Exhibit 10.1
****CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTION. ASTERISKS DENOTE SUCH OMISSIONS.
Execution Copy
AMENDMENT NO. 1
TO THE
PRODUCT SUPPLY AND DISTRIBUTION AGREEMENT
BY AND BETWEEN
DIGITAL ANGEL CORPORATION
AND
SCHERING-PLOUGH HOME AGAIN LLC
This AMENDMENT NO. 1 (this “Amendment No. 1”) dated as of this 5th day of
January, 2008 (the “Amendment Effective Date”), to the Product Supply and
Distribution Agreement dated February 13, 2007 (“Agreement”), is made by and
between DIGITAL ANGEL CORPORATION (“Digital Angel”) and SCHERING-PLOUGH HOME
AGAIN LLC (“Schering”).
Recitals:
WHEREAS, Schering and Digital Angel (referred to collectively as “Parties” and
individually as “Party”) entered into the Agreement to, among other things,
provide for the distribution of Products within the Territory;
WHEREAS, Schering and Digital Angel entered into Agreed Contract Amendment Terms
on July 20, 2007 (“July Contract Terms”), pursuant to which the Parties agreed
to enter in a formal amendment to the Agreement to reflect and memorialize the
terms set forth in such July Contract Terms;
****
WHEREAS, the Parties desire to **** and memorialize the July Contract Terms by
amending the Agreement in accordance with Section 11.5(b) thereof in order to,
among other things, (a) expand the market within which Schering may sell
specific quantities of RFID Biotherm Products under the Agreement, (b) provide
for certain minimum purchases of Products by Schering, (c) reduce the prices
payable by Schering for Products and Readers, (d) add obligations for each Party
with respect to new ISO Readers and the conversion from the existing Reader
technology to the new ISO 134 kHz standard, and (e) ****; and
NOW, THEREFORE, Schering and Digital Angel hereby agree to amend the Agreement
as follows:

 

 

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1. Defined Terms. Unless otherwise defined herein, each of the capitalized terms
used in this Amendment No. 1 shall have the meaning ascribed to it in the
Agreement.
2. Amendments to Article I.
(a) Article I of the Agreement is hereby amended and supplemented by adding the
following new defined terms:
“Designated Animals” shall mean (a) horses, (b) parrots and other birds (to the
extent not included in the definition of Companion Animals, including poultry
and exotics), (c) animals typically found or maintained in a zoo, aquarium or
research facility, (d) rodents, primates and other mammals (to the extent not
included in the definition of Companion Animals), (e) reptiles, (f) wild game,
including wild game that is ranch-raised for hunting or for food, and (g) any
other species for which Digital Angel does not, as of the Amendment Effective
Date, have an exclusive supply agreement with any Person as indicated in
Schedule A, which is attached hereto and made a part hereof; provided, however,
that this term shall not include humans, cattle, swine, and sheep.
“Designated Animal Territory” shall mean all countries of the world (including
the countries in the Territory), but excluding those countries listed in
Schedule A.
“Universal Reader” shall mean a Reader that is capable of reading, translating
and displaying Transponders at 125 kHz, 128 kHz and 134 kHz, which shall include
the capability to read, translate and display using the Trovan and Avid
technologies via version 74 software. For the avoidance of doubt, Universal
Readers include any make or model of Basic Readers, Read/Write Readers, Biothem
Readers and Biotherm Read/Write Readers capable of reading, translating and
displaying Transponders at 125 kHz, 128 kHz and 134 kHz.
(b) Section 1.39 of the Agreement (definition of Readers) is hereby amended and
supplemented by adding the words “and (e) Universal Readers” after the phrase
“Biotherm Read/Write Readers,” and such section shall read in its entirety as
follows:
“Readers” shall mean (a) Basic Readers, including the Worldscan Reader for
veterinary clinics and Worldscan PLUS Reader for animal shelters, (b) Read/Write
Readers, (c) Biothem Readers, (d) Biotherm Read/Write Readers, and (e) Universal
Readers.
(c) Section 1.45 of the Agreement (definition of RFID Product) is hereby deleted
in its entirety and replaced with the following:
“RFID Product” shall mean (a) an injectable sterile glass encapsulated radio
frequency microtransponder (frequency as specified by Schering) that stores and
transmits RFID identification information together with an anti-migration cap,
preloaded in a sterilized 12 gauge microtransponder syringe with plunger used to
deposit the transponder subcutaneously, (b) registration form content/artwork as
specified by Schering, (c) shrink-wrapped package containing (a) and (b) above
as well as inserts, tags, and administration instruction headercard, and
(d) when ordered in quantities, the multiple unit boxes (25 units per package)
and related packaging, master shipping carton and labels containing all of the
forgoing components, in each case (Section 1.45(a) through (c)) produced in
accordance with the Specifications.

 

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(d) Section 1.48 of the Agreement (definition of Specification) is hereby
deleted in its entirety and replaced with the following:
“Specifications” shall mean the written specifications for the manufacture,
quality control testing, and delivery of a Product, including details of the
finished packaging components for each Product, as set forth on Exhibit A-1 to
Amendment No. 1 or as added to after the Amendment Effective Date pursuant to
Section 4.02(a), which is attached hereto and made a part hereof, and as may be
amended from time to time by written agreement of the Parties.
3. Amendments to Article III.
(a) The first sentence of Section 3.01(a) of the Agreement is hereby deleted in
its entirety, and such section shall read in its entirety as follows:
During the Term, Digital Angel shall exclusively manufacture, supply, and sell
to Schering, and Schering shall exclusively purchase from Digital Angel, (i) the
quantities of the Products specified in Part I of Schedule B, which is attached
hereto and made a part hereof for the periods specified in Part I of Schedule B
and (ii) such additional quantities of the Products as Schering may specify from
time to time, pursuant to Section 3.03 of this Agreement. The purchase and sale
of Products is subject to the additional terms and conditions set forth in
Part II of Schedule B. Digital Angel shall not manufacture, supply or sell the
Products to any Person in the Territory, other than Schering. If, at any time
during the Initial Term, Schering exits the pet recovery business entirely, the
rights granted in this Section 3.01(a) and Section 3.01(b) shall become
non-exclusive.
(b) The first sentence of Section 3.01(b) of the Agreement is hereby amended and
supplemented by adding the words “and Designated Animal market in the Designated
Animal Territory” after the phrase “Companion Animal market in the Territory”
and before the phrase “both as to Schering and to any downstream purchaser.” The
second sentence of Section 3.01(b) is hereby amended and supplemented by adding
the words “and Designated Animal market in the Designated Animal Territory”
after the phrase “Companion Animal market in the Territory.” The third sentence
of Section 3.01(b) is hereby amended and supplemented by adding the words
“Designated Animal” before the word “Territory,” and such section shall read in
its entirety as follows:

 

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Digital Angel’s sales of Products and Readers to Schering are intended to be
unconditional and to fully exhaust Digital Angel’s rights in such Products and
Readers under the Patent Rights in the Companion Animal market in the Territory
and Designated Animal market in the Designated Animal Territory, both as to
Schering and any downstream purchaser or user of Products or Readers sold by
Schering, including any rights of Digital Angel in any apparatus, method or
system claims within the Patent Rights. To the extent that the patent exhaustion
doctrine (as set forth in United States v. Univis Lens Co., Inc. 316 U.S. 241
(1942) and subsequent case law) is found not to exhaust Digital Angel’s rights
in such Products and Readers under the Patent Rights, Digital Angel hereby
grants Schering the right to use the Patent Rights and Digital Angel’s other
Intellectual Property Rights relating to the Products and Readers solely in
connection with the distribution, marketing and sale of the Products and Readers
in the Companion Animal market in the Territory and Designated Animal market in
the Designated Animal Territory. Schering shall have the right to grant
sublicenses in connection with its distribution, marketing, and sale of the
Products and Readers in the Designated Animal Territory.
(c) Section 3.02(a) of the Agreement is hereby amended and supplemented by
deleting the second sentence and adding a new second sentence, and such section
shall read in its entirety as follows::
Digital Angel hereby grants exclusive distribution, marketing and sale rights to
all of Digital Angel’s RFID products (including the Products) in the Companion
Animal market in the Territory. Digital Angel hereby grants Schering
non-exclusive distribution, marketing and sale rights to Digital Angel’s RFID
Biotherm Product in the Designated Animal market in the Designated Animal
Territory subject to a maximum of **** units of such RFID Biotherm Products.
Upon exhaustion of such quantity (**** such units having been shipped to, and
accepted by, Schering as of this Amendment Effective Date), all rights in the
Designated Animal market in the Designated Animal Territory shall expire and
Schering shall have no further rights in such Designated Animal market in the
Designated Animal Territory.
(d) Section 3.02 of the Agreement is hereby amended and supplemented by adding
the following new subsection (e):
During the Term, Digital Angel shall manufacture, supply, and sell to Schering,
and Schering shall purchase from Digital Angel, (i) the quantities of the
Universal Readers specified in Part II of Schedule C, which is attached hereto
and made a part hereof for the periods specified in Part II of Schedule C and
(ii) such additional quantities of the Universal Readers as Schering may specify
from time to time. The purchase and sale of Universal Readers is subject to the
additional terms and conditions set forth in Parts I and III of Schedule C.
(e) Section 3.02 of the Agreement is hereby amended and supplemented by adding
the following new subsection (f):
Digital Angel shall match Schering donations of up to 12,500 HomeAgain sterile
syringe assemblies in both 2007 and 2008 based upon a Schering proposal.

 

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(f) Section 3.02 of the Agreement is hereby amended and supplemented by adding
the following new subsection (g):
Schering shall have the option (but not the obligation) to convert some or all
of the older Readers that are currently in inventory or in the marketplace into
newer Universal Readers. If Schering elects to convert Readers, Digital Angel
shall replace or refit the older Readers with Universal Readers in accordance
with the pricing and other terms set forth in Part IV of Schedule C, and
Attachments A, B and C to Amendment No. 1 shall apply.
(i) Section 3.03 of the Agreement is hereby amended and supplemented by adding
the following new subsection (d):
(d) For the avoidance of doubt, Schering shall have no obligation to submit to
Digital Angel forecasts or purchase orders for Products for the Designated
Animal market in the Designed Animal Territory.
4. Amendments to Article IV.
(a) The first sentence of Section 4.01(a) of the Agreement is hereby amended and
supplemented by adding the words “and Designated Animal market in the Designated
Animal Territory” after the phrase “Companion Animal market in the Territory.”
The second sentence of Section 4.01(a) is hereby deleted in its entirety and
replaced with a new second sentence, and such section shall read in its entirety
as follows:
Digital Angel hereby appoints Schering as a distributor with non-exclusive
rights to market, distribute, and sell Readers throughout the Companion Animal
market in the Territory and Designated Animal market in the Designated Animal
Territory. Schering may order Readers from Digital Angel using the procedures
set forth in Section 3.03(c) and (d).
(b) Section 4.04(c) of the Agreement is hereby deleted in its entirety and
replaced with the following:
Schering may, but shall not be obligated to, promote, market and sell
(i) Readers to its customers in the Territory and Designated Animal Territory,
and (ii) Digital Angel’s RFID Biotherm Products (subject to the limitations set
forth in 3.02(a)) in the Designated Animal market in the Designated Animal
Territory.
5. Amendments to Article V.
(a) Section 5.01(a) of the Agreement is hereby amended and supplemented by
adding a second sentence, and shall read in its entirety as follows:
For all orders placed and to be shipped during the period beginning on the
Effective Date and ending on October 1, 2007, Digital Angel shall provide the
RFID Product to Schering at a price of (i) **** for purchases of less than ****
units during the Term, and (ii) **** for purchases of **** or more units. For
all orders placed and to be shipped after October 1, 2007 and for the remainder
of the Term, Digital Angel shall provide the RFID Product to Schering at a price
of ****.

 

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(b) Section 5.02 (Cost of Readers) of the Agreement is hereby deleted in its
entirety and replaced with the following:
For all orders placed during the period beginning on the Effective Date and
ending on August 1, 2007, the price of (a) the Worldscan Reader shall be ****,
and (b) the Worldscan PLUS Reader shall be ****. For all orders placed after
August 1, 2007, the price of new Universal Readers shall be (i) ****for the
balance of calendar year 2007, and (ii) **** thereafter and for the remainder of
the Term. For the avoidance of doubt, the Worldscan Reader and Worldscan PLUS
Reader are both Biotherm Readers. The pricing for Universal Readers is based on
the components listed in Part I of Schedule C.
(c) Section 5.04 (Permitted Product Substitution) of the Agreement is hereby
deleted in its entirety and replaced with the following:
The Parties acknowledge that Digital Angel will not have sufficient inventories
of the RFID Product to supply Schering’s expected demand in the first contract
year of the Term. Digital Angel has agreed to supply Schering with not more than
**** RFID Biotherm Products in lieu of RFID Products at the same price as RFID
Products. As of the Amendment Effective Date, Schering had received and paid for
**** of these RFID Biotherm Products. Schering agrees (a) to accept those ****
RFID Biotherm Products in lieu of RFID Products, and (b) with respect to the
**** RFID Biotherm Products contemplated herein, Schering may market and sell
these RFID Biotherm Products to its customers in the Companion Animal market in
the Territory and Designated Animal market in the Designated Animal Territory.
The **** RFID Biotherm Products previously purchased by Shiseido (and any
additional RFID Biotherm Products purchased by Schering after the Amendment
Effective Date, up to the stated maximum of ****) shall be counted as RFID
Products for purposes of determining the threshold for reduced pricing for RFID
Products in Section 5.01(a)(ii). ****
6. Amendments to Article VI. Section 6.02 (Protection) of the Agreement is
hereby amended and supplemented by adding the words “Designated Animal” before
the word “Territory” in the first sentence, and such section shall read in its
entirety as follows:
Digital Angel shall: (a) at all times recognize the validity and ownership of
the Trademarks, whether owned by Schering or any Affiliate or licensor of
Schering, and Schering’s sole right to use and license such Trademarks in the
Designated Animal Territory; and (b) at no time do, or allow to be done by its
Agents or any Person on behalf of Digital Angel or its Agents, whether by act,
omission or commission, anything that would (i) put into issue or otherwise
adversely affect such

 

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validity or ownership or (ii) damage or prejudice the reputation or goodwill of
Schering or any Affiliate or licensor of Schering. Digital Angel shall not,
except with the prior written consent of Schering or any Affiliate or licensor
of Schering, as the case may be, use the name, Schering-Plough Home Again LLC,
HomeAgain, the Trademarks, or any other trademarks, trade dress, logos, or
designs owned by Schering or such Affiliate or licensor in or as a trademark or
trade name or any trademark, trade dress, name, word or symbol that is
confusingly similar in appearance, sound, meaning, or commercial impression to,
a colorable imitation of, misleading or deceptive with respect to, or dilutes
any of, the Trademarks or any part thereof or any other trademark, trade dress,
logo or design owned by Schering as a trademark or trade name, whether during
the Term or after the expiration or termination of this Agreement. Digital Angel
shall comply with all trademark usage requirements established by Schering in
connection with the depiction or presentation of the Trademarks. The packaging
for the Products shall indicate that the Products is manufactured by Digital
Angel and identify Digital Angel’s patent registration numbers.
7. Amendments to Article IX. Section 9.06 (Effect of Termination) of the
Agreement is hereby amended and supplemented by adding the words “Readers” in
paragraph (a) after the words “inventory of the Products” and by adding the
words “(but not, for the avoidance of doubt, the Readers)” in paragraph
(b) after the words “and any unfinished goods,” and such section shall read in
its entirety as follows:
Upon the expiration or termination of this Agreement, (a) Schering shall have
the right to sell its remaining inventory of the Products, Readers, and any
unfinished goods or (b) Schering shall, at its option, have the right (but not
the obligation) to require Digital Angel to purchase from Schering, and Schering
shall sell to Digital Angel, all or any portion of the inventory of the Products
and any unfinished goods (but not, for the avoidance of doubt, the Readers) held
by or for Schering at the cost in which they were purchased by Schering;
provided, however, that Digital Angel shall not be required to purchase from
Schering any Products, Readers or unfinished goods that have been contract
manufactured or packaged in a way that makes their resale by Digital Angel
impossible (i.e., permanent markings with the Trademarks, etc.).
8. Amendments to Article XI. Section 11.01 (Compliance with Applicable Laws) of
the Agreement is hereby amended and supplemented by adding the words “Designated
Animal” before the word “Territory,” and such section shall read in its entirety
as follows:
At all times during the Term, each Party shall comply with all Applicable Laws
in effect in the Designated Animal Territory.
9. ****

 

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10. Representations and Warranties. Each Party represents and warrants to the
other Party that (a) it has not sold, assigned, transferred, hypothecated,
pledged or encumbered, or otherwise disposed of, in whole or in part,
voluntarily or involuntarily, any Claim released pursuant to this Amendment
No. 1, and (b) no Person had or has any interest in any Claim released pursuant
to this Amendment No. 1.
11. Construction, Amendment and Waiver. Capitalized terms used in this Agreement
without definition shall have the meanings assigned to them in the Agreement.
From and after the execution of this Amendment No. 1, all references in the
Agreement to “this Agreement,” “hereof,” “herein,” and similar words or phrases
shall mean and refer to the Agreement as amended, including this Amendment
No. 1. This Amendment No. 1 shall not be modified, supplemented, amended, or
terminated in any manner whatsoever, except by a written instrument signed by
the Party against which such modification, supplement, amendment, or termination
is sought to be enforced.
12. Effect of the Amendment. Except as expressly modified by this Amendment
No. 1, all other terms and conditions of the Agreement shall remain in full
force and effect. The provisions of Section 9 **** and Section 10
(Representations and Warranties) of this Amendment No. 1 shall survive the
expiration or termination of the Agreement for any reason. This Amendment No. 1,
together with the Agreement, contains the entire agreement of the Parties with
respect to the subject matter hereof, and all prior or contemporaneous
understandings or agreements, including the July Contract Terms, between the
Parties with respect to such subject matter are hereby superseded in their
entireties.
IN WITNESS WHEREOF, each of Schering and Digital Angel has caused this Amendment
No. 1 to be executed by its respective duly authorized officer as of the date
first above written.

            DIGITAL ANGEL CORPORATION
      By:   /s/ Joseph J. Grillo         Name:   Joseph J. Grillo       
Title:   Pres./CEO        SCHERING-PLOUGH HOME AGAIN LLC
      By:   /s/ Steven Shul         Name:   Steven Shul        Title:   VP,
General Manager     

 

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Amendment No. 1
Schedule A
Designated Animal Territory

          No.   Countries Covered by Exclusivity   1.    
****
  2.    
****
  3.    
****
  4.    
****
  5.    
****
  6.    
****
  7.    
****
  8.    
****
  9.    
****

Digital Angel represents and warrants to Schering that the countries set forth
on Schedule A above are the only countries in which Digital Angel has granted
exclusive rights as of the Amendment Effective Date. If, at any time following
the Amendment Effective Date, Digital Angel elects to grant exclusive rights in
any other country, such exclusivity shall be subject to an exception that allows
Schering to sell, on a non-exclusive basis, 125 kHz RFID Biotherm Product in the
Designated Animal market subject to a maximum of **** units of such RFID
Biotherm Products, as provided in Section 3.02(a) of the Agreement, as amended.
*       *       *

 

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Amendment No. 1
Schedule B
Minimum Purchase Requirement for Products and Related Terms
Part I:

          Period   Quantity   Transponder Frequency
4th Quarter Calendar 2007
  ****   134 kHz RFID Products
Calendar Year 2008
  ****   Frequency as specified by Schering
Calendar Year 2009
  ****   Frequency as specified by Schering

Part II:
1. Should Digital Angel fail to deliver **** 134 kHz RFID Products by
December 31, 2007 to Schering, Digital Angel shall pay Schering an amount equal
to (a) the difference between the **** and the number of 134 kHz RFID Products
actually received by Schering, (b) ****.
2. Schering has submitted or will submit all new package/syringe blister
pack/registration form artwork to Digital Angel. Digital Angel will print the
requested materials as supplied. Samples / proofs to be sent to Schering for
approval before construction. If the mutually agreed deadlines for artwork
delivery are not met, Digital Angel reserves the right to delay shipments by an
equivalent amount of time.
3. Digital Angel will utilize upon agreement by Schering a new master shipper
carton configuration of either (8) or twelve (12) clinic packs of 25 assemblies
/ master shipper carton. Schering and Digital Angel will work together to
conduct appropriate shipper testing to ensure integrity of clinic packs when
shipped and Schering Quality Assurance must provide written approval of new
shipper carton configuration.
4. Schering has provided or will provide new dog tags for use in assemblies. If
the mutually agreed deadlines for dog tag delivery are not met, Digital Angel
reserves the right to delay shipments by an equivalent amount of time. If
Digital Angel is to provide the dog tag, the cost per assembly will ****.
5. All shipping charges are billed directly to Schering.
6. Puppy Broker Packaging

 

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A. From time to time Products are returned to Schering for reasons unrelated to
the performance or quality of the Product. The Parties have developed procedures
for (i) breaking down the existing packaging for the returned products,
(ii) removing the product literature and other materials included with the
returned product, (iii) inserting new product literature for a new product,
(iv) re-sterilizing the syringe and new product materials, (v) repacking the
syringe and new product materials in a new blister pack, and (vi) assembling the
blister packs in boxes of 250 units each. Following sterilization validation,
the repackaged, boxed Products will be a new salable SKU for Schering known
generally as a “puppy broker product.”
B. Digital Angel will perform the steps referenced A(i) through A(v) above to
break down and repackage returned products so that they become puppy broker
products. Schering will pay Digital Angel ****/assembly for each returned
product that is repackaged in accordance with A(i) through A(v) above. As of the
Amendment Effective Date, approximately **** returned units have been approved
by Digital Angel Quality Control for use in the new Schering puppy broker
product assemblies.
C. The new puppy broker product configuration requires the use of new blister
packaging. The new packaging will require sterilization validation. Digital
Angel currently uses an outside contractor to perform this sterilization
validation. Digital Angel has received a cost estimate of **** for the process.
Schering has given oral approval to cover up to **** of the cost associated with
the validation of the new blister pack. This will be paid via a separate
purchase order from Schering.
*       *       *

 

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Amendment No. 1
Schedule C
Minimum Purchase Requirement for Readers and Related Terms
Part I:
The following components are included with each Universal Reader:

  •  
Pocket Reader model with ISO standard programming (“Universal”)
    •  
Latest production revision including temperature-sensing functionality (i.e.,
“Bio-Thermo” technology)
    •  
134 kHz test tag and batteries
    •  
Shipping box w/ label
    •  
Reader labels
    •  
Instruction manual
    •  
24-month standard customer warranty and 6-month full replacement warranty,
incremental to 24-month in-service customer warranty, if shipped through the
Schering distribution center.

Part II:

                  Quantity of Universal Pocket     Period   Readers (Units)  
Price per Unit
August 2007
    ****     ****
September 2007
    ****     ****
October 2007
    ****     ****
November 2007
    ****     ****
December 2007
    ****     ****
Total:
    ****     ****

Beginning January 1, 2008, additional purchases of ISO Universal Pocket Readers
under the Agreement will be priced at **** for the remaining term of the
Agreement.
Part III:
Incremental changes / parts to the Universal Pocket Readers will be billed at
the prices as outlined in Attachment A to Amendment No. 1: Incremental Hardware
/ Parts Pricing — based on prior written authorization and approval by Schering
Supply Chain Manager for all scanners requiring such changes/parts.
July purchase orders placed for **** ISO Universal Pocket Readers and **** ISO
Universal EX readers will remain in effect as currently ordered, priced and
accepted.

 

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Digital Angel will produce new readers on the basis of **** / week beginning
August 1, 2007. New Readers ordered by the first day of each month will be
produced and shipped within approximately 3 weeks from the date of accepted
purchase order.
Schering has submitted or will submit all new package / label artwork to Digital
Angel. Digital Angel will print / produce the requested materials as supplied.
Samples / proofs to be sent to Schering for approval before construction. If the
mutually agreed deadlines for artwork delivery are not met, Digital Angel
reserves the right to delay shipments by an equivalent amount of time.
All shipping charges are billed directly to Schering.
Part IV:
This Part IV sets forth the procedures for converting Readers that do not have
universal sensing functionality (i.e., the ability to read, translate and
display Transponders at 125 kHz, 128 kHz and 134 kHz) into Universal Readers.
Schering may submit Readers for conversion that are new or that have been
previously released in the marketplace. Digital Angel will convert the new or
previously released Readers into Universal Readers as provided below. For those
Readers that have been previously released, conversion pricing is based not only
on the age but the condition of the Reader received from the marketplace. Based
on this age / condition, Readers will be placed into the appropriate pricing
scenario as outlined in Attachments A and B. In addition, the following terms
shall apply to Reader conversions:
1. Schering will pay **** to convert the **** new Readers currently in
Schering’s inventory that do not have universal sensing functionality into
Universal Readers.
2. Digital Angel will pay the **** conversion fee on **** Readers from the new
Scanner Stands distributed in the spring of 2007 on the launch of the new
HomeAgain program as specified in Scenario 2 of Attachment B to Amendment No. 1.
3. Conversion of Readers currently in the marketplace will be billed to Schering
as outlined in Attachment B: ISO Reader Conversion Pricing.
4. Repair of Readers currently in the marketplace will be billed to Schering as
outlined in Attachment A: Incremental Hardware / Parts Pricing and Attachment B:
ISO Reader Conversion Pricing. Repairs will be approved in advance and confirmed
in writing by Schering’s Supply Chain Manager.
5. Schering has submitted or will submit all new package / label artwork to
Digital Angel. Digital Angel will print / produce the requested materials as
supplied. Samples / proofs to be sent to Schering for approval before
construction. If the mutually agreed deadlines for artwork delivery are not met,
Digital Angel reserves the right to delay shipments by an equivalent amount of
time.
6. All shipping charges will be billed directly to Schering.

 

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7. An action plan to handle the conversion of the Readers received from the
marketplace will be mutually agreed upon by both Schering and Digital Angel.
This plan will be driven by market requirements and customer satisfaction
demands in support of Schering plan to effectively and proactively develop the
U.S. scanner infrastructure and restore veterinary and shelter confidence in the
U.S. microchipping market.
8. Schering will authorize Digital Angel to begin conversion of Readers received
from the marketplace and/or Schering per the scenarios and pricing structures
outlined in the Attachments through the use of open Purchase Orders.
9. Contingent upon the receipt and steady flow of Readers into Digital Angel’s
production facility, Digital Angel will convert Readers on the basis of 400 /
week in the month of August. By September 1, Digital Angel will increase the
conversion rate to 750 Readers / week through the end of February 2008.
*       *       *

 

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ATTACHMENT A:
INCREMENTAL HARDWARE / PARTS PRICING
Should Schering wish to provide new or replacement parts / hardware for Readers
that are received for conversion, and upon Schering’s written authorization and
approval prior to any rework/repair commencing, the following is a list of the
incremental cost associated with each.

  •  
Labor costs to insert / add the following materials are included in the cost of
the appropriate estimate scenarios detailed above.

          Price / Unit
•   Test Tag: 125 kHz
  ****
•   Test Tag: 134 kHz
  ****
•   Batteries
  ****
•   Instruction Manual
  ****
•   Lens Protector / Sleeve
  ****

  •  
Labor costs to insert / add the following materials are not included in the cost
of the appropriate estimate scenarios detailed above and will be billed
incrementally on basis of ****.

          Price / Unit
•   Antenna
  ****
•   Casement / Shell
  ****
•   Battery Clips
  ****
•   Display
  ****
•   Lanyard
  ****

NOTES:
When originally designed and constructed, the Pocket Reader and Pocket Reader EX
models were not intended to ever be opened again. In fact, the internal
circuitry is fused to the plastic housing / covers and is quite difficult to
separate after the fact.
With regard to the proposed software conversion, Readers will not require
opening as the conversion process can be accomplished via external means.
If Schering directs Digital Angel to open Readers in an attempt to repair
potential problems, the likelihood of damage to the internal circuitry is
significantly heightened. A more cost effective approach may be to provide a new
Reader to the customer and/or offer a discount on the purchase of a new Reader
as the repair costs will probably outweigh the cost of a new unit.
In the case of housing replacements alone, not only is the likelihood of damage
to the circuitry heightened, but the labor involved in separating the elements
from one another will be extensive and costly. If Schering decides that a Reader
must have housing replaced, again, it may be more cost effective to provide a
new Reader to the customer and / or offer a discount on the purchase of a new
Reader rather than try to replace the housing.
*       *       *

 

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ATTACHMENT B:
ISO READER CONVERSION PRICING
The following is a presentation of the costs associated with converting the
current PocketReader (a/k/a WorldScan) and PocketReader EX (a/k/a WorldScan
PLUS) models to become Universal Readers.
In response, Digital Angel has created cost estimates based on six different
scenarios in to which Readers may be grouped, handled and billed to complete the
Reader conversion process. This information is detailed as follows. A complete
breakdown of the actions that will be taken with regard to each Reader will be
presented in the ISO Conversion Action Plan. As agreed by the Parties on
July 13, 2007, each of the scenarios described below will include a 24-month
standard customer warranty and 6-month full replacement warranty, incremental to
24-month in-service customer warranty, if shipped through the Schering
distribution center.
NOTE: Conversion pricing is based not only on the age but the condition of the
Reader received from the marketplace. Based on this age / condition, Readers
will be placed into the appropriate pricing scenario as outlined below:

              Reader Condition / Age Included   Estimated Cost   Services
Included   New Parts
 
           
Scenario 1:
Readers that are new / in stock at Schering’s warehouse Schering Labels (approx.
**** units)
Thank you insert
  ****   Receive into Digital Angel system
Unpackaged
Identify serial #/age/condition
Reprogram
Repackage
Relabel
Ship to recipient   No new parts
 
           
 
      * Shipping costs are billed directly to Schering’s carrier account #.    

 

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              Reader Condition / Age Included   Estimated Cost   Services
Included   New Parts
 
           
Scenario 2:
Field returns shipped to Schering since December, 2005
  ****   Receive into Digital Angel system
Schering Labels
Unpackaged
Shipping Box
Identify serial #/age/condition
Thank you insert
Reprogram
Test
Clean (wipe / surface clean)
Repackage
Relabel
Ship to recipient*    
 
           
 
      Shipping costs are billed directly to Schering’s carrier account #.    
 
           
Scenario 3:
Field returns that are non-FDXB optimized and are older than December, 2005 but
less than 5 years old and do not require returning of circuitry system
  ****   Receive into Digital Angel system
Schering Labels
Unpackaged
Shipping Box
Identify serial #/age/condition
Thank you insert
Reprogram
Test
Clean (wipe /surface clean)
Repackage
Relabel
Ship to recipient   No new parts
 
           
 
      * Shipping costs are billed directly to Schering’s carrier account #.    
 
           

 

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              Reader Condition / Age Included   Estimated Cost   Services
Included   New Parts
 
           
Scenario 4:
Field returns that are non-FDXB optimized and are older than December, 2005 but
less than 5 years old and do require retuning of circuitry
  ****   Receive into Digital Angel system
Schering Labels
Unpackaged
Shipping Box
Identify serial #/age/condition
Thank you insert
Reprogram
Test
Repair**
Retest
Clean (wipe / surface clean)
Repackage
Relabel
Ship to recipient*   No new parts
 
            Scanners reworked in excess of 1,000 units in this category will be
set aside for Schering approval and instructions.
 
           
 
      * Shipping costs are billed directly to Schering’s carrier account #.    
 
           
 
      * Software repair only; no new parts included.    

 

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              Reader Condition / Age Included   Estimated Cost   Services
Included   New Parts
 
           
Scenario 5:
      Receive into Digital Angel systems    
Field returns that are non-Functioning
           
     Labels
      Unpackaged    
Recycling Fee =
  ****        
     Shipping Box
      Identify serial #/age/condition    
If Reprogram, Repair, Return =
  ****   Reject & Recycle — or —    
     Thank you insert
      Approved parts    
 
      Reprogram    
 
      Test    
 
      Generate repair estimate    
 
      Submit estimate to Schering for “proceed” / “return”    
 
           
 
      If “proceed”
     Repair***
     Retest
     Clean
     Repackage
     Relabel
     Ship to recipient*
     If “return”
     Repackage
     Relabel
     Ship to recipient    
 
           
 
      * Shipping costs are billed directly to Schering’s carrier account #.    
 
           
 
      *** Requires hardware / software repair; parts billed to Schering as
necessary to make the Reader operational within the specs of the conversion.    
 
            Recommendation: Offer the owners of non-functioning units the
opportunity to purchase a new Reader at a discounted price rather than attempt
to make repairs as the costs to repair may outweigh the cost of a new unit.

 

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              Reader Condition / Age Included   Estimated Cost   Services
Included   New Parts
 
           
Scenario 6:
Field returns that do not qualify for the conversion because they were
manufactured before 2002.
     Shipping box
Recycling Fee =
     NQ insert
  ****   Receive into Digital Angel system

 
Unpackaged
 
Identify serial #/age/condition
Reject & Recycle — or —
Repackage
Relabel
Ship to recipient*    
 
           
 
      * Shipping costs are billed directly to Schering’s carrier account #.    
 
            Recommendation: offer the owners of non-qualifying units the
opportunity to purchase a new Reader at a discounted price in return for
surrendering their NQ Reader.

*       *       *

 

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