UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6K
REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13a-16 AND 15d -16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of November 1998
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
(Name of Registrant)
251 Saulteaux Crescent, Winnipeg, Manitoba Canada R3J 3C7
(Address of principal executive offices)
1. Quarterly Report:For Period Ending July 31, 1998
Indicate by check mark whether the Registrant files of will file annual
reports under cover of Form 20-F of Form 40-F.
Form 20-F X Form 40-F ___
Indicate by check mark whether the Registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.Yes ___No X
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1943, the
registrant has duly cause this Form 6-K to be signed on its behalf by the
undersigned, thereunto duly authorised.
National Healthcare Manufacturing Corporation -- SEC No. 0-27998
(Registrant)
Date:November 24, 1998 By: /s/ Mac Shahsavar
-----------------------------------------
M.J. Shahsavar, President/CEO, Director
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDED JULY 31, 1998
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED BALANCE SHEETS
JULY 31, 1998 AND SEPTEMBER 30, 1997
(In Canadian Dollars)
ASSETS
July 31, Sept 30,
1998 1997
CURRENT ASSETS
Cash and short-term investments $363,037 $2,020,775
Accounts receivable (Note 10) 2,434,331 2,034,448
Inventories (Notes 4 and 10) 5,685,752 3,660,955
Prepaid expenses 310,629 339,735
------------ -----------
8,793,749 8,055,915
RECEIVABLES FROM SHAREHOLDERS AND
DIRECTOR-RELATED COMPANIES (Notes 5 and 19) 1,197,644 404,353
INVESTMENT IN NATIONAL
HEALTHCARE LOGISTICS LLC (Note 6) 1,202,987 2,237,273
PROPERTY, PLANT AND EQUIPMENT
USED IN OPERATIONS (Notes 7, 10 and 11) 18,342,240 7,741,428
ASSETS UNDER DEVELOPMENT (Notes 8 and 10) 627,504 9,978,001
OTHER ASSETS (Note 9) 1,964,621 -
------------- -------------
$32,128,745 $ 28,,416,970
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Cheques issued in excess of amounts on
deposit $557,712 $667,904
Accounts payable and accrued liabilities 3,479,103 1,930,304
Current portion of long-term debt (Note 10) 1,298,500 670,000
Current portion of obligations under capital
leases (Note 11) 6,023,160 1,766,750
------------ -----------
11,358,745 5,034,959
LONG-TERM DEBT (Note 10) 13,681,901 3,158,306
OBLIGATIONS UNDER CAPITAL LEASES (Note 11) - 5,043,951
DEFERRED FOREIGN EXCHANGE GAIN (LOSS) (532,239) 51,395
PAYABLES TO SHAREHOLDERS
AND DIRECTOR-RELATED COMPANIES (Notes 12
and 19) 555,497 1,160,134
----------- -----------
25,063,634 14,448,745
----------- -----------
SHAREHOLDERS' EQUITY
Capital stock (Note 13) 17,179,856 11,433,351
Warrants (Note 14) 12,093,206 12,093,206
Deficit (22,207,951) (9,558,332)
------------ ------------
7,065,111 13,968,225
------------ ------------
$32,128,745 $28,416,970
============ ============
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED JULY 31, 1998
AND THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997
(In Canadian Dollars)
July 31, Sept 30,
1998 1997
REVENUES
Sales (Note 16) $3,190,223 $1,757,999
Other revenue 177,746 87,704
----------- -----------
3,367,969 1,845,703
----------- -----------
COSTS AND EXPENSES
Cost of sales 1,737,875 960,458
Selling, distribution and administrative 1,667,217 1,460,269
Depreciation and amortisation 382,026 328,434
Interest on long-term debt 450,781 85,959
Other expenses 0 14,326
----------- ----------
4,237,899 2,849,447
----------- ----------
LOSS FROM OPERATIONS 869,930 1,003,744
LOSS FROM INVESTMENT IN
NATIONAL HEALTHCARE LOGISTICS LLC (Note 6) 195,337 226,005
----------- ----------
NET LOSS $1,065,267 $1,229,749
=========== ===========
BASIC LOSS PER SHARE $0.07 $0.10
=========== ===========
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 15,821,903 11,895,970
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTH PERIOD ENDED JULY 31, 1998
AND THE YEARS ENDED APRIL 30, 1998 AND JUNE 30, 1997
(In Canadian Dollars)
Class A Common Shares
Shares Amount Paid in Deficit Total
capital
Balances 10,753,290 8,677,351 - (4,080,540) 4,596,811
at June
30, 1996
Issue of 67,125 140,812 - - 140,812
shares
for cash
Issue of - - 12,315,000 - 12,315,000
special
warrants
(Note
14)
Warrant - - (221,794) - (221,794)
issue
costs
Exercise 250,000 500,000 - - 500,000
of
warrants
(Note
14)
Net loss - - - (4,248,043) (4,248,043)
----------- --------- ----------- ------------ ------------
Balances 11,070,415 9,318,163 12,093,206 (8,328,583) 13,082,786
at June
30, 1997
Issue of 37,500 91,440 - - 91,440
shares
for cash
(Note
13)
Issue 225,000 1,552,500 - - 1,552,500
for
Mertex
distribu
tion
right
(Note 9)
Share - (1,174,275) - - (1,174,275)
issue
costs
Conversi 1,475,572 4,935,924 - - 4,935,924
on of
converti
ble debt
(Note
10)
Exercise 3,013,416 1,293,748 - - 1,293,748
of
warrants
(Note
14)
Equity - 1,162,356 - - 1,162,356
portion
of
converti
ble debt
(Note
10)
Net loss - - - (12,814,101) (12,814,101)
---------- ---------- --------- ------------- --------------
Balances 15,821,903 $17,179,856 $12,093,206 $(21,142,684) $8,130,378
at April
30, 1998
Net loss - - - (1,065,267) (1,065,267)
----------- ----------- ----------- ------------ ------------
Balances 15,821,903 $17,179,856 $12,093,206 $(22,207,951) $7,065,111
at July =========== =========== =========== ============= ============
31, 1998
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED JULY 31, 1998
AND THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997
(In Canadian Dollars)
July 31, Sept 30,
1998 1997
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss $(1,065,267) $(1,229,749)
Items not affecting cash
Amortisation of deferred
foreign exchange loss 28,096 (2,756)
Accrued interest 284,912 -
Unrealised foreign exchange loss 411,482 -
Depreciation and amortisation 382,026 328,434
Loss from investee 195,337 226,005
------------ -----------
236,586 (678,065)
Net change in non-cash
operating assets and liabilities
Accounts receivable (168,054) (207,239)
Inventories (897,051) (810,943)
Prepaid expenses (65,225) (25,263)
Accounts payable and accrued liabilities (61,261) 658,684
---------- ----------
(955,005) (1,012,301)
---------- -----------
INVESTING ACTIVITIES
Investment in
National Healthcare Logistics LLC (179,236) (2,015,482)
Acquisition of property, plant and equipment 13,185 (435,163)
---------- ------------
(166,051) (2,450,645)
---------- ------------
FINANCING ACTIVITIES
(Repayment of) obligations under capital leases (317,472) (412,386)
Proceeds from long-term debt 133,017 560,980
Deferred foreign exchange gain (loss) - (2,733)
Advances from (repayment to) shareholders
and director-related companies (609,807) (1,309,152)
Net proceeds from issuance of
Class A common shares - 2,115,188
---------- -----------
(794,262) 951,897
----------- -----------
CHANGE IN CASH (1,915,318) (2,511,048)
CASH, beginning of year 1,720,643 3,863,919
----------- -----------
CASH, end of year $(194,675) $1,352,871
=========== ===========
NATIONAL HEALTHCARE MANUFACTURING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED JULY 31, 1998
AND THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997
(In Canadian Dollars)
(continued)
July 31, Sept 30,
1998 1997
Represented by:
Cash and short-term investments $363,037 $2,020,775
Cheques issued in excess of funds on deposit (557,712) (667,904)
---------- ----------
$(194,675) $1,352,871
========== ==========
Supplemental disclosure of cash flow information
Cash paid for:Interest (net of amount
capitalised) $110,834 $85,959
========== ==========
Income taxes $- $-
========== ==========
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 (symbol
NHMCF). 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 which resulted
in the differing quarter one ending dates contained herein.
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 21. All
amounts are stated in Canadian dollars.
2.BUSINESS CONSIDERATIONS
The Company has incurred significant up front 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.
Thus far in fiscal 1999, 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 centralise 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 realise 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 $22,207,951 as at July 31, 1998. Also, as at
July 31, 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 maturates 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 realisable
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 capitalised. 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 leases 30% declining balance
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 capitalised until the
asset is substantially completed and ready for its intended and
productive use.
Other Assets
Included in other assets are the following:
*Exclusive right to distribute and sell certain protective textiles,
including the "Mertex" and "Mertex-Plus" fabrics. The distribution right
is being amortised 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 amortised 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 recognised 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 unrealised exchange
gains and losses on long-term debt. The foreign exchange loss relating
to the March 31, 1998 Convertible Debentures are being deferred and
amortised over the remaining term of the debentures.
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,
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 period.
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 $3,726,484 $1,262,680
Finished goods 1,959,268 2,398,275
----------- -----------
$5,685,752 $3,660,955
=========== ===========
5.RECEIVABLES FROM SHAREHOLDERS AND DIRECTOR-RELATED COMPANIES
1998 1997
Receivable from shareholders $189,203 $-
Receivable from director-related companies 1,008,441 404,353
----------- ---------
$1,197,644 $404,353
=========== =========
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 now holds 1,000 Class C non-
voting 7% preferred shares of National Healthcare Logistics LLC
("NHLC"). This investment is being accounted for under the equity
method. NHLC, a limited liability company, was created in April, 1997.
NHLC is in the business of consolidating and managing the purchasing
and distribution activities for regional hospital alliances, utilising
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 $574,150
Building,
improvements
and paving 2,356,801 220,831 2,135,970 2,209,215
Furniture and
fixtures 335,916 111,453 224,463 188,763
Automotive 74,009 33,746 40,263 -
Computer 383,819 116,183 267,636 230,845
equipment
Machinery and
equipment 7,888,398 2,163,667 5,724,731 2,236,372
Leasehold
improvements 55,803 55,803 - -
Equipment
under capital 12,122,376 2,729,702 9,392,674 2,483,746
lease ------------ ---------- ---------- -----------
$23,773,625 $5,431,385 $18,342,240 $7,741,428
============= ========== =========== ===========
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 - 7,256,193
--------- ----------
$627,504 $9,978,001
========== ===========
In fiscal 1998, the machinery and equipment in storage and the
equipment under capital lease 1194 were written down to zero value.
Interest of $109,151 was capitalised to the equipment under capital
lease 1094-001 in the period ended September 30, 1997. Later 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 $54,101
in accumulated amortisation $1,598,429 $-
March 31, 1998 Convertible Debentures issue
costs, net of $73,238 in accumulated 366,192 -
amortisation ------------ --------
$1,964,621 $-
============ ========
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 amortised 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
$1,937,852 $1,654,180
Province of Manitoba term loan, matures September
1, 2003, bears interest at the rate charged to
Manitoba Crown Corporations for borrowings
amortised 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
thereafter, until fully repaid
2,174,126 2,174,126
10.LONG-TERM DEBT (continued)
1998 1997
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
$1,162,356 reclassified to equity in accordance
with Canadian GAAP)
9,336,863 -
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 monthly payments of
U.S. $580 35,991 -
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 currently negotiating terms of
renewal of this loan
301,454 -
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 blended monthly payments of
$12,191 957,068 -
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 shares of the Company
237,046 -
----------- -----------
14,980,401 3,828,306
Less: current portion (1,298,500) (670,000)
----------- ----------
$13,681,901 $3,158,306
=========== ==========
Minimum principal repayments required under the terms of the debt
agreements for the years ended April 30 are as follows:
1999 $ 1,298,500
2000 1,635,662
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)
During the quarter, 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 July 31, 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 settlement 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 initial 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 equity portion of the Convertible Debenture was calculated using an
effective cost of capital equal to 13%. Interest is accrued at 13% which
provides for the 6% accruing to the Debenture holders and the remaining 7%
increases the future value of the liability portion to its face value at
the date of maturity. The March Debentures balance recorded in these
financial statements consists of the following:
Liability portion of March $8,399,694
Debentures
Deferred foreign exchange 560,335
loss
Accrued interest 376,834
----------
$9,336,863
==========
11. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases specialised 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 July 31, 1998 as follows:
Lease Lease Lease
1094-001 1094-002 1194 Total
1999 $1,308,135 $716,019 $674,091 $2,698,246
2000 1,237,706 678,160 - 1,915,866
2001 1,237,706 678,160 - 1,915,866
2002 309,427 282,566 - 591,993
---------- --------- -------- ----------
Total
minimum 4,092,974 2,354,905 674,091 7,121,971
lease
payments
Less: am
ount
represent
ing 679,389 408,463 10,959 1,098,811
interes
t
approxima
ting 12% ----------- ----------- -------- -----------
$3,413,586 $1,946,442 $663,132 $6,023,160
=========== =========== ======== ===========
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 recognise 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.
During the quarter ended July 31, 1998, 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 $555,497 $1,160,134
Payable to director-related companies - -
--------- -----------
$555,497 $1,160,134
========= ===========
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
Authorised
Unlimited Class A common shares, voting
Issued
15,821,903Class A common shares,
net of issue costs (1997 - 12,474,331) $17,179,856 $11,433,351
=========== ===========
13.CAPITAL STOCK (continued)
Potential Dilution ( in shares - see Note 19)
1998 1997
Performance shares 1,180,000 1,180,000
Stock options 1,580,904 1,330,154
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 -
-
January 8, 1997, Special Warrants - 1,600,000
January 8, 1997, SW Warrants - -
Importex Warrant 150,000 150,000
March 31, 1998 Debenture Warrants 337,500 -
--------- ----------
3,248,404 5,368,570
========= ==========
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
Options outstanding, 1,210,904 1,367,654
beginning of period
Options granted 370,000 -
Options exercised - (37,500)
Options cancelled or expired - -
---------- ------------
Options outstanding, end of period 1,580,904 1,330,154
========== ============
Exercise prices of options
granted during the period $3.70 $3.81 - $6.13
Expiry date of options May 21, 2003 Aug 11, 2001 and
granted during the period 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, 2003. 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
authorising 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 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. On July 8, 1998, the SW warrants and the agent's warrants
expired.
Importex Warrant
Concurrent with the acquisition of the right to distribute Mertex and
Mertex-Plus from Importex (see Note 9), 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 July 31, 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 July 31, 1998.
15.INCOME TAXES
The Company has non-capital losses carried forward of approximately
$17,000,000 ($1997 - $10,990,000) which can be utilised 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
recognised 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 $1,576,664 $866,568
Sales to customers within Canada 1,613,559 891,431
---------- --------
$3,190,223 $1,757,999
========== ==========
17.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 period, the Company paid $nil (1997 - nil) 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.
18. 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
annualised 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.
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 annualised
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
===========
In fiscal 1998, management re-evaluated the acquisition and determined
that the goodwill in the amount of $400,000 should be written off. The
write-off was included in amortisation expense.
18.BUSINESS ACQUISITIONS (continued)
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.
19.COMPARATIVE FIGURES
Certain of the prior year's figures have been reclassified to conform
to the current year's presentation.
20.SUBSEQUENT EVENTS
The following event occurred subsequent to quarter end, in addition to
those events disclosed elsewhere in these financial statements.
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.
Palm Beach Gardens Medical Center Contract
On November 16, 1998, the Company announced the signing of a Custom
Sterile Procedure Tray contract with Palm Beach Gardens Medical Center
(PBMC) of Palm Beach, Florida. PBMC,part of the Tenet Healthcare
Corporation, is a 450-bed acute care facility performing 8,000 multi-
specialty surgical procedures annually.
HealthPro Procurement Services Contract
On November 19, 1998, the Company announced that it was selected by
HealthPro Procurement Services Inc. (HealthPro) of Etobicoke, Ontario
to provide a wide range of Medical Procedure Trays in Ontario for the
next three years. HealthPro, currently representing 210 member
institutions, was created through the consolidation of the two major
group-purchasing organisations in Ontario.
21.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 (symbol NHMCF).
A description of the Company's accounting principles which differ
significantly from U.S. GAAP are as follows:
Foreign Currency Translation
Unrealised exchange gains and losses relating to the translation of the
March 31, 1998 Convertible Debentures are deferred and amortised over
the remaining term of the debenture. Under U.S. GAAP, the exchange
gains and losses would be recognised in income currently.
Earnings Per Share
Under U.S. GAAP, the Company would not include the 1,180,000
performance shares held in escrow in the calculation of the weighted
average number of shares used to determine earnings per share. The
release of these performance shares will result in recognition of
compensation expense under U.S. GAAP based on market value of the
shares when released from escrow.
Deferred Taxes
Under U.S. GAAP, deferred taxes are provided on all temporary
differences. Temporary differences encompass timing differences and
other events that create differences between the tax basis of an asset
or liability and its reported amount in the financial statements. A
deferred tax asset is recorded in a loss period and is reduced by a
valuation allowance to the extent it is more likely than not that the
deferred tax asset will not be realised. For U.S. 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 also been accrued.
Under U.S. GAAP, there would be no separation 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.
21.UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP)
(continued)
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 $(1,065,267) $(1,229,749)
Additions to deferred foreign exchange
gain (loss) (440,439) (2,733)
Incremental interest expense resulting
from difference between the economic
interest and coupon rate on the March
31, 1998 Convertible Debentures 138,202 -
------------ ------------
Net loss - U.S. GAAP $(1,367,504) $(1,232,482)
============ ============
Weighted average shares outstanding - 14,641,903 10,715,970
============ ============
U.S. GAAP
Loss per share - U.S. GAAP $(.09) $(0.12)
============ ============
Shareholders' equity as reported $7,065,111 $13,968,225
Incremental interest expense resulting
from difference between the economic
interest and coupon rate on the March
31, 1998 Convertible Debentures 138,202 -
Deferred foreign exchange gain (loss) (440,439) 51,395
Portion of March 31, 1998
Convertible Debentures allocated to (1,162,356) -
equity
Portion of March 31, 1998
Convertible Debentures allocated to
warrants 300,000 -
----------- ------------
Shareholders' equity - U.S. GAAP $5,900,518 $14,019,620
=========== ============
Newly issued, but not yet adopted, U.S. accounting principles are not
expected to have a material impact on these consolidated financial
statements.
22.UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
Most entities depend on computerised 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.