b) if the Company's common stock is traded on a national securities exchange or the National Association of Securities Dealers Automated Quotation System, the last reported bid or sale price of the Company's common stock on the first trading day following a public announcement of the Issuance. 3.2 Adjustment of Number of Shares. Upon each adjustment of the Warrant Price, the number of Shares issuable upon exercise of the Warrant shall be increased to equal the quotient obtained by dividing (a) the product resulting from multiplying (i) the number of Shares issuable upon exercise of the Warrant and (ii) the Warrant Price, in each case as in effect immediately before such adjustment, by (b) the adjusted Warrant Price. 3.3 Securities Deemed Outstanding. For the purpose of this Section 3, all securities issuable upon exercise of any outstanding Convertible Securities or Options, warrants, or other rights to acquire securities of the Company shall be deemed to be outstanding. 4. No Adjustment for Issuances Following Deemed Issuances. No adjustment to the Warrant Price shall be made upon the exercise of Options or conversion of Convertible Securities. 5. Adjustment Following Changes in Terms of Options or Convertible Securities. If the consideration payable to, or the amount of common stock Issuable by, the Company increases or decreases, respectively, pursuant to the terms of any outstanding Options or Convertible Securities, the Warrant Price shall be recomputed to reflect such increase or decrease. The recomputation shall be made as of the time of the Issuance of the Options or Convertible Securities. Any changes in the Warrant Price that occurred after such Issuance because other Additional Common Shares were Issued or deemed Issued shall also be recomputed. 6. Recomputation Upon Expiration of Options or Convertible Securities. The Warrant Price computed upon the original Issue of any Options or Convertible Securities, and any subsequent adjustments based thereon, shall be recomputed when any Options or rights of conversion under Convertible Securities expire without having been exercised. In the case of Convertible Securities or Options for common stock, the Warrant Price shall be recomputed as if the only Additional Common Shares Issued were the shares of common stock actually Issued upon the exercise of such securities, if any, and as if the only consideration received therefor was the consideration actually received upon the Issue, exercise or conversion of the Options or Convertible Securities. In the case of Options for Convertible Securities, the Warrant Price shall be recomputed as if the only Convertible Securities Issued were the Convertible Securities actually Issued upon the exercise thereof, if any, and as if the only consideration received therefor was the consideration actually received by the Company (determined pursuant to Section 9), if any, upon the Issue of the Options for the Convertible Securities. 7. Limit on Readjustments. No readjustment of the Warrant Price pursuant to Sections 5 or 6 shall increase the Warrant Price more than the amount of any decrease made in respect of the Issue of any Options or Convertible Securities. 2 8. 30 Day Options. In the case of any Options that expire by their terms not more than 30 days after the date of Issue thereof, no adjustment of the Warrant Price shall be made until the expiration or exercise of all such Options. 9. Computation of Consideration. The consideration received by the Company for the Issue of any Additional Common Shares shall be computed as follows: (a) Cash shall be valued at the amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest or accrued dividends. (b) Property. Property other than cash shall be computed at the fair market value thereof at the time of the Issue as determined in good faith by the Board of Directors of the Company. (c) Mixed Consideration. The consideration for Additional common Shares Issued together with other property of the Company for consideration that covers both shall be determined in good faith by the Board of Directors. (d) Options and Convertible Securities. The consideration per Additional Common Share for Options and Convertible Securities shall be determined by dividing: (i) the total amount, if any, received or receivable by the Company for the Issue of the Options or Convertible Securities, plus the minimum amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon exercise of the Options or conversion of the Convertible Securities, by (ii) the maximum amount of common stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) ultimately Issuable upon the exercise of such Options or the conversion of such Convertible Securities. 10. General. 10.1 Governing Law. This Antidilution Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 10.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 10.3 Entire Agreement. Except as set forth below, this Antidilution Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 10.4 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to Purchaser at Purchaser's address as set forth below, or at such other address as Purchaser shall have furnished to the Company in writing, or (b) if to the Company, at the Company's address set forth below, or at such other address as the Company shall have furnished to the Purchaser in writing. 10.5 Severability. In case any provision of this Antidilution Agreement shall be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions of this Antidilution Agreement shall not in any way be affected or impaired thereby. 3 10.6 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Antidilution Agreement. 10.7 Counterparts. This Antidilution Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. PURCHASER COMPANY SILICON VALLEY BANK ORTHOLOGIC CORP. By: /s/ Amy Lou Blunt By: /s/ Thomas R. Trotter ---------------------------------- ------------------------------- Name: Amy Lou Blunt Name: Thomas R. Trotter -------------------------------- ----------------------------- (Print): (Print):President & CEO ----------------------------- -------------------------- Title: Assistant Vice President Title:Chairman of the Board, ------------------------------- President or Vice President Address: Address: 4455 East Camelback Road, Suite E-290 1275 W. Washington Phoenix, AZ 85018 Tempe, AZ 85281 4 EX-10.40 4 EMPLOYMENT AGREEMENT FOR WILLIAM C. RIEGER EMPLOYMENT AGREEMENT This Agreement is to be effective, as of December 15, 1997, by and between OrthoLogic Corp., a Delaware corporation (the "Company"), and William C. Rieger ("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 Employee accepts such employment and agrees to perform such reasonable responsibilities and duties as may be assigned to him from time to time by the Company's Chief Executive Officer (the "CEO"). Initially, Employee's title shall be Vice President, with general responsibility for Marketing. Such title and duties may be changed from time to time by the CEO. Employee will report to the CEO. 2. Term. The initial term of this Agreement shall expire on December 31, 1998. Thereafter this Agreement shall renew automatically for additional terms of one-year each unless it is terminated pursuant to Section 7. 3. Compensation. (a) Salary. From the effective date of this Agreement through December 31, 1998, the Company shall pay Employee a minimum base annual salary, before deducting all applicable withholdings, of $166,000 per year, payable at the times and in the manner dictated by the Company's standard payroll policies. Effective January 1, 1998, and annually thereafter, the minimum base annual salary shall be reviewed by the Compensation Committee of the Board of Directors (the "Board"). (b) Bonus. Employee shall be eligible to participate in such bonus and incentive programs as determined from time to time by the Board. Any bonuses shall be based upon the achievement of individual goals and Company performance. With respect to the year ending 1 December 31, 1998, Employee will be eligible for a target bonus of 40% of Employee's base salary for achievement of the Board-approved plan. (c) Stock Options. The Company shall grant to Employee incentive options (the parties understand that only a portion of such options will qualify as incentive options for tax purposes), from the Company's 1997 Stock Option Plan, to purchase 100,000 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 1997 Stock Option Plan. So long as Employee is still employed by the Company at each such time of vesting, options to purchase 25,000 shares shall vest on the first anniversary of Employee's employment by the Company, and additional options to purchase 2,083.3333 shares shall vest on January 31, 1999 and on the last day of each calendar month thereafter, until such shares are fully vested. 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. 5. Vacation. Employee shall be entitled to vacation with pay in accordance with the Company's vacation policy as in effect from time to time. In addition, Employee shall be entitled to such holidays as the Company may approve from time to time. 6. 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 goods and family from Illinois to the Phoenix Metropolitan Area; (ii) the brokerage commission and closing costs related to the sale of his existing home in Illinois; (iii) closing costs related to his new home in the Phoenix Metropolitan Area; and (iv) such amounts as may be necessary, for a period of not to exceed three months, to cover the reasonable costs of temporary living expenses and an automobile in, and commuting to and from the Phoenix Metropolitan Area. If Employee resigns his employment before the date two years after the effective date, he shall reimburse OrthoLogic for a prorata portion of the total relocation expenses reimbursed by OrthoLogic. Such portion shall be determined by multiplying the total relocation 2 expenses reimbursed by a fraction the numerator of which is the number of full months Employee has been employed by OrthoLogic, and the denominator of which is 24. 7. Termination. (a) For Cause. The Company may terminate this Agreement for cause upon written notice to Employee stating the facts constituting such cause, provided that Employee shall have 30 days following such notice to cure any conduct or act, if curable, alleged to provide grounds for termination for cause hereunder. In the event of termination for cause, the Company shall be obligated to pay Employee only the minimum base salary due him through the date of termination. The written notice shall state the cause for termination. Cause shall include neglect of duties, willful failure to abide by instructions or policies from or set by the Board of Directors, commission of a felony or serious misdemeanor offense or pleading guilty or nolo contendere to same, Employee's breach of this Agreement or Employee's breach of any other material obligation to the Company. (b) Without Cause. The Company may terminate Employee's Employment at any time, immediately and without cause, by giving written notice to Employee. If the Company terminates Employee without cause, provided Employee first executes a Severance Agreement in the form then used by the Company, the Company shall continue to pay to Employee his minimum base salary in effect at the time of termination for a period of one year following the date of termination, at the time and in the manner dictated by the Company's standard payroll policies. (c) Disability. If during the term of this Agreement, Employee fails to perform his duties hereunder on account of illness or other incapacity for a period of 45 consecutive days, or for 60 days during any six-month period, the Company shall have the right to terminate this Agreement without further obligation hereunder except as otherwise provided in disability plans generally applicable to 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 resignation as an officer 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. 8. 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 3 Employee may obtain knowledge or access through or as a result of Employee's relationship with the Company (including information conceived, originated, discovered or developed in whole or in part by Employee). Confidential Information includes, but is not limited to, the following types of information and other information of a similar nature (whether or not reduced to writing) related to the Company's business: discoveries, inventions, ideas, concepts, research, development, processes, procedures, "know-how", formulae, marketing or manufacturing techniques and materials, marketing and development plans, business plans, customer names and other information related to customers, price lists, pricing policies, methods of operation, financial information, employee compensation, and computer programs and systems. Confidential Information also includes any information described above which the Company obtains from another party and which the Company treats as proprietary or designates as Confidential Information, whether or not owned by or developed by the Company, including Confidential Information acquired by the Company from any of its affiliates. Employee acknowledges that the Confidential Information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use. Information publicly known without breach of this Agreement that is generally employed by the trade at or after the time Employee first learns of such information, or generic information or knowledge which Employee would have learned in the course of similar employment or work elsewhere in the trade, shall not be deemed part of the Confidential Information. Employee further agrees: a. To furnish the Company on demand, at any time during or after employment, a complete list of the names and addresses of all present, former and potential suppliers, financing sources, clients, customers and other contacts gained while an employee of the Company in Employee's possession, whether or not in the possession or within the knowledge of the Company. b. That all notes, memoranda, electronic storage, documentation and records in any way incorporating or reflecting any Confidential Information shall belong exclusively to the Company, and Employee agrees to turn over all copies of such materials in Employee's control to the Company upon request or upon termination of Employee's employment with the Company. 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 4 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. 9. Loyalty During Employment Term. Employee agrees that during the term of Employee's employment by the Company, Employee will devote substantially all of Employee's business time and effort to and give undivided loyalty to the Company, and will not engage in any way whatsoever, directly or indirectly, in any business that is competitive with the Company or its affiliates, nor solicit, or in any other manner work for or assist any business which is competitive with the Company or its affiliates. During the term of Employee's employment by the Company, Employee will undertake no planning for or organization of any business activity competitive with the Company or its affiliates, and Employee will not combine or conspire with any other employee of the Company or any other person for the purpose of organizing any such competitive business activity. 10. 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 two years after this Agreement is terminated or Employee leaves the employment of the Company for any reason, Employee will not: a. Engage in any work activity for or in conjunction with any business or entity that is in competition with or is preparing to compete with the Company; 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 5 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. 11. Injunctive Relief. It is agreed that the restrictions contained in Sections 8, 9 and 10 of this Agreement are reasonable, but it is recognized that damages in the event of the breach of any of those restrictions will be difficult or impossible to ascertain; and, therefore, Employee agrees that, in addition to and without limiting any other right or remedy the Company may have, the Company shall have the right to an injunction against Employee issued by a court of competent jurisdiction enjoining any such breach without showing or proving any actual damage to the Company. This paragraph shall survive the termination of Employee's employment. 12. Part of Consideration. Employee also agrees, acknowledges, covenants, represents and warrants that he is fully and completely aware that, and further understands that, the restrictive covenants contained in Sections 8, 9, and 10 of this Agreement are an essential part of the consideration for the Company entering into this Agreement and that the Company is entering into this Agreement in full reliance on these acknowledgments, covenants, representations and warranties. 13. Time and Territory Reduction. If any of the periods of time and/or territories described in Sections 8, 9 and 10 of this Agreement are held to be in any respect an unreasonable restriction, it is agreed that the court so holding may reduce the territory to which the restriction pertains or the period of time in which it operates or may reduce both such territory and such period, to the minimum extent necessary to render such provision enforceable. 14. Survival. The obligations described in Sections 8 and 10 of this Agreement shall survive any termination of this Agreement or any termination of the employment relationship created hereunder. 15. 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. 6 16. 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. 17. 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. 18. 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. 19. 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: William C. Rieger --------------------- --------------------- --------------------- 20. 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 and are a complete and exclusive statement of those terms. They supersede all understandings and negotiations concerning the matters specified herein. Any representations, promises, warranties or statements made by either party that differ in any way from the terms of this written Agreement shall be given no force or effect. The parties specifically represent, each to the other, that there are no additional or supplemental agreements between them related in any way to the matters herein contained unless specifically included or 7 referred to herein. No addition to or modification of any provision of this Agreement shall be binding upon any party unless made in writing and signed by all parties. To the extent that there is any conflict between this Agreement and the Invention, Confidential Information and Non- Competition Agreement, the provisions of this Agreement shall govern. 21. 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. 22. 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. 23. 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. 24. 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." 25. Headings. Headings in this Agreement are for informational purposes only and shall not be used to construe the intent of this Agreement. 26. 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. 27. 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 the date first written above. ORTHOLOGIC CORP. ("Company") By: /s/ Thomas R. Trotter ----------------------------------- Thomas R. Trotter Chief Executive Officer WILLIAM C. RIEGER ("Employee") By: /s/ William c. Rieger ----------------------------------- 9 EX-10.41 5 TRANSITIONAL EMPLOYMENT AGREEMENT TRANSITIONAL EMPLOYMENT AGREEMENT This Agreement, which shall be effective as of February 2, 1998, is by and between OrthoLogic Corp., a Delaware corporation (the "Company"), and Allen R. Dunaway ("Employee"). RECITALS: - --------- A. Employee is presently employed by the Company pursuant to an Employment Agreement dated as of December 1, 1996. Both parties now wish to revise the terms and nature of the employment relationship and provide for the termination of the employment relationship at a specific time in the future. B. The parties wish to set forth in this Agreement the terms and conditions of such continuing employment and eventual termination. 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 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 Chief Financial Officer, but Employee's title may be changed from time to time, or eliminated altogether, by the CEO, acting in his sole discretion. Employee will report to the Company's CEO. 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 the CEO (an "Election"), Employee's duties will change as of a specific date, and thereafter, Employee will be involved only in specific projects relating to the Company's finance matters, reimbursement and information systems as may be assigned to him from time to time by the CEO. After the effective time of an Election, Employee shall not have set work hours. 2. Term. Until the effective time of an Election, the term of Employee's employment pursuant to this Agreement shall be for up to three months beginning on February 2, 1998. However, upon the effective time of an Election, the term of employment shall be extended to the date 15 months after the effective time of such Election. After the expiration of the term of this Agreement, it may be extended only by a written agreement executed by both parties. 1 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 $125,000 per year, payable at the times and in the manner dictated by the Company's standard payroll policies. (b) Bonus. Additionally, Employee shall receive a bonus of $25,000 upon the completion, to the satisfaction of the CEO, of the Company's annual audit, annual report and report on Form 10-K for the year ended December 31, 1997. (c) Stock Options. Employee currently has options to purchase shares of the Company's Common Stock. So long as Employee remains employed by the Company, unvested options shall continue to vest in accordance with the applicable terms of grant. All unvested options shall vest immediately upon a termination of Employee's employment for any reason other than the expiration of the term of employment as described in Section 2. After the termination of Employee's employment, the options shall remain exercisable for the applicable time specified in the applicable terms of grant. 4. Fringe Benefits. (a) In addition to the compensation, bonus and options described in Section 3, and any other employee benefit plans (including life insurance and 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 maintained at a level comparable to that enjoyed by management-level employees of the Company. (b) 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. (c) The Company 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 no later than 90 days after the date on which Employee's employment by the Company terminates. 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. 2 6. Termination. (a) For Cause. The Company may terminate this Agreement for cause upon written notice to Employee stating the facts constituting such cause, provided that Employee shall have 10 days following such notice to cure any conduct or act, if curable, alleged to provide grounds for termination for cause hereunder. The written notice shall state the cause for termination. Cause shall include neglect of duties, willful failure to abide by instructions or policies from or set by the Board of Directors, commission of a felony or serious misdemeanor offense or pleading guilty or nolo contendere to same, Employee's material breach of this Agreement or Employee's breach of any other material obligation to the Company. If a termination for cause occurs before the effective time of an Election, the Company shall be obligated to pay Employee only the minimum base salary due him through the date of termination. However, if a termination for cause occurs after the effective time of an Election, so long as Employee continues to comply with the requirements of this Agreement, including Sections 7 and 9, the Company 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) 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 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) Disability. If during the term of this Agreement, Employee fails to perform his duties hereunder because 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. (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, 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. 3 (e) Resignation. Employee may resign his employment by giving the Company written notice. In the event of such a resignation, the Company shall be obligated to pay Employee only the minimum base salary due him through the effective date of the resignation. 7. Confidential Information. Employee acknowledges that Employee may receive, or contribute to the production of, Confidential Information. For purposes of this Agreement, Employee agrees that "Confidential Information" shall mean any and all information or material proprietary to the Company or designated as Confidential Information by the Company and not generally known by non-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 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. 4 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 the effective time of an Election, 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 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 5 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, 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. 12. Time and Territory Reduction. If any of the periods of time and/or territories described in Sections 7, 8, or 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. 6 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. 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. 7 To the Company: ORTHOLOGIC CORP. 1275 West Washington Street Tempe, AZ 85281 Attention: Chief Executive Officer To Employee: Allen R. Dunaway 4612 East Onyx Phoenix, AZ 85025 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, and are a complete and exclusive statement of those terms. They supersede all understandings and negotiations concerning the matters specified herein, including the Employment Agreement between the parties which is dated as of December 1, 1996. 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 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." 8 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 February 2, 1998. ORTHOLOGIC CORP. ("Company") By: /s/ Thomas R. Trotter -------------------------- Thomas R. Trotter President and CEO ALLEN R. DUNAWAY ("Employee") By: /s/ Allen R. Dunaway -------------------------- Allen R. Dunaway 9 EX-10.42 6 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Agreement shall be effective, as of March 16, 1998, by and between OrthoLogic Corp., a Delaware corporation (the "Company"), and Terry C. Meier ("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 Employee accepts such employment and agrees to perform such reasonable responsibilities and duties as may be assigned to him from time to time by the Company's Chief Executive Officer (the "CEO"). Initially, Employee's title shall be Senior Vice President. Effective April 1, 1998, Employee's title shall become Senior Vice President and Chief Financial Officer, and Employee shall have general responsibility for the books of account, financial statements, financial reporting and administration of the Company. Such title and duties may be changed from time to time by the CEO. Employee will report to the CEO. 2. Term. The initial term of this Agreement shall expire on March 16, 2001. Thereafter this Agreement shall renew automatically for additional terms of one-year each unless either party gives to the other notice of non-renewal at least 90 days before the end of the initial term or any renewal term, or unless it is terminated pursuant to Section 7. 3. Compensation. (a) Salary. Beginning on the effective date of this Agreement, the Company shall pay Employee a base annual salary, before deducting all applicable withholdings, of $175,000 per year, payable at the times and in the manner dictated by the Company's standard payroll policies. Effective January 1, 1999, and annually thereafter, the base annual salary shall be reviewed by the Compensation Committee of the Board of Directors (the "Board"). (b) Bonus. Employee shall be eligible to participate in such bonus and incentive programs as are determined from time to time by the Board. Any bonuses shall be based upon the achievement of individual goals and Company performance. Each fiscal year, Employee will be eligible for a target bonus of 40% of Employee's base salary for achievement of the Board-approved plan, which shall be prorated for periods of less than one full year. (c) Stock Options. Effective March 16, 1998, The Company shall grant to Employee incentive options (the parties understand that only a portion of such options will qualify as incentive options for tax purposes), from the Company's 1997 Stock Option Plan, to purchase 150,000 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 1997 Stock Option Plan. So long as Employee is still employed by the Company at each such time of vesting, options to purchase 50,000 shares shall vest on the first anniversary of Employee's employment by the Company, additional options to purchase 4,166 shares shall vest on March 16, 1999 and on the 16th day of each calendar month thereafter through February 16, 2001 and options to purchase 4,182 shares shall vest on March 16, 2001. 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. 5. Vacation. Employee shall be entitled to vacation with pay in accordance with the Company's vacation policy as in effect from time to time. In addition, Employee shall be entitled to such holidays as the Company may approve from time to time. 6. 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 to Arizona. Employee shall be reimbursed for (i) the direct relocation costs of moving his household goods 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) such amounts as may be necessary, for a period of not to exceed three months, to cover the reasonable costs of temporary living expenses and an automobile in, and commuting to and from the Phoenix Metropolitan Area. If Employee resigns his employment before the date two years 2 after the effective date, he shall reimburse OrthoLogic for a prorata portion of the total relocation expenses reimbursed by OrthoLogic; provided that if Employee resigns for health reasons and qualifies for payments under OrthoLogic's long-term disability plan then in effect, no such reimbursement shall be required. Any such portion shall be determined by multiplying the total relocation expenses reimbursed by a fraction the numerator of which is the number of full months Employee has been employed by OrthoLogic, and the denominator of which is 24. (c) Returning to Missouri. If Employee remains employed by the Company for at least three consecutive years and then returns to Missouri within one year after the termination of his Employment by the Company, Employee shall also be reimbursed for the brokerage commission and closing costs related to the sale of his home in Arizona. 7. Termination. (a) For Cause. The Company may terminate this Agreement for cause upon written notice to Employee stating the facts constituting such cause, provided that Employee shall have 30 days following such notice to cure any conduct or act, if curable, alleged to provide grounds for termination for cause hereunder. In the event of termination for cause, the Company shall be obligated to pay Employee only the base salary due him through the date of termination. The written notice shall state the cause for termination. Cause shall include neglect of duties, willful failure to abide by instructions or policies from or set by the Board of Directors, commission of a felony or serious misdemeanor offense or pleading guilty or nolo contendere to same, Employee's material breach of this Agreement or Employee's breach of any other material obligation to the Company. (b) Without Cause. The Company may terminate Employee's Employment at any time, immediately and without cause, by giving written notice to Employee. If the Company terminates Employee without cause, provided Employee first executes a Severance Agreement in the form then used by the Company, the Company shall continue to pay to Employee his base salary in effect at the time of termination for a period of one year following the date of termination, at the time and in the manner dictated by the Company's standard payroll policies. (c) Disability. If during the term of this Agreement, Employee fails to perform his duties hereunder because of illness or other incapacity for a period of 45 consecutive days, or for 60 days during any six-month period, the Company shall have the right to terminate this Agreement without further obligation hereunder except as otherwise provided in disability plans generally applicable to 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. 3 (e) Resignation. Employee may resign his employment by giving the Company written notice, which shall also include his resignation as an officer of the Company. In the event of such a resignation, the Company shall be obligated to pay Employee only the base salary due him through the effective date of the resignation. 8. 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 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. 4 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. 9. Loyalty During Employment Term. Employee agrees that during the term of Employee's employment by the Company, Employee will devote substantially all of Employee's business time and effort to and give undivided loyalty to the Company, and will not engage in any way whatsoever, directly or indirectly, in any business that is competitive with the Company or its affiliates, nor solicit, or in any other manner work for or assist any business which is competitive with the Company or its affiliates. During the term of Employee's employment by the Company, Employee will undertake no planning for or organization of any business activity competitive with the Company or its affiliates, and Employee will not combine or conspire with any other employee of the Company or any other person for the purpose of organizing any such competitive business activity. 10. 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 two years after this Agreement is terminated or Employee leaves the employment of the Company for any reason, Employee will not: a. Engage in any work activity for or in conjunction with any business or entity that is in competition with or is preparing to compete with the Company; 5 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. 11. Injunctive Relief. It is agreed that the restrictions contained in Sections 8, 9 and 10 of this Agreement are reasonable, but it is recognized that damages in the event of the breach of any of those restrictions will be difficult or impossible to ascertain; and, therefore, Employee agrees that, in addition to and without limiting any other right or remedy the Company may have, the Company shall have the right to an injunction against Employee issued by a court of competent jurisdiction enjoining any such breach without showing or proving any actual damage to the Company. This paragraph shall survive the termination of Employee's employment. 12. Part of Consideration. Employee also agrees, acknowledges, covenants, represents and warrants that he is fully and completely aware that, and further understands that, the restrictive covenants contained in Sections 8, 9, and 10 of this Agreement are an essential part of the consideration for the Company entering into this Agreement and that the Company is entering into this Agreement in full reliance on these acknowledgments, covenants, representations and warranties. 13. Time and Territory Reduction. If any of the periods of time and/or territories described in Sections 8, 9 and 10 of this Agreement are held to be in any respect an unreasonable restriction, it is agreed that the court so holding may reduce the territory to which the restriction pertains or the period of time in which it operates or may reduce both such territory and such period, to the minimum extent necessary to render such provision enforceable. 14. Survival. The obligations described in Sections 8 and 10 of this Agreement shall survive any termination of this Agreement or any termination of the employment relationship created hereunder. 6 15. 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. 16. 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. 17. 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. 18. 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. 19. 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. 1275 West Washington Street Tempe, AZ 85281 Attention: Chief Executive Officer To Employee: Terry C. Meier ---------------- ---------------- ---------------- 7 20. 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 and are a complete and exclusive statement of those terms. They supersede all understandings and negotiations concerning the matters specified herein. Any representations, promises, warranties or statements made by either party that differ in any way from the terms of this written Agreement shall be given no force or effect. The parties specifically represent, each to the other, that there are no additional or supplemental agreements between them related in any way to the matters herein contained unless specifically included or referred to herein. No addition to or modification of any provision of this Agreement shall be binding upon any party unless made in writing and signed by all parties. To the extent that there is any conflict between this Agreement and the Invention, Confidential Information and Non- Competition Agreement, the provisions of this Agreement shall govern. 21. 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. 22. 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. 23. 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. 24. 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." 25. Headings. Headings in this Agreement are for informational purposes only and shall not be used to construe the intent of this Agreement. 26. 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. 27. 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 8 assigns. Notwithstanding anything contained in this Agreement to the contrary, nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective heirs, successors, executors, administrators and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. This Agreement has been executed by the parties as the date first written above. ORTHOLOGIC CORP. ("Company") By: /s/ Thomas R. Trotter --------------------------------- Thomas R. Trotter Chief Executive Officer TERRY C. MEIER ("Employee") By: /s/ Terry C. Meier --------------------------------- 9 EX-10.43 7 REVISED EMPLOYMENT AGREEMENT REVISED AND RESTATED EMPLOYMENT AGREEMENT This Revised and Restated Employment Agreement (the "Agreement'), which shall be effective as of March 16, 1998, 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. C. This Agreement revises, restates and replaces for all purposes an earlier version which was entitled "Employment Agreement" and was effective as of October 17, 1997. 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 CEO or Board of Directors (the "Board"). Until March 23, 1998, Employee's title shall be Board Member, with responsibility for strategic product alliances and acquisitions. After March 23, 1998, Employee shall not have an official title. Employee will report to the Company's President and CEO. Employee shall not have set work hours. While various projects may require more or less time within any given month, it is contemplated that, without his consent, Employee will not be asked to work on Company matters for more than five days per month. Until March 23, 1998, the Company shall use its best efforts to maintain Employee as a member of the Board; and Employee hereby resigns from the Board, with such resignation to be effective on March 23, 1998. Employee understands that from and after October 20, 1997, and until the end of the term of this Agreement, 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. 1 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) 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 60 days following such notice to cure any conduct or act, if curable, alleged to provide 2 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 specified in Section 3(a) through October 19, 1999. The written notice shall state the cause for termination. Cause shall be limited to gross or willful neglect of duty, willful failure to abide by reasonable instructions or policies from or set by the Board of Directors, conviction of a felony or misdemeanor punishable by at least one year in prison, or pleading guilty or nolo contendere to same. Without limiting the foregoing, the fact that the Company does not request services from Employee with respect to any period or periods of time shall not constitute cause. (b) Without Cause. The Company may not terminate Employee's employment without cause. (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-Company personnel, which Employee develops 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: 3 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 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 affiliates as the result of Employee's employment. The parties further acknowledge that the scope of business 4 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. 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 5 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 and the Indemnification Agreement dated March 16, 1998 (the "Indemnification Agreement"). These obligations shall survive the termination of Employee's employment for any reason. 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. 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. 18. 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. 19. 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 6 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. 1275 West Washington Street Tempe, AZ 85281. Attention: Chief Executive Officer To Employee: Allan M. Weinstein 3177 E. Sierra Vista Drive Phoenix, AZ 85016 20. Entire Agreement. This Agreement, the Indemnification 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, 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 three 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 any 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. To the extent there is any conflict between this Agreement and the Indemnification Agreement, the Indemnification Agreement shall govern. 21. 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. 22. 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. 23. 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. 7 24. 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." 25. Headings. Headings in this Agreement are for informational purposes only and shall not be used to construe the intent of this Agreement. 26. 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. 27. 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 March 16, 1998. ORTHOLOGIC CORP. ("Company") By: /s/ Thomas R. Trotter ------------------------------------- Thomas R. Trotter, President and CEO ALLAN M. WEINSTEIN ("Employee") By: /s/ Allan M. Weinstein ------------------------------------- 8 EX-10.44 8 LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page 1 ACCOUNTING AND OTHER TERMS.........................................................4 -------------------------- 2 LOAN AND TERMS OF PAYMENT..........................................................4 ------------------------- 2.1 Advances................................................................4 2.2 Overadvances............................................................5 2.3 Interest Rate, Payments.................................................5 2.4 Fees....................................................................5 3 CONDITIONS OF LOANS................................................................6 ------------------- 3.1 Conditions Precedent to Initial Advance.................................6 3.2 Conditions Precedent to all Advances....................................6 4 CREATION OF SECURITY INTEREST......................................................6 ----------------------------- 4.1 Grant of Security Interest..............................................6 5 REPRESENTATIONS AND WARRANTIES.....................................................6 ------------------------------ 5.1 Due Organization and Authorization......................................6 5.2 Collateral..............................................................6 5.3 Litigation..............................................................7 5.4 No Material Adverse Change in Financial Statements......................7 5.5 Solvency................................................................7 5.6 Regulatory Compliance...................................................7 5.7 Subsidiaries............................................................7 5.8 Full Disclosure.........................................................7 6 AFFIRMATIVE COVENANTS..............................................................7 --------------------- 6.1 Government Compliance...................................................7 6.2 Financial Statements, Reports, Certificates.............................8 6.3 Inventory; Returns......................................................8 6.4 Taxes...................................................................8 6.5 Insurance...............................................................8 6.6 Primary Accounts........................................................8 6.7 Financial Covenants.....................................................9 6.8 Further Assurances......................................................9 7 NEGATIVE COVENANTS.................................................................9 ------------------ 7.1 Dispositions............................................................9 7.2 Changes in Business, Ownership, Management or Business Locations........9 7.3 Mergers or Acquisitions.................................................9 7.4 Indebtedness............................................................9 7.5 Encumbrance............................................................10 7.6 Distributions; Investments.............................................10 7.7 Transactions with Affiliates...........................................10 7.8 Subordinated Debt......................................................10 7.9 Compliance.............................................................10 8 EVENTS OF DEFAULT.................................................................10 ----------------- 8.1 Payment Default........................................................10 8.2 Covenant Default.......................................................10 8.3 Material Adverse Change................................................11 8.4 Attachment.............................................................11 8.5 Insolvency.............................................................11
2 8.6 Other Agreements.......................................................11 8.7 Judgments..............................................................11 8.8 Misrepresentations.....................................................11 9 BANK'S RIGHTS AND REMEDIES........................................................11 -------------------------- 9.1 Rights and Remedies....................................................11 9.2 Power of Attorney......................................................12 9.3 Accounts Collection....................................................12 9.4 Bank Expenses..........................................................12 9.5 Bank's Liability for Collateral........................................12 9.6 Remedies Cumulative....................................................13 9.7 Demand Waiver..........................................................13 10 NOTICES..........................................................................13 ------- 11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER......................................13 ------------------------------------------- 12 GENERAL PROVISIONS...............................................................13 ------------------ 12.1 Successors and Assigns................................................13 12.2 Indemnification.......................................................13 12.3 Time of Essence.......................................................14 12.4 Severability of Provision.............................................14 12.5 Amendments in Writing, Integration....................................14 12.6 Counterparts..........................................................14 12.7 Survival..............................................................14 12.8 Confidentiality.......................................................14 13 DEFINITIONS......................................................................14 ----------- 13.1 Definitions...........................................................14
3 This LOAN AND SECURITY AGREEMENT dated March 2, 1998, between SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara, California 95054 with a loan production office located at 4455 East Camelback Road, Suite E-290, Phoenix, Arizona 85018 and ORTHOLOGIC CORP. ("Borrower"), whose address is 1275 W. Washington, Tempe, Arizona 85281 provides the terms on which Bank will lend to Borrower and Borrower will repay Bank. The parties agree as follows: 1 ACCOUNTING AND OTHER TERMS -------------------------- Accounting terms not defined in this Agreement will be construed following GAAP Calculations and determinations must be made following GAAP. The term "financial statements" includes the notes and schedules. The terms "including" and "includes" always mean "including (or includes) without limitation," in this or any Loan Document. This Agreement shall be construed to impart upon Bank a duty to act reasonably at all times. 2 LOAN AND TERMS OF PAYMENT ------------------------- 2.1 Advances. Borrower will pay Bank the unpaid principal amount of all Advances and interest on the unpaid principal amount of the Advances. 2.1.1 Revolving Advances. (a) Bank will make Advances not exceeding the lesser of (A) the Committed Revolving Line or (B) the Borrowing Base, whichever is less. Amounts borrowed under this Section may be repaid and reborrowed during the term of this Agreement. (b) To obtain an Advance, Borrower must notify Bank by facsimile or telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be made. Borrower must promptly confirm the notification by delivering to Bank the Payment/Advance Form attached as Exhibit B. Bank will credit Advances to Borrower's deposit account. Bank may make Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if the Advances are necessary to meet Obligations which have become due. Bank may rely on any telephone notice given by a person whom Bank believes is a Responsible Officer or designee. Borrower will indemnify Bank for any loss Bank suffers due to reliance. (c) The Committed Revolving Line terminates on the Revolving Maturity Date, when all Advances and other amounts due under this Agreement are immediately payable. 2.1.2 Equipment Advances. (a) Bank will make an advance (the "Initial Equipment Advance") not exceeding the Committed Equipment Line. The Initial Equipment Advance may not exceed the lesser of (i) 50% of the net book value of the continous passive motion devices in the rental base or (ii) the Committed Equipment Line. All subsequent Equipment Advances (the "Subsequent Equipment Advances") shall be made on a semi-annual basis not to exceed the lesser of (i) 75% of the in-service cost of newly manufactured and rebuilt devices or (ii) the Committed Equipment Line. Equipment Advances made under this Section may be repaid and reborrowed during the term of the Committed Equipment Line. (b) Interest accrues from the date of the Initial and Subsequent Equipment Advances at the rate in Section 2.3(a) and is payable monthly until the May 1, 2000 (the "Equipment Maturity Date"). The Initial Equipment Advance payment will be determined by dividing the outstanding principal balance by 30, which sum will constitute the monthly principal payments due to Bank. Such payments shall be payable for 30 months beginning one month following the date of the Initial Equipment Advance and all subsequent payments of principal will be due on the same day of each month thereafter through the Equipment Maturity Date. The repayment of all outstanding Subsequent Equipment Advances shall be 4 determined on a semi-annual basis, following the Initial Equipment Advance by dividing the aggregate outstanding Equipment Advances by 30, which sum will constitute the monthly principal payment due to Bank. Such payments shall be payable beginning one month following the date of the Subsequent Equipment Advance and all subsequent payments of principal will be due on the same day of each month thereafter through the Equipment Maturity Date. (c) To obtain an Equipment Advance, Borrower must notify Bank (the notice is irrevocable) by facsimile no later than 3:00 p.m. Pacific time 1 Business Day before the day on which the Equipment Advance is to be made. The notice in the form of Exhibit B (Payment/Advance Form) must be signed by a Responsible Officer or designee and include a copy of the invoice for the Equipment being financed. 2.2 Overadvances. If Borrower's Obligations under Section 2.1.1 exceed the lesser of either (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower must immediately pay Bank the excess. 2.3 Interest Rate, Payments. (a) Interest Rate. (i) Advances accrue interest on the outstanding principal balance at a per annum rate of .200% percentage points above the Prime Rate; and (ii) Equipment Advances accrue interest on the outstanding principal balance at a per annum rate of .450% percentage points above the Prime Rate. Upon Borrower achieving 2 consecutive quarters of profitability, the interest rate on the Committed Revolving Line and the Committed Equipment Line will reduce by .10% and will further reduce by .10% upon Borrower achieving 4 consecutive quarters of profitability. Such interest rate change shall be effective as of the first day of the month following Bank's receipt of Borrower's financial statements indicating Borrower has met the above-described criteria. After an Event of Default, Obligations accrue interest at 5.00 percentage points above the rate effective immediately before the Event of Default. The interest rate increases or decreases when the Prime Rate changes. Interest is computed on a 360 day year for the actual number of days elapsed. (b) Payments. Interest due on the Committed Revolving Line is payable on the first (1st) of each month. Principal and interest due on the Equipment Advances is payable on the first (1st) of each month. Bank may debit any of Borrower's deposit accounts including Account Number ____________________ for principal and interest payments or any amounts Borrower owes Bank. Bank will notify Borrower when it debits Borrower's accounts. These debits are not a set-off. Payments received after 12:00 noon Pacific time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest accrue. 2.4 Fees. Borrower will pay: (a) Bank Expenses. All Bank Expenses (including reasonable attorneys' fees and expenses) incurred through and after the date of this Agreement, are payable when due. 3 CONDITIONS OF LOANS ------------------- 3.1 Conditions Precedent to Initial Advance. Bank's obligation to make the initial Advance is subject to the condition precedent that it receive the agreements, documents and fees it requires. Bank's completion of a satisfactory accounts receivable audit. 5 3.2 Conditions Precedent to all Advances. Bank's obligations to make each Advance, including the initial Advance, is subject to the following: (a) timely receipt of any Payment/Advance Form; and (b) the representations and warranties in Section 5 must be materially true on the date of the Payment/Advance Form and on the effective date of each Advance and no Event of Default may have occurred and be continuing, or result from the Advance. Each Advance is Borrower's representation and warranty on that date that the representations and warranties of Section 5 remain true. 4 CREATION OF SECURITY INTEREST ----------------------------- 4.1 Grant of Security Interest. Borrower grants Bank a continuing security interest in all presently existing and later acquired Collateral to secure all Obligations and performance of each of Borrower's duties under the Loan Documents. Except for Permitted Liens, any security interest will be a first priority security interest in the Collateral. 5 REPRESENTATIONS AND WARRANTIES ------------------------------ Borrower represents and warrants as follows: 5.1 Due Organization and Authorization. Borrower and each Subsidiary is duly existing and in good standing in its state of formation and qualified and licensed to do business in, and in good standing in, any state in which the conduct of its business or its ownership of property requires that it be qualified. The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower's formation documents, nor constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which or by which it is bound in which the default could cause a Material Adverse Change. 5.2 Collateral. Borrower has good title to the Collateral, free of Liens except Permitted Liens. The Accounts are bona fide, existing obligations, and the service or property has been performed or delivered to the account debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has no notice of any actual or imminent Insolvency Proceeding of any account debtor whose accounts are an Eligible Account in any Borrowing Base Certificate. All Inventory is in all material respects of good and marketable quality, free from material defects. 5.3 Litigation. Except as shown in the Schedule, there are no actions or proceedings pending or, to Borrower's knowledge, threatened by or against Borrower or any Subsidiary in which an adverse decision could cause a Material Adverse Change. 5.4 No Material Adverse Change in Financial Statements. All consolidated financial statements for Borrower, and any Subsidiary, delivered to Bank fairly present in all material respects Borrower's consolidated financial condition and Borrower's consolidated results of operations. There has not been any material deterioration in Borrower's consolidated financial condition since the date of the most recent financial statements submitted to Bank. 6 5.5 Solvency. The fair salable value of Borrower's assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; the Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature. 5.6 Regulatory Compliance. Borrower is not an "investment company" or a company "controlled" by an "investment company" under the Investment Company Act. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has complied with the Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation of which could cause a Material Adverse Change. None of Borrower's or any Subsidiary's properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each Subsidiary has timely filed all required tax returns and paid, or made adequate provision to pay, all taxes, except those being contested in good faith with adequate reserves under GAAP. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to continue its business as currently conducted. 5.7 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments and any entities owned on the Closing Date. 5.8 Full Disclosure. No representation, warranty or other statement of Borrower in any certificate or written statement given to Bank contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements misleading. 6 AFFIRMATIVE COVENANTS --------------------- Borrower will do all of the following: 6.1 Government Compliance. Borrower will maintain its and all Subsidiaries' legal existence and good standing in its jurisdiction of formation and maintain qualification in each jurisdiction in which the failure to so qualify could have a material adverse effect on Borrower's business or operations. Borrower will comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it is subject, noncompliance with which could have a material adverse effect on Borrower's business or operations or cause a Material Adverse Change. 6.2 Financial Statements, Reports, Certificates. (a) Borrower will deliver to Bank: (i) as soon as available, but no later than 30 days after the last day of each month, a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during the period, in a form and certified by a Responsible Officer acceptable to Bank; (ii) as soon as available, but no later than 90 days after the last day of Borrower's fiscal year, audited consolidated financial statements prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm acceptable to Bank; (iii) a prompt report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of $100,000 or more; and (iv) budgets, sales projections, operating plans or other financial information Bank requests. 7 (b) Within 20 days after the last day of each month, Borrower will deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in the form of Exhibit C, with a summary report of accounts receivable and accounts payable. (c) Within 30 days after the last day of each month, Borrower will deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in the form of Exhibit D. (d) Bank has the right to audit Borrower's Accounts at Borrower's expense, but the audits will be conducted on an annual basis unless an Event of Default has occurred and is continuing. 6.3 Inventory; Returns. Borrower will keep all Inventory in good and marketable condition, free from material defects. Returns and allowances between Borrower and its account debtors will follow Borrower's customary practices as they exist at execution of this Agreement. Borrower must promptly notify Bank of all returns, recoveries, disputes and claims, that involve more than $50,000. 6.4 Taxes. Borrower will make, and cause each Subsidiary to make, timely payment of all material federal, state, and local taxes or assessments and will deliver to Bank, on demand, appropriate certificates attesting to the payment. 6.5 Insurance. Borrower will keep its business and the Collateral insured for risks and in amounts, as Bank requests. Insurance policies will be in a form, with companies, and in amounts that are satisfactory to Bank. All property policies will have a lender's loss payable endorsement showing Bank as an additional loss payee and all liability policies will show the Bank as an additional insured and provide that the insurer must give Bank at least 20 days notice before canceling its policy. At Bank's request, Borrower will deliver certified copies of policies and evidence of all premium payments. Proceeds payable under any policy will, at Bank's option, be payable to Bank on account of the Obligations. 6.6 Primary Accounts. Borrower will maintain its primary depository and operating accounts with Bank. 6.7 Financial Covenants. Borrower will maintain as of the last day of each month: (i) Quick Ratio. A ratio of Quick Assets to Current Liabilities of at least 2.00 to 1.00. (ii) Debt/Tangible Net Worth Ratio. A ratio of Total Liabilities less Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than 0.50 to 1.00. (iii) Tangible Net Worth. A Tangible Net Worth of at least $50,000,000. (iv) Profitability. Borrower will be profitable each quarter, except that Borrower may suffer losses, provided such losses do not exceed $5,000,000 in aggregate for the quarters ending March 31, 1998 and June 30, 1998 excluding any scheduled expense incurred or accounting treatment for option payments to Chrysalis. 6.8 Further Assurances. Borrower will execute any further instruments and take further action as Bank requests to perfect or continue Bank's security interest in the Collateral or to effect the purposes of this Agreement. 8 7 NEGATIVE COVENANTS ------------------ Borrower will not do any of the following: 7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than Transfers (i) of Inventory in the ordinary course of business, (ii) of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business, or (iii) of worn-out or obsolete Equipment. 7.2 Changes in Business, Ownership, Management or Business Locations. Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower or have a material change in its ownership of greater than 25%. Borrower will not, without at least 30 days prior written notice, relocate its chief executive office or add any new offices or business locations. 7.3 Mergers or Acquisitions. (i) Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, if no Event of Default has occurred and is continuing or would result from such action during the term of this Agreement or result in a decrease of more than 25% of Tangible Net Worth; or (ii) merge or consolidate a Subsidiary into another Subsidiary or into Borrower. 7.4 Indebtedness. Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness. 7.5 Encumbrance. Create, incur, or allow any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, or permit any Collateral not to be subject to the first priority security interest granted here. 7.6 Distributions; Investments. Directly or indirectly acquire or own any Person, or make any Investment in any Person, other than Permitted Investments, or permit any of its Subsidiaries to do so. Pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock. 7.7 Transactions with Affiliates. Directly or indirectly enter or permit any material transaction with any Affiliate except transactions that are in the ordinary course of Borrower's business, on terms less favorable to Borrower than would be obtained in an arm's length transaction with a non-affiliated Person. 7.8 Subordinated Debt. Make or permit any payment on any Subordinated Debt, except under the terms of the Subordinated Debt, or amend any provision in any document relating to the Subordinated Debt without Bank's prior written consent. 9 7.9 Compliance. Become an "investment company" or a company controlled by an "investment company," under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock, or use the proceeds of any Advance for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could have a material adverse effect on Borrower's business or operations or cause a Material Adverse Change, or permit any of its Subsidiaries to do so. 8 EVENTS OF DEFAULT ----------------- Any one of the following is an Event of Default: 8.1 Payment Default. If Borrower fails to pay any of the Obligations; 8.2 Covenant Default. If Borrower does not perform any obligation in Section 6 or violates any covenant in Section 7 or does not perform or observe any other material term, condition or covenant in this Agreement, any Loan Documents, or in any agreement between Borrower and Bank and as to any default under a term, condition or covenant that can be cured, has not cured the default within 10 days after it occurs, or if the default cannot be cured within 10 days or cannot be cured after Borrower's attempts within 10 day period, and the default may be cured within a reasonable time, then Borrower has an additional period (of not more than 30 days) to attempt to cure the default. During the additional time, the failure to cure the default is not an Event of Default (but no Advances will be made during the cure period); 8.3 Material Adverse Change. (i) If there occurs a material impairment in the perfection or priority of the Bank's security interest in the Collateral or in the value of such Collateral which is not covered by adequate insurance or (ii) if the Bank determines, based upon information available to it and in its reasonable judgment, that there is a reasonable likelihood that Borrower will fail to comply with one or more of the financial covenants in Section 6 during the next succeeding financial reporting period. 8.4 Attachment. If any material portion of Borrower's assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizure or levy is not removed in 10 days, or if Borrower is enjoined, restrained, or prevented by court order from conducting a material part of its business or if a judgment or other claim becomes a Lien on a material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed against any of Borrower's assets by any government agency and not paid within 10 days after Borrower receives notice. These are not Events of Default if stayed or if a bond is posted pending contest by Borrower (but no Advances will be made during the cure period); 8.5 Insolvency. If Borrower becomes insolvent or if Borrower begins an Insolvency Proceeding or an Insolvency Proceeding is begun against Borrower and not dismissed or stayed within 30 days (but no Advances will be made before any Insolvency Proceeding is dismissed); 10 8.6 Other Agreements. If there is a default in any agreement between Borrower and a third party that gives the third party the right to accelerate any Indebtedness exceeding $100,000 or that could cause a Material Adverse Change; 8.7 Judgments. If a money judgment(s) in the aggregate of at least $50,000 is rendered against Borrower and is unsatisfied and unstayed for 10 days (but no Advances will be made before the judgment is stayed or satisfied); or 8.8 Misrepresentations. If Borrower or any Person acting for Borrower makes any material misrepresentation or material misstatement now or later in any warranty or representation in this Agreement or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document. 9 BANK'S RIGHTS AND REMEDIES -------------------------- 9.1 Rights and Remedies. When an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following: (a) Declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank); (b) Stop advancing money or extending credit for Borrower's benefit under this Agreement or under any other agreement between Borrower and Bank; (c) Settle or adjust disputes and claims directly with account debtors for amounts, on terms and in any order that Bank considers advisable; (d) Make any payments and do any acts it considers necessary or reasonable to protect its security interest in the Collateral. Borrower will assemble the Collateral if Bank requires and make it available as Bank designates. Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank's rights or remedies; (e) Apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of Borrower; (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral; and (g) Dispose of the Collateral according to the Code. 9.2 Power of Attorney. Effective only when an Event of Default occurs and continues, Borrower irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name on any checks or other forms of payment or security; (ii) sign Borrower's name on any invoice or bill of lading for any Account or drafts against account debtors, (iii) make, settle, and adjust all claims under Borrower's insurance policies; (iv) settle and adjust disputes and claims about the Accounts directly with account debtors, for amounts and on terms Bank 11 determines reasonable; and (v) transfer the Collateral into the name of Bank or a third party as the Code permits. Bank may exercise the power of attorney to sign Borrower's name on any documents necessary to perfect or continue the perfection of any security interest regardless of whether an Event of Default has occurred. Bank's appointment as Borrower's attorney in fact, and all of Bank's rights and powers, coupled with an interest, are irrevocable until all Obligations have been fully repaid and performed and Bank's obligation to provide Advances terminates. 9.3 Accounts Collection. When an Event of Default occurs and continues, Bank may notify any Person owing Borrower money of Bank's security interest in the funds and verify the amount of the Account. Borrower must collect all payments in trust for Bank and, if requested by Bank, immediately deliver the payments to Bank in the form received from the account debtor, with proper endorsements for deposit. 9.4 Bank Expenses. If Borrower fails to pay any amount or furnish any required proof of payment to third persons Bank may make all or part of the payment or obtain insurance policies required in Section 6.5, and take any action under the policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and immediately due and payable, bearing interest at the then applicable rate and secured by the Collateral. No payments by Bank are deemed an agreement to make similar payments in the future or Bank's waiver of any Event of Default. 9.5 Bank's Liability for Collateral. If Bank complies with reasonable banking practices it is not liable for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other person. Borrower bears all risk of loss, damage or destruction of the Collateral. 9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank's exercise of one right or remedy is not an election, and Bank's waiver of any Event of Default is not a continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is effective unless signed by Bank and then is only effective for the specific instance and purpose for which it was given. 9.7 Demand Waiver. Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable. 10 NOTICES ------- All notices or demands by any party about this Agreement or any other related agreement must be in writing and be personally delivered or sent by an overnight delivery service, by certified mail, postage prepaid, return receipt requested, or by telefacsimile to the addresses set forth at the beginning of this Agreement. A Party may change its notice address by giving the other Party written notice. 11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER ------------------------------------------- California law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the non-exclusive jurisdiction of the State and Federal courts in Santa Clara County, California. 12 BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL. 12 GENERAL PROVISIONS ------------------ 12.1 Successors and Assigns. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights under it without Bank's prior written consent which may be granted or withheld in Bank's discretion. Bank has the right, without the consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits under this Agreement. 12.2 Indemnification. Borrower will indemnify, defend and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities asserted by any other party in connection with the transactions contemplated by the Loan Documents; except for losses caused by Bank's gross negligence or willful misconduct and (b) all losses or Bank Expenses incurred, or paid by Bank from, following, or consequential to transactions between Bank and Borrower (including reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3 Time of Essence. Time is of the essence for the performance of all obligations in this Agreement. 12.4 Severability of Provision. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision. 12.5 Amendments in Writing, Integration. All amendments to this Agreement must be in writing. This Agreement represents the entire agreement about this subject matter, and supersedes prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement merge into this Agreement and the Loan Documents. 12.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement. 12.7 Survival. All covenants, representations and warranties made in this Agreement continue in full force while any Obligations remain outstanding. The obligations of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of limitations for actions that may be brought against Bank have run. 13 12.8 Confidentiality. In handling any confidential information, Bank will exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made (i) to Bank's subsidiaries or affiliates in connection with their business with Borrower, (ii) to prospective transferees or purchasers of any interest in the Loans, (iii) as required by law, regulation, subpoena, or other order, (iv) as required in connection with Bank's examination or audit and (v) as Bank considers appropriate exercising remedies under this Agreement. Confidential information does not include information that either: (a) is in the public domain or in Bank's possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank; or (b) is disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information. 13 DEFINITIONS ----------- 13.1 Definitions. In this Agreement: "Accounts" are all existing and later arising accounts, contract rights, and other obligations owed Borrower in connection with its sale or lease of goods (including licensing software and other technology) or provision of services, all credit insurance, guaranties, other security and all merchandise returned or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Advance" or "Advances" is a loan advance (or advances) under the Committed Revolving Line. "Affiliate" of a Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person's managers and members. "Bank Expenses" are all audit fees and expenses and reasonable costs or expenses (including reasonable attorneys' fees and expenses) for preparing, negotiating, administering, defending and enforcing the Loan Documents (including appeals or Insolvency Proceedings). "Borrower's Books" are all Borrower's books and records including ledgers, records regarding Borrower's assets or liabilities, the Collateral, business operations or financial condition and all computer programs or discs or any equipment containing the information. "Borrowing Base" is 80% of Eligible Accounts as determined by Bank from Borrower's most recent Borrowing Base Certificate. "Business Day" is any day that is not a Saturday, Sunday or a day on which the Bank is closed. "Closing Date" is the date of this Agreement. "Code" is the California Uniform Commercial Code. "Collateral" is the property described on Exhibit A. "Committed Equipment Line" is a Credit Extension of up to $2,500,000. "Committed Revolving Line" is an Advance of up to $10,000,000. "Contingent Obligation" is, for any Person, any direct or indirect liability, contingent or not, of that Person for (i) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (ii) any obligations for undrawn letters of 14 credit for the account of that Person; and (iii) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but "Contingent Obligation" does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under the guarantee or other support arrangement. "Credit Extension" means each Advance, Equipment Advance, letter of credit, or any other extension of credit by Bank for the benefit of Borrower hereunder. "Current Liabilities" are the aggregate amount of Borrower's Total Liabilities which mature within one (1) year. "Eligible Accounts" are Accounts in the ordinary course of Borrower's business that meet all Borrower's representations and warranties in Section 5.2; but Bank may change eligibility standards by giving Borrower notice. Unless Bank agrees otherwise in writing, Eligible Accounts will not include: (a) Accounts that the account debtor has not paid within 120 days of invoice date; (b) Accounts for an account debtor, 50% or more of whose Accounts have not been paid within 120 days of invoice date; (c) Credit balances over 120 days from invoice date; (d) Accounts for an account debtor, including Affiliates, whose total obligations to Borrower exceed 25% of all Accounts, for the amounts that exceed that percentage, unless the Bank approves in writing; (e) Accounts for which the account debtor does not have its principal place of business in the United States; (f) Accounts for which the account debtor is a federal, state or local government entity or any department, agency, or instrumentality, with the exception of Accounts from Medicare and Medicade; (g) Accounts for which Borrower owes the account debtor, but only up to the amount owed (sometimes called "contra" accounts, accounts payable, customer deposits or credit accounts); (h) Accounts for demonstration or promotional equipment, or in which goods are consigned, sales guaranteed, sale or return, sale on approval, bill and hold, or other terms if account debtor's payment may be conditional; (i) Accounts for which the account debtor is Borrower's Affiliate, officer, employee, or agent; (j) Accounts in which the account debtor disputes liability or makes any claim and Bank believes there may be a basis for dispute (but only up to the disputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of business; (k) Accounts for which Bank reasonably determines collection to be doubtful. "Equipment" is all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "Equipment Advance" is defined in Section 2.1.2. 15 "Equipment Maturity Date" is defined in Section 2.1.2. "ERISA" is the Employment Retirement Income Security Act of 1974, and its regulations. "GAAP" is generally accepted accounting principles. "Indebtedness" is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations and (d) Contingent Obligations. "Insolvency Proceeding" are proceedings by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Inventory" is present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or later owned by or in the custody or possession, actual or constructive, of Borrower, including inventory temporarily out of its custody or possession or in transit and including returns on any accounts or other proceeds (including insurance proceeds) from the sale or disposition of any of the foregoing and any documents of title. "Investment" is any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "Lien" is a mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" are, collectively, this Agreement, any note, or notes or guaranties executed by Borrower or Guarantor, and any other present or future agreement between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated. "Material Adverse Change" is defined in Section 8.3. "Obligations" are debts, principal, interest, Bank Expenses and other amounts Borrower owes Bank now or later, including letters of credit and exchange contracts and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank. "Permitted Indebtedness" is: (a) Borrower's indebtedness to Bank under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and shown on the Schedule; (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business; and (e) Indebtedness secured by Permitted Liens. "Permitted Investments" are: (a) Investments shown on the Schedule and existing on the Closing Date; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States or its agency or any State maturing within 1 year from its acquisition, (ii) commercial paper maturing no more 16 than 1 year after its creation and having the highest rating from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of deposit issued maturing no more than 1 year after issue. "Permitted Liens" are: (a) Liens existing on the Closing Date and shown on the Schedule or arising under this Agreement or other Loan Documents; (b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, if they have no priority over any of Bank's security interests; (c) Purchase money Liens (i) on Equipment acquired or held by Borrower or its Subsidiaries incurred for financing the acquisition of the Equipment, or (ii) existing on equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the equipment; (d) Leases or subleases and licenses or sublicenses granted in the ordinary course of Borrower's business and any interest or title of a lessor, licensor or under any lease or license, if the leases, subleases, licenses and sublicenses permit granting Bank a security interest; (e) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (c), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase. "Person" is any individual, sole proprietorship, partnership, limited liability company, joint venture, company association, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency. "Prime Rate" is Bank's most recently announced "prime rate," even if it is not Bank's lowest rate. "Quick Assets" is, on any date, the Borrower's consolidated, unrestricted cash, cash equivalents, net billed accounts receivable and investments with maturities of fewer than 12 months determined according to GAAP. "Responsible Officer" is each of the Chief Executive Officer, the President, the Chief Financial Officer and the Controller of Borrower. "Revolving Maturity Date" is May 1, 1999. "Schedule" is any attached schedule of exceptions. "Subordinated Debt" is debt incurred by Borrower subordinated to Borrower's debt to Bank (and identified as subordinated by Borrower and Bank). "Subsidiary" is for any Person, or any other business entity of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by the Person or one or more Affiliates of the Person. "Tangible Net Worth" is, on any date, the consolidated total assets of Borrower and its Subsidiaries minus, (i) any amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, Patents, trade and service marks and names, Copyrights and research and development expenses except prepaid expenses, and (c) reserves not already deducted from assets, and (ii) Total Liabilities plus Subordinated Debt. 17 "Total Liabilities" is on any day, obligations that should, under GAAP, be classified as liabilities on Borrower's consolidated balance sheet, including all Indebtedness, and current portion Subordinated Debt allowed to be paid, but excluding all other Subordinated Debt. BORROWER: OrthoLogic Corp. By: /s/ Thomas R. Trotter ------------------------------ Title: President & CEO --------------------------- BANK: SILICON VALLEY BANK By: /s/ Amy Lou Blunt ---------------------------------- Title: Assistant Vice President ------------------------------- 18 EX-10.45 9 REGISTRATION RIGHTS AGREEMENT SILICON VALLEY BANK REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT is entered into as of March 2, 1998, by and between Silicon Valley Bank ("Purchaser") and the Company whose name appears on the last page of this Agreement. RECITALS A. Concurrently with the execution of this Agreement, the Purchaser is purchasing from the Company a Warrant to Purchase Stock (the "Warrant") pursuant to which Purchaser has the right to acquire from the Company the Shares (as defined in the Warrant). B. By this Agreement, the Purchaser and the Company desire to set forth the registration rights of the Shares all as provided herein. NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. Registration Rights. The Company covenants and agrees as follows: 1.1 Definitions. For purposes of this Section 1: (a) The term "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means (i) the Shares (if Common Stock) or all shares of Common Stock of the Company issuable or issued upon conversion of the Shares and (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, any stock referred to in (i). (c) The terms "Holder" or "Holders" means the Purchaser or qualifying transferees under subsection 1.8 hereof who hold Registrable Securities. (d) The term "SEC" means the Securities and Exchange Commission. 1.2 Company Registration. (a) Registration. If at any time or from time to time, the Company shall determine to register any of its securities, for its own account or the account of any of its shareholders, other than a registration on Form S-1 or S-8 relating solely to employee stock option or purchase plans, or a registration on Form S-4 relating solely to an SEC Rule 145 transaction, or a registration on any other form (other than Form S-1, S-2, S-3 or S-18, or their successor forms) or any successor to such forms, which does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities, the Company will: (i) promptly give to each Holder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (ii) include in such registration (and compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 30 days after receipt of such written notice from the Company, by any Holder or Holders, except as set forth in subsection 1.2(b) below. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to subsection 1.2(a)(i). In such event the right of any Holder to registration pursuant to this subsection 1.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other shareholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. 1.3 Expenses of Registration. All expenses incurred in connection with any registration, qualification or compliance pursuant to this Section 1 including without limitation, all registration, filing and qualification fees, printing expenses, fees and disbursements of counsel for the Company and expenses of any special audits incidental to or required by such registration, shall be borne by the Company except the Company shall not be required to pay underwriters' fees, discounts or commissions relating to Registrable Securities. All expenses of any registered offering not otherwise borne by the Company shall be borne pro rata among the Holders participating in the offering and the Company. 1.4 Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Registration Rights Agreement, the Company will keep each Holder participating therein advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. Except as otherwise provided in subsection 1.3, at its expense the Company will: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to 120 days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities 2 Act or the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 1.5 Indemnification. (a) The Company will indemnify each Holder of Registrable Securities and each of its officers, directors and partners, and each person controlling such Holder, with respect to which such registration, qualification or compliance has been effected pursuant to this Rights Agreement, and each underwriter, if any, and each person who controls any underwriter of the Registrable Securities held by or issuable to such Holder, against all claims, losses, expenses, damages and liabilities (or actions in respect thereto) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, or any violation or alleged violation by the Company of the Securities Act, the Securities Exchange Act of 1934, as amended, ("Exchange Act") or any state securities law applicable to the Company or any rule or regulation promulgated under the Securities Act, the Exchange Act or any such state law and relating to action or inaction required of the Company in connection with any such registration, qualification of compliance, and will reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, within a reasonable amount of time after incurred for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 1.5(a) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld); and provided further, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by an instrument duly executed by such Holder or underwriter specifically for use therein. (b) Each Holder will, if Registrable Securities held by or issuable to such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company within the meaning of the Securities Act, and each other such Holder, each of its officers, directors and partners and each person controlling such Holder, against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, partners, persons or underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder specifically for use therein; provided, however, that the indemnity agreement contained in this subsection 1.5(b) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Holder, (which consent shall not be unreasonably withheld); and provided further, that the total amount for which any Holder shall be liable under this subsection 1.5(b) shall not in any event exceed the aggregate proceeds received by such Holder from the sale of Registrable Securities held by such Holder in such registration. 3 (c) Each party entitled to indemnification under this subsection 1.5 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom; provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense; and provided further, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations hereunder, unless such failure resulted in prejudice to the Indemnifying Party; and provided further, that an Indemnified Party (together with all other Indemnified Parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the Indemnifying Party, if representation of such Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between such Indemnified Party and any other party represented by such counsel in such proceeding. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 1.6 Information by Holder. Any Holder or Holders of Registrable Securities included in any registration shall promptly furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to herein. 1.7 Rule 144 Reporting. With a view to making available to Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees at all times to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, after 90 days after the effective date of the first registration filed by the Company for an offering of its securities to the general public; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and (c) so long as a Holder owns any Registrable Securities, to furnish to such Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as the Holder may reasonably request in complying with any rule or regulation of the SEC allowing the Holder to sell any such securities without registration. 1.8 Transfer of Registration Rights. Holders' rights to cause the Company to register their securities and keep information available, granted to them by the Company under subsections 1.2 and 1.7 may be assigned to a transferee or assignee of a Holder's Registrable Securities not sold to the public, provided, that the Company is given written notice by such Holder at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being assigned. The Company may prohibit the transfer of any Holders' rights under this subsection 1.8 to any proposed transferee or assignee who the Company reasonably believes is a competitor of the Company. 4 2. General. 2.1 Waivers and Amendments. With the written consent of the record or beneficial holders of at least a majority of the Registrable Securities, the obligations of the Company and the rights of the Holders of the Registrable Securities under this agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), and with the same consent the Company, when authorized by resolution of its Board of Directors, may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement; provided, however, that no such modification, amendment or waiver shall reduce the aforesaid percentage of Registrable Securities without the consent of all of the Holders of the Registrable Securities. Upon the effectuation of each such waiver, consent, agreement of amendment or modification, the Company shall promptly give written notice thereof to the record holders of the Registrable Securities who have not previously consented thereto in writing. This Agreement or any provision hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, except to the extent provided in this subsection 2.1. 2.2 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 2.3 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 2.4 Entire Agreement. Except as set forth below, this Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 2.5 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to Holder, at such Holder's address as set forth below, or at such other address as such Holder shall have furnished to the Company in writing, or (b) if to the Company, at the Company's address set forth below, or at such other address as the Company shall have furnished to the Holder in writing. 2.6 Severability. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement or any provision of the other Agreement s shall not in any way be affected or impaired thereby. 2.7 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 2.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 5 PURCHASER COMPANY SILICON VALLEY BANK ORTHOLOGIC CORP. By: /s/ Amy Lou Blunt By: /s/ Thomas R. Trotter ---------------------------------- ------------------------------ Name: Amy Lou Blunt Name: Thomas R. Trotter -------------------------------- ---------------------------- Title: Assistant Vice President Title: President & CEO ------------------------------- --------------------------- By: ------------------------------ Name: ---------------------------- Title: --------------------------- Address: Address: 4455 East Camelback Road, Suite E-290 1275 W. Washington Phoenix, AZ 85018 Tempe, AZ 85281 EX-11.1 10 STATEMENT OF COMPUTATION ORTHOLOGIC CORP. STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING* (In thousands, except per share amounts)
Years Ended December 31, ------------------------ 1997 1996 1995 ---- ---- ---- Net income (loss) .................................................... ($17,714) $ 2,538 ($1,352) ======= ======= ======= Common shares outstanding at end of period............................ 25,255 25,022 19,252 Adjustment to reflect weighted average for shares issued during the period..................................................... (139) (878) (3,703) -------- ------- ------- Weighted average number of common shares outstanding.................. 25,116 24,144 15,549 ======= ======= ======= Net income (loss) per weighted average number of common shares outstanding........................................................... ($.71) $.11 ($.09) ======= ======= =======
* Adjusted to reflect the Company's 2-for-1 stock split effected in the form of a 100% stock dividend in June 1996. EX-13.1 11 PORTIONS OF 1997 ANNUAL REPORT TO STOCKHOLDERS ORTHOLOGIC ANNUAL REPORT SPECIAL NOTES REGARDING FORWARD-LOOKING STATEMENTS This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections of results of operations and financial condition, statements of future economic performance, and general or specific statements of future expectations and beliefs. The matters covered by such forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to differ materially from those contemplated or implied by such forward-looking statements. Important factors which may cause actual results to differ include, but are not limited to, the following matters, which are discussed in more detail in the Company's Form 10-K for the 1997 fiscal year: The Company's lack of experience with respect to newly acquired technologies and products may reduce the Company's ability to exploit the opportunities offered by the acquisitions discussed in this report. Potential difficulties in integrating the operations of newly acquired businesses may impact negatively on the Company's ability to realize benefits from the acquisitions. As discussed herein, the Company intends to pursue sales in international markets. The Company, however, has had little experience in such markets. Expanded efforts at pursuing new markets necessarily involves expenditures to develop such markets and there can be no assurance that the results of those efforts will be profitable. There can be no assurance that the Company's estimates of the market opportunity are accurate, or that changes in that market will not cause the nature and extent of that market to deviate materially from the Company's expectations. To the extent that the Company presently enjoys perceived technological advantages over competitors, technological innovation by present or future competitors may erode the Company's position in the market. To sustain long-term growth, the Company must develop and introduce new products and expand applications of existing products; however, there can be no assurance that the Company will be able to do so or that the market will accept any such new products or applications. The Company operates in a highly regulated environment and cannot predict the actions of regulatory authorities. The action or non-action of regulatory authorities may impede the development and introduction of new products and new applications for existing products, and may have temporary or permanent effects on the Company's marketing of its existing or planned products. There can be no assurance that the influence of managed care will continue to grow either in the United States or abroad, or that any such growth will result in greater acceptance or sales of the Company's products. In particular, there can be no assurance that existing or future decision makers and third party payors within the medical community will be receptive to the use of the Company's products or replace or supplement existing or future treatments. Moreover, the transition to managed care and the increasing consolidation underway in the managed care industry may concentrate economic power among buyers of the Company's products, which concentration could foreseeably adversely affect the price third party payors are willing to pay, and thus adversely affect the Company's margins. Although the Company believes that existing litigation initiated against the Company is without merit and the Company intends to defend such litigation vigorously, an adverse outcome of such litigation could have a material adverse effect on the Company's business, financial condition and results of operations. topic: FINANCIAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL OrthoLogic ("the Company") was founded in July 1987. Through August 1996, the Company was engaged primarily in the commercialization of the Company's proprietary BioLogic technology in order to develop products that stimulate the healing of bone fractures and spinal fusions. On August 30, 1996, OrthoLogic acquired Sutter Corporation (Sutter). Sutter develops, manufactures and markets orthopaedic rehabilitation products (primarily continuous passive motion (CPM) devices) and services. As discussed in Note 2 to the Company's consolidated financial statements, the Company completed two additional CPM related acquisitions in March 1997 and commenced the consolidation and integration of all of its facilities, operations and personnel. The manufacturing operations for the CPM product line were consolidated in Toronto, Canada, and the administrative and CPM service and repair operations were consolidated in Phoenix, Arizona. The Company reduced the number of facilities from six to two during the second and third quarters of 1997. The Company's product line includes bone growth stimulation and fracture fixation devices, CPM devices and related products and Hyalgan. BONE GROWTH STIMULATION AND FRACTURE FIXATION DEVICES In March 1994, the Company received approval of its Premarket Approval Application (PMA) from the U.S. Food and Drug Administration (the "FDA") and commenced marketing its OrthoLogic 1000 Bone Growth Stimulator for the treatment of nonunion fractures. In 1993, the Company commenced clinical trials for the SpinaLogic 1000, an application of the BioLogic technology as an adjunct to spinal fusion surgery. Also, during 1993, the Company commenced sales of its first commercial product, the OrthoFrame External Fixator. Additionally, in cooperation with the Mayo Clinic in Rochester, Minnesota, the Company developed the OrthoFrame/Mayo Wrist Fixator and commenced sales of this product during the first quarter of 1994. The Orthopaedic Department of the Mayo Clinic provides ongoing clinical input on future product design enhancements. In the fourth quarter of 1995, the Company commenced an ongoing clinical trial of the SpinaLogic 1000 as a noninvasive treatment for a failed spinal fusion surgery. Prior to the second quarter of 1996, the Company marketed its products primarily through a network of independent orthopaedic specialty dealers. During the second quarter of 1996, the Company commenced conversion of the primary marketing channel to a direct sales force. The Company paid approximately $10.8 million to former independent dealers for the return of territory rights, covenants-not-to-compete and the right to hire former independent dealer sales representatives as Company employees. During the third quarter of 1997, the Company determined the dealer intangible acquired in the transition to a direct sales force had been impaired. As part of a restructuring charge totaling $13.8 million, the Company recognized a $10.0 million write-off of the dealer intangible. At December 31, 1997 the bone growth stimulation and fracture fixation device direct sales force had approximately 65 sales representatives. The Companys OrthoLogic 1000 is sold to patients upon receipt of a written prescription. The Company submits a bill to the patients insurance carrier (third party payor) for reimbursement. All bills for the OrthoLogic 1000 are submitted to third party payors at the products list price. The Company's OrthoFrame products are used in conjunction with surgical procedures and are sold to hospitals. The Company recognizes revenue at the time of product shipment. OrthoFrame products are shipped based upon receipt of purchase orders from hospitals, which are billed at the time of shipment. Each OrthoLogic 1000 is shipped based upon receipt of a physicians prescription. Therefore, the Company operates with no backlog. CONTINUOUS PASSIVE MOTION The Company's CPM products are rented to patients in the home, hospital and outpatient surgical facilities. In addition to CPM rentals the Company also markets bracing and cryotherapy products. The Company maintains a fleet of CPMs which are rented to patients upon receipt of a written prescription. The Company recognizes CPM revenue daily during the period of prescribed usage. A bill is sent to the patients insurance carrier (third party payor) for reimbursement. At December 31, 1997, the CPM direct sales force had approximately 100 sales representatives. HYALGAN The Company began marketing Hyalgan during July 1997 under a co-promotion agreement with Sanofi Pharmaceuticals, Inc. ("Sanofi"). The Company has the marketing rights for all orthopaedic surgeons in the United States. Hyalgan is used for relief of pain from osteoarthritis of the knee for those patients who have failed to respond adequately to conservative non pharmacological therapy and to simple analgesics, e.g. acetaminophen. The product is manufactured by Fidia S.p.A. and sold to Sanofi who in turn sells the product to a wholesale distributor. The Company recognizes fee revenue when the product is shipped from the distributor to the orthopaedic surgeon under a purchase order. The fee revenue is based upon the number of units sold at the wholesale acquisition cost less amounts for distribution costs, discounts, rebates, returns, product transfer price, overhead factor and a royalty factor. The Company's entire sales force markets Hyalgan. OTHER OrthoLogic reported a net loss of $17.7 million during 1997 with a deficit as of December 31, 1997, of $34.7 million. As of December 31, 1997, the Company had approximately $17.4 million in net operating loss carryforwards for federal tax purposes. The Companys ability to utilize its net operating loss carryforwards may be subject to annual limitations in future years pursuant to the "change in ownership rules" under Section 82 of the Internal Revenue Code of 1986, as amended, and are dependent on the Company's future profitability. Future operating results will depend on numerous factors including, but not limited to, demand for the Company's products, the timing, cost and acceptance of product introductions and enhancements made by the Company or others, level of third party payment, FINANCIALS.97 ORTHOLOGIC ANNUAL REPORT 14/15 alternate treatments which currently exist or may be introduced in the future, practice patterns, competitive conditions in the industry, general economic conditions and other factors influencing the orthopaedic market in the United States or other countries in which the Company operates or expands. In addition, efforts to reform the health care system and contain health care expenditures in the United States could adversely affect the Company's revenues and results of operations. Furthermore, the Company's medical devices are subject to regulation by the FDA, and the FDA has the power to affect the Company's sales and marketing of its devices. The Company cannot determine the effect such trends and regulations will have on its operations, if any. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 REVENUES. OrthoLogics revenue increased from $14.7 million in 1995 to $41.9 million in 1996, an increase of 185%. The increase in revenue is primarily attributable to higher sales levels of the OrthoLogic 1000 and four months of revenues from Sutter. Revenues increased 84% from $41.9 million in 1996 to $77.0 million in 1997. The increase in revenues is attributed to a full year of revenues from Sutter, the addition of Danninger and Toronto product lines in March 1997 and fee income for Hyalgan which started in July 1997. Sales of OrthoLogic 1000 declined in 1997 compared to 1996. GROSS PROFIT. Gross profit increased from $11.6 million in 1995 to $33.6 million in 1996, an increase of 189%. Gross profit increased 75% from $33.6 million in 1996 to $58.7 million in 1997. Gross profit as a percentage of sales increased from 79.1% in 1995 to 80.2% in 1996. The gross profit percentage declined to 76.2% in 1997 primarily as a result of the recently acquired CPM operations which have a lower gross profit percentage than the Companys fracture healing products. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses increased 182% from $11.3 million in 1995 to $31.9 million in 1996 and increased 93% to $61.5 million in 1997. The increase from 1995 to 1996 is primarily due to the variable costs (commissions, bad debts and royalties) associated with the increased revenue. The fixed component of the SG&A also increased due to additional personnel at all levels for senior management, human resources, marketing, accounting and management information systems and other infrastructure required to support the growing revenue volume. The increase from 1996 to 1997 is primarily due to a full year of fixed costs and variable costs associated with the 1996 acquisition of Sutter and the acquisition of the CPM businesses of Toronto Medical Corp. ("Toronto") and Danninger Medical Technology Inc. ("DMTI") in the first quarter of 1997. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased from $2.1 million in 1995 to $2.2 million in 1996. Research and development expenses increased 7% from $2.2 million in 1996 to $2.3 million in 1997. RESTRUCTURING AND OTHER CHARGES. During the third quarter of 1997, the Company restructured its sales, marketing and managed care groups. As a result of their restructuring and a second consecutive quarter of declining sales of the OrthoLogic 1000 in the third quarter of 1997, the Company determined that certain dealer intangibles acquired in the transition to a direct sales force had 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. NET INCOME (Loss). Net loss during 1997 is composed of an operating loss of $19 million offset by other income of $1.5 million, consisting primarily of interest income of $1.4 million. Net income during 1996 is composed of an operating loss of $485,000 which is offset by other income of $3.0 million, consisting predominantly of interest income of $2.8 million. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations through the public and private sales of equity securities and product revenues. From inception through December 31, 1997, the Company had raised $119.4 million in net proceeds from equity financing. At December 31, 1997, the Company had cash and cash equivalents of $7.8 million and short term investments of $4.6 million. Working capital decreased 40% from $75.0 million at December 31, 1996 to $44.9 million at December 31, 1997. This decrease is primarily the result of working capital used for the acquisitions of Toronto and DMTI. The net cash outlay was approximately $ 7.5 million for Toronto and $ 10.7 million for DMTI. Subsequent to year end, the Company secured a $10.0 million accounts receivable revolving line of credit and a $2.5 million revolving term loan from a bank. The maximum amount, which may be borrowed under these facilities, in the aggregate, is $10.0 million (Note 15). The Company anticipates that its cash on hand and the funds available from this line of credit will be sufficient to meet the Company's presently projected cash and working capital requirements for the next 12 months. There can be no assurance, however, that this will prove to be the case. The timing and amounts of cash used will depend on many factors, including the Company's ability to continue to increase revenues, reduce or control its expenditures, become profitable and collect amounts due from third party payors. Additional funds may be required if the Company is not successful in any of these areas. The Companys ability to continue funding its planned operations beyond the next 12 months is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required. Net cash used by operations increased 44.6% from $4.8 million in 1995 to $6.9 million in 1996. This increase was primarily due to the increases in accounts receivable and inventory of $4.7 million and $2.3 million, respectively, offset by increases in net income and depreciation/amortization of $3.9 million and $1.6 million respectively. Net cash used by operations decreased 30.2% from $6.9 million in 1996 to $4.8 million in 1997. This decrease was primarily due to (1) a net loss of $17.7 million in 1997 as compared to a net profit of $2.5 million in 1996, which was offset by a restructuring charge of $13.8 million, and (2) a decrease in accrued liabilities of $2.8 million, which was offset by increases in accounts receivable, inventory and depreciation/amortization of $6.4 million, $1.6 million and $3.6 million, respectively. As discussed in greater detail in Note 12 the Company has been named as a defendant in certain lawsuits. Management believes that the allegations are without merit and will vigorously defend them. No costs related to the potential outcome of these actions have been accrued. Under the terms of the Hyalgan co-promotion agreement, the Company is obligated to pay a total of $4 million during the first eighteen months of the agreement payable at $1.0 million every six months. During the second quarter of 1997, the Company paid $1.0 million of the required payment under the co-promotion agreement for the right to market and promote Hyalgan. The Company relocated to new corporate offices during the first quarter of 1998. The terms of the lease are for a ten-year period with an escalation of payments after five years. The Company is accounting for the lease as an operating lease. YEAR 2000 COMPLIANCE The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a 2 digit year is commonly referred to as the Year 2000 Compliance issue. As the year 2000 approaches, such systems may be unable to accurately process certain date-based information. The Company has identified all significant applications that will require modification to ensure Year 2000 Compliance. Internal and external resources are being used to make the required modifications and test Year 2000 Compliance. The modification process of all significant applications is substantially complete. The Company plans on completing the testing process of all significant applications by December 31, 1998. In addition, the Company has communicated with others with whom it does significant business to determine their Year 2000 Compliance readiness and the extent to which the Company is vulnerable to any third party Year 2000 issues. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. The total cost to the Company of these Year 2000 Compliance activities has not been and is not anticipated to be material to its financial position or results of operations in any given year. These costs and the date on which the Company plans to complete the Year 2000 modification and testing processes are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ from those plans. FINANCIALS.97 ORTHOLOGIC ANNUAL REPORT 16/17 topic: SELECTED FINANCIAL DATA The selected financial data for each of the five years in the period ended December 31, 1997 are derived from audited financial statements of the Company. The selected financial data should be read in conjunction with the Financial Statements and related Notes thereto and other financial information appearing elsewhere herein and the discussion in "Management Discussion and Analysis of Financial Condition and Results of Operations." As discussed in Note 2 of the footnotes, the Company completed two acquisitions in March, 1997.
Years Ended December 31, STATEMENTS OF OPERATIONS DATA: 1997 1996 1995 1994 1993 ======================================================================================================= (in thousands, except per share data) Total revenues $ 77,049 $ 41,884 $ 14,678 $ 4,953 $ 326 Total cost of revenues 18,369 8,299 3,065 1,314 161 Operating expenses: Selling, general, and administrative 61,484 31,901 11,304 5,611 1,113 Research and development 2,320 2,169 2,132 2,787 2,769 Restructuring and other charges [Note 1] 13,844 -- -- -- -- - ------------------------------------------------------------------------------------------------------- Total operating expenses 77,648 34,070 13,436 8,398 3,882 - ------------------------------------------------------------------------------------------------------- Operating loss (18,968) (485) (1,823) (4,760) (3,717) Other income 1,466 3,023 471 288 393 Income taxes (212) -- -- -- -- - ------------------------------------------------------------------------------------------------------- Net income (loss) $(17,714) $ 2,538 $ (1,352) $ (4,472) $ (3,324) ======================================================================================================= Net income (loss) per common share Basic [Note 1] (.71) .11 (.09) (.33) (.26) Net income (loss) per common share Diluted [Note 1] (.71) .11 (.09) (.33) (.26) Basic shares outstanding 25,116 23,275 15,549 13,791 13,090 Equivalent shares and stock options -- 869 -- -- -- - ------------------------------------------------------------------------------------------------------- Diluted shares outstanding 25,116 24,144 15,549 13,791 13,090 =======================================================================================================
(1) Net income was affected in 1997 by a one-time charge for restructuring and other costs, applicable to the impairment of dealer intangibles acquired in the transition to a direct sales force and expenses related to severance, facility closing and related costs. The effect on EPS from the restructuring and other changes is a loss of .55 cents per share.
Years Ended December 31, BALANCE SHEET DATA: 1997 1996 1995 1994 1993 ======================================================================================================= (in thousands) Working capital $ 44,859 $ 74,985 $ 23,518 $ 4,968 $ 9,553 Total assets 103,103 113,026 27,490 7,576 10,949 Long-term debt, less current maturities 1,631 280 -- -- 20 Stockholders' equity 84,737 101,927 24,437 6,052 10,214
STOCKHOLDER INFORMATION MARKET INFORMATION. The Company's Common Stock commenced trading on the Nasdaq National Market on January 28, 1993 under the symbol "OLGC." The bid price information [adjusted for a 2-for-1 stock split effected as a stock dividend in June 1996] included herein is derived from the Nasdaq Monthly Statistical Report, represents quotations by dealers, may not reflect applicable markups, markdowns or commissions and does not necessarily represent actual transactions. 1997 1996 High Low High Low ================================================================================ First Quarter $ 7 $ 4 1/2 $ 13.656 $ 7 1/8 Second Quarter 6 9/16 4 1/4 26 1/4 9 7/8 Third Quarter 7 4 9/16 16 3/8 7 1/8 Fourth Quarter 6 3/16 4 5/8 11 3/8 5 5/8 As of February 28, 1998, there were 25,274,290 shares outstanding of the Common Stock of the Company held by approximately 306 stockholders of record. DIVIDENDS. The Company has never paid a cash dividend on its Common Stock. The Board of Directors currently anticipates that all the Company's earnings, if any, will by retained for use in its business and does not intend to pay any cash dividends on its Common Stock in the foreseeable future. FINANCIALS.97 ORTHOLOGIC ANNUAL REPORT 18/19 topic: CONSOLIDATED BALANCE SHEETS
December 31, ASSETS 1997 1996 ====================================================================================================== Current assets: Cash and cash equivalents $ 7,783,349 $ 13,493,853 Short-term investments [Note 5] 4,568,526 35,306,989 Accounts receivable, less allowance for doubtful accounts of $11,370,524 and $8,595,000 34,423,951 26,856,144 Inventories, net [Note 6] 10,548,173 6,551,382 Prepaids and other current assets 1,672,939 1,194,679 Deferred income taxes [Note 8] 2,596,386 2,401,000 ---------------------------------------------------------------------------------------------- Total current assets 61,593,324 85,804,047 ============================================================================================== Furniture, rental fleet & equipment, net [Note 7] 11,459,035 9,082,003 Deposits and other assets [Note 10] 152,718 93,112 Note receivable - officer [Note 10] -- 200,000 Goodwill [Note 2] 26,008,805 7,757,981 Intangibles, net [Notes 3 and 14] 3,888,889 10,088,559 - ------------------------------------------------------------------------------------------------------ Total assets $ 103,102,771 $ 113,025,702 ============================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY ====================================================================================================== Current liabilities: Accounts payable $ 2,896,056 $ 2,041,943 Loan payable - current portion 500,000 -- Accrued compensation 3,844,359 3,443,988 Deferred credits 1,683,321 2,738,779 Accrued royalties [Note 4] 447,380 556,495 Accrued restructuring expenses [Note 3] 2,408,476 -- Obligations under co-promotion agreement [Note 14] 2,000,000 -- Accrued expenses 2,955,010 2,037,634 ---------------------------------------------------------------------------------------------- Total current liabilities 16,734,602 10,818,839 ---------------------------------------------------------------------------------------------- Deferred rent and capital leases 106,251 279,929 Loan payable - long term 524,457 -- Obligations under co-promotion agreement [Note 14] 1,000,000 -- - ------------------------------------------------------------------------------------------------------ Total liabilities 18,365,310 11,098,768 ---------------------------------------------------------------------------------------------- Commitments and contingencies [Notes 4,11,12 and 14] STOCKHOLDERS' EQUITY [NOTE 9] ====================================================================================================== Common Stock, $.0005 par value; 40,000,000 shares authorized; 25,255,190 and 25,022,346 shares issued and outstanding 12,626 12,510 Additional paid-in capital 119,413,210 118,832,040 Deficit (34,688,375) (16,917,616) ---------------------------------------------------------------------------------------------- Total stockholders' equity 84,737,461 101,926,934 ---------------------------------------------------------------------------------------------- Total liabilities and stockholders' Equity $ 103,102,771 $ 113,025,702 ==============================================================================================
See notes to consolidated financial statements. topic: CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ending December 31, 1997 1996 1995 =========================================================================================================== REVENUES Net sales $ 36,043,169 $ 31,031,451 $ 14,678,362 Net rentals 37,362,446 10,852,788 -- Fee revenue from co-promotion agreement [Note 14] 3,643,618 -- -- --------------------------------------------------------------------------------------------------- Total revenues 77,049,233 41,884,239 14,678,362 --------------------------------------------------------------------------------------------------- COST OF REVENUES Cost of good sold 10,224,397 5,714,510 3,065,451 Cost of rentals 8,144,806 2,584,530 -- --------------------------------------------------------------------------------------------------- Total cost of revenues 18,369,203 8,299,040 3,065,451 --------------------------------------------------------------------------------------------------- GROSS PROFIT 58,680,030 33,585,199 11,612,911 OPERATING EXPENSES Selling, general and administrative 61,484,418 31,900,966 11,303,624 Research and development 2,319,640 2,169,090 2,132,441 Restructuring and other charges [Note 3] 13,843,591 -- -- --------------------------------------------------------------------------------------------------- Total operating expenses 77,647,649 34,070,056 13,436,065 --------------------------------------------------------------------------------------------------- OPERATING LOSS (18,967,619) (484,857) (1,823,154) OTHER INCOME (EXPENSE) Grant/other revenue 147,263 182,658 214,704 Interest income 1,384,133 2,840,588 305,243 Interest expense (65,884) -- (48,438) --------------------------------------------------------------------------------------------------- Total other income 1,465,512 3,023,246 471,509 --------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE TAXES (17,502,107) 2,538,389 (1,351,645) Provision for income taxes [Note 8] (211,560) -- -- --------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(17,713,667) $ 2,538,389 $ (1,351,645) =================================================================================================== Net income (loss) per common share basic $ (.71) $ .11 $ (.09) =================================================================================================== Net income (loss) per common share diluted $ (.71) $ .11 $ (.09) =================================================================================================== Basic shares outstanding 25,116,164 23,274,763 15,548,856 Equivalent shares and stock options -- 869,000 -- --------------------------------------------------------------------------------------------------- Diluted shares outstanding 25,116,164 24,143,763 15,548,856 ===================================================================================================
See notes to consolidated financial statements. FINANCIALS.97 ORTHOLOGIC ANNUAL REPORT 20/21 topic: CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL -------------------------- PAID IN SHARES AMOUNT CAPITAL DEFICIT TOTAL ================================================================================================================================= Balance, January 1, 1995 6,971,091 $ 3,486 $ 24,153,096 $ (18,104,360) $ 6,052,222 Sale of common stock 2,512,199 1,256 19,564,379 -- 19,565,635 Exercise of common options at prices ranging from $.325 to $5.75 per share 141,300 70 85,875 -- 85,945 Stock option compensation -- -- 84,455 -- 84,455 Exercise of common stock warrant 1,274 1 (1) -- -- Net loss -- -- -- (1,351,645) (1,351,645) -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 9,625,864 4,813 43,887,804 (19,456,005) 24,436,612 Sale of common stock 2,530,000 1,265 73,949,643 -- 73,950,908 Exercise of common options at prices ranging from $3.25 to $14.625 per share 324,318 162 852,051 -- 852,213 Exercise of common stock warrant 10,241 5 (5) -- -- Stock option compensation -- -- 64,307 -- 64,307 Two for one stock split [Note 9] 12,490,423 6,245 (6,245) -- -- Exercise of common options at prices ranging from $1.844 to $7.313 per share 41,500 20 84,485 -- 84,505 Net income -- -- -- 2,538,389 2,538,389 -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 22,022,346 12,510 118,832,040 (16,917,616) 101,926,934 Exercise of common options at prices ranging from $.16 to $4.78 per share 232,844 116 496,593 -- 496,709 Stock option compensation -- -- 84,577 -- 84,577 Other -- -- -- (57,092) (57,092) Net loss -- -- -- (17,713,667) (17,713,667) -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 25,255,190 $ 12,626 $ 119,413,210 $ (34,688,375) $ 84,737,461 ==========================================================================================================================
See notes to consolidated financial statements. topic: CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ending December 31, 1997 1996 1995 ================================================================================================================================ OPERATING ACTIVITIES: Net income (loss) $(17,713,667) $ 2,538,389 $ (1,351,645) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 5,510,251 1,926,056 301,567 Restructuring and other charges 13,843,591 -- -- Other (438,504) -- -- Change in operating assets and liabilities: Accounts receivable (2,652,844) (9,062,119) (4,407,128) Inventories (1,494,096) (3,171,448) (860,449) Prepaids and other current assets (570,073) (819,623) (97,969) Deposits and other assets 2,068 4,636 (1,866) Accounts payable (871,546) (708,136) 582,228 Accrued and other current liabilities (437,934) 2,377,410 1,051,730 ------------------------------------------------------------------------------------------------------------------------ Net cash used in operating activities (4,822,754) (6,914,835) (4,783,532) ------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Expenditures for furniture and equipment, net (5,128,159) (1,389,309) (133,818) Intangibles from dealer transactions (704,966) (10,752,116) -- Officer note receivable, net 200,000 (75,000) -- Acquisitions, net of cash acquired (24,886,134) (24,907,442) -- (Purchase) sale of short-term investments 30,738,463 (26,157,629) (9,149,360) ------------------------------------------------------------------------------------------------------------------------ Net cash (used) provided in investing activities 219,204 (63,281,496) (9,283,178) ------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Payments under long-term debt and capital lease obligations (233,756) (27,956) (19,706) Payments on loan payable (420,084) -- -- Payments under co-promotion agreement (1,000,000) -- -- Net proceeds from stock options exercised 546,886 700,700 -- Proceeds from issuance of common stock -- 74,186,926 19,651,580 ------------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities (1,106,954) 74,859,670 19,631,874 ------------------------------------------------------------------------------------------------------------------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,710,504) 4,663,339 5,565,164 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 13,493,853 8,830,514 3,265,350 - -------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,783,349 $ 13,493,853 $ 8,830,514 ================================================================================================================================ Supplemental schedule of non-cash investing and financing activities: Stock option compensation $ 84,575 $ 64,307 $ 84,455 The Company acquired a $4 million dollar intangible asset through an obligation for product distribution rights (Note 14) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 65,884 $ 0 $ 48,438
See notes to consolidated financial statements. FINANCIALS.97 ORTHOLOGIC ANNUAL REPORT 22/23 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION. OrthoLogic Corp. (formerly IatroMed, Inc.) was incorporated on July 30, 1987 (date of inception) and commenced operations in September 1987. On August 30, 1996 OrthoLogic Corp. acquired all of the outstanding capital stock of Sutter Corporation ("Sutter") which became a wholly-owned subsidiary of OrthoLogic (collectively the "Company or "OrthoLogic"). 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). Concurrent with the acquisition of Toronto the Company formed a wholly-owned Canadian subsidiary, now known as OrthoLogic Canada Ltd. The Company's continuous passive motion ("CPM") manufacturing and international sales are conducted through this subsidiary. DESCRIPTION OF THE BUSINESS. OrthoLogic develops, manufactures and markets proprietary, technologically advanced orthopaedic products and packaged services for the orthopaedic health care market including bone growth stimulation, CPM devices and ancillary orthopaedic recovery products primarily in the United States. OrthoLogics products are designed to enhance the healing of diseased, damaged, degenerated or recently repaired musculoskeletal tissue. The Company's products focus on improving the clinical outcomes and cost-effectiveness of orthopaedic procedures that are characterized by compromised healing, high-cost, potential for complication and long recuperation time. In June 1997, the Company further extended its product line by entering into a co-promotion agreement (the "Co-Promotion Agreement") with Sanofi Pharmaceuticals, Inc. of New York (Note 14). The Co-Promotion Agreement allows the Company to market Hyalgan (sodium hyaluronate) to orthopaedic surgeons in the United States for the relief of pain from osteoarthritis of the knee. The Company commenced marketing of Hyalgan in July 1997. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of OrthoLogic Corp. since its inception, Sutter since its acquisition on August 30, 1996 and OrthoLogic Canada Ltd. since March 3, 1997. All material intercompany accounts and transactions have been eliminated. The following briefly describes the significant accounting policies used in the preparation of the financial statements of the Company: A. Inventories are stated at the lower of cost (first in, first out method) or market. B. Furniture, rental fleet, and equipment are stated at cost or, in the case of leased assets under capital leases, at the present value of future lease payments at inception of the lease. Depreciation is calculated on a straight-line basis over the estimated useful lives of the various assets, which range from three to seven years. Leasehold improvements and leased assets under capital leases are amortized over the life of the asset or the period of the respective lease using the straight-line method, whichever is the shortest. C. Grant revenue is recorded as earned in accordance with the terms of the grant contracts. D. Research and development represent both costs incurred internally for research and development activities, as well as costs incurred by the Company to fund the activities of the various research groups which the Company has contracted. All research and development costs are expensed when incurred. E. Cash and cash equivalents consists of cash on hand and cash deposited with financial institutions, including money market accounts, and commercial paper purchased with an original maturity of three months or less. F. Income (loss) per weighted average number of common and common equivalent shares outstanding is computed on the weighted average number of common or common and common equivalent shares outstanding during each year. Basic EPS is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants, and other convertible securities and includes shares issuable upon exercise of stock options when dilutive. G. Certain reclassifications have been made to the 1996 and 1995 financial statements to conform to the 1997 presentation. H. Intangible assets - Goodwill from the acquisition of Sutter, Toronto and DMTI is capitalized and amortized on a straight-line basis over the estimated useful life of the related asset (15-20 years). The intangible relating to the product distribution rights for Hyalgan acquired in the co-promotion agreement is being amortized over 15 years. I. Long-lived assets - In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, the Company reviews the carrying values of its long-lived assets and identifiable intangibles for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets to be held and used may not be recoverable. J. Stock based compensation - The Company accounts for its stock based compensation plan based on Accounting Principles Board ("APB") Opinion No. 25. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation. The Company has determined that it will not change to the fair value method and will continue to use APB Opinion No. 25 for measurement and recognition of employee stock based transactions (Note 9). K. Use of estimates - The preparation of the financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. L. 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 adopted this SFAS in 1997. 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 Companys financial statements. The "Disclosures about Segments on 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. 2. ACQUISITIONS On March 3, 1997 and March 12, 1997, the Company acquired certain assets and assumed certain liabilities of Toronto Medical Corp. ("Toronto") and Danniger 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 purchases under the purchase method of accounting which resulted in goodwill of $4.5 million for Toronto and $9.5 million for DMTI. The goodwill is being amortized over 20 years. On August 30, 1996, OrthoLogic acquired all of the outstanding capital stock of Sutter for $24.5 million in cash and assumption of $11.7 million of liabilities. The acquisition was accounted for as a purchase, resulting in goodwill of $13.2 million which is being amortized over 15 years. The Company has substantially completed its integration of operations related to these acquisitions. The following unaudited pro forma summary combines the consolidated results of operations of OrthoLogic, Toronto and DMTI as if the acquisitions had occurred January 1, 1997, and the operation of OrthoLogic and Sutter as if the acquisition had occurred January 1, 1996, after giving effect to certain adjustments including amortization of FINANCIALS.97 ORTHOLOGIC ANNUAL REPORT 24/25 goodwill, interest income and income taxes. This pro forma summary is not necessarily indicative of the results of operations that would have occurred if OrthoLogic, Sutter, Toronto, and DMTI had been combined during such periods. Moreover, the pro forma summary is not intended to be, and may not be, indicative of the results of operations to be attained in the future. Year Ended December 31, 1997 1996 ================================================================================ (in thousands, except per share data) Net revenues $ 80,332 $ 65,623 Income (loss) from continuing operations (17,725) (1,487) Net income (loss) per common share $ (.71) $ (.06) Net cash paid, assets acquired and debt assumed for 1997 acquisitions are shown in the table below: (in thousands) 1997 ================================================================================ Receivables $ 4,889 Inventories 2,574 Fixed assets 1,629 Intangibles 13,987 Other assets 1,005 Debt and other liabilities assumed (6,015) - -------------------------------------------------------------------------------- Net cash paid $ 18,069 ================================================================================ 3. RESTRUCTURING AND OTHER CHARGES During the third quarter of 1997, the Company restructured its sales, marketing and managed care groups. As a result of their 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 in 1996 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, $2.3 million in severance, $1.2 million in facility closing and $300,000 of related costs. The remaining balance on December 31, 1997 of the restructuring reserve totaled $2.4 million remaining for severance, facility closings and related costs. The Company anticipates the remaining balance will be paid during 1998 using available cash on hand. 4. RESEARCH, PRODUCT DEVELOPMENT AND LICENSE AGREEMENTS The Company has entered into several research contracts, product development agreements and license agreements. These agreements relate to products being sold, products currently under development and ongoing scientific results. Future commitments related to these agreements are summarized as follows: Year Ended December 31, Amount ================================================================================ 1998 $795,333 1999 and thereafter -- - -------------------------------------------------------------------------------- Total $795,333 ================================================================================ In addition, the Company has committed to pay royalties on the sale of products or components of products developed under certain of these agreements. The royalty percentages vary but generally range from 7% to 0.5% of the sales amount for licensed products. The royalty percentage under the different agreements decreases when either a certain sales dollar amount is reached or royalty amount is paid. Royalty expense under these totaled $360,110, $621,597 and $414,408 in 1997, 1996 and 1995 respectively. 5. INVESTMENTS The Company has implemented Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities." At December 31, 1997, marketable securities were comprised of corporate debt securities and direct obligations of the United States Government and its agencies and were managed as part of the Companys cash management program and were classified as held-to-maturity securities. All such securities were purchased with original maturities less than one year. Such classification requires these securities to be reported at amortized cost. A summary of the fair market value and unrealized gains and losses on these securities is as follows: Year Ended December 31, 1997 1996 ================================================================================ Amortized cost $ 4,568,526 $35,306,989 Gross unrealized gains 11,250 48,912 Gross unrealized losses (73,947) (13,117) - -------------------------------------------------------------------------------- Fair value $ 4,505,829 $35,342,784 ================================================================================ 6. INVENTORIES Inventories consisted of the following: Year Ended December 31, 1997 1996 ================================================================================ Raw materials $ 5,812,861 $ 4,646,620 Work-in-progress 3,463,197 127,514 Finished goods 1,633,753 2,037,850 - -------------------------------------------------------------------------------- 10,909,811 6,811,984 Less allowance for obsolescence (361,638) (260,602) - -------------------------------------------------------------------------------- Total $ 10,548,173 $ 6,551,382 ================================================================================ 7. FURNITURE, RENTAL FLEET AND EQUIPMENT Furniture, rental fleet and equipment consisted of the following: December 31, 1997 1996 ================================================================================ Rental fleet $ 10,843,842 $ 7,366,886 Machinery and equipment 2,007,544 1,738,572 Computer equipment 2,332,979 1,070,534 Furniture and fixtures 1,021,956 825,894 Leasehold and improvements 186,431 362,409 - -------------------------------------------------------------------------------- 16,392,752 11,364,295 Less accumulated depreciation and amortization (4,933,717) (2,282,292) - -------------------------------------------------------------------------------- Total $ 11,459,035 $ 9,082,003 ================================================================================ 8. INCOME TAXES At December 31, 1997, the Company has incurred approximately $17.4 million in net operating loss carryforwards expiring from 2002 through 2012 for federal income tax purposes. Stock issuances, as discussed in Note 9, may cause a change in ownership under the provisions of Internal Revenue Code Section 382; accordingly, the utilization of the Company's net operating loss carryforwards may be subject to annual limitations. FINANCIALS.97 ORTHOLOGIC ANNUAL REPORT 26/27 Management has evaluated the available evidence about future taxable income and other possible sources of realization of deferred tax assets. The valuation allowance reduces deferred tax assets to an amount that management believes will more likely than not be realized. The components of deferred income taxes at December 31 are as follows (in thousands): 1997 1996 ================================================================================ Allowance for bad debts $ 4,560 $ 4,005 Other accruals and reserves 672 46 Valuation allowance (2,636) (1,650) - -------------------------------------------------------------------------------- Total current 2,596 2,401 - -------------------------------------------------------------------------------- Net operating loss carrryforwards 6,971 5,515 Difference in basis of fixed assets (978) (835) Nondeductible accruals and reserves 340 441 Amortization of intangibles and other 2,075 1,505 Difference in basis of dealer intangible 4,198 -- Valuation allowance (12,606) (6,626) - -------------------------------------------------------------------------------- Total noncurrant -- -- - -------------------------------------------------------------------------------- Total deferred income taxes $ 2,596 $ 2,401 ================================================================================ A reconciliation of the difference between the provision for income taxes and income taxes at the statutory U.S. federal income tax rate is as follows for the years ended December 31. Income taxes at statutory rate $(5,950) $ 863 Net operating losses used -- (930) State income taxes (1,024) 200 Change in valuation allowance 6,558 -- Other 628 (133) - -------------------------------------------------------------------------------- Net provision $ 212 $ -- ================================================================================ Prior to 1996, the Company had experienced net operating losses for all years; therefore, there was no provision for 1995. 9. STOCKHOLDERS EQUITY In October 1987, the stockholders adopted a Stock Option Plan (the "1987 Option Plan") which was amended in September 1996, and approved by shareholders in May 1997, to increase the number of common shares reserved for issuance under the 1987 Option Plan to 4,160,000 shares. This plan expired during October 1997. In May 1997, the Stockholders adopted a new Stock Option Plan (the "1997 Option Plan") which replaced the 1987 Option Plan. The 1997 Option Plan reserved for issuance 1,040,000 shares of common stock. Two types of options may be granted under the 1997 Option Plan: options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code ("Code") and other options not specifically authorized or qualified for favorable income tax treatment by the Code. All eligible employees may receive more than one type of option. Any director or consultant who is not an employee of the Company shall be eligible to receive only nonqualified stock options under the 1997 Option Plan. In October 1989, the Board of Directors (the "Board") approved that in the event of a takeover or merger of the Company in which 100% of the equity of the company is purchased, 75% of all unvested employee options will vest, with the balance vesting equally over the ensuing 12 months, or according to the individual's vesting schedule, whichever is earlier. If an employee or holder of stock options is terminated as a result of or subsequent to the acquisition, 100% of that individuals stock options will vest immediately upon employment termination. These provisions are also included in the 1997 Option Plan. Options are granted at prices which are equal to the current fair value of the Company's common stock at the date of grant. The vesting period is generally related to length of employment and all vested options lapse upon termination of employment if not exercised within a 90-day period (or one year after death or disability or the date of termination if terminated for cause). A summary of the status of the option plans as of December 31, 1997, 1996, and 1995, and changes during the years then ended is presented below:
1997 1996 1995 WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE =================================================================================================================================== Fixed options outstanding at beginning of year $ 2,509,644 $ 7.31 $ 2,356,034 $ 3.33 $ 1,654,034 $ 1.61 Granted 1,132,150 5.54 903,746 13.15 1,112,600 5.04 Exercised (232,844) 2.37 (690,136) 1.60 (282,600) .30 Forfeited (873,500) 9.59 (60,000) 6.23 (128,000) 2.42 - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 2,535,450 $ 6.07 2,509,644 $ 7.31 2,356,034 $ 3.33 =================================================================================================================================== Options exercisable at year-end 1,072,975 613,737 774,220 =================================================================================================================================== Weighted-average fair value of options granted during the year $ 3.02 $ 7.50 $ 2.87 ===================================================================================================================================
The following table summarizes information about fixed stock options outstanding at December 31, 1997: OPTIONS OUTSTANDING
=================================================================================================================================== WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE EXERCISE PRICES 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE 12/31/97 EXERCISE PRICE =========================================================================================================================== $ 1.84-2.63 513,900 4.86 $ 2.28 324,983 $ 2.18 2.88-5.37 582,950 6.35 4.88 300,536 4.79 5.50-6.56 585,700 5.01 5.87 39,097 6.12 6.78-7.75 528,200 3.13 6.86 270,992 6.83 8.75-17.38 324,700 5.92 13.28 137,367 14.34 --------------------------------------------------------------------------------------------------------------------------- $ 1.84-17.38 2,535,450 5.01 $ 6.07 1,072,975 $ 5.79 ===========================================================================================================================
FINANCIALS.97 ORTHOLOGIC ANNUAL REPORT 28/29 The Company applies APB Opinion No. 25 and related interpretations in accounting for its option plans. Accordingly, no compensation cost has been recognized for its option plans. Had compensation cost been computed based on the fair value of awards on the date of grant, utilizing the Black-Scholes option-pricing model, consistent with the method stipulated by SFAS No. 123, the Companys net earnings and earnings per share for the years ended December 31, 1997 and 1996 would have been reduced to the pro forma amounts indicated below, followed by the model assumptions used:
1997 1996 ====================================================================================================== Net income (loss): As reported (in thousands) $ (17,714) $ 2,538 Pro forma (in thousands) $ (20,371) $ 679 Net income (loss) per weighted average number of common and common equivalent shares outstanding: As reported $ (.71) $ 0.11 Pro forma $ (.81) $ 0.03 Black-Scholes model assumptions: Risk-free 6.00% 6.00% Expected volatility .6 .6 Expected term 5 Years 5 Years Dividend yield 0% 0%
At December 31, 1997, options for 1,072,975 shares of common stock were exercisable. The options generally expire five or ten years from the date of grant. At the closing of the Company's IPO on January 28, 1993 all convertible Series D Preferred Stock, totaling 4,173,002 shares, was converted into an equal amount of common stock. At December 31, 1997, there were 2,000,000 shares of preferred stock authorized and none were issued and outstanding. The former preferred stockholders and certain of their transferees now holding their shares of common stock may require the Company, commencing April 28, 1993 and ending on July 6, 2003, on not more than two occasions, to file a registration statement under the Securities Act with respect to at least 30% of their shares of common stock. Stockholders holding 60% of such registerable shares must make the registration demand. The Company must file a registration statement with the Securities and Exchange Commission within 90 days of the receipt of the request. The former holders of all of the shares of Series D Preferred Stock may require the Company, on one or more occasions, to file a registration statement under the Securities Act for all or any part of their shares of common stock. The Company must file a registration statement within 90 days of the receipt of the request. Further, holders of common stock with registration rights may require the Company to register all or a portion of their shares of common stock on Form S-3, subject to certain conditions and limitations. The Company is obligated to pay the offering expenses of each such offering, except for the selling stockholders' pro rata portion of underwriting discounts and commissions. During 1994, the former holders of certain shares of Series D Preferred Stock and certain warrant holders required the Company to register their shares of common stock. In connection with the Company's IPO in January 1993, the Company issued a warrant to purchase 50,000 shares of common stock, at an exercise price of $4.20 per share, to the underwriter. In 1995 as a result of the private placement, the exercise price was reduced to $4.055. The warrant was exercised using a net exercise provision during 1995 and 1996. In 1993, the Company issued a warrant to purchase 20,000 shares of common stock, at an exercise price of $1.813 per share, to another company for an ownership interest of that company (see Note 10). This warrant expires in August 1998. On February 28, 1995, the Company issued 1,000,000 shares of common stock upon the closing of a private placement of its common stock. Gross proceeds to the Company were $2 million. Net proceeds to the Company after deducting costs of the offering were approximately $1.9 million. The holders of such shares of common stock exercised their right to require the Company to register the shares under the Securities Act, and the Company so registered the shares prior to March 1996. In 1996, the Company issued a warrant to purchase 5,000 shares of common stock, at an exercise price of $2.41 per share, to a consultant as partial payment for services. This warrant expires in March 2001. On October 31, 1995 and November 6, 1995 the Company issued a total of 4,024,398 shares of common stock upon the closing of a public offering of its common stock. Gross proceeds to the Company were $19.1 million. Net proceeds to the Company after deducting costs of the offering were approximately $17.6 million. On April 30, 1996, the Company issued 5,060,000 shares of common stock upon the closing of a public offering of its common stock. Gross proceeds to the Company were $78.4 million. The net proceeds to the Company after deducting costs of the offering were approximately $74.0 million. The common stock was sold at $15.50 per share. During the first quarter of 1996 the Company amended it Articles of Incorporation to authorize 40,000,000 shares of common stock, $.0005 par value. In addition, the Board of Directors approved a 2-for-1 stock split in the form of a 100% common share dividend which was paid on June 25, 1996, to stockholders of record as of June 4, 1996. The accompanying financial statements and footnotes have been restated to give effect to the split. 10. Related parties During June 1992, the Company loaned $125,000 to its CEO. The note plus accrued interest was paid during 1996. During November 1996, the Company loaned $200,000 to its former President. This note plus accrued interest was paid during 1997. The Company has a 5% ownership interest in a company which is providing research services to the Company. The Company paid approximately $32,000 and granted a warrant for 10,000 shares of the Companys stock for the ownership interest. This investment is included in deposits and other assets at December 31, 1997. The Company's former CEO has a minority interest in royalties paid by the Company under a product license. The former CEO has transferred to the Company his rights to any royalties under this agreement as long as he is a director or officer of the Company. The Company has received no royalties to date under this agreement. 11. COMMITMENTS The Company is obligated under non-cancelable operating lease agreements for its office, manufacturing and research facilities. Rent expense for the years ended December 31, 1997, 1996 and 1995 was $594,420, $482,000 and $131,000. The following is a schedule of future minimum lease payments for the years ending December 31 under non-cancelable lease agreements with original terms in excess of one year.
1998 1999 2000 2001 2002 AFTER 2002 TOTAL ====================================================================================================================== Office/manufacturing $ 146,817 $ 1,006,412 $ 985,003 $ 937,740 $ 937,740 $ 6,251,555 $10,265,267 Computer capital leases 135,079 113,263 52,223 -- -- -- 300,565 Depots 324,383 91,401 26,390 -- -- -- 442,174 - ---------------------------------------------------------------------------------------------------------------------- Total $ 606,279 $ 1,211,076 $ 1,063,616 $ 937,740 $ 937,740 $ 6,251,555 $11,008,006 ======================================================================================================================
FINANCIALS.97 ORTHOLOGIC ANNUAL REPORT 30/31 12. LITIGATION During 1996 certain lawsuits were filed in the United States District Court for the District of Arizona against the Company and certain officers and directors alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder. Plaintiffs in these actions allege that correspondence received by the Company from the U.S. Food and Drug Administration (the "FDA") pertaining principally to the promotion of the Companys OrthoLogic 1000 Bone Growth Stimulator was material and undisclosed, leading to an artificially inflated stock price. Plaintiffs further alleged practices referenced in that correspondence operated as a fraud against plaintiffs. Plaintiffs further allege that once the FDA letter became known, a material decline in the stock price of the Company occurred, causing damage to the plaintiffs. All plaintiffs seek class action status, unspecified compensatory damages, fees and costs. Plaintiffs also seek extraordinary, equitable and/or injunctive relief as permitted by law. The actions were consolidated for all purposes in the United States District Court for the District of Arizona and lead plaintiffs and counsel were appointed. The Company and its officers and directors moved to dismiss the consolidated amended complaint for failure to state a claim. The Court dismissed the consolidated amended complaint in its entirety against the Company and its officers and directors but gave plaintiffs leave to amend all claims to cure all deficiencies. If any claim deficiencies are not cured, that claim will be dismissed with prejudice as against the Company and its officers and directors. In addition, the Company has been served with a substantially similar action filed in Arizona state court alleging state law causes of action grounded in the same set of facts. By agreement between the parties this action has been stayed while the federal actions proceed. In addition to the foregoing, a shareholder derivative complaint alleging, among other things, breach of fiduciary duty in connection with the conduct alleged in the aforesaid federal and state court class actions have also been filed in Arizona state court. By agreement between the parties, that action has been stayed pending a decision on defendants forthcoming motion to dismiss those actions. In March 1998, the former owner of the CPM assets acquired in the DMTI acquisition filed a lawsuit in the Court of Common Pleas in Franklin County, Ohio against the Company. The plaintiff alleges that the Company breached the acquisition agreement by not satisfying certain liabilities it assumed in the acquisition and that the Company breached an ancillary agreement for the temporary provision of services following the acquisition. Plaintiff has also demanded from the Court of Common Pleas a declaration that the Company is not entitled to cash escrowed in the acquisition. The Company had previously requested delivery to it of the escrowed cash and demanded indemnification for this plaintiff's breaches of representations and warranties in the acquisition agreement. The costs associated with defending these allegations and the potential outcome cannot be determined at this time and accordingly, no estimate for such costs have been included in these financial statements. Management believes that the allegations are without merit and will vigorously defend them. At December 31, 1997, the Company is involved in various other legal proceedings that arose in the ordinary course of business. In managements opinion, the ultimate resolution of these other legal proceedings will not have a material effect on the financial position, results of operations, or cash flow of the Company. 13. 401(K) PLAN The Company adopted a 401(k) plan (the "Plan") for its employees on July 1, 1993. The company may make matching contributions to the Plan on behalf of all Plan participants, the amount of which is determined by the Board of Directors. The Company did not make any matching contributions to the Plan in 1997, 1996 and 1995. 14. CO-PROMOTION AGREEMENT The Company entered into an exclusive co-promotion agreement ("the agreement") with Sanofi Pharmaceuticals Inc. ("Sanofi") on June 23, 1997 for the purpose of marketing Hyalgan, a hyaluronic acid sodium salt, to orthopaedic surgeons in the United States for the treatment of pain in patients with osteoarthritis of the knee. The initial term of the agreement ends on December 31, 2002. Upon the expiration of the initial term, Sanofi may terminate the agreement, extend the agreement for an additional one year period, or enter into a revised agreement with the Company. Upon termination of the agreement, Sanofi must pay the Company the amount equal to 50% of the gross compensation paid to the Company, pursuant to the agreement, for the immediately preceding year. The Company is paid a commission which is based upon the number of units sold at the wholesale acquisition cost less amounts for distribution costs, discounts, rebates and returns. In addition, the Company is obligated: to use its best efforts to market and promote Hyalgan; to pay Sanofi a royalty of 10% of the net selling price, as defined; and to pay the manufacturer of Hyalgan a product transfer price and a pro-rata portion of a 10% royalty on combined annual net sales of Hyalgan by Sanofi and the Company in excess of $30 million. In addition, the Company is obligated to pay a total of $4.0 million during the first eighteen months of the agreements. During 1997, the Company paid $1.0 million of this amount. The Company has recorded the remaining $3.0 million as a liability in its financial statements. The Company's sales force began to promote Hyalgan in the third quarter of 1997. Fee revenue of $3.6 million was recognized during 1997. 15. SUBSEQUENT EVENTS The Company announced in January 1998 that it has acquired a minority equity interest in a biotech firm, Chrysalis BioTechnology, Inc., for $750,000. As part of the transaction, the Company has been awarded a nine-month world-wide exclusive option to license the orthopaedic applications of Chrysalin, a patented 23-amino acid peptide that has shown promise in accelerating the healing process. Chrysalis is currently developing the technology to stimulate the skin-wound healing process and has completed an extensive pre-clinical safety and efficiency profile for the product. In pre-clinical animal studies, Chrysalin was also shown to double the rate of fracture healing with a single injection into the fresh fracture gap. The Company's agreement with Chrysalis contains provisions for the Company to continue and expand its option to license Chrysalin contingent upon regulatory approvals, successful pre-clinical trials, and certain trials and certain milestone payments to Chrysalis by the Company. The cost of performing the pre-clinical and clinical trials will be funded by the Company. The Company will pursue commercialization of Chrysalin, initially seeking Food and Drug Administration approval for the human clinical trials for the fracture-healing indication. The Company projects that Chrysalin could receive all the necessary FDA approvals and be introduced in the market during 2000. There can be no assurance, however, that clinical trials will result in favorable data or that FDA approvals, if sought, will be obtained. Subsequent to year end, the Company secured a $10.0 million accounts receivable revolving line of credit and a $2.5 million revolving term loan from a bank. The maximum, which may be borrowed under these facilities, in the aggregate, is $10.0 million. The Company may borrow up to 80% of the eligible accounts receivable under the accounts receivable revolving line of credit and 50% of the net book value of CPM rental fleet under the revolving term loan. The accounts receivable revolving line of credit matures on May 1, 1999, and the revolving term loan matures on May 1, 2000. Interest is payable monthly on the accounts receivable revolving line of credit and amortized principal and interest are due monthly on the revolving term loan. The interest rate is prime plus .20% for the accounts receivable line of credit and prime plus .45% for the revolving term loan. The rates will be reduced based upon the Companys achievement of defined future financial performance. In addition, there are certain financial covenants and reporting requirements associated with the loans. In connection with these loans the Company issued a warrant to purchase 10,000 shares of common stock at a price equal to the average fair market value for five days prior to closing of the loans. FINANCIALS.97 ORTHOLOGIC ANNUAL REPORT 32 topic: INDEPENDENT AUDITOR'S REPORT BOARD OF DIRECTORS AND STOCKHOLDERS OrthoLogic Corp. Phoenix, Arizona We have audited the accompanying consolidated balance sheets of OrthoLogic Corp. and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Phoenix, Arizona January 29,1998 EX-21.1 12 SUBSIDIARIES OF ORTHOLOGIC CORP. SUBSIDIARIES OF ORTHOLOGIC CORP. Name Under Which Name Jurisdiction of Incorporation Subsidiary Does Business - ---- ----------------------------- ------------------------ Sutter Corporation California Sutter Corporation OrthoLogic Canada Ltd. Canada OrthoLogic Canada Ltd. EX-23.1 13 INDEPENDENT AUDITOR'S CONSENT INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in the Registration Statements No. 33-79010, No. 333-1268, No. 333-09785, No. 333-35507 and No. 333-35505 of OrthoLogic Corp. on Form S-8 and Registration Statements No. 33-82050 and No. 333-1558 of OrthoLogic Corp. on Form S-3 of our report dated January 29, 1998, appearing in and incorporated by reference in the Annual Report on Form 10-K of OrthoLogic Corp. for the year ended December 31, 1997. DELOITTE & TOUCHE LLP Phoenix, Arizona March 27, 1998 EX-27 14 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the financial statements in OrthoLogic Corp's report on Form 10-K for the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 7,783,349 4,568,526 45,794,475 11,370,524 10,548,173 61,593,323 11,459,035 4,933,717 103,102,771 16,734,602 0 0 0 12,626 84,724,835 103,102,771 36,043,169 77,049,233 10,244,397 77,647,649 0 0 0 (17,502,107) 211,560 (17,713,667) 0 0 0 (17,713,667) (0.71) (0.71)
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