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