UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
FISCAL 1997 ENDED JUNE 30, 1997
___
___ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
___
XXX ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
___
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-27998
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
(Exact name of Registrant as specified in its charter)
Manitoba, Canada
(Jurisdiction of incorporation or organization)
251 Saulteaux Crescent, Winnipeg, Manitoba Canada R3J 3C7
(Address of principal executive offices)
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period
covered by the annual report. 11,070,415
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 12 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past ninety days. Yes xxx No ___
Indicate by check mark which financial statement item the
registrant has elected to follow: Item 17 XXX Item 18 ___
Page 1 of 99
Index to Exhibits on Page 77
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
TABLE OF CONTENTS
Page
Item 1. Description of Business......................... 3
Item 2. Description of Property......................... 25
Item 3. Legal Proceedings............................... 28
Item 4. Control of Registrant........................... 29
Item 5. Nature of Trading Market........................ 31
Item 6. Exchange Controls and Other Limitation
Affecting Security Holders...................... 33
Item 7. Taxation........................................ 34
Item 8. Selected Financial Data......................... 42
Item 9. Management's Discussion and Analysis of
Financial Condition and Results of Operations... 44
Item 10. Directors and Officers of the Registrant........ 62
Item 11. Compensation of Directors and Officers.......... 64
Item 12. Options to Purchase Securities from Registrant
or Subsidiaries................................. 66
Item 13. Interest of Management in Certain Transactions.. 70
PART II
Item 14. Description of Securities to be Registered...... 72
PART III
Item 15. Defaults Upon Senior Securities................. 75
Item 16. Changes in Securities and Changes in Security
for Registered Securities....................... 75
PART IV
Item 17. Financial Statements............................ 75
Item 18. Financial Statements
Item 19. Financial Statements and Exhibits............... 76
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
The Company is an automated medical products manufacturer, whose principal
business is the assembly and packaging of disposable kits and trays for
medical and surgical procedures, such as patient care trays, custom
procedure kits, diagnostic trays and homecare kits. Through two of its
subsidiaries, National Care Products Ltd. ("NCP") and National Healthcare
Manufacturing Corporation, U.S. ("NHMC US"), the Company is also involved
in manufacturing liquid products for use in the Company's kits and trays,
and for distribution to healthcare institutions throughout North America.
The Company's head office and manufacturing facility is located at: 251
Saulteaux Crescent, Winnipeg, Manitoba, Canada R3J 3C7.
The contact person is Mahmood (Mac) Shahsavar, President, CEO, and
Director. The telephone number is (204) 885-5555; and the facsimile number
is (204) 885-5588.
The Company maintains an administrative and investor relations office
located at:
409 Granville Street, Suite #1455, Vancouver, British Columbia, Canada V6C
1T2. The contact person is Morteza Seyed Torabian, Executive Vice
President and Director. The telephone number is (604) 689-8581; and the
facsimile number is (604) 689-8337.
The Company has an unlimited number of Class A common shares without par
value authorized; and as of 6/30/97, the end of the Company's most recent
fiscal year, there were 11,070,415 common shares outstanding. As of
11/30/97, there were 12,474,331 common shares outstanding.
Effective May 15, 1995, the Company's common shares were split on a
571.4286:1 basis. All discussion in this Annual Report refer to post-split
stock unless otherwise indicated.
The Company's consolidated financial statements are stated in Canadian
Dollars (CDN$) and are prepared in accordance with Canadian Generally
Accepted Accounting Principles (GAAP), the application of which, in the
case of the Company, conforms in all material respects for the periods
presented with US GAAP except as noted in footnotes to the financial
statements.
Herein, all references to "$" and "CDN$" refer to Canadian Dollars and all
references to "US$" refer to United States Dollars.
The information in this Annual Report is current as of 11/30/97, unless
otherwise indicated.
The Company was incorporated on August 23, 1993 under The Corporations Act
(Manitoba) by registration of its Articles of Incorporation. The Company
was extra-provincially registered in the Province of British Columbia on
December 9, 1994.
The Company is a reporting Company in the Provinces of British Columbia and
Manitoba. The Company's common shares have been listed for trading on the
senior board of the Vancouver Stock Exchange since January 15, 1996 under
the trading symbol "NHM". The common shares have also been quoted on the
Small Capital Market of the National Association of Securities Dealers
Automated Quotation system ("NASDAQ") since August 14, 1996 under the
symbol "NHMCF".
The Company owns 100% of the issued and outstanding shares of National
Healthcare Manufacturing Corporation, U.S. ("NHMC US"), a private company
incorporated on October 25, 1994 under the Business Corporations Act
(Delaware). NHMC US was established for the purpose of entering into
certain lease arrangements (see ITEM #1, "Business of the Company,
Operations, Equipment") and to carry on the medical products packaging
operations of the Company in the USA. (see ITEM #1, "Business of Company,
Operations, General").
The Company owns 100% of the issued and outstanding shares of Associated
Healthcare Sales Ltd. ("AH Sales"), a private company incorporated on
October 4, 1994 under The Corporations Act (Manitoba). AH Sales is a non-
operating subsidiary of the Company.
The Company owns 100% of the issued and outstanding shares of National Care
Products Ltd. ("NCP"), a private company incorporated on May 6, 1996 under
The Corporations Act (Manitoba). NCP operates the business previously
operated by Arjo Canada Inc. as its Liquid Division (see ITEM #1, "Business
of the Company, Acquisitions and Dispositions, Liquid Division of Arjo
Canada Inc.").
The Company owns 50% of the issued and outstanding voting shares of
National Healthcare Logistics, LLC, a Limited Liability Company ("NHLC"), a
private company incorporated on March 26, 1997 under the Nevada Limited
Liability Company Act. The remaining 50% of NHLC's voting shares is owned
by Joe Smith and Duane Jorgenson, each as to 25%. NHLC was established to
offer material management and alternative distribution channels to
integrated hospital groups in the USA.
Initial Public Offering
The Company's initial public offering on the Vancouver Stock Exchange was
pursuant to a prospectus with an effective date of 11/30/95, only to
investors in the Canadian provinces of British Columbia and Manitoba,
issuing 1,150,000 common shares, raising $2,070,000 (after agent's
commissions).
Private Placements
In July 1996, the Company completed the private placement of 905,000
Special Warrants at $3.00 per Special Warrant. Each Special Warrant
entitled the holder to receive, without additional cost or action, a common
share and a share purchase warrant. The Special Warrants were converted on
8/1/97.
In January 1997, the Company completed the private placement of 1,600,000
Special Warrants at $6.00 per Special Warrant. Each Special Warrant
entitled the holder, without additional cost or action, a common share and
one share purchase warrant entitling the holder to purchase at $7.00 an
additional common share. 91,000 Special Warrants were converted on 8/5/97.
The remaining Special Warrants are expected to be converted in December
1997.
In October 1997, the Company issued Convertible Notes in the amount of
US$5,000,000. The Convertible Notes bear cumulative dividends at the rate
of 6% per year, payable in cash or in common shares. The Convertible Notes
entitle the holders to acquire, without additional payment, Convertible
Debentures in the aggregate amount of US$5,000,000 and an aggregate of
250,000 CN Warrants. The Convertible Debentures are convertible into
common shares at a conversion price equal to the lower of (a) US$2.33 or
(b) 85% of the closing price of the Company's common shares on NASDAQ on
the conversion date.
In this Annual Report, unless otherwise specified, all dollar amounts are
expressed in Canadian Dollars (CDN$). The Government of Canada permits a
floating exchange rate to determine the value of the Canadian Dollar
against the US Dollar (US$).
Table No. 1 sets forth the rate of exchange for the Canadian Dollar at the
end of each of the five most recent fiscal years ended June 30th, the
average rates for the year, and the range of high and low rates for each
year.
For purposes of this table, the rate of exchange means the noon buying rate
in New York City for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York. The table sets
forth the number of Canadian Dollars required under that formula to buy one
U.S. Dollar. The average rate means the average of the exchange rates on
the last day of each month during the period.
Table No. 1
U.S. Dollar/Canadian Dollar
Average High Low Close
Fiscal Year Ended 6/30/97 1.37 1.40 1.33 1.38
Fiscal Year Ended 6/30/96 1.36 1.38 1.33 1.36
Fiscal Year Ended 6/30/95 1.38 1.42 1.34 1.37
Fiscal Year Ended 6/30/94 1.34 1.40 1.28 1.38
The current rate of exchange was 1.44 on November 30, 1997.
BUSINESS OF THE COMPANY
Description of Business and General Development
The Company is an automated medical products manufacturer, whose principal
business is the assembly and packaging of disposable kits and trays for
medical and surgical procedures, such as patient care trays, custom
procedure kits, diagnostic trays and homecare kits (see the subheading
"Products"). The market for the Company's products is comprised of users
of medical and surgical device products such as hospitals, outpatient
surgery centres, dental and medical clinics, retirement homes, homecare
providers and multi-level care facilities. The Company has marketed its
kit and tray products to various healthcare facilities throughout North
America, through an independent sales team and independent distributors.
(See the subheading "Market and Competition".)
Prior to the use of custom procedure kits, a healthcare facility would
order from a number of sources and maintain a substantial inventory of each
individual sterile product used in the procedures performed at that
facility. Each surgical procedure would require a lengthy set-up time in
which all products required for the surgical procedure would be manually
selected and organized by hospital staff. In addition to placing demands
on hospital personnel, this procedure had a greater risk of product
contamination and waste. Custom procedure kits increase efficiency and
productivity by consolidating the products used in a given surgical
procedure into a single package. Pre-assembled kits eliminate the opening
of many different packages of sterile materials and reduce the risk of
contamination. They also reduce the demand on hospital personnel and
facilities associated with the ordering and maintaining of inventory.
Custom procedure kits are particularly beneficial to facilities that have
limited storage space and limited investment in infrastructure and
personnel. The use of custom procedure kits also allows for easier
identification of costs associated with specific procedures.
The Company has acquired the Liquid Division of Arjo Canada Inc. ("Arjo")
which manufactures liquid medical products, such as disinfectants, shampoos
and skin creams, to the Company's range of products (see "Business of the
Company - Acquisitions and Dispositions - Liquid Division of Arjo Canada
Inc.") The Company has also acquired the on-going business and certain
assets of Huntington Laboratories Gam-Med Division, Inc. which packages
antimicrobial products in patented disposable plastic dispensers. (See
ITEM #1, "Business of the Company, Acquisitions and Dispositions,
Huntington Laboratories Gam-Med Division, Inc.").
The Company received final approval in September 1997 for its acquisition
of the exclusive right for Mertex and Mertex-Plus. These technologically-
advanced fabrics are used to manufacture re-usable surgical gowns and
drapes and provide protection against bodily fluids and bacterial
contamination within an operating room environment. Having received FDA
and ISO clearances, these fabrics are endorsed and are currently being used
in a number of hospitals in North America and Europe.
Althin Medical A.B. of Sweden and Mediset GMBH of Germany have also been
appointed for sales and marketing of these unique gowns and drapes
throughout Germany and Scandinavian countries.
National Healthcare Logistics, LLC, a Limited Liability Company ("NHLC")
was created in April 1997 by the Company as an equal partner with two well-
respected U.S. authorities in materials management and medical distribution
systems. The Company owns 150 Class A voting shares of NHLC purchased at a
price of US$1.00 each and 750 Class C preferred non-voting shares of NHLC
purchased at a price of US$1,500 each. The Company intends to contribute
additional share capital to purchase a further 750 Class C preferred shares
of NHLC. NHLC is in the service business managing the purchasing and
distribution activities for multiple numbers of hospitals utilizing a "hub
and spoke" distribution system. The hub and spoke distribution system is
the start of the art in supply chain management for integrating hospital
systems. This concept has been developed by Duane Jorgenson, one of the
principals of NHLC, who is a highly regarded authority in material
management logistics. Mr. Jorgenson has also developed and implemented a
number of stockless inventory systems for hospitals throughout the USA.
The formation of NHLC provides the Company with an entry to "alternative"
distribution channels, a fast growing segment of the medical products
distribution market. This directly benefits the Company and its
subsidiaries by providing them with an excellent opportunity to market
their products directly to end user hospitals through hub and spoke
distribution systems managed by NHLC. In August 1997, NHLC entered into a
10-year agreement with Sysco Corporation, through which NHLC will bring in
supply management contracts for various integrated hospital systems, based
on hub and spoke distribution, while Sysco Corporation will provide the
capital for setting up the hubs and provide inventory and distribution.
The Company markets all its products to hospitals, long term care
facilities and homecare providers in Canada through independent
distributors. The Company uses an independent sales team and its interest
in NHLC to market its products in the United States and Europe. Through
its 50% interest in the recently-founded NHLC, a medical products
purchasing and distribution company, the Company is further establishing
its U.S. market presence. Also, as part of its marketing strategy, the
Company intends to introduce the "NCP" (standing for "National Care
Products") brand name.
The Company has signed a definite agreement to purchase 100% of privately-
held Medi Guard Inc., one of Canada's leading manufacturers of celluose-
based disposable protective products for medical use. Completion of this
acquisition is subject to Vancouver Stock Exchange approval.
The Company was inactive from incorporation until June 1994 when it began
raising capital for the acquisition and modification of its Winnipeg
facility for the packaging of medical supplies for the healthcare industry.
To date, the Company has accomplished the following:
in October 1994, secured in excess of $10 million in lease financing
for three robotic multi-component packaging assembly lines (see ITEM
#1, "Business of the Company, Operations, Equipment");
in November and December 1994 entered into agreements with both the
Government of Manitoba and Government of Canada for financial
assistance of up to $4,611,852 (certain conditions apply, see ITEM #9,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations");
in December 1994, acquired a 71,000 square foot manufacturing plant
sited on approximately 3.396 acres of land (the "Property") located in
Winnipeg, Manitoba (see ITEM #1, "Management's Discussion and Analysis
of Financial Condition and Results of Operations, Acquisitions and
Dispositions, Property");
modified the Winnipeg manufacturing plant and upgraded its utility
systems to meet production requirements;
purchased the necessary machinery and warehousing equipment to meet
operation requirements (see ITEM #1, "Business of the Company,
Operations, Production Line Assembly Equipment");
in May 1995, acquired the exclusive North American and European
licenses to use certain robotic technology to assemble, package and
market trays, packs and custom procedure kits in the Continental USA
and Canada (see ITEM #9, "Management's Discussion and Analysis of
Financial Condition and Results of Operations, Acquisitions and
Dispositions, Robotic Technology License Agreement");
in July 1995 officially opened its Winnipeg manufacturing facility and
in September 1995 shipped its first order of kits and trays for
sterilization.
obtained a listing as a 'senior board company' on the Vancouver Stock
Exchange on January 15, 1996;
obtained U.S. Food and Drug Administration ("FDA") designation of the
Company's Winnipeg manufacturing facility as a 'Class 10,000 clean
room' (see ITEM #1, "Business of the Company, Operations, Regulatory
Process");
obtained registration in the USA with the Securities and Exchange
Commission under Section 12g of the 1934 Act;
in August 1996, commenced trading on the NASDAQ Small Cap Market,
under symbol NHMCF;
in September 1996, completed an upgrade to its robotic packaging
technology and developed new feeder assemblies for the placement of
various medical tray and kit components;
in September 1996, acquired the Liquid Division of Arjo Canada Inc.
(see ITEM #9, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Acquisitions and Dispositions,
Liquid Division of Arjo Canada Inc.");
in January 1997, completed the Special Warrant ("SW") Private
Placement;
in February 1997, acquired the on-going business and certain assets of
Huntington Laboratories Gam-Med Division, Inc., including a 15,253
square foot manufacturing facility located in Antioch, Illinois, USA.
(see ITEM #9, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Acquisitions and Dispositions,
Huntington Laboratories Gam-Med Division, Inc.");
in March 1997, co-founded NHLC, a private Nevada company established
to manage the purchasing and distribution of medical products,
including those of the Company, to hospital groups in the USA;
in August 1997, through its 50% interest in NHLC, entered into a 10-
year agreement with Sysco Corporation to provide material distribution
to integrated hospital systems (see ITEM #9, Management's Discussion
and Analysis of Financial Condition and Results of Operations,
Acquisitions and Dispositions, National Healthcare Logistics, LLC";
in September 1997, completed the acquisition of certain textile rights
from Importex (see ITEM #9, Management's Discussion and Analysis of
Financial Condition and Results of Operations, Acquisitions and
Dispositions, Textile Rights, Importex Corporation"); and
in October 1997, completed the Convertible Note ("CN") Private
Placement.
in November 1997, signed definite agreement to purchase 100% of
privately-held Medi Guard Inc., a leading Canadian manufacuturer of
cellulose based disposable protective products.
Products
The Company's business consists of the assembly and packaging of sterile
and non-sterile ready-to-use custom procedure trays, packs and kits,
containing mostly disposable medical/surgical products, for hospitals,
outpatient surgery centres, dental and medical clinics, retirement homes,
homecare providers and multi-level care facilities. The Company produces
medical and surgical products under its own brand name.
The Company's product line is comprised of several hundred items, ranging
in price from $1.00 to $1,900 based on the complexity of each item. The
Company's production cost is estimated as follows:
Patient Care Custom Proced
Trays ure Trays
Direct Cost (labour and 55% to 68% 40% to 55%
materials)
Indirect Cost (indirect labour, 12% to 15% 12% to 15%
manufacturing supervision, etc.)
To date, the Company's products include the following:
patient care trays
custom procedure kits
medical, speciality and diagnostic trays
wound care kits and mother/baby kits
NCP liquid products
surgical textiles
antimicrobial products
Patient Care Trays
Sterile patient care trays include those for dressings, urinary
catheterization, irrigation, and suture removal. Non-sterile patient care
trays include those for mouth care, shave preparation and enema
administration.
Custom Procedure Kits
All of the Company's custom procedure kits (which include orthopaedic kits,
eye packs, laparoscopy kits, anthroscopy kits and cardiovascular kits) are
sterile. The main custom procedure products have been developed. A custom
procedure kit is a single tray/package containing a procedure-ready set of
customer specified disposable supplies in a pre-determined configuration.
Typically, the product is aseptically wrapped, sterilized and delivered to
the customer as needed. The custom kits are designed to meet individual
customer specifications. Contents may be as simple as a double-wrapped
bowl, pitcher and cup with lid to a complex tray of items for open heart
surgery, including a bulky collection of towels, gowns and drapes. The
majority of the items included in the custom kits are disposable. As an
example, a typical custom kit for a cataract procedure would include all of
the following items:
* Latex Gloves * Mayo Stand Cover * Table Cover
* Med Cup * Suture Bag * Syringe 3cc L/L
* Saline * Wrap 23" x 24" * Tray
* Cotton Tip Applicator * Eye Pad * Sponge 3" x 3"
* Sponge 8" x 4" * Incise Drape * Wrap 54" x 54"
* Eye Spears
Medical, Specialty and Diagnostic Trays
Medical, specialty and diagnostic trays cover such procedures as regional
anaesthesia, lumbar puncture and myelogram. This product line is still
under development.
Wound Care Kits and Mother/Baby Kits
The Company has introduced two other product lines, namely the wound care
kits and mother/baby kits, for the homecare market. The Company is not
aware of any current competition existing for these products. The
mother/baby kits each contain four days of supplies commonly required by
mothers and newborns upon their discharge from hospital following the
infant's birth.
NCP Liquid Products
Pursuant to the Arjo Agreement (see ITEM #9, "Management's Discussion and
Analysis of Financial Condition and Results of Operations, Acquisitions and
Dispositions, Liquid Division of Arjo Canada Inc."), the following lists
the private label products (the "NCP Products") for which formulae has been
transferred by Arjo to NCP:
Mouthwash/Mouthrinse Shampoo and Body Wash
Hair Conditioner High Powered Cleanaway
Whirlclean Vita Health Vitamin E Cream
Hand and Body Lotion Tub Cleansers
All Purpose Disinfectant Medicated and Non-Medicated Skin Creams
Antiseptic Liquid Hand Soaps Scrubs and Preps
<APGE>
Surgical Textiles
Pursuant to the Importex Assignment (see ITEM #9, "Management's Discussion
and Analysis of Financial Condition and Results of Operations, Acquisitions
and Dispositions, Importex Corpora-tion"), the Company acquired the
exclusive rights to distribute and sell Mertex and Mertex Plus protective
textiles. These state-of-the-art textiles are used to manufacture reusable
surgical gowns and drapes. Mertex and Mertex Plus offer technologically
advanced protection from bodily fluids and bacterial contamination. With a
life expectancy of 80 uses, these fabrics are not only economical, but
reduce medical waste.
Antimicrobial Products
Pursuant to the Gam-Med Agreement (see ITEM #9, "Management's Discussion
and Analysis of Financial Condition and Results of Operations, Acquisitions
and Dispositions, Huntington Laboratories Gam-Med Division, Inc."), the
Company's subsidiary has agreed to purchase Ecolab iodine products, which
will be sold by the Company both separately and as part of a kit/tray.
Proprietary Protection
Neither the Company nor Excelco has made application for patent protection
relating to the Robotic Technology.
The Arjo Agreement transferred any outstanding service marks, trademarks,
trade names and copyrights provided to NCP solely for the purpose of
manufacturing and distributing of products for the authorized person(s)
selling those products.
The Gam-Med Agreement transferred all proprietary patents relating to the
fusion moulding process technology acquired by NHMC US thereunder.
The Importex Agreement gives the Company exclusive North American and
European marketing rights for Mertex and Mertex Plus for five years.
Market and Competition
The statistical information provided throughout this section has been
sourced from reports and public offering disclosure published by
competitors believed by Management of the Company to be accurate, from
common and general industry knowledge, and knowledge of the Company's
executive obtained through experience in the industry and related
activities.
The Market
Kits and Trays Market
The Company has entered the procedure tray segment of the medical device
market. This segment is comprised of patient care trays, custom procedure
kits and diagnostic trays. The Company's management estimates that in
North America, the market for patient care trays is approximately $1.3
billion annually and growing at a minimum rate of 5% per year, while the
market for custom procedure kits and diagnostic trays is approximately $1.8
billion annually and growing at a minimum of 10% per year. The market for
such products in Europe and elsewhere cannot presently be determined.
The market for the Company's procedure tray products is comprised of users
of medical and surgical device products such as hospitals, outpatient
surgery centres, dental and medical clinics, retirement homes, homecare
providers and multi-level care facilities. The Company has marketed its
procedure tray products to various healthcare facilities throughout North
America, through independent distributors, and sales to date have been made
in Canada and Asia. Although the Company does not intend to provide
exclusive distribution rights to its procedure tray products to any party,
the Company's marketing efforts to date have resulted in alliances with the
following Canadian distributors to cover the Provinces noted:
Medical Mart Supplies Limited - Quebec and Ontario
Cascade Dismed - Quebec and Ontario
Stevens and Sons - Western Canada and Ontario
Associated Healthcare Systems Inc. - British Columbia and Alberta
Can-Med Surgical Supplies Limited - Nova Scotia and Newfoundland
No formal written agreements have been entered into between the Company and
any of the above distributors, all of which are arms' length to the
Company.
The United States and Europe are the Company's other primary targets for
all its products. The Company is permitted by the FDA to market all its
current patient care trays and custom procedure kits in the USA. The
Company's sales and marketing efforts have resulted in establishing an
independent national sales team in the USA; the Company also signed with
two European distributors, Althin Medical A.B. of Sweden and Mediset GMBH
of Germany. The Company has also co-founded NHLC which offers and manages
alternative material distribution channels to integrated hospital systems.
In August 1997, NHLC signed a 10-year agreement with Sysco Corporation to
provide material management distribution systems to hospitals throughout
the USA.
Liquid Products Market
NCP products currently compete in the $450 million consumable chemicals
segment of the $2.1 billion healthcare infection control market in North
America. NCP's current product mix is focused on the long term care
segment, with secondary applications in hospitals. NCP products are
currently supplied through Arjo Industries. The Company is seeking
regional and national distributors to facilitate access to all segments of
the North American market.
Competition
Kits and Trays Competition
The Canadian market for kits and trays is dominated by two companies,
Baxter Canada Inc. and Ingram & Bell Inc. Baxter International Corporation
("Baxter") of Deerfield, Illinois, has more than 50% of the tray market in
both the USA and Canada in all market sub-segments. Baxter is positioned
as the leading manufacturer and marketer of products and services used in
healthcare settings. Ingram & Bell Inc. ("I & B"), a subsidiary of MDS
Health Group Ltd., is the leading Canadian owned distributor of
medical/surgical supplies and equipment. I & B only participates in the
Canadian market. In June 1997, the parent companies of Baxter and I & B
merged to form a new company, Source Medical, to service the Canadian
market.
Patient Care Trays
Baxter supplies 50% of the $50 million market in Canada by importing
trays that are private branded for them by a contract manufacturer. I
& B controls 30% of the market via their own manufacturing facility in
Canada. The balance of the market is very fragmented with five or six
small players. This market has achieved a substantial conversion to
single use product in hospitals but continues to grow at a minimum
rate of 5% per year due to market expansion in other areas.
Custom Procedure Trays
I & B has a minor position in this segment in Canada. This market is
served by U.S. manufacturers exporting product and serving the market
by a direct sales force or via select distributors. In addition to
Baxter Custom Sterile, a division of Baxter, the major providers are
Maxxim and Deroyal. This market is in its infancy in Canada and
growing at a minimum rate of 20% per year. This market represents an
opportunity area for the Company.
Medical Specialty and Diagnostic Trays
I & B and Preferred Medical Products of Thorald, Ontario, are the two
Canadian manufacturers of these products. I & B supplies their own
requirements for the Canadian market. Preferred Medical Products
markets their product directly in Canada and via specialty
distributors in the U.S. The other entrants are Baxter and Portex
(the trademark for Smith Industries Medical Systems), both of whom
have major market shares in Canada and the U.S. There are
manufacturers that supply only the U.S. market, such as Kendall
Healthcare Products Co.
This segment represents an area of innovation and relatively high
profit potential for the Company. The complexity of the product and
the direct decision making process by the end user removes this
product segment from the commodity area. While price is important in
the buying process, innovation, product design and personal rapport
are the key factors for success.
Liquid Products Competition
Skincare Products
The major competitors in this segment are Sween, Calgon and Huntington
Laboratories. Skincare products are Sween's primary market focus,
whereas Calgon and Huntington access this segment as add on sales from
their handwashing customers.
Bathing Products
Competition consists of Sween and Calgon, as well as companies such as
Chester Labs and Amada.
Antimicrobial Handwashing Products
Calgon and Huntington Laboratories are the current market leaders.
Surgical Scrub Products
This is a highly fragmented component of the overall market, with
Purdue Fredrick, Becton-Dickenson, Baxter Healthcare, and Huntington
Laboratories being the key competitors.
Pricing Policy
It is the Company's policy to price its products at a slight discount to
market.
Competitive Environment
Consolidation of the kit and tray industry has been occurring for the past
few years as distributors divest of manufacturing subsidiaries in order to
return to their core business and manufacturers acquire small regional
competitors to realize the benefits of increased economics of scale. This
is evidenced by the actions of several competitors in the industry: the
merger of the parent companies of Baxter and I & B; the sale by Owens and
Minor of its unprofitable tray business to Sterile Concepts in 1990; the
sale by Johnson & Johnson of Sterile Design to Maxxim Medical Inc. in 1993;
the purchase by Isolyser of MedSurg; the desire by I & B to divest of its
manufacturing facilities in Canada; and the purchase by Maxxim of Sterile
Concepts.
The following table indicates the current North American market share (with
respect to the kit and tray product segments in which the Company competes)
estimated by the Company to be held by certain competitors:
Market Share
Name of Competitor
U.S. Canada
Baxter 44% 0%
Maxxim Medical 23% 4%
Deroyal 10% 10%
Source Medical -- 80%
Others* 23% 6%
Total 100% 100%
* Smaller manufacturing competitors include the Company, C.R. Bard,
Seamles, Cypress Medical Products and Trinity Laboratories.
The foregoing estimates are based upon the knowledge and experience within
the kit and tray industry possessed by management of the Company.
Key Success Factors
Low Cost Producers
Price competition increases the importance of reducing production costs.
The Company intends to become the low cost producer of procedure trays with
its automated assembly line, allowing the Company to establish a cost
advantage over its U.S. competitors. In addition, a Canadian manufacturing
facility should reduce transportation and holding costs relative to U.S.
competitors.
Access to Distribution Networks
In attempting to achieve efficient distribution of product, existing
competitors have shown their commitment to developing sophisticated
material handling systems for their customers to achieve this goal by
introducing Just-In-Time ("JIT") inventory and practices.
The Company intends to access customers, through independent distributors,
in a quick and efficient manner in order to pass the benefits of lower
production costs on to the consumer. (See ITEM #9, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Acquisitions and Dispositions", for information relating to the Company's
recent acquisitions.)
Customer Service
A high commitment to service and a fast response to consumer demands are
critical to success in this market. The Company's automated production
allows it to achieve a timely product turnaround (from order to shipment)
in 45 days, as opposed to the industry standard which management believes
is 90 days.
Reference should be made to ITEM #1, "Business of the Company, Products"
for additional information concerning the pricing of the Company's
products. In addition, reference should be made to disclosure under ITEM
#1, "Business of the Company, Description of Business and General
Development" with respect to the Company's marketing plan.
Marketing Plans and Strategies
Management believes that the healthcare industry is currently undergoing
significant transformations driven not by legislation, but by major
purchasers of healthcare. One important element of this reform is the
continuous effort on the part of healthcare providers to streamline
routines and maximize efficiencies by eliminating labour intensive
processes and reducing procedural costs without negative impact on the
outcome of those procedures.
The Company's approach to serving the healthcare industry is to introduce
cost effective systems. New and progressive concepts for healthcare
industry supply and distribution will be continuously explored by the
Company in order to assist end users in reducing and having better control
over their costs. Although the Company expects to expand its growth in
Canada, its primary focus will be to the U.S. market where it believes that
the low Canadian dollar, low production cost and quick purchase order
turnaround will enable it to enter into strategic business alliances with
established North American marketing and distribution companies such as the
distribution agreement entered into August 1997 between NHLC and Sysco
Corporation.
Since the initial public offering, the Company has added the following key
individuals to assist with its sales and marketing program:
Gordon John Farrimond - VP, Sales and Marketing, and Director;
Nancy Clark - Vice President Operations; and
John Stone - VP, Mertex and Mertex-Plus Surgical Division.
Recent acquisitions have resulted in synergistic opportunities for sales
and marketing and have provided distribution channels to a broader and more
established market.
The Company advertises in trade magazines and has attended numerous trade
and investment shows throughout North America. Since the initial public
offering, the Company has expended over $500,000 on administration costs to
cover the Company's marketing program. The Company anticipates that over
the next 12 months, over $1,000,000 will be required to meet the costs of
its marketing program which is designed to meet its stated business
objectives, the major components of which are as follows:
Marketing Component Monthly Cost
Advertising $ 10,000
Brochures and Promotional 5,000
Conferences 2,000
Samples 3,000
Salaries and Consultants 70,000
Tradeshows 2,000
Total $ 92,000
Risk Factors
Investment in the Company's common shares must be considered highly
speculative due to the nature of the Issuer's business and its present
stage of development. Specific risk factors to be considered include, but
are not limited to, the following:
(1) The market for the Company's products is highly competitive and
subject to increasing competition based on price. The Company has a
limited operating history and existing competitors may have greater
financial and managerial resources, operating histories and name
recognition. There is no assurance that the Company will be able to
adapt to evolving markets and technologies, develop new products,
achieve and maintain technological advances or maintain a unit selling
price competitive with other products. (See ITEM #1, "Business of the
Company, Market and Competition".)
(2) The Company's operations currently rely upon the two computerized form-
fill seal units and two robotic units for the assembly and packaging
of its product.
(3) Receipt of the balance of the government financial assistance, and
repayment of the total amounts received, as disclosed under the
heading ITEM #9, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", are subject to certain
conditions.
(4) The Company is subject to government regulations in the jurisdictions
in which it distributes its products. Future changes in such
regulations may have an adverse impact on the operations of the
Company.
(6) Neither the Company nor Excelco has filed an application for patent
protection relating to the Robotic Technology.
(7) The Company is dependent upon the personal efforts and commitment of
its management team. The loss of senior management personnel may
adversely affect the Company.
(8) The Company's business may be affected by other factors beyond its
control, such as economic recessions and adverse fluctuations in
foreign exchange rates.
(9) The Company has not paid dividends in the past and does not anticipate
paying dividends in the near future. The MG Agreement and the WEDD
Agreement place certain restrictions on the payment of dividends by
the Company. (See ITEM #9, "Management's Discussion and Analysis of
Financial Condition and Results of Operations".)
(10)Certain of the Company's directors and officers may serve as directors
or officers of, or have shareholdings in, other companies and, to the
extent that such other companies may compete with the Company,
conflicts of interests may arise which may be harmful to the interests
of the Company. (See ITEM #13, "Interest of Management in Certain
Transactions".)
(11)The Company's business utilizes a new technology that is being
developed for the purpose of the Company's business. Accordingly, the
Company is subject to risks associated with start-up companies,
including start-up losses, uncertainty of revenues, markets and
profitability and the necessity of additional funding. In addition,
the technology acquired by the Company and being developed by the
Company has not yet been proven in a production environment on an
ongoing basis.
(12)The evolving nature of the healthcare industry in North America in
terms of cost containment is leading to changing purchasing practices
amongst purchasers at various institutions. This change in purchasing
environment (i.e. towards a more centralized buying approach) may put
additional pressure on the Company to compete on a price basis in
order to achieve adequate market penetration and maintain customer
loyalty. There can be no assurances that the Company will be able to
implement its business strategy with its current pricing structure.
Plan of Operations
Sources of Funds
At 6/30/97, the Company had working capital of $5,456,000, including
$4,213,255 in cash and equivalents.
The Company received the final advance on the MG Loan of $561,000 in August
1997; and received an additional advance from WEDD of $150,655 in October
1997.
In addition, in October 1997, the Company issued Convertible Notes in the
amount of US$5,000,000. The Convertible Notes bear cumulative dividends at
the rate of 6% per year, payable in cash or in common shares. The
Convertible Notes entitle the holders to acquire, without additional
payment, Convertible Debentures in the aggregate amount of US$5,000,000 and
an aggregate of 250,000 CN Warrants. The Convertible Debentures are
convertible into common shares at a conversion price equal to the lower of
(a) US$2.33 or (b) 85% of the closing price of the Company's common shares
on NASDAQ on the conversion date.
Each CN Warrant is exercisable for two years (until 10/1/99), and entitles
the holder to purchase one common share at US$4.76 per share in the first
year and at US$5.20 per share during the second year. A holder of a
Convertible Debenture has the right to convert same at any time during the
Debenture Conversion Period, commencing the earlier of: (a) December 30,
1997 or (b) the later of the effective date of a Registration Statement
filed with the US Securities and Exchange Commission under the 1933 Act
regarding the Convertible Notes or the date on which the last of the
receipts for a prospectus filed with British Columbia Securities Commission
regarding registration of the Convertible Debentures and CN Warrants, and
maturing on October 2, 1998.
The Company has 1,267,154 stock options outstanding entitling the holders
to acquire additional shares at prices ranging from $2.00 to $6.13 per
share. The Company has 1,076,000 share purchase warrants outstanding
entitling the holder to acquire additional shares at prices ranging from
$3.50 to $7.94 per share.
In addition, in January 1997, the Company issued 1,600,000 Special Warrants
at $6.00 each. Each Special Warrant entitles the holder to acquire,
without additional payment, one SW Unit. Each SW Unit consists of one
common share and one share purchase warrant which entitles the holder to
purchase one additional common share at $7.00 until 1/9/98. 1,509,000 of
these Special Warrants remain outstanding.
The Company believes that it has sufficient working capital to sustain
operations through Fiscal 1998. The Company anticipates profitable and
self-sustaining operations to be achieved by the end of Fiscal 1998.
Uses of Funds
While the Company generated $4.9 million in revenue from sales in Fiscal
1997, net losses of $4.2 million were still reported. During Fiscal 1998,
the Company anticipates generating about $26 million in revenue and a small
profit.
The Company expenses research/development costs in the period incurred and
anticipates about $300,000 of such expenses during Fiscal 1998.
In addition, the Company anticipates capital expenditure of about $4
million, including the Medi Guard Inc. acquisition.
Finally, the Company anticipates utilizing about $3 million to reduce long-
term debt and capital leases.
Anticipated Changes to Facilities/Employees
The Company anticipates acquiring material facilities during Fiscal 1998 to
facilitate manufacturing and marketing growth. The Company anticipates
staffing at the Vancouver, British Columbia office will remain the same in
Fiscal 1998. Staffing at the Winnipeg, Manitoba head office/manufacturing
facility is anticipated to increase modestly from 84 employees at 6/30/97.
Staffing at the Antioch, Illinois, USA, manufacturing facility is
anticipated to increase modestly from 20 employees at 6/30/97. Recently
acquired, Medi Guard Inc. has thirty employees.
Research and Development Activities
During Fiscal 1995, the Company expended approximately $1.4 million on
research and development efforts, primarily to develop and fine tune its
robotic manufacturing/packaging technology. During Fiscal 1996, the
Company expended approximately $0.5 million on such efforts, primarily to
develop a second generation of its technology, with new feeders for its
robots to handle various components for new products. During Fiscal 1997,
the Company expended approximately $0.4 million on such efforts, primarily
to fine tune its robotic manufacturing/packaging technology. During Fiscal
1998, the Company expected to expend approximately $0.3 million on such
efforts, primarily to generate fourth generation technology aimed at
further automation of the manufacturing facility.
USA vs. Foreign Sales/Assets
During Fiscal 1995, the Company generated no revenue.
During Fiscal 1996, the Company generated $171,217 of its revenue through
sales in Canada and $384,888 in the United States.
During Fiscal 1997, the Company generated $2,423,366 of its revenue through
sales in Canada and $2,482,035 in the United States.
At 6/30/96 and 6/30/97, all assets were located in Canada with the
exception of $1.1 million located in Antioch, Illinois, representing NHMC
Gam-Med Division US and $2.3 located in California representing laboratory
equipment.
Employees
At 11/30/97, the Company operated with the/services of its eight
Directors, eleven Executive Officers (six of whom are Directors), and
ninety-three (93) additional employees. In addition, recently acquired
Medi Guard Inc. has thirty employees. There is no collective bargaining
agreement in place.
ITEM 2. DESCRIPTION OF PROPERTY
General
The Company owns a 71,000 square foot manufacturing plant, located on a
3.396 acre fully developed site at 251 Saulteaux Crescent, Winnipeg,
Manitoba. This facility is located in the Murray Industrial Park, close to
the Winnipeg International Airport. At the Winnipeg facility, kits and
trays are assembled, and liquid products are formulated and produced.
Where necessary, sterilization of the Company's kits and trays occurs
following assembly of the components in the Winnipeg facility.
Sterilization of the Company's kits and trays is provided under contract by
various companies at arms'-length to the Company. The sterilization
process currently utilizes technology associated with ethylene oxide gas.
The Company also owns a 15,253 square foot manufacturing plant, located on
a 9.568 acre fully developed site at 712 Anita Street, Antioch, Illinois.
Using a proprietary plastic fusion molding process, NHMC US custom packages
a wide variety of antimicrobial solutions in patented disposable plastic
dispensers.
The Company has obtained general liability insurance in the amount of
$5,000,000. While the Company believes that its insurance provisions are
adequate for its operations, there can be no assurance that the coverage
maintained by the Company will be sufficient to cover any future claims or
will continue to be available in adequate amounts or at a reasonable cost.
Regulatory Process
All phases of the Company's manufacturing, sterilization and distribution
process in Canada are governed by the Food and Drug Act, R.S., c.F-27, s.1
(the "CFDA"). The class of medical devices forming part of the Company's
products sold in Canada requires the filing of a medical device
notification form with the Bureau of Radiation and Medical Devices, Device
Evaluation Division (the "Bureau"), within 10 days of the first completed
sale of the device. The purpose of this filing is to inform the Bureau
that the Company is marketing a product which conforms with the Bureau's
requirements. To date, all requisite filings have been made by the Company
under the CFDA.
In addition, the export of certain products of the Company from Canada is
subject to further regulation.
Distribution of the Company's products in the U.S. is subject to FDA Good
Manufacturing Practices Regulations ("GMPR") CFR 801 and CFR 820. The main
elements of the GMPR cover quality assurance systems, building environment,
equipment and calibration thereof, components and raw materials, labelling,
packaging, distribution, quality control testing, quality control
documentation and product failure complaints. In the U.S., medical device
manufacturers and importers are required to file premarket notifications
under s. 510(k) of the Federal Food, Drug and Cosmetic Act for each type of
device with the FDA. As a general practice, for each new device that the
Company develops, the Company files a premarket notification with the FDA.
Effective May 20, 1997, the FDA established Interim Regulatory Guidance
("IRG") exempting pre-market notification for packs and trays. As a result
of the IRG, the Company is allowed to market all of its current packs and
trays in the U.S.
The Company's Winnipeg manufacturing facility has been designated by the
FDA as a 'Class 10,000 clean room'. Clean room classification specifies
concentration limits for airborne particles within the confines of a
designated space; the lower the classification number, the cleaner the
environment. Class 100,000 is the minimum requirement for the Company's
type of operation. The Company's Class 10,000 clean room designation means
its Winnipeg facility is 10 times cleaner than the minimum requirement.
Suppliers
There exist approximately 400 to 500 suppliers from which the Company may
purchase the components for its kits and trays. The Company purchases such
components from numerous North American suppliers based upon an evaluation
with emphasis on quality and pricing. Major product purchases of the
Company include procedural hospital tray components and packaging
materials. The Company also relies on supplies from its own subsidiaries.
Equipment
The Company has purchased most of its automated insertion equipment,
together with two fully computerized Tiromat 3000 Form-Fill-Seal packaging
units (the "Tiromats"). The Company utilizes this equipment together with
two leased robotic units to assemble and package patient care trays and
procedural kits. The Tiromats form trays, seal packages, and print barcode
and product/customer related information. The robotic units pick and place
the tray components. The first robotic unit has been utilized since
commencement of production in July 1995; the second robotic unit was
installed in July 1997 and will be operational in Fiscal 1998. The cost of
leasing the robotic units is covered under the existing Lease Agreements
(referred to below).
As at September 30, 1997, the Company has spent $962,942 to install and
upgrade its robotic units. The Company is in the process of finalizing its
fourth generation robotic packaging units. These additional units will be
used to package operating room packs. The Company has allocated $250,000
from the current Funds Available towards the upgrade and installation of
its fourth generation robotic units.
The Company leases specialized equipment (the "Equipment"), including the
robotic packaging units, under three capital leases (collectively, the
"Lease Agreements") from arms'-length parties, D & T Leasing, Inc. and D &
T Leasing Limited Partnership (jointly, the "Lessors"). The Lease
Agreements have been entered into by NHMC US, which was established for the
specific purpose of entering into the Lease Agreements on behalf of its
parent company, the Company. The Lease Agreements provide for the
following payments by NHMC US over the next five fiscal years of the
Company (converted from U.S. to Canadian dollars using the exchange rate as
at June 30, 1997):
Lease Lease Lease Total
NHM#1094-001 NHM#1094-002 NHM#1194
1998 $1,131,226 $ 619,818 $675,705 $2,426,749
1999 1,131,226 619,818 619,400 2,370,444
2000 1,131,226 619,818 nil 1,751,044
2001 1,131,226 619,818 nil 1,751,044
2002 377,077 309,909 nil 686,986
Total Minimum 4,901,981 2,789,181 1,295,105 8,986,267
Payments
Less Interest 1,055,670 619,705 87,355 1,762,730
approximating 10.4%
to 11.5%
3,846,311 2,169,476 1,207,750 7,223,537
Less Current Portion 726,397 390,484 601,671 1,718,552
Balance of Obligation $3,119,914 $1,778,992 $ 606,079 $5,504,985
Upon expiration of the initial terms of the Lease Agreements, the Lease
Agreements will automatically renew for successive three month terms unless
either party gives notice to the contrary. NHMC US has the option to
purchase the equipment leased under Leases NHM#1094-001 and NHM#1094-002 at
the expiry of their respective terms by paying the fair market value of the
equipment. NHMC US also has the option to purchase the equipment leased
under Lease NHM#1194 at the expiry of the term by paying the fair market
value of the equipment, which has been agreed to be nominal.
As the owner of the Robotic Technology incorporated into the Equipment,
Excelco has the right, pursuant to an agreement, dated October 26, 1994
(the "Guarantee Agreement") with the Lessor, to acquire the leased robotic
packaging unit for $100 if NHMC US does not exercise its option to acquire
the same upon expiration of Lease NHM#1094-001.
Reference is made to ITEM #9, Management's Discussion and Analysis of
Financial Condition and Results of Operations, Acquisitions and
Dispositions, Robotic Technology License Agreement" for specific
information relating to the grant by Excelco to the Company of the
exclusive right to assemble, package and market custom procedure tray
packaging in North America using Excelco's Robotic Technology.
ITEM 3. LEGAL PROCEEDINGS
Equipment Lease Dispute
Since Fiscal 1995, the Company was in dispute with the original lessor in
respect of capital leases 1094-001, 1094-002 and 1194. The lessor did not
recognize the validity of a settlement agreement signed in Fiscal 1995.
The Company believed that it had strong arguments to support the validity
of the settlement agreement. As a result, the Company made certain
adjustments in 1995 to the various equipment under capital leases and the
lease obligations based on the then interpretation of the settlement terms.
During Fiscal 1997, the dispute was finally settled and the leases were
assumed by a new lessor. The terms were similar to the 1995 settlement
agreement except for the following:
a) the refundable deposit on equipment paid by the Company was
applied against the lease liability by the lessor; and
b) the implicit interest rate of the capital lease obligations
was reduced as a result of the settlement.
Accordingly, the capital lease obligations, the respective equipment under
capital leases and the refundable deposit on equipment were adjusted
accordingly.
Other than disclosed above, the Company knows of no material, active or
pending legal proceedings against them; nor is the Company involved as a
plaintiff in any material proceeding or pending litigation.
Other than disclosed above, the Company knows of no active or pending
proceedings against anyone that might materially adversely affect an
interest of the Company.
ITEM 4. CONTROL OF REGISTRANT
The Registrant is a publicly-owned Canadian corporation, the shares of
which are owned by Canadian residents, US residents, and residents of
other countries. The Registrant is not controlled directly or indirectly
by another corporation or any foreign government, except as disclosed
below.
Table No. 2 lists as of 11/30/97, all persons/companies known to the
Registrant to be the beneficial owner of more than ten percent (10%) of the
outstanding common shares of the Registrant.
Table No. 2
10% Shareholders
Title Amount and Nature Percent
of of Beneficial of
Class Name of Beneficial Owner Ownership Class #
Common Janice Shahsavar (1) 4,491,805 36.1%
Total 4,491,805 36.1%
120,000 shares are escrowed where release is controlled by
Canadian regulatory authorities; refer to ITEM #14,
"Escrowed Performance Shares".
100,000 represent currently exercisable stock options.
4,271,805 shares are held indirectly through Excelco, a private
company controlled by Ms. Shahsavar.
1,071,100 shares held by Mahmood (Mac) Shahsavar excluded.
# Based on 12,474,331 shares outstanding as of 11/30/97.
Table No. 3 lists as of 11/30/97, all Directors and Officers who
beneficially own the Registrant's voting securities and the amount of the
Registrant's voting securities owned by the Directors and Executive
Officers as a group.
Table No. 3
Shareholdings of Directors and Officers
Title Amount and Nature Percent
of of Beneficial of
Class Name of Beneficial Owner Ownership Class #
Common Janice Shahsavar (1) 4,491,805 36.0%
Common Mahmood (Mac) Shahsavar (2) 1,071,100 8.3%
Common Morteza Seyed Torabian (3) 675,874 5.3%
Common Alice Elaine Affleck (4) 290,600 2.3%
Common Aristotle (Telly) John Mercury (5) 175,498 1.4%
Common Robert Alexander Jackson (6) 81,400 0.7%
Common Gordon John Farrimond (7) 57,900 0.5%
Common Reginald Adrian Ebbeling (8) 32,000 0.3%
Common Ross Scavuzzo (9) 20,000 0.2%
Common Darrell Wayne Van Dyke (9) 20,000 0.2%
Common Richard J. Johnson (10) 19,250 0.1%
Common John Ryrie Stone (11) 27,000 0.2%
Common Nancy Clark (12) 17,000 0.1%
Total Directors/Officers 6,979,427 55.6%
(1) 120,000 shares are escrowed where release is controlled by Canadian
regulatory authorities; refer to ITEM #14, "Escrowed Performance
Shares".
100,000 represent currently exercisable stock options. 4,271,805
shares
are held indirectly through Excelco, a private company controlled by
Ms.
Shahsavar. 1,063,600 shares held by Mahmood (Mac) Shahsavar
excluded.
(2) 690,000 shares are escrowed where release is controlled by Canadian
regulatory authorities; refer to ITEM #14, "Escrowed Performance
Shares".
370,000 represent currently exercisable stock options. Excludes
4,491,805 shares held directly/indirectly by Janice Shahsavar.
(3) 120,000 shares are escrowed where release is controlled by Canadian
regulatory authorities; refer to ITEM #14, "Escrowed Performance
Shares".
210,779 represent currently exercisable stock options. 17,000
represent
currently exercisable Special Warrants which are held indirectly
through
Paymon Trading, a private company controlled by the Torabian family.
(4) 80,000 shares are escrowed where release is controlled by Canadian
regulatory authorities; refer to ITEM #14, "Escrowed Performance
Shares".
75,000 represent currently exercisable stock options.
(5) 30,000 represent currently exercisable stock options.
(6) 50,000 shares are escrowed where release is controlled by Canadian
regulatory authorities; refer to ITEM #14, "Escrowed Performance
Shares".
28,500 represent currently exercisable stock options.
(7) 47,500 represent currently exercisable stock options.
(8) 17,000 represent currently exercisable stock options.
(9) 20,000 represent currently exercisable stock options.
(10) 19,250 represent currently exercisable stock options.
(11) 10,000 represent currently exercisable stock options.
(12) 17,000 represent currently exercisable Special Warrants.
# Based on 12,474,331 common shares outstanding as of 11/30/97 and stock
options/Special Warrants held by each beneficial owner which are
exercisable within 60 days.
ITEM 5. NATURE OF TRADING MARKET
The Company's common shares trade on the Senior Board of the Vancouver
Stock Exchange in Vancouver, British Columbia, Canada, having the trading
symbol "NHM" and CUSIP# 635902-10-9. The common shares were posted/called
for trading on 1/15/96.
The Company's common shares trade on the NASDAQ Small Cap Stock Market in
the United States, having the trading symbol "NHMCF". Trading on NASDAQ
was initiated on 8/14/96.
Table No. 4 lists the trading activity on the Vancouver Stock Exchange
during the last six fiscal quarters. The closing price on 11/30/97 was
CDN$4.20.
Table No. 4
Vancouver Stock Exchange Trading Activity
Canadian Dollars__
Fiscal Quarter Ended Volume High Low Close
June 30, 1997 589,772 $7.75 $5.50 $7.25
March 31, 19976 500,399 8.00 6.00 7.00
December 31, 1996 1,805,605 8.00 3.80 7.00
September 30, 1996 598,152 4.85 3.80 4.15
June 30, 1996 931,720 $4.46 $2.66 $4.30
March 31, 1996 1,669,783 3.15 2.00 2.75
Table No. 5 lists the trading activity on the NASDAQ Small Cap Stock
Exchange during the last four fiscal quarters. The closing price on
11/30/97 was US$2.89.
Table No. 5
Vancouver Stock Exchange Trading Activity
_____US Dollars______
Fiscal Quarter Ended Volume High Low Close
June 30, 1997 1,177,701 $5.94 $3.88 $5.38
March 31, 1997 1,236,000 6.00 4.25 5.09
December 31, 1996 2,973,400 6.62 2.75 5.25
September 30, 1996 95,000 3.62 2.75 3.06
The Company's common shares are issued in registered form. Pacific
Corporate Trust Company (located in Vancouver, British Columbia, Canada) is
the registrar and transfer agent for the common shares.
On 10/15/97, the shareholders' list for the Company's common shares showed
126 registered shareholders and 12,474,331 shares outstanding. 40 of
these registered shareholders were U.S. residents, holding 2,751,695 shares
or 22% of the issued stock.
The Company has researched indirect holdings registered to the various
depository institutions and stockbrokerage firms and estimates that there
were 3300 "holders of record" resident in the United States holding the
above referenced 2,751,695 shares.
Based on the above research and other research, the Company estimates that
there are in excess of 4300 beneficial shareholders.
The Company's common shares are not registered to trade in the United
States in the form of American Depository Receipts (ADR's) or similar
certificates.
The Company has not declared any dividends since incorporation and does not
anticipate that it will do so in the foreseeable future. The present
policy of the Company is to retain future earnings for use in its
operations and the expansion of its business.
Pursuant to the MG Agreement the Company is restricted from paying any
dividends for the first three years after the advance of funds under the MG
Agreement (until October 1998).
In addition, the WEDD Agreement prohibits the Company from paying
dividends without the prior written approval of the FGWEDD until the
WEDD loan is repaid in full.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS
AFFECTING SECURITY HOLDERS
The Investment Canada Act (the "ICA"), which became effective on
6/30/85, regulates the acquisition by non-Canadians of control of a
Canadian business enterprise. In effect, the ICA required review by
Investment Canada, the agency which administers the ICA, and approval
by the Canadian government in the case of an acquisition of control of a
Canadian business by a non-Canadian (other than a "NAFTA investor" as
defined in the ICA) where: (i) in the case of a direct acquisition
(for example, through a share purchase or asset purchase), the assets
of the business are $5 million or more in value; or (ii) in the case of
an indirect acquisition (for example, the acquisition of the foreign
parent of the Canadian business) where the Canadian business has assets
of $50 million or more in value or if the Canadian business represents
more than 50% of the assets of the original group and the Canadian
business has assets of $5 million or more in value. Review and approval
are also required for acquisition or establishment of a new business
in areas concerning "Canada's cultural heritage or national identity"
such as book publishing, film production and distribution, television and
radio, production and distribution of music, and the oil and natural gas
industry, regardless of the size of the investment.
In the context of the Company, in essence, three methods of acquiring
control of a Canadian business are regulated by the ICA: (i) the
acquisition of all or substantially all of the assets used in carrying
on the Canadian business; (ii) the acquisition, directly or
indirectly, of voting shares of a Canadian corporation carrying on the
Canadian business; (iii) the acquisition of voting shares of an entity
which controls, directly or indirectly, another entity carrying on a
Canadian business. An acquisition of a majority of the voting interests of
an entity, including a corporation, is deemed to be an acquisition of
control under the ICA. An acquisition of less than one-third of the
voting shares of a corporation is deemed not to be an acquisition of
control. An acquisition of less than a majority, but one-third or more,
of the voting shares of a corporation is presumed to be an acquisition
of control unless it can be established that on the acquisition the
corporation is not, in fact, controlled by the acquirer through the
ownership of voting shares. For partnerships, trusts, joint ventures
or other unincorporated entities, an acquisition of less than a majority
of the voting interests is deemed not to be an acquisition of control.
In 1988, the ICA was amended pursuant to the Free Trade Agreement
dated 1/2/88 between Canada and the United States to relax the
restriction of the ICA. As a result of these amendments, except
where the Canadian business is in the cultural, oil and gas,
uranium, financial services or transportation sectors, the threshold
for direct acquisition of control by U.S. investors and other foreign
investors acquiring control of a Canadian business from U.S. investors
has been raised from $5 million to $150 million of gross assets, and
indirect acquisitions are not reviewable.
In addition to the foregoing, the ICA requires that all other
acquisitions of control of Canadian businesses by non-Canadians are subject
to formal notification to the Canadian government.
These provisions require a foreign investor to give notice in the
required form, which notices are for information, as opposed to
review, purposes.
ITEM 7. TAXATION
The following summary of the material Canadian federal income tax
considerations generally applicable in respect of the common shares
reflects the Company's opinion. The tax consequences to any particular
holder of common shares will vary according to the status of that holder as
an individual, trust, corporation or member of a partnership, the
jurisdiction in which that holder is subject to taxation, the place where
that holder is resident and, generally, according to that holder's
particular circumstances. This summary is applicable only to holders who
are resident in the United States, have never been resident in Canada, deal
at arm's length with the Company, hold their common shares as capital
property and who will not use or hold the common shares in carrying on
business in Canada. Special rules, which are not discussed in this
summary, may apply to a United States holder that is an issuer that carries
on business in Canada and elsewhere.
This summary is based upon the provisions of the Income Tax Act of Canada
and the regulations thereunder (collectively, the "Tax Act, or ITA") and
the Canada-United States Tax Convention as amended by the Protocols thereto
(the "Tax Convention") as at the date of the Registration Statement and the
current administrative practices of Revenue Canada, Customs, Excise and
Taxation. This summary does not take into account Canadian provincial
income tax consequences.
This summary is not exhaustive of all possible income tax
consequences. It is not intended as legal or tax advice to any particular
holder of common stock and should not be so construed. Each holder
should consult his own tax advisor with respect to the income tax
consequences applicable to him in his own particular circumstances.
North American Free Trade Agreement (Canada)
The Investment Act was amended with the North American Free Trade
Agreement (NAFTA) to provide for special review thresholds for
Americans (including "American-controlled "entities" as defined in
the Investment Act). Under the Investment Act, as amended, an
investment in the Registrant's common shares by an American would be
reviewable only if it was an investment to acquire control of the
Registrant and the value of the assets of the Registrant was equal to or
greater than a specified amount (the "Review Threshold"), which
increases in stages. The Review Threshold is currently $150 million
and remains at $150 million in constant 1992 dollars (calculated as
prescribed in the Investment Act) after 1992.
Disposition of Common Shares
If a non-resident were to dispose of common shares of the Company to
another Canadian corporation which deals or is deemed to deal on a
non-arm's length basis with the non-resident and which, immediately
after the disposition, is connected with the Company (i.e., which
holds shares representing more than 10% of the voting power and more
than 10% of the market value of all issued and outstanding shares of the
Company), the amount by which the fair market value of any consideration
(other than any shares of the purchaser corporation) exceeds the
paid-up capital of the common shares sold will be deemed to be taxable
as a dividend paid by the purchasing corporation, either immediately or
eventually by means of a deduction in computing the paid-up capital of
the purchasing corporation, and subject to withholding taxes as
described below.
Under the Tax Act, a gain from the sale of common shares by a non-resident
will not be subject to Canadian tax, provided the shareholder (and/or
persons who do not deal at arm's length with the shareholder) have not
held a "substantial interest" in the Company (25% or more of the shares of
any class of the Company's stock) at any time in the five years preceding
the disposition. Generally, the Tax Convention will exempt from Canadian
taxation any capital gain realized by a resident of the United States,
provided that the value of the common shares is not derived principally
from real property situated in Canada.
Dividend
In the case of any dividends paid to non-residents, the Canadian tax is
withheld by the Company, which remits only the net amount to the
shareholder. By virtue of Article X of the Tax Convention, the rate of tax
on dividends paid to residents of the United States is generally limited
to 15% of the gross dividend (or 5% in the case of certain corporate
shareholders owning at least 10% of the Company's voting shares pending
ratafication of the Protocol amending the treaty; the Protocol has been
ratified by the USA and is awaiting ratification in Canada). In the
absence of the Tax Convention provisions, the rate of Canadian withholding
tax imposed on non-residents is 25% of the gross dividend. Stock dividends
received by non-residents from the Company are taxable by Canada as
ordinary dividends and therefore the withholding tax rates will be
applicable.
Where a holder disposes of common shares to the Company (unless the
Company acquired the common shares in the open market in the manner in
which shares would normally be purchased by any member of the public),
this will result in a deemed dividend to the U.S. holder equal to the
amount by which the consideration paid by the Company exceeds the paid-up
capital of such stock. The amount of such dividend will be subject to
withholding tax as described above.
Capital Gains
A non-resident of Canada is not subject to tax under the ITA in respect of
a capital gain realized upon the disposition of a share of a class that is
listed on a prescribed stock exchange unless the share represents "taxable
Canadian property" to the holder thereof. A common share of the Company
will be taxable Canadian property to a non-resident holder if, at any time
during the period of five years immediately preceding the disposition, the
non-resident holder, persons with whom the non-resident holder did not deal
at arm's length, or the non-resident holder and persons with whom he/she
did not deal at arm's length owned 25% or more of the issued shares of any
class or series of the Company. In the case of a non-resident holder to
whom shares of the Company represent taxable Canadian property and who is
resident in the United States, no Canadian tax will be payable on a capital
gain realized on such shares by reason of the Tax Convention unless the
value of such shares is derived principally from real property situated in
Canada or the non-resident holder previously held the shares while
resident in Canada. The Company believes that the value of its common
shares is not derived from real property situated inside Canada.
Certain United States Federal Income Tax Consequences
The following is a discussion of certain possible United States Federal
income tax consequences, under the law, generally applicable to a U.S.
Holder (as defined below) of common shares of the Company. This
discussion does not address all potentially relevant Federal income
tax matters and it does not address consequences peculiar to persons
subject to special provisions of Federal income tax law, such as those
described below as excluded from the definition of a U.S. Holder. In
addition, this discussion does not cover any state, local or foreign tax
consequences.
The following discussion is based upon the sections of the Internal
Revenue Code of 1986, as amended ("the Code"), Treasury
Regulations, published Internal Revenue Service ("IRS") rulings,
published administrative positions of the IRS and court decisions that
are currently applicable, any or all of which could be materially and
adversely changed, possibly on a retroactive basis, at any time. In
addition, the discussion does not consider the potential effects, both
adverse and beneficial, of recently proposed legislation which, if
enacted, could be applied, possibly on a retroactive basis, at any time.
The following discussion is for general information only and is not
intended to be, nor should it be construed to be, legal or tax advice to
any holder or prospective holder of common shares of the Company and no
opinion or representation with respect to the United States Federal income
tax consequences to any such holder or prospective holder is made.
Accordingly, holders and prospective holders of common shares of the
Company should consult their own tax advisors about the federal, state,
local, and foreign tax consequences of purchasing, owning and
disposing of common shares of the Company.
U.S. Holders
As used herein, a ("U.S. Holder") includes a holder of common shares of
the Company who is a citizen or resident of the United States, a
corporation created or organized in or under the laws of the United
States or of any political subdivision thereof and any other person or
entity whose ownership of common shares of the Company is effectively
connected with the conduct of a trade or business in the United States.
A U.S. Holder does not include persons subject to special provisions of
Federal income tax law, such as tax-exempt organizations, qualified
retirement plans, financial institutions, insurance companies, real estate
investment trusts, regulated investment companies, broker-dealers, non-
resident alien individuals or foreign corporations whose ownership of
common shares of the Company is not effectively connected with the
conduct of a trade or business in the United States and shareholders
who acquired their stock through the exercise of employee stock options
or otherwise as compensation.
Distributions on Common Shares of the Company
U.S. Holders receiving dividend distributions (including constructive
dividends) with respect to common shares of the Company are required to
include in gross income for United States Federal income tax purposes the
gross amount of such distributions to the extent that the Company has
current or accumulated earnings and profits, without reduction for any
Canadian income tax withheld from such distributions. Such Canadian tax
withheld may be credited, subject to certain limitations, against the U.S.
Holder's United States Federal Income tax liability or, alternatively, may
be deducted in computing the U.S. Holder's United States Federal taxable
income by those who itemize deductions. (See more detailed discussion at
"Foreign Tax Credit" below). To the extent that distributions exceed
current or accumulated earnings and profits of the Company, they will be
treated first as a return of capital up to the U.S. Holder's adjusted basis
in the common shares and thereafter as gain from the sale or exchange of
the common shares. Preferential tax rates for long-term capital gains are
applicable to a U.S. Holder which is an individual, estate or trust.
There are currently no preferential tax rates for long-term capital gains
for a U.S. Holder which is a corporation.
Dividends paid on the common shares of the Company will not generally
be eligible for the dividends received deduction provided to
corporations receiving dividends from certain United States
corporations. A U.S. Holder which is a corporation may, under
certain circumstances, be entitled to a 70% deduction of the United States
source portion of dividends received from the Company (unless the Company
qualifies as a "foreign personal holding company" or a "passive
foreign investment company", as defined below) if such U.S. Holder owns
shares representing at least 10% of the voting power and value of the
Company. The availability of this deduction is subject to several
complex limitations which are beyond the scope of this discussion.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian
income tax with respect to the ownership of common shares of the
Company may be entitled, at the option of the U.S. Holder, to either a
deduction or a tax credit for such foreign tax paid or withheld.
Generally, it will be more advantageous to claim a credit because a
credit reduces United States Federal income taxes on a dollar-for-dollar
basis, while a deduction merely reduces the taxpayer's income subject
to tax. This election is made on year-by-year basis and applies to all
foreign income taxes (or taxes in lieu of income tax) paid by (or
withheld from) the U.S. Holder during the year. There are significant
and complex limitations which apply to the credit, among which is the
general limitation that the credit cannot exceed the proportionate
share of the U.S. Holder's United States income tax liability that
the U.S. Holder's foreign source income bears to his/her or its
worldwide taxable income. In the determination of the application
of this limitation, the various items of income and deduction must be
classified into foreign and domestic sources. Complex rules govern this
classification process. There are further limitations on the foreign tax
credit for certain types of income such as "passive income", "high
withholding tax interest", "financial services income", "shipping income",
and certain other classifications of income. The availability of the
foreign tax credit and the application of the limitations on the credit
are fact specific and holders and prospective holders of common shares
of the Company should consult their own tax advisors regarding their
individual circumstances.
Disposition of Common Shares of the Company
A U.S. Holder will recognize gain or loss upon the sale of common shares of
the Company equal to the difference, if any, between (i) the amount of cash
plus the fair market value of any property received, and (ii) the
shareholder's tax basis in the common shares of the Company. This gain or
loss will be capital gain or loss if the common shares are capital asset
in the hands of the U.S. Holder, which will be a short-term or long-term
capital gain or loss depending upon the holding period of the U.S. Holder.
Gains and losses are netted and combined according to special rules in
arriving at the overall capital gain or loss for a particular tax year.
Deductions for net capital losses are subject to significant limitations.
For U.S. Holders which are individuals, any unused portion of such net
capital loss may be carried over to be used in later tax years until such
net capital loss is thereby exhausted. For U.S. Holders which are
corporations (other than corporations subject to Subchapter S of the Code),
an unused net capital loss may be carried back three years from the loss
year and carried forward five years from the loss year to be offset against
capital gains until such net capital loss is thereby exhausted.
Other Considerations
In the following four circumstances, the above sections of the discussion
may not describe the United States Federal income tax consequences
resulting from the holding and disposition of common shares of the Company.
However, on the basis of (a) the number of shareholders of its common
shares, (b) the majority ownership of its shares by Canadian residents, and
c) the majority of its assets are actively managed (not passively held),
the Company believes that its is neither a "Foreign Personal Holding
Company", "Foreign Investment Company", "Passive Foreign Investment
Company", nor a "Controlled Foreign Corporation".
Foreign Personal Holding Company
If at any time during a taxable year more than 50% of the total
combined voting power or the total value of the Company
outstanding shares is owned, actually or constructively, by five
or fewer individuals who are citizens or residents of the United
States and 50% or more of the Company's gross income for such
year was derived from certain passive sources (e.g. from
dividends received from its subsidiaries), the Company would be
treated as a "foreign personal holding company." In that event,
U.S. Holders that hold common shares of the Company would be
required to include in gross income for such year their
allowable portions of such passive income to the extent the
Company does not actually distribute such income.
Foreign Investment Company
If 50% or more of the combined voting power or total value of the
Company outstanding shares are held, actually or constructively,
by citizens or residents of the United States, United States domestic
partnerships or corporations, or estates or trusts other than foreign
estates or trusts (as defined by the Code Section 7701(a)(31)), and the
Company is found to be engaged primarily in the business of investing,
reinvesting, or trading in securities, commodities, or any interest
therein, it is possible that the Company might be treated as a
"foreign investment company" as defined in Section 1246 of the Code,
causing all or part of any gain realized by a U.S. Holder selling or
exchanging common shares of the Company to be treated as ordinary income
rather than capital gains.
Passive Foreign Investment Company
As a foreign corporation with U.S. Holders, the Company could
potentially be treated as a passive foreign investment company ("PFIC"),
as defined in Section 1297 of the Code, depending upon the percentage of
the Company's income which is passive, or the percentage of the Company's
assets which is held for the purpose of producing passive income.
Certain United States income tax legislation contains rules governing
PFICs which can have significant tax effects on U.S. shareholders of
foreign corporations. These rules do not apply to non-U.S. shareholders.
Section 1297(a) of the Code defines a PFIC as a corporation that is not
formed in the United States and, for any taxable year, either (i) 75% or
more of its gross income is "passive income", which includes interest,
dividends and certain rents and royalties or (ii) the average percentage,
by fair market value (or, if the company is a controlled foreign
corporation or makes an election, by adjusted tax basis), of its assets
that produce or are held for the production of "passive income" is 50% or
more. The taxation of a US shareholder who owns stock in a PFIC is
extremely complex and is therefore beyond the scope of this discussion. US
persons should consult with their own tax advisors with regards to the
impact of these rules.
Controlled Foreign Corporation
If more than 50% of the voting power of all classes of stock or the total
value of the stock of the Company is owned, directly or indirectly, by
citizens or residents of the United States, United States domestic
partnerships and corporations or estates or trusts other than foreign
estates or trusts, each of whom own 10% or more of the total combined
voting power of all classes of stock of the Company or the total value of
the stock of ("United States shareholder"), the Company could be
treated as a controlled foreign corporation" under Subpart F of the
Code.
This classification would effect many complex results including the
required inclusion by such United States shareholders in income of
their pro rata share: of "Subpart F Income" (as specially defined by
the Code) of the Company; of the Company's earnings invested in U.S.
property; and of earnings invested "excess passive assets" (as
specifically defined by the Code). the Company, In addition, under
Section 1248 of the Code, gain from the sale or exchange of common shares
of the Company by a U.S. person who is or was a United States shareholder
(as defined in the Code) at any time during the five years period ending
with the sale or exchange is treated as ordinary dividend income to the
extent of earnings and profits of the Company attributable to the stock
sold or exchanged. Because of the complexity of Subpart F, and because it
is not clear that the Company is a controlled foreign corporation, a more
detailed review of these rules is outside of the scope of this discussion.
ITEM 8. SELECTED FINANCIAL DATA
The selected financial data for Fiscal 1997, 1996 and Fiscal 1995 ended
June 30th was derived from the financial statements of the Company which
have been audited by Arthur Andersen & Co. and Deloitte & Touche,
independent Chartered Accountants, as indicated in their reports which are
included elsewhere in this Annual Report. The selected financial data for
Fiscal 1994 was derived from the audited financial statements of the
Company, not included herein.
The selected financial data was extracted from the more detailed financial
statements and related notes included herein and should be read in
conjunction with such financial statements and with the information
appearing under the heading ITEM #9, "Manage-ment's Discussion and Analysis
of Financial Condition and Results of Operations".
Reference is made to notes to the audited financial statements of the
Company included herein for a discussion of the material differences
between Canadian GAAP and U.S. GAAP, and their effect on the Company's
financial statements.
The Company did not generate material revenue from operations until the
last half of Fiscal 1996. Accordingly, through Fiscal 1997, the Company
has not generated sufficient cashflow from operations to fund ongoing
operational requirements and cash commitments. The Company has financed
its operations principally through the sale of its equity securities,
government-backed loans, and lease financing for equipment. The Company
believes it has sufficient capital and liquidity to finance current
operations.
Nevertheless, the Company's ability to continue operations is ultimately
dependent on the ability of the Company to generate profitable operations
and/or to arrange additional external financing. The Company anticipates
reaching a level of operations by the end of Fiscal 1998 sufficient that
operating profits will make the Company self-sustaining.
Table No. 6
Selected Financial Data
(CDN$ in 000, except per share data)
Year Year Year Year
Ended Ended Ended Ended
6/30/97 6/30/96 6/30/95 6/30/94
Sales Revenue $4905 $556 0 0
Net Income (loss) (4248) (3212) (869) 0
Earnings (Loss) per Share ($0.39) ($0.32) ($0.15) 0
Wgt. Avg. No. Shares (1)(5) 10926 10088 5768 0
Dividends Per Share $0.00 $0.00 $0.00 0
Working Capital $5456 $ (927) $(818) 0
Property/Plant/Equipment 7698 6917 7436 0
Assets Under Development 9867 8924 8010 0
Long-Term Debt 3267 2169 0 0
Capital Lease Obligations (3) 7224 8651 8837 0
Loans Payable to Shareholders, etc. 2065 721 203 0
Shareholders' Equity 13083 4597 5958 0
Total Assets 27313 17534 15922 0
US GAAP Shareholders' Equity 13137 4607 6152 0
US GAAP Net (Loss) (4) (4382) (3202) (674) 0
US GAAP (Loss) per Share (5) ($0.45) ($0.36) ($0.12) 0
US GAAP Wgt.Avg. No. Shares (5) 9746 8908 5751 0
(1) Effective 5/15/95, the Company's common shares were split on a
571.4286:1 basis. All discussion in this Annual Report refer
to post-split stock unless otherwise indicated.
(2) Refer to ITEM #1, ITEM #2, ITEM #9, and ITEM #14 for a
discussion of disputed lease agreements.
(3) Refer to ITEM #1, ITEM #2, and ITEM #9 for a discussion of
the Lease Agreements.
(4) Under US GAAP, the Company would have expensed "foreign exchange
gain (loss)" during Fiscal 1995 of $194,301, during Fiscal 1996
of $9,772 and during Fiscal 1997 of ($134,026).
(5) Under US GAAP, the Company would not have utilized 1,180,000
contingently-cancelable escrowed shares in the calculation of
weighted average number of shares used in the calculation of
loss per share.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Domestic and Foreign Sales
Year Ended Year Ended
June 30, 1997 June 30, 1996
Sales to customers outside Canada 2,482,035 384,888
Sales to customers inside Canada 2,423,366 171,217
Gross Profit after Cost of Sales 2,268,086 264,786
While sales volumes increased from 1996 to 1997, gross profit before
depreciation percentages of 47.6% for 1996 and 46.2% for 1997 remained
relatively the same.
Fiscal Year Ended June 30, 1997
For Fiscal 1997, the Company had cost of sales of $2,637,315 on sales of
$4,905,401. Gross profit before depreciation for the year ended June 30,
1997 was $2,268,086. The Company recorded depreciation and amortization of
property, plant and equipment of $1,576,975 and interest on long term debt
of $415,035. These amounts were expensed, as the Company was past the
start-up stage and capable of production. The Company also experienced a
significant increase in selling, distribution and administrative expenses
which totalled $4,424,582. The increase was due to increased activity in
sales and marketing, the expenses associated with investigating potential
acquisitions, and the expenses associated with the acquisition of the
liquid division of Arjo Canada Inc. Sales increased from $556,105 for 1996
to $4,905,401 for 1997, due to increased sales and marketing activity and
the addition of liquid and antimicrobial products to the Company's product
line.
On July 31, 1996, 905,000 special warrants were issued by the Company for a
subscription price of $3.00 each for gross proceeds of $2,715,000. The
Special Warrants converted into units of common shares and share purchase
warrants. After deduction of the Agent's commission of $190,050 in respect
of this private placement, the Company received net proceeds of $2,524,950.
On January 8, 1997, 1,600,000 Special Warrants were issued by the Company
for a subscription price of $6.00 each for proceeds of $9,600,000. As
commission the Agent was issued Agent's Special Warrants.
The long term liabilities of the Company as at June 30, 1997 included
obligations under capital leases of $5,504,985.
(For additional information on leased equipment, see ITEM #2, "Description
of Property, Operations, Equipment" and the Financial Statements appended
hereto.) As at June 30, 1997, inventories were valued at $2,850,012. The
Company's working capital was $5,456,000 and its asset base exceeded $27
million. The net loss for Fiscal 1997 was ($4,248,043).
Fiscal Year Ended June 30, 1996
For Fiscal 1996, the Company had cost of sales of $291,319 on sales of
$556,105. Gross profit before depreciation for the year ended June 30,
1996 was $264,786. The Company recorded depreciation and amortization of
property, plant and equipment of $1,188,053 and interest on long term debt
of $409,258. These amounts were expensed as the Company was past the start-
up stage and capable of production. The Company also experienced a
significant increase in selling, distribution and administrative expenses
which totalled $1,888,352, including advertising expenses of $185,082. The
increase was due to increased activity in sales and marketing, the expenses
associated with investigating potential acquisitions, and the expenses
associated with the acquisition of the liquid division of Arjo Canada Inc.
which closed subsequent to this period.
General and administrative expenses included $328,019 in consulting fees,
$149,384 in business and property taxes, and $540,927 in wages and employee
benefits.
The long term liabilities of the Company as at June 30, 1996 included
obligations under capital leases of $7,223,699. As at June 30, 1996,
inventory was valued at $507,203. The Company's working capital deficiency
was $926,575 and its asset base exceeded $17,500,000. The net loss for the
year ended June 30, 1996 was ($3,211,746).
Liquidity
Historically, the Company has relied on debt and equity financing to
develop and operate its business. On a prospective basis, the Company has
not yet achieved profitable operations and must continue to rely upon
funding through further private and public equity financings and by drawing
upon funds available under the MG Agreement and the WEDD Agreement (as
hereinafter defined). (For further information relating to the MG
Agreement and the WEDD Agreement, see subheading "Financial Assistance"
following.)
Prior to the initial public offering of the Company's common shares on
November 30, 1995 (the "IPO Prospectus"), liquidity was dependent upon cash
invested by principals of the Company and private investors. Additional
funds were provided by shareholder loans and funds advanced from the
Manitoba and Federal Governments pursuant to the MG Agreement and WEDD
Agreement. In December 1995, the Company received net proceeds of
approximately $1,800,000 from the IPO Prospectus offering. As at June 30,
1997, the Company had received a total of $1,613,146 under the MG Agreement
and $1,654,180 under the WEDD Agreement. Although these sources of funding
were adequate for its initial start-up expenses, the Company required
additional funding from further private equity financings in order to
pursue its acquisition plans and implement a sales and marketing program in
Canada and the United States. To that end, during its year ended June 30,
1997, the Company completed the SW Private Placement, raising proceeds of
$9,600,000 and, on October 1, 1997, closed the CN Private Placement,
raising net proceeds of $6,543,600. The Company will continue to require
additional funds, through private or public equity financings, in order to
maintain its objective of rapid growth.
Private Placement of Equity
In June 1996, the Company sold 905,000 Special Warrants at $3.00, raising
$2,715,000 gross.
In January 1997, the Company sold 1,600,000 Special Warrants at $6.00,
raising $9,600,000 gross. Refer to ITEM #12, "Options to Purchase
Securities from Registrant or Subsidiaries".
In October 1997, the Company sold US$5,000,000 of Convertible Notes. Refer
to ITEM #12, "Options to Purchase Securities from Registrant or
Subsidiaries".
Financial Assistance
Manitoba Government
By agreement dated November 24, 1994, as amended September 21, 1995 and
November 14, 1995 (the "MG Agreement"), the Department of Industry Trade
and Tourism of the Manitoba Government, through its Crown Corporation and
agent, Manitoba Development Corporation ("MDC") agreed to provide the
Company with financial assistance equal to the lesser of $2,674,000 or 33%
of the costs excluding G.S.T. incurred and paid for the land and buildings
purchased, building improvements made, and equipment purchased at arms
length, all respecting the Company's production of automated packaged
medical and surgical devices, kits and procedural trays for the medical and
healthcare market (the "Eligible Project Costs"). The Company met
conditions sufficient for it to obtain a maximum of $2,174,000 of financial
assistance (the "MG Loan") from MDC.
The MG Agreement requires the creation and maintenance of a certain number
of jobs over a four year period, starting in 1995, as follows:
Calendar Year Number of New Jobs Number of Jobs
Required to be Required to be
Created Maintained
1995 5 5
1996 23 28
1997 18 46
1998 3 49
During calendar 1999 and until the MG Loan is repaid in full, the Company
is required to maintain the number of jobs required to be maintained for
calendar 1998. The Company has created and maintained the requisite number
of jobs and currently employs 84 full-time employees.
The MG Loan is secured with a first-fixed charge against land, buildings
and certain equipment and certain second fixed charges, and will be subject
to interest (both before and after maturity) at a rate, compounded monthly,
equivalent to that being charged by the Province of Manitoba to its Crown
corporations for borrowings amortized over a ten year period. The MG Loan
is to be repaid as follows:
(a) six consecutive monthly payments of $30,000 from May 5, 1999 through
October 5, 1999; and
(b) the remaining principal payments must be made by way of 48 equal
consecutive monthly payments of $51,958.33 from November 5, 1999 up to
and including October 5, 2003.
In addition, a maximum 42 months' relief on interest has been granted to
the Company, subject to the Company providing a certain number of jobs per
year, as stated in the above table, until the MG Loan has been repaid.
However, the MG Agreement also provides for the acceleration of interest
and principal in the event the Company fails to provide the above stated
number of jobs per year. The accelerated payments shall be calculated
proportionally to the shortfall in jobs for a specific year. The MG Loan
is also repayable on demand in the event of default by the Company under
any of the security agreements.
The Company received a total draw down pursuant to the MG Agreement in the
amount of $2,174,000 (of the $2,674,000 originally available to the
Company). Prior to advance of the final $500,000 of the possible maximum
of $2,674,000 from MDC, the Company was to achieve sales of $2,093,000
during the 12 months ended June 30, 1996 and $16,884,000 during the 12
months ended June 30, 1997. As such sales targets were not achieved, the
Company did not receive the final $500,000 from MDC.
The MG Agreement also places certain limitations on the payment of
dividends by the Company, including that the Company not pay any dividends
until October 5, 1998.
Pursuant to the MG Agreement, the following supporting documentation, all
dated September 5, 1995, was delivered by the Company to MDC:
(a) Real Property Mortgage and Security Agreement
The Company has granted to MDC a mortgage (the "Real Property
Mortgage") on the Property. Pursuant to an agreement (the "Security
Agreement"), the Company also granted to MDC a first security interest
in certain lands, buildings and equipment, and a second security
interest in receivables and inventory of the Company.
(b) Assignment/Postponement of Shareholder Loans Agreement
Pursuant to an agreement (the "Assignment/Postponement of Shareholder
Loans Agreement") among the Company, Excelco Systems Inc. ("Excelco"),
Mahmood (Mac) Shahsavar, Janice Shahsavar and MDC, it was agreed that
during the term of the MG Loan:
(i) neither Mahmood (Mac) Shahsavar nor Janice Shahsavar would
sell, transfer, assign or otherwise dispose of their respective
incentive stock options (see "Options and Other Rights to
Purchase Securities"),
(ii) neither Mahmood (Mac) Shahsavar nor Janice Shahsavar would
sell, transfer, assign or otherwise dispose of any Shares
acquired pursuant to an exercise of their respective incentive
stock options or acquired upon the release of shares from escrow
(as disclosed under the heading "Performance Shares"), and
(iii) the Company would not make any payments to Excelco or to any
other shareholders of the Company on account of any loans
advanced by them to the Company,
without the prior written consent of MDC.
(c) Equity Undertaking Agreement
Pursuant to an agreement (the "Equity Undertaking Agreement") with
Excelco, Mahmood (Mac) Shahsavar, Janice Shahsavar and MDC, as amended
October 8, 1996, the Company agreed that during the term of the MG
Loan it would:
(i) not repay any debts or liabilities owing to persons other
than MDC, except for debts and liabilities owing to Her Majesty
The Queen in Right of Canada under the WEDD Agreement and
accounts payable incurred by the Company in the ordinary course
of business; and
(ii) not issue any new shares or create any new class of shares,
and will not merge with any other entity, without first notifying
MDC.
(d) Lease and Credit Undertaking Agreement
An agreement (the "Lease and Credit Undertaking Agreement") among the
Company, Excelco and MDC, whereby Excelco has agreed and undertaken
that, in the event the Company is unable or unwilling to meet any or
all of its obligations to the lessors under the Lease Agreements (as
disclosed under the heading ITEM #2, "Description of Property,
Operations"), Excelco shall advance such funds to the Company or the
lessors directly as are required to fulfil such obligations. Should
the Company be in default or fail to comply with any term of the Lease
Agreements, MDC has the right, but not the obligation, to assume the
obligations of the Company under the Lease Agreements.
(e) Excelco Guarantee
An agreement (the "Excelco Guarantee") among the Company, Excelco and
MDC, whereby Excelco has agreed to guarantee the repayment of the loan
by the Company to MDC.
Federal Government
By agreement dated December 5, 1994 (the "WEDD Agreement"), entered into
with the Government of Canada's Western Economic Diversification Program
("WEDP"), the Company received approval for non-interest bearing,
subordinated financial assistance in the aggregate amount of $1,937,852.
To date, $1,804,835 has been received under the WEDD Agreement, leaving a
balance of $133,017 available to be paid and expected to be drawn down
prior to March 1998.
Repayment of the loan, assuming the full amount of $1,937,852 is drawn
down, will be made by quarterly payments commencing December 1, 1997 and
ending December 1, 1999, as follows:
December 1, 1997 $100,000
March 1, 1998 $180,000
June 1, 1998 $180,000
September 1, 1998 $210,000
December 1, 1998 $210,000
March 1, 1999 $290,000
June 1, 1999 $290,000
September 1, 1999 $290,000
December 1, 1999 $187,852
The WEDD Agreement prohibits the Company from paying dividends without the
prior written approval of the WEDP until the WEDD loan is repaid in full.
The loan is also repayable on demand upon default by the Company of a term
or condition of the WEDD Agreement, including bankruptcy, insolvency or
winding-up of the Company or failure to operate in Western Canada until the
WEDD loan has been repaid in full.
Copies of the MG Agreement, WEDD Agreement, Real Property Mortgage and
Security Agreement, Assignment/Postponement of Shareholder Loans Agreement,
Equity Undertaking Agreement, Lease and Credit Undertaking Agreement, and
Guarantee Agreement are available for inspection as specified under the
heading "Material Contracts".
Stated Business Objectives
The primary objectives of the Company are:
to obtain ISO (International Standards Organization) 9000
Series certification;
to develop and exploit the markets of Europe, Asia and South
America;
to acquire additional automated robotic units; and
to distribute its surgical gowns, on a lease basis, through
joint venture arrangements with distributors.
Milestones
The significant events that must occur for the business objectives of the
Company to be accomplished, and the specific time periods in which each
event is expected to occur and the estimated costs related to each event
are as follows:
Significant Event Time Period Related Cost
Satisfy ISO (International Standards 1 year nominal
Organization) that ISO 9000 Series
certification standards are met by
Company
Hire key individual to develop and 1 year $45,000
exploit markets in Asia, South America per annum
and Europe
Structure additional equity financing to 12-18 months $6,000,000
acquire additional robotic packaging
units
Enter into joint venture arrangements 12-18 months $1,500,000 to
with distributors to distribute the $2,000,000 for
Company's surgical gowns on a lease initial inventory
basis
Acquisitions and Dispositions
Property
Pursuant to an arms'-length agreement dated December 15, 1994, as amended
April 20, 1995 (the "Property Agreement"), the Company acquired from Otto
Bock Orthopaedic Industry of Canada ("Otto Bock") its Winnipeg
manufacturing plant, together with equipment located thereon, located at
251 Saulteaux Crescent, Winnipeg, Manitoba (the "Property"). The Property
consists of a one storey manufacturing building together with a two storey
office portion, altogether comprising a total building area in excess of
71,000 square feet sited on a land area of approximately 147,930 square
feet (3.396 acres).
The consideration paid by the Company to Otto Bock was $1,400,000 cash
together with 200,000 Shares issued at a deemed price of $1.75 per share,
for a total purchase price of $1,750,000. The Company also incurred
additional costs in the approximate amount of $40,000 in transfer taxes and
legal fees associated with this transaction.
Robotic Technology License
By agreement dated May 30, 1995 (the "Robotic Technology License
Agreement"), as amended, Excelco Systems Inc. ("Excelco") granted to the
Company the exclusive right and license (the "Licensed Rights") to use the
robotic technology (the "Robotic Technology") to manufacture and package
surgical custom procedure trays and kits, and to sell products to
healthcare institutions in Canada, Mexico and the U.S. The Robotic
Technology License Agreement is for an initial term of ten years, with an
automatic renewal for consecutive ten year terms thereafter.
Janice Shahsavar, the Vice-President Human Resources of the Company, owns
100% of the issued shares of Excelco. In addition, Mac Shahsavar, the
President, Chief Executive Officer, Promoter and a Director of the Company,
is also the President and Chief Executive Officer of Excelco. At the time
of entering into the Robotic Technology License Agreement, Seyed Torabian,
the Executive Vice-President and a Director of the Company, owned 5.78% of
the issued shares of Excelco.
The Company agreed to purchase all automated machinery from Excelco,
subject to the terms and conditions of an agreement dated October 21, 1994
(the "Selectronics Agreement") entered into between Excelco and
Selectronics Robotics & Automation Inc. and Selectronics Brokerage, Inc.
(jointly, "Selectronics"), the manufacturer of the equipment and machinery.
Pursuant to the Selectronics Agreement, which is for a term of 20 years,
Excelco has granted to Selectronics the exclusive right to manufacture all
machinery and equipment which incorporate the Robotic Technology (the
"Products"), and Excelco has agreed to purchase Products only from
Selectronics. The Selectronics Agreement provides that the price to be
paid for the Products to be supplied by Selectronics to Excelco, or its
designate, shall not exceed 25% of the competitive market retail price for
the Products. Selectronics and Excelco have agreed to meet annually to
negotiate the price of the Products to be supplied. Excelco has agreed to
sell the Products under the Selectronics Agreement to the Company at cost.
(For information relating to the purchase of equipment by the Company from
Selectronics, see ITEM #2, "Description of Property, Operations,
Equipment".)
The Robotic Technology License Agreement prohibits the Company from sub-
licensing the License Rights without first obtaining the consent of
Excelco, and then only under certain other conditions which Excelco may
impose as to equity ownership of the sub-licensee.
Liquid Division of Arjo Canada Inc.
Pursuant to an agreement dated May 14, 1996 (the "Arjo Agreement") between
the Company and Arjo Canada Inc. ("Arjo"), Arjo USA Inc. ("Arjo U.S.") and
3485367 Manitoba Ltd. (now known as National Care Products Ltd.) ("NCP"),
the Company acquired Arjo's Liquid Division by purchasing all the shares of
NCP. At the time of purchase, NCP was a wholly-owned subsidiary of Arjo.
In consideration therefor, the Company paid to Arjo the sum of $10 and
assumed an unsecured promissory note payable to Arjo in the amount of
$896,447, representing payment for certain assets as set forth in the Arjo
Agreement. This promissory note was paid in full. The parties negotiated
the allocation of the purchase price to be as follows: $262,680 in fixed
assets; $633,768 in inventory; and $10 in goodwill, contract assignments,
licenses, records and intangibles. Ross Scavuzzo, a director of the
Company, was the President of Arjo as well as being a director of the
Company at the date of the Arjo Agreement.
The Arjo Agreement was accepted for filing by the Exchange on August 9,
1996.
Arjo, a wholly-owned subsidiary of Getinge Industrict A.B. of Sweden, began
operations in 1975. From a manufacturing facility in Winnipeg, Arjo's
liquid division produced liquid disinfectant, shampoos, skin care ointments
and creams for sale in Canada as well as in the United States and in
Europe.
NCP has agreed that, subject only to certain limited circumstances, it
shall sell and distribute all of the products it manufactures under its own
label, distinct from the Arjo label.
Pursuant to the Arjo Agreement, Arjo and Arjo US have jointly and severally
agreed, until August 31, 1999 (the "Purchase Expiry Date"), to purchase
disinfectants used for bathtubs and whirlpools, shampoo and body wash
liquid soaps, bath oils and Arjosound water conditioners (the "Selected NCP
Products") only from NCP, totalling in the aggregate not less than
$2,180,000 annually (the "Minimum Purchase"), failing which Arjo agrees to
pay annually to NCP an amount equal to the amount by which the Minimum
Purchase exceeds the amount of such liquid products actually purchased in a
particular year multiplied by the following:
(a) 33.75% in the first year;
(b) 20.00% in the second year; and
(c) 15.00% in the third year;
provided that the Minimum Purchase shall be reduced by an amount, if any,
of sales by NCP (either directly or through its distributors and/or agents)
of the Selected NCP Products not bearing the Arjo label to Arjo's customers
in North America. Upon the Purchase Expiry Date, NCP has the right of
first refusal to continue to supply the Selected NCP Products to Arjo and
Arjo US for an additional two years. No Minimum Purchase shall apply to
the extended term.
NCP has agreed to use its best efforts to cause delivery of at least 90% of
the Selected NCP Products sold to Arjo and Arjo US within three working
days of receipt of an order from Arjo, directly to customers located in the
greater Vancouver urban area, Calgary, Edmonton, Saskatoon, Regina,
Winnipeg, Hamilton, Toronto, Ottawa, Moncton, and Halifax, and within five
working days to any other location in Canada, Aurora, Nebraska, and
Chicago, Illinois (the "Delivery Deadlines"). If in any quarter less than
90% of the Selected NCP Products sold to Arjo and Arjo US are delivered
within the Delivery Deadlines, then the Minimum Purchase obligations of
Arjo and Arjo US shall be reduced during that and the following year by 2%
for each 1% drop in delivery performance level below 90% and if, during any
two consecutive quarters or during any two of four consecutive quarters,
such delivery service levels drop below 80%, then Arjo and Arjo US shall be
released from all further purchase obligations. Deficiencies in delivery
which are directly attributable to causes which are beyond the control or
direct influence of NCP and which are generally applicable to other
suppliers of comparable products in North America shall not be counted.
Pursuant to the provisions of the Arjo Agreement, the Company and NCP have
agreed that they shall not, without the prior written consent of Arjo,
until the Purchase Expiry Date, actively solicit sales of shampoos and body
wash liquids and bath oils from the specific locations of stated hospitals,
nursing homes or healthcare facilities located in North America and
serviced by Arjo, in competition with Arjo, or sell to or solicit to the
same facilities any water conditioners or disinfectants used only for the
purposes of bathtubs or whirlpools. Arjo and Arjo US have agreed that,
except as permitted pursuant to the Arjo Agreement, they shall not, or
cause anyone to, until the Purchase Expiry Date, sell or solicit sales for
skin cream products to anyone, and thereafter, until August 31, 2001, sell
or solicit sales for skin cream products to hospitals, anywhere in North
America, in competition with the Company and NCP, except for skin cream
products purchased from NCP.
The principal assets and operations of the Liquid Division are located at
the Company's manufacturing facility in Winnipeg.
Huntington Laboratories Gam-Med Division, Inc.
By an arms'-length asset purchase agreement dated January 22, 1997 (the
"Gam-Med Agreement") among NHMC US, Huntington Laboratories Gam-Med
Division, Inc. ("Gam-Med") and Ecolab Inc. ("Ecolab"), the Company acquired
certain properties, assets, contracts and business of Gam-Med, including
land, building, machinery and equipment, accounts receivable, inventory,
proprietary patents and on-going business, in consideration of the payment
to Gam-Med of US $1,310,165 (the "Purchase Price"), and the assumption by
the Company of certain contractual obligations of Gam-Med. Gam-Med, a
wholly-owned subsidiary of Ecolab (listed on the New York Stock Exchange),
is a medical products packager and owns the proprietary right to a fusion
moulding process (the "Gam-Med Technology") which has been used to
manufacture various patented plastic disposable liquid-dispensing products
since 1989. On February 17, 1997, the Exchange approved the Gam-Med
Agreement and the acquisition closed on February 20, 1997.
Pursuant to and as part of the Gam-Med Agreement, the Company entered into
a supply agreement (the "Ecolab Supply Agreement") dated February 20, 1997
between NHMC US and Ecolab whereby NHMC US has committed to purchase a
minimum of 500 gallons of Ecolab iodine products every 6 months, at a price
of actual cost plus 15% (subject to certain allowances) over a term of two
years or unless earlier terminated by mutual consent, by NHMC US upon 90
days' written notice, by either party on written notice upon any material
breach of default and failure to cure such breach or default within 30 days
of such notice, or by Ecolab by written notice to NHMC US upon any failure
to meet its minimum purchase commitments for any six month period and
failure to cure such breach within 30 days of such notice.
Textile Rights
Mercana Industries Ltd.
By an arm's length letter of intent (the "Mercana LOI") dated October 18,
1996 with Mercana Industries Ltd. ("Mercana"), the Company agreed to
acquire all the issued and outstanding share capital of Mercana. The
primary asset of Mercana at the date of the Mercana LOI was the exclusive
marketing rights (the "Exclusive Rights") for two protective textiles
"Mertex" and "Mertex-Plus" used to manufacture reusable surgical gowns and
drapes. The Company had proposed to include surgical gowns and drapes in
its custom procedure kits. Pursuant to the Mercana LOI, the Company
advanced a total of $300,000 to Mercana. By a general security agreement
(the "Mercana GSA") dated October 16, 1996, Mercana granted to the Company,
by way of a subordinate fixed and specific mortgage and charge, a security
interest in the present and future undertaking, property and assets of
Mercana, to secure the funds advanced to Mercana.
The Mercana LOI expired without a binding agreement having been entered
into. Subsequently, Mercana ceased to hold the Exclusive Rights. The
$300,000 advanced by the Company to Mercana has been written off.
Importex Corporation
By an arms'-length agreement dated February 4, 1997 (the "Importex
Assignment") among the Company, Importex Corporation ("Importex") and
Mertexas Partnership ("Mertexas"), the Company was assigned: Importex'
interest in an agreement between Importex and Nosawa & Co., Ltd. ("Nosawa")
dated January 31, 1997 (the "Nosawa Agreement").
Nosawa, with its manufacturing and administrative operations located in
Osaka, Japan, is the manufacturer of certain protective textiles, including
"Mertex" and "Mertex-Plus" (collectively, the "Textiles"). By virtue of
the Importex Agreement, the Company has the exclusive right under the
Nosawa agreement to distribute and sell the Textiles in North America,
Mexico and Europe (including the European Community).
Pursuant to the Importex Assignment, the Company paid and issued to
Importex: (a) $100,000 cash; (b) 225,000 Shares at a deemed price of $6.90
per Share; and (c) a warrant (the "Importex Warrant") entitling Importex to
purchase 150,000 Shares at a price of $6.90 per Share in the first year and
at a price of $7.94 per Share in the second year, expiring on February 3,
1999. Closing of the Importex Assignment occurred on September 8, 1997.
Pursuant to the Nosawa Agreement, the Company will be required to make
minimum purchases of the Textiles from Nosawa, as follows:
(a) 25,000 meters on or before January 31, 1998;
(b) 60,000 meters on or before January 31, 1999;
(c) 75,000 meters on or before January 31, 2000;
(d) 100,000 meters on or before January 31, 2001; and
(e) 125,000 meters on or before January 31, 2002.
and if the foregoing minimum purchases are not made, Nosawa may terminate
the agreement on 90 days' written notice.
The term of the Nosawa Agreement is five years, renewable for additional
one-year periods. The minimum textile purchase for each additional one-
year renewal period is negotiable.
Machinery and Equipment
As at September 30, 1997, the Company has expended in excess of $3,277,518
towards machinery and equipment purchases, office supplies and other set-up
costs related to production, and has expended in excess of $250,000 towards
modifying the utilities systems of its Winnipeg facility to establish air
quality to meet operational requirements. A further $387,958 has been
expended on machinery and equipment, furniture, furnishings and
accessories, and computer hardware in connection with the acquisition of
the liquid division. (See ITEM #9, "Management's Discussion and Analysis
of Financial Condition and Results of Operations, Acquisitions and
Dispositions, Liquid Division of Arjo Canada Inc.") A further $224,493 has
been expended on machinery, equipment, furniture, furnishings and
accessories, and computer hardware in connection with the acquisition of
the antimicrobial packaging division. (See ITEM #9, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Acquisitions and Dispositions, Huntington Laboratories Gam-Med Division,
Inc.") Also, the Company has arranged for lease financing in excess of
$10,000,000 for its robotic assembly and packaging equipment. All
production machinery purchased and leased by the Company is from arms'-
length parties. (See ITEM #2, "Description of Property, Operations,
Equipment")
Medi Guard Inc.
The Company has entered into a binding letter agreement dated November 25,
1997, with shareholders of the privately-held Medi Guard Inc. ("MGI") of
Oakville, Ontario for the purchase of 100% of the issued and outstandind
shares of MGI together with all shareholder loans. MGI is one of Canada's
leading manufacturers of celluose-based disposable protective products for
medical use. These products include examination gowns, drapes, table
paper, bibs, towels, and aprons. Medi Guard also produces a line of single
use products for airline in-flight services. In 1996, Medi Guard revenues
were $770,000, which increased to $2.8 million in 1997, with revenue for
1998 projected at $5 million. The consideration agreed upon is $1 plus the
greater of $400,000 or 3.5 time the annualized earnings of MGI for the one
year period following the agreement date. The terms of the acquisition are
subject to the preparation of a formal agreement and Vancouver Stock
Exchange approval.
National Healthcare Logistics LLC
During Fiscal 1997, the Company acquired 150 Class A common voting shares,
representing a 50% interest, and 333 1/3 Class C non-voting shares of
National Healthcare Logistics LLC. This investment is being accounted for
under the equity method.
National Healthcare Logistics LLC , a limited liability company ("NHLC"),
was created in April 1997 by the Company as an equal partner with two well-
respected US authorities in materials management and medical distribution
systems. The Company owns the Class A voting shares purchased at a price
of US$1 each and the Class C non-voting shares purchased at a price of
US$1,500 each. The Company intends to contribute additional share capital
to purchase a further 500 Class C preferred shares of NHLC. NHLC is in the
service business managing the purchasing and distibution activities for
multiple numbers of hospitals utilizing a "hub and spoke" distribution
system. The hub and spoke distribution system is the state of the art in
supply chain management for integrating hospital systems. This concept has
been developed by Duane Jorgenson, one of the principals of NHLC, who is a
highly-regarded authority in material management logistics. Mr. Jorgenson
has also developed and implemented a number of stockless inventory systems
for hospitals throughout the United States. The formation of NHLC provides
the Company with an entry to "alternative" distribution channels, the
fastest growing segment of the medical products distribution market. This
directly benefits the Company and its subsidiaries by providing them with
an opportunity to market their products directly to end user hosital
through hub and spoke distribution systems managed by NHLC. In August
1997, NHLC entered into a ten-year agreement with Sysco Corporation,
through which NHLC will bring in supply management contacts for various
integrated hospitals systems, based on hub and spoke distribution, while
Sysco Corporation will provide the capital for setting up the hubs and
provide inventory and distribution.
RISK FACTORS
Investment in the Company's securities must be considered speculative. In
addition to the other information contained in this Annual Report, a
prospective investor should carefully consider the following factors:
(1) The market for the Company's products is highly competitive and
subject to increasing competition based on price. The Company has a
limited operating history and existing competitors may have greater
financial and managerial resources, operating histories and name
recognition. These competitors may be able to institute and sustain
price wars, resulting in a reduction of the Company's share of the
market and reduced price levels and profit margins. There can be no
assurance that the market will consider the Company's products to be
superior or equivalent to existing or future competitive products or
that the Company will be able to adapt to evolving markets and
technologies, develop new products, achieve and maintain technological
advances or maintain a unit selling price competitive with other
products. (See ITEM #1, "Business of the Company, Market and
Competition".)
(2) The Company's operations currently rely upon the two Tiromats with two
robotic units for the assembly and packaging of the product.
(3) Receipt of the balance of the government financial assistance, and
repayment of the total amounts received, as disclosed under the
heading ITEM #9, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", are subject to certain
conditions.
(4) The Company is subject to government regulations in the jurisdictions
in which it distributes its products. Future changes in governmental
regulations may have an adverse impact on the operations of the
Company.
(5) The Company currently has 12,474,331 Shares issued and outstanding.
After giving effect to the issue of the common shares issuable upon
the exercise of the Special Warrants, there will be an additional
1,637,000 Shares outstanding. In addition, there are or will be
outstanding options and warrants to acquire a minimum of 3,980,154
Shares. (See ITEM #12, "Options to Purchase Securities from
Registrant or Subsidiaries".)
(6) Neither the Company nor Excelco has filed an application for patent or
copyright protection relating to the Robotic Technology.
(7) The Company is dependent upon the personal efforts and commitment of
its management team. The loss of senior management personnel may
adversely affect the Company. Upon such loss, other individuals would
be required to manage and operate the business and there is no
assurance that individuals with suitable qualifications could be
found.
(8) The Company's business may be affected by other factors beyond its
control, such as economic recessions and adverse fluctuations in
foreign exchange rates.
(9) The Company has not paid dividends in the past and does not anticipate
paying dividends in the near future. The MG Agreement and the WEDD
Agreement place certain restrictions on the payment of dividends by
the Company.
(10) The Company has a limited operating history. The Company's ability to
meet market demand will be a critical factor in the Company's success.
(11) Certain of the Company's directors and officers may serve as directors
or officers, or have shareholdings in other companies and accordingly,
conflicts of interest may arise. Reference should be made to specific
disclosure under ITEM #13, "Interest of Management in Certain
Transactions, Payments to Insiders and Promoters". All such possible
conflicts will be disclosed and handled in accordance with the
requirements of the Corporations Act (Manitoba).
(12) The Company's business utilizes a new technology that is being
developed for the purpose of the Company's business. Accordingly, the
Company is subject to risks associated with start-up companies,
including start-up losses, uncertainty of revenues, markets and
profitability and the necessity of additional funding. In addition,
the technology acquired by the Company and being developed by the
Company has not yet been proved in a production environment on an
ongoing basis.
(13) The evolving nature of the healthcare industry in North America in
terms of cost containment is leading to changing purchasing practices
amongst purchasers at various institutions. This change in purchasing
environment (i.e. towards a more centralized buying approach) may put
additional pressure on the Company to compete on a price basis in
order to achieve adequate market penetration and maintain customer
loyalty. There can be no assurances that the Company will be able to
implement its business strategy with its current pricing structure.
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Table No. 7 lists as of 11/30/97 the names of the Directors of the Company.
The Directors have served in their respective capacities since their
election and/or appointment and will serve until the next Annual General
Meeting of Shareholders or until a successor is duly elected, unless the
office is vacated in accordance with the Articles/By-Laws of the Company.
All Directors are residents and citizens of Canada.
Table No. 7
Directors
Date First Elected
Name Age or Appointed
Alice Elaine Affleck (1)(4) 66 August 1993
Reginald Adrian Ebbeling (2)(4) 67 May 1995
Gordon John Farrimond (1)(2)(4) 47 May 1995
Robert Alexander Jackson (2)(3) 54 May 1995
Aristotle (Telly) John Mercury (1)(3) 62 May 1995
Ross Scavuzzo (4) 41 September 1995
Mahmood (Mac) Jamshidi Shahsavar (2)(3) 41 August 1993
Morteza Seyed Torabian (2) 41 May 1995
Jack Tapper (1)(2) 44 October 1997
(1) Member of Audit Committee.
(2) Member of Executive Committee
(3) Member of Nomination Committee
(4) Member of Compensation and Corporate Governance Committee
Table No. 8 lists, as of 11/30/97, the names of the Executive Officers of
the Company. The Executive Officers serve at the pleasure of the Board of
Directors. All Executive Officers devote full time to the affairs of the
Company. All Executive Officers are residents and citizens of Canada, with
the following exceptions: Mr. Van Dyke who is resident/citizen of Illinois,
USA.
Table No. 8
Executive Officers
Name Position Date of Board Approval
Mahmood (Mac) Shahsavar President/CEO July 1994
Jack Tapper VP and CFO October 1997
Reginald Adrian Ebbeling Chairman June 1995
Morteza Seyed Torabian Executive Vice President June 1995
Robert Alexander Jackson Executive Vice President May 1995
Alice Elaine Affleck Secretary/Treasurer May 1995
Nancy Clark VP Operations November 1997
Gordon John Farrimond VP Sales-Marketing August 1996
Janice M.J. Shahsavar VP Human Relations June 1995
John Ryrie Stone VP, Mertex and Mertex Plus Feb 1997
Darrell Wayne Van Dyke VP, NHMC US February 1997
Richard J. Johnson VP, NCP February 1997
No Director and/or Executive Officer has been the subject of any order,
judgment, or decree of any governmental agency or administrator or of
any court or competent jurisdiction, revoking or suspending for cause
any license, permit or other authority of such person or of any
corporation of which he is a Director and/or Executive Officer, to engage
in the securities business or in the sale of a particular security or
temporarily or permanently restraining or enjoining any such person or any
corporation of which he is an officer or director from engaging in or
continuing any conduct, practice, or employment in connection with
the purchase or sale of securities, or convicting such person of
any felony or misdemeanor involving a security or any aspect of the
securities business or of theft or of any felony.
Mahmood (Mac) Shahsavar and Janice Shahsavar are husband and wife.
Other than disclosed above, there are no family relationships
between any two or more Directors or Executive Officers.
There are no arrangements or understandings between any two or more
Directors or Executive Officers, pursuant to which he/she was selected as
a Director or Executive Officer.
Other than disclosed below, there are no arrangements or understandings
between any two or more Directors or Executive Officers. Janice Shahsavar
owns 100% of Excelco; refer to ITEM #1, ITEM #4, ITEM $9, ITEM #13, and
ITEM #14. Refer to ITEM #1, ITEM #9, ITEM #12, ITEM #13 and ITEM #14
regarding restrictions and obligations placed upon Mahmood (Mac)
Shahsavar and Janice Shahsavar and Excelco pursuant to the MG Agreement,
the WEDD Agreement, and various agreements with D&T Leasing.
ITEM 11. EXECUTIVE COMPENSATION
The Company has no formal plan for compensating its Directors for their
service in their capacity as Directors. Directors are entitled to
reimbursement for reasonable travel and other out-of-pocket expenses
incurred in connection with attendance at meetings of the Board of
Directors. The Board of Directors may award special remuneration to any
Director undertaking any special services on behalf of the Company other
than services ordinarily required of a Director. Other than indicated
below no Director received and/or accrued any compensation for his
services as a Director, including committee participation and/or special
assignments.
The Company grants stock options to Directors, Executive Officers and
employees; refer to ITEM #12, "Options to Purchase Securities from
Registrant or Subsidiary".
Other than discussed below, the Company has no plans or arrangements in
respect of remuneration received or that may be received by Executive
Officers of the Company in Fiscal 1998 to compensate such officers in the
event of termination of employment (as a result of resignation, retirement,
change of control) or a change of responsibilities following a change of
control, where the value of such compensation exceeds US$60,000 per
Executive Officer.
During Fiscal 1997, no funds were set aside or accrued by the Company to
provide pension, retirement or similar benefits for Directors or Executive
Officers.
Except for the stock option program discussed below, the Company has
no material bonus or profit sharing plans pursuant to which cash or non-
cash compensation is or may be paid to the Company's Directors or Executive
Officers.
During Fiscal 1997, no Director or Executive Officer received and/or
accrued "other compensation" in excess of the lesser of US$25,000 or 10% of
such cash compensation, and all Directors and Executive Officers as a group
did not receive other compensation which exceeded US$25,000 times the
number of persons in the group or 10% of compensation.
There are no written employment agreements with any Director or Executive
Officer.
Table No. 9 details the compensation during Fiscal 1997 ended 6/30/97 for
the Chief Executive Officer, the four next highly compensated Directors and
Executive Officers to the extent that they were compensated in excess of
US$60,000, all other Directors and Executive Officers as a group, as well
as compensation for all Directors and Executive Officers as a group.
Table No. 9
Compensation to Executive Officers/Directors
Fiscal 1997 Ended 6/30/97
Value of
Stock Option Below Market
Salary/Bonus Exercise Stock
Consulting Net Market Options
Total
Directors/Officers Fees Value(1) Granted(2)Compensation
Mahmood (Mac) Shahsavar (3) $120,000 $0 $0 $120,000
Alice E. Affleck 30,000 118,000 0 148,000
M. Seyed Torabian (3) 72,000 0 69,560 141,560
Robert A. Jackson 78,000 37,180 3,700 118,880
Darrell Van Dyke 56,700 0 0 56,700
Other Officers/Directors 114,775 12,900 11,100 138,775
Total $471,475 $168,080 $84,360 $723,915
(1) Stock Option Exercise Net Market Value represents the aggregate
difference between the exercise price of stock options exercised
during
Fiscal 1997 and the market value of the common stock on the date of
exercise.
(2) Market Value of Below-Market Stock Options Granted represents the
aggregate difference between the exercise price of stock options
granted
in Fiscal 1997 and the market value of the common stock on the date of
granting.
(3) Accrued but not paid. Refer to ITEM #13.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR
SUBSIDIARIES
Stock Options to purchase securities from Registrant are granted to
Directors and Employees of the Registrant on terms and conditions
acceptable to the regulatory authorities in Canada, notably the Vancouver
Stock Exchange. The Registrant has no formal written stock option plan.
The Company is examining the feasibility of adopting a formal stock plan.
Under the stock option program, stock options for up to 10% of the number
of issued and outstanding common shares may be granted from time to
time, provided that stock options in favor of any one individual may not
exceed 5% of the issued and outstanding common shares. A waiver of the
10% and 5% rules is available to Senior Board companies (like the
Registrant). No stock option granted under the stock option
program is transferable by the optionee other than by will or the laws
of descent and distribution, and each stock option is exercisable during
the lifetime of the optionee only by such optionee.
The exercise price of all stock options granted under the stock option
program must be at least equal to the fair market value of such common
shares on the date of grant, and the maximum term of each stock option
may not exceed ten years.
The exercise prices for stock options were determined in accordance with
Vancouver Stock Exchange ("VSE") guidelines and reflect the average closing
price of the Registrant's common shares for the ten trading days on the VSE
immediately preceding the day on which the Directors granted and publicly
announced the stock options, less an allowable discount.
The names and titles of the Directors and Executive Officers of the
Registrant to whom outstanding stock options have been granted and the
number of common shares subject to such stock options are set forth in
Table No. 10 as of 11/30/97, as well as the number of stock options granted
to Directors and all employees as a group. The exercise price of the stock
options is stated in Canadian Dollars.
Table No. 10
Stock Options Outstanding
Number of Shares of CDN$
Common Exer. Expiration
Name Stock Price Date
Mahmood (Mac) Shahsavar (1) 370,000 $2.00 11/30/2000
Morteza Seyed Torabian 107,829 2.00 11/30/2000
Morteza Seyed Torabian 94,000 3.81 8/11/2001
Morteza Seyed Torabian 8,950 6.13 6/03/2002
Janice Shahsavar (1) 100,000 2.00 11/30/2000
Alice Elaine Affleck 60,000 2.00 11/30/2000
Alice Elaine Affleck 15,000 6.13 6/03/2002
Robert Alexander Jackson 16,000 2.00 11/30/2000
Robert Alexander Jackson 5,000 3.81 8/11/2001
Robert Alexander Jackson 7,500 6.13 6/03/2002
Reginald Adrian Ebbeling 12,000 2.00 11/30/2000
Reginald Adrian Ebbeling 5,000 3.81 8/11/2001
Gordon John Farrimond 30,000 2.00 11/30/2000
Gordon John Farrimond 10,000 3.81 8/11/2001
Gordon John Farrimond 7,500 6.13 6/03/2002
Aristotle (Telly) John Mercury 30,000 2.00 11/30/2000
Ross Scavuzzo 20,000 2.00 11/30/2000
Darrell Van Dyke 20,000 6.13 6/03/2002
Richard Johnson 19,250 6.13 6/03/2002
John Stone 10,000 6.13 6/03/2002
Total Officers/Directors (12 persons) 948,029
Total Employees/Advisors (39 persons) 319,125
Total 1,267,154
(1) Pursuant to the MG Agreement and the WEDD Agreement, the exercise
of stock options and the subsequent resale of such shares is
restricted (refer to ITEM #2, ITEM #9, and ITEM #13).
Table No. 11 lists, as of 11/30/97 share purchase warrants outstanding, the
date the share purchase warrants were issued, the exercise price, and the
expiration date of the share purchase warrants.
Table No. 11
Share Purchase Warrants Outstanding
Number of Number of
Share Share Expiration
Purchase Purchase Date of
Effective Warrants Warrants Exercise Price Share
Date of Originally Still First Second Purchase
Issuance Granted Outstanding Year Year Warrants
6/02/96 (1) 905,000 835,000 $3.50 (18 months) 2/02/98
8/05/97 (2) 91,000 91,000 6.00 7.00 7/08/98
12/09/97 (3) 150,000 150,000 6.90 7.94 2/03/99
(1) Issued upon exercise of the July 1996 Special Warrants.
(2) Issued upon exercise of the January 1997 Special Warrants.
(3) Issued pursuant to acquisition of Importex.
In addition, in January 1997, the Company issued 1,600,000 Special Warrants
at $6.00 each. Each Special Warrant entitles the holder to acquire,
without additional payment, one SW Unit. Each SW Unit consists of one
common share and one share purchase warrant which entitles the holder to
purchase one additional common share at $7.00 until 7/8/98. 1,509,000 of
these Special Warrants remain outstanding. Officers/Directors own 34,000
Special Warrants.
In connection with the above referenced private placement of Special
Warrants, the Company issued 128,000 Agent Warrants. Each Agent Warrant
entitles the holder to acquire, without additional consideration, one Agent
Unit. Each Agent Unit consists of one common share and one share purchase
warrant which entitles the holder to purchase one additional common share
at $7.00 until 7/8/98.
In addition, in October 1997, the Company issued Convertible Notes in the
amount of US$5,000,000. The Convertible Notes bear cumulative dividends at
the rate of 6% per year, payable in cash or in common shares. The
Convertible Notes entitle the holders to acquire, without additional
payment, Convertible Debentures in the aggregate amount of US$5,000,000 and
an aggregate of 250,000 CN Warrants. The Convertible Debentures are
convertible into common shares at a conversion price equal to the lower of
(a) US$2.33 or (b) 85% of the closing price of the Company's common shares
on NASDAQ on the conversion date.
Each CN Warrant is exercisable for two years (until 10/1/99), and entitles
the holder to purchase one common share at US$4.76 per share in the first
year and at US$5.20 per share during the second year.
A holder of a Convertible Debenture has the right to convert same at any
time during the Debenture Conversion Period, commencing the earlier of: (a)
December 30, 1997 or (b) the later of the the effective date of a
Registration Statement filed with the US Securities and Exchange Commission
under the 1933 Act regarding the Convertible Notes or the date on which the
last of the receipts for a prospectus filed with British Columbia
Securities Commission regarding registration of the Convertible Debentures
and CN Warrants, and maturing on October 2, 1998.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Ross Scavuzzo, a director of the Company, was the President of Arjo and a
director of the Company at the time the Company entered into an agreement
with Arjo whereby the Issuer has acquired Arjo's Liquid Division. (See
ITEM #9, "Management's Discussion and Analysis of Financial Condition and
Results of Operation, Acquisitions and Dispositions, Liquid Division of
Arjo Canada Inc.")
Janice Shahsavar, the Vice-President Human Resources of the Company, owns
100% of the issued and outstanding shares of Excelco. In addition, Mahmood
(Mac) Shahsavar, the President, Chief Executive Officer, Promoter and a
director of the Company, is the President and Chief Executive Officer of
Excelco. The Company has entered into an agreement whereby Excelco has
granted to the Company the right to use certain Robotic Technology. During
Fiscal 1995/1996/1997, respectively, the Company paid $345,890, $314,228,
and $804,832 for machinery and equipment from Excelco. (See ITEM #9,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation, Acquisitions and Dispositions, Robotic Technology License
Agreement".)
See ITEM #9, "Management's Discussion and Analysis of Financial Condition
and Results of Operation, Financial Assistance, Manitoba Government" for
information relating to certain restrictions and obligations placed upon
Mahmood (Mac) Shahsavar and Janice Shahsavar in order to provide security
to MDC pursuant to the MG Agreement.
Darrell Wayne Van Dyke, Vice President of NHMC US, was General Manager of
Huntington Laboratories Gam-Med Division, Inc. ("Gam-Med") at the time that
the Company entered into an agreement with Gam-Med whereby the Company
acquired the on-going business and certain assets of Gam-Med. (See ITEM
#9, "Management's Discussion and Analysis of Financial Condition and
Results of Operation, Acquisitions and Dispositions, Huntington
Laboratories Gam-Med Division, Inc.)
Aristotle (Telly) John Mercury, Director of the Company, is a partner in
the Manitoba law firm of Aikins MacAulay & Thorvaldson. During Fiscal
1995/1996/1997, respectively, that firm received $1,927, $64,965 and
$48,331 for legal services rendered to the Company.
Seyed Torabian and Elaine Afflect are both directors of World Wide Golf
Resorts and Mahood (Mac) Shahsavar is Chairman.
Shareholder Loans
At 6/30/95, 6/30/96, and 6/30/97, respectively, the Company had received
non-interest bearing loans totaling $203,109, $551,479, and $1,049,410 from
Excelco (owned by Janice Shahsavar; in addition, Mahmood (Mac) Shahsavar,
is President/CEO of Excelco), which loans have no fixed terms of repayment.
At 6/30/95, 6/30/96, and 6/30/97, respectively, the Company had received
non-interest bearing loans totaling $0, $155,496, and $155,496 from
Inscoca, an arm's length company which had a significant stock position in
the Company until 3/13/96 whereupon the shareholding in the Company was
distributed to that firm's shareholders, which loans have no fixed terms of
repayment.
At 6/30/97, Mahmood (Mac) Shahsavar owed the Company $17,355.
At 6/30/96 and 6/30/97, respectively, the Company had received non-interest
bearing loans totaling $25,320 and $877,219 from companies controlled by
Mahmood (Mac) Shahsavar, President and CEO of the Company. These loans are
unsecured, non-interest bearing, with no fixed terms of repayment.
Accrued Salaries
Salary owed to Mahmood (Mac) Shahsavar, President/CEO/Director of the
Company, for Fiscal 1995/1996/1997, respectively, of $60,000, $120,000, and
$120,000 has been accrued but not paid.
Salary owed to Morteza Seyed Torabian, Executive Vice President and
Director of the Company, for Fiscal 1995 and 1996, respectively, of $48,000
and $72,000 was been accrued but not paid. During Fiscal 1997, the Company
paid $138,000 to Mr. Torabian, leaving a balance of $54,000 accrued and
owing.
Other than as disclosed above, there have been no transactions since
8/23/93, or proposed transactions, which have materially affected or will
materially affect the Company in which any Director, Executive Officer, or
beneficial holder of more that 10% of the outstanding common shares, or any
of their respective relatives, spouses, associates or affiliates has had or
will have any direct or material indirect interest.
Management believes the transactions referenced above were on terms at
least as favorable to the Company as the Company could have obtained from
unaffiliated parties.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
The authorized capital of the Company is an unlimited number of Class A
common shares without par value, of which 12,474,331 were issued and
outstanding at 11/30/97.
Effective 5/15/95, the Company's common shares were split on a 571.4286:1
basis. All discussion in this Annual Report refers to post-split stock
unless otherwise indicated.
All of the authorized shares of common shares of the Company are of the
same class and, once issued, rank equally as to dividends, voting powers,
and participation in assets. Holders of common shares are entitled to one
vote for each share held of record on all matters to be acted upon by the
shareholders.
Holders of common shares are entitled to receive such dividends as may be
declared from time to time by the Board of Directors, in its discretion,
out of funds legally available therefore.
Upon liquidation, dissolution or winding up of the Company, holders of
common shares are entitled to receive pro rata the assets of Company, if
any, remaining after payments of all debts and liabilities. No shares have
been issued subject to call or assessment. There are no pre-emptive or
conversion rights and no provisions for redemption or purchase for
cancellation, surrender, or sinking or purchase funds.
There are no restrictions on the repurchase or redemption of common shares
of the Company while there is any arrearage in the payment of dividends or
sinking fund installments.
Pursuant to the MG Agreement the Company is restricted from paying any
dividends for the first three years after the initial advance of funds
under the MG Agreement (until October 1998). In addition, the WEDD
Agreement prohibits the Company from paying dividends without the prior
written approval of the FGWEDD until the WEDD loan is repaid in full.
Manitoba Corporations Act
Provisions as to the modification, amendment or variation of such
shareholder rights or provisions are contained in the Corporation Act of
Manitoba. Unless the Corporations Act or the Company's Articles or
memorandum otherwise provide, any action to be taken by a resolution of the
members may be taken by an ordinary resolution or by a vote of a majority
or more of the common shares represented at the shareholders' meeting.
The Company's Articles and the Manitoba Corporations Act contain provisions
which require a "special resolution" for effecting certain corporate
actions. Such a "special resolution" requires a two-thirds vote of
shareholders rather than a simple majority for passage. The principle
corporate actions that require a "special resolution" include:
a. Transferring the Company's jurisdiction from one province
to another jurisdiction;
b. Disposing of all or substantially all of the Company's
undertakings;
c. Removing a Director before expiration of his term of office;
d. Certain alterations of share capital;
e. Changing the Company name;
f. Altering any restrictions on the Company's business; and
g. Certain reorganizations of the Company.
In addition, the Manitoba Corporation Act permits cumulative voting for
Directors.
Escrowed Performance Shares
1,180,000 of the issued and outstanding common shares are "Escrowed
Performance Shares" held as indicated below:
Mahmood (Mac) Shahsavar -- 690,000 shares
Seyed Torabian -- 120,000 shares
Janice Shahsavar -- 120,000 shares
Alice Elaine Affleck -- 80,000 shares
Robert Alexander Jackson -- 50,000 shares
Employees -- 120,000 shares
The escrow restrictions provide that the common shares may not be traded
in, dealt with in any manner whatsoever, or released, nor may the Company,
its transfer agent or escrow holder make any transfer or record any trading
of these shares without the consent of the Superintendent of Brokers for
British Columbia.
The terms of the escrow agreement provide that a portion of the
consideration for the original issuance of the escrowed shares is to
encourage the escrow shareholders to act in the best interests of the
Company, and if the Company becomes successful, due in part to the efforts
of the escrow shareholders, or any one of them, the escrow shareholders
shall be entitled to maintain their ownership of the escrowed shares and to
a release of the shares from the terms of the escrow agreement, from time
to time, in accordance with the general policies of the Superintendent of
Brokers or the Vancouver Stock Exchange.
The performance shares may be released from escrow, on a pro-rata basis,
based upon the cumulative cash flow of the Company, as evidenced by the
Company's annual audited financial statements. "Cash Flow" is
defined as Net Income or loss before tax, adjusted for certain add-
backs. For each $0.09 of cumulative cash flow generated by the
Company from its operations, one performance share may be released from
escrow.
The terms of the escrow agreement further provide that any escrow
shares not released shall be canceled if the Company's common shares are
subject to a cease trade order for two consecutive years.
The terms of the escrow agreement further provide that any escrow
shares not released by 11/30/2005 shall be canceled.
See ITEM #9, "Management's Discussion and Analysis of Financial Condition
and Results of Operation, Financial Assistance, Manitoba Government" for
information relating to certain restrictions and obligations placed upon
Mahmood (Mac) Shahsavar and Janice Shahsavar in order to provide security
to MDC pursuant to the MG Agreement with respect to the sale, transfer,
assignment or other disposition of their respective escrowed performance
shares.
Debt Securities to be Registered. Not applicable.
American Depository Receipts. Not applicable.
Other Securities to be Registered. Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES Not Applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR
REGISTERED SECURITIES Not Applicable.
PART IV
ITEM 17. FINANCIAL STATEMENTS
The Company's financial statements are stated in Canadian Dollars (CDN$)
and are prepared in accordance with Canadian Generally Accepted Accounting
Principles (GAAP), the application of which, in the case of the Company,
conforms in all material respects for the periods presented with United
States GAAP, except as discussed in notes to the financial statements.
The financial statements and notes thereto as required under ITEM #17 are
attached hereto and found immediately following the text of this Annual
Report. The audit reports of Arthur Andersen & Co. and Deloitte & Touche,
independent Chartered Accountants, are included herein immediately
preceding the financial statements.
Audited Financial Statements
for Fiscal 1997, Fiscal 1996 and Fiscal 1995
ITEM 18. FINANCIAL STATEMENTS
The Company has elected to provide financial statements pursuant to ITEM
#17.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
The financial statements and notes thereto as required under ITEM #17 are
attached hereto and found immediately following the text of this Annual
Report. The audit reports of Arthur Andersen & Co. and Deloitte & Touche,
independent Chartered Accountants, for the audited financial statements and
notes thereto are included herein immediately preceding the audited
financial statements.
Audited Financial Statements:
Fiscal 1997, 1996 and 1995 Ended June 30th
Auditor's Report dated 10/6/1997
Auditor's Report dated 11/8/1996
Consolidated Balance Sheet at 6/30/97 and 6/30/96
Consolidated Statement of Operations
for the years ended 6/30/97, 6/30/96 and 6/30/95
Consolidated Statement of Shareholders' Equity
for the years ended 6/30/97, 6/30/96 and 6/30/95
Consolidated Statements of Changes in Financial Position
for the years ended 6/30/97, 6/30/96 and 6/30/95
Notes to Consolidated Financial Statements
(B) INDEX TO EXHIBITS:
Page
1. Certificate of Incorporation, By-Laws/Articles
-- Incorporated by Reference to Form 20-FR
(as amended) and Form 6K's --
2. Instruments defining the rights of holders of
equity or debt securities being registered.
--- Refer to Exhibit No. 1 ---
3. Material Contracts:
-- Incorporated by Reference to Form 20-FR
(as amended) and Form 6K's --
4. Foreign Patents: Not Applicable.
5. Diagram of Parent and Subsidiaries: Not Included.
6. Other Documents:
-- Incorporated by Reference to Form 20-FR
(as amended) and Form 6K's --
SIGNATURE PAGE....................................... 99
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1997
TOGETHER WITH AUDITORS' REPORT
AUDITORS' REPORT
To the Directors of
NATIONAL HEALTHCARE MANUFACTURING CORPORATION:
We have audited the consolidated balance sheet of NATIONAL HEALTHCARE
MANUFACTURING CORPORATION (a Manitoba corporation) as at June 30, 1997 and
the consolidated statement of operations, shareholders' equity and changes
in financial position for the year then ended. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in Canada, which are in substantial agreement with those in the
United States of America. 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 June 30,
1997 and the results of its operations and the changes in its financial
position for the year then ended in accordance with generally accepted
accounting principles in Canada.
Accounting practices of the Company used in preparing the accompanying
consolidated financial statements conform with generally accepted
accounting principles applicable to consolidated financial statements in
Canada ("Canadian GAAP"), but do not conform with accounting principles
generally accepted in the United States of America ("U.S. GAAP"). A
description of the significant differences between Canadian GAAP and U.S.
GAAP and the approximate effect of those differences on consolidated net
loss and shareholders' equity are set forth in Note 19 of the Notes to
consolidated financial statements.
The consolidated balance sheet of National Healthcare Manufacturing
Corporation as at June 30, 1996 and the consolidated statement of
operations, shareholders' equity and changes in financial position for the
years ended June 30, 1996 and 1995 were audited by other auditors who
expressed an opinion without reservation on those statements in their
report dated July 22, 1996.
Winnipeg, Manitoba
October 6, 1997
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(with comparative balances as at June 30, 1996)
ASSETS
1997 1996
CURRENT ASSETS
Cash and short-term investments $4,213,255 $958,568
Accounts receivable (Note 8) 1,827,239 153,322
Inventories (Notes 4 and 8) 2,850,012 507,203
Prepaid expenses 364,998 73,808
9,255,504 1,692,901
INVESTMENT IN NATIONAL
HEALTHCARE LOGISTICS LLC (Note 5) 490,772 -
PROPERTY, PLANT AND EQUIPMENT
USED IN OPERATIONS (Notes 6, 8 and 9) 7,698,374 6,916,680
ASSETS UNDER DEVELOPMENT (Notes 7, 8 and 9) 9,868,849 8,924,389
$27,313,499 $17,533,970
<FN>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Cheques issued in excess of amounts on deposit $349,336 $68,448
Accounts payable and accrued liabilities 1,271,616 1,123,986
Current portion of long-term debt (Note 8) 460,000 -
Current portion of obligations
under capital leases (Note 9) 1,718,552 1,427,042
3,799,504 2,619,476
LONG-TERM DEBT (Note 8) 2,807,326 2,169,085
OBLIGATIONS UNDER CAPITAL LEASES (Note 9) 5,504,985 7,223,699
DEFERRED FOREIGN EXCHANGE GAIN 54,128 204,073
LOANS PAYABLE TO SHAREHOLDERS
AND DIRECTOR-RELATED COMPANIES (Note 10) 2,064,770 720,826
14,230,713 12,937,159
SHAREHOLDERS' EQUITY
Share capital (Note 11) 9,318,163 8,677,351
Warrants (Note 12) 12,093,206 -
Deficit (8,328,583) (4,080,540)
13,082,786 4,596,811
$27,313,499 $17,533,970
<FN>
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLDIATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
(with comparative balances for the years ended June 30, 1996 and 1995)
1997 1996 1995
REVENUES
Sales (Note 14) $4,905,401 $556,105 $-
Other 166,196 51,339 25,659
5,071,597 607,444 25,659
COSTS AND EXPENSES
Cost of sales 2,637,315 291,319 -
Depreciation and amortization
of property, plant and equipment 1,576,975 1,188,053 -
Interest on long-term debt 415,035 409,258 -
Other 56,026 42,208 -
Selling, distribution and 4,424,582 1,888,352 894,453
administrative
9,109,933 3,819,190 894,453
LOSS FROM OPERATIONS 4,038,336 3,211,746 868,794
LOSS FROM INVESTEE 209,707 - -
NET LOSS $4,248,043 $3,211,746 $868,794
BASIC LOSS PER SHARE $ 0.39 $0.32 $0.15
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 10,925,842 10,088,419 5,767,530
<FN>
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1997
(with comparative balances for the years ended June 30, 1996 and 1995)
Class A Common Shares
Shares Amount Paid in Ca Deficit Total
pital
Balance
s at
June
30,
1994 - $- $ - $ - $-
Issue
of
shares
for
cash 13,472 6,339,864 - - 6,339,864
Issue
of
shares
for
propert
y 350 350,000 - - 350,000
Share
split 7,884,468 - - - -
Issue
of
shares
for
cash 1,680,000 136,800 - - 136,800
Net
loss - - - (868,794) (868,794)
Balance
s at
June
30,
1995 9,578,290 6,826,664 - (868,794) 5,957,870
Issue
of
shares
for
cash 1,175,000 2,306,250 - - 2,306,250
Share
issue
costs - (455,563) - - (455,563)
Net
loss - - - (3,211,746) (3,211,746)
Balance
s at
June
30,
1996
10,753,290 8,677,351 - (4,080,540) 4,596,811
Issue
of
shares
for
cash 67,125 140,812 - - 140,812
Issue
of
special
warrant
s (Note
12) - - 12,315,000 - 12,315,000
Warrant
issue
costs - - (221,794) - (221,794)
Exercis
e of
warrant
s (Note
12) 250,000 500,000 - - 500,000
Net
loss - - - (4,248,043) (4,248,043)
Balance
s at
June
30,
1997 11,070,415 $9,318,163 $12,093,206 $(8,328,583) $13,082,786
<FN>
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE YEAR ENDED JUNE 30, 1997
(with comparative balances for the years ended June 30, 1996 and 1995)
1997 1996 1995
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss $(4,248,043) $(3,211,746) $(868,794)
Items not affecting cash
Amortization of deferred
foreign exchange gain
(15,950) - -
Depreciation and amortization
1,576,975 1,188,053 -
Loss from investee 209,707 - -
(2,477,311) (2,023,693) (868,794)
Net change in non-cash
operating assets and
liabilities
Accounts receivable (1,416,063) (104,443) (48,879)
Inventories (1,377,116) (507,203) -
Prepaid expenses (291,190) 7,904 (81,712)
Accounts payable and accrued
liabilities 147,630 393,833 730,153
(5,414,050) (2,233,602) (269,232)
INVESTING ACTIVITIES
Acquisition of shares in
National Healthcare
Logistics LLC (700,479) - -
Acquisition of property, plant
and equipment (1,476,066) (1,583,214) (14,692,122)
Deposit on specialized
equipment - - (753,786)
Interest capitalized on
equipment (475,404) - -
Acquisition of National Care
Products Ltd. (896,447) - -
Acquisition of Gam-Med
Division (1,678,728) - -
(5,227,124) (1,583,214) (15,445,908)
FINANCING ACTIVITIES
Proceeds from (repayment of)
obligations under capital
leases (1,427,204) (186,189) 8,836,930
Proceeds from long-term debt
1,098,241 2,169,085 -
Deferred foreign exchange gain
(134,026) 9,772 194,301
Advances from shareholders and
director-related companies
1,343,944 517,717 203,109
Net proceeds from issuance of
Class A common shares
640,812 1,850,687 6,826,664
Net proceeds from issuance of
warrants 12,093,206 - -
13,614,973 4,361,072 16,061,004
INCREASE IN CASH 2,973,799 544,256 345,864
CASH, beginning of year 890,120 345,864 -
CASH, end of year $3,863,919 $890,120 $345,864
Represented by:
Cash and short-term
investments $4,213,255 $958,568 $345,864
Cheques issued in excess of
funds on deposit (349,336) (68,448) -
$3,863,919 $890,120 $345,864
Supplemental disclosure of
cashflow information
Cash paid for:Interest (net of
amount capitalized) $415,035 $184,241 $-
Income taxes $ - $- $-
<FN>
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(with comparative balances as at June 30, 1996 and for the years ended June
30, 1996 and 1995)
1.DESCRIPTION OF BUSINESS
National Healthcare Manufacturing Corporation (the "Company") was
incorporated on August 23, 1993 under the Manitoba Corporations Act and
registered as an extra provincial company in the Province of British
Columbia on December 9, 1994. The Company is primarily engaged in the
manufacturing, assembly and packaging of medical supplies for the
healthcare industry. Its shares are traded on the Vancouver Stock
Exchange. As of August 14, 1996, the shares of the Company were listed
on the Small Cap board of NASDAQ Stock Market.
These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada and
conform in all material respects with accounting principles generally
accepted in the United States, except as described in Note 19. All
amounts are stated in Canadian dollars.
2.BUSINESS CONSIDERATIONS
The Company has incurred significant upfront costs to establish an
automated plant for the assembly and packaging of medical supplies
which management believes is necessary to establish a strong market
presence as a new entrant to the healthcare industry. The Company's
objective is to produce and distribute custom products to users of
medical and surgical devices throughout North America. During fiscal
1997, the Company successfully obtained certification for distribution
of products in the United States from the Food and Drug Administration.
Management's plans for fiscal 1998 are to obtain ISO 9001
certification, develop electronic data interchange, undertake research
and development to streamline operations and expand product lines, and
evaluate the acquisition of business with existing distribution
networks in order to consolidate sales and marketing activities. The
Company anticipates manufacturing products for national and regional
distributing companies and intends to sell directly to homecare
providers across Canada and the United States. The long-term growth
plan of the Company includes the targeting of additional markets. The
Company expects that private/original equipment manufacturers' branding
of products for other manufacturers and/or distributors will be handled
directly by the Company. No formal agreements are in place at this
time.
The Company has incurred significant operating losses and business
development costs to date and had a consolidated deficit from
operations of $8,328,583 as at June 30, 1997. As at June 30, 1997, the
Company had positive working capital, primarily due to additional funds
raised through two private placements (see Note 12). The Company's
ability to continue as a going concern is dependent upon developing
profitable operations and obtaining additional funds needed to finance
these development activities.
These consolidated financial statements have been prepared on the going
concern basis, which assumes that the Company will realize its assets
and discharge its liabilities in the normal course of operations.
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(with comparative balances as at June 30, 1996 and for the years ended June
30, 1996 and 1995)
3.ACCOUNTING POLICIES
Basis of Consolidation
These consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries National Healthcare
Manufacturing Corporation, U.S. and National Care Products Ltd. All
significant intercompany transactions and balances have been eliminated
upon consolidation. The Company accounts for its investments in non-
controlled investees using the equity method.
Cash and Short-term Investments
Cash and short-term investments consist principally of deposit
instruments which are highly liquid and have original maturities of 90
days or less.
Inventories
Raw materials are valued at the lower of cost and replacement cost.
Finished goods are valued at the lower of cost and net realizable
value. Cost is determined on the first in, first out basis.
Property, Plant and Equipment Used in Operations
Property, plant and equipment used in operations is recorded at cost
less accumulated depreciation. Costs of additions, betterments,
renewals and interest during development are capitalized. Depreciation
is being provided for by the declining balance method at the following
annual rates:
Building, improvements and paving 4 - 8%
Furniture and fixtures 20%
Computer equipment 20 - 30%
Machinery and equipment 20 - 30%
Equipment under capital lease 30%
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(with comparative balances as at June 30, 1996 and for the years ended June
30, 1996 and 1995)
3.SIGNIFICANT ACCOUNTING POLICIES (continued)
Assets under Development
Assets under development are recorded at cost. Cost includes all
expenditures incurred in acquiring the asset and preparing it for use.
Interest costs on related debt obligations are capitalized until the
asset is substantially completed and ready for its intended and
productive use.
Leases
Leases entered into are classified as either capital or operating
leases. Leases that transfer substantially all of the benefits and
risks of ownership to the Company are accounted for as capital leases.
At the time a capital lease is entered into, an asset is recorded
together with a related long-term obligation. Equipment acquired under
capital leases is being depreciated on the same basis as other fixed
assets.
Rental payments under operating leases are charged to expenses as
incurred.
Deferred Foreign Exchange Gain
The deferred foreign exchange gain relates to the obligations under
capital leases and is being amortized over the term of the respective
leases.
Revenue Recognition
Sales revenues are recognized at the time of product shipment to
distributors or customers.
Foreign Currency Translation
Foreign currency transactions are translated to Canadian dollars at the
rate of exchange in effect on the dates they occur. Monetary assets
and liabilities are subsequently adjusted to reflect the rate of
exchange in effect at the balance sheet date. Exchange gains and
losses arising on translation of monetary assets and liabilities are
included in income, except for unrealized exchange gains and losses
relating to the translation of the obligations under capital leases
which are deferred and amortized over the remaining term of the leases.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingencies at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(with comparative balances as at June 30, 1996 and for the years ended June
30, 1996 and 1995)
3.SIGNIFICANT ACCOUNTING POLICIES (continued)
Loss Per Share
Loss per share data has been computed by dividing net loss by the
weighted average number of common shares outstanding during the year.
4.INVENTORIES
1997 1996
Raw Materials $912,681 $280,542
Finished goods and samples 1,937,331 226,661
$2,850,012 $507,203
<FN>
5.INVESTMENT IN NATIONAL HEALTHCARE LOGISTICS LLC
During fiscal 1997, the Company acquired 150 Class A common voting
shares, representing a 50% interest, and 333 1/3 Class C non-voting
preferred shares of National Healthcare Logistics LLC. This investment
is being accounted for under the equity method.
6.PROPERTY, PLANT AND EQUIPMENT USED IN OPERATIONS
1997 1996
Accumulated
Cost Depreciation Net Net
Land $565,461 $ - $565,461 $125,000
Building,
improvements 2,331,828 126,618 2,205,210 1,742,117
and paving
Furniture and 254,897 61,286 193,611 139,872
fixtures
Computer 216,783 27,989 188,794 36,198
equipment
Machinery and 2,882,646 821,094 2,061,552 1,889,932
equipment
Equipment under
capital 4,211,479 1,727,733 2,483,746 2,983,561
lease
$10,463,094 $2,764,720 $7,698,374 $6,916,680
<FN>
In fiscal 1997, no interest was capitalized to the equipment under
capital lease (1996 - $89,034).
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(with comparative balances as at June 30, 1996 and for the years ended June
30, 1996 and 1995)
7.ASSETS UNDER DEVELOPMENT
1997 1996
Machinery and equipment in storage $408,562 $408,562
Refundable deposit on equipment lease (Note - 753,786
9)
Equipment under capital lease (1194) 2,313,245 2,432,299
Equipment under capital lease (1094 - 001) 7,147,042 5,329,742
$9,868,849 $8,924,389
<FN>
In fiscal 1997, the refundable deposit on equipment lease was applied
against obligations under capital lease, in connection with the
settlement as described in Note 9.
Interest of $475,404 (1996 - $505,668) has been capitalized to the
equipment under capital lease 1094-001.
8.LONG-TERM DEBT
1997 1996
Western Economic Diversification, term loan,
matures December 1, 1999, unsecured, non-
interest bearing, repayable in variable
quarterly payments commencing December 1, 1997 $1,654,180 $918,347
Province of Manitoba, term loan, bears interest at
the rate charged to Manitoba Crown Corporations
for borrowings amortized over a ten year period
(currently 8%), secured by a first fixed charge
against land, buildings and equipment, and a
second charge over accounts receivable and
inventories, repayable in six consecutive
monthly instalments of $30,000 each commencing
May, 1999 and consecutive monthly instalments 1,613,146 1,250,738
of $51,958 each thereafter, until fully repaid
3,267,326 2,169,085
Less: current portion (460,000) -
$2,807,326 $2,169,085
<FN>
The Western Economic Diversification loan represents subordinated
financial assistance to a maximum of $1,937,852, to assist in capital
costs, marketing cost, and working capital requirements. Under the
terms of the loan agreement, the Company has agreed to maintain equity
of not less than $2,200,000 and to postpone the repayment of
shareholder loans and
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(with comparative balances as at June 30, 1996 and for the years ended June
30, 1996 and 1995)
8.LONG-TERM DEBT (continued)
dividends until the loan is repaid in full. Subsequent to June 30,
1997, a further advance of $150,655 was received by the Company (See
Note 18).
The Company has entered into an agreement with the Province of Manitoba
for a term loan. The loan is subject to certain conditions which
include minimum capital expenditures of $5,000,000, equity
contributions of $4,700,000, achievement of certain sales targets and a
minimum level of new job creation. A maximum of 42 months' relief on
interest has been granted to the Company, subject to the Company
providing a certain number of new jobs per year. A final advance of
$561,000 was received by the Company subsequent to June 30, 1997 (See
Note 18).
The agreement provides for the acceleration of interest and principal
in the event the Company fails to provide a certain number of jobs per
year. Under the terms of the loan agreement, the Company has agreed to
postpone the repayment of shareholder loans and dividends.
Minimum principal repayments required under the terms of the debt
agreements are as follows (including amounts advanced subsequent to
June 30, 1997):
1998 $460,000
1999 $1,060,000
2000 $880,502
2001 $623,500
2002 $623,500
2003 $331,479
9.OBLIGATIONS UNDER CAPITAL LEASES
The Company leases specialized equipment under three capital leases.
The leases are held in U.S. dollars in the name of National Healthcare
Manufacturing Corporation, U.S. and are converted to Canadian dollars
using the exchange rate as at June 30, 1997 as follows:
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(with comparative balances as at June 30, 1996 and for the years ended June
30, 1996 and 1995)
9.OBLIGATIONS UNDER CAPITAL LEASES (continued)
Lease Lease Lease
1094-001 1094-002 1194 Total
1998 $1,131,226 $619,818 $675,705 $2,426,749
1999 1,131,226 619,818 619,400 2,370,444
2000 1,131,226 619,818 - 1,751,044
2001 1,131,226 619,818 - 1,751,044
2002 377,077 309,909 - 686,986
Total minimum lease 4,901,981 2,789,181 1,295,105 8,986,267
payments
Less: amount representing
interest approximating 1,055,670 619,705 87,355 1,762,730
10.4% to 11.5%
3,846,311 2,169,476 1,207,750 7,223,537
Less: current portion 726,397 390,484 601,671 1,718,552
$3,119,914 $1,778,992 $606,079 $5,504,985
<FN>
Since fiscal 1995, the Company was in dispute with the original lessor
in respect of capital leases 1094-001, 1094-002 and 1194. The lessor
did not recognize the validity of a settlement agreement signed in
fiscal 1995. The Company believed that it had strong arguments to
support the validity of the settlement agreement. As a result, certain
adjustments were made in 1995 to the various equipment under capital
leases and the lease obligations based on the then interpretation of
the settlement terms.
During fiscal 1997, the dispute was finally settled and the leases were
assumed by a new lessor. The terms were similar to the 1995 settlement
agreement except for the following:
i)The refundable deposit on equipment paid by the Company was applied
against the lease liability by the lessor.
ii)The implicit interest rate of the capital lease obligations was
reduced as a result of the settlement.
The capital lease obligations, the respective equipment under capital
leases and the refundable deposit on equipment were adjusted
accordingly.
The above lease obligations reflect the new lease terms after
settlement of the dispute with the lessor.
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(with comparative balances as at June 30, 1996 and for the years ended June
30, 1996 and 1995)
10.LOANS PAYABLE TO SHAREHOLDERS AND DIRECTOR-RELATED COMPANIES
1997 1996
Loans payable, shareholders $1,187,551 $720,826
Loans payable, director-related companies 877,219 -
$2,064,770 $720,826
<FN>
The loans payable to shareholders and director-related companies are
unsecured, non-interest bearing, with no fixed terms of repayment.
The terms of the government assistance agreement with Western Economic
Diversification require that the Company obtain the consent of both the
Minister of Western Economic Diversification and Manitoba Development
Corporation prior to the repayment of shareholders' loans. The
shareholders and director-related companies have agreed to not demand
repayment within fiscal 1998; accordingly these loans have been
classified as non-current.
11.SHARE CAPITAL
1997 1996
Common Shares
Authorized
Unlimited Class A common shares, voting
Issued
11,070,415Class A common shares,
net of issue costs (1996 - 10,753,290) $9,318,163 $8,677,351
Performance Shares
The Company has issued 1,180,000 performance shares at a price of $.01
per share which are currently held in escrow pursuant to an Escrow
Agreement dated June 29, 1995. The escrow restrictions contained in
the Escrow Agreement provide that the shares may not be traded in,
dealt with in any manner whatsoever, or released, nor may the Company,
its transfer agent or escrow holder make any transfer or record any
trading of the shares without the consent of the Superintendent of
Brokers for British Columbia or, while the shares are listed on the
Vancouver Stock Exchange, the consent of the Exchange. For each $.09
of cumulative cash flow generated by the Company from its operations,
one performance share may be released from escrow.
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(with comparative balances as at June 30, 1996 and for the years ended June
30, 1996 and 1995)
11.SHARE CAPITAL (continued)
Stock Options
The Company has issued options to certain directors and employees of
the Company and its subsidiaries to purchase common shares of the
Company, as follows:
Date of Issuance
1997 1996 1995
Options outstanding, 957,829 987,829 -
beginning of year
Options granted 536,950 - 987,829
Options exercised (67,125) - -
Options cancelled or (60,000) (30,000) -
expired
Options outstanding, end 1,367,654 957,829 987,829
of year
Exercise prices of
options $3.81 - $6.13 $ 2.00
granted during the year
Expiry date of options Aug 11, 2001
granted during the year and November 30, 2000
June 3, 2002
<FN>
Certain restrictions and obligations have been placed upon certain
management personnel with respect to the exercise of their stock
options and the sale, transfer, assignment or other disposition of
their stock options or shares issued to them upon exercise of their
stock options, as a condition of the government assistance received
from the Province of Manitoba.
12.WARRANTS
The Company has issued various types of warrants, as follows:
Agent's Warrants
In connection with its initial public offering the Company issued to an
agent non-transferable share purchase warrants entitling the agent to
purchase up to 250,000 shares at any time up to the close of business
two years from the date the shares are listed, posted and called for
trading on the Vancouver Stock Exchange, at a price of $2.00 per share
in the first year and at a price of $2.30 per share in the second year.
As at June 30, 1997, all agents warrants had been exercised.
Special Warrants
On June 26, 1996, the Board of Directors passed a resolution
authorizing a private placement of up to 1,200,000 special warrants at
a price of $3.00 per warrant. On July 31, 1996, a total of 905,000
special warrants were issued for gross proceeds of $2,715,000. The
special warrants
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(with comparative balances as at June 30, 1996 and for the years ended June
30, 1996 and 1995)
12.WARRANTS (continued)
Special Warrants (continued)
were issued as a fully paid security and each special warrant is
exercisable into one Class A common share and one transferable Class A
share purchase warrant. Each Class A share purchase warrant entitles
the holder to purchase one additional Class A share at a price of $3.50
per share. The warrants are exercisable at the earlier of eighteen
months from the closing date or six months after the date of the last
receipt for the prospectus.
The Company paid the agent commission equal to 7% of the aggregate
proceeds and issued 75,416 broker's warrants which represent 8.3333% of
the special warrants sold pursuant to the offering. Each broker's
warrant is exercisable into one compensation warrant. Each
compensation warrant entitles the broker to purchase one Class A share
at a price of $3.00 per share.
On January 8, 1997, the Company closed a second private placement of
1,600,000 special warrants at a price of $6.00 per special warrant.
Each special warrant entitled the holder, upon exercise, to acquire one
unit consisting of one Class A share and one-half of one non-
transferable share purchase warrant. Each whole warrant entitled the
holder to purchase one additional Class A share at a price of $7.00 per
share. Because receipts for the prospectus filed by the Company to
qualify the units were not obtained from all relevant regulatory
authorities within 120 days from the date of closing the private
placement, each unit now consists of one Class A share and one (rather
than one-half) non-transferable share purchase warrant. The Company
raised gross proceeds of $9,600,000 from this private placement and
incurred a commission of 8% of gross proceeds which was paid by the
issuance of 128,000 special warrants at a deemed price of $6.00 per
special warrant.
All of the above special warrants and broker's warrants were
outstanding at June 30, 1997.
13.INCOME TAXES
The Company has non-capital losses carried forward of approximately
$10,990,000 (1996 - $4,883,000) which can be utilized to reduce the
taxable income of future years. The Company is also entitled to tax
credits of approximately $244,000 (1996 - $227,000) which are
creditable against provincial income taxes.
The benefits relating to the losses and the tax credits have not been
recognized in the financial statements and the losses expire as
follows:
2002 $1,887,000
2003 2,996,000
2004 6,006,000
2012 101,000
$10,990,000
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(with comparative balances as at June 30, 1996 and for the years ended June
30, 1996 and 1995)
13.INCOME TAXES (continued)
The tax credits available to the Company begin to expire in 2002.
14.SEGMENTED INFORMATION
The Company operates primarily in, and derives revenue from, the
automated packaging and sale of surgical and custom procedure trays and
liquid products for the healthcare industry segment.
A significant portion of the Company's sales during the year were to
customers in a foreign country:
1997 1996 1995
Sales to customers outside Canada $2,482,035 $384,888 $-
Sales to customers within Canada 2,423,366 171,217 -
$4,905,401 $556,105 $-
15.RELATED PARTY TRANSACTIONS
The President and Chief Executive Officer of the Company also serves as
President and Chief Executive Officer of another company which has
granted National Healthcare Manufacturing Corporation rights to certain
technology under a licensing agreement made under similar terms and
conditions as transactions with unrelated entities. The license
agreement, dated May 30, 1995, is for an initial term of ten years with
provisions for renewal for consecutive ten year terms thereafter.
National Healthcare Manufacturing Corporation has agreed to purchase
all automated machinery from this related company, subject to the terms
of a twenty year agreement between the related company and a
manufacturer. The related company has granted the manufacturer the
exclusive right to manufacture all machinery and equipment which
incorporates the said technology, and the related company has agreed to
purchase products only from the manufacturer. The related party has
agreed to sell machinery and equipment to National Healthcare
Manufacturing Corporation at its cost. During the year, the Company
paid $804,832 (1996 - $314,228 and 1995 - $345,890) for such machinery
and equipment.
The above transactions are measured at the exchange amount, which is
the amount of consideration established and agreed to by the related
parties.
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(with comparative balances as at June 30, 1996 and for the years ended June
30, 1996 and 1995)
16.BUSINESS ACQUISITIONS
Acquisition of National Care Products Ltd.
Effective September 1, 1996, the Company acquired all of the issued and
outstanding shares of National Care Products Ltd., the wholly-owned
liquid products subsidiary of Arjo Canada Inc. The acquisition was
accounted for using the purchase method and the total consideration
paid was allocated, based on the estimated fair value of the net assets
at the date of acquisition, as follows:
Inventory $633,768
Property, plant and equipment 262,679
Total cash consideration $896,447
The results of operations have been included in the accounts of the
Company from the effective date of acquisition. Pro-forma results of
operations have not been presented for the full year as it would not be
materially different from the 1997 results of operations.
Under the terms of the purchase agreement, Arjo Canada Inc. has given a
three year commitment to certain minimum levels of purchases of liquid
products at agreed-upon prices.
Acquisition of Gam-Med Division
Effective February 21, 1997, the Company (through its wholly-owned
subsidiary National Healthcare Manufacturing Corporation, U.S.)
acquired certain properties, assets, contracts and business of Gam-Med,
a division of Huntington Laboratories Inc., including land, building,
machinery and equipment, accounts receivable, inventory, proprietary
patents and on-going business. The total consideration paid was
allocated, based on the estimated fair value of the net assets acquired
at the date of acquisition, as follows:
Accounts receivable $257,824
Inventory 331,925
Property, plant and equipment 1,088,979
Total cash consideration $1,678,728
The results of operations have been included in the accounts of the
Company from the effective date of acquisition. Pro-forma results of
operations have not been presented for the full year as it would not be
materially different from the 1997 results of operations.
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(with comparative balances as at June 30, 1996 and for the years ended June
30, 1996 and 1995)
17.COMPARATIVE FIGURES
Certain of the prior years figures have been reclassified to conform to
the current year's presentation.
18.SUBSEQUENT EVENTS
Additional Investment in National Healthcare Logistics LLC
Subsequent to June 30, 1997, the Company acquired an additional 166 2/3
Class C preferred shares of National Healthcare Logistics LLC, for cash
consideration of $347,875.
Exercise of Warrants and Stock Options
Subsequent to June 30, 1997, 306,416 warrants and 37,500 stock options
were exercised in exchange for the issuance of common shares.
Agreement with Importex Corp.
Effective September 8, 1997 the Company entered into an agreement with
Importex Corp. to acquire the rights to distribute the Mertex and
Mertex-Plus fabrics and miscellaneous other assets. As consideration
for the purchase, the Company agreed to pay $100,000 cash, 225,000
shares of the Company and a warrant entitling Importex to purchase
150,000 Class A common shares of the Company at $6.90. The agreement
requires the Company to make certain minimum purchases of the fabrics
from the manufacturer.
Issuance of Convertible Debentures
Subsequent to June 30, 1997, the Company issued U.S. $5,000,000 in
Convertible Debentures. The Convertible Debentures bear interest of 6%
annually and are convertible, upon approval by securities authorities,
into Class A common shares of the Company at the lesser of the average
quoted market price prior to conversion and $6.01. All debentures must
be converted within one year from the closing day. In addition, the
debenture holder received a two year warrant to purchase 50,000 Class A
common shares at $6.61 for the first year and $7.21 for the second
year.
The Company is in the process of filing a registration statement with
respect to this issuance with the appropriate securities authorities.
Government Loans
Subsequent to June 30, 1997, the Company received additional advances
of $150,655 and $561,000 from Western Economic Diversification and the
Province of Manitoba respectively, under the respective agreements (See
Note 8).
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(with comparative balances as at June 30, 1996 and for the years ended June
30, 1996 and 1995)
19.UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP)
The Company has applied for registration under the 1934 Act with the
United States Securities and Exchange Commission. Effective July 31,
1996, the Company obtained formal approval for quotation of its
securities on NASDAQ in the United States.
A description of the Company's accounting principles which differ
significantly from U.S. GAAP follows:
Foreign Currency Translation
Unrealized exchange gains and losses relating to the translation of the
obligation under capital leases are deferred and amortized over the
remaining term of the leases. Under U.S. GAAP, these exchange gains
and losses would be recognized in income currently.
Earnings Per Share
Under U.S. GAAP, the Company would not include the 1,180,000
performance shares held in escrow in the calculation of the weighted
average number of shares used to determine earnings per share. The
release of these performance shares will result in recognition of
compensation expense under U.S. GAAP based on market value of the
shares when released from escrow.
Deferred Taxes
Under U.S. GAAP, deferred taxes are provided on all temporary
differences. Temporary differences encompass timing differences and
other events that create differences between the tax basis of an asset
or liability and its reported amount in the financial statements. A
deferred tax asset is recorded in a loss period and is reduced by a
valuation allowance to the extent it is more likely than not that the
deferred tax asset will not be realized. For U.S. GAAP purposes, a
valuation allowance equal to the tax loss benefits referred to in Note
13 would be disclosed.
Fair Value of Other Financial Instruments and Other Disclosures
The carrying amount of the following instruments approximate fair value
because of the short maturity of these instruments - cash, accounts
receivable, accounts payable and accrued liabilities, and current
portion of obligations under capital leases.
The application of U.S. GAAP, as described above, would have had the
following effects on net loss, loss per share and shareholders' equity.
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(with comparative balances as at June 30, 1996 and for the years ended June
30, 1996 and 1995)
19.UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP)
(continued)
Fair Value of Other Financial Instruments and Other Disclosures
(continued)
1997 1996 1995
Net loss as reported $(4,248,043) $(3,211,746) $(868,794)
Deferred foreign exchange gain (134,026) 9,772 194,301
(loss)
Net loss - U.S. GAAP $(4,382,069) $(3,201,974) $(674,493)
Weighted average shares 9,745,842 8,908,419 5,751,366
outstanding - U.S. GAAP
Loss per share - U.S. GAAP $(0.45) $(0.36) $(0.12)
Shareholders' equity as $13,082,786 $4,596,811 $5,957,870
reported
Deferred foreign exchange gain 54,128 9,772 194,301
Shareholders' equity - U.S. $13,136,914 $4,606,583 $6,152,171
GAAP
<FN>
Newly issued, but not yet adopted, U.S. accounting principles are not
expected to have a material impact on these consolidated financial
statements.
REPORT OF INDEPENDENT OF CHARTERED ACCOUNTANTS
To: NATIONAL HEALTHCARE MANUFACTURING CORPORATION:
We have audited the consolidated balance sheet of NATIONAL HEALTHCARE
MANUFACTURING CORPORATION (a Manitoba corporation) as at June 30, 1997 and
the consolidated statement of operations, shareholders' equity and changes
in financial position for the year then ended. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in Canada, which are in substantial agreement with those in the
United States of America. 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 June 30,
1997 and the results of its operations and the changes in its financial
position for the year then ended in accordance with generally accepted
accounting principles in Canada.
Accounting practices of the Company used in preparing the accompanying
consolidated financial statements conform with generally accepted
accounting principles applicable to consolidated financial statements in
Canada ("Canadian GAAP"), but do not conform with accounting principles
generally accepted in the United States of America ("U.S. GAAP"). A
description of the significant differences between Canadian GAAP and U.S.
GAAP and the approximate effect of those differences on consolidated net
loss and shareholders' equity are set forth in Note 19 of the Notes to
consolidated financial statements.
Winnipeg, Manitoba
October 6, 1997
SIGNATURE PAGE
Pursuant to the requirements of Section 12g of the Securities Exchange Act of
1934, the Registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this Annual Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
National Healthcare Manufacturing Corporation -- SEC #0-27998
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Registrant
BY \s\ Seyed Torabian
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Seyed Torabian, Vice President/Director