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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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: 1-13861
MED-EMERG INTERNATIONAL INC.
(Exact Name of Registrant as Specified in Its Charter)
PROVINCE OF ONTARIO, CANADA
(State or Other Jurisdiction of Incorporation or Organization)
2550 Argentia Road, Suite 205
Mississauga, Ontario, Canada L5N 5R1
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (905) 858-1368
Securities registered or to be registered pursuant to Section 12(b) of the Act.
(Title of each class) (Name of each exchange on which registered)
COMMON STOCK, NO PAR VALUE NASDAQ SmallCap and Boston Stock
Exchange
REDEEMABLE COMMON STOCK NASDAQ SmallCap and Boston Stock
PURCHASE WARRANTS Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act.
COMMON STOCK, NO PAR VALUE NASDAQ SmallCap and Boston Stock
Exchange
REDEEMABLE COMMON STOCK NASDAQ SmallCap and Boston Stock
PURCHASE WARRANTS Exchange
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NONE
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 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 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the shares of Common Stock
(based upon the closing sales price of these shares as reported on the NASDAQ
Stock Market's SmallCap Market on March 31, 1999) of the registrant held by
non-affiliates on March 31, 1999 was approximately US$3,869,430.
As of March 31, 1999, 3,095,544 shares of the registrant's
Common Stock were outstanding.
PART I
ITEM 1: DESCRIPTION OF BUSINESS
BACKGROUND
Med-Emerg International, Inc. ("Med-Emerg" or the "Company"), based in
Ontario, Canada, is a provider of a broad range of quality healthcare
management services. Established in 1983, the Company specializes in the
coordination and contract staffing of emergency physicians for hospitals and
clinics in Canada. Though emergency-related services are still an important
component of the Company's business, Med-Emerg has expanded to offer a wide
variety of medical services including nurse staffing, physician management
services and an internet-based healthcare network.
Med-Emerg is positioned to establish industry leadership in Canada by
providing integrated professional management services in the delivery of
healthcare to the Canadian healthcare consumer. The Company's operations are
divided into three divisions, Physician and Nurse Recruitment Services,
Physician Management Services and an internet based healthcare network called
Healthyconnect.com. Med-Emerg's strategy is to remain focussed on these three
divisions while continuing to broaden its consolidation of physicians over a
wider geographic base. Med-Emerg believes that it is well positioned to
benefit from the aging of the baby boomer population, to capitalize on recent
developments within the North American healthcare environment and internet
technology. Specifically, the Company's strategy is to leverage its 15 years
of physician recruitment experience in becoming a dominant player in
Physician Management Services and to develop an internet-based healthcare
network that connects physicians, patients, third party payors and consumers
to a "virtual world" of healthcare products and services.
THE COMPANY
The "Company" refers to: (i) Med-Emerg International, Inc.;(ii) its
wholly-owned subsidiaries, Med-Emerg Urgent Care Centres Inc., Med-Emerg
Dundas Urgent Care Centre Inc., JC Medical Management Inc., 927563 Ontario
Inc. and 927564 Ontario Inc.; (iii) its indirect wholly-owned subsidiaries
Med-Emerg Inc. and Med Plus Health Centres Ltd., which is wholly-owned by
927563 Ontario Inc. and 927564 Ontario Inc., respectively; (iv) its 75% owned
subsidiary, Doctors on Call Ltd.; (v) its 45% owned subsidiary Medical Urgent
Care Inc.; (vi) its51% owned subsidiary Caremedics (Elmvale) Inc.; and, (vii)
its 51% owned subsidiary York Lanes Health Centres Inc.
As part of its business strategy, the Company intends to pursue rapid growth,
including possible acquisitions of, and joint ventures with, related and
complementary businesses. In June 1998, the Company acquired all of the
outstanding capital stock of a 6-physician family practice clinic, JC Medical
Management Inc. In September 1998, the Company acquired 75% of the
outstanding capital in a 24-hour on-call physician service, Doctors on Call
Ltd. During the first quarter of 1999, the Company acquired a 45% interest in
Medical Urgent Care Inc., a 51% interest in Caremedics (Elmvale) Inc. and a
51% interest in York Lanes Health Centres Inc., and entered in management
services agreements with all three companies. The Company is currently
considering other acquisitions, but has no other commitments, undertakings or
agreements for any particular acquisition.
The Company provides emergency medical services to hospitals and to other
medical groups through its Physician and Nurse Recruitment Division and
clinical medical services to the public, in clinics through its Physician
Management Services Division. In September 1997, the Company launched its
Urgent Care Centres program, which provides on-site emergency medical
services. The Company intends to continue to aggressively market its
facilities and services as a viable outsource alternative to public
hospitals' present emergency room operations.
THE PHYSICIAN AND NURSE RECRUITMENT DIVISION
Competitive pressures have focused the attention of many healthcare
administrators, in the public sector, on the need for better staffing of
their medical professionals. Hospitals have increasingly turned to contract
staffing firms with specialized skills to help solve physician contract and
scheduling problems.
The Physician and Nurse Recruitment Division was established in 1983 as a
medical staffing and recruitment business. The Company provides physician
staffing, nurse staffing and administrative support to emergency departments
and physician recruitment services to Canadian hospitals and physician
groups. The administrative services include billing, maintenance of records
and coordinating with third party payors. Under its contracts with hospitals,
the Company provides emergency department physician coverage. The Company
also coordinates the scheduling of staff physicians which provides emergency
department coverage and assists the hospital's administrative and medical
staff in such areas as quality assurance, risk management, departmental
accreditation and marketing.
The Company's hospital physician staffing services are reimbursed either
based on a monthly fee payable by the hospital or on a per shift basis. As of
February 28, 1999, the Company had 16 hospital physician contracts, of which
12 were contracted to pay monthly administration fees, two were contracted to
pay on a per-shift basis and two were contracted to pay based on a percentage
of billings generated by the physicians on each shift. As of February 28,
1999, the Company was providing physician coverage for a total of
approximately 554 shifts per month, representing over 6,650 hours per month.
The Company's nurse staffing services are reimbursed at a fixed rate per hour
of coverage provided. The Company had four hospital nursing contracts as at
February 28, 1999,which provided a total of approximately 1,482 hours in the
month of February.
CONTRACTUAL ARRANGEMENTS
MANAGEMENT CONTRACTS WITH PHYSICIANS. The Company identifies, recruits and
screens potential candidates to serve as emergency room physicians in
hospitals that have contracted for the Company's contract staffing services.
The Company then enters into contracts with physicians who meet its
qualifications and provides those physicians as candidates for admission to
the hospital's medical staff. The Company requires all physicians to be
currently licensed to practice medicine in the Province of Ontario and to be
Advanced Cardiac Life Support ("ACLS") or Advanced Trauma Life Support
("ATLS") certified before entering into a contract for the physician's
services.
The terms and conditions of the Company's contracts with physicians generally
provide that the Company, on a best efforts basis, will place the physician
in a functioning facility and the Company will collect all fees due to the
physician for rendering services. The Company then pays the physician for the
medical services provided based on the terms of the contract between the
Company and the physician. These contracts contain the following provisions:
Each physician is not an employee of the Company but is instead an
independent contractor of services to various medical facilities under
contract with the Company; Each physician must remain in good standing with
the College of Physicians & Surgeons of the Province of Ontario and be
licensed to practice medicine in the Province of Ontario; Each physician must
remain in good standing with the Canadian Medical Protective Association
("CMPA") and have appropriate CMPA coverage to provide physician services to
patients while working with the Company. Physicians are bound by a
non-competition restriction not to provide services at any hospital where the
Company has a contract for one year following the contract term. Each
physician full-time contract has a term of twelve months and renews
automatically for an additional twelve months.
CONTRACTS WITH HOSPITALS FOR PHYSICIAN STAFFING. The Company coordinates the
scheduling of staff physicians to provide coverage on a negotiated basis to a
hospital's emergency department.
The Company generally provides contract physician staffing services to
hospitals on the following arrangements: fee-for-service contracts and
physicians per shift that the Company provides to the hospital. In addition,
physicians under contract to the Company authorize the Company to bill and
collect fees. Depending upon the hospital patient volume, the Company may
receive a subsidy from the hospital. Pursuant to such contracts, the Company
assumes responsibility for billing and collection and assumes risks of
administrative error and subsequent non-payment. All of these factors are
taken into consideration by the Company in arriving at appropriate
contractual arrangements with healthcare institutions and professionals. The
hospital contracts are generally for one year, are generally terminable by
either party upon two months written notice, and automatically renew if not
terminated.
When determining the split arrangement to be used in the physician
compensation model for the Company's fee-for-service contracts, the Company
considers a hospital's emergency room patient
volume, the monthly gross margin targets set by the Company, the location of
the hospital in relation to the supply of physicians, and shift coverage
offered or required by the hospital.
When determining the fixed administrative fee to be charged to the hospital,
the Company considers several factors including location of the hospital in
relation to the availability of physicians, number of physicians from which
to draw, the number of physician shifts required, and patient volumes.
For the majority of the hospital staffing contracts, the Company's monthly
fee is due on the 1st of the month for which shift coverage is being
provided. For a few of the Company's contracts, the fee is not due until the
end of the month for which shift coverage was provided. For all of the
Company's hospital staffing contracts (fee-for-service and fixed fee) the
physicians are paid on the 15th of each month for services rendered up to the
15th the prior month.
CONTRACTS WITH NURSES. The Company identifies, recruits and screens potential
candidates to serve as emergency room nurses in hospitals that have
contracted for the Company's staffing services. The Company then enters into
contracts with nurses who meet its qualifications. The Company requires all
nurses to be Basic Life Support ("BLS") certified and prefers Advanced
Cardiac Life Support ("ACLS") certification. Nurses must have a minimum of
two years' experience in emergency departments and pass a written examination
that tests their skills as a critical care nurse.
The Company bills a fixed hourly rate to the hospital for each hour of
service provided by a nurse under contract with the Company. The nurses are
paid a lower fixed hourly rate on the 15th and 30th of each month.
CONTRACTS WITH HOSPITALS FOR NURSE STAFFING. The Company provides nursing
coverage to hospital emergency departments on a shift-by-shift basis. The
Company charges a fixed hourly rate for every hour of nursing coverage
provided. The hospital contracts are generally for one year, are terminable
by either party upon three months written notice, and automatically renew if
not terminated.
THE PHYSICIAN AND NURSE RECRUITMENT DIVISION'S OPERATIONS
The principal operating activities of the Physician and Nurse Recruitment
Division include the following:
RECRUITMENT AND CREDENTIALS. Med-Emerg has developed into one of the larger
providers of physician recruitment and placement services to many communities
and hospitals across Canada. Services include the complete assessment of a
community's needs, practice opportunities, the development of a recruitment
strategy and implementation process.
The recruitment and certifying of credentials of qualified independent
contract physicians is a central aspect of the Company's operations.
Full-time employees of the Company are dedicated to recruiting and certifying
credentials of the independent contract physicians for the Company. The
Company recruits physicians from three groups. The first group is recruited
directly from postgraduate training programs. Seminars are currently held in
most of the teaching hospitals in Ontario, with plans to provide seminars
across Canada to educate all the residents in family medicine and other
specialties about career opportunities in the Company. The second and third
groups recruited are established family physicians with an interest in
emergency medicine and full-time emergentologists. The Company has developed
a database that tracks the physicians during their medical career. This
database enhances the Company's ability to maximize the medical service
contribution of each physician. In the Canadian healthcare environment where
there exists a significant shortage of qualified physicians, one measure of
value of a Physician Management Organization is its ability to access in a
timely manner the quantity of physicians in an organization's database. As
part of its recruiting strategy, the Company has established a stock option
plan and group benefits plan in which its contracted physicians can
participate. The Company believes that this will encourage physicians to make
long-term commitments.
Qualified independent contract nurses are recruited through advertising,
word-of-mouth and trade shows. Nurses must have two years of experience in
critical care nursing and possess Basic Life Support ("BLS") training and
preferably Advanced Cardiac Life Support ("ACLS") training.
QUALITY ASSURANCE. The Company maintains a Quality Assurance program designed
to ensure consistency in clinical practice performance. These systems are
subject to review and examination by independent hospital credential and
regulatory agencies. As part of the Company's quality assurance program, all
physicians are required to have ACLS and ATLS certification, provide a
Certificate of Professional Conduct from the College of Physicians and
Surgeons of Ontario, be approved by the credentialing committee in their
respective hospitals that are governed by the Public Hospital Act, maintain
adequate malpractice coverage, and maintain continuing medical education
credits. Principally, quality assurance is the responsibility of Dr. Stephen
Fowler, the Company's Executive Medical Director. The efficiency of these
systems, and the performance of the Company's contract physicians, are
critical to maintaining a good relationship with the hospitals, as well as
minimizing the exposure of the Company to liability claims.
TIME SCHEDULING. The scheduling of physician hours and nurse hours is
performed monthly. For physician services, hospitals are provided a monthly
physician coverage schedule prior to the first of each month. Under some of
the hospital contracts, multiple physician coverage is required during
certain periods. For nursing services, hospitals contact the Company with
their shift requirements. Because of varying other demands on the contract
nurses and physicians, the scheduling process is complex and requires
significant management attention.
BILLING AND COLLECTION OF SERVICES. Fees generated by emergency department
coverage of physicians are comprised of two elements: (i) hospital
administrative fees; and (ii) physician services. Under each hospital
contract, the Company has the responsibility for the billing and collection
of physician fees. The Company's bad debt experience in collection of
physician fees has historically been less than 1% of allowable billings. In
addition, the Company charges each hospital a fee for its recruiting and
staffing services either on a fixed fee or fee-for-service basis.
PERSONNEL ADMINISTRATION. The Company assists the contracted physicians in
personnel administration, which includes the administration of physician fee
reimbursement. In addition, the Company provides for the administration of
fringe benefit programs, which may include but are not limited to life
insurance, health insurance, professional dues and disability insurance.
CONSULTING AND HEALTHCARE MANAGEMENT SERVICES. Hospitals have increasingly
turned to consulting specialists with specialized skills to strengthen the
management of their professional medical staff and specific clinical
departments, to better control costs, and to assist hospitals in meeting
their healthcare coverage needs and obligations to patients who are indigent,
uninsured or unassigned to a referring physician. In the past few years,
consulting contracts have been conducted with Hotel-Dieu Grace Hospital in
Windsor, Canada and The Wellesley Hospital in Toronto, Canada. In 1998, a
consulting contract was completed for the Chatham-Kent Health Alliance and
the Company is currently working on a consulting contract with Northumberland
Health Care Corporation.
The Company has also conducted several international consulting assignments
for healthcare clients in Saipan, the Cayman Islands, Malaysia and India,
including feasibility studies, identification of medical service needs,
planning of healthcare delivery systems and developing marketing strategies.
In 1997, the Company completed a consulting assignment to provide an
integrated strategic plan for the delivery of health and social services in
the Northwest Territories in Canada, the costs of which were funded by the
Northwest Territory Provincial government.
The Company expects to continue its growth through staffing additional
hospital contracts. In particular, the Company intends to both strategically
target hospitals and physician groups. Management actively seeks
opportunities to competitively bid for hospital contracts.
In addition, the Company intends to take advantage of the government's plans
to restructure the delivery of Canadian medical care through fewer but more
efficient hospitals and hospital groups. Management expects that hospitals
will increasingly look to outsourcing from third party providers.
Specifically, the Company expects that hospitals will seek opportunities for
emergency care specialists not only to staff the emergency departments but
also to administer and operate all aspects of those departments.
THE PHYSICIAN MANAGEMENT SERVICES DIVISION
As of March 15, 1999, the Company has ownership interest in and manages ten
clinics in Canada, including two clinics in Toronto's Lester B. Pearson
International Airport. The locations of and services provided at the
Company's clinics are as follows:
AIRPORT. The Company has a contract with the Greater Toronto Airport
Authority to provide emergency services for both Terminal 1 and 2 Medical
Clinics at Toronto's Lester B. Pearson International Airport. The current
contract expires on June 30, 1999 and a proposal has been submitted to the
Greater Toronto Airport Authority for a new contract. The airport clinics
provide emergency services throughout the airport to approximately
twenty-eight million travelers who use the airport each year and walk-in
services to the approximately 35,000 employees. The staff consists of highly
qualified critical care nurses who are on-site and emergency physicians who
are on call. Other services, generally provided to employees of the airport,
include chiropractic, massage therapy and audio testing which services.
GLENDERRY, POND MILLS, CENTRAL, ST. CLAIR MEDICAL CENTRE, ELMVALE, YORK
LANES. The Company operates six clinics that offer both family practice and
walk-in services for patients. Other services that may be provided at the
clinics are travel medicine, chiropractic, massage therapy, weight loss
program, internal medicine, paediatrics, haemotology and professional family
counseling. The Company manages the clinics by providing scheduling,
staffing, recruiting, billing, collections and accounting services to the
clinic. In the clinics where the Company does not own 100% of the outstanding
capital stock, such as Elmvale and York Lanes, the Company has entered into a
5-year management services contract whereby the Company receives a monthly
management fee to provide the management services.
In August 1996, the Company acquired the assets and physician contracts of
St. George Medical Clinic, a Health Services Organization (HSO), and merged
the operations into the Central Clinic. The clinic is funded under a
contractual agreement with the Ministry of Health to provide primary care at
a clinic for a specified number of registered patients. The Ministry
allocates a specific payment for each patient on a monthly basis, whether the
services are used or not. The monthly fee is determined by the age and sex of
the patient and is referred to as the capitation rate. As at December 31,
1998, the average monthly capitation rate was $12.82 per patient with
approximately 5,964 patients enrolled under the HSO program. Under the
fee-for-service model, a fee is billed to the Ministry only when a patient
visits the clinic and a service is performed. The fee-for-service rates are
set by the Ministry and vary depending on the type of medical service
performed.
In June 1998, the Company acquired the shares of J.C. Medical Management
Inc., operating as St. Clair Medical Centre, a 6-physician primary health
care practice located in Toronto, Canada. The Company manages the clinics by
providing scheduling, staffing, recruiting, billing, collections and
accounting services to the clinic.
In September 1998, the Company acquired 75% of the shares of Doctors on Call,
Ltd, an on-call service providing patients with 24-hour physician access.
This service is being managed from the Central location.
In March 1999, the Company acquired a 51% interest in each of Caremedics
(Elmvale) Inc. ("Elmvale") and York Lanes Health Centres Inc. The Company
provides management services to the clinics for a monthly fee based on a
percentage of revenues generated at each clinic.
DUNDAS URGENT CARE CENTRE, BRITANNIA URGENT CARE CENTRE The Company plans to
continue to develop a chain of Urgent Care Centres, initially in Ontario and
then in other Canadian provinces, that will gain public recognition and
government support as a quality deliverer of urgent health care.
Due to government funding constraints, many primary care physicians in Canada
have moved to other countries to practice medicine, retired from the practice
of medicine, or have closed their practices to become a member of a group of
physicians that provide only limited access to health care. Consequently,
approximately 1 in 4 residents of Ontario is without a primary care physician.
The Company's plan is to develop its Urgent Care Centre services, through
which it intends to offer on-site, one-stop medical care comparable to the
services provided in a traditional emergency department.
The Urgent Care Centre concept consists of a group of emergency trained
physicians, a medical laboratory, a diagnostic radiology service, and a
pharmacy, each of which must be present for the others to co-exist, and each
of which is provided by a separately owned company. The Company will operate
the clinic component of the Urgent Care Centre and the support staff will be
employees of the Company. The Company intends to provide emergency medical
services, including emergency physician staffing, emergency nurse staffing,
receptionist staffing, physician billing services, all financial services,
inventory control, Medical Directorship and other operational components such
as quality improvement and risk management initiatives. Each
emergency-trained physician working at an Urgent Care Centre will have
critical care expertise to treat most clinical problems. Unlike most walk-in
clinics and family physician offices, the Company's management believes its
Urgent Care Centres will generally be able to treat 90% of the cases seen in
a typical Ontario emergency department. In certain cases requiring
hospitalization, the Company intends that the Urgent Care Centre will
stabilize the patient and then transfer them to hospitals.
The Company bills and collects the professional fees for medical services
provided at its Urgent Care Centres. Fees are billable to the Ontario
Ministry of Health ("OHIP") in accordance with prescribed fee for service
billing guidelines. In addition, for medical services not covered by OHIP,
the Company will bill the patient directly. Direct patient billings represent
a small portion of the Company's billings. Subsequent to the receipt by the
Company of its billings for medical services, professional fees payable to
the physician are disbursed pursuant to each physician's contract. The direct
costs associated with each Urgent Care Centre are those associated with
employing the nursing and administrative support staff, the facility lease
costs and the cost of supplies. The profitability of each Urgent Care Centre
will be directly effected by the number of patients that each centre services.
The Company opened its first centre on September 19, 1997. In January 1999,
the Company acquired a 45% interest in Medical Urgent Care Inc., a company
that operates the Britannia Urgent Care Centre. The Company has a 5-year
agreement to provide management services to the Britannia Urgent Care Centre
for a percentage of the revenues generated by the clinic component.
The success of the Urgent Care Centre concept will depend on the Company
realizing several strategic objectives. The Company desires to offer
comprehensive medical care at a level comparable to traditional hospital
based emergency departments. In order to accomplish this objective, it must
recruit sufficient physicians and nurses with appropriate critical care
expertise to ensure quality care for all clinical problems, recruit
experienced providers of diagnostic imaging, medical laboratory services, and
pharmacy services to be co-participants in each centre, manage day-to-day
operations with an experienced Medical Director for quality assurance and an
experienced Clinical Director for operational efficiency, and operate in a
cost effective manner to maximize profitability.
The Company believes that customer service is essential to its success. The
Company believes that the following steps will increase patient satisfaction:
Overlap physician staffing to suit volume so that the average waiting time
from the moment the patient enters the Centre is 30 minutes or less; On-site
location of diagnostic imaging, laboratory services and a pharmacy to reduce
patient delays; Periodic patient satisfaction surveys to identify problems at
an early stage and prevent reoccurrence of the same type of complaints;
Customer access to waiting rooms with televisions, air conditioning, current
magazines, and toys for children; and clean sanitary facilities, particularly
washrooms.
HEALTHYCONNECT.COM DIVISION
HealthyConnect.com is an internet-based healthcare network that will connect
physicians, hospitals, third party payors and consumers. This network will
allow all participants to access and exchange healthcare related information,
purchase healthcare products and services, and communicate more
cost-effectively with one another. HealthyConnect.com will deliver healthcare
services and products and provide timely access to reliable healthcare
information through the utilization of advanced telecommunication technology.
Targeted users of HealthyConnect.com are consumers, physicians and other
healthcare providers, and healthcare suppliers.
CONSUMERS. Consumers will benefit from 24-hour, 7-day a week access, via the
internet and telephone, to the Med-Emerg healthcare service provider network.
In addition, consumers will have multiple site secure access to their own and
their family members' electronic medical record, access to a physician
management health and wellness centre, and convenient at-home shopping for
health products and services.
PHYSICIANS AND OTHER HEALTHCARE PROVIDERS. HealthyConnect.com will enable
physicians and other healthcare providers to access reliable information and
provide them with additional support in delivering cost effective, high
quality healthcare services using all available technologies. Benefits
include 24-hour coverage for patients, access to a comprehensive physician
medical reference database, online Continuing Medical Education courses,
tools for chronic disease management, and participation in clinical trials.
HEALTHCARE SUPPLIERS. HealthyConnect.com will link healthcare product and
service suppliers with the Med-Emerg clinical network patient family.
Convenient and secure access and at home/office browsing and purchasing
capabilities will facilitate direct sales opportunities for member suppliers.
Healthcare suppliers that may benefit from using HealthyConnect.com include
pharmaceutical companies, insurance companies, employers, government, managed
care organizations, physicians and hospitals.
GOVERNMENT REGULATION
The provision of medical services in Canada is for the most part under
provincial jurisdiction. Under the Health Insurance Act, the government of
Ontario is responsible for paying physicians for the provision of insured
services to residents of Ontario. In 1993, the government placed an overall
hard cap of approximately $3.8 billion on the amount physicians could
collectively bill OHIP for insured services. As physicians' billings exceeded
this hard cap in successive years, the government reduced the fees received
under OHIP by prescribed percentages ("clawbacks"). This clawback is subject
to constant revision and review. In addition to the hard cap, individual
physicians' billings under OHIP are subject to threshold amounts, or soft
caps. Once a physician reaches a prescribed level in the 12-month period
beginning April 1 of each year, the government reduces payments to the
physician by a prescribed fraction. Any changes in reimbursement regulations,
policies, practices, interpretations or statutes that place material
limitations on reimbursement amounts or practices could adversely affect the
operations of the Company, absent, or prior to, satisfactory renegotiations
of contracts with clients and arrangements with contracted physicians.
Under a combination of statutory provisions, both Federal and provincial,
physicians are prohibited from billing their patients for fees in excess of
those payable for services listed in the OHIP Schedule of Benefits. The
Canada Health Act allows for cash contributions by the Federal government in
respect of insured health services provided under provincial healthcare
insurance plans. In order for a province to qualify for a full cash
contribution, there is a requirement that the provincial healthcare insurance
plan satisfy the criteria set out in the Canada Health Act. In addition, the
provincial plan must ensure that no payments are permitted in respect of
insured health services that have been subject to extra billing.
Continuing budgetary constraints at both the Federal and provincial level and
the rapidly escalating costs of healthcare and reimbursement programs have
led, and may continue to lead, to significant reductions in government and
other third party reimbursements for certain medical charges. The Company's
independent contracted physicians as well as the Company are subject to
periodic audits by government reimbursement programs to determine the
adequacy of coding procedures and reasonableness of charges.
Business corporations are legally prohibited from providing, or holding
themselves out as providers of, medical care in many provinces. While the
Company will seek to structure its operations to comply with the corporate
practice of medicine laws of each province in which it operates, there can be
no assurance that, given varying and uncertain interpretations of such laws,
the Company would be found in compliance with restrictions on the corporate
practice of medicine in all provinces. A determination that the Company is in
violation of applicable restrictions on the practice of medicine in any
province in which it operates or could operate could have a material adverse
effect on the Company if the Company were unable to restructure its
operations to comply with the requirements of such province.
Due to increasing government fiscal restraint, Ontario's health care system
is currently undergoing a significant restructuring by the provincial
government. Based on a determination that the Ontario public
healthcare system was not fiscally efficient, in 1997 the Province of Ontario
enacted the Savings and Restructuring Act, which gives its provincial
government the ability to implement a health care system restructuring plan.
The new legislation established the Health Services Restructuring Commission,
which has broad decision making authority over every aspect of a public
hospital's operations, including all aspects of operations, fiscal policy,
public funding and even the continuance or cessation of a public hospital's
existence. The objective of the legislation is to induce public hospitals'
care delivery systems in the Ontario health care area to improve the quality
of health care and particularly to install efficiencies of cost in the
delivery of medical services to the 11 million person population of the
Province of Ontario (37% of all of Canada). Inefficient hospitals run the
risk of the loss of public funding if they fail to meet the objectives of the
Commission. Accordingly, the incentives are in place to induce public
hospitals to find solutions to achieve the desired efficiencies, including
outsourcing available from and through private sector organizations, such as
the Company.
PROPOSED HEALTHCARE LEGISLATION
The Health Services Restructuring Commission (HSRC), established under Bill
26, has the mandate and authority to facilitate and accelerate hospital
restructuring in Ontario. This legislation contains measures intended to
control public and private spending on healthcare as well as to provide
universal public access to the healthcare system. The Company cannot predict
what effect, if any, this and other healthcare legislation will have on its
operations. Significant changes in Canada's healthcare system are likely to
have a gradual but substantial impact on the manner in which the Company
conducts its business and could have a material effect on its results of
operations.
Despite pronouncements by the Ontario Minister of Health that managed care
options, such as in the United States, are being considered, it is not
evident that U.S. styled managed care will play a significant role in the
fee-for-service sector of the publicly funded healthcare system. Management
believes that government actions in the area of legislation to date indicate
a present intent to let the healthcare system proceed without intervening
directly in the management of patient care, although there can be no
assurance thereof. In the future, greater emphasis may be placed on such
managed care tools as utilization review, practice guidelines, and outcome
measurement. The current move away from traditional fee-for-service
mechanisms may have a similar effect as physicians attempt to minimize the
risk they face and as the government strives for accountability and
value-for-dollar assurances.
COMPETITION
Competition in the industry is based on the scope, quality and cost of
services provided. Certain of the Company's current and potential competitors
have substantially greater financial resources than the Company. While
management believes that it competes on the basis of the quality of its
services, the larger resources of its competitors may give them certain cost
advantages over the Company (e.g., in the areas of malpractice insurance,
cost savings from internal billing and collection and a broader scope of
services). The clinics operated by the Physician Management Services Division
compete with hospitals and other private physicians. The Urgent Care Centre
competes with hospital emergency rooms. The Company believes that the varied
physician practice alternatives coupled with competitive remuneration plans
create a significant incentive for physicians to provide patient services
through the Company.
EMPLOYEES
On March 31, 1999, the Company had 45 full-time employees, of whom three were
in general executive positions, 18 were in administration and 23 were in the
Clinics. In addition, as of such date approximately 197 independent
physicians and 32 independent nurses were actively working as independent
contractors of the Company. These physicians and nurses are not employees of
the Company. Approximately 16 nurses working at the Airport clinic are
represented by a collective bargaining agreement with the Ontario Nurses
Association. The Company considers its employee relations to be satisfactory.
ITEM 2: DESCRIPTION OF PROPERTY
The Company's head office is located at 2550 Argentia Road, Suite 205,
Mississauga, Ontario, L5N 5R1. The head office occupies approximately 5,560
square feet of space under a lease that expires in February 2001 at an
average annual rental rate of approximately $105,700.
The Central clinic is located at 458 Central Avenue, London, Ontario, N6B
2E5. The clinic occupies approximately 6,400 square feet of space under a
lease that expires December 31, 2002 at an average annual rental rate of
approximately $94,900. The Pond Mills clinic is located at 1166 Commissioners
Road East, London, Ontario, N5Z 4R3. This lease is currently on a
month-to-month basis for approximately $4,470 per month. The Glenderry clinic
is located at 2760 Derry Road West, Mississauga, Ontario, L5N 3N5. The clinic
occupies approximately 2,600 square feet at an annual rental rate of
approximately $69,200.
The St. Clair Medical Centre is located at 50 St. Clair Avenue East, Toronto,
Ontario, M4T 1M9. The clinic occupies approximately 2,000 square feet at an
annual rental rate of approximately $29,200. The lease expires in December
2005.
The Dundas Urgent Care Centre is located at 801 Dundas Street East,
Mississauga, Ontario, L4Y 4G9. Med-Emerg occupies approximate 2,700 square
feet at an annual rental rate of approximately $41,775. The lease expires in
September 2002.
The Britannia Urgent Care Centre is located at 1201 Britannia Road West,
Mississauga, Ontario. The Urgent Care Centre occupies approximately 11,000
square feet at an annual rental rate of approximately $78,500. The lease
expires February 28, 2008. A total of 3,000 square feet is subleased to
service providers, such as pharmacy, radiology, laboratory and physiotherapy
and rehabilitation services. The service providers contribute approximately
80,000 in annual rent and the sublease expires in March and May 2003.
The Elmvale Clinic is located at 1910 St. Laurent Blvd., Ottawa, Ontario.
Annual rent totals approximately $46,000 for 2,936 square feet. The lease
expires June 7, 2003.
The York Lanes Clinic is located within York University at Unit #28, 4700
Keele Street, North York, Ontario. Annual rent totals approximately $142,000
for 4,693 square feet. The lease expires February 28, 2004.
ITEM 3: LEGAL PROCEEDINGS
The Company is presently party to one legal proceeding that was commenced on
July 4, 1997 in the General Division of the Ontario Court. This proceeding
relates to the November 1996 Recapitalization, in which the Estate of Dr.
Donald Munro ("Estate") contributed 75,000 of its 150,000 shares of Common
Stock to the capital of the Company. The Estate, the applicant in the
proceeding, has taken the position that it continues to be the beneficial
owner of 150,000 shares of Common Stock. The Company disagrees with the
Estate's position and intends to defend this action vigorously. However, in
the event that the Company is unsuccessful in its action, the Company will be
required to return to the Estate the 75,000 shares which were previously
surrendered in the November 1996 Recapitalization.
In addition, in the future, the Company could be subject to claims arising
from its contracts with hospitals or other institutions or professional
associations to which it provides services.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on Friday, August
21, 1998. At this meeting, the following matters were voted on by the
company's shareholders:
(A) ELECTION OF DIRECTORS
Ramesh Zacharias, Carl W. Pahapill, William E. Thomson, Peter Deeb, and
Robert M. Rubin were duly elected as directors of the Company to service
until the next Annual Meeting of Shareholders or until their respective
successors have been duly elected and qualified. The vote was as follows:
NAMES VOTES CAST IN FAVOUR VOTES WITHHELD VOTES CAST AGAINST
- ----- -------------------- -------------- ------------------
Ramesh Zacharias 2,441,085 927,812 271,147
Carl W. Pahapill 2,441,085 927,812 271,147
William E. Thomson 2,441,085 927,812 271,147
Peter Deeb 2,441,085 927,812 271,147
Robert M. Rubin 2,441,085 927,812 271,147
(B) APPOINTMENT OF AUDITORS
The shareholders of the Company ratified the appointment of Schwartz,
Levitsky, Feldman, Chartered Accountants as the Company's independent, by the
following vote:
VOTES CAST IN FAVOUR VOTES CAST AGAINST ABSTENTIONS
- -------------------- ------------------ -----------
2,712,232 0 927,812
(C) AMENDMENT TO ARTICLES OF INCORPORATION TO CREATE A CLASS OF SPECIAL
SHARES
The Company's shareholders approved the amendment to the Articles of
Incorporation to include a class of special shares, issuable in series, as
part of the company's authorized capital, by the following vote:
VOTES CAST IN FAVOUR VOTES CAST AGAINST ABSTENTIONS
- -------------------- ------------------ -----------
2,441,085 271,147 927,812
(D) REDUCTION IN STATED CAPITAL
The Company's shareholders approved the reduction in the stated capital of the
Company's Preferred Shares by Cdn$5,525,414, by the following vote:
VOTES CAST IN FAVOUR VOTES CAST AGAINST ABSTENTIONS
- -------------------- ------------------ -----------
2,441,085 271,147 927,812
PART II
ITEM 5: NATURE OF TRADING MARKET
The Common Shares and Redeemable Common Stock Purchase Warrants are listed
for trading under the symbols "MDER" and "MDERW", respectively, on the NASDAQ
SmallCap Market and under the symbols "MEI" and MEIW", respectively, on the
Boston Stock Exchange. The Common Shares and Redeemable Common Stock Purchase
Warrants have been listed on both Exchanges since February 12, 1998. Prior to
that date the Common Shares and Redeemable Common Stock Purchase Warrants
were privately held.
The following table sets forth the range of high and low sales prices from
February 12, 1998:
COMMON SHARES
-----------------------------
HIGH LOW
-------- ---------
First Quarter (from Feb.12/98) US$4-3/4 US$3-3/8
Second Quarter 4 2-13/16
Third Quarter 3-1/4 1-11/16
Fourth Quarter 2 1
As of May 5, 1999, the Company had approximately 508 shareholders, including
29 shareholders of record and approximately 479 persons or entities holding
common stock in nominee name.
The Company has not declared cash dividends on its Common Stock in the last
two fiscal years.
There were no unregistered sales of securities during the last fiscal year.
The net proceeds to the Company from its Initial Public Offering after
deducting underwriting discounts and commissions and other expenses of the
Offering, were US $3,737,158. The Company used the net proceeds of the
Offering as follows:
Amount
(U.S. DOLLARS)
--------------
Repayment of Lines of Credit (1) $ 862,108
Repayment of Bridge Notes (2) 546,589
Working Capital Requirements 630,077
Acquisitions (3) 245,407
Urgent Care Centre 147,147
Dividends on Preferred Shares 117,710
Capital Assets 106,617
Share Repurchase Plan (4) 76,209
Purchase of Note Receivable 50,688
----------
Proceeds used to date 2,782,552
General Corporate Purposes and
Potential Acquisitions (5) 954,606
----------
$3,737,158
(1) Represents repayment of an aggregate of US $250,000 of loans against
line of credit provided to the Company by Robert Rubin, a director of
the Company. The loan bore interest at 2% over the prime rate in effect
from time to time as reported in The Wall Street Journal. The Company
used these loans for working capital and certain costs associated with
the opening of the first urgent care centre. Also represents repayment
of approximately $890,000 (US $600,200) against the Company's
outstanding balance on its bank credit facility, such balance bearing
interest on an annual basis at the facility's announced prime rate plus
1.5%. The proceeds borrowed from the bank credit facility were used by
the Company as working capital.
(2) Represents repayment of the principal and accrued interest on the 8%
promissory notes sold in the January 1997 private placement ("Bridge
Financing"). The proceeds from the Bridge
Financing were applied to reduce the Company's bank borrowings.
(3) The Company completed two acquisitions since the completion of the
Initial Public Offering. All of the shares of J.C. Medical Management
Inc. were purchased in June, 1998 and 75% of the shares of Doctors on
Call Ltd. were purchased in September, 1998.
(4) The Company repurchased 43,500 shares of its Common Stock during the
fourth quarter of 1998.
(5) The Company intended to use a portion of the net proceeds of the
Offering to fund additional acquisitions.
ITEM 6: SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company is
qualified by reference to and should be read in conjunction with the
consolidated financial statements, related notes thereto, other financial
data, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein.
STATEMENT OF OPERATIONS DATA:
CDN $
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
On a Canadian GAAP basis: (1)
Revenue $15,282,584 $11,572,667 $10,817,048 $10,983,553 $10,474,754
Physician Fees and Other Direct Costs 11,837,088 8,749,735 8,554,396 8,406,631 7,977,679
Gross Profit 3,445,496 2,822,932 2,262,652 2,576,922 2,497,075
Operating Expenses (4) 3,639,724 2,890,748 5,948,069 2,860,892 2,218,420
Operating Income (Loss) (194,228) (67,816) (3,685,417) (283,970) 278,655
Other Income (Expense) (18,657) (444,878) (55,461) 54,930 (51,879)
Provision for Income Taxes (Recovery) (55,349) (40,609) (146,554) 71,447 52,245
Net Income (Loss) (157,536) (472,085) (3,594,324) (300,487) 174,531
Net Income (Loss) per Common Share (2) (0.05) (0.24) (1.18) (0.13) 0.07
Basic Income (loss) per Common Share (0.11) (0.24) (1.18) (0.13) 0.07
On a U.S. GAAP basis: (1)
Operating Expenses (3)(4) $ 3,901,769 $ 3,037,525 $ 6,006,643 $ 2,860,892 $ 2,218,420
Operating Income (Loss) (456,273) (214,593) (3,743,991) (283,970) 278,655
Other Income (Expense) (18,657) (444,878) (55,461) 54,930 (51,879)
Provision for Income Taxes (Recovery) (55,349) (40,609) (146,554) 71,447 52,245
Net Income (Loss) (419,581) (618,862) (3,652,898) (300,487) 174,531
Primary Earnings (Loss) Per Share (0.20) $ (0.31) $ (1.51) $ (0.13) $ 0.08
BALANCE SHEET DATA:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Working Capital 2,295,360 $(1,930,382) $(1,192,641) $ (480,475) $ 104,154
Total Assets 8,352,468 5,201,571 3,539,823 2,699,369 1,663,815
Retained Earnings (Accumulated Deficit) (4,564,963) (9,758,265) (9,286,180) (166,442) 338,051
Long Term Debt 102,322 79,352 -- -- --
Preference Shares 594,586 6,120,000 6,120,000 -- --
Common Shares 7,582,837 2,507,479 2,020,979 189 206
Common Stock Purchase Warrants 150,741 -- -- -- --
Convertible Debenture 590,625 -- -- -- --
Contributed Surplus (5) 1,316,980 1,246,000 1,246,000 -- --
Shareholders' Equity 5,670,806 115,214 100,799 (166,253) 338,257
(1) The Company prepares its financial statements in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP")
which may differ in certain respects from accounting principles in the
United States ("U.S. GAAP"). For an explanation of the differences
between Canadian GAAP and U.S. GAAP, see Note 16 to the Company's
consolidated financial statements.
(2) Net income per share reflects a weighted average of 2,975,853 shares of
Common Stock outstanding at December 31, 1998. 1,941,510 shares of
Common Stock outstanding at December 31, 1997, 3,038,214 shares of
Common Stock outstanding at December 31, 1996 and 2,333,333 shares of
Common Stock outstanding prior to such dates.
(3) At December 31, 1998, December 31, 1997 and December 31, 1998, U.S. GAAP
requires the inclusion of $262,045, $146,777 and $58,574, respectively,
as additional write-off of deferred start-up costs and deferred
acquisition costs.
(4) At December 31, 1997, operating expenses included stock compensation
expenses of $139,000 for shares issued to a director. At December 31,
1996, operating expenses included stock compensation expenses of
$1,695,800 for shares issued to a shareholder as part of the November
1997 Recapitalization and $1,246,000 for the issuance of stock options
to a director.
(5) Contributed surplus arises from the difference between the fair market
value of $2.78 and the exercise price of $1.00 for 700,000 stock options
issued to a director, plus the difference between the average carrying
value of common shares and the actual price paid to repurchase and
cancel 43,500 common shares.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
In the Physician Management Services operations, revenue is generated when
the contracted physician performs a medical service that in turn is billed by
the Company to the Ministry of Health. The fee-for-services billed to the
Ministry of Health are based on rates set by the Ministry of Health and vary
depending on the type of medical service performed. The Ministry of Health
pays the Company on a monthly basis for these services billed and the Company
in turn pays the physician according to the contract between the physician
and the Company. In addition, the Company owns and manages its clinic and
provides staffing, administration, management and financial support.
Therefore, the Company receives a monthly management fee from each clinic and
is entitled to distributions made from the clinic.
In May of 1998, management entered into a strategic partnership with
Clinicare of Calgary, an automated medical records practice management
system. The Clinicare system, when utilized to integrate the Company's
medical clinics, enables management to develop incremental medical records
based complementary business opportunities. As the dominant player in the
Canadian Physician Management Services industry, management believes there is
significant incremental revenue and profitability that will be derived from
the effective management of the underlying medical records supporting the
Company's annual patient visits.
The company is launching an internet-based healthcare network, called
HealthyConnect.com, that will allow participants to access and exchange
healthcare related information, purchase healthcare products and services,
and communicate more cost-effectively with one another. HealthyConnect.com,
combined with the Clinicare strategic partnership, provides a platform by
which the Company can benefit from business opportunities that are
complementary to its other two divisions. These opportunities include
provision of clinical trial services, the marketing of patient focussed
medical information, and the ability of third party service providers to
efficiently conduct their operations through an electronically integrated
business partnership.
This integrated and rapidly growing Canadian Physician Management Services
structure will be well positioned to provide physicians with the beneficial
aspects of managed care, including dealing with the business complexities of
cross-relationships with service providers, and day-to-day operating
efficiencies required to maximize earnings from their practice of medicine.
During 1998, the Company completed two acquisitions. In June of 1998, the
Company completed the acquisition all of the outstanding shares of JC Medical
Management Inc., a multi-physician primary care clinic located in Toronto,
Canada that provides healthcare to the surrounding community. In September of
1998, the Company acquired 75% of the outstanding shares of Doctors On Call
Ltd., an on-call service that provides patients with 24-hour access to
medical services in London, Canada.
In January of 1999, the Company acquired a 45% interest in an Urgent Care
Centre, Medical Urgent Care Inc. The Company developed and opened its first
Urgent Care Centre in September 1997. The Urgent Care Centre concept consists
of a group of emergency trained physicians, a medical laboratory, a
diagnostic radiology service, and a pharmacy, each of which must be present
for the others to co-exist, and each of which is provided by a separately
owned company. The Company manages the clinic component of the Urgent Care
Centre and provides the support staff for this component. Ownership of
Medical Urgent Care Inc. is shared with the group of emergency trained
physicians that provides the medical service in the clinic component.
In February, 1999, the Company became party to a lease for the clinic located
within York University in Toronto, Canada. The Company has entered into a
management services agreement to manage to clinic for a monthly fee based on
revenues generated by the clinic. The Company will have a 51% interest in the
company that owns the clinic.
In March of 1999, the Company purchased 51% of the outstanding capital of
Caremedics (Elmvale) Inc., a multi-physician primary healthcare clinic
located in Ottawa, Canada. The Company entered into a management services
agreement to manage the clinic for a monthly fee based on revenues generated
by the clinic.
Complementary to the development of the Physician Management Services
Organization (PMSO) and internet business, the Company continues to promote
its medical manpower staffing services throughout Canada. Demand for
emergency care has grown significantly over the past ten years,
notwithstanding the small proportion of physicians focusing on emergency
medicine. Moreover, recruitment of experienced emergency medicine
practitioners by hospitals in other countries is intense and such demand is
expected to continue for some time. Given the uncertainties associated with
patient volumes in several Ontario hospital emergency departments, the pool
of available physicians willing to practice emergency medicine has been
declining.
The Company's ability to provide solutions and source physicians and highly
skilled nurses will be enhanced by its success in developing its dominant
status in the PMSO sector. In Canada, in excess of seventy percent of
physician staffing in hospital based emergency departments is provided by
family physicians. The Company's business strategy is to integrate and
through its physicians program offer the family physician a comprehensive
practice opportunity. Management believes that the creation of a dominant MSO
status in Canada will significantly contribute to the Company's efforts in
growing its emergency services recruitment division. It is management's
intention to market its MSO services to the Canadian physician community,
which totals approximately 55,000 members strong and collects annual billings
of approximately $11.0 billion.
Fees charged by the Company for emergency department staffing services are
comprised of two elements: (i) hospital services; and (ii) physician
services. Under each hospital contract, the Company has the responsibility
for the billing and collection of physician fees. The Company charges each
hospital a fee for its recruiting and staffing services on a fixed fee basis.
The Company's hospital contracts are designed to transfer to the hospital
certain financial risks arising from changes in patient volume. Because the
majority of such contracts are reimbursed from government healthcare
insurance plans, the Company's bad debt experience in collection of physician
fees has been less than 1% of allowable billings, primarily due to
administrative errors. Fee-for-service contractual arrangements involve a
credit risk related to services provided to uninsured individuals. The
Company's working capital needs are generally a function of the acquisition
of new hospital contracts or the conversion of fixed fee contracts to
fee-for-service contracts. As discussed below in Results of Operations, the
Company has sometimes experienced a reduction in the number of its hospital
contracts, making the acquisition of new contracts particularly important.
The Company's physician contracts are entered into between the Company and
individual physicians and are either part time or full-time. In general, each
contracted physician will be placed in a functioning facility by the Company
and the Company will collect all fees due to the physician for rendering
medical services. The Company then pays the physician for the medical
services provided based on the terms of the contract between the Company and
the physician.
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
NET SERVICE REVENUES. Revenues increased by $3,709,917 or 32.1% from
$11,572,667 for the year ended December 31, 1997 to $15,282,584 for the
comparable period in 1998. The increase is due to: (i) revenue generated from
the acquisitions of JC Medical Management Inc. and Doctors on Call Ltd., (ii)
additional revenue recorded on the increase in ownership of Glenderry Walk-in
Clinic from 33 1/3% to 100%, (iii) revenue generated from the emergency nurse
staffing service launched in 1998, and (iv) general increase in patient
volumes in both the physician staffing service and clinic operations.
For the year ended December 31, 1998, revenues of Physician and Nurse
Recruitment division increased by $2,484,439 or 27.3% to $11,576,670 from
$9,092,231 for the year ended December 31, 1997. The launch of the nurse
staffing service in April 1998 contributed $444,439 to the increase in
revenue during 1998. Revenue from the physician staffing service increased as
a result of: (i) a significant increase in the amount of physician coverage
provided under two hospital contracts, (ii) two new hospital contracts during
1998 and two contracts that commenced during the fourth quarter of 1997 and
continued throughout 1998, (iii) three new hospital contracts under which the
Company provided coverage for the summer months only. The increase in revenue
was offset by the termination of one large and four smaller hospital
contracts, the one-time consulting fee that was received in 1997 and a
one-time overseas physician placement for the Canadian government during the
fourth quarter of 1997.
For the year ended December 31, 1998, operating income from the Physician
and Nurse Recruiting division decreased by $45,484 to $1,045,811 from income
of $1,091,295 for the year ended December 31, 1997. During 1997, operating
income of $317,296 was earned on a one-time consulting fee. This decrease in
income was offset in 1998 by the operating income of $78,228 earned from the
nurse staffing service launched in April 1998 and the gross margin realized
on the increased revenue from physician staffing contracts.
For the year ended December 31, 1998, revenues of the Physician
Management Services division increased by $1,225,478 or 49.4% to $3,705,914
from $2,480,436 for the year ended December 31, 1997. The acquisitions of JC
Medical Management Inc. in June 1998 and Doctors on Call Ltd. in September
1998 contributed $450,058 and 57,060, respectively, to the increase in
revenue. In addition, the consolidation of Glenderry Medical Walk-in Clinic
at 100% since August 1998 versus 33 1/3% in 1997, resulted in an increase in
revenue of $258,202. In September 1997, the Company opened its first Urgent
Care Centre. During the start-up period, no revenue was recognized from the
operations of this Urgent Care Centre. Upon completion of the start-up
period, the Company recognized $110,306 in revenue in 1998 from the Urgent
Care Centre. In addition, the services provided to the two clinics at the
Lester B. Pearson International Airport were increased in April 1998,
resulting in additional revenue of $140,925. The remaining increase in
revenue is attributable to increased patient volumes in 1998 compared to 1997
at the Pond Mills and Central clinics.
For the year ended December 31, 1998, operating income for the Physician
Management Services division increased by $43,436 to $431,324 from $387,888
for the year ended December 31, 1997. The increase was due to the operating
income from the acquisitions of JC Medical Management Inc., Doctors on Call
Ltd. and Glenderry Medical Walk-in Clinic, which was offset by increased head
office costs for salaries and general overhead related to the overall
management of the clinics.
PHYSICIAN FEES AND OTHER DIRECT COSTS. Physician fees, which represent
fees to contract physicians, represent the largest single variable expense.
These fees are earned primarily through the Company's Physician and Nurse
Recruiting services to the hospital emergency department contracts. Physician
fees and other direct costs for the year ended December 31 increased by
$3,087,353 or 35.3% from
$8,749,735 in 1997 to $11,837,088 in 1998. Physician fees and other direct
costs represented 75.6% of net revenues for the year ended December 31, 1997
and 77.5% of net revenues for the year ended December 31, 1998. In 1997 other
direct costs include travel, marketing and consulting costs related to
international projects, representing 2.4% of net revenues for the year. The
1997 costs relate to the undertaking of a consulting project in the Northwest
Territories, Canada.
OPERATING EXPENSES. In 1997, operating expenses increased by $748,976 or
25.9% from $2,890,748 for the year ended December 31, 1997 to $3,639,724 for
the year ended December 31, 1998. Operating costs include general operating
expenses and stock compensation expense. The general operating expenses,
excluding stock compensation expense, represents 23.9% of net revenues for
the year ended December 31, 1998 and 23.8% of net revenues for the year ended
December 31, 1997. The stock compensation expense of $139,000 in 1997
represents shares issued to a director.
Under U.S. GAAP, operating expenses for the period ending December 31,
1998 includes additional charges of $215,821 for development and start-up
costs as compared to $146,777 at December 31, 1997. For U.S. GAAP, the
start-up costs of $215,821 at December 31, 1998 and $146,777 at December 31,
1997 are expensed as incurred whereas under Canadian GAAP these costs are
deferred and amortized over a prescribed benefit period.
OTHER EXPENSE. Other expense decreased by $426,221 or 95.8% from
$444,878 to $18,657 for the year ended December 31, 1997 and 1998
respectively. In 1998, other expense includes interest expense for less than
two months on the bridge promissory notes. In 1997, other expense is due
primarily to interest on increased bank borrowings, interest charged on the
bridge promissory notes, foreign exchange loss on the U.S. dollar promissory
notes and the amortization of deferred financing charges relating to the
bridge shares issued in January 1997.
NET LOSS. As a result of the above items, the Company had a net loss of
$157,536 for the year ended December 31, 1998 as compared to a net loss of
$472,085 for the year ended December 31, 1997.
Under U.S. GAAP, the Company reported net loss of $419,581 for the year
ended December 31, 1998 as compared to a net loss of $618,862 for the year
ended December 31, 1997.
FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
NET SERVICE REVENUES. Revenues increased by $755,619 or 7.0% from
$10,817,048 for the year ended December 31, 1996 to $11,572,667 for the
comparable period in 1997. The increase is due to: (i) revenue generated from
the St. George acquisition completed in August 1996, and (ii) revenue earned
on a one-time consulting project. For the year ended December 31, 1997,
revenue from the St. George clinic totaled $686,529 compared to $286,272 in
1996. Revenue for the year ended December 31, 1997 includes $591,177
consulting fees earned from a one-time consulting project performed by the
Company in the first and second quarters of 1997. The increase in revenue
from the St. George clinic and the consulting project was offset by a small
reduction in revenue generated from hospital contracts.
For the year ended December 31, 1997, revenues of the Physician and Nurse
Recruiting division increased by $308,922 or 3.5% to $9,092,231 from
$8,783,309 for the year ended December 31, 1996. The increase in revenue is
due to the one-time consulting project that earned $591,177 in fees. This
increase in revenue was offset by the reduction of revenues due to: (i) the
termination of eight fixed fee hospital contracts that were replaced by three
new fixed fee contracts, and one fee-for-service contract, (ii) the
termination of two fixed fee contracts for correctional institutions, (iii) a
marginal decline in fee-for-service contracts from two hospitals.
For the year ended December 31, 1997, operating income before stock
compensation from the Physician and Nurse Recruiting division increased by
$193,780 to $1,091,295 from $897,515 for the year ended December 31, 1996.
This increase was due to the profit earned on the one-time consulting project
that was offset by additional salaries and overhead in anticipation of the
Company's requirements upon completion of the initial public offering, and
the write-off of a loan receivable in the amount of $48,895.
For the year ended December 31, 1997, revenues of the Physician Management
Services division increased by $446,697 or 22.0% to $2,480,436 from $2,033,739
for the year ended December 31, 1996.
The increase in revenues was due to the acquisition of a new clinic during
the third quarter of the 1996 fiscal period.
For the year ended December 31, 1997, operating income before stock
compensation for the Physician Management Services division increased by
$798,861 to $387,888 from a loss of $410,973 for the year ended December 31,
1996. The increase was due to greater revenues from the newly acquired
clinic, as well as reductions in operating costs as a result of the
amalgamation of the new clinic with one of the Company's other medical
clinics. At December 31, 1996, the operating loss included the write-off of
deferred start-up project costs of $466,462. There was no write-off of
deferred start-up costs at December 31, 1997.
PHYSICIAN FEES AND OTHER DIRECT COSTS. Physician fees, which represent
fees to contract physicians, represent the largest single variable expense.
These fees are earned primarily through the Company's Physician and Nurse
Recruiting services to the hospital emergency department contracts. Physician
fees and other direct costs for the year ended December 31 increased by
$195,339 or 2.3% from $8,554,396 in 1996 to $8,749,735 in 1997. Physician
fees and other direct costs represented 79.0% of net revenues for the year
ended December 31, 1996 and 75.6% of net revenues the year ended December 31,
1997. Included in physician fees is clawback expense, which is a recovery of
billings due to over utilization of medical services. The clawback rate for
1997 was 0% compared to the rate of 6.5% set by the Ontario Ministry of
Health for the 1996 period. The clawback charge for the year ended December
31, 1996 totaled $143,261. Other direct costs include travel, marketing and
consulting costs related to international projects. These costs represent
2.4% of net revenues for the year ended December 31, 1997 and 2.4% of net
revenues for the year ended December 31, 1996. The 1997 costs relate to the
undertaking of a consulting project in the Northwest Territories, Canada and
the 1996 costs relate to the undertaking of consulting projects in Hungary,
India and Malaysia.
OPERATING EXPENSES. Operating expenses decreased by $3,057,321 or 51.4%
from $5,948,069 for the year ended December 31, 1996 to $2,890,748 for the
year ended December 31, 1997. Operating costs include general operating
expenses, the write-off of deferred start-up costs and stock compensation
expense. The general operating expenses excluding the write-off of deferred
start-up costs and stock compensation expenses represents 23.1% of net
revenues for the year ended December 31, 1996 and 23.8% of net revenues for
the year ended December 31, 1997. The 1996 write-off of deferred start-up
costs in the amount of $466,462 relate to an investment in a clinic in
Prague, Czech Republic. The 1996 write-down was due to an unanticipated
difficulty in penetrating the market and generating a sufficient return on
capital invested from that clinic. Given the domestic opportunities
available, the Company had decided to focus its efforts on domestic
operations. The remaining 1996 write-down of $42,875 relates to start-up
project costs for a healthcare consulting project in Malaysia.
Under U.S. GAAP, operating expenses for the period ending December 31,
1997 includes additional charges of $146,777 for development and start-up
costs as compared to $58,574 at December 31, 1996. For U.S. GAAP, the
start-up costs of $146,777 at December 31, 1997 and $58,574 at December 31,
1996 are expensed as incurred whereas under Canadian GAAP these costs are
deferred and amortized over a prescribed benefit period.
OTHER EXPENSE. Other expense increased by $389,417 or 702% from $55,461
to $444,878 for the year ended December 31, 1996 and 1997 respectively. The
increase in other expense is due primarily to interest on increased bank
borrowings, interest charged on the bridge promissory notes, foreign exchange
loss on the U.S. dollar promissory notes and the amortization of deferred
financing charges relating to the bridge shares issued in January 1997. For
the year ended December 31, 1997, interest expense on bank borrowings was
$68,029, $66,683 was charged as interest on the promissory notes, foreign
exchange loss was $37,518, and $272,647 was amortized as financing costs.
NET LOSS. As a result of the above items, the Company had a net loss of
$472,085 for the year ended December 31, 1997 as compared to a net loss of
$3,594,324 for the year ended December 31, 1996.
Under U.S. GAAP, the Company reported net loss of $618,862 for the year
ended December 31, 1997 as compared to a net loss of $3,652,898 for the year
ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company operates in three areas of healthcare, Physician and Nurse
Recruiting, Physician Management Services and an internet-based healthcare
network called HealthyConnect.com.
The Physician and Nurse Recruiting operations involve providing physician and
nurse staffing and administrative support to emergency departments and
physician recruitment services to hospitals and physician groups. The assets
employed by the Company to support the Physician and Nurse Recruiting
operations are primarily working capital to finance accounts receivable which
are generated by individual physicians but collected by the Company pursuant
to contractual agreements between the Company and the independent contracted
physicians. The average age of collection of the accounts receivable balances
averages approximately 56 days; however, the physicians are paid after
approximately 27 days. Thus, the liquidity of the Company is significantly
affected by the volume of billings generated by the Physician and Nurse
Recruiting operations which fluctuates from month to month.
Physician Management Services operations include family practices, walk-in
services and chiropractic and massage therapy to patients. In addition to a
similar requirement to finance the accounts receivable which are generated by
individual physicians but collected by the Company pursuant to contractual
agreements between the Company and the independent contracted physicians, the
Company must also finance assets utilized in the operations of the clinics.
These assets include leasehold improvements and fixtures, medical equipment,
information systems and office furniture and supplies. Thus the average
amount of assets employed by the Company to support the Physician Management
Services operations is generally greater than Physician and Nurse Recruiting
operations calculated on a per physician basis.
The Company is launching its third division, an internet-based healthcare
network called HealthyConnect.com. The assets currently employed by this
division are primarily working capital to finance the development costs of
HealthyConnect.com.
The capital requirements of the Company arise in four major areas. These are
(i) the development of an internet-based healthcare network (ii) the need for
additional capital to increase business through new service contracts for
hospital emergency departments, (iii) the commencement of new specialty
healthcare clinics, and (iv) the need for capital to increase administrative
capabilities, including centralized billing and collection services and
management information systems.
In January 1996, the Company consummated a private offering of 1,000,000
shares of Common Stock for net proceeds of approximately $845,000 together
with warrants to purchase 1,000,000 shares at an exercise price of $2.00 per
share. The Company consummated this private offering because it needed
working capital funds, including funds to partially repay its bank credit
facility. As part of the Company's November 1996 Recapitalization (as such
term is hereinafter defined), all holders of the warrants surrendered their
outstanding warrants.
In September 1996, the Company acquired all of the assets and physician
contracts of the St. George Health Services Organization (HSO) for a $193,732
promissory note, 75,000 shares of the Company's Common Stock, and the
assumption of $270,868 of liabilities. This HSO was a contractual agreement
with the Ministry of Health to provide primary care at a clinic for a
specified number of registered patients.
In January 1997, the Company completed a private placement of its securities
("Bridge Financing"), in which it sold 8% promissory notes in the aggregate
principal amount of US$500,000 and 125,000 shares of its Common Stock and
raised aggregate gross proceeds of US $500,000. The net proceeds of US
$425,000 were initially applied to reduce the Company's bank borrowings. The
principal and accrued interest on the notes were repaid from the net proceeds
of the Company's Initial Public Offering, which was completed on February 20,
1998.
On February 20, 1998, the Company completed its Initial Public Offering of
1,250,000 shares of Common Stock and 1,437,500 Class A Redeemable common
Stock Purchase Warrants for an aggregate public offering of US$5,456,250.
Each warrant entitles the holder to purchase one share of common stock at a
price of US$4.50 for a four year period commencing one year from the date of
completion of the offering.
The Company established a new credit facility in 1998 with the Hongkong Bank
of Canada. The new facility provides an available demand, revolving,
operating line of credit amounting to $2,000,000, bearing interest at the
bank's prime lending rate plus 0.5% per annum with interest payable monthly,
and an available demand, non-revolving, capital line of credit amounting to
$1,000,000, primarily intended for the acquisition of fixed assets relating
to the development of Urgent Care Centres. The capital line of credit bears
interest at the bank's prime lending rate plus 0.75% per annum with interest
payable monthly. As security, the Company will provide a first-ranking
general assignment of accounts receivable, a general security agreement
constituting a first charge over all present and future personal property of
the Company, a chattel mortgage over all equipment financed by the capital
loan, an assignment of all risk insurance policies and an assignment of key
man life insurance of a director in the amount of $1,000,000.
In October 1998, the Company's Board of Directors approved the repurchase of
up to 5% of its outstanding common stock over a three-month period. The
Company repurchased and cancelled 44,500 common shares for total cash
consideration of $115,367 from October 1998 to January 1999.
Inflation has not had, nor is it expected to have, a material impact on the
operations and financial condition of the Company.
YEAR 2000
Med-Emerg has developed a program designed to identify, assess, and remediate
potential malfunctions and failures that may result from the inability of
computers and embedded computer chips within the Company's information
systems and equipment to appropriately identify and utilize date-sensitive
information relating to periods subsequent to December 31, 1999. This issue
is commonly referred to as the "Year 2000 issue" and affects not only the
Company, but virtually all companies and organizations with which the Company
does business.
To address the Year 2000 issue, the Company has formed a Year 2000 committee
comprised of representatives from a cross-section of the Company's
operations. The committee developed a plan to address the Year 2000 issue
within all facets of the Company's operations. The plan includes processes to
inventory, assess, remediate or replace as necessary the Company's
information systems and equipment. In addition, the committee is assessing
the compliance of all companies and organizations with which the Company does
business.
The Company has completed the inventory phase of its plan and is in the
process of assessing the identified systems and equipment. Based on the
assessments completed to date, the Company estimates that expenditures to
remedy or replace potential Year 2000 problems will not exceed $50,000. This
includes amounts in connection with standardizing certain of the information
systems at the clinic level that would have been spent regardless of the Year
2000 issue.
The foregoing estimates and conclusions regarding the Company's Year 2000
plan contain forward looking statements and are based on management's best
estimates of future events. Risks to completing the Year 2000 plan include
availability of resources, the Company's ability to discover and correct
potential Year 2000 problems that could have a serious impact on specific
systems, equipment or facilities, the ability of material suppliers and
businesses to achieve Year 2000 compliance, the proper functioning of new
systems and the integration of those systems and related software into the
Company's operations. Some of these risks are beyond the Company's control.
ITEM 8: FINANCIAL STATEMENTS
The Company's financial statements and the related notes, together with the
report of Schwartz Levitsky Feldman LLP thereon, are set forth in Item 14.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING &
FINANCIAL DISCLOSURE
KPMG was previously the auditors for Med-Emerg International, Inc. KPMG's
appointment as auditors for the Company was terminated during the 1998
calendar year and Schwartz Levitsky Feldman was engaged as independent
auditors for the Company and its subsidiaries. The decision to change
auditors was approved by the Company's board of directors.
There have not been disagreements with the auditors on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements if not resolved to their
satisfaction would have caused them to make reference in connection with
their opinion to the subject matter of the disagreement.
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND THE REGISTRANT
The following table sets forth certain information concerning the directors,
executive officers and key employees of the Company.
NAME AGE POSITION
- ---- --- --------
William Thomson, CA. 57 Chairman of the Board
Ramesh Zacharias, M.D., FRCSC 47 Chief Executive Officer,
Director
Carl W. Pahapill, CA 40 Chief Operating Officer,
President and Director
Kathryn Gamble, CA. 31 Vice President of Finance,
Chief Financial Officer,
Secretary
Stephen Fowler, M.D 49 Executive Medical Director
Lianne M. Hill, CA 29 Corporate Controller &
Director, Special Projects
Robert M. Rubin 57 Director
Jeffery Lyons 58 Director
WILLIAM E. THOMSON, C.A. Mr. William Thomson has been a Director of the
Company since January 1996 and is currently the Chairman. Mr. Thomson is
President of William E. Thomson Associates Inc., one of Canada's best known
crisis management firms. His assignments at Thomson Associates Inc. include
the operation of companies in crisis; monitoring the clients of financial
institutions; counseling the board of directors, chief executive officers and
senior management during periods of change, growth, initial public offerings
and other financings; and general consulting and financial intermediation
services. Mr. Thomson has operated companies in diverse fields including
manufacturing, hospitality, forest products, medical services, transportation
and tier two automotive supplies.
Mr. Thomson has been President and Chief Executive Officer of Speedware
Corporation, a TSE listed information technology company, since June 1998.
Mr. Thomson is Chairman of Asia Media Group Corp. in Singapore, Med-Emerg
International Inc., and International Wallcoverings Inc. In addition, Mr.
Thomson acts as a director of the following companies: TPI Plastics Ltd.,
Elegant Communications Ltd., Imperial Plastech Corp., Electrical Contacts
Ltd., The Aurora Fund, Barney's Fine Foods, and Esna Technologies Ltd.
RAMESH ZACHARIAS, M.D., FRCSC. Dr. Ramesh Zacharias is the founder and
remains the Chief Executive Officer of Med-Emerg Inc. He has practiced
medicine in Canada since 1981 and has extensive experience in the delivery of
emergency medical care. He has provided consulting services regarding the
delivery of emergency care in the Caribbean, Saipan and Malaysia and provided
management consulting services regarding the operation of medical clinics in
Canada, the United States and Russia.
CARL W. PAHAPILL, C.A. Mr. Carl Pahapill joined the Company as President
in February 1996 and became a Director of the Company in October 1996. From
September 1995 to January 1996, Mr. Pahapill acted as a consultant to the
Company. From 1994 to 1995, Mr. Pahapill was the Chief Operating Officer of
Signature Brands Limited, a publicly traded food processing company (TSE).
From 1984 to 1993, Mr. Pahapill was a Partner at BDO Dunwoody Chartered
Accountants. Prior to that, Mr. Pahapill was a supervisor at Ernst & Young
Chartered Accountants.
KATHRYN GAMBLE, C.A. Ms. Kathryn Gamble joined the Company in January
1996 serving as the Company's Vice President of Finance and became the
Company's Chief Financial Officer in October 1996. From February 1995 to
December 1995, Ms. Gamble was the Corporate Controller for Signature Brands
Limited, a publicly traded food processing company (TSE). From February 1993
to February 1995, Ms. Gamble was an Audit Analyst with Abitibi Price Inc., a
publicly traded company (TSE, NYSE).
STEPHEN FOWLER, MD. Dr. Fowler functions as the Executive Medical
Director and is responsible for medical oversight of the Company's
operations. Dr. Fowler has over 20 years experience in the delivery of
emergency medicine and primary care family services. He was formerly the
Chief of Family Medicine at Credit Valley Hospital in Mississauga, Ontario,
from 1985 to 1992 and then the Emergency Department Director at the same
hospital 1991 to 1997. Dr. Fowler joined MEI in 1996 as Associate Medical
Director.
LIANNE HILL, C.A. Ms. Hill joined the Company in May 1997 as the
Controller. From July 1995 to May 1997, Ms. Hill was the Divisional
Controller for Pelmorex Radio Inc. Prior to that Ms. Hill was an Audit
Manager at Deloitte & Touche, Chartered Accountants.
ROBERT M. RUBIN Mr. Rubin has served as a director of the Company since
October 1996. Since June 1992, Mr. Rubin has served as a director of Diplomat
Corporation, a publicly traded company involved in the sale of infant wear
and babycare products through direct mail order catalogues.
Since November 20, 1992, Mr. Rubin has served as the Chairman of the Board of
Directors of Western Power & Equipment Corp. ("WPEC"), a construction
equipment distributor. Between October, 1990 and January 1, 1994, Mr. Rubin
served as the Chairman of the Board and Chief Executive Officer of American
United Global Inc., a technology and communication company and majority owner
of WPEC ("AUGI") and since January 1, 1994, solely as Chairman of the Board
of AUGI. Mr. Rubin was the founder, President, Chief Executive Officer and a
Director of Superior Care, Inc. ("SCI") from its inception in 1976 until May
1986 and continued as a Director of SCI (now known as Olsten Corporation
until the latter part of 1987. Olsten, a New York Stock Exchange listed
company, is engaged in providing home care and institutional staffing
services and health care management services. Mr. Rubin is also a Director
and minority
stockholder of Response USA, Inc., a public company engaged in the sale and
distribution of personal emergency response systems.
JEFFERY LYONS, Q.C. Mr. Lyons recently joined the board of Directors of
Med-Emerg. Mr. Lyons practices municipal law, administrative law and public
policy with Morrison, Brown, Sosnovitch, Barristers and Solicitors in
Toronto, Ontario. He currently serves as the Commissioner of the Toronto
Police Services Board and as a Director of VIA Rail Canada Inc., BDP Business
Data Services Limited, CAMVEC Corporation, Toronto International Film
Festival and Toronto Police Benefit Fund. Mr. Lyons is also a member of the
Molson Indy Board of Trustees, Governor's Council of North York General
Hospital and the Contract Settlement board, Supply and Services Canada. In
addition to several previous offices and directorships held, Mr. Lyons was a
Director of International Managed Healthcare Inc. from 1996 to 1998.
ITEM 11: COMPENSATION OF DIRECTORS AND OFFICERS
The following table sets forth the cash compensation, as well as certain
other compensation paid or accrued to the Company's Chairman, Chief Executive
Officer and Chief Operating Officer for the fiscal year ended December 31,
1998. No other executive officer has a total annual salary and bonus of more
than U.S.$100,000 during the reporting periods.
ANNUAL COMPENSATION (CDN $)
---------------------------
OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- --------------------------- ------- ------- ------------
Ramesh Zacharias 1998 $224,000 $ 0 $ 7,688 (1)
Chief Executive Officer 1997 $204,000 $ 0 $13,064 (1)
1996 $169,462 $ 0 $19,582 (1)
Carl Pahapill 1998 $175,000 $25,000 $10,000
Chief Operating Officer, President 1997 $175,000 $ 0 $10,000
1996 $131,845 $15,000 $ 9,000 (2)
(1) In addition to being the Chief Executive Officer of the Company, Dr.
Zacharias on occasion covers physician assignments that the Company is
otherwise unable to fill. For each assignment that Dr. Zacharias covers,
he is paid as an independent contracting physician. This amount represents
fees paid to Dr. Zacharias for services rendered as a physician.
(2) Represents fees paid to Mr. Pahapill for acting as a consultant to the
Company prior to joining the Company on a full-time basis.
Employment Agreements
All of the Company's executive officers intend to offer their full business
time to the affairs of the Company. The Company entered into employment
agreements with both Dr. Zacharias and Mr. Pahapill. Dr. Zacharias' agreement
provides that he will devote all of his business time to the Company in
consideration of an annual salary of $204,000 effective January 1, 1997
increasing to $225,000 per year during the final year. The agreement is for a
term of three years, but may be terminated by the Company for cause, or
without cause with penalty. Mr. Pahapill's agreement is for a term of two
years, but may be terminated by the Company for cause or without cause with
penalty. The agreement provides that Mr. Pahapill devote all of his business
time to the Company in consideration of an annual salary of $175,000.
Stock Option Plan
In April 1997, the Board of Directors and shareholders adopted and approved
the Company's 1997 Stock Option Plan (the "Plan"). The Plan is to be
administered by the Board of Directors or a committee appointed by the Board.
Pursuant to the Plan, options to acquire an aggregate of 638,000 shares of
Common Stock may be granted, 226,500 of which have been granted. The Plan is
to provide for grants to employees and directors of the Company. During
fiscal 1998, the Company granted 1,500 options to
employees at an exercise price of US$2.50 and 19,400 options to eligible
physicians under the Plan at an exercise price of US$4.25. No options were
granted during the fiscal year ended December 31, 1998 to the named executive
officers.
[GRAPHIC]
COMPARISON OF 10 MONTH CUMULATIVE TOTAL RETURN*
AMONG MED-EMERG INTERNATIONAL, INC.,
THE NASDAQ HEALTH SERVICES INDEX
AND THE RUSSELL 2000 INDEX
2/12/98 3/98 6/98 9/98 12/98
NASDAQ HEALTH SERVICES 100 106 96 72 82
RUSSELL 2000 100 109 106 85 98
MED-EMERG
INTERNATIONAL, INC. 100 91 66 43 35
*$100 INVESTED ON 2/12/98 IN STOCK OR INDEX -
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 8, 1999, certain information with
respect to stock ownership of (i) all persons known by the Company to be
beneficial owners of 5% or more of its outstanding shares of Common Stock;
(ii) all directors and officers as a group.
Shares Of Percentage
Common Stock Ownership
------------ ---------
Name(1)
- -------
1245841 Ontario Inc (2) 1,042,544 27.1%
Ramesh Zacharias (3) 1,207,544 30.1%
M.D., FRCSC
Victoria Zacharias (3) 1,207,544 30.1%
Robert Rubin (4) 750,000 19.8%
Hampton House
International (5) 274,375 8.9%
Carl Pahapill (6) 265,000 8.1%
Ambrose Group 170,000 5.5%
All Officers and Directors as
a group (6 persons)
(3)(4)(6)(7) 2,322,544 46.7%
(1) Unless otherwise indicated, the address is c/o Med-Emerg International,
Inc., 2550 Argentia Road, Suite 205, Mississauga, Ontario L5N 5R1, Canada.
(2) 1245841 Ontario Inc. is a Canadian company which is owned by Ramesh and
Victoria Zacharias.
(3) Includes (i) 292,544 shares owned by 1245841 Ontario Inc., which is owned
by Dr. and Mrs. Zacharias (ii) 165,000 shares issuable upon exercise of
currently exercisable options granted under the Company's 1997 Stock Option
Plan to Dr. Zacharias, and (iii) 750,000 shares of Common stock issuable
upon conversion of up to 500,000 shares of Convertible Preferred Stock
which preferred stock is currently held by 1245841 Ontario Inc., a company
owned by Dr. and Mrs. Zacharias. For a period of ten years from issuance,
each share of preferred stock is convertible into 1.5 shares of Common
Stock and thereafter into such number of shares of Common Stock as is equal
to U.S.$4,500,000 divided by the then current market price of the Common
Stock on the date of conversion. For purposes of the above chart, the
number of shares of Common Stock issuable upon conversion of the Preferred
Stock was calculated by assuming a one for one and one-half conversion. "
Dr. Zacharias and Mrs. Zacharias each disclaim beneficial ownership of the
shares owned by the other.
(4) Includes 700,000 shares of Common Stock currently issuable upon exercise of
options.
(5) These shares may be deemed to be owned by Peter Deeb, a past director of
the Company. Mr. Deeb owns 75% of Hampton House and is its Chairman and
Chief Executive Officer.
(6) Includes 100,000 shares of Common Stock and 165,000 shares issuable upon
exercise of options.
(7) Represents 1,192,544 voting securities currently owned and 1,130,000 voting
securities issuable upon exercise of currently exercisable options issued
under the Company's 1997 Stock Option Plan to Directors and Officers.
ITEM 13: INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Between 1994 and 1996, the Company loaned an aggregate of $137,719 to Dr.
Zacharias and Victoria Zacharias. In February 1998, the Company repurchased
37,456 shares of its common stock from Ramesh and Victoria Zacharias at a
purchase price of US $2.75 per share. The aggregate consideration payable by
the Company was used to repay all outstanding amounts owed by Dr. Zacharias
and Victoria Zacharias and their affiliated companies.
In June 1996, the Company loaned $60,000 to Carl Pahapill, the Company's
President, to purchase 100,000 shares of Common Stock in the Company. The
loan is non-interest bearing, unsecured and repayable over a five year period
with principal payments commencing in February 2000.
On November 1, 1996, the Company effected a recapitalization whereby Dr.
Zacharias, the Company's Chief Executive Officer and Director, and Victoria
Zacharias, Dr. Zacharias' wife, converted an aggregate of 2,203,333 shares of
Common Stock into an aggregate of 500,000 shares of preferred stock. In 1997,
the shares were transferred to 1245841 Ontario Inc., a company owned by Dr.
and Mrs. Zacharias.
On November 1, 1996, the Company granted Robert Rubin, a director, an option
to purchase 700,000 shares of Common Stock at US$.75 per share and approved
the issuance of 50,000 shares of Common Stock, all of which shares were
issued in 1997 in consideration of services rendered to the Company as
director. Under a US $800,000 line of credit previously established between
Mr. Rubin and the Company, Mr. Rubin advanced an aggregate of US $250,000
from July 1997 to January 1998.
In connection with the Bridge Financing in January 1997, the Company issued
8% promissory notes in the principal amount of US$500,000 and an aggregate of
125,000 shares of Common Stock to four investors for gross proceeds of
US$500,000. Robert Rubin, a director of the Company, purchased a promissory
note in the principal amount of US$150,000 and 37,500 shares of Common Stock.
To comply with the National Association of Securities Dealers, Inc., Mr.
Rubin and the another investor agreed to surrender to the Company for
cancellation without consideration an aggregate of 62,500 shares of Common
Stock obtained in the Bridge Financing. The Company remained obligated to
repay the promissory notes issued to the two investors in the aggregate
principal amount of $250,000, upon the closing of the Initial Public Offering.
Except with respect to the non-interest bearing loans made to the Zacharias'
and Mr. Pahapill, the Company believes all previous transactions between the
Company and its officers, directors or 5% stockholders, and their affiliates
were made on terms no less favorable to the Company than those available from
unaffiliated parties. In the future, the Company will present all proposed
transactions with affiliated parties to the Board of Directors for its
consideration and approval. Any such transaction will be approved by a
majority of the disinterested directors.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following financial statements and exhibits are filed as part of this
Annual Report:
A. FINANCIAL STATEMENTS
Auditors' Report
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statement of Deficit
Consolidated Statement of Changes in Financial Position
Notes to Consolidated Financial Statements
B. EXHIBITS
Number Description
- ------ -----------
3.1* Certificate of Incorporation and Amendments thereto of the
Company.
3.2* By-laws of the Company.
10.1* Employment Agreement between the Company and Ramesh
Zacharias.
10.2* Employment Agreement between the Company and Carl Pahapill.
10.3* Operating lease covering the Company's facilities.
10.4 Deleted.
10.4.1 1997 Stock Option Plan (as amended).
10.5* Loan Agreement between the Company and Carl Pahapill.
10.6* Corporate Resolution Regarding November Recapitalization.
10.7* Form of Hospital Contract.
10.8* Form of Physician Contract for Clinical Operations.
10.9* Form of Physician Contract for Emergency Services.
10.10* Letter of Credit Agreement dated April 17, 1997 between the
Company and Robert Rubin.
10.11* Amendment to April 17, 1997 Letter of Credit Agreement
between the Company and Robert Rubin dated January 30, 1998.
21.1 Deleted.
21.1.1 List of Subsidiaries
23.1 Consent of Schwartz Levitsky Feldman, Chartered Accountants.
23.2 Consent of KPMG, Chartered Accountants.
* Incorporated by reference to Registrant's registration statement on Form
F-1, Registration Statement No. 333-21899.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MED-EMERG INTERNATIONAL, INC.
/s/ Carl Pahapill
-------------------------------
Carl W. Pahapill, CA
President and Chief Operating Officer
DATE: May 17, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Carl Pahapill
-------------------------------
Carl W. Pahapill
Director
DATE: May 17, 1999
/s/ Ramesh Zacharias
-------------------------------
Ramesh Zacharias
Director
DATE: May 17, 1999
/s/ William Thomson
-------------------------------
William Thomson
Director, Chairman of the Board
DATE: May 17, 1999
MED-EMERG INTERNATIONAL, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
TABLE OF CONTENTS
Auditors' Report F - 1 to F - 2
Consolidated Balance Sheet F - 3
Consolidated Statement of Operations F - 5
Consolidated Statement of Deficit F - 6
Consolidated Statement of Changes in Financial Position F - 7
Notes to Consolidated Financial Statements F - 8 to F - 23
AUDITORS' REPORT
To the Shareholders of
Med-Emerg International, Inc.
We have audited the consolidated balance sheets of Med-Emerg
International, Inc. as at December 31, 1998 and 1997 and the
consolidated statements of operations and deficit and changes in
financial position for each of the years then ended. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as at December 31, 1998 and 1997 and the results of its
operations and the changes in its financial position for each of the
years then ended in accordance with generally accepted accounting
principles.
Canadian generally accepted accounting principles differ in some
respects from those applicable in the United States of America
(note 16).
/s/ Schwartz Levitsky Feldman
-----------------------------
Chartered Accountants
Toronto, Ontario
February 5, 1999, except for Note 15 for which the date is March 2, 1999
AUDITORS' REPORT
To the Shareholders of
Med-Emerg International, Inc.
We have audited the consolidated balance sheets of Med-Emerg
International, Inc. as at December 31, 1996 and 1995 and the
consolidated statements of operations and deficit and changes in
financial position for each of the years in the two year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the
Med-Emerg International Inc. as at December 31, 1996 and 1995 and the
results of its operations and the changes in its financial position
for each of the years in the two year period ended December 31, 1996
in accordance with generally accepted accounting principles.
Under date of March 26, 1997 we expressed an unqualified opinion on
the Company's consolidated financial statements as at December 31,
1996 for the year then ended. As described in note 2, subsequent to
March 26, 1996, material adjustments have been reflected in the
attached consolidated financial statements as at December 31, 1996 and
for the year then ended. Because of the material effect of these
adjustments, we hereby withdraw our previously issued report dated
March 26, 1997.
Accounting principles generally accepted in Canada vary in certain
significant respects from accounting principles generally accepted in
the United States. Application of accounting principles generally
accepted in the United States would have affected results of
operations for each of the years in the two-year period ended December
31, 1996 and the shareholders' equity as of December 31, 1996 and
1995, to the extent summarized in note 18 to the consolidated
financial statements.
The consolidated balance sheet of Med-Emerg Inc. (a wholly owned
subsidiary of Med-Emerg International Inc.) as at December 31, 1994
and the consolidated statements of earnings and changes in financial
position for the year then ended, were audited and reported on
separately by other auditors who expressed an opinion without
reservation on those statements in their report dated March 15, 1995.
We have audited the statements of earnings and changes in financial
position of Med-Plus Health Centres Ltd. (a wholly owned subsidiary of
Med-Emerg International Inc.) for the year ended December 31, 1994.
The contribution of Med-Plus Health Centres Ltd. to revenues and net
income of Med-Emerg International Inc. for the year ended December 31,
1994 represented 14% and 17% of the respective restated totals. We
also audited the combination of the accompanying consolidated
statements of operations and retained earnings (deficit) and changes
in financial position of Med-Emerg International Inc. for the year
ended December 31, 1994. In our opinion, such consolidated statements
have been properly combined on the basis described in note 1(a) of the
notes to the consolidated financial statements.
/s/ KPMG
KPMG
Chartered Accountants
Mississauga, Ontario
March 26, 1997, except for Notes 2, 11, 12 and 19 for which the date is
January 27, 1998
MED-EMERG INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 1998
1998 1997
$ $
ASSETS
CURRENT ASSETS
Cash 1,669,899 554,432
Accounts receivable (note 4) 2,765,491 2,164,883
Prepaid and other 439,310 357,308
-------------- --------------
4,874,700 3,076,623
LOANS AND ADVANCES (note 5) 135,175 204,531
CAPITAL ASSETS (note 6) 883,463 551,019
OTHER ASSETS (note 7) 1,763,330 1,182,518
DEFERRED INCOME TAXES 695,800 186,880
-------------- --------------
8,352,468 5,201,571
-------------- --------------
-------------- --------------
APPROVED ON BEHALF OF THE BOARD
Director
Director
MED-EMERG INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 1998
1998 1997
$ $
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness (note 8) 209,281 1,464,085
Accounts payable and accrued
liabilities 2,282,658 2,553,796
Lease obligations - current portion 87,401 48,050
Promissory notes payable (note 9) - 941,074
-------------- --------------
2,579,340 5,007,005
OBLIGATIONS UNDER CAPITAL LEASES
(note 14) 102,322 79,352
-------------- --------------
2,681,662 5,086,357
-------------- --------------
COMMITMENTS AND CONTINGENCIES
(notes 8, 14 and 17)
SHAREHOLDERS' EQUITY
CAPITAL STOCK (note 10) 8,328,164 8,627,479
CONVERTIBLE DEBENTURE (note 11) 590,625 -
CONTRIBUTED SURPLUS (note 12) 1,316,980 1,246,000
DEFICIT (4,564,963) (9,758,265)
-------------- --------------
5,670,806 115,214
-------------- --------------
8,352,468 5,201,571
-------------- --------------
-------------- --------------
The accompanying notes are an integral part of these
consolidated financial statements.
MED-EMERG INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
1998 1997 1996
(note 21)
$ $ $
REVENUE 15,282,584 11,572,667 10,817,048
Physician fees and other
direct costs 11,837,088 8,749,735 8,554,396
------------ ------------ ------------
3,445,496 2,822,932 2,262,652
------------ ------------ ------------
EXPENSES
Salaries and benefits 1,886,679 1,570,452 1,450,320
General and administration 753,345 514,808 469,721
Occupancy costs and supplies 554,040 374,679 355,603
Travel and marketing 261,466 163,679 142,909
Stock compensation - 139,000 2,941,800
Depreciation and amortization 184,194 128,130 78,379
Write-off of deferred start-up
costs - - 509,337
------------ ------------ ------------
3,639,724 2,890,748 5,948,069
------------ ------------ ------------
LOSS BEFORE INTEREST AND
BRIDGE FINANCING COSTS 194,228 67,816 3,685,417
INTEREST AND BRIDGE FINANCING
COSTS 18,657 444,878 55,461
------------ ------------ ------------
LOSS BEFORE INCOME TAXES 212,885 512,694 3,740,878
Income tax recovery -
deferred (55,349) (40,609) (146,554)
------------ ------------ ------------
NET LOSS 157,536 472,085 3,594,324
PREFERRED SHARE DIVIDENDS 175,576 - -
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON
SHARES 333,112 472,085 3,594,324
------------ ------------ ------------
------------ ------------ ------------
NET LOSS BEFORE PREFERRED SHARE
DIVIDEND, PER COMMON SHARE 0.05 0.24 1.18
PREFERRED SHARE DIVIDENDS,
PER SHARE 0.06 - -
------------ ------------ ------------
BASIC AND FULLY DILUTED LOSS,
PER COMMON SHARE 0.11 0.24 1.18
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES 2,975,853 1,941,510 3,038,214
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
MED-EMERG INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1998
1998 1997 1996
(note 21)
$ $ $
DEFICIT, BEGINNING OF YEAR (9,758,265) (9,286,180) (166,442)
Net loss (157,536) (472,085) (3,594,324)
Restatement of excess of
redemption price over
issuance price of
preference shares
(note 10b) 5,525,414 - (5,525,414)
Dividends on preference
shares (174,576) - -
------------ ------------ ------------
DEFICIT, END OF YEAR (4,564,963) (9,758,265) (9,286,180)
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
MED-EMERG INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE YEAR ENDED DECEMBER 31, 1998
1998 1997 1996
(Note 21)
$ $ $
OPERATING ACTIVITIES
Net loss (157,536) (472,085) (3,594,324)
Items not affecting cash
Depreciation and amortization 184,194 128,130 78,379
Amortization of bridge financing costs - 272,648 -
Deferred income taxes recovery (508,920) (40,326) (146,554)
Stock compensation - 139,000 2,941,800
----------- ----------- ----------
(482,262) 27,367 (720,699)
Changes in non-cash operating items
Accounts receivable (600,608) (56,744) 235,367
Prepaid and other (82,002) (566,847) 98,340
Accounts payable and accrued liabilities (271,138) 567,444 65,824
Income taxes payable - - (27,319)
----------- ----------- ----------
Cash provided by (used in) operating
activities (1,436,010) (28,780) (348,487)
----------- ----------- ----------
INVESTING ACTIVITIES
Business acquisitions (note 3) (904,875) - (324,863)
Additions to capital assets (438,505) (389,874) (94,794)
Loans to (repayments from) shareholders
and directors 87,471 - (37,203)
Note receivable (75,175) - -
Other assets 245,930 (524,605) (196,534)
Loan to officer - - (60,000)
----------- ----------- ----------
Cash used in investing activities (1,085,154) (914,479) (713,394)
----------- ----------- ----------
FINANCING ACTIVITIES
Issuance of common shares (note 10a) 5,570,832 347,500 919,576
Issuance of warrants (note 10c) 150,741 - -
Repurchase and cancellation of
common shares (note 10a) (113,025) - -
Cancellation of surrendered
common shares (note 10a) (173,750) - -
Repurchase and cancellation of common
shares from directors (137,719) - -
Issuance of convertible debenture (notes 3 & 11) 590,625 - -
Issuance of promissory note payable - 929,825 193,732
Repayment of promissory note payable (941,074) (132,483) (50,000)
Obligation under capital lease 62,321 127,402 -
Due from affiliates 57,060 (4,833) (14,972)
Dividends paid on preference shares (174,576) - -
----------- ----------- ----------
Cash provided by financing activities 4,891,435 1,267,411 1,048,336
----------- ----------- ----------
INCREASE (DECREASE) IN CASH 2,370,271 324,152 (13,545)
Bank indebtedness, beginning of year (909,653) (1,233,805) (1,220,260)
----------- ----------- ----------
CASH (BANK INDEBTEDNESS), END OF YEAR 1,460,618 (909,653) (1,233,805)
----------- ----------- ----------
----------- ----------- ----------
REPRESENTED BY
Cash 1,669,899 554,432 75,135
Bank indebtedness (209,281) (1,464,085) (1,308,940)
----------- ----------- ----------
1,460,618 (909,653) (1,233,805)
----------- ----------- ----------
----------- ----------- ----------
The accompanying notes are an integral part of these consolidated
financial statements.
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Med-Emerg International Inc. is a publicly traded company listed on
the NASDAQ Exchange. The Company completed its initial public
offering in February, 1998.
Med-Emerg International Inc. is a physician management services
organization specializing in the delivery of emergency and primary
healthcare related services. The Company is committed through
information technology and its platform as a management services
organization to delivering an internet-based healthcare network with
the objective of delivering quality, timely and access to healthcare
products and services.
The Company's operations are divided into three divisions, Physician
and Nurse Recruitment, Physician Management Services and Integrated
Health Services Delivery Network.
On a contractual basis, the Company provides emergency department
physician and nurse recruitment, staffing and administrative support
services to hospitals. At December 31, 1998, the Company had 18
contracts under its management.
Under physician management services, the Company owns and manages
medical clinic facilities providing physicians with the ability to
practice within a professional managed network enabling the physician
to concentrate on the clinical aspects of their practices. All the
clinic assets including medical equipment are owned by the company.
At December 31, 1998, the Company owned and managed 7 clinics and
subsequently purchased an ownership interest in an additional 3
clinics.
The Company has newly created a division called Integrated Health
Service Delivery Network (IHSDN). IHSDN is an internet-based network
that connects physicians, patients, third party payors and consumers
to a "virtual world" of healthcare products and services. The Company
is electronically connecting its clinical facilities and establishing
strategic partnerships in delivering a comprehensive healthcare
program.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are expressed in Canadian
dollars and are prepared in accordance with Canadian generally
accepted accounting principles. Differences between Canadian and
United States accounting principles are described in Note 16.
a) Basis of Consolidation
The financial statements consolidate the accounts of Med-Emerg
International Inc. and its subsidiaries (collectively called the
"Company").
Investments in jointly controlled partnerships were accounted
for using the proportionate consolidation method whereby the
Company's proportionate share of revenues, expenses, assets and
liabilities are recorded in the accounts.
Significant intercompany accounts and transactions have been
eliminated.
b) Development and Start-up Costs
Direct costs incurred, net of any revenue, during the
development and start-up period for a new clinic are deferred
until the clinic reaches a commercial level of activity and is
then amortized on a straight-line basis over five years.
c) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting assets and liabilities and
the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
d) Capital Assets
Capital assets are recorded at cost and are amortized over their
estimated useful lives at the undernoted rates and methods:
Furniture and fixtures 20% Declining balance
Medical Equipment 10% Declining balance
Computer software 100% Declining balance
Computer hardware 30% Declining balance
Leasehold improvements 5-10 years Straight-line
e) Goodwill
Goodwill is recorded at cost and is being amortized over a
period of 10 to 20 years. The Company assesses the
recoverability of goodwill by determining whether the
amortization of the goodwill balance over its remaining life can
be recovered through projected future operating results.
Impairment, if any, is measured based on discounted future
operating cash flows using a discount rate reflecting the
Company's average cost of funds or based on the fair value of
the related business unit or activity. The assessment of the
recoverability of intangible assets will be impacted if
estimated future operating cash flows are not achieved.
f) Revenue Recognition
The Company recognizes revenues in its physician and Nurse
Recruiting division under its contracts with hospitals as its
services are rendered, based on an accrual of the monthly fee or
actual shifts worked, in accordance with the terms of the
contracts. In addition, the Company recognizes revenues as
medical services are rendered by physicians under contract with
the Company, in accordance with the Ontario Health Insurance
Plan (OHIP). The Company bills and collects from OHIP all fees
relating to medical services rendered by the physician.
The Company recognizes revenues in its Physician Management
Services division as medical services are rendered and billed in
accordance with the Ontario Health Insurance Plan. The Company
bills and collects from OHIP all fees relating to medical
services rendered by the physician.
g) Deferred Income Taxes
The Company follows the "asset and liability method" of
accounting for deferred income taxes under Canadian GAAP
pursuant to which recognition is given to deferred taxes on all
"temporary differences" (differences between accounting basis
and tax basis of the Company's assets and liabilities) using
current enacted tax rates. The Company records deferred tax
assets for the future tax benefits of capital losses carried
forward, less a provision for any deferred tax assets where it
is more likely than not that the asset will not be realized.
The Company did not recognize future tax benefits in connection
with capital losses carried forward because it is not currently
likely that the company would realize these tax benefits.
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
3. BUSINESS ACQUISITIONS
Effective June 1, 1998, the Company purchased all of the issued and
outstanding shares of J C Medical Management Inc. for cash of
$196,875 and a convertible debenture in the amount of $590,625 (note
11), plus legal costs. J C Medical Management Inc. is a company that
owns the assets of a medical clinic located in Toronto, Canada and
manages a group of primary care physicians.
Effective September 15, 1998, the Company purchased 75% of the issued
and outstanding shares of Doctors on Call Ltd. for consideration of
$117,375, plus legal costs. Doctors on Call Ltd. is an after-hours
on-call service that provides patients with 24-hour access to primary
care services.
Effective August 1, 1998, the Company acquired all of the assets and
assumed all of the liabilities of Glenderry Medical Clinic. The
Company previously had a 33 1/3% interest in Glenderry Medical
Clinic Partnership. Glenderry Medical Clinic provides walk-in and
family practice health care services to the local community.
The following is a summary of assets purchased and liabilities
assumed:
Glenderry J C Medical Doctors on Call Total
--------- ----------- --------------- --------
$ $ $ $
Total assets 182,177 151,441 14,549 348,167
Goodwill 13,272 744,656 133,321 891,249
Less liabilities assum (195,449) (108,597) (30,495) (334,541)
--------- ----------- --------------- -------
- 787,500 117,375 904,875
--------- ----------- --------------- -------
4. ACCOUNTS RECEIVABLE
1998 1997
$ $
Trade receivables 2,824,971 2,202,299
Allowance for doubtful accounts (59,480) (37,416)
--------- ---------
2,765,491 2,164,883
--------- ---------
--------- ---------
5. LOANS AND ADVANCES
1998 1997
$ $
Note receivable 75,175 -
Loans to shareholders and directors, unsecured, non-interest
bearing, with no specific terms of repayment - 87,471
Due from affiliates - 57,060
Loan to officer, unsecured, non-interest bearing, repayable over a
five-year period with principal repayments
commencing February, 2000. 60,000 60,000
------- -------
135,175 204,531
------- -------
------- -------
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
5. LOANS AND ADVANCES (cont'd)
NOTE RECEIVABLE
On June 29, 1998, the company purchased a note receivable, payable by
the Estate of Dr. Donald Munro ("Estate"). The security for the note
includes the 150,000 shares of common stock of the company described
in Note 17 and any proceeds from the sale of the common stock by the
Estate must be applied to repay the note. The company may demand
repayment of the note on or after April 1, 1999.
LOANS TO SHAREHOLDERS AND DIRECTORS
Concurrent with the initial public offering disclosed in note 10a,
the Company repurchased 37,456 common shares held by directors, as
consideration for the repayment of loans to directors and
shareholders totalling $87,471, as well as amounts due from
affiliates totalling $50,248.
6. CAPITAL ASSETS
1998 1997
------------------------------------------- ------------
Accumulated
Cost Amortization Net Net
--------- ------- ------- -------
$ $ $ $
Furniture and fixtures 182,896 102,010 80,886 69,127
Medical equipment 225,999 65,698 160,301 114,341
Computer software 102,276 85,899 16,377 1,706
Computer hardware 539,325 257,369 281,956 107,500
Leasehold improvements 501,396 157,453 343,943 258,345
--------- ------- ------- -------
1,551,892 668,429 883,463 551,019
--------- ------- ------- -------
--------- ------- ------- -------
7. OTHER ASSETS
1998 1997
$ $
Goodwill (net of accumulated amortization of
$127,021; $60,569 at December 31, 1997) 1,213,834 389,037
Deferred start-up costs 434,957 219,136
Deferred charges relating to proposed financing 104,539 564,345
Other 10,000 10,000
--------- ---------
1,763,330 1,182,518
--------- ---------
--------- ---------
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
8. BANK INDEBTEDNESS
The Company used a portion of the proceeds from the initial public
offering to fully repay the bank line of credit. The bank line of
credit was repaid on February 25, 1998. On March 23, 1998, the
Company signed a letter of agreement with another bank to establish a
$2,000,000 demand revolving operating facility and a $1,000,000
demand non-revolving capital facility.
The Company established a new credit facility with its bankers. The
new facility provides an available demand, revolving, operating line
of credit amounting to $2,000,000, bearing interest at the bank's
prime lending rate plus 0.5% per annum with interest payable monthly,
and an available demand, non-revolving, capital line of credit
amounting to $1,000,000, for use in the acquisition of unspecified
fixed assets, bearing interest at the bank's prime lending rate plus
0.75% per annum with interest payable monthly. As security, the
Company has provided a first-ranking general assignment of accounts
receivable, a general security agreement constituting a first charge
over all present and future personal property of the Company, a
chattel mortgage over all equipment financed by the capital loan, an
assignment of all risk insurance policies and an assignment of key
man life insurance of a director in the amount of $1,000,000.
As at December 31, 1998, the Company has drawn $96,750 against the
capital line of credit. The Company has not drawn against the
operating line of credit.
The Company established a capital credit facility and an operating
line with the Royal Bank of Canada in September 1997 to fund the
opening of its first Urgent Care Centre. The capital credit facility
bears interest at the bank's prime lending rate plus 1.75% per annum
with interest payable monthly. The principal is being repaid in equal
monthly installments over a 4-year period ending August, 2002. The
operating line is due on demand and bears interest at the bank's
prime lending rate plus 1.5% per annum.
At December 31, 1998, the Company had $50,944 outstanding on the
capital credit facility and had drawn $61,587 against the operating
line of credit.
9. PROMISSORY NOTES PAYABLE
Promissory notes payable are represented by the following:
1998 1997
$ $
a) Bridge financing repayable from the proceeds
of the initial public offering - 715,250
b) Promissory notes with interest at prime plus 2% repayable from the
proceeds of the initial public offering - 214,575
------- -------
- 929,825
c) Note payable on acquisition - 11,249
------- -------
- 941,074
------- -------
------- -------
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
10. CAPITAL STOCK
Authorized
Unlimited number of the following classes of shares and
warrants:
Preference shares, voting, non-redeemable, non-retractable,
having a cumulative dividend of US$0.27 per share,
convertible to common shares
Class "A", redeemable, retractable, non-cumulative
preferred shares,
Class "B", redeemable, retractable, non-cumulative
preferred shares,
Special Shares, issuable in series, with rights, privileges
and restrictions
to be fixed by the directors
Common shares
Common stock purchase warrants, redeemable, entitling holder
to purchase one share of common stock at a price of
US$4.50 per share up to February 11, 2003
Issued
1998 1997
$ $
500,000 Preference shares 594,586 6,120,000
3,096,544 Common shares (1,990,000 in 1997) 7,582,837 2,507,479
1,437,500 Common stock purchase warrants 50,741 -
--------- ---------
8,328,164 8,627,479
--------- ---------
--------- ---------
Common shares
Number Amount
--------- ----------
Balance, December 31, 1996 1,815,000 $2,020,979
Shares issued related to bridge financing in January 1997 125,000 347,500
Shares issued to director as compensation 50,000 139,000
--------- ----------
Balance, December 31, 1997 1,990,000 $2,507,479
Shares surrendered for cancellation (62,500) (173,750)
Shares repurchased for directors and cancelled (37,456) (137,719)
Shares issued in connection with initial public offering 1,250,000 5,570,832
Shares repurchased and cancelled (43,500) (184,005)
--------- ----------
Balance, December 31, 1998 3,096,544 $7,582,837
--------- ----------
--------- ----------
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
10. CAPITAL STOCK (cont'd)
Warrants
Number Amount
------ -------
Balance, December 31, 1997 - $ -
Warrants issued in connection with initial public offering 1,437,500 150,741
--------- --------
Balance, December 31, 1998 1,437,500 $150,741
--------- --------
--------- --------
(A) COMMON SHARES
On February 20, 1998 the Company completed an Initial Public Offering
(the "Offering") of 1,250,000 shares of Common Stock and 1,437,500
Class A Redeemable Common Stock Purchase Warrants for net initial
public offering proceeds of $5,570,832. The Company's stock is
listed in NASDAQ under the symbol MDERF and the warrants are
listed under MDEWF.
Concurrent with the closing of the Offering, the Company
repurchased 37,456 Common Shares held by a director to repay
loans as described in note 5.
In January 1997, the Company completed a private offering and sale
of promissory notes ("Bridge Notes") with a principal amount of
US$500,000. The Bridge Note holders also received 125,000 common
shares having an ascribed value of $2.78 per common share. The
value ascribed to the common shares was accounted for as a
financing. Upon closing of the Offering, the Company repaid the
principal balance of US$500,000 plus interest on the promissory
notes. In addition, the Company repaid US$150,000 due to a
director of the Company. Immediately preceding the closing of the
Offering, certain investors in the Company's January 1997 private
offering surrendered for cancellation an aggregate of 62,500
common shares. The effect of this event is a reduction in
shareholders' equity of $173,750 and an equal reduction of other
assets.
At December 31, 1997, the Company had issued 50,000 common shares
to a director of the Company. The issuance of these shares was
accounted for as compensation expense as the related services were
rendered by the director.
In October 1998, the Board of Directors approved the repurchase
over a three-month period of up to 5% of the outstanding common
stock of the Company. The Company repurchased and cancelled 43,500
common shares for an aggregate cost of $113,025. Share capital was
reduced by $184,005 based on the assigned value per share and
contributed surplus was increased by $70,980.
(B) PREFERENCE SHARES
Each preferred share is convertible into one and one-half shares of
common stock of the Company at the option of the holder for a ten
year period from the date of issuance. At the end of the ten year
period, the Preferred Shares are convertible at the option of the
holder into such number of shares of the Company's Common Stock as
is equal to the ascribed value of US$4,500,000 divided by the then
current market value of the Common Stock. The preferred shares are
entitled to receive a cumulative dividend of US$0.27 per share
payable in cash or equivalent common shares based on their then
quoted market value from the date of closing of the initial public
offering. The preference shares were, at the time of their issue,
redeemable and retractable by the holder. On October 24, 1997, the
attributes of the shares were changed and the shares ceased to be
redeemable and retractable.
12
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
10. CAPITAL STOCK (cont'd)
On August 21, 1998, the shareholders approved a reduction in the
stated capital of the preferred shares. The issuance of the
preferred shares was originally recorded in the amount of
$6,120,000, based on the value ascribed to the shares translated
at the exchange rate in effect at the date of issuance, and
resulted in a charge of $5,525,414 to retained earnings, which
represents the excess of the value ascribed to the preferred
shares issued over the carrying value of the common shares
cancelled. In 1998, the Company reduced the value of the preferred
shares by $5,525,414 and reduced the deficit by the same amount.
(C) WARRANTS AND STOCK OPTION PLANS
In April 1997, the Board of Directors obtained shareholder
approval of the Company's Stock Option Plan (The "Plan"). Pursuant
to the Plan, options to acquire an aggregate of 638,000 shares of
common stock may be granted. The Plan is to provide for grants to
employees, consultants and directors of the Company to enable them
to purchase shares. The Company has granted options to purchase an
aggregate of 226,500 shares of common stock at an exercise price
of US$2.50 per share and 19,400 shares of common stock at an
exercise price of US$4.25 per share.
Under a stock option plan, a director was granted an option on
November 1, 1996 to purchase 700,000 common shares of the Company
at an exercise price of US$0.75 per share. The difference of
$1,246,000 between the fair market value of $2.78 (US$2.05) per
share and the exercise price of $1.00 (US$0.75) per share has been
charged to earnings and contributed surplus in 1996.
In connection with the Initial Public Offering, the Company issued
1,437,500 Class A Redeemable Common Stock Purchase Warrants for
gross proceeds of US$0.10 per warrant. Each warrant entitles the
holder to purchase one share of common stock at a price of US$4.50
for a four year period commencing one year from the date of
completion of the offering. In addition, the Underwriters were
granted warrants entitling the Underwriters to purchase up to
125,000 shares of Common Stock and 125,000 warrants at a price per
share of Common Stock or warrant equal to 150% of the Initial
Public Offering price.
During 1998, the Company granted warrants to purchase 125,000
shares of common stock to a private investor. Each warrant
entitles the holder to purchase one share of common stock at a
price of US$4.65 for a one-year period following the effective
date of a registration statement to be filed with the Securities
and Exchange Commission to register the warrant stock.
11. CONVERTIBLE DEBENTURE
As part of the consideration for the purchase of JC Medical
Management Inc. described in Note 3, the company issued a
convertible debenture in the amount of $590,625. The debenture is
convertible into 132,000 shares of common stock of the company if
the company's stock meets a certain trading threshold within two
years. Until the trading threshold is met, the company must pay a
fixed monthly fee of $5,000. It is management's expectation that
the trading threshold will be met within the two-year period.
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
12. CONTRIBUTED SURPLUS
1998 1997
$ $
Stock compensation - difference between fair market value
and exercise price (note 10c) 1,246,000 1,246,000
Share repurchase - difference between cost per share
and assigned value (note 10a) 70,980 -
--------- ---------
1,316,980 1,246,000
--------- ---------
--------- ---------
13. INCOME TAXES
In fiscal 1998, the Company implemented the recommendations of CICA
Handbook Section 3465, Accounting for Income Taxes. Under the new
recommendations, the "asset and liability method" of accounting for
deferred income taxes is used, which gives recognition to deferred
taxes on all "temporary differences" (differences between accounting
basis and tax basis of the Company's assets and liabilities) using
current enacted tax rates. In addition, the new recommendations
requires the Company to record all deferred tax assets, including
future tax benefits of capital losses carried forward, and to record
a "valuation allowance" for any deferred tax assets where it is more
likely than not that the asset will not be realized. Prior to the
adoption of the new recommendations, income tax expense was
determined using the deferral method of tax allocation. There is no
material impact on the financial statements resulting from this
change.
The components of the future tax benefit classified by source of
temporary differences that gave rise to the benefit are as follows:
1998 1997
$ $
Accounting depreciation in excess of
tax depreciation 15,307 50,565
Losses available to offset future income taxes 817,539 181,201
Share issue costs 894,352 24,246
Valuation allowance (1,031,398) (69,132)
----------- --------
Deferred income taxes 695,800 186,880
----------- --------
----------- --------
At December 31, 1998, the Company has non-capital losses available
for carry-forward of $1,858,000. These losses expire between 2003
and 2005. In addition, the Company has capital loss carry-forwards
of approximately $368,000, which may be applied against future
taxable capital gains. No accounting recognition has been given to
the capital loss carry-forwards.
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
14. COMMITMENTS
The Company is committed to payments under operating leases of its
premises and equipment totaling $889,000. Annual payments under
operating leases are as follows:
1999 $267,000
2000 236,000
2001 143,000
2002 124,000
2003 40,000
Thereafter 79,000
--------
$889,000
--------
--------
Obligations under capital lease of total $195,000. Annual payments
under capital leases are as follows:
1999 $102,000
2000 64,000
2001 21,000
2002 7,000
2003 1,000
--------
$195,000
--------
--------
Rent and leasing expenses charged to operations for the year ended
December 31, 1998 was $285,902 (December 31, 1997 - $205,463).
15. SUBSEQUENT EVENTS
On January 29, 1999, the Company purchased 45% of the issued and
outstanding shares of Medical Urgent Care Inc., an urgent care
centre, for consideration of $142,050. The Company entered into a
Management Services Agreement with Medical Urgent Care Inc. to
manage the urgent care centre for an annual fee based on gross
revenues.
On February 26, 1999, the Company, through a 51% owned subsidiary,
became party to a lease for the premises known as York Lanes
Health Centres Inc., a primary care health centre located at York
University, Toronto, Canada. The Company has entered into a
Management Services Agreement with York Lanes Health Centres Inc.
to manage the clinic for an annual fee based on gross revenues.
On March 2, 1999, the Company purchased 51% of the issued and
outstanding shares of Caremedics (Elmvale) Inc., a walk-in and
family practice health care clinic, for total consideration of
$84,000. The Company entered into a Management Services Agreement
with Caremedics (Elmvale) Inc. to manage the clinic for an annual
fee based on gross revenues.
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
16. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES
These consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles
("Canadian GAAP"), which conform in all material respects applicable
to the Company, with those in the United States ("U.S. GAAP") during
the periods presented except with respect to the following:
Consolidated statements of operations
If United States GAAP were employed, net loss for the period would be
adjusted as follows:
1998 1997 1996
(Note 21)
$ $ $
Net loss based on Canadian GAAP (157,536) (472,085) (3,594,324)
Deferred start-up costs (215,821) (146,777) (58,574)
Deferred acquisition costs (46,224) - -
-------- -------- ----------
Net loss based on United States GAAP (419,581) (618,862) (3,652,898)
-------- -------- ----------
Primary loss per share (0.20) (0.31) (1.51)
-------- -------- ----------
-------- -------- ----------
If United States GAAP were employed, deficit, other assets, prepaid
and other assets, and total liabilities would be adjusted as follows:
1998 1997 1996
(Note 21)
$ $ $
Deficit based on Canadian GAAP (4,564,963) (9,758,265) (9,286,180)
Deferred start-up costs (421,172) (205,351) (58,574)
Deferred acquisition costs (46,224) - -
---------- ---------- ----------
(5,032,359) (9,963,616) (9,344,754)
---------- ---------- ----------
---------- ---------- ----------
Other assets based on Canadian GAAP 1,763,330 1,182,518 700,668
Deferred start-up costs (421,172) (205,351) (58,574)
---------- ---------- ----------
1,342,158 977,167 642,094
---------- ---------- ----------
---------- ---------- ----------
Prepaid and other assets based on
Canadian GAAP 439,310 357,308 63,109
Deferred acquisition costs (46,224) - -
---------- ---------- ----------
393,086 357,308 63,109
---------- ---------- ----------
---------- ---------- ----------
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
16. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES (cont'd)
1998 1997 1996
(Note 21)
$ $ $
Total liabilities based on Canadian GAAP 2,681,662 5,086,357 3,439,024
Convertible debenture 590,625 - -
--------- --------- ---------
3,272,287 5,086,357 3,439,024
--------- --------- ---------
--------- --------- ---------
(a) Deferred Income Taxes
Under U.S. GAAP, the Company is required to follow Statement of
Financial Accounting Standards (SFAS No. 109) "Accounting for
Income Taxes", which requires the use of the "asset and
liability method" of accounting for deferred income taxes, which
gives recognition to deferred taxes on all "temporary
differences" (differences between accounting basis and tax basis
of the Company's assets and liabilities, such as the
non-deductible values attributed to assets in a business
combination) using current enacted tax rates. In addition, SFAS
No. 109 requires the Company to record all deferred tax assets,
including future tax benefits of capital losses carried forward,
and to record a "valuation allowance" for any deferred tax
assets where it is more likely than not that the asset will not
be realized. The Company has followed this method under Canadian
GAAP.
(b) Deferred Start-up Costs
Under Canadian GAAP, development and start-up costs, which meet
certain criteria, are deferred and amortized. Under United
States GAAP, development and start-up costs are expensed as
incurred.
(c) Deferred Acquisition Costs
Under Canadian GAAP, pre-acquisition costs, which meet certain
criteria, are deferred and amortized. Under United States GAAP,
development and start-up costs are expensed as incurred.
(d) Convertible Debenture
Under U.S. GAAP, convertible debentures are presented as
liabilities, regardless of the attributes of the convertible
debenture, and transferred to equity upon conversion, whereas,
under Canadian GAAP, the likelihood of conversion to equity is
considered in determining the classification between liability
or equity.
(e) Earnings Per Share
U.S. GAAP requires common shares and warrants to purchase common
shares, issued or exercisable at prices below the initial public
offering ("I.P.O.") price and which were issued within one year
prior to the initial filing of the registration statement
relating to the I.P.O., to be treated as if the common shares
were outstanding from the beginning of the period in the
calculation of weighted average number of common shares
outstanding and loss per share, even where such inclusion is
anti-dilutive. Primary earnings per common share is determined
using the weighted average number of shares outstanding during
the year, adjusted to reflect the application of the treasury
stock method for outstanding options and warrants in accordance
with U.S. GAAP.
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
16. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES (cont'd)
(f) Stock Compensation
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123), was issued by the
Financial Accounting Standards Board in October 1995. SFAS 123
establishes financial accounting and reporting standards for
transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees, as well as
stock-based employee compensation plans. All transactions in
which goods or services are the consideration received for the
issuance of equity instruments are to be accounted for based on
the fair value of the consideration received or the fair value
of the equity instrument issued, whichever is more reliably
measurable.
For those transactions described in note 10 and under SFAS 123:
- the issuance of 125,000 common shares to promissory note
holders resulted in a charge to income (finance expense)
over the term of the related promissory note payable, at
$2.78 (US$2.05) per share equal to $347,500 of which
$272,648 has been charged to earnings in the year ended
December 31, 1997 and $74,852 has been charged to earnings
in the year ended December 31, 1998.
- the issuance of 50,000 shares to a director for services
rendered resulted in a charge to income at $2.78 (US$2.05)
per share equal to $139,000 in the year ended December 31,
1997.
- the issuance of an option on November 1, 1996 to a director
to acquire 700,000 shares (note 13) has resulted in a charge
to income equal to $1,246,000 in 1996 based on $2.78
(US$2.05) per share, and the "minimum value" method of
calculation permitted under SFAS 123 for non-public
entities.
As allowed by SFAS 123, the Company has decided to continue to
use Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" in accounting for the Company's Stock
Option Plan (the "Plan") for U.S. GAAP purposes, pursuant to
which there is no significant difference between U.S. and
Canadian GAAP in the accounting for the granting of options
under the Plan.
(g) Shareholders' Equity
Under U.S. GAAP, loans issued to officers to acquire stock are
presented as a deduction from shareholders' equity (deficit).
Under Canadian GAAP, the detachable stock purchase warrants
issued as in conjunction with the private stock offering on
January 22, 1996 and subsequently surrendered, all as described
in note 13, have been given no recognition in the financial
statements.
Under U.S. GAAP, detachable stock purchase warrants are given
separate recognition from the primary security issued. Upon
initial recognition, the carrying amount of the two securities
is allocated based on the relative fair values at the date of
issuance. Under U.S. GAAP, based on an ascribed fair value of
$0.50 for each of the 1,000,000 share warrants issued, share
capital would be lower by $50,000 and, given that the stock
purchase warrants were cancelled during the year, the carrying
amount of contributed surplus would be increased by $50,000.
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
16. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES (cont'd)
The effect on shareholders' equity would be as follows:
1998 1997 1996
(Note 21)
$ $ $
Capital stock (as previously shown) 8,328,164 8,627,479 8,140,979
Ascribed fair value of share purchase
warrants issued (50,000) (50,000) (50,000)
--------- --------- ---------
Capital stock - U.S. GAAP 8,278,164 8,577,479 8,090,979
Share purchase loan to officer (60,000) (60,000) (60,000)
--------- --------- ---------
Net capital stock - U.S. GAAP 8,218,164 8,517,479 8,030,979
--------- --------- ---------
Convertible debenture (as previously shown) 590,625 - -
Convertible debenture included in long-term
debt (590,625) - -
--------- --------- ---------
Convertible debenture - U.S. GAAP - - -
--------- --------- ---------
Contributed surplus (as previously shown) 1,316,980 1,246,000 1,246,000
Share purchase warrants 50,000 50,000 50,000
--------- --------- ---------
Contributed surplus - U.S. GAAP 1,366,980 1,296,000 1,296,000
--------- --------- ---------
Deficit - U.S. GAAP (5,032,359) (9,963,616) (9,344,754)
--------- --------- ---------
Shareholders' equity (deficit) - U.S. GAAP 4,552,785 (150,137) (17,775)
--------- --------- ---------
--------- --------- ---------
(h) Consolidated Statement of Changes in Financial Position
Operating activities reflect interest paid of $69,248 during the
year ended December 31, 1998 (December 31, 1997 - $121,640;
December 31, 1996 - $55,461) and income taxes paid of nil during
the year ended December 31, 1998 (December 31, 1997 - nil;
December 31, 1996 - $27,319).
Under U.S. GAAP, bank indebtedness would not be included as a
component of cash position in the consolidated statement of
changes in financial position. Accordingly, the $1,254,804
decrease at December 31, 1998 (December 31, 1997 - $155,145
increase) would be presented as a financing activity for each
year.
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
16. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES (cont'd)
(i) Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), was issued by the Financial
Accounting Standards Board in June 1997. SFAS 123 establishes
standards for reporting and display of comprehensive income and
its components in the financial statements. SFAS 130 is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier period
provided for comparative purposes is required. The adoption of
SFAS 130 will have no impact on the Company's consolidated
results of operations, financial position or cash flows.
17. CONTINGENCIES
The Company is presently party to one legal proceeding, which was
commenced on July 4, 1997. The applicant in the proceeding has taken
the position that it continues to be the beneficial owner of the
75,000 shares of Common Stock that it contributed to the capital of
the Company in November 1996. The Company disagrees with the Estate's
position and intends to defend this action vigorously. No amount has
been accrued in the accounts in respect of this matter.
Revenue
Substantially all of the Company's operating revenue is derived from
government funded and administered programs. In previous years,
revenue was "clawed back" by the government in an effort to reduce
government spending.
Clawback adjustments for prior periods have been reflected as a
liability and were charged to operations. Management's best estimates
of clawback adjustments recoverable from physicians and hospitals are
recorded in accounts receivable and offset the amount of clawback
charged to operations.
1998 1997
$ $
Clawback liability 447,008 501,170
Clawback receivable 385,430 392,317
18. SEGMENTED INFORMATION
The Company operates under three divisions: Physician and Nurse
Recruitment, Physician Management Services and Integrated Health
Services Delivery network (IHSDN).
The Physician and Nurse Recruitment involves contracting with
hospitals for the provision of physician staffing, nurse staffing and
administrative support services. The Company also contracts with
clinical facilities and local communities for the locum or permanent
placement of a physician in a community.
The Physician Management Services division owns and manages medical
clinic facilities, which provide physicians with the ability to
practice medicine in a professionally managed environment. The
clinics include family practice, walk-in services, and other related
services such as massage therapy and chiropractic services.
The IHSDN division, launched in 1998, involves electronically linking
clinical facilities and other healthcare service providers into a
network. This internet-based network will provide healthcare
professionals and consumers access to medical services, products,
communications and information tools.
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
18. SEGMENTED INFORMATION (cont'd)
Details are as follows:
1998
----------------------------------------------------------
Physician Physician
& Nurse Management
Recruiting Services IHSDN Consolidated
---------- ---------- -------- ------------
Revenue 11,576,670 3,705,914 - 15,282,584
Gross margin 1,933,571 1,511,925 - 3,445,496
Operating income before Corporate Overhead
& Public Company-related costs 1,045,811 431,324 (125,360) 1,425,310
Corporate Overhead (1,319,289)
Public Company-related costs (300,249)
-----------
Operating loss (194,228)
Assets employed at year end 5,917,022 2,284,683 150,763 8,352,468
Depreciation and amortization 63,163 121,031 - 184,194
Capital expenditures 229,514 208,991 - 438,505
1997
------------------------------------------
Physician Physician
& Nurse Management
Recruiting Services Consolidated
---------- ---------- ------------
Revenue 9,092,231 2,480,436 11,572,667
Gross margin 1,766,035 1,056,897 2,822,932
Operating income before Corporate Overhead
& Stock Compensation 1,091,295 387,888 1,479,183
Corporate Overhead (1,407,999)
-----------
Operating loss before Stock Compensation 71,184
Stock Compensation (139,000)
-----------
Operating loss (67,816)
Assets employed at year end 3,447,169 1,754,402 5,201,571
Depreciation and amortization 65,041 63,089 128,130
Capital expenditures 92,011 297,863 389,874
MED-EMERG INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
18. SEGMENTED INFORMATION (cont'd)
1996 (Note 21)
------------------------------------------
Physician Physician
& Nurse Management
Recruiting Services Consolidated
---------- ---------- ------------
Revenue 8,783,309 2,033,739 10,817,048
Gross margin 1,508,027 754,625 2,262,652
Operating income (loss) before Corporate Overhead
& Stock Compensation 897,515 (410,973) 486,542
Corporate Overhead (1,230,159)
-----------
Operating loss before Stock Compensation (743,617)
Stock Compensation (2,941,800)
-----------
Operating loss (3,685,417)
Assets employed at year end 2,621,707 918,116 3,539,823
Depreciation and amortization 40,679 37,700 78,379
Capital expenditures 85,304 9,490 94,794
Operating loss of Physician Management Services for the year ended
December 31, 1996 includes the non-recurring write-off of start-up
costs in the amount of $509,337.
Total operating loss for the year ended December 31, 1996 includes a
$2,941,800 general corporate charge for Stock Compensation costs paid
to an investment advisor and stock options granted to a director
below fair market value.
19. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems
may recognize the year 2000 as 1900 or some other date, resulting in
errors when information using year 2000 dates is processed. In
addition, similar problems may arise in some systems which use
certain dates in 1999 to represent something other than a date. The
effects of the Year 2000 issue may be experienced before, on, or
after January 1, 2000, and, if not addressed, the impact on
operations and financial reporting may range from minor errors to
significant systems failure which could effect any entity's ability
to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 issue affecting the
Company, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
20. COMPARATIVE FIGURES
Certain figures in the 1997 financial statements have been
reclassified to conform with the basis of presentation in 1998.
21. AUDIT BY ANOTHER FIRM
The Company's 1996 figures were audited by another firm of chartered
accountants.