UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
FISCAL 1998 ENDED APRIL 30, 1998
___
___ 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
For the transition period from __________ to ________
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. 15,821,903
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 ___
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
TABLE OF CONTENTS
Page
Item 1. Description of Business......................... 3
Item 2. Description of Property......................... 25
Item 3. Legal Proceedings............................... 29
Item 4. Control of Registrant........................... 31
Item 5. Nature of Trading Market........................ 32
Item 6. Exchange Controls and Other Limitation
Affecting Security Holders...................... 34
Item 7. Taxation........................................ 36
Item 8. Selected Financial Data......................... 44
Item 9. Management's Discussion and Analysis of
Financial Condition and Results of Operations... 46
Item 10. Directors and Officers of the Registrant........ 67
Item 11. Compensation of Directors and Officers.......... 69
Item 12. Options to Purchase Securities from Registrant
or Subsidiaries................................. 71
Item 13. Interest of Management in Certain Transactions.. 74
PART II
Item 14. Description of Securities to be Registered...... 76
PART III
Item 15. Defaults Upon Senior Securities................. 79
Item 16. Changes in Securities and Changes in Security
for Registered Securities....................... 79
PART IV
Item 17. Financial Statements............................ 79
Item 18. Financial Statements............................ 79
Item 19. Financial Statements and Exhibits............... 80
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 Dexter Talwar in Investor Relations.
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 4/30/98, the end of the Company's most recent
fiscal year, there were 15,821,903 common shares outstanding. As of
9/30/98, there were 16,321,903 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$) and are prepared in accordance with Canadian Generally
Accepted Accounting Principles (GAAP), the application of which, in the
case of the Company, conforms in all material respects for the periods
presented with US GAAP except as noted in the footnotes to the financial
statements.
Herein, all references to "$" 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 9/30/98, 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 had been listed for trading on the
senior board of the Vancouver Stock Exchange since January 15, 1996 under
the trading symbol "NHM", up to and including June 30, 1998. At which time
the Company requested that its common stock no longer be listed on the
Vancouver Stock Exchange. The common shares are currently 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,
Description of Business and General Development").
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, Description of Business and General Development").
The Company owns 100% of the issued and outstanding shares of Medi Guard
Inc.("Medi Guard"), a private company incorporated on June 1, 1997 under
The Corporations Act (Ontario). Medi Guard is the leading manufacturer of
cellulose-based disposable protective products in Canada.(see ITEM #1,
"Business of the Company, Description of Business and General
Development").
The Company owns 100% of the issued and outstanding shares of Budva
International, LLC, a Limited Liability Company("Budva"), a private company
incorporated on July, 1996 under The Kansas Limited Liability Company
Act.(see ITEM #1, "Business of the Company, Description of Business and
General Development").
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 Jorgensen, 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. Of the 905,000 share purchase warrants issued, 305,000 were
exercised and the balance expired.
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 to, 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 were converted in December 1997. On July 8,
1998 a total of 1,600,000 SW Warrants remained unexercised therefore they
automatically expired.
In October 1997, the Company issued Convertible Notes in the amount of
US$5,000,000. The Convertible Notes bore cumulative interest at the rate
of 6% per year, payable in cash or in common shares. The Convertible Notes
entitled 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 were convertible into
common shares at a conversion price equal to the lower of (a) US$4.33 or
(b) 85% of the closing price of the Company's common shares on NASDAQ on
the conversion date. As at March 31, 1998, debentures with face value of
US$3,425,000 were converted to 1,475,572 common shares with the remaining
amount redeemed in cash at this date which completed and closed this
financing.
In March 1998, the Company issued Convertible Notes in the amount of
US$6,750,000. The Convertible Notes bear cumulative interest at the rate of
6% per year, payable in cash or in common shares. The Convertible Notes
entitle the holder to acquire, at no additional cost, Convertible
Debentures in the aggregate amount of US$6,750,000 and an aggregate of
337,500 CD Warrants. The Debentures are convertible into Class A shares at
a conversion price of 85% of the average closing bid price for the five
trading days immediately preceding the conversion notice. The notes carry
a maximum price of US $3.50 and a rolling floor price of US $2.50.
In this Annual Report, unless otherwise specified, all dollar amounts are
expressed in Canadian Dollars (CDN$). 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 year ends, 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 4/30/98 1.41 1.46 1.37 1.43
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 1.50 on September 30, 1998.
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.
In September 1996, the Company acquired the Liquid Division of Arjo Canada
Inc. ("Arjo") which added liquid medical products, such as disinfectants,
shampoos and skin creams, to the Company's range of products. In February
1997, the Company acquired the on-going business and certain assets of
Huntington Laboratories Gam-Med Division, Inc. which packages antimicrobial
products in patented disposable plastic dispensers.
The Company received final approval in September 1997 for its acquisition
of the exclusive distribution rights for Mertex and Mertex-Plus. These
technologically-advanced fabrics are used to manufacture re-usable surgical
gowns and drapes that provide protection against bodily fluids and
bacterial contamination within an operating room environment. FDA and ISO
clearances have been obtained and SIS Certification is in process. The
Mertex fabrics are endorsed and are currently being used in a number of
hospitals in North America and Europe.
Procurator Medical A.B., of Sweden, and Mediset GMBH, of Germany, have been
appointed to market and sell these unique gowns and drapes throughout
Germany and the 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 1,000 Class C preferred non-voting shares of NHLC
purchased at a price of US$1,500 each. NHLC is in the service business
managing the purchasing and distribution activities for regional hospitals
utilizing a "Hub & Spoke" distribution system.
The "Hub & Spoke" distribution system is state-of-the-art in supply chain
management for integrating hospital systems. The concept was developed by
Duane Jorgensen, one of the principals of NHLC, who is a highly regarded
authority in material management logistics. Mr. Jorgensen 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
the "Hub & 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 & Spoke" distribution, while SYSCO
Corporation will provide the capital for setting up the "Hub", provide
inventory and distribution.
On September 14, 1998, NHCL opened its first "Hub & Spoke" distribution
center, the LeeSar Regional Service Center (LeeSar) in Fort Myers, Florida.
LeeSar, owned by two Florida-based hospital systems, Sarasota Memorial and
Lee Memorial Healthcare System, began operations and commenced distribution
to its member hospitals. The "Hub", or primary distribution center, is
owned by the two hospital systems. NHCL receives a management fee based on
a percentage of the monthly sales volume.
On May 21,1998, NHCL signed a letter of intent to establish and manage a
second "Hub & Spoke" distribution center.
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 to market its
products in the United States and Europe. Through its 50% interest in the
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 for liquid products such as hand
and body lotions, disinfectants and shampoos.
Effective November 24, 1997, the Company acquired privately-held Medi Guard
Inc.(Medi Guard). Medi Guard is Canada's leading manufacturer of cellulose-
based disposable protective products for medical use. These products
include examination gowns, drapes, table paper, bibs, towels, and aprons.
The company also produces a line of single use products for airline in-
flight services. The acquisition of Medi Guard and the inclusion of their
products in NHMC's custom procedure kits and trays enhances NHMC's
vertical integration strategy. Also, NHMC's existing distribution channels
in Canada, Europe & the United States further bolster the growth of Medi
Guard sales.
In March 1998, the company signed a long term supply/purchase agreement
with Simplex Medical Systems (SMS). The Company's manufacturing facility in
Antioch, Illinois, exclusively packages, in one of its patented delivery
systems, all of the buffer solution manufactured and used in SMS's unique
HIV Diagnostic Test Kit. Production of the test kits using the new buffer
started April 1, 1998. SMS introduced the new test kits into its
manufacturing, sales and marketing program immediately thereafter. In
addition, the Company and SMS have begun negotiations on developing and
manufacturing the next generation test kit which will incorporate the
advanced packaging concepts of NHMC into a fully integrated, user friendly
line of rapid, saliva-based point-of-use testing systems which SMS will
distribute through its distribution network.
On April 29, 1998 the Company acquired Budva international L.L.C.
Completion of the acquisition passed all regulatory approvals. The
acquisition is still conditional on the verification that all of the
injection molding presses are in operational condition. For many years
Budva has been a leading manufacturer and provider of disposable plastic
products to the healthcare industry. Along with the existing product
offering of specimen collection containers, medicine and denture cups and
specialty products including sterile or specimen collections and sterile
mid-stream collection kits, the Company expanded the existing 26 product
lines to offer other plastic products for all three major areas of
healthcare. The vertical acquisition of Budva enables the Company to fully
produce the majority of the products it uses within its primary business of
kits & trays manufacturing. The addition of the plastic manufacturing
combined with existing capabilities to manufacture solution and cellulose-
based paper products places NHMC in a very unique position to control its
overall costs and profitability.
In June 1998, the Company signed a co-distribution agreement with Paradigm
Medical Industries and Pharmacia & Upjohn covering a range of ophthalmic
products. The three companies will offer a comprehensive package of
products to cataract surgeons, including cataract surgical equipment,
intraocular lens implants, intraocular pharmaceuticals, surgical
instruments, and sterile procedure packs. Paradigm is a high technology
ophthalmic device company that manufactures the Precisionist ThirtyThousand
ophthalmic workstation, utilized in cataract surgery for
phacoemulsification. Paradigm is currently conducting clinical trials in
the United States for its Photon laser cataract removal system. Paradigm
will provide a turnkey ordering and delivery of products from its Salt Lake
City headquarters; the Company will employ its fully automated production
facility to package a line of standard and custom sterile cataract
procedural packs. Pharmacia & Upjohn products to be distributed as part of
the alliance agreement include Healon and Healon GV viscoelastic solution
and the CeeOn line of foldable, small-incision intraocular lens implants,
designed to replace the natural lens removed during cataract surgery.
The Company announced the acquisition of Custom Pack Reliability ("CPR") on
Sept. 15, 1998. The privately-held Niagara Falls, New York-based company
has been assembling and supplying custom packs to hospitals and surgical
centers throughout North America since 1992. The acquisition will increase
the Company's North American sales force by 50 to more than 200. CPR will
continue operations from its Niagara Falls facilities as a subsidiary of
the Company and will conduct business under the CPR name. Completion of
this acquisition is subject to regulatory 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
#2, "Description of Property, Equipment");
* in November and December 1994 entered into agreements with both the
Manitoba Government (MG) and Government of Canada (WEDD) 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, Financial Assistance");
* 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 #9, "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;
* 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");
* 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 #2, "Description of Property, 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 Limited Liability
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 an agreement to purchase 100% of privately-
held Medi Guard Inc., a leading Canadian manufacturer of cellulose-
based disposable protective products.
* in December 1997, introduced recently installed third generation
robotic technology at a ceremony in the Winnipeg manufacturing
facility/headquarters.
* in January 1998, through its 50% interest in NHCL signed its first
long term agreement to establish and manage a "Hub & Spoke"
distribution center for five Florida based hospitals.
* in January 1998, received regulatory approval to acquire Medi Guard
Inc. Of Oakville, Ontario, Canada's leading manufacturer of cellulose-
based disposable protective products.
* in March 1998, signed a long term supply/purchase agreement with
Simplex Medical Systems to exclusively package, in one of our patented
delivery systems, all of the buffer solution manufactured and used in
SMS HIV Diagnostic Test Kit.
* in March 1998, completed a US$6,750,000 private placement through the
issuance of 6% Convertible Notes.
* in April 1998, announced the acquisition of 100% of privately held
Budva International LLC, of Lenexa, Kansas, a leading manufacturer and
provider of disposable plastic products to the healthcare industry.
Completion of this acquisition was subject to regulatory approvals.
* in April 1998, the Company announced that it had received registration
for the coveted British Standards EN ISO 9001 certification.
* in May 1998, through its 50% interest in NHCL, signed a letter of
intent to establish and manage its second "Hub & Spoke" distribution
center.
* in June 1998, requested that its common stock no longer be traded on
the Vancouver Stock Exchange. The Company's stock continues to trade
on NASDAQ under the symbol NHMCF.
* in June 1998, along with Paradigm Medical Industries, announced that
it signed a co-distribution agreement with Pharmacia & Upjohn (NYSE:
PNU) covering a range of ophthalmic products. The three companies
offer a comprehensive package of products to cataract surgeons,
including cataract surgical equipment, intraocular lens implants,
intraocular pharmaceuticals, surgical instruments, and sterile
procedure packs.
* in September 1998, announced that its National Healthcare Logistics
(NHCL) division's first "Hub & Spoke" distribution center, Fort Myers,
Florida-based LeeSar Regional Service Center (LeeSar), began
operations and commenced distribution to its member hospitals
effective September 14.
* in September 1998, announced that subject to regulatory approval it
will expand its Custom Pack Division with the acquisition of privately-
held Niagara Falls, New York-based Custom Pack Reliability (CPR).
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.
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,
- - cellulose-based disposable protective products, and
- - disposable plastic 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 primary 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
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 Corporation"), 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 then be sold by the Company both separately and as part of a kit/tray.
Disposable Protective Products
Pursuant to the Medi Guard Inc. Agreement (see ITEM #9, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Acquisitions and Dispositions, Medi Guard, Inc.") the Company acquired all
production of a variety of cellulose-based disposable protective products
for medical use. These products, which will also be used in the Company's
kits and trays, include examination gowns, drapes, table paper, bibs,
towels, and aprons. Medi Guard Inc. also produces a line of single use
products for airline in flight services.
Disposable Plastic Products
Pursuant to the Budva Agreement (see ITEM #9, "Management's Discussion and
Analysis of Financial Condition and results of Operations, Acquisitions and
Dispositions, Budva International L.L.C.") the Company acquired the
business of the production of disposable plastic products which it will use
to expand its existing production in Antioch, Illinois. These products
include specimen collection containers, medicine and denture cups and
speciality products including sterile or specimen collections and sterile
mid-stream collection kits.
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 which is 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 which is 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 markets for
all of 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 has also signed
with two European distributors, Procurator 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. In January 1998, NHCL signed its first long-
term agreement to establish & manage a "Hub & Spoke" distribution center.
This center was opened and became fully operational in September 1998.
Also, a Letter of Intent was signed in May 1998 to establish a second long
term "Hub & Spoke" distribution center.
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 distributed through Arjo Inc. The Company is seeking regional and
national distributors to facilitate access to all segments of the North
American market for its private - label NCP product line.
Competition
Kits and Trays Competition
The Canadian market for kits and trays is dominated by Source Medical Inc.
This is a new company formed by their parent companies Allegiance and
M.D.S. Health Group. Allegiance ("Source Medical Inc." in Canada) has more
than 50% of the tray market in both the USA and Canada.
* Patient Care Trays
Source Canada supplies more than 70% of the $50 million market in Canada by
importing trays that are private branded for them by a contract
manufacturer and by purchasing trays from the Ingram & Bell manufacturing
division in Canada. This new relationship was developed as a result of the
formation of Source. The balance of the market is very fragmented with five
or six smaller companies. This market has achieved a substantial
conversion to single use product in hospitals and continues to grow at a
minimum rate of 5% per year.
* Custom Procedure Trays
The Canadian market is serviced by the importation of trays from the USA.
Ballard Medical acquired Preferred Medial Products, of Thorold, Ontario and
consolidated this business in the USA. In addition to Allegiance Custom
Sterile, the major providers are Maxxim, Alcon and Deroyal. The market is
undeveloped in Canada and growing at a minimum rate of 20% per year. The
other entrants are Allegiance, Portex (the trademark for Smith Industries
Medical Systems), both of whom have major market shares in Canada and the
USA.
The custom procedure tray market is a high profile area where the Company
can demonstrate its innovation. The complexity of the product and the
direct input from the end user positions this product segment so that price
is not the lone consideration. 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, Steris and Huntington
Laboratories. Skincare products are Sween's primary market focus, whereas
Steris and Huntington access this market segment by cross-selling their
handwashing customers.
* Bathing Products
Competition consists of Sween and Steris, as well as companies such as
Chester Labs and Amada.
* Antimicrobial Handwashing Products
Steris 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, Allegiance Healthcare, 3M and Huntington
Laboratories being the key competitors.
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 Allegiance Canada Inc. and I & B; the sale by Owens in 1990; the
sale by Johnson & Johnson of Sterile Design to Maxxim Medical Inc. in 1993;
the purchase by Isolyser of MedSurg; 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 companies:
COMPANY MARKET SHARE
U.S.A. Canada
Allegiance 50.0% --
Maxxim Medical 30.0% 12.5%
Deroyal 10.0% 5.0%
Alcon 5.0% 7.5%
Medline 2.5% --
Source -- 70.0%
Others* 2.5% 5.0%
Total 100% 100%
* Smaller manufacturers include the Company, C.R. Bard, Orion, 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. This advantage will be magnified as
the Company's sales volume increases and production runs lengthen.
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's
investment in NHCL also addresses the customers' needs.
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 having a 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. The Company 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
- - Kurt Tartar - VP, US Sales
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. The Company anticipates that
during fiscal 1999, aproximately $1,200,000 will be required to meet the
costs of its marketing program, the major components of which are as
follows:
Marketing Component Monthly Cost
Advertising $ 5,000
Brochures and Promotional 3,000
Conferences 3,000
Samples 3,000
Salaries and Consultants 83,000
Trade shows 3,000
----------
Total $100,000
==========
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 increased 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 utilize two computerized form-fill
seal units and two robotic units for the assembly and packaging of its
product.
(3) 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.
(4) Neither the Company nor Excelco has filed an application for patent
protection relating to the Robotic Technology.
(5) 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.
(6) The Company's business may be affected by other factors beyond its
control, such as economic recessions and adverse fluctuations in
foreign exchange rates.
(7) 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, Financial Assistance".)
(8) 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".)
(9) 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 financing to fund
growth.
(10) 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 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 arm's-length companies. 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 maintains 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.
The Company is currently ISO 9001 certified and is continually implementing
and reviewing quality standards throughout subsidiaries so that the
corporation as a whole maintains compliance with this International
Standard. Through ISO 9001 certification, the Company is actively pursuing
EN 46001 (CE Mark) certification for the European Union.
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 price. Major product purchases of the Company
include procedural hospital tray components, bulk chemicals 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,
incorporating generation two and three technology, was installed in July
1997 and was operational in December 1997. The cost of leasing the robotic
units is covered under the existing Lease Agreements (referred to below).
As at April 30, 1998, 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.
NHMC US 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 provide for the following payments by NHMC US over the next five
fiscal years (converted from U.S. to Canadian dollars using the exchange
rate as at April 30, 1998):
Lease Lease Lease Total
NHM#1094- NHM#1094- NHM#1194
001 002
1999 $1,171,443 $641,853 $699,731 2,513,027
2000 1,171,443 641,853 58,311 1,871,607
2001 1,171,443 641,853 nil 1,813,296
2002 575,722 427,902 nil 1,013,624
Total Minimum Payments 4,100,051 2,353,461 758,042 7,211,554
Less Interest
approximating 12.3% 737,795 440,577 22,037 1,200,409
3,362,256 1,912,884 736,005 6,011,145
Since fiscal 1995, NHMC US was in dispute with the original lessor in
respect of capital leases 1094-001, 1094-003 and 1194. The lessor did not
recognize the validity of a settlement agreement signed in fiscal 1995. The
Company believed 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 settlment 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:
(1) The refundable deposit on equipment paid by NHMC US was applied
against the lease liability by the lessor.
(2) 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.
Subsequent to April 30, 1998, NHMC US suspended payments to the lessor of
the equipment under capital lease. The lessor's assignee, Johnson & Johnson
Finance Corporation, has issued, subsequent to April 30, 1998, a letter of
default and therefore the full amount of the obligation has been classified
as a current liability. The parties involved are negotiating to settle the
matter.
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, NHMC US 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, NHMC US 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 NHMC US 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.
The capital lease obligations, the respective equipment under capital
leases and the refundable deposit on equipment were adjusted accordingly.
Subsequent to April 30, 1998, the assignee of D & T Leasing Inc. gave
notice that NHMC US is in arrears of payments owing to D & T Leasing Ltd.
The outcome is not determinable.
A former employee of the Company has sued for unspecified general damages.
His action is for wrongful dismissal, the value of certain performance
shares in escrow, interest and cost. The Company disputes all of the
plaintiff's claims. The outcome is not determinable.
Four former employees of National Care Products Ltd. and/or Arjo Canada
Inc., have sued Arjo Canada Inc. and may sue National Care Products Ltd.
Their actions are for wrongful dismissal, and they are seeking unspecified
general and special damages. In each case, the outcome is not determinable.
Consulef Management Services Inc., carrying on business as Custom Pack
Reliability and the said Custom Pack Reliability have sued the Company in
the Circuit Court of the Ninth Judicial Circuit in and for Orange County,
Florida for injunctive relief, unspecified damages, interest and costs. The
action relates to the Company's association with former employees of the
Plaintiff. The likelihood of loss is not determinable. The Company signed a
letter of intent with Consulef Management Services Inc. for the purchase of
all the issued and outstanding shares of Consulef Management Services Inc.
It is a condition of the transaction that any action between the Company
and Consulef Management Services Inc. will be discontinued without costs to
any party.
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 9/30/98, 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) 4,350,805 26.7%
Total 4,350,805 26.7%
(1) 120,000 shares are escrowed where release is controlled by
Canadian regulatory authorities; refer to ITEM #14,
"Escrowed Performance Shares".
4,229,305 shares are held indirectly through Excelco, a private
company controlled by Ms. Shahsavar.
705,600 shares held by Mahmood (Mac) Shahsavar excluded.
# Based on 16,321,903 shares outstanding as of 9/30/98.
Table No. 3 lists as of 9/30/98, 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) 4,350,805 26.7%
Common 11 Directors/Officers as a group (2) 1,144,248 7.0%
Total 5,495,053 33.7%
(1) 120,000 shares are escrowed where release is controlled by
Canadian
regulatory authorities; refer to ITEM #14, "Escrowed Performance
Shares".
4,229,305 shares are held indirectly through Excelco, a private company
controlled by Ms. Shahsavar.
(2) 820,000 shares are escrowed where release is controlled by Canadian
regulatory authorities; refer to ITEM #14, "Escrowed Performance
Shares".
# Based on 16,321,903 common shares outstanding as of 9/30/98.
ITEM 5. NATURE OF TRADING MARKET
The Company's common shares traded 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. At the Company's request, its common stock is no
longer trading on the Vancouver Stock Exchange as of July 1, 1998.
The Company's common shares presently 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 6/30/98 was
CDN$2.60.
Table No. 4
Vancouver Stock Exchange Trading Activity
Canadian Dollars
Fiscal Quarter Ended Volume High Low Close
July 31, 1998* 180,630 $3.85 $2.52 $2.60
April 30, 1998** 153,695 4.00 3.10 3.25
March 31, 1998 949,333 4.78 3.45 3.75
December 31, 1997 790,619 6.15 3.60 4.00
September 30, 1997 1,053,178 7.95 5.80 6.05
June 30, 1997 589,772 7.75 5.50 7.25
*Last trading day on the Vancouver Stock Exchange was 6/30/98
**Thirty day quarter due to change in fiscal year-end.
Table No. 5 lists the trading activity on the NASDAQ Small Cap Stock
Exchange during the last six fiscal quarters. The closing price on 9/30/98
was US$0.75.
Table No. 5
NASDAQ Trading Activity
US Dollars
Fiscal Quarter Ended Volume High Low Close
July 31, 1998 5,069,700 $2.75 $1.25 $1.25
April 30, 1998 * 1,576,100 2.81 2.12 2.31
March 31, 1998 4,463,683 3.28 2.31 2.56
December 31, 1997 3,887,200 4.50 2.62 2.79
September 30, 1997 4,167,500 6.00 3.19 4.50
June 30, 1997 1,177,701 5.94 3.88 5.38
*Thirty day quarter due to change in fiscal year-end.
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 September 30, 1998, the shareholders' list for the Company's common
shares showed 126 registered shareholders and 16,321,903 shares
outstanding. 44 of these registered shareholders were U.S. residents,
holding 6,090,113 shares or 37.3% of the issued stock.
The Company has researched indirect holdings registered to the various
depository institutions and stockbrokerage firms and estimates that there
were 3,700 "holders of record" resident in the United States holding the
above referenced 6,090,113 shares.
Based on the above research and other research, the Company estimates that
there are in excess of 4,800 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 requires 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;
and (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
January 2, 1988 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 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 with the same paid-up capital as the
shares sold) 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
ratification 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
and deemed 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 a
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 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 that 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 it 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's 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 or 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's
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 PFC. 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 PFC. 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 1998 ended April 30, 1998, and for
fiscal 1997 and 1996 ended June 30th were derived from the financial
statements of the Company which have been audited by Arthur Andersen LLP,
independent Chartered Accountants, as indicated in their reports which are
included elsewhere in this Annual Report. The selected financial data for
fiscal 1995 ended June 30th were derived from the financial statements of
the Company which were audited by Deloitte & Touche, independent Chartered
Accountants, as indicated in their report which are included elsewhere in
this document. 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, "Management'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 1998, 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 loans, and lease financing for equipment.
The Company's ability to continue operations is dependent upon developing
profitable operations and obtaining additional external financing. The
Company expects to reach a level of operations by the end of Fiscal 1999
that will result in positive cashflow.
Table No. 6
Selected Consolidated Financial Data
(CDN$ in 000, except per share data)
Year Year Year Year
Ended Ended Ended Ended
4/30/98 6/30/97 6/30/96 6/30/95
Sales Revenue $7,521 $ 4,905 $556 0
Net loss before Unusual Items(6) ( 8,222) (4,248) (3,212) (869)
Net loss (12,814) (4,248) (3,212) (869)
Loss per Share before Unusual(6) ($0.61) ($0.39) ($0.32) ($0.15)
Loss per Share ($0.95) ($0.39) ($0.32) ($0.15)
Wgt. Avg. No. of Shares (1)(5) 13,512 10,926 10,088 5,768
Dividends Per Share $0.00 $0.00 $0.00 $0.00
Working Capital ($1,617) $5,456 $(927) $(818)
Property/Plant/Equipment 18,687 7,698 6,917 7,436
Assets Under Development 627 9,867 8,924 8,010
Long-Term Debt 12,920 3,267 2,169 0
Capital Lease Obligations (3) 6,011 7,224 8,651 8,837
Loans Payable to Shareholders, etc. 554 2,065 721 203
Shareholders' Equity 8,130 13,083 4,597 5,958
Total Assets 33,120 27,313 17,534 15,922
US GAAP Shareholders' Equity 7,268 13,137 4,607 6,152
US GAAP Net (Loss) (4) (12,814) (4,382) (3,202) (674)
US GAAP (Loss) per Share (5) ($1.03) ($0.45) ($0.36) ($0.12)
US GAAP Wgt.Avg. No. Shares (5) 12,332 9,746 8,908 5,751
Note: Year ended 6/30/94 omitted as the above categories were all zero.
(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, in 1996 of $9,772, in 1997
of($134,026) and in 1998 of (91,800).
(5) Under US GAAP, the Company would have omitted 1,180,000 contingently-
cancelable escrowed shares in the calculation of weighted average number of
shares used to determine loss per share.
(6) The Company took a full reserve on (1) $2,721,807 of laboratory equipment
in storage pending the results of an insurance claim, and (2) $1,870,274 of
a related party receivable. Any future recovery from these items will be
recorded as a non-operating gain in the year realized.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Fiscal Year Ended April 30, 1998
Domestic and Foreign Sales
Year Ended Year Ended
April 30, June 30, 1997
1998
Sales to customers outside Canada 2,858,349 2,482,035
Sales to customers inside Canada 4,662,890 2,423,366
Gross Profit after Cost of Sales 2,046,212 2,268,086
Sales revenue increased by $2,615,838 or 53% during fiscal 1998 compared to
fiscal 1997. Considering that fiscal 1998 was a ten month period, the
annualized increase in sales between periods was 84%. The increase in
Canadian sales relative to non-Canadian sales was attributable to Medi
Guard Inc. whose customer base is predominately Canadian. The gross profit
percentage, before depreciation, decreased from 46.2% in 1997 to 27.2% in
1998 due primarily to Medi Guard Inc.'s lower margin sales. Subsequent to
yearend, management successfully increased the selling prices for both of
Medi Guard Inc.'s product lines. Also, cost savings have been realized in
the manufacturing process.
For the ten month period ended April 30, 1998, the Company recorded
depreciation and amortization of $1,922,534 and interest on long-term debt
of $1,014,519. The loss from operations before interest, taxes,
depreciation and amortization was $4,507,239. Selling, distribution and
administration expenses increased by $2,223,371 due to 1) increased sales
and marketing activity as the sales network and distribution channels were
expanded, and 2) the expense associated with investigating potential
acquisitions and the actual acquisitions of Medi Guard Inc. and Budva
International LLC. Thus far in fiscal 1999, cost reductions have been
realized in production labor, distribution, executive services and general
administration.
In fiscal 1998, management undertook an asset impairment analysis and
recorded two unusual items. Laboratory equipment of $2,721,807 under
capital lease was reserved for in full. Management noted in 1995 that part
of the equipment was missing and opted to leave the remaining equipment in
storage while the insurance claim process was pursued. The insurance claim
is sill unsettled and the ultimate outcome unknown. A related party
receivable of $1,870,274 was reserved for in full. Any future recovery
from the above items will be recorded as a non-operating gain in the year
realized.
NHMC US has suspended payments on the equipment under capital lease pending
the resolution of a matter regarding the prior lease payments. The lessor
has issued a letter of default and therefore the entire obligation has been
classified as a current liability. Management believes that the situation
will be resolved without material effect on the Company or its operations.
The Company had a working capital deficiency of $1,617,000 at April 30,
1998. This was a result of the capital leases being classified as current
(see above). At April 30, 1998, accounts receivable were $2,266,277 and
inventories were $4,788,701. Management is in the process of obtaining a
working capital facility supported by a first claim against these assets.
Management is also sourcing a capital expenditure facility to be used to
finance further acquisitions and increases in production efficiency.
As of April 30, 1998, total assets were $33,119,968 and shareholders'
equity was $8,130,378.
On October 2, 1997, the Company announced the completion of a US$5,000,000
private placement through the issuance of Convertible Notes. The Notes,
issued to two European funds, were convertible into units consisting of
Convertible Debentures and Warrants entitling the holders to purchase up to
250,000 shares of common stock of the Company upon registration with the US
Securities and Exchange Commission and a receipt being issued for the
Company's prospectus by the B.C. Securities Commission. The Convertible
Debentures were convertible into the Company's common stock at a conversion
price equal to the lower of the average closing bid price of a share of
common stock over the five consecutive trading days prior to (a) $US4.33 or
(b) 85% of average closing price on conversion date. Unless earlier
converted, the Convertible Debentures would be automatically converted into
common stock on October 1, 1998. The Convertible Notes bore cumulative
interest at the rate of 6% per annum, payable in cash or in common stock.
The Warrants had a term of two years and were exercisable at 110% and 120%
of the average closing price if exercised during the first year or during
the second year from the Closing Date, respectively. The company paid 5%
commission in connection with this private placement to Corporate Capital
Management. The Company used the net proceeds from the private placement to
facilitate its expanded growth and to finance acquisitions. As at March 31,
1998, 1,475,572 shares had been converted at a total value of $4,935,924
and the remaining amount were redeemed in cash which completed and closed
the financing. The Warrants were cancelled by mutual consent.
Effective March 31, 1998 the Company completed a US$6,750,000 private
placement through the issuance of 6% Convertible Notes. The Debentures are
convertible into Class A shares at a conversion price of 85% of the average
closing bid price for the five trading days immediately preceding the
conversion notice. The notes carry a maximum price of US $3.50 and a
rolling floor price of US $2.50. The Notes are convertible upon
registration with the SEC and 120 days as required by the British Columbia
Securities Commission. A commission of 5% was paid in connection with this
financing. The Company also issued 337,500 Warrants which are exercisable
at 110% and 120% of the average closing price exercised during the first
year or during the second year from the Closing Date, respectively. Part of
the proceeds from this financing went to redeem the October 1997 Debenture
financing.
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.
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. The Company has not yet achieved a sales
volume that would result in profitable operations and must continue to rely
upon funding through further private and public equity financings and by a
working capital facility supported by accounts receivable and inventories.
Management is in the process of obtaining a working capital facility
supported by a first claim against these assets. Management is also
sourcing a capital expenditure facility to be used to finance further
acquisitions and increases in production efficiency.
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 Canada 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 April 30,
1998, the Company had received a total of $2,174,126 under the MG Agreement
and $1,804,835 under the WEDD Agreement.
Although the above 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 April 30, 1998, the Company completed the CN Private
Placement, on October 1, 1997, raising proceeds of US$5,000,000 and on
March 31, 1998, the Company closed another CN Private Placement, raising
proceeds of US$6,750,000. The Company will continue to require additional
funds, through private or public equity financings, and a working capital
facility, 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".
In March 1998, the Company sold US$6,750,000 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, with respect to, the
land and buildings purchased, building improvements made, and equipment
purchased at arm's length, relating to 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 $2,174,126
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 Required Number of Jobs
to be Created Required to be
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 105 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 and a
final payment of $19,710.
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 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. (Refer to Item#14, "Description of
Securities, Escrowed 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. The loans referred to in the
agreement were converted to equity when the Company went public.
(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.
Awaiting the results of a related pending matter, the Company's subsidiary,
NHMC US, has suspended payments to the lessor of the equipment under
capital lease. The lessor has issued a letter of default and therefore the
full amount of the obligation has been classified as a current liability.
Management believes that the matter will be resolved without material
effect to the Company.
Since fiscal 1995, the Company was in dispute with the original lessor in
respect of capital leases 1094-001, 1094-003 and 1194. The lessor did not
recognize the validity of a settlement agreement signed in fiscal 1995. The
Company believed 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 interpretation of the settlement terms at that time.
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:
(1) The refundable deposit on equipment paid by the Company was applied
against the lease liability by the lessor.
(2) 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.
(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, the full amount of $1,937,852 has been received under the WEDD
Agreement.
Repayment of the loan will be made by quarterly payments commencing
September 1, 1998 and ending September 1, 2000, as follows:
September 1, 1998 $100,000
December 1, 1998 $180,000
March 1, 1999 $180,000
June 1, 1999 $210,000
September 1, 1999 $210,000
December 1, 1999 $290,000
March 1, 2000 $290,000
June 1, 2000 $290,000
September 1, 2000 $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".
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 US. 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, CEO and Director of the Company, is also the President and CEO
of Excelco. At the time of entering into the Robotic Technology License
Agreement, Seyed Torabian, a former 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 therefore, 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") between the Company, Importex Corporation ("Importex") and
Mertexas Partnership ("Mertexas"), the Company was assigned Importex's
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 Union).
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 July 31, 1998, the Company has expended in excess of $3,344,280
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 $410,058 of machinery
and equipment, furniture, fixtures, and computer hardware was acquired 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 $274,464 of machinery, equipment, furniture, fixtures, and
computer hardware was acquired 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."). A
further $2,413,208 of machinery, equipment, furniture, and computer
hardware was acquired in connection with the acquisition of Medi Guard Inc.
(see Item #9 "Management's Discussion & Analysis of Financial Condition and
Results of Operations, Medi Guard"). A further $1,669,035 of machinery,
equipment, furniture and fixtures was acquired in connection with the
acquisition of Budva International L.L.C. (See Item #9, "Management's
Discussion & Analysis of Financial Condition and Results of Operations,
Budva International LLC."). Also, the Company's US subsidiary, NHMC US,
obtained 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 arm's-length parties. (See ITEM #2, "Description of
Property, Operations, Equipment")
Medi Guard Inc.
The Company entered into a binding letter agreement dated November 24,
1997, with shareholders of the privately-held Medi Guard Inc. of Oakville,
Ontario for the purchase of 100% of the issued and outstanding shares of
MGI together with all shareholder loans. Medi Guard is Canada's leading
manufacturers of cellulose-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. The consideration agreed upon was $1 plus
the greater of $400,000 or 3.5 time the annualized earnings of Medi Guard
for the one year period following the agreement date (the "Purchase
Price"). A Share Purchase Agreement was drafted and signed by all the
interested parties on January 20, 1998. The Agreement between the
shareholders and the Company specified terms and conditions including the
aforementioned Purchase Price. The terms of the acquisition were approved
by the B.C. Securities Commission on January 27, 1998. The original
Purchase Price was subsequently adjusted in an Amending Agreement signed by
all the interested parties on 4/7/98. The new Purchase Price is the greater
of (a) $400,001.00; or (b) $1.00 plus the product of the Annualized
Earnings multiplied by 1.5 .
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. During fiscal 1998, the Company acquired
an additional 666 2/3 Class C shares.
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 and 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. NHLC is in the
business of managing the purchasing and distribution activities for
regional hospital alliances utilizing a "Hub & Spoke" distribution system.
The "Hub & Spoke" distribution system is the state-of-the-art in supply
chain management for integrating hospital systems. The concept was
developed by Duane Jorgensen, one of the principals of NHLC, who is a
highly-regarded authority in material management logistics. Mr. Jorgensen
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 hospitals
through "Hub & 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 the "Hub & Spoke" distribution, while SYSCO
Corporation will provide the capital for setting up the "Hubs" and provide
inventory and distribution.
In January 1998, NHCL signed its first long-term agreement to establish and
manage a "Hub & Spoke" distribution center for five Florida based hospitals
including Sarasota Memorial and the Lee Memorial Healthcare System of Fort
Myers. This center was opened and became fully operational in September
1998. The "Hub" is the dedicated distribution center and serves as the
platform upon which "Spokes" are formed by mutual consent of the
participating hospitals. Each NHCL "Hub" is customized to meet specific
local requirements. Feasibility studies conducted by NHCL will allow the
hospital groups to determine the benefits to be gained from developing any
particular "Spoke". The "Spokes" are common services that can be cost
shared by the local alliance or Integrated Delivery Network. "Spokes" can
achieve cost savings of 15-20% and be a source of new revenue for the
hospitals. The Fort Myers, FL-based LeeSar Regional Service Center
(LeeSar), has begun operations and commenced distribution to its member
hospitals effective September 14, 1998. The "Hub", or primary distribution
center, is owned by the two hospital systems. NHCL will receive a
management fee based on a percentage of the monthly sales volume. Also, a
Letter of Intent was signed in May 1998 to establish a second long term
"Hub & Spoke" distribution center.
Budva International LLC.
In April 1998, the Company entered into an agreement with Budva
International LLC. to purchase all the issued and outstanding shares of
Budva International LLC, of Lenexa, Kansas, USA (Budva). The Membership
Purchase Agreement was effective April 29, 1998. For the past six years
Budva has been a leading manufacturer and provider of disposable plastic
products to the healthcare industry. Along with the existing product
offering of specimen collection containers, medicine and denture cups and
specialty products including sterile or specimen collections and sterile
mid-stream collection kits, the Company will expand Budva's existing 26
product lines to offer other plastic products for all three major areas of
healthcare. Although the Company included the assets and liabilities of
Budva into its fiscal 1998 balance sheet, the acquisition remains
conditional on verification that the injection molding presses are in
operational condition. Subject to the close of the acquisition, the Company
will assume US$1.225 million of bank debt and will pay two times the net
annualized earnings which are to be paid in NHMC's Class A common shares
issued at the average closing price for the five trading days preceding the
12 months from the closing date.
Custom Pack Reliability
The Company announced on September 15, 1998, that subject to regulatory
approval it will expand its Custom Pack Division with the acquisition of
privately-held Niagara Falls, NY-based Custom Pack Reliability (CPR). CPR
has been assembling and supplying custom packs to hospitals and surgical
centers throughout North America since 1992. CPR revenues for 1997 were $5
million Canadian (US$3.2 million) and CPR contracts to date for 1998 total
$7.5 million Canadian (US$5 million). The acquisition will increase the
Company's North American sales force by 50 to more than 200. The companies
plan to consolidate certain functions to achieve cost efficiencies. CPR
will continue operations from its Niagara Falls facilities as a division of
National Healthcare and will conduct business under the CPR name.
Purchasing, customer quotation and logistics for the Custom Pack Division
will be based at the Niagara Falls facility, using the existing fully-
integrated computerized inventory control, order processing and accounting
system. This acquisition will also provide the Company with additional
facilities in the Northeast, which will complement access to markets
throughout North America.
YEAR 2000 ISSUE
Most entities depend on computerized systems and therefore are exposed to
the Year 2000 conversion risk. Management is currently implementing a plan
whereby all hardware, software, and imbedded processors are analyzed to
ensure Year 2000 compliance. Management intends to poll major suppliers
and customers as to their state of readiness for the Year 2000. At this
time, it is not possible to determine whether all Year 2000 issues will be
fully resolved without adverse impact on the Company's operations.
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) Repayment of government financial assistance of 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 16,321,903 Shares issued and outstanding.
In addition, there are outstanding options and warrants to acquire a
minimum of 2,068,404 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.
(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.
(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 9/30/98 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) 68 May 1995
Gordon John Farrimond (1)(2)(4) 49 May 1995
Robert Alexander Jackson (2)(3) 55 May 1995
Aristotle (Telly) John Mercury (1)(3) 64 May 1995
Ross Scavuzzo (4) 44 September 1995
Mahmood (Mac) Jamshidi Shahsavar (2)(3) 41 August 1993
Jack Tapper (1)(2) 45 November 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 9/30/98, 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/CFO November 1997
Reginald Adrian Ebbeling Chairman of the Board 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 Shahsavar VP Human Relations June 1995
Darrell Wayne Van Dyke VP, NHMC US 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/she 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/she 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/her 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 1998, 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 1998, 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 1998 ended April 30,
1998 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 1998 Ended 4/30/98
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 $100,000 $0 $0 $100,000
M. Seyed Torabian 60,000 55,000 0 115,000
Robert A. Jackson 65,000 8,500 0 73,500
Darrell Van Dyke 141,000 0 0 141,000
Jack Tapper 60,000 0 0 60,000
Other Officers/Directors 179,400 111,775 0 291,175
------------ --------- ----------- ------------
Total $605,400 $175,275 $0 $780,675
(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) Value of Below-Market Stock Options Granted represents the aggregate
difference between the exercise price of stock options granted in Fiscal
1998 and the market value of the common stock on the date of granting.
The Company plans to review the stock options granted plus other incentives
to adjust managements' total remuneration more inline with other medical
companies similar in scope to that of the Company.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR
SUBSIDIARIES
Stock Options to purchase securities from the Company are granted to
Directors and Employees of the Company on terms and conditions acceptable
to the regulatory authorities in Canada. The Company 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. No stock options
granted under the stock option program are 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 options expire 30 days after termination of employment.
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 Company'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 9/30/98, as well as the number of stock options granted
to Directors and all employees as a group. The exercise price of the stock
options are stated in Canadian Dollars.
Table No. 10
Stock Options Outstanding
CDN$
Common Exer. Expiration
Name Stock Price Date
Mahmood (Mac) Shahsavar (1) 370,000 $2.00 11/30/2000
Mahmood (Mac) Shahsavar 42,500 3.70 5/21/2003
Janice Shahsavar (1) 100,000 2.00 11/30/2000
Janice Shahsavar 10,000 3.70 5/21/2003
Alice Elaine Affleck 60,000 2.00 11/30/2000
Alice Elaine Affleck (2) 15,000 3.70 6/03/2002
Alice Elaine Affleck 10,000 3.70 5/21/2003
Robert Alexander Jackson 16,000 2.00 11/30/2000
Robert Alexander Jackson 5,000 3.81 8/11/2001
Robert Alexander Jackson (2) 7,500 3.70 6/03/2002
Robert Alexander Jackson 10,000 3.70 5/21/2003
Reginald Adrian Ebbeling 12,000 2.00 11/30/2000
Reginald Adrian Ebbeling 5,000 3.81 8/11/2001
Reginald Adrian Ebbeling 10,000 3.70 5/21/2003
Gordon John Farrimond 30,000 2.00 11/30/2000
Gordon John Farrimond 10,000 3.81 8/11/2001
Gordon John Farrimond (2) 7,500 3.70 6/03/2002
Gordon John Farrimond 10,000 3.70 5/21/2003
Aristotle (Telly) John Mercury 30,000 2.00 11/30/2000
Aristotle (Telly) John Mercury 10,000 3.70 5/21/2003
Ross Scavuzzo 20,000 2.00 11/30/2000
Ross Scavuzzo 10,000 3.70 5/21/2003
Nancy Clark 5,000 3.81 8/11/2001
Nancy Clark (2) 15,000 3.70 6/03/2002
Nancy Clark 10,000 3.70 5/21/2003
Jack Tapper 10,000 3.70 5/21/2003
Darrell Van Dyke (2) 20,000 3.70 6/03/2002
John Stone (2) 10,000 3.70 6/03/2002
---------
Total Officers/Directors(12 persons) 870,500
Total Employees/Advisors (80 persons) 710,404
---------
Total 1,580,904
(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 #9 and ITEM #13).
(2) Options were initially granted at $6.13 then re-priced to $3.70 on
5/21/98.
Table No. 11 lists, as of 9/30/98 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
9/07/97 (1) 150,000 150,000 $6.90 $7.94 9/07/99
3/31/98 (2) 337,500 337,500 US$2.83 US$3.09 3/31/00
(1) Issued pursuant to the Importex Assignment.
(2) Issued in connection with the Convertible Debenture financing of March
31, 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 Company 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, 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, and 1998, respectively, the Company paid $345,890,
$314,228, $804,832 and $0 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".)
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, and 1998, respectively, that firm received $1,927, $64,965,
$48,331 and $46,942 for legal services rendered to the Company.
Elaine Affleck is a director of World Wide Golf Resources, Inc. Mahmood
(Mac) Shahsavar is Chairman/CEO and a Director of World Wide Golf Resources
Inc.
Shareholder Loans
At 6/30/95, 6/30/96, 6/30/97 and 4/30/98, respectively, the Company had
received/(advanced) non-interest bearing loans totaling $203,109, $551,479,
$1,049,410 and ($14,819) from/(to) 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, 6/30/97 and 4/30/98, respectively, the Company had
received non-interest bearing loans totaling $0, $155,496, $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 and 4/30/98, respectively, the Company had advanced Mahmood
(Mac) Shahsavar $17,355 and $175,322.
At 6/30/96, 6/30/97 and 4/30/98, respectively, the Company had
received/(advanced) non-interest bearing loans totaling $25,320, $877,219,
and ($2,266,331) from/(to) 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, except for $393,257 which is
secured by the assets of Simply Natural Spring Water Corporation, a related
Company. At 4/30/98, the Company took a full reserve against the board
approved advance of $1,870,274 to World Wide Golf Resources Inc., a related-
party company. Any future recovery of said amount will be recorded as a non-
operating gain when realized.
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
The authorized capital of the Company is an unlimited number of Class A
common shares without par value, of which 16,321,903 were issued and
outstanding at 9/30/98.
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 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 report of Arthur Andersen LLP, independent Chartered
Accountants, is included herein immediately preceding the financial
statements.
Audited Financial Statements for Fiscal 1998
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 report of Arthur Andersen LLP for the audited financial
statements and notes thereto are included herein immediately preceding the
audited financial statements.
Audited Financial Statements:
Fiscal 1998 Ended April 30th
Auditor's Report dated 10/2/98
Consolidated Balance Sheet at 4/30/98 and 6/30/97
Consolidated Statement of Operations
for the years ended 4/30/98, 6/30/97 and 6/30/96
Consolidated Statement of Shareholders' Equity
for the years ended 4/30/98, 6/30/97 and 6/30/96
Consolidated Statements of Cash Flows
for the years ended 4/30/98, 6/30/97 and 6/30/96.
Notes to Consolidated Financial Statements
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TEN MONTH PERIOD ENDED APRIL 30, 1998
AND THE YEARS ENDED JUNE 30, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
AUDITORS' REPORT
To the Shareholders of
NATIONAL HEALTHCARE MANUFACTURING CORPORATION:
We have audited the consolidated balance sheets of NATIONAL HEALTHCARE
MANUFACTURING CORPORATION (a Manitoba corporation) as at April 30, 1998 and
June 30, 1997 and the consolidated statements of operations, shareholders'
equity and cash flows for the ten month period ended April 30, 1998 and the
year ended June 30, 1997. 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
audits.
We conducted our audits 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 April
30, 1998 and June 30, 1997 and the results of its operations and its cash
flows for the ten month period ended April 30, 1998 and year ended June 30,
1997 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 22 of the notes to
consolidated financial statements.
The 1996 consolidated statements of operations, shareholders' equity and
cash flows were audited by other auditors who expressed an opinion without
reservation on those consolidated statements in their report dated July 22,
1996.
Winnipeg, Manitoba, Canada
October 2, 1998
AUDITORS' REPORT
Comments by Auditors for U.S. Readers on Canada-U.S. Reporting Difference
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when the
financial statements are affected by conditions and events that cast
substantial doubt on the company's ability to continue as a going concern,
such as those described in Note 2 to the financial statements. Our report
to the shareholders dated October 2, 1998 is expressed in accordance with
Canadian reporting standards which do not permit a reference to such events
and conditions in the Auditors' Report when these are adequately disclosed
in the financial statements. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Winnipeg, Manitoba, Canada
October 2, 1998
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1998 AND JUNE 30, 1997
(In Canadian Dollars)
ASSETS
April 30, June 30,
1998 1997
CURRENT ASSETS
Cash and short-term investments $2,684,713 $4,213,255
Accounts receivable (Note 10) 2,266,277 1,827,239
Inventories (Notes 4 and 10) 4,788,701 2,850,012
Prepaid expenses 250,747 364,998
----------- ----------
9,990,438 9,255,504
RECEIVABLES FROM SHAREHOLDERS AND
DIRECTOR-RELATED COMPANIES (Note 5) 586,209 -
INVESTMENT IN NATIONAL
HEALTHCARE LOGISTICS LLC (Note 6) 1,213,745 490,772
PROPERTY, PLANT AND EQUIPMENT
USED IN OPERATIONS (Notes 7, 10 and 11) 18,687,442 7,698,374
ASSETS UNDER DEVELOPMENT (Notes 8, 10 and 17) 627,504 9,868,849
OTHER ASSETS (Note 9) 2,014,630 -
----------- ----------
$33,119,968 $ 27,313,499
=========== ============
<FN>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Cheques issued in excess of amounts on deposit $964,070 $349,336
Accounts payable and accrued liabilities 3,540,364 1,271,616
Current portion of long-term debt (Note 10) 1,091,488 460,000
Current portion of obligations under capital 6,011,145 1,718,552
leases (Note 11)
----------- ----------
11,607,067 3,799,504
LONG-TERM DEBT (Note 10) 12,920,454 2,807,326
OBLIGATIONS UNDER CAPITAL LEASES (Note 11) - 5,504,985
DEFERRED FOREIGN EXCHANGE GAIN (LOSS) (91,800) 54,128
PAYABLES TO SHAREHOLDERS
AND DIRECTOR-RELATED COMPANIES (Note 12) 553,869 2,064,770
----------- ----------
24,989,590 14,230,713
----------- ----------
SHAREHOLDERS' EQUITY
Capital stock (Note 13) 17,179,856 9,318,163
Warrants (Note 14) 12,093,206 12,093,206
Deficit (21,142,684) (8,328,583)
------------ -----------
8,130,378 13,082,786
------------- -----------
$33,119,968 $ 27,313,499
============= ============
<FN>
Approved on behalf of the Board:
/s/Mac Shahsavar Director /s/Jack Tapper Director
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TEN MONTH PERIOD ENDED APRIL 30, 1998
AND THE YEARS ENDED JUNE 30, 1997 AND 1996
(In Canadian Dollars)
April 30, June 30, June 30,
1998 1997 1996
REVENUES
Sales (Note 16) $7,521,239 $4,905,401 $556,105
Other revenue 221,628 166,196 -
---------- ---------- ---------
7,742,867 5,071,597 556,105
---------- ---------- ---------
COSTS AND EXPENSES
Cost of sales 5,475,027 2,637,315 291,319
Selling, distribution and 6,647,953 4,424,582 1,888,352
administrative
Depreciation and amortization (Note 1,922,534 1,576,975 1,188,053
19)
Interest on long-term debt 1,014,519 415,035 409,258
Other expenses 127,126 56,026 (9,131)
---------- ---------- ---------
15,187,159 9,109,933 3,767,851
---------- ---------- ----------
LOSS FROM OPERATIONS 7,444,292 4,038,336 3,211,746
LOSS FROM INVESTMENT IN
NATIONAL HEALTHCARE LOGISTICS LLC 777,728 209,707 -
---------- ---------- -----------
(Note 6)
LOSS BEFORE THE UNDERNOTED 8,222,020 4,248,043 3,211,746
UNUSUAL ITEMS (Note 17) 4,592,081 - -
----------- ---------- -----------
NET LOSS $12,814,101 $4,248,043 $3,211,746
=========== ========== ===========
BASIC LOSS PER SHARE BEFORE UNUSUAL $0.61 $0.39 $0.32
ITEMS =========== ========== ===========
BASIC LOSS PER SHARE $0.95 $0.39 $0.32
=========== ========== ===========
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 13,512,344 10,925,842 10,088,419
=========== ========== ===========
<FN>
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE TEN MONTH PERIOD ENDED APRIL 30, 1998
AND THE YEARS ENDED JUNE 30, 1997 AND 1996
(In Canadian Dollars)
Class A Common Shares
Shares Amount Paid in Deficit Total
capital
Balanc 9,578,290 $6,826,664 $ - $(868,794) $5,957,870
es at
June
30,
1995
Issue 1,175,000 2,306,250 - - 2,306,250
of
shares
for
cash
Share - (455,563) - - (455,563)
issue
costs
Net - - - (3,211,746) (3,211,746)
loss --------- ---------- -------- ------------- ------------
Balanc 10,753,290 8,677,351 - (4,080,540) 4,596,811
es at
June
30,
1996
Issue 67,125 140,812 - - 140,812
of
shares
for
cash
Issue - - 12,315,000 - 12,315,000
of
specia
l
warran
ts
(Note
14)
Warran - - (221,794) - (221,794)
t
issue
costs
Exerci 250,000 500,000 - - 500,000
se of
warran
ts
(Note
14)
Net - - - (4,248,043) (4,248,043)
loss --------- -------- ---------- ------------ ------------
Balanc 11,070,415 9,318,163 12,093,206 (8,328,583) 13,082,786
es at
June
30,
1997
Issue 37,500 91,440 - - 91,440
of
shares
for
cash
(Note
13)
Issue 225,000 1,552,500 - - 1,552,500
for
Mertex
distri
bution
right
(Note
9)
Share - (1,174,275) - - (1,174,275)
issue
costs
Conver 1,475,572 4,935,924 - - 4,935,924
sion
of
conver
tible
debt
(Note
10)
Exerci 3,013,416 1,293,748 - - 1,293,748
se of
warran
ts
(Note
14)
Equity - 1,162,356 - - 1,162,356
portio
n of
conver
tible
debt
(Note
10)
Net - - - (12,814,101) (12,814,101)
loss --------- ----------- -------- ------------ -------------
Balanc 15,821,903 $17,179,856 $12,093,206 $(21,142,684) $8,130,378
es at ========== =========== =========== ============== =============
April
30,
1998
<FN>
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TEN MONTH PERIOD ENDED APRIL 30, 1998
AND THE YEARS ENDED JUNE 30, 1997 AND 1996
(In Canadian Dollars)
April 30, June 30, June 30,
1998 1997 1996
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss $(12,814,101) $(4,248,043) $(3,211,746)
Items not affecting cash
Amortization of deferred
foreign exchange gain (54,128) (15,950) -
Amortization of deferred 98,922 - -
financing costs
Depreciation and 1,922,534 1,576,975 1,188,053
amortization
Loss from investee 777,728 209,707 -
Unusual items 4,592,081 - -
------------- ------------ ------------
(5,476,964) (2,477,311) (2,023,693)
Net change in non-cash
operating assets and
liabilities
Accounts receivable 284,321 (1,416,063) (104,443)
Inventories (1,421,672) (1,377,116) (507,203)
Prepaid expenses 154,053 (291,190) 7,904
Accounts payable and accrued 1,157,737 147,630 393,833
liabilities
------------ ------------ ------------
(5,302,525) (5,414,050) (2,233,602)
------------ ------------ ------------
INVESTING ACTIVITIES
Acquisition of shares in
National Healthcare (1,500,672) (700,479) -
Logistics LLC
Acquisition of property, (2,063,751) (1,476,066) (1,583,214)
plant and equipment
Interest capitalized on (180,770) (475,404) -
equipment
Acquisition of National Care - (896,447) -
Products Ltd.
Acquisition of Gam-Med - (1,678,728) -
Division
Acquisition of Medi Guard (400,001) - -
Inc.
Acquisition of Budva
International LLC (136,132) - -
(net of bank indebtedness
of $136,132)
Acquisition of Mertex (100,000) - -
distribution rights
------------ ------------ ------------
(4,381,326) (5,227,124) (1,583,214)
------------ ------------ ------------
FINANCING ACTIVITIES
Repayment of obligations (1,212,392) (1,427,204) (186,189)
under capital leases
Proceeds from (repayment of) 12,601,232 1,098,241 2,169,085
long-term debt
Deferred foreign exchange (91,800) (134,026) 9,772
gain (loss)
Advances from (repayment to)
shareholders (3,967,378) 1,343,944 517,717
and director-related
companies
Net proceeds from issuance
of 210,913 640,812 1,850,687
Class A common shares
Net proceeds from issuance - 12,093,206 -
of warrants
------------ ----------- ----------
7,540,575 13,614,973 4,361,072
------------ ----------- ----------
CHANGE IN CASH (2,143,276) 2,973,799 544,256
CASH, beginning of year 3,863,919 890,120 345,864
------------ ----------- ----------
CASH, end of year $1,720,643 $3,863,919 $890,120
============ =========== ==========
<FN>
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TEN MONTH PERIOD ENDED APRIL 30, 1998
AND THE YEARS ENDED JUNE 30, 1997 AND 1996
(In Canadian Dollars)
(continued)
April 30, June 30, June 30,
1998 1997 1996
Represented by:
Cash and short-term investments $2,684,713 $4,213,255 $958,568
Cheques issued in excess of funds on (964,070) (349,336) (68,448)
deposit ---------- ----------- ---------
$1,720,643 $3,863,919 $890,120
========= ========== =========
Supplemental disclosure of cashflow
information
Cash paid for: Interest (net of amount $1,014,519 $ 515,035 $184,241
capitalized) ========== ========== ========
Income taxes $- $- $-
========== ========== ========
<FN>
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. As of August 14, 1996, the shares of the Company
were listed on the Small Cap board of NASDAQ Stock Market. Effective
June 30, 1998, the Company de-listed itself from the Vancouver Stock
Exchange. In fiscal 1998, the Company changed its year end from June
30 to April 30 for administrative reasons.
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 22. 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 supplies 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, and in fiscal 1998 it obtained ISO 9001 certification.
Management plans for fiscal 1999 include:
implementing the next generation of automation;
expanding the breadth of the product lines;
developing broader sales distribution channels;
maintaining focus on the core business; and
continuing to focus on cost efficiencies.
Subsequent to April 30, 1998, the Company is in the process of
implementing the following:
In June 1998, along with Paradigm Medical Industries, the Company
announced that it signed a co-distribution agreement with Pharmacia &
Upjohn covering a range of ophthalmic products. The three companies offer
a comprehensive package of products to cataract surgeons.
2. BUSINESS CONSIDERATIONS (continued)
The Company's equity investee, National Healthcare Logistics LLC
(NHLC) (see Note 6) began operations in September 1998 of its first "Hub &
Spoke" distribution centre, Fort Myers, Florida based LeeSar Regional
Service Centre (LeeSar). The "Hub" is owned jointly by Lee Memorial
Healthcare Systems and Sarasota Memorial. The combination of a management
fee earned by NHLC and cross-selling opportunities with the Company and its
subsidiaries have the potential to increase revenues and earnings. In
addition, NHLC now has a tangible facility in which to showcase the
benefits of the "Hub & Spoke" system to others regional hospital systems in
the United States.
Management plans to reduce administrative costs of the operating
entities and reduce the executive payroll at head office. The Company
continues to streamline processes and to centralize certain functions.
These consolidated financial statements have been prepared on the
assumption that the Company is a going concern, meaning it will be able
to realize its assets and discharge its liabilities in the normal
course of operations for the foreseeable future.
The Company has incurred significant research and development costs,
operating losses, and business development costs to date and had a
consolidated deficit of $21,142,684 as at April 30, 1998. Also, as at
April 30, 1998, the Company had negative working capital, which was a
function of the capital leases being classified as current (see Note
11). The Company's ability to continue as a going concern is dependent
upon developing profitable operations and obtaining additional funds
needed to finance the growth in sales. These consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
3. SIGNIFICANT 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., Medi Guard Inc., National Care
Products Ltd., and Budva International LLC ("Budva"). All significant
intercompany transactions and balances have been eliminated upon
consolidation. The Company accounts for its investment in National
Healthcare Logistics LLC 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.
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
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 following rates and methods:
Building, improvements and 4 - 8% declining balance
paving
Furniture and fixtures 20% declining balance
Automotive 30% declining balance
Computer equipment 20 - 30% declining balance
Machinery and equipment 20 - 30% declining balance
Equipment under capital 30% declining balance
leases
and
7 years units of production
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.
Other Assets
Included in other assets is the following:
Exclusive right to distribute and sell certain protective textiles,
including the "Mertex" and "Mertex-Plus" fabrics. The distribution right
is being amortized over the estimated useful life of the asset, which
management estimates to be seven years, using a method based on forecasted
future sales.
Costs related to the issuance of the March 31, 1998 Convertible
Debentures. The issue costs are being amortized on a straight-line basis
over a two year period.
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
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 expense
as incurred.
Revenue Recognition
Sales are recognized at the time the product is shipped 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 denominated in a foreign currency are adjusted to
reflect the rate of exchange in effect at the balance sheet date.
Exchange gains and losses arising on the translation of monetary assets
and liabilities are included in income, except for unrealized exchange
gains and losses on long-term debt. In fiscal 1998, the foreign
exchange loss relating to the March 31, 1998 Convertible Debentures,
was deferred and amortized over the remaining term of the debentures.
In fiscal 1997 and 1996, the unrealized exchange gains and losses
relating to the capital lease obligations were deferred and amortized
over the terms 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.
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.
Income Taxes
The Company follows the deferral method of income tax allocation.
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
4. INVENTORIES
1998 1997
Raw materials $3,891,327 $ 912,681
Finished goods 897,374 1,937,331
---------- -----------
$4,788,701 $ 2,850,012
========== ===========
5. RECEIVABLES FROM SHAREHOLDERS AND DIRECTOR-RELATED COMPANIES
1998 1997
Receivable from shareholders $190,151 $-
Receivable from director-related companies 396,058 -
--------- ---------
$586,209 $-
========= =========
The receivables from shareholders and director-related companies are
unsecured, non-interest bearing, with no specified terms of repayment,
except for the receivable from a director-related company in the amount
of $393,257 which is secured by the related company's fixed assets.
6. 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 ("NHLC"). During
fiscal 1998, the Company acquired an additional 666 2/3 Class C non-
voting, preferred shares. This investment is being accounted for under
the equity method. NHLC, a limited liability company, was created in
April, 1997. NHLC is in the service business managing the purchasing
and distribution activities for hospitals, utilizing a "Hub and Spoke"
distribution system.
7. PROPERTY, PLANT AND EQUIPMENT USED IN OPERATIONS
1998 1997
Accumulated
Cost Depreciation Net Net
Land $556,503 $- $556,503 $565,461
Building,
improvements 2,350,206 199,237 2,150,969 2,205,210
and paving
Furniture and 329,925 100,356 229,569 193,611
fixtures
Automotive 74,009 30,481 43,528 -
Computer 353,855 94,032 259,823 188,794
equipment
Machinery and 7,763,091 1,931,883 5,831,208 2,061,552
equipment
Leasehold 53,809 53,809 - -
improvements
Equipment
under capital 12,122,376 2,506,534 9,615,842 2,483,746
lease ------------ ----------- ------------ -----------
$23,603,774 $4,916,332 $18,687,442 $7,698,374
============ =========== ============ ===========
8. ASSETS UNDER DEVELOPMENT
1998 1997
Machinery and equipment $627,504 $
Machinery and equipment in storage - 408,562
Equipment under capital lease 1194 - 2,313,245
Equipment under capital lease 1094 - 001 - 7,147,042
-------- ----------
$627,504 $ 9,868,849
======== ===========
In fiscal 1998, the machinery and equipment in storage and the
equipment under capital lease 1194 were written down to zero value (see
Note 17).
Interest of $180,770 was capitalized to the equipment under capital
lease 1094-001 in fiscal 1998 (1997 - $475,404). In fiscal 1998 the
equipment was put into production, and accordingly was transferred into
property, plant, and equipment used in operations.
9. OTHER ASSETS
1998 1997
Mertex distribution rights, net of $59,020
in accumulated amortization $1,593,510 $-
March 31, 1998 Convertible Debentures issue
costs, net of $18,310 in accumulated amortization 421,120 -
----------- --------
$2,014,630 $-
=========== ========
Effective September 8, 1997 the Company entered into an agreement with
Importex Corporation ("Importex") and acquired 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 Class A common shares of the Company at $6.90 per share
and a warrant entitling Importex to purchase 150,000 Class A common
shares of the Company (see Note 14).
The Company incurred $439,430 of costs related to the issuance of the
March 31, 1998 Convertible Debentures (Note 10). The issue costs are
being amortized on a straight-line basis over a two year period.
10.LONG-TERM DEBT
1998 1997
Western Economic Diversification, term loan,
matures September 1, 2000, unsecured, non-
interest bearing, repayable in variable
quarterly payments commencing September 1, 1998 $1,804,835 $1,654,180
Province of Manitoba term loan, matures September
1, 2003, 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 of $51,958 each 2,174,126 1,613,146
thereafter, until fully repaid
Convertible Debentures, issued March 31, 1998
for $6,750,000 U.S., bear cumulative
interest at the rate of 6% per annum,
repayable in cash or Class A common
shares, automatic conversion to Class A
common shares on March 31, 2000 (net of 8,583,416 -
$1,162,356 reclassified to equity in
accordance with Canadian GAAP)
Banister Bank, term loan, bears interest at
the rate of U.S. prime plus 2.5%, matures
April 17, 2002, secured by inventory and
equipment of Budva, repayable in blended 34,065 -
monthly payments of U.S. $580
Banister Bank, term loan, bears interest at
the rate of U.S. prime plus 2%, matures
September 1, 1998, secured by accounts
receivable of Budva. Management is 285,315 -
currently negotiating terms of renewal of
this loan
Banister Bank, term loan, bears interest at
the rate of U.S. prime plus 2.5%, matures
September 25, 2003, secured by inventory
and equipment of Budva, repayable in 905,830 -
blended monthly payments of $12,191
Mr. Perovich, note payable, non-interest
bearing, matures April 15, 1999, secured
by a second charge over the assets of
Budva, repayable by U.S. $50,000 cash and
U.S. $100,000 worth of Class A common 224,355 -
shares of the Company ------------- ----------
14,011,942 3,267,326
Less: current portion (1,091,488) (460,000)
------------- ----------
$12,920,454 $2,807,326
============= ==========
Minimum principal repayments required under the terms of the debt
agreements for the years ended April 30 are as follows:
1999 $1,091,488
2000 1,627,662
2001 1,119,973
2002 795,723
2003 and thereafter 793,680
The Convertible Debentures will be repaid in Class A common shares on
maturity. Accordingly, they have been excluded from the above
repayment schedule.
10.LONG-TERM DEBT (continued)
Subsequent to year end the Company received a further $133,017 advance
on the Western Economic Diversification loan.
Western Economic Diversification Loan
The Western Economic Diversification loan represents subordinated
financial assistance for capital costs, marketing costs, 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.
Province of Manitoba Loan
The Company has entered into an agreement with the Province of Manitoba
for a term loan. 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. 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. As of April 30, 1998 the
job creation commitment has been met.
Convertible Debentures
Effective October 1, 1997, the Company issued U.S. $5,000,000 in
Convertible Debentures (October Debentures). The October Debentures
bore interest at 6% and were convertible into Class A common shares of
the Company at the lesser of either 85% of the average quoted market
price five day prior to conversion and U.S. $4.33. In addition,
attached to the October Debentures were 250,000 warrants to acquire
Class A common shares (October Warrants). During fiscal 1998, a
portion of the October Debentures were converted to 1,475,572 Class A
common shares. The remaining outstanding October Debentures were then
repaid with proceeds from the March Debentures (see below). The
October Warrants were cancelled upon extinguishment of the October
Debentures.
Effective March 31, 1998 the Company issued U.S. $6,750,000 in
Convertible Debentures (March Debentures). The March 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 either 85% of the average quoted market price prior to
conversion and U.S. $3.50. All debentures must be converted within two
years from the closing day. In addition, attached to the debentures
were 337,500 two year Convertible Debentures warrants (March Warrants).
Each March Warrant entitled the holder to purchase one Class A common
share at U.S. $2.83 during the first year or U.S. $3.09 during the
second year.
Management has determined the equity and liability portions of the
March Debentures to be as follows:
10.LONG-TERM DEBT (continued)
Convertible Debentures (continued)
Liability portion $8,399,694
Equity portion 1,162,356
-----------
$9,562,050
===========
The March Debentures balance recorded in these financial statements
consists of the following:
Liability portion of March $8,399,694
Debentures
Deferred foreign exchange loss 91,800
Accrued interest 91,922
----------
$8,583,416
==========
11.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 April 30, 1998 as follows:
Lease Lease Lease
1094-001 1094-002 1194 Total
1999 $1,171,443 $641,853 $699,731 $2,513,027
2000 1,171,443 641,853 58,311 1,871,607
2001 1,171,443 641,853 - 1,813,296
2002 585,722 427,902 - 1,013,624
---------- -------- --------- ----------
Total minimum
lease payments 4,100,051 2,353,461 758,042 7,211,554
Less: amount
representing interest
approximating 12% 737,795 440,577 22,037 1,200,409
---------- ---------- -------- ----------
$3,362,256 $1,912,884 $736,005 $6,011,145
========== ========== ======== ==========
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 interpretation of the settlement terms
at that time. During fiscal 1997, the dispute was finally
11.OBLIGATIONS UNDER CAPITAL LEASES (continued)
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.
Subsequent to year end National Healthcare Manufacturing Corporation,
U.S., suspended payments to the lessor of the equipment under capital
lease. The lessor issued a letter of default and therefore the full
amount of the obligation has been classified as current. Management
believes that the matter relating to the letter of default will be
resolved without material effect to the Company.
12.PAYABLE TO SHAREHOLDERS AND DIRECTOR-RELATED COMPANIES
1998 1997
Payable to shareholders $553,869 $1,187,551
Payable to director-related companies - 877,219
-------- ----------
$553,869 $2,064,770
======== ==========
The payables to shareholders and director-related companies are
unsecured, non-interest bearing, with no fixed terms of repayment. The
shareholders have agreed to not demand repayment within fiscal 1999;
accordingly these payables have been classified as non-current.
13.CAPITAL STOCK
1998 1997
Common Shares
Authorized
Unlimited Class A common shares, voting
Issued
15,821,903 Class A common shares,
net of issue costs (1997 - 11,070,415) $17,179,856 $ 9,318,163
=========== ===========
13.CAPITAL STOCK (continued)
Potential Dilution
1998 1997
Performance shares 1,180,000 1,180,000
Stock options 1,210,904 1,367,654
July 31, 1996, Special Warrants - 905,000
July 31, 1996, Broker's Special Warrants - 75,416
January 8, 1997, Agent's Special Warrants - 128,000
January 8, 1997, Agent's Warrants 128,000 -
January 8, 1997, Special Warrants - 1,600,000
January 8, 1997, SW Warrants 1,600,000 -
Importex Warrant 150,000 150,000
March 31, 1998 Debenture Warrants 337,500 -
---------- -----------
4,606,404 5,406,070
========== ===========
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. For each $.09 of cumulative cash flow
generated by the Company from its operations, one performance share may
be released from escrow.
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
1998 1997 1996
Options outstanding, 1,367,654 957,829 987,829
beginning of year
Options granted - 536,950 -
Options exercised (37,500) (67,125) -
Options cancelled or expired (119,250) (60,000) (30,000)
----------- ----------- ---------
Options outstanding, end of year 1,210,904 1,367,654 957,829
=========== =========== =========
Exercise prices of options
granted during the year NIL $3.81 -
$6.13
Expiry date of options Aug 11, 2001
granted during the year and
June 3, 2002
13.CAPITAL STOCK (continued)
Stock Options (continued)
On May 21, 1998, the stock options with an exercise price of $6.13 were
repriced to $3.70. On May 31, 1998, 370,000 stock options were granted
at an exercise price of $3.70. These options expire May 21, 2000. On
October 2, 1998, all outstanding stock options were repriced to $0.96.
As a condition of the government assistance received from the Province
of Manitoba, 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.
14.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.
In fiscal 1997, all agents warrants were 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 were issued as a fully paid security and each special
warrant was exercisable into one Class A common share and one
transferable Class A common share purchase warrant. Each Class A
common share purchase warrant entitled the holder to purchase one
additional Class A common share at a price of $3.50 per share. The
warrants were exercisable at the earlier of eighteen months from the
closing date or six months after the date of the last receipt for the
prospectus. During fiscal 1998, all of the special warrants were
exercised, resulting in issuance of 905,000 Class A common shares and
905,000 Class A common shares purchase warrants. In addition, 305,000
of the Class A common shares purchase warrants were exercised for
305,000 Class A common shares. The remaining Class A common share
purchase warrants had expired.
14.WARRANTS (continued)
Special Warrants (continued)
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 was exercisable into one compensation warrant. Each
compensation warrant entitled the broker to purchase one Class A common
share at a price of $3.00 per share. During fiscal 1998 the broker and
compensation warrants were exercised.
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 common share and one-half of one non-
transferable SW warrant. Each whole warrant entitled the holder to
purchase one additional Class A common share at a price of $7.00 per
share. Since 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 common share and one
(rather than one-half) non-transferable SW 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.
During fiscal 1998, both the January 8, 1997 special warrants and the
January 8, 1997 agent's warrants were exercised. This gave rise to the
issuance of 1,600,000 SW warrants and 128,000 agent's warrants which
entitled the holder to purchase one additional share at a price of
$7.00 prior to the expiry date of July 8, 1998.
Importex Warrant
Concurrent with the acquisition of the right to distribute Mertex and
Mertex-Plus from Importex (see Note 8), Importex received a warrant to
purchase 150,000 Class A common shares at a purchase price of $6.90
until September 7, 1998, after which the purchase price increases to
$7.94 until expiry on September 7, 1999. This one Importex warrant
remained outstanding as at April 30, 1998.
Debenture Warrants
Concurrent with the issuance of U.S. $6,750,000 in Convertible
Debentures on March 31, 1998, the debenture holders received 337,500
warrants. Each warrant is exercisable within two years of issuance and
entitles the holder to purchase one Class A common share at a purchase
price of U.S. $2.83, if converted during the first year or U.S. $3.09,
if converted during the second year. These debenture warrants remained
outstanding as at April 30, 1998.
15.INCOME TAXES
The Company has non-capital losses carried forward of approximately
$17,000,000 ($1997 - $10,990,000) which can be utilized to reduce the
taxable income of future years. These losses expire between 2002 and
2013. The Company is also entitled to tax credits of approximately
$227,000 (1997 - $244,000) which are creditable against provincial
income taxes. The tax credits expire between 2002 and 2003.
The benefits relating to the losses and the tax credits have not been
recognized in the financial statements.
16.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.
1998 1997
Sales to customers outside Canada $2,858,349 $2,482,035
Sales to customers within Canada 4,662,890 2,423,366
---------- ----------
$7,521,239 $4,905,401
========== ==========
The 1998 increase in sales to customers within Canada was partially due
to the acquisition of Medi Guard Inc. (see Note 19).
17.UNUSUAL ITEMS
During the fourth quarter of 1998, the Company undertook an asset
impairment analysis which indicated that the net carrying values of
certain laboratory equipment of $2,721,807, acquired under capital
lease 1194 in fiscal 1995, were impaired. An insurance claim was filed
in fiscal 1995 when the Company noted that a portion of the equipment
was missing. The Company opted to leave the equipment in storage until
the insurance claim was settled. As the claim is still unsettled, the
result indeterminable and in conjunction with the asset impairment
analysis, the Company has reduced the carrying value of the equipment
to zero.
During fiscal 1998, the Company made advances of $1,870,274 to a
related company and its subsidiary. Collectibility of this amount is
not determinable and accordingly, management has reserved for the full
amount of the advances receivable.
Recovery, if any, from the above items will be recorded as a gain in
the year realized.
18.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 the Company 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. The Company 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 the Company.
During the year, the Company paid $nil (1997 - $804,832) 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.
19.BUSINESS ACQUISITIONS
Acquisition of Budva International, LLC
Effective April 29, 1998, the Company acquired all of the issued and
outstanding shares of Budva International LLC, a manufacturer of
disposable plastic products for the healthcare industry. In
consideration therefore, the Company agreed to pay two times the net
annualized earnings of the business for the twelve months following two
months after the effective date. The purchase price is to be paid by
the Company by issuing Class A common shares at a per share value equal
to the average closing price for the five trading days preceding the
anniversary of the closing date. 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:
Current assets $181,322
Property, plant and equipment 1,669,035
Current liabilities (400,792)
Long-term debt (1,449,565)
-----------
$-
===========
Contingent consideration based on future earnings will be recorded when
it is determinable and the allocation of the purchase price will be
adjusted accordingly.
19.BUSINESS ACQUISITIONS (continued)
Acquisition of Medi Guard Inc.
Effective November 24, 1997 the Company acquired all of the issued and
outstanding shares of Medi Guard Inc. In consideration therefore, the
Company agreed to pay the greater of $400,001 or 1.5 times annualized
earnings of the business in the first year after acquisition. The
purchase price is to be paid by the Company issuing Class A common
shares at a per share value equal to the average closing price for the
five trading days preceding the anniversary of the closing date. 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:
Current assets $1,104,331
Property, plant and equipment 2,001,213
Other assets 98,922
Goodwill 400,000
Current liabilities (1,635,189)
Obligations under capital leases (500,000)
Long-term debt (1,069,276)
-----------
$400,001
===========
Subsequent to the acquisition date, management has evaluated the
acquisition and has determined that the goodwill in the amount of
$400,000 should be written off. This write-off is included in
amortization expense.
Contingent consideration based on future earnings will be recorded when
it is determinable and the allocation of the purchase price will be
adjusted accordingly.
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 fiscal 1998 results of operations.
20.COMPARATIVE FIGURES
Certain of the prior year's figures have been reclassified to conform
to the current year's presentation.
21.SUBSEQUENT EVENTS
The following event occurred subsequent to year end, in addition to
those events disclosed elsewhere in these financial statements.
21.SUBSEQUENT EVENTS (continued)
Acquisition of Custom Pack Reliability
Effective September 5, 1998, the Company acquired 100% of the issued
and outstanding shares of Conseluf Management Services Inc., a
privately held company based in Niagara Falls, New York doing business
as Custom Pack Reliability. Custom Pack Reliability has been
assembling and supplying custom packs to hospitals and surgical centres
throughout North America since 1992. The Company paid $500,000 for all
the shares and shareholder loans of Conseluf Management Services Inc.
and for certain assets. The purchase price is to be paid, over a
period of 300 days following the signing of a formal agreement of
purchase and sale, by the Company electing to either pay cash or issue
Class A common shares at a per share value equal to the average closing
price for the five trading days preceding the closing date. The
acquisition is subject to regulatory approval.
22.UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP)
Effective July 31, 1996, the Company obtained formal approval for
quotation of its securities on the Small Cap board of NASDAQ in the
United States.
A description of the Company's accounting principles which differ
significantly from U.S. GAAP are as follows:
Foreign Currency Translation
Unrealized exchange gains and losses relating to the translation of the
March 31, 1998 Convertible Debentures are deferred and amortized over
the remaining term of the debenture. Under U.S. GAAP, the 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
22.UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP)
(continued)
Deferred Taxes (continued)
GAAP purposes, a valuation allowance equal to the tax loss benefits
referred to in Note 15 would be disclosed.
Convertible Debentures
The March 31, 1998 Convertible Debentures have been apportioned between
debt and equity in accordance with the substance of the contractual
arrangement. In addition, the difference between the economic interest
on a comparable debt instrument with no convertible feature, and the
coupon interest rate, has been accrued.
Under U.S. GAAP, there would be no bifurcation of the Convertible
Debenture between its debt and equity components. In addition the
difference between the economic interest rate and the coupon rate would
not be accounted for. Also, under U.S. GAAP value would be allocated
to the warrants which were attached to the Convertible Debentures.
The application of U.S. GAAP, as described above, would have had the
following effects on net loss, loss per share and shareholders' equity.
1998 1997
Net loss as reported $(12,814,101) $(4,248,043)
Additions to deferred foreign exchange gain (91,800) (134,026)
(loss)
Incremental interest expense resulting from
difference between the economic interest
and 92,000 -
coupon rate on the March 31, 1998 ------------- -------------
Convertible Debentures
Net loss - U.S. GAAP $(12,813,901) $(4,382,069)
============= ============
Weighted average shares outstanding - U.S. 12,332,344 9,745,842
GAAP ============= ============
Loss per share - U.S. GAAP $(1.03) $(0.45)
============= ============
Shareholders' equity as reported $8,130,378 $13,082,786
Incremental interest expense resulting from
difference between the economic interest
and 92,000 -
coupon rate on the March 31, 1998
Convertible Debentures
Deferred foreign exchange gain (loss) (91,800) 54,128
Portion of March 31, 1998
Convertible Debentures allocated to (1,162,356) -
equity
Portion of March 31, 1998
Convertible Debentures allocated to 300,000 -
warrants ----------- -------------
Shareholders' equity - U.S. GAAP $7,268,222 $13,136,914
=========== ============
22.UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP)
(continued)
Convertible Debentures (continued)
Newly issued, but not yet adopted, U.S. accounting principles are not
expected to have a material impact on these consolidated financial
statements.
23.UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
Most entities depend on computerized systems and therefore are exposed
to the Year 2000 conversion risk, which, if not properly addressed,
could affect an entity's ability to conduct normal business operations.
Management is addressing this issue, however, given the nature of this
risk, it is not possible to be certain that all aspects of the Year
2000 Issue affecting the Company and those with whom it deals such as
customers, suppliers or other third parties, will be fully resolved
without adverse impact on the Company's operations.
(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....................................... 112
SIGNATURE PAGE
Pursuant to the requirements of Section 12g of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all the requirements for
filing on Form 20-F and has duly caused this Annual Report for Fiscal 1998
to be signed on its behalf by the undersigned, thereunto duly authorized.
National Healthcare Manufacturing Corporation; SEC File #0-27998
Registrant
Dated: 11/13/98 By: /s/ Mahmood Shahsavar
---------------------------------------------
Mahmood (Mac) Shahsavar, President and Chief
Executive Officer