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.
<PAGE>
ORTHOLOGIC CORP.
FORM 10-K ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C> <C>
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
</TABLE>
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Approx.
Location Square Feet Lease Expires Description Principal Activity
- -------- ----------- ------------- ----------- ------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/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)
</TABLE>
S-1
<PAGE>
ORTHOLOGIC CORP.
EXHIBIT INDEX TO REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
(File No. 0-21214)
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
<S> <C> <C> <C>
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
</TABLE>
EX-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
<S> <C> <C> <C>
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
</TABLE>
EX-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
<S> <C> <C> <C>
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.
</TABLE>
EX-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
<S> <C> <C> <C>
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)
</TABLE>
EX-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit Filed
No. Description Incorporated by Reference To: Herewith
--- ----------- ----------------------------- --------
<S> <C> <C> <C>
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
- ---------------------------------------
</TABLE>
(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
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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").
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
- --------------------------------------------------------------------------------
LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
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
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
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
</TABLE>
3
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
"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
<PAGE>
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
<PAGE>
"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
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,
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
ORTHOLOGIC CORP.
STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING*
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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)
======= ======= =======
</TABLE>
* Adjusted to reflect the Company's 2-for-1 stock split effected in the form of
a 100% stock dividend in June 1996.
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.
<PAGE>
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.
<PAGE>
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,
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<TABLE>
<CAPTION>
Years Ended December 31,
STATEMENTS OF OPERATIONS DATA: 1997 1996 1995 1994 1993
=======================================================================================================
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
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
=======================================================================================================
</TABLE>
(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.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
BALANCE SHEET DATA: 1997 1996 1995 1994 1993
=======================================================================================================
(in thousands)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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.
<PAGE>
FINANCIALS.97 ORTHOLOGIC ANNUAL REPORT
18/19
topic:
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1997 1996
======================================================================================================
<S> <C> <C>
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
==============================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
topic:
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ending December 31,
1997 1996 1995
===========================================================================================================
<S> <C> <C> <C>
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
===================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FINANCIALS.97 ORTHOLOGIC ANNUAL REPORT
20/21
topic:
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------- PAID IN
SHARES AMOUNT CAPITAL DEFICIT TOTAL
=================================================================================================================================
<S> <C> <C> <C> <C> <C>
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
==========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
topic:
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ending December 31,
1997 1996 1995
================================================================================================================================
<S> <C> <C> <C>
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
</TABLE>
See notes to consolidated financial statements.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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).
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
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
===================================================================================================================================
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
===================================================================================================================================
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
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
$ 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
===========================================================================================================================
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
======================================================================================================
<S> <C> <C>
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%
</TABLE>
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.
<PAGE>
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.
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 AFTER 2002 TOTAL
======================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
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
======================================================================================================================
</TABLE>
<PAGE>
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
<PAGE>
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.
<PAGE>
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
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.
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 7,783,349
<SECURITIES> 4,568,526
<RECEIVABLES> 45,794,475
<ALLOWANCES> 11,370,524
<INVENTORY> 10,548,173
<CURRENT-ASSETS> 61,593,323
<PP&E> 11,459,035
<DEPRECIATION> 4,933,717
<TOTAL-ASSETS> 103,102,771
<CURRENT-LIABILITIES> 16,734,602
<BONDS> 0
0
0
<COMMON> 12,626
<OTHER-SE> 84,724,835
<TOTAL-LIABILITY-AND-EQUITY> 103,102,771
<SALES> 36,043,169
<TOTAL-REVENUES> 77,049,233
<CGS> 10,244,397
<TOTAL-COSTS> 77,647,649
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17,502,107)
<INCOME-TAX> 211,560
<INCOME-CONTINUING> (17,713,667)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,713,667)
<EPS-PRIMARY> (0.71)
<EPS-DILUTED> (0.71)
</TABLE>
