Basis of consolidation
The significant accounting policies of the Company and its subsidiaries, as summarized below, conform with generally accepted accounting principles in Canada. These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries:

Cybermedix Health Services Ltd.
Fort Frances Clinic Holdings Limited

Capital assets
Capital assets are recorded at cost. Amortization is computed using the following methods and rates which are designed to charge the cost of capital assets to income over their estimated useful lives:

Buildings	5% declining balance
Laboratory equipment	10% straight-line and 10% declining balance
Computer equipment	20% straight-line and 20% declining balance
Furniture and fixtures	10% straight-line and 10% declining balance
Leasehold improvements	20% straight-line and 20% declining balance

Licenses
Licenses are amortized on a straight-line basis over 16.5 to 40 years.

The need for any writedown of the unamortized portion of licenses due to a permanent impairment in value is based on management's assessment of the undiscounted long-term operating results of the licenses. Any writedown of licenses arising from a permanent impairment in value is recorded in the period in which the impairment is identified.

Leasehold rights
Leasehold rights are amortized over the term of the lease to which they relate.

Investments
The investment in partnership, representing a 25% interest, is accounted for using the equity method. The investment in an affiliate in which the Company is not able to exercise significant influence is accounted for by the cost method.

Income taxes
Income taxes are accounted for on the tax allocation basis. Deferred income taxes are provided for all significant timing differences between accounting and taxable income.

	September 30, 1996
	Cost	Accumulated amortization	Net
Building	$ 97,976	$ 50,615	$ 47,361
Laboratory equipment	6,021,603	4,637,819	1,383,784
Computer equipment	3,721,372	3,562,154	159,218
Furniture and fixtures	1,368,607	1,219,143	149,464
Leasehold improvements	3,768,862	3,261,176	507,686
	$ 14,978,420	$ 12,730,907	$ 2,247,513
	September 30, 1995
	Cost	Accumulated amortization	Net
Land	$ 335,733	$ ---	$ 335,733
Buildings	2,216,993	1,141,168	1,075,825
Laboratory equipment	5,896,265	4,462,852	1,433,413
Computer equipment	3,634,422	3,407,399	227,023
Furniture and fixtures	1,373,515	1,118,465	255,050
Leasehold improvements	3,678,056	3,098,920	579,136
	$ 17,134,984	$ 13,228,804	$ 3,906,180

Bank indebtedness is secured by (i) a general security agreement, (ii) a general assignment of book debts, laboratory licenses, and the shares of the Company and (iii) a $60 million demand debenture with a fixed and floating charge over all the assets of the Company.

	For the year ended September 30
	1996	1995
Bank loan, bearing interest at bank prime rate plus 1%, payable in monthly amounts of $300,000 plus interest, due July 2001.	$ 31,200,000	$ 34,800,000
Mortgage payable, bearing interest at 8.25%, payable in blended monthly amounts of $1,492 due October 1996.	-	148,875
Due to shareholder, unsecured and non-interest bearing with no set terms of repayment.	---	1,809,032
	31,200,000	36,757,907
Less: current portion of long-term debt	(3,600,000)	(3,605,981)
	$ 27,600,000	$ 33,151,926

The security for the bank loan is described in Note 4.

The principal repayments required in the next five years are as follows:

1997	$ 3,600,000
1998	3,600,000
1999	3,600,000
2000	3,600,000
2001	3,600,000
Thereafter	13,200,000

Authorized

• Unlimited number of new Class A special shares, non-voting, entitled to a non-cumulative dividend not in excess of $5 per share, redeemable and retractable at $100 per share
  
• Unlimited number of Class C special shares, non-voting, entitled to a 8% non-cumulative dividend, redeemable at $1 per share
  
• Unlimited number of Class A non-voting common shares
  
• Unlimited number of Class B common shares

In the event of liquidation, dissolution or wind-up of the Company, the special shares rank in priority as new Class A and Class C over the common shares, and the Class A common are entitled to $1,000 per share in priority to the Class B common shares.

Issued

The following is a summary of the changes in share capital during the year.

	New Class A Special	Class C Special	Class A Common	Class B Common
Number of shares
Outstanding at September 30, 1994	---	179,083	1,000	1,000
Outstanding at September 30, 1995	---	179,083	1,000	1,000
Shares issued	5,511	---	---	---
Redeemed and cancelled	(5,511)	---	---	(181)
Outstanding at September 30, 1996	---	179,083	1,000	819

	New Class A Special	Class C Special	Class A Common	Class B Common	Total
Outstanding at September 30, 1994	$ ---	$ 179,083	$ 1,011	$ 1,010	$ 181,104
Outstanding at September 30, 1995	---	179,083	1,011	1,010	181,104
Shares issued	551,100	---	---	---	551,100
Redeemed and cancelled	(551,100)	---	---	(183)	(551,283)
Outstanding at September 30, 1996	$ ---	$ 179,083	$ 1,011	$ 827	$ 180,921

On March 1, 1996, the following transactions took place:

1. The Company issued 5,511 new Class A special shares to the shareholder of the Company as a $551,100 repayment of the shareholder loan.

2. The Company redeemed and cancelled 5,511 new Class A special shares and 181 Class B common shares. Consideration consisted of the Company's investment in a related company recorded at $1,205,348 (Note 11). The excess of the consideration over the stated capital of the shares redeemed was recorded as a charge to retained earnings in the amount of $654,065.

Weighted average number of shares outstanding
The weighted average number of shares outstanding is based on the retro-active application of resolutions to change each Class C special share, Class A common share and Class B common share into 0.05207, 83.924 and 10,930.282 common shares respectively (Note 13(b)).
Accordingly, for purposes of calculating net income per share, the weighted average number of shares outstanding during 1996 was 10,201,909 (1995 - 11,023,531).

Future payments in respect of operating leases are as follows:

1997	$ 6,308,402
1998	5,376,027
1999	4,259,229
2000	2,840,199
2001	2,455,364

The Company is a defendant in various legal actions that have been instituted in the ordinary course of business. The outcome of the claims, aggregating approximately $3,372,000, cannot be determined. The Company is also a defendant by counterclaim in actions totalling $8,000,000. The outcome of the counterclaim is also not determinable.

The Ontario Ministry of Health has set certain limits on health care expenditures and set graduated limits on the amounts reimbursed for clinical laboratory services. To the extent that fees paid to private medical laboratories exceed the set limits, amounts received will have to be reimbursed. Each year the repayment amounts are not determined until after the completion of the fiscal year end of the Government of Ontario.

The Company has used the latest available information in estimating the amount of fees received that will have to be reimbursed. Assumptions were made with respect to the amount of reimbursement required, the volume and type of tests referred to the Company from certain physicians and the Company's market share. As at September 30, 1996, the Company estimated $1,430,000 (1995 - $4,165,000) to be reimbursed to the Ontario Ministry of Health. It is reasonably possible, based on existing knowledge, that changes in future conditions in the near term could require a material change in the amount to be reimbursed.

	September 30
	1996	1995
Combined Canadian federal and provincial statutory income tax rate	44.6 %	44.5 %
Increase in statutory income tax rate resulting from the following:
Non-deductible amortization of licenses	4.2	6.8
Other permanent differences	0.2	1.3
Effective income tax rate per financial statements	49.0 %	52.6 %

At September 30, 1996, the Company has net capital losses in the amount of $148,000 which can be applied indefinitely against future taxable capital gains. The tax benefit of these losses has not been recognized in the accounts.

In the normal course of business, the Company leased facilities from companies which were controlled by the shareholder of Canadian Medical Laboratories Limited. Rent expense of $233,546 (1995 - $226,000) measured at the exchange amount, has been included in operating, general and administrative expenses.

On March 1, 1996, the Company transferred land and building at the net carrying amount of $1,340,586 and the related mortgage at the net carrying amount of $146,870, to a company which is controlled by the shareholder and a family member. The Company received as proceeds shares in the related company. Subsequently, the Company retracted the shares of the related company in exchange for redeeming certain of the Company's shares (Note 6(ii)).

The Company's revenues are substantially all received from the Ontario Ministry of Health.

1. On November 14, 1996, the Board of Directors approved a stock option plan ("the Plan") and reserved 1,700,000 units under the Plan. Options to subscribe for 1,241,660 common shares were granted to certain directors and employees and may be exercised for a period of six years from the date of the grant at a price equal to the offering price of the common shares under an initial public offering prospectus.

2. Through a series of resolutions dated from November 19, 1996 to November 25, 1996, the Company amended its share capital. Furthermore, on November 25, 1996, pursuant to an initial public offering, the Company issued 5,800,000 common shares and 2,900,000 common share purchase warrants for net proceeds of $28,470,750.

   As of November 25, 1996, prior to the acquisition of Bestview Investments Inc. (Note 13(e)), the share capital of the Company was as follows:

   
   

   Authorized	Issued	Amount
   Unlimited number of preference shares	Nil	$ Nil
   Unlimited number of common shares	14,845,150	27,107,421
   Share purchase warrants	2,900,000	1,544,250
   		$ 28,651,671

3. On November 22, 1996, the Company declared and paid a cash dividend in the amount of $894,000.

4. On November 22, 1996, a company controlled by the shareholder and a family member, purchased the Company's investment in partnership, investment in shares and building for $894,000 cash. This related party transaction did not result in a gain or loss to the Company.

5. On November 25, 1996, under the terms of an Acquisition Agreement, the Company issued 919,242 common shares, 459,621 common share purchase warrants and cash of $167,564 to acquire all of the shares of Bestview Investments Inc. ("Bestview") and repay $1,254,522 of loans due to Bestview shareholders. The transaction is to be accounted for by the purchase method.