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)
<PAGE>
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.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in Canadian dollars]
TORONTO MEDICAL CORP.
May 31, 1996
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
1996 1995
$ $
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
<PAGE>
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
<TABLE>
<CAPTION>
1996 1995
$ $
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
<PAGE>
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
<TABLE>
<CAPTION>
1996 1995
$ $
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
------------------------ -------------------------
Accumulated Accumulated
Cost amortization Cost amortization
$ $ $ $
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
------------------------- -----------------------
Accumulated Accumulated
Cost amortization Cost amortization
$ $ $ $
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------
</TABLE>
6. DEBT AND COMMITMENTS
[a] Long-term debt consists of a bank term loan and note payable to
Thera-Kinetics Inc. as follows:
<TABLE>
<CAPTION>
1996 1995
$ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- -------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
$ $
-------------------------------------------------------------------------------------------------
<S> <C> <C>
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
-------------------------------------------------------------------------------------------------
</TABLE>
[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
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995
$ $
-------------------------------------------------------------------------------------------------
<S> <C> <C>
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
-------------------------------------------------------------------------------------------------
</TABLE>
[b] The Company has recorded investment tax credits of $53,000 [1995 - $84,000]
as a reduction of research and development expenses.
10
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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.
<PAGE>
OrthoLogic Corp.
Unaudited Pro Forma Consolidated Statement of Income/(Loss)
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Pro Forma
OrthoLogic Toronto Pro Forma Consolidated
Corp. Medical Corp. Adjustments Totals
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
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.
<PAGE>
OrthoLogic Corp.
Unaudited Pro Forma Consolidated Statement of Income/(Loss)
Three month period ended March 31, 1997
<TABLE>
<CAPTION>
Pro Forma
OrthoLogic Toronto Pro Forma Consolidated
Corp. Medical Corp. Adjustments Totals
---------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
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.
<PAGE>
(c) Exhibits.
See Exhibit Index.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
ORTHOLOGIC CORP.
May 19, 1997 By /s/ Allen R. Dunaway
----------------------------
Allen R. Dunaway
Chief Financial Officer
3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description of Exhibit Paginated No.
- ------------------ ------------------------------------------------------------------------- ---------------------
<S> <C>
* 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....................................................
</TABLE>
- ---------------------------
* Previously filed.
E-1
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
