-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DMj86lf40eowDySsrtTE5w3yv/lNtWRrILZxU2KLno0KIcyzR717BwaR1v4S4jJ1 cT8DAai3sQsry3nKNxTTaw== 0000950147-97-000339.txt : 19970520 0000950147-97-000339.hdr.sgml : 19970520 ACCESSION NUMBER: 0000950147-97-000339 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970519 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORTHOLOGIC CORP CENTRAL INDEX KEY: 0000887151 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 860585310 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21214 FILM NUMBER: 97611414 BUSINESS ADDRESS: STREET 1: 2850 S 36TH ST #16 CITY: PHOENIX STATE: AZ ZIP: 85034 BUSINESS PHONE: 6024375520 MAIL ADDRESS: STREET 1: 2850 S 36TH ST STREET 2: SUITE 16 CITY: PHOENIX STATE: AZ ZIP: 85034 8-K/A 1 FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A AMENDMENT NO. 1 TO FORM 8-K Current Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 Date of report (Date of earliest event reported) March 3, 1997 ----------------------- OrthoLogic Corp. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware - -------------------------------------------------------------------------------- (State or Other Jurisdiction of Incorporation) 0-21214 86-0585310 - ------------------------ ------------------------------------ (Commission File Number) (I.R.S. Employer Identification No.) 2850 South 36th Street, Phoenix, Arizona 85034 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (602) 437-5520 - -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) OrthoLogic Corp., a Delaware corporation ("OrthoLogic"), hereby amends Item 7 of its Report on Form 8-K dated March 3, 1997. Item 7. Financial Statements and Exhibits. (a) Financial Statements. Pursuant to a Purchase and Sale Agreement, as amended, and an Assignment of Purchase and Sale Agreement, Toronto Medical Orthopaedics Ltd., a corporation organized and existing under the laws of Canada and a wholly owned subsidiary of OrthoLogic, acquired substantially all of the assets and liabilities of Toronto Medical Corp., an Ontario corporation ("TMC"), and certain of the assets and liabilities of the United States subsidiaries of TMC on March 3, 1997. This Form 8-K/A includes two years audited financial statements for TMC for the years ended May 31, 1996 and 1995 and a report thereon from Ernst & Young. An audit of TMC was conducted for the year ended May 31, 1994 by another independent auditor, and this Item 7 requires the filing of three years audited financial statements of TMC. The independent auditor of TMC for the year ended May 31, 1994 has informed OrthoLogic that it will not reissue its opinion on the 1994 financial statements. OrthoLogic, therefore, is filing the two years financial statements that are currently available and has engaged another independent auditor to audit the financial statements of TMC for the period from June 1, 1996 through February 28, 1997. Such 1997 financial statements could not be prepared by the required filing date of this report on Form 8-K/A but will be provided as soon as they are completed. CONSOLIDATED FINANCIAL STATEMENTS [Expressed in Canadian dollars] TORONTO MEDICAL CORP. May 31, 1996 AUDITORS' REPORT To the Directors of Toronto Medical Corp. We have audited the consolidated balance sheets of Toronto Medical Corp. as at May 31, 1996 and 1995 and the consolidated statements of income (loss) and retained earnings (deficit) and cash flows for the years then ended. 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 an audit to obtain reasonable assurance 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at May 31, 1996 and 1995 and the results of its operations and the changes in its financial position for the years then ended in accordance with generally accepted accounting principles. Toronto, Canada, August 9, 1996 [except as to note 1 /s/ ERNST & YOUNG which is as of October 21, 1996 and note 12 which is as of May 15, 1997]. Chartered Accountants COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCE In the United States, reporting standards for auditors require the addition of an explanatory paragraph in the auditors' report [following the opinion paragraph] when the financial statements are affected by conditions and events that cast substantial doubt on the company's ability to continue as a going concern, such as those described in note 1 to the financial statements. Our report to the directors dated August 9, 1996 [except as to note 1 which is as of October 21, 1996 and note 12 which is as of May 15, 1997] is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors' report when these are adequately disclosed in the financial statements. Toronto, Canada /s/ ERNST & YOUNG May 15, 1997 Chartered Accountants Toronto Medical Corp. Incorporated under the laws of Ontario CONSOLIDATED BALANCE SHEETS [Amounts expressed in thousands of Canadian dollars] [See basis of presentation - note 1] As at May 31
1996 1995 $ $ - -------------------------------------------------------------------------------------------------------- ASSETS [note 6] Current Cash 71 64 Accounts receivable 2,752 3,027 Income taxes recoverable 509 205 Inventories [note 3] 1,700 1,793 Prepaid expenses 62 73 - -------------------------------------------------------------------------------------------------------- Total current assets 5,094 5,162 - -------------------------------------------------------------------------------------------------------- Capital assets [note 4] 1,804 2,004 Rental assets [note 5] 755 1,455 Goodwill [note 1[c]] -- 448 - -------------------------------------------------------------------------------------------------------- 7,653 9,069 - -------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness [note 6] 300 -- Accounts payable and accrued liabilities 3,549 1,822 Current portion of long-term debt [note 6] 1,255 46 Current portion of obligations under capital leases [note 6] 46 74 - -------------------------------------------------------------------------------------------------------- Total current liabilities 5,150 1,942 - -------------------------------------------------------------------------------------------------------- Long-term debt [note 6] 566 1,140 Obligations under capital leases [note 6] 37 82 Deferred income taxes -- 43 - -------------------------------------------------------------------------------------------------------- Total liabilities 5,753 3,207 - -------------------------------------------------------------------------------------------------------- Contingencies [note 9] Shareholders' equity Capital stock [note 7] 4,461 4,536 Retained earnings (deficit) (2,561) 1,326 - -------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,900 5,862 - -------------------------------------------------------------------------------------------------------- 7,653 9,069 - --------------------------------------------------------------------------------------------------------
See accompanying notes Toronto Medical Corp. CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT) [Amounts expressed in thousands of Canadian dollars, except earnings (loss) per share and number of shares outstanding] [See basis of presentation - note 1] Years ended May 31
1996 1995 $ $ - -------------------------------------------------------------------------------------------------------- Revenue Rental 7,534 10,097 Sales 2,875 4,882 - -------------------------------------------------------------------------------------------------------- 10,409 14,979 Cost of revenue 3,355 3,822 General and administrative 3,934 4,982 Selling 3,396 4,603 Write-down of goodwill [note 1[c]] 416 -- Research and development, net [note 8] 239 292 Interest [note 6] 114 122 - -------------------------------------------------------------------------------------------------------- Income (loss) from operations before the following (1,045) 1,158 Costs associated with special review of U.S. operations [note 9] 40 352 Settlement of lawsuit [note 1[a]] 1,493 -- Costs associated with lawsuit [note 1[a]] 1,458 226 - -------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (4,036) 580 - -------------------------------------------------------------------------------------------------------- Provision for (recovery of) income taxes [note 8] Current (166) 194 Deferred (43) (16) - -------------------------------------------------------------------------------------------------------- (209) 178 - -------------------------------------------------------------------------------------------------------- Net income (loss) for the year (3,827) 402 Retained earnings, beginning of year 1,326 1,054 Premium on share redemption [note 7] (60) (130) - -------------------------------------------------------------------------------------------------------- Retained earnings (deficit), end of year (2,561) 1,326 - -------------------------------------------------------------------------------------------------------- Earnings (loss) per share [note 7] Basic (1.07) 0.11 Fully diluted (1.07) 0.10 - -------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding Basic 3,586,941 3,699,409 Fully diluted 3,754,441 4,026,909 - --------------------------------------------------------------------------------------------------------
See accompanying notes Toronto Medical Corp. CONSOLIDATED STATEMENTS OF CASH FLOWS [Amounts expressed in thousands of Canadian dollars] [See basis of presentation - note 1] Years ended May 31
1996 1995 $ $ - -------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) for the year (3,827) 402 Add (deduct) items not involving cash Amortization 1,209 1,228 Write-down of goodwill 416 -- Deferred income taxes (43) (16) Settlement of lawsuit 1,440 -- Unrealized foreign exchange gain on long-term debt and capital leases (37) (85) - -------------------------------------------------------------------------------------------------------- (842) 1,529 Net change in non-cash working capital balances related to operations 1,048 (130) - -------------------------------------------------------------------------------------------------------- Cash provided by operating activities 206 1,399 - -------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to capital assets (97) (53) Additions to rental assets (180) (410) - -------------------------------------------------------------------------------------------------------- Cash used in investing activities (277) (463) - -------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Principal repayments on long-term debt and obligations under capital leases (87) (191) Redemption of common shares (135) (241) - -------------------------------------------------------------------------------------------------------- Cash used in financing activities (222) (432) - -------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash during the year (293) 504 Cash (bank indebtedness), beginning of year 64 (440) - -------------------------------------------------------------------------------------------------------- Cash (bank indebtedness), end of year (229) 64 - -------------------------------------------------------------------------------------------------------- Represented by Cash 71 64 Bank indebtedness (300) -- - -------------------------------------------------------------------------------------------------------- (229) 64 - --------------------------------------------------------------------------------------------------------
See accompanying notes Toronto Medical Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Tabular amounts expressed in thousands of Canadian dollars] May 31, 1996 1. BASIS OF PRESENTATION AND SUBSEQUENT EVENTS These consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern, which contemplates continuity of operations and realization of assets and discharge of liabilities in the ordinary course of business. The ability of the Toronto Medical Corp. [the "Company"] to realize its assets and discharge its liabilities and the appropriateness of continuing to prepare financial statements on a going concern basis are dependent upon, among other things, the continued cooperation of the Company's lender [note 1[d]], the ability of the Company to generate sufficient cash flow to meet its obligations and the restructuring of its financial affairs [note 1[b]]. These consolidated financial statements do not give effect to adjustments to amounts and presentation of assets and liabilities that may be appropriate should the Company not be able to continue in the normal course of business. [a] Lawsuit settlement On June 14, 1994, a competitor operating in the United States filed a lawsuit in the United States District Court for the District of New Jersey, naming as defendants the Company and its subsidiaries, as well as several other companies and individuals. The lawsuit requested compensatory and punitive damages in excess of U.S. $10 million. In response to the lawsuit, the Company and its subsidiaries moved to dismiss the complaint. After limited discovery had been taken and argument held before the New Jersey court, the competitor voluntarily dismissed the action on June 23, 1995. Thereafter, on August 8, 1995, the same competitor filed a lawsuit in the United States District Court for the Eastern District of Virginia, naming as defendants the Company and its subsidiaries, as well as two former employees of one of the U.S. subsidiaries. Again, the lawsuit requested compensatory and punitive damages in excess of U.S. $10 million. Also, the competitor alleged in the lawsuit that the Company and its subsidiaries conspired to harm the competitor and tortiously interfered with contractual relationships between the competitor and its employees and customers. 1 Toronto Medical Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Tabular amounts expressed in thousands of Canadian dollars] May 31, 1996 On April 16, 1996, a jury decision was rendered awarding damages in the amount of U.S. $2 million to the plaintiff, Thera-Kinetics Inc. The defendants, the Company, Toronto Medical Inc. ["TMI"], United States Orthopedic Corporation ["US Ortho"] and Michael Torretti, were found jointly and severally liable for tortious interference in hiring former employees of Thera-Kinetics Inc. As an officer of US Ortho, Michael Torretti was insured under the Companies' Directors and Officers policy with Guarantee Company of North America ["GCNA"]. On May 24, 1996, the judge in the case ruled on several post-trial motions presented by the defendants and the plaintiff, and confirmed the damage award of U.S. $2 million plus costs. An appeal was launched by the defendants in Virginia on June 18, 1996. In the United States, the filing of an appeal does not typically prevent the plaintiff from exercising a judgement without the defendant posting a supersedeas bond. In this case, the amount necessary to stay execution of the judgement was set by the court at U.S. $2.2 million. After extensive discussions with GCNA, it was clear that cooperation to post a bond was not possible. On September 27, 1996, a settlement in the amount of U.S. $2.1 million, including costs and accrued interest, was reached with Thera-Kinetics Inc. subject to court, bank and GCNA approval. The Company's portion of the settlement includes an immediate cash payment in the amount of U.S. $550,000 which has been recorded as an accrued liability and U.S. $500,000 to be paid in 40 monthly payments of U.S. $14,750 principal and interest [note 6[a]]. GCNA's portion of the settlement is an immediate cash payment of U.S. $1,050,000. [b] Proposed restructuring of operations On June 6, 1996, following the court's confirmation of the jury award noted above, the Company's U.S. subsidiary, TMI and its wholly-owned subsidiary US Ortho, filed a voluntary petition in the United States Bankruptcy Court ["bankruptcy court"] in the District of Colorado for reorganization under Chapter 11 of the code. The award of U.S. $2 million plus costs, the expense related to the defense of the suit in Virginia and that of the related action previously dismissed in New Jersey, placed too heavy a financial burden on the U.S. operations. In response, the Company has been developing a restructuring plan [the "Plan"] designed to address its financial difficulties and to restructure its financial affairs. 2 Toronto Medical Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Tabular amounts expressed in thousands of Canadian dollars] May 31, 1996 The Board of Directors approved the Plan on October 21, 1996. The Plan, if confirmed by the court, provides for the transfer of all assets of US Ortho to a new corporation owned directly by the existing Toronto Medical Corp. shareholders through a new Canadian holding company. The assets will be transferred at estimated realizable value, which approximates carrying value. Legal and administrative costs related to Chapter 11 and the formation of the new structure are expected to be approximately $450,000 and will be charged to operations as an expense in the period incurred. Management believes that liabilities of at least $450,000 may be discharged by virtue of the bankruptcy court. These liabilities have not been written down in these consolidated financial statements. There are no assurances that the court will approve the Plan. [c] Write-down of goodwill The Company has determined that the unamortized balance of goodwill in the amount of $416,000 recorded on the acquisition of a 22% minority interest in US Ortho on May 17, 1994, should be written down to nil as a result of the events noted above. [d] Bank covenants At May 31, 1996, the Company was not in compliance with certain covenants related to its loan payable and operating lines of credit. Although the lender has not surrendered any of its rights, the lender continues to make its credit facilities available to the Company. As the lender has not given up its rights to call the loans affected by non-compliance with covenants, these loans have been classified as current obligations in these consolidated financial statements. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles in Canada applied within the framework of the accounting policies summarized below: Basis of consolidation These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, TMI, US Ortho and Tor Med U.S.A. Corporation. 3 Toronto Medical Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Tabular amounts expressed in thousands of Canadian dollars] May 31, 1996 Revenue recognition Revenue from product sales is recognized upon shipment. Rental revenue from operating leases and direct to patient rentals is recognized as billed. Accounts receivable and provision for contractual adjustments The Company derives a significant amount of its revenues in the United States from participation in the Medicare program and other third party health insurance plans. Amounts paid under these plans are generally based on fixed or allowable reimbursement rates. Revenues are recorded at the expected or preauthorized reimbursement rates when billed. Some billings are subject to review by such third party payers and may be subject to adjustments. In the opinion of management, adequate allowances have been provided for doubtful accounts and contractual adjustments. Any differences between estimated reimbursement and final determinations are reflected in the year finalized. Inventories Inventories are valued at the lower of cost, determined on the first-in, first-out basis, and market value. For finished goods and work-in-process, market value is defined as net realizable value and for purchased and fabricated parts and raw materials, market value is defined as replacement cost. Capital assets Capital assets are recorded at cost and amortized over their estimated useful lives as follows: Building 20 years straight-line Machinery and equipment 10% to 30% declining balance Office equipment and computers 20% to 30% declining balance Patents 20% declining balance Rental assets Rental assets, including those under capital leases, are recorded at cost and amortized on a straight-line basis over a period of 48 months. 4 Toronto Medical Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Tabular amounts expressed in thousands of Canadian dollars] May 31, 1996 Goodwill Goodwill, representing the excess of the cost of acquisitions over the identifiable net assets acquired, is amortized on a straight-line basis over 15 years. The Company assesses the impairment of goodwill by determining whether the unamortized balance can be recovered through future undiscounted operating income of the acquired operations. Any permanent impairment of the value of the unamortized portion of goodwill is written down with a charge against income. Foreign currency translation The Company's subsidiaries are all considered to be integrated operations. Monetary assets and liabilities are translated at the year-end exchange rate and non-monetary assets are translated at their historical exchange rates. Revenue and expenses are translated at weighted average exchange rates except amortization which is translated at the historical exchange rate applicable to the related assets. Foreign exchange gains and losses on long-term monetary assets and liabilities are deferred and amortized over the remaining term of the related asset and liability. Other foreign exchange gains and losses are included in income as they arise. Research and development All research and development costs, except for acquisition of capital assets, are expensed in the year in which they are incurred unless a development project meets generally accepted accounting criteria for deferral and amortization. No development costs have been deferred to date. Refundable investment tax credits earned in the year on qualifying research and development expenditures are recorded as a reduction of the related expenditure when the expenditures are incurred. Income taxes The Company follows the deferral method of income tax allocation. Deferred income taxes result from the difference between reported and taxable income which occurs when revenue and expenses recognized in the accounts in one year are claimed for income tax purposes in another year. 5 Toronto Medical Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Tabular amounts expressed in thousands of Canadian dollars] May 31, 1996 3. INVENTORIES Inventories are comprised of the following: 1996 1995 $ $ - -------------------------------------------------------------------------------- Raw materials 216 134 Work-in-process 699 910 Finished goods 785 749 - -------------------------------------------------------------------------------- 1,700 1,793 - -------------------------------------------------------------------------------- 4. CAPITAL ASSETS Capital assets are comprised of the following:
1996 1995 ------------------------ ------------------------- Accumulated Accumulated Cost amortization Cost amortization $ $ $ $ - -------------------------------------------------------------------------------------------------------- Land 369 -- 369 -- Building 1,704 673 1,704 588 Machinery and equipment 757 537 748 506 Office equipment and computers 783 637 713 464 Patents 87 49 69 41 - -------------------------------------------------------------------------------------------------------- 3,700 1,896 3,603 1,599 Less accumulated amortization (1,896) (1,599) - -------------------------------------------------------------------------------------------------------- 1,804 2,004 - --------------------------------------------------------------------------------------------------------
6 Toronto Medical Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Tabular amounts expressed in thousands of Canadian dollars] May 31, 1996 5. RENTAL ASSETS Rental assets are comprised of the following:
1996 1995 ------------------------- ----------------------- Accumulated Accumulated Cost amortization Cost amortization $ $ $ $ - ------------------------------------------------------------------------------------------------ Rental equipment 3,506 2,966 3,388 2,258 Rental equipment under capital lease 700 485 638 313 - ------------------------------------------------------------------------------------------------ 4,206 3,451 4,026 2,571 Less accumulated amortization (3,451) (2,571) - ------------------------------------------------------------------------------------------------ 755 1,455 - ------------------------------------------------------------------------------------------------
6. DEBT AND COMMITMENTS [a] Long-term debt consists of a bank term loan and note payable to Thera-Kinetics Inc. as follows:
1996 1995 $ $ - ------------------------------------------------------------------------------------------------- U.S. $831,150 term loan bearing interest at 7.75%, repayable in monthly blended payments of U.S. $8,095 principal and interest due June 30, 1997 1,135 1,186 U.S. $500,000 note payable bearing interest at 10%, repayable in 40 monthly blended payments of U.S. $14,750 commencing December 1996 686 -- - ------------------------------------------------------------------------------------------------- 1,821 1,186 Less current portion 1,255 46 - ------------------------------------------------------------------------------------------------- 566 1,140 - -------------------------------------------------------------------------------------------------
7 Toronto Medical Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Tabular amounts expressed in thousands of Canadian dollars] May 31, 1996 Future principal repayments on long-term debt are estimated to be as follows: $ - -------------------------------------------------------------------------------- 1997 1,255 1998 195 1999 215 2000 156 - -------------------------------------------------------------------------------- 1,821 - -------------------------------------------------------------------------------- The consolidated statements of income (loss) and retained earnings (deficit) includes interest expense of $88,000 [1995 - $83,000] related to long-term debt. [b] At May 31, 1996, the Company had available operating lines of credit and letters of credit and/or guarantees totalling $1,068,000 of which $300,000 was utilized. The lines of credit are payable on demand and bear interest at a Canadian chartered bank's prime rate of interest plus 1/4 of 1%. The fees on the letters of credit and/or guarantees are determinable on a transaction by transaction basis. Substantially all of the Company's assets, including an assignment of insurance proceeds, have been pledged as collateral security for the Company's operating lines of credit and long-term debt. The Company is in breach of certain covenants relating to the term loans and operating lines of credit [note 1[d]]. 8 Toronto Medical Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Tabular amounts expressed in thousands of Canadian dollars] May 31, 1996 [c] The Company has entered into lease agreements for certain rental assets. Future minimum lease payments required under the capital leases are as follows:
1996 1995 $ $ ------------------------------------------------------------------------------------------------- 1996 -- 90 1997 54 54 1998 39 39 ------------------------------------------------------------------------------------------------- Total minimum lease payments 93 183 Less amount representing interest at an average rate of 14% per annum 10 27 ------------------------------------------------------------------------------------------------- Balance of obligations 83 156 Less current portion 46 74 ------------------------------------------------------------------------------------------------- 37 82 -------------------------------------------------------------------------------------------------
[d] At May 31, 1996, the Company had commitments under operating leases for premises requiring annual rental payments as follows: $ --------------------------------------------------------------------------- 1997 129 1998 20 Thereafter -- --------------------------------------------------------------------------- 149 --------------------------------------------------------------------------- 7. CAPITAL STOCK [a] The Company's authorized, issued and outstanding capital stock is as follows: 1996 1995 $ $ --------------------------------------------------------------------------- Authorized Unlimited common shares Issued and outstanding 3,560,016 common shares [1995 - 3,618,316] 4,461 4,536 --------------------------------------------------------------------------- 9 Toronto Medical Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Tabular amounts expressed in thousands of Canadian dollars] May 31, 1996 [b] During the year, 7,800 [1995 - 16,200] common shares were redeemed for $19,500 [1995 - $40,500] pursuant to the Company's employee share purchase plan. In addition, 50,500 common shares were redeemed for $115,140 as part of a separation agreement with the Company's former President. At year end, 9,800 common shares were subject to the Company's employee put/call option agreement. Under this agreement, shares owned by the employees are redeemable and retractable at $2.50 per share upon termination of the employee. [c] At year end, under the Company's stock option plan there were 167,500 options outstanding to acquire common shares [1995 - 327,500]. Options granted pursuant to the plan are exercisable to the extent they have vested at $2.50 per share for a period of ten years from the date of granting such options. At year end, all options had vested and had expiration dates ranging from May 31, 1997 to January 13, 2004. [d] Earnings per share has been calculated based on the weighted average common shares outstanding. Fully diluted earnings per share has been calculated based on the assumption that all outstanding stock options would be exercised. 8. INCOME TAXES [a] The Company's provision for (recovery of) income taxes is comprised as follows:
1996 1995 $ $ ------------------------------------------------------------------------------------------------- Combined basic Canadian federal and provincial income taxes (recovery) (1,796) 258 Federal tax abatement 76 (44) Small business deduction 57 (32) Manufacturing and processing credit 20 (9) Lower (higher) effective income taxes on earnings (losses) of U.S. subsidiaries 825 136 Losses and timing differences not benefitted 600 (101) Other 9 (30) ------------------------------------------------------------------------------------------------- Actual provision for (recovery of) income taxes (209) 178 -------------------------------------------------------------------------------------------------
[b] The Company has recorded investment tax credits of $53,000 [1995 - $84,000] as a reduction of research and development expenses. 10 Toronto Medical Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Tabular amounts expressed in thousands of Canadian dollars] May 31, 1996 [c] The Company has net operating loss carryforwards available to its subsidiaries in the United States of approximately $1,500,000. The Company has cumulative timing differences of approximately $1,300,000 relating to lawsuit payments and long term reserves deducted for accounting purposes in excess of amounts recorded for income tax purposes. Deferred income tax debits relating to these loss carryforwards and cumulative timing differences have not been recognized in these consolidated financial statements. 9. CONTINGENCIES During 1995, the Company commenced a special review of the operations of its United States subsidiary, US Ortho, in light of significant changes in its senior management. Particular emphasis was placed on its billing practices with respect to third party reimbursement. The review identified that certain reimbursement claims submitted to the Medicare program used incorrect billing codes or otherwise incomplete information. If US Ortho had submitted such claims in a complete and proper fashion, US Ortho may not have been entitled to these reimbursements. US Ortho has ceased billing under these incorrect codes and has ceased submitting claims with incomplete information. The amounts relating to these incorrect billing practices have been identified and can reasonably be estimated to be U.S. $250,000, all of which have been provided for in the accounts. US Ortho began the process of reporting these findings to the United States Government ["Government"] and negotiating the terms for repayment of the amounts which were accrued in the accounts for fiscal 1995. The Government has statutory authority to seek criminal sanctions or, if it believes that false claims were knowingly submitted, to seek penalties of up to U.S. $10,000 per claim together with payment of up to three times the amount incorrectly reimbursed. The Company is unable, at the present time, to determine the extent to which the Government may seek to exercise its authority or to forecast the probable outcome. The amount which the Government could seek to impose, for which no accruals have been made, could have a material effect on the Company's financial position. However, under the provisions of US Ortho's plan of reorganization as filed with the bankruptcy court, this contingent liability is a general unsecured claim which would be discharged without payment [note 1[b]]. 11 Toronto Medical Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Tabular amounts expressed in thousands of Canadian dollars] May 31, 1996 10. SEGMENTED INFORMATION The Company conducts substantially all of its business in the manufacture, sale, lease and rental of medical devices. 1996 1995 $ $ - -------------------------------------------------------------------------------- REVENUE Canada 2,960 4,568 United States 8,056 11,718 Less intercompany (607) (1,307) - -------------------------------------------------------------------------------- 10,409 14,979 - -------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES Canada (1,802) 391 United States (2,527) (276) Add intercompany 293 465 - -------------------------------------------------------------------------------- (4,036) 580 - -------------------------------------------------------------------------------- IDENTIFIABLE ASSETS Canada 4,204 3,847 United States 4,437 7,466 Less intercompany (988) (2,244) - -------------------------------------------------------------------------------- 7,653 9,069 - -------------------------------------------------------------------------------- Revenue to overseas companies included in Canadian operations 2,231 2,874 - -------------------------------------------------------------------------------- Transfer between geographic segments are accounted for at prices comparable to open market prices for similar products and services. 11. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 1996 consolidated financial statements. 12 Toronto Medical Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Tabular amounts expressed in thousands of Canadian dollars] May 31, 1996 12. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The Company's consolidated financial statements are prepared using accounting policies generally accepted in Canada ["Canadian GAAP"] which conform with accounting principles generally accepted in the United States ["U.S. GAAP"] except for the following: [a] The calculation of primary earnings per share would be calculated using the weighted average number of common shares and common share equivalents which include stock options using the treasury stock method. However, because the stock options are anti-dilutive for all periods presented they are excluded from the calculation. Primary and fully diluted earnings per share under U.S. GAAP do not differ significantly from earnings per share under Canadian GAAP; [b] U.S. GAAP does not recognize the disclosure of a subtotal of the amount of "income (loss) from operations before the following" in the consolidated statements of income (loss) and retained earnings (deficit); [c] Bank indebtedness would not be reported as a cash equivalent in the consolidated statements of cash flows. As a result, in 1996 the cash provided by financing activities would increase by $300 and the cash, end of year would decrease by $300; and, [d] The Company follows the deferral method of income tax allocation. Under U.S. GAAP, Statement of Financial Accounting Standards No. 109 "Income Taxes" requires that the liability method be used. Under the liability method, deferred income taxes are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 13 Toronto Medical Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Tabular amounts expressed in thousands of Canadian dollars] May 31, 1996 Under U.S. GAAP, the Company's deferred tax liabilities consist of the following timing differences: 1996 1995 $ $ - -------------------------------------------------------------------------------- Deferred tax assets Accruals not deductible for tax purposes (604) (394) Book depreciation in excess of tax depreciation (276) (123) Tax losses (520) -- - -------------------------------------------------------------------------------- Total deferred tax assets (1,400) (517) Valuation allowance 1,400 517 - -------------------------------------------------------------------------------- Net deferred tax assets -- -- - -------------------------------------------------------------------------------- Deferred tax liabilities Tax depreciation in excess of book depreciation -- 43 - -------------------------------------------------------------------------------- -- 43 - -------------------------------------------------------------------------------- 14 (b) Pro Forma Financial Information - The required pro forma financial information is set forth below: Pursuant to a Purchase and Sale Agreement, as amended, and an Assignment of Purchase and Sale Agreement, Toronto Medical Orthopaedics, Ltd., a corporation organized and existing under the laws of Canada and a wholly owned subsidiary of OrthoLogic, acquired for $7.2 million cash, substantially all of the assets and certain liabilities of Toronto Medical Corp., an Ontario corporation ("TMC"), and certain of the assets and liabilities of the United States subsidiaries of TMC on March 3, 1997. The Unaudited Pro Forma Consolidated Statements of Income/(Loss) for the year ended December 31, 1996 and the three months ended March 31, 1997 combine historical statements of income/(loss) for OrthoLogic and the acquired company, TMC, as if the acquisition had occurred on January 1, 1996 and January 1, 1997, respectively. The detailed assumptions used to prepare the unaudited pro forma consolidated financial information are contained in the accompanying Unaudited Pro Forma Consolidated Statements of Income/(Loss). These statements reflect the use of the purchase method of accounting for the acquisition. The unaudited pro forma financial information assumes the acquisition was funded from currently available cash. The unaudited pro forma consolidated financial information does not purport to represent the results of operations of OrthoLogic that actually would have resulted had the acquisition occurred on January 1, 1996, or January 1, 1997, nor should it be taken as indicative of the future results of operations. OrthoLogic Corp. Unaudited Pro Forma Consolidated Statement of Income/(Loss) Year Ended December 31, 1996
Pro Forma OrthoLogic Toronto Pro Forma Consolidated Corp. Medical Corp. Adjustments Totals ------------ ------------- ------------- ------------ REVENUES - Net $ 41,884,239 $ 6,646,159 $ -- $ 48,530,398 ------------ ------------ ------------ ------------ COST OF REVENUES Cost of goods sold 5,714,510 1,831,483 -- 7,545,993 Cost of rentals 2,584,530 558,607 -- 3,143,137 ------------ ------------ ------------ ------------ Total cost of revenues 8,299,040 2,390,090 -- 10,689,130 ------------ ------------ ------------ ------------ GROSS PROFIT 33,585,199 4,256,069 -- 37,841,268 ------------ ------------ ------------ ------------ OPERATING EXPENSES Selling, general and administrative 31,900,966 5,216,046 200,000 (a) 37,317,012 Research and development 2,169,090 147,351 -- 2,316,441 ------------ ------------ ------------ ------------ Total operating expenses 34,070,056 5,363,397 200,000 39,633,453 ------------ ------------ ------------ ------------ OPERATING INCOME (LOSS) (484,857) (1,107,328) (200,000) (1,792,185) OTHER INCOME (EXPENSE) 3,023,246 (1,709,799) (381,600)(b) 931,847 ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 2,538,389 (2,817,127) (581,600) (860,338) (PROVISION) BENEFIT FOR INCOME TAXES -- 114,992 -- 114,992 ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ 2,538,389 $ (2,702,135) $ (581,600) $ (745,346) ============ ============ ============ ============ NET INCOME (LOSS) PER WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING $ 0.11 $ -- $ -- $ (0.03) ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 24,143,763 -- -- 24,143,763 ============ ============ ============ ============
Pro Forma Adjustment Legend (a) Reflects a pro forma increase in amortization expense associated with the capitalization of the cost of acquisition in excess of net assets acquired resulting from the application of purchase accounting principles. (b) Reflects a pro forma decrease in interest income imputed on consideration paid for the acquisition. OrthoLogic Corp. Unaudited Pro Forma Consolidated Statement of Income/(Loss) Three month period ended March 31, 1997
Pro Forma OrthoLogic Toronto Pro Forma Consolidated Corp. Medical Corp. Adjustments Totals ---------- ------------- ----------- ------------ REVENUES - Net $ 17,301,715 $ 823,793 $ -- $ 18,125,508 ------------ ------------ ------------ ------------ COST OF REVENUES Cost of goods sold 2,714,037 276,868 -- 2,990,905 Cost of rentals 2,031,331 29,588 -- 2,060,919 ------------ ------------ ------------ ------------ Total cost of revenues 4,745,368 306,456 -- 5,051,824 ------------ ------------ ------------ ------------ GROSS PROFIT 12,556,347 517,337 -- 13,073,684 ------------ ------------ ------------ ------------ OPERATING EXPENSES Selling, general and administrative 12,889,498 637,953 50,000 (a) 13,577,451 Research and development 576,056 29,529 -- 605,585 ------------ ------------ ------------ ------------ Total operating expenses 13,465,554 667,482 50,000 14,183,036 ------------ ------------ ------------ ------------ OPERATING INCOME (LOSS) (909,207) (150,145) (50,000) (1,109,352) OTHER INCOME (EXPENSE) 636,117 (17,930) (95,400)(b) 522,787 ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES (273,090) (168,075) (145,400) (586,565) (PROVISION) BENEFIT FOR INCOME TAXES -- -- -- -- ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ (273,090) $ (168,075) $ (145,400) $ (586,565) ============ ============ ============ ============ NET INCOME (LOSS) PER WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING $ (0.01) $ -- $ -- $ (0.02) ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 25,037,890 -- -- 25,037,890 ============ ============ ============ ============
Pro Forma Adjustment Legend (a) Reflects a pro forma increase in amortization expense associated with the capitalization of the cost of acquisition in excess of net assets acquired resulting from the application of purchase accounting principles. (b) Reflects a pro forma decrease in interest income imputed on consideration paid for the acquisition. (c) Exhibits. See Exhibit Index. 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. ORTHOLOGIC CORP. May 19, 1997 By /s/ Allen R. Dunaway ---------------------------- Allen R. Dunaway Chief Financial Officer 3 EXHIBIT INDEX
Sequentially Exhibit No. Description of Exhibit Paginated No. - ------------------ ------------------------------------------------------------------------- --------------------- * 2.1 Purchase and Sale Agreement dated as of December 30, 1996 by and between OrthoLogic Corp., a Delaware corporation, and Toronto Medical Corp., an Ontario corporation ..................... * 2.2 Amendment to Purchase and Sale Agreement dated as of January 13, 1997 by and between OrthoLogic Corp., a Delaware corporation, and Toronto Medical Corp., an Ontario corporation ................................................... * 2.3 Second Amendment to Purchase and Sale Agreement dated as of March 1, 1997 by and between OrthoLogic Corp., a Delaware corporation, and Toronto Medical Corp., an Ontario corporation ................................................... * 2.4 Assignment of Purchase and Sale Agreement dated as of March 1, 1997 by and among OrthoLogic Corp., a Delaware corporation, Toronto Medical Orthopaedics Ltd., a Canada corporation, and Toronto Medical Corp., an Ontario corporation ........................................................... 23.1 Consent of Auditors....................................................
- --------------------------- * Previously filed. E-1 EX-23.1 2 CONSENT OF AUDITORS Consent of Auditors We consent to the use of our auditors' report dated August 9, 1996 [except as to note 1 which is as of October 21, 1996 and note 12 which is as of May 15, 1997] for the two years ended May 31, 1996 and 1995 and our report "Comments by Auditors for U.S. Readers on Canada-U.S. Reporting Difference" dated May 15, 1997 with respect to the consolidated financial statements of Toronto Medical Corp. included in Form 8-K/A Amendment No. 1 to Form 8-K expected to be filed on or about May 19, 1997 for OrthoLogic Corp. Toronto, Canada, /s/ ERNST & YOUNG May 15, 1997. Chartered Accountants -----END PRIVACY-ENHANCED MESSAGE-----