THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. IF YOU ARE IN
ANY DOUBT ABOUT THE CONTENTS OF THIS DOCUMENT, YOU SHOULD CONSULT A PERSON
AUTHORISED UNDER THE FINANCIAL SERVICES AND MARKETS ACT 2000 WHO SPECIALISES IN
ADVISING ON THE ACQUISITION OF SHARES AND OTHER SECURITIES. THIS DOCUMENT HAS
BEEN DRAWN UP IN ACCORDANCE WITH THE REQUIREMENTS AND COMPRISES AN ADMISSION
DOCUMENT FOR THE PURPOSES OF THE AIM RULES.
APPLICATION HAS BEEN MADE FOR THE SHARES OF COMMON STOCK, BOTH ISSUED AND TO BE
ISSUED PURSUANT TO THE PLACING, TO BE ADMITTED TO TRADING ON AIM, A MARKET
OPERATED BY THE LONDON STOCK EXCHANGE. THE SHARES OF COMMON STOCK ARE NOT DEALT
ON ANY OTHER RECOGNISED INVESTMENT EXCHANGE AND NO APPLICATION HAS BEEN OR IS
BEING MADE FOR THE SHARES OF COMMON STOCK TO BE ADMITTED TO ANY SUCH EXCHANGE.
AIM IS A MARKET DESIGNED PRIMARILY FOR EMERGING OR SMALLER COMPANIES TO WHICH A
HIGHER INVESTMENT RISK TENDS TO BE ATTACHED THAN TO LARGER OR MORE ESTABLISHED
COMPANIES. AIM SECURITIES ARE NOT ADMITTED TO THE OFFICIAL LIST OF THE UNITED
KINGDOM LISTING AUTHORITY. A PROSPECTIVE INVESTOR SHOULD BE AWARE OF THE RISKS
OF INVESTING IN SUCH COMPANIES AND SHOULD MAKE THE DECISION TO INVEST ONLY AFTER
CAREFUL CONSIDERATION AND, IF APPROPRIATE, CONSULTATION WITH AN INDEPENDENT
FINANCIAL ADVISER. FURTHER IT IS EMPHASISED THAT NO APPLICATION IS BEING MADE
FOR THE ADMISSION OF THE SHARES OF COMMON STOCK TO THE OFFICIAL LIST OF THE
UNITED KINGDOM LISTING AUTHORITY. NEITHER THE LONDON STOCK EXCHANGE NOR THE
UNITED KINGDOM LISTING AUTHORITY HAS ITSELF EXAMINED OR APPROVED THE CONTENTS OF
THIS DOCUMENT.
PROSPECTIVE INVESTORS SHOULD READ THE WHOLE TEXT OF THIS DOCUMENT AND SHOULD BE
AWARE THAT AN INVESTMENT IN THE COMPANY IS SPECULATIVE AND INVOLVES A HIGHER
THAN NORMAL DEGREE OF RISK. THE ATTENTION OF PROSPECTIVE INVESTORS IS DRAWN IN
PARTICULAR TO THE SECTION ENTITLED "RISK FACTORS" SET OUT IN PART 2 OF THIS
DOCUMENT. ALL STATEMENTS REGARDING THE COMPANY'S BUSINESS, FINANCIAL POSITION
AND PROSPECTS SHOULD BE VIEWED IN LIGHT OF THESE RISK FACTORS.
This document does not constitute a prospectus for the purposes of the
Prospectus Rules of the Financial Services Authority and has not been delivered
to the Registrar of Companies in England and Wales. Copies of this document will
be available free of charge during normal business hours on any weekday (except
Saturdays, Sundays and public holidays) at the offices of Collins Stewart, 9th
Floor, 88 Wood Street, London EC2V 7QR from the date of this document for the
period of one month from Admission.
The directors of the Company, whose names appear on page 3 of this document,
accept responsibility for the information contained in this document including
individual and collective responsibility for compliance with the AIM Rules. To
the best of the knowledge and belief of the Directors (who have taken all
reasonable care to ensure that such is the case), the information contained in
this document is in accordance with the facts and does not omit anything likely
to affect the import of such information. In connection with this document
and/or the invitation contained in it, no person is authorised to give any
information or make any representation other than as contained in this document.
- --------------------------------------------------------------------------------
SPACELABS HEALTHCARE, INC.
(Incorporated under the laws of the State of Delaware,
United States of America)
PLACING OF o NEW SHARES OF COMMON STOCK OF US$0.001 EACH
AT o P PER SHARE OF COMMON STOCK (EQUIVALENT TO APPROXIMATELY US$ o PER SHARE
OF COMMON STOCK)
ADMISSION TO TRADING ON THE AIM MARKET
NOMINATED ADVISER AND BROKER
COLLINS STEWART LIMITED
- --------------------------------------------------------------------------------
AUTHORISED ISSUED AND FULLY PAID
AMOUNT NUMBER AMOUNT NUMBER
US$250,000 250,000,000 Shares of Common Stock of US$0.001 each US$ o o
- --------------------------------------------------------------------------------
The Placing Shares will, on Admission, rank in full for all dividends or other
distributions hereafter declared, made or paid on the Shares of Common Stock and
will rank pari passu in all respects with all other Shares of Common Stock which
will be in issue on completion of the Placing.
Collins Stewart is regulated in the United Kingdom by the Financial Services
Authority and is acting exclusively for the Company and no one else in
connection with the Placing and Admission. Collins Stewart will not regard any
other person (whether or not a recipient of this document) as its customer or be
responsible to any other person for providing the protections afforded to
customers of Collins Stewart nor for providing advice in relation to the
transactions and arrangements detailed in this document. Collins Stewart is not
making any representation or warranty, express or implied, as to the contents of
this document.
Collins Stewart has been appointed as nominated adviser and broker to the
Company. In accordance with the AIM Rules, Collins Stewart has confirmed to the
London Stock Exchange that it has satisfied itself that the Directors have
received advice and guidance as to the nature of their responsibilities and
obligations to ensure compliance by the Company with the AIM Rules and that, in
its opinion and to the best of its knowledge and belief, all relevant
requirements of the AIM Rules have been complied with. No liability whatsoever
is accepted by Collins Stewart for the accuracy of any information or opinions
contained in this document or for the omission of any material information, for
which it is not responsible.
THE SHARES OF COMMON STOCK HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE
UNITED STATES SECURITIES ACT 1933, AS AMENDED AND MAY NOT BE OFFERED OR SOLD IN,
OR INTO THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, US PERSONS
(AS DEFINED IN REGULATION S PROMULGATED UNDER THE US SECURITIES ACT). THE SHARES
OF COMMON STOCK ARE BEING OFFERED ONLY TO NON-US PERSONS OUTSIDE THE UNITED
STATES IN TRANSACTIONS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE US
SECURITIES ACT, IN RELIANCE ON REGULATION S. PURCHASERS OF THE SHARES OF COMMON
STOCK MAY NOT OFFER TO SELL, PLEDGE, OR OTHERWISE TRANSFER THE SHARES OF COMMON
STOCK IN THE UNITED STATES OF AMERICA OR TO PERSONS (OTHER THAN DISTRIBUTORS)
UNLESS SUCH OFFER, SALE OR PLEDGE OR OTHER TRANSFER IS REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED OR AN EXEMPTION FROM
REGISTRATION IS AVAILABLE. HEDGING TRANSACTIONS INVOLVING SHARES OF COMMON STOCK
MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE US SECURITIES ACT.
This document contains forward-looking statements, including, without
limitation, statements containing the word "believes", "anticipates", "expects"
and similar expressions. Such forward looking statements involve unknown risks,
uncertainties and other factors which may cause the actual results, financial
condition, performance or achievements of the Company, or industry results, to
be materially different from any future results, performance or achievements
expressed or implied by such forward looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in Part
2 "Risk Factors". Given these uncertainties, prospective investors are cautioned
not to place undue reliance on such forward-looking statements. The Company and
the Directors disclaim any obligation to update any such forward looking
statements in this admission document to reflect future events or developments.
Other than in accordance with the Company's obligations under the AIM Rules, the
Company undertakes no obligation to update or revise publicly any
forward-looking statement, whether as a result of new information, future events
or otherwise. All subsequent written and oral forward-looking statements
attributable to the Company, its directors or to persons acting on its behalf
are expressly qualified in their entirety by the cautionary statements referred
to above and contained elsewhere in this document.
Information or other statements presented in this document regarding market
growth, market size, development of the market and other industry data
pertaining to the healthcare markets and the Company's business consists of
estimates based on data and reports compiled by industry professionals or
organisations and analysts and the Company's knowledge of its sales and markets.
The information on the Company's websites do not form part of this document.
In making any investment decision in respect of the Placing, no information or
representation should be relied upon in relation to the Placing or in relation
to the Placing Shares other than as contained in this document.
THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SHARES OF COMMON STOCK IN ANY JURISDICTION IN WHICH SUCH AN OFFER
OR SOLICITATION IS UNLAWFUL. THE SHARES OF COMMON STOCK HAVE NOT BEEN AND WILL
NOT BE REGISTERED UNDER THE US SECURITIES ACT OF 1933 OR UNDER THE APPLICABLE
STATE SECURITIES LAWS OF THE UNITED STATES OR UNDER THE APPLICABLE SECURITIES
LAWS OF CANADA, JAPAN, THE REPUBLIC OF IRELAND OR AUSTRALIA. ACCORDINGLY,
SUBJECT TO CERTAIN EXCEPTIONS, THE SHARES OF COMMON STOCK MAY NOT BE OFFERED OR
SOLD OR SUBSCRIBED, DIRECTLY OR INDIRECTLY, WITHIN THE UNITED STATES, CANADA,
JAPAN, THE REPUBLIC OF IRELAND OR AUSTRALIA OR TO OR BY ANY US PERSON (AS SUCH
TERM IS DEFINED IN REGULATION S PROMULGATED UNDER THE US SECURITIES ACT) OR ANY
NATIONAL, RESIDENT OR CITIZEN OF CANADA, JAPAN, THE REPUBLIC OF IRELAND OR
AUSTRALIA OR ANY CORPORATION, PARTNERSHIP OR OTHER ENTITY CREATED OR ORGANISED
UNDER THE LAWS THEREOF. THIS DOCUMENT SHOULD NOT BE DISTRIBUTED TO PERSONS WITH
ADDRESSES IN THE UNITED STATES, CANADA, JAPAN, THE REPUBLIC OF IRELAND OR
AUSTRALIA OR TO ANY CORPORATION, PARTNERSHIP OR OTHER ENTITY CREATED OR
ORGANISED UNDER THE LAWS THEREOF, WHERE SUCH DISTRIBUTION MAY LEAD TO BREACH OF
ANY LAW OR REGULATORY REQUIREMENTS.
The Company takes responsibility for compiling and extracting, but has not
independently verified, market data provided by third parties or industry or
general publications and takes no further responsibility for such data.
- --------------------------------------------------------------------------------
CONTENTS
Directors, Secretary and Advisers 3
Definitions 4
Glossary 7
Placing Statistics 8
Expected Timetable of Principal Events 8
Part 1: Information on the Group 9
Background 9
Introduction 9
Products and services 10
Customers 13
Market opportunities 13
Research and development 15
Corporate strategy 16
Future trading between OSI Systems & Spacelabs Healthcare 16
Manufacturing 17
Distribution 17
Competition 17
Directors, senior management and employees 18
Employee Stock Option Schemes 20
Corporate governance 20
Financial information on the Group 21
Current trading and prospects 21
Properties 22
Dividend policy 22
Reasons for the Placing and use of proceeds 22
Bank credit facility 22
Details of the Placing 22
Admission 23
Lock-in/orderly market arrangements 23
US transfer restrictions 23
CREST 23
Taxation 23
Takeover offers (known as tender offers in the US) 23
Further information 24
Part 2: Risk factors 25
Part 3: Accountants' report on Spacelabs Medical, Inc. and Related Companies 33
Part 4: Accountants' report on Spacelabs Healthcare, Inc. 54
Part 5: Financial information on Blease Medical Holdings 56
Part 6: Unaudited pro forma statement of net assets of the Group 89
Part 7: Additional information 90
- --------------------------------------------------------------------------------
2
- --------------------------------------------------------------------------------
DIRECTORS, SECRETARY AND ADVISERS
DIRECTORS Sir John Michael Middlecott Banham Non-executive Chairman
George MacDonald Kennedy Non-executive Vice Chairman
Deepak Chopra Chief Executive Officer
Ralph Edward Hunter Chief Financial Officer
Nikhil Atul Mehta Vice President Business Development
Steve Cary Good Non-executive Director
Meyer Luskin Non-executive Director
all of:
5150 220th Avenue SE, Issaquah, Washington 98029,
United States
COMPANY SECRETARY Victor Sze
CORPORATE HEADQUARTERS 5150 220th Avenue SE, Issaquah, Washington 98029,
United States
NOMINATED ADVISER AND BROKER Collins Stewart Limited
TO THE COMPANY 9th Floor
88 Wood Street
London EC2V 7QR
REPORTING ACCOUNTANTS Deloitte & Touche LLP, London, UK
TO THE COMPANY Athene Place
66 Shoe Lane
London EC4A 3BQ
AUDITORS TO THE COMPANY Deloitte & Touche LLP, Seattle, US
925 Fourth Avenue
Suite 3300
Seattle, Washington 98104-1126
United States
SOLICITORS TO THE COMPANY Kirkpatrick & Lockhart Nicholson Graham LLP
110 Cannon Street
London EC4N 6AR
SOLICITORS TO THE Berwin Leighton Paisner
ADVISER AND BROKER Adelaide House
London Bridge
London EC4R 9HA
US LEGAL COUNSEL TO THE Loeb & Loeb LLP
COMPANY AND TO THE PLACING 10100 Santa Monica Blvd.
Suite 2200
Los Angeles, CA 90067- 416
United States
REGISTRARS Computershare Investor Services Limited (Channel Islands)
P.O. Box. No. 83 Ordnance House
31 Pier Road, St. Helier,
Jersey JE4 8PW
BANKERS Bank of America Corporation
800 5th Avenue
Seattle, WA 98104
United States
Bank of the West
300 South Grand Avenue
Suite 700
Los Angeles, CA 90071
United States
- --------------------------------------------------------------------------------
3
- --------------------------------------------------------------------------------
DEFINITIONS
The following definitions apply throughout this document, unless the context
otherwise requires:
"Act" the Companies Act 1985 of England and Wales
(as amended)
"Admission" the admission of the Shares of Common Stock,
issued and to be issued pursuant to the
Placing, to trading on AIM becoming effective
in accordance with the AIM Rules
"AIM" a market operated by the London Stock Exchange
"AIM Rules" the rules for AIM companies and their
nominated advisers issued by the London Stock
Exchange
"Audit Committee" the audit committee of the Board
"Blease Medical Holdings" Blease Medical Holdings Limited, a UK company
acquired by OSI in February 2005, and its
wholly owned subsidiaries, Blease Medical
Equipment Limited and Blease Medical Services
Limited, whose activities relate to the
manufacture, design, sale and service of
anaesthesia delivery systems in the UK and
export markets
"Board" or "Directors" the board of directors of the Company from
time to time, including any duly constituted
committee thereof
"Business" the business of the Group
"By-laws" the by-laws of the Company adopted on o
October 2005 as amended from time to time
"Certificate of Incorporation" the certificate of incorporation of the
Company filed with the State of Delaware on 2
August 2005
"Collins Stewart" Collins Stewart Limited of 9th Floor, 88 Wood
Street, London EC2V 7QR
"Combined Code" the Combined Code on Corporate Governance
appended to but not forming part of the
Listing Rules
"Company" or "Spacelabs Spacelabs Healthcare, Inc., a company
Healthcare" incorporated in Delaware on 2 August 2005
"CREST" the system of paperless settlement of trades
and the holding of uncertificated shares
administered by CRESTCo
"CRESTCo" CRESTCo Limited, a company incorporated under
the laws of England and Wales and the Operator
of CREST (as defined in the CREST Regulations)
"CREST Regulations" the Uncertificated Securities Regulations 2001
(SI 2001 No. 3755), as amended
"Dolphin Medical" Dolphin Medical Inc., an 89 per cent. owned
subsidiary of the Company, whose activities
relate to the design, manufacture and
marketing of pulse oximetry products under its
own brand, as well as the brands of other
parties
"Enlarged Share Capital" the Shares of Common Stock in issue
immediately following Admission
- --------------------------------------------------------------------------------
4
DEFINITIONS
- --------------------------------------------------------------------------------
"Executive Directors" the executive directors of the Company,
namely, Deepak Chopra, Ralph Hunter and Nikhil
Mehta
"FDA" the US Food and Drug Administration
"Financial Services Authority" the Financial Services Authority of the UK in
or "FSA" its capacity as the competent authority for
the purposes of FSMA
"FSMA" the Financial Services and Markets Act 2000 of
England and Wales, as amended
"Governance and Remuneration means the governance and remuneration
Committee" committee of the Board
"Group" or "Spacelabs the Company, its subsidiaries and its branch
Healthcare Group" offices
"International Committee on a joint initiative involving both regulators
Harmonisation" or "ICH" and industry as equal partners in the
scientific and technical discussions of the
testing procedures which are required to
ensure and assess the safety, quality, and
efficacy of medicines. Their guidelines are
accepted as regulatory guidance in Western
Europe, Japan, and the US
"Listing Rules" the rules of the United Kingdom Listing
Authority relating to admission to the
Official List
"London Stock Exchange" London Stock Exchange plc
"Medical Data Services" Spacelabs Medical Data, a division of the
"Medical Data" Company and a provider of or ECG services
"Medical Solutions" the business division of Spacelabs Healthcare
comprising pulse oximetry, bone densitometery,
ABP and medical data
"Model Code" the model code on directors dealings in AIM
securities as set out in Annex 1 to Listing
Rule 9 of the Listing Rules
"NASDAQ" the National Association of Securities Dealers
Automated Quotations System National Market in
the US
"New Stock Option Scheme" the employee stock option scheme [to be
adopted by the Company conditionally upon
Admission], further details of which can be
found in paragraph o of Part 7 of this
document
"Nominated Adviser and Broker the agreement dated o October 2005 between the
Agreement" Company and Collins Stewart relating to
Collins Stewart acting as nominated adviser
and broker to the Company, further details of
which are set out in Part 7 of this document
"Non-executive Directors" the non-executive directors of the Company,
namely, Sir John Banham, George Kennedy, Steve
Good and Meyer Luskin
"Official List" the official list of the United Kingdom
Listing Authority
"Old Stock Scheme" the 2004 Spacelabs Medical Stock Option Plan
"OSI" or "OSI Systems" OSI Systems, Inc. a company incorporated in
Delaware and whose stock is traded on NASDAQ
under the symbol OSIS
"Osteometer MediTech, Inc." Osteometer MediTech, Inc., a wholly owned
subsidiary of Spacelabs Healthcare, Inc. whose
activities relate to bone densitometery
devices
- --------------------------------------------------------------------------------
5
DEFINITIONS
- --------------------------------------------------------------------------------
"Placing" the conditional placing of the Placing Shares
pursuant to the Placing Agreement
"Placing Agreement" the conditional agreement dated o October 2005
between Collins Stewart, the Company, OSI and
the Directors, relating to the Placing,
further details of which are set out in
paragraph o of Part 7 of this document
"Placing Price" o p per Placing Share (equivalent to
approximately US$ o )
"Placing Shares" the o new Shares of Common Stock to be issued
by the Company pursuant to the Placing
"Prospectus Rules" the rules made for the purposes of Part VI of
FSMA in relation to offers of securities to
the public and admission of securities to
trading on a regulated market
"Regulation S" regulation S promulgated under the US
Securities Act
"Rule 144" rule 144 promulgated under the US Securities
Act
"Shareholders" holders of Shares of Common Stock
"Shares of Common Stock" shares of Common Stock of US$0.001 each in the
capital of the Company
"Spacelabs Medical" Spacelabs Medical, Inc., a subsidiary of the
Company
"Stock Option Schemes" the Old Stock Scheme and the New Stock Option
Scheme
"Subsidiary" as defined in sections 736 and 736A of the Act
"UDT Sensors" UDT Sensors Inc., a company incorporated in
California and wholly owned subsidiary of OSI
"UK" or "United Kingdom" the United Kingdom of Great Britain and
Northern Ireland
"US" or "United States" the United States of America, its territories
and possessions, any state of the United
States of America and the District of Columbia
"US persons" has the meaning ascribed to such term by
Regulation S
"US Securities Act" the United States Securities Act of 1933, as
amended
All references to times in this document are to UK BST unless otherwise stated.
References to the singular shall include references to the plural, where
applicable and vice versa.
- --------------------------------------------------------------------------------
6
- --------------------------------------------------------------------------------
GLOSSARY
The following terms apply throughout this document, unless the context otherwise
requires:
ambulatory designed for or available to patients who are
not bedridden
ABP ambulatory blood pressure monitoring system
arrhythmia alteration in rhythm of the heartbeat either
in time or force
bone densitometry a simple non-invasive procedure to screen for
osteoporosis or loss of bone mineral density
densitometer apparatus for measuring the optical density of
bone
ECG, EKG or electrocardiogram measures electrical current generated by the
heart as it depolarises and repolarises;
generates a graphic representation of
depolarisation and repolarisation; most
commonly used test to measure the measurement
of electrophysiologic activity of the heart;
used as a diagnostic tool and to monitor
critically ill patients
Multi-parameter equipment capable of monitoring multiple
diagnostic metrics on a simultaneous basis
OEM original equipment manufacturer (a company
that manufactures products for third parties
who resell (with or without modification) to
customers)
osteoporosis a condition characterised by a decrease in
bone mass with decreased density and
enlargement of bone spaces resulting in bone
fragility
osteopenia a condition resulting in progressive loss of
bone density
oximeter a device for measuring the oxygen saturation
of arterial blood
perioperative relating to, occurring in, or being the period
around the time of a surgical operation
pulse oximeter an oximeter that measures the oxygen
saturation of arterial blood by passing a beam
of red and infrared light through a pulsating
capillary bed, the ratio of red to infrared
transmission varying with the oxygen
saturation of the blood; because it responds
only to pulsatile objects, it does not detect
nonpulsating objects like skin and venous
blood
telemetry use of battery operated monitoring equipment
with radio links to monitor patient status at
a central station without wires
vapouriser a device for converting water or a medicated
liquid into a vapour for inhalation
ventilation in respiratory physiology, the process of
exchange of air between the lungs and the
ambient air. Pulmonary ventilation (usually
measured in litres per minute) refers to the
total exchange, whereas alveolar ventilation
refers to the effective ventilation of the
alveoli (small cells containing air in the
lungs) in which gas exchange with the blood
takes place
white coat hypertension a temporary elevation in a patient's blood
pressure that is caused by being in a medical
setting (such as a physician's office) and
that is usually due to anxiety on the part of
the patient; also called white coat effect
- --------------------------------------------------------------------------------
7
- --------------------------------------------------------------------------------
PLACING STATISTICS(1)
Placing Price per Placing Share o p (US$ o )
Number of Shares of Common Stock in issue prior to the Placing o
Number of Placing Shares o
Number of Shares of Common Stock in issue following the Placing and o
Admission
Estimated net proceeds of the Placing(2) (pounds) o million (US$ o million)
Proportion of enlarged issued Shares of Common Stock subject to the o per cent.
Placing
Market capitalisation at the Placing Price on Admission (pounds) o million (US$ o million)
(1) The statistics assume full subscription of the Placing Shares under the
Placing.
(2) Net proceeds of the Placing are after deduction of the expenses of the
Placing.
EXPECTED TIMETABLE OF PRINCIPAL EVENTS
Publication of this document o October 2005
Admission and commencement of dealings in the Shares of Common Stock o October 2005
on AIM
Despatch of definitive Common Stock certificates o October 2005
References to "dollars", "US$" and "US dollars" are to United States dollars and
all references to " (pounds)" are to British pounds sterling. Unless
otherwise stated, this document translates figures in US dollars into pounds
sterling, or vice versa, at the exchange rate of (pounds)1 equals US$ o
, being the closing spot exchange rate on o October 2005, the latest practicable
date prior to the publication of this document.
- --------------------------------------------------------------------------------
8
- --------------------------------------------------------------------------------
PART 1 -- INFORMATION ON THE GROUP
BACKGROUND
Since 1988 OSI Systems has built a healthcare equipment, services and supplies
business based on the manufacture and sale of patient monitoring devices and
anaesthesia systems. This business represents a significant proportion of OSI's
business. The OSI board has been reviewing strategic options for the development
of the healthcare business.
The board of OSI has determined that the best method to continue the development
of the healthcare business is for it to operate as an independent entity.
Accordingly, OSI's board has decided to create a separate company, Spacelabs
Healthcare, to operate the healthcare divisions with an independent UK based
Chairman and Vice Chairman and to seek an AIM trading facility for this company.
The annual revenues of OSI's healthcare businesses have grown from approximately
US$11 million in the fiscal year ended 30 June 2003, to approximately US$195.7
million in the fiscal year ended 30 June 2005, primarily as a result of the
acquisitions of Spacelabs Medical and Blease Medical Holdings. During Q4 to 30
June 2005 OSI reported revenues for its healthcare businesses of US$51.1 million
(US$45.4 million Q4 to 30 June 2004). For the fiscal year ended 30 June 2005 the
healthcare companies contributed US$195.73 million (50.82 per cent. of total OSI
revenues) and contributed an operating income of US$7.02 million against a total
OSI operating loss of US$6.98 million.
INTRODUCTION
Spacelabs Healthcare is an international developer, manufacturer and distributor
of medical equipment including the pioneering development of patient monitoring
solutions, anaesthesia delivery and ventilation systems, pulse oximeters and
sensors and bone densitometers sold to hospitals, clinics and physicians'
offices. Additionally, the Group provides ECG laboratory services to
pharmaceutical companies undertaking clinical trials, whereby patient ECG data
are recorded, analysed, tabulated and interpreted.
The Group employs approximately 1,050 personnel in its 14 offices in the UK,
Canada, France, Germany, Finland, Singapore, the US and elsewhere. The Group
conducts its manufacturing operations and research and development in India, the
UK and the US.
The Group has established international brand names in both medical devices and
medical services such as "Spacelabs", "Blease" and "Dolphin". It has sold
approximately 117,000 patient monitors in the last 12 years and 4,500
anaesthesia delivery systems in the last 10 years. The Directors intend to
leverage this global installed base to provide solutions that integrate patient
monitors, anaesthesia delivery systems and pulse oximetry products and to offer
related equipment, software and services as well as to capture the replacement
cycle business of existing customers.
HISTORY
Spacelabs Healthcare was, prior to Admission, a wholly owned subsidiary of OSI
Systems, a US-based NASDAQ listed company. OSI Systems has been involved in the
healthcare business since 1987, primarily as a supplier to OEM's. The Business
has grown principally through the acquisition of 6 companies and technologies
since its inception to have now become a provider of end products in patient
monitoring, anaesthesia, pulse oximetry and medical services.
In 1998, OSI acquired Osteometer MediTech A/S, a Danish manufacturer of
diagnostic scanners used for the early detection of symptoms of osteoporosis for
US$7.9 million. In August 1999, the Danish operations of Osteometer were
relocated to Hawthorne, California (US) where they continue to operate.
Between 1998 and 2001, OSI acquired businesses relating to pulse oximetry and
infrared-based patient monitoring subsystems. The pulse oximetry and
infrared-based patient monitoring subsystem business is currently operated by
Dolphin Medical.
In 2003, OSI entered into a stock purchase and option agreement with ConMed
Corporation (a NASDAQ listed company: CNMD), whereby ConMed Corporation
purchased a 9 per cent. interest in Dolphin Medical for US$2 million and OSI
granted to ConMed an option to acquire for a purchase price equal to 2 times
revenue in the year preceding the option exercise, the remainder of the Dolphin
Medical business for a price not less than US$30 million in the event that the
option is exercised between 1 January 2004 to 31 December 2007 or not less than
US$40 million in the event that the option is exercised between 1 January 2008
and the option expiry date (31 December 2008). In addition, ConMed Corporation
and Dolphin Medical entered into a distribution agreement in 2003, which
provides ConMed Corporation with distribution rights for certain Dolphin Medical
products within certain defined territories, including North America.
- --------------------------------------------------------------------------------
9
PART 1 -- INFORMATION ON THE GROUP
- --------------------------------------------------------------------------------
In October 2003, GE Healthcare was required to sell Spacelabs Medical (as part
of its acquisition of Finland based Instrumentarium Corporation) to comply with
competition and anti-trust measures imposed by the European Commission and US
Department of Justice. OSI sought to purchase Spacelabs Medical in part, to open
up the Spacelabs Medical installed base to Dolphin pulse oximetry products. In
March 2004, OSI completed the acquisition of Spacelabs Medical (for
approximately US$47.9 million, net of cash acquired and including acquisition
costs), from Instrumentarium Corporation.
Spacelabs Medical, based in Issaquah, Washington, is an international
manufacturer and distributor of patient monitoring systems for critical care and
anaesthesia, wired and wireless networks, clinical information connectivity
solutions, ambulatory blood pressure monitors, and medical data services.
Spacelabs Medical was founded in 1958 in collaboration with the US Air Force
(NASA) to develop systems to monitor the vital signs of astronauts in space. The
European Commission required that GE Healthcare as part of the divestiture of
Spacelabs Medical, enter into an agreement under which Spacelabs Medical would
have the right to distribute certain GE Healthcare anaesthesia products within
the European Union until 2008. The requirement was imposed to ensure that
Spacelabs Medical could offer medical monitoring and anaesthesia products as a
single suite in the perioperative market, as was the practice of other
manufacturers. Furthermore, the European Commission approved the purchase of
Spacelabs Medical, in view of OSI's strategic plans to enhance Spacelabs
Medical's competitive position and expand its activities in Europe through
product development and further acquisitions.
In February 2005, OSI completed the acquisition of Blease Medical Holdings
Limited and its subsidiaries, Blease Medical Equipment and Blease Medical
Services, a UK manufacturer, supplier and distributor of anaesthetic and
ventilator equipment. The business of Blease Medical Holdings was established in
circa 1946 and was acquired by OSI for an initial payment of (pounds)4.5
million, plus future payments of a maximum of [(pounds)6.25] million, to be
satisfied by the issue of loan notes, to be determined by reference to the
achievement of specified operating milestones for each of the accounting periods
ending March 2006, 2007 and 2008 (being the final period for any payment).
Blease Medical Equipment is one of a number of well established companies in the
business of anaesthesia delivery systems and ventilators. Blease Medical
Equipment sells its systems in the UK, Middle East, Asia and Africa through
distributors.
Following the acquisition of Blease, the directors of OSI believed that OSI had
built a healthcare equipment, service and supplies business that could
effectively leverage development, manufacturing and distribution of its
products. On 2 August 2005, Spacelabs Healthcare was formed as a newly
incorporated Delaware (US) company, for the purpose of consolidating all of the
healthcare companies previously held by OSI into a new healthcare group and to
seek admission to trading on AIM for the holding company of the new group.
The Company entered into an agreement with OSI and UDT Sensors on o 2005 for the
acquisition by the Company of the healthcare companies previously owned by OSI
and UDT Sensors. It has not been possible prior to publication of this document
to complete all of the formalities required to register the transfers of the
shares of each relevant company. Therefore the Company will be only the
beneficial, and not the legal owner, of the shares in certain of these companies
until such formalities are completed. Further details of the companies concerned
are set out in paragraph 2.4 of Part 7.
OSI Systems will continue to operate its remaining businesses (the sale of
security and inspection systems and opto-electronic components), and will retain
its NASDAQ listing. On the basis that the Placing Shares are fully subscribed
following Admission, Spacelabs Healthcare will be 65 per cent. owned by OSI and
its subsidiary UDT Sensors. Spacelabs Healthcare intends to commence trading on
o October 2005.
PRODUCTS AND SERVICES
The Group designs, manufactures and markets its products internationally to end
users under several brand names. The Group's patient monitoring systems, network
and connectivity solutions, ambulatory blood pressure monitors and Medical Data
Services are sold under the "Spacelabs Medical (TM) " brand name. The
Group's anaesthesia systems and components are sold under the "Blease (Trade
Mark) " brand names. The Group's arterial haemoglobin saturation monitors and
sensors, including hand-held and wireless monitoring tools, are sold under the
"Spacelabs Medical" and "Dolphin (TM) " brand names and its peripheral
bone densitometers and ultrasound bone sonometers are sold under the "Osteometer
(TM) " brand name. As brand and distribution channels further integrate,
the Directors anticipate that the Group will increasingly be able to leverage
its research and development teams, manufacturing capabilities and supply chain
relationships.
The Group offers "Ultraview SL (TM) " patient monitors for applications
in the hospital, including neonatal, paediatric and adult critical and emergency
care, as well as anaesthesia and sub-acute care. Spacelabs
- --------------------------------------------------------------------------------
10
PART 1 -- INFORMATION ON THE GROUP
- --------------------------------------------------------------------------------
Healthcare's patient monitoring systems comprise monitors and central nurse
stations connected wirelessly or through hospital networks, as well as stand
alone monitors where the patient data can be transported physically from one
monitor to another as the patient is moved. This enables hospital staff to
access patient data where and when it is required. In addition, the Group's
products are "open architecture" in that they are designed to interact with
hospital information systems acquired from other vendors. WinDNA (Registered
Trademark) , based on Citrix (R) application server
technology, is a feature of many of these products allowing clinicians to view
and control Microsoft Windows applications on the patient monitor's display
thereby eliminating the need for separate terminals in the patient's room.
Attending nurses can check laboratory results and other reports, enter orders,
review protocols, and do charting at the patient's bedside. Spacelabs Medical's
monitors are designed to facilitate ease of use. Specifically, inputs can be
made using a mouse, keyboard, and touchscreen.
For electrocardiograph monitoring or multi-parameter monitoring of ambulatory
patients, Spacelabs Medical's offers a digital telemetry system. The
multi-parameter transmitter also integrates with the Spacelabs Medical
"Ultralite SL (TM) " ambulatory blood pressure monitor for the
transmission of non-invasive blood pressure values to a central station or a
multi-disclosure and information system.
The Group sells anaesthesia machines, ventilators and monitors under a license
from GE Healthcare. It also designs and manufactures its own proprietary "Focus
(TM) ," "Genius (TM) " and "Sirius (TM) " anaesthesia
delivery systems sold under the "Blease" brand name. These provide flexible
anaesthesia solutions for most operating room environments, anaesthesia
induction areas, day surgery units, maternity suites, magnetic resonance imaging
facilities and other facilities where the administration of anaesthesia is
required. These anaesthesia delivery systems are designed to work in conjunction
with patient monitoring systems, including those sold under the "Spacelabs
Medical" brand name. Its "Datum (TM) " anaesthesia vapourisers and its
line of anaesthesia ventilators are also designed to be compatible with the
anaesthesia delivery systems of several other manufacturers.
The Group develops next-generation digital pulse oximetry instruments and
compatible pulse oximetry sensors under the "Dolphin ONE (TM) " product
line. "Dolphin ONE (TM) " products include the "Voyager (TM) ,"
"Dolphin 2100 (TM) " and "Dolphin 2150 (TM) ". The Voyager
(TM) is a pocket PC-based pulse oximetry product used in this market.
The Group also manufactures and distributes, under the "Dolphin 2000/3000 (Trade
Mark) " product line, sensors that are compatible with products made by other
manufacturers of pulse oximetry products. The Group sells "TruLink (TM)
" pulse oximetry sensors, manufactured by Dolphin Medical, under the "Spacelabs
Medical" brand.
The medical data services of the Group include centralised ECG laboratory
services. These services include the collection, analysis and interpretation of
cardiac safety data in Phase I-IV clinical trials for drugs. These services are
provided to pharmaceutical companies and clinical research organisations
("CROs"). The Medical Data services division's customers include major
pharmaceutical companies as well as biotech companies, universities, CROs and
device manufacturers.
The Group is also a provider of diagnostic ambulatory blood pressure (ABP)
monitors. ABP monitoring is a routine procedure in many European countries and
is increasingly being used in the United States. Hypertension affects
approximately 50 million Americans and is particularly prevalent in the US
Medicare (the US Federal Healthcare Insurance programme) system population. Many
physicians are using ambulatory blood pressure monitoring to detect "white coat"
hypertension, a condition in which patients experience elevated blood pressure
in the doctor's office but not in their daily lives. It is estimated that in the
US as many as 20 per cent. of the persons diagnosed with hypertension based on
blood pressure measurements taken in their physicians' offices are not actually
hypertensive. ABP monitoring helps improve diagnostic accuracy and minimise the
associated treatment costs. ABP monitoring is also used to adjust drug therapies
for hypertensive patients.
The Group manufactures and distributes the "DTX-200 (TM) " and "DexaCare
G4 (TM) " dual energy x-ray forearm densitometers. These products are
used to diagnose osteoporosis as well as to provide follow-up bone density
measurements. The Group also manufactures and distributes the "DTU-One (Trade
Mark)," a calcaneus (heel bone) ultrasound bone sonometer.
The Group sells a broad line of supplies and accessories as an adjunct to its
medical device sales. These supplies include patient electrodes, specialty graph
paper, sensors and connecting lead wires. In most cases, these products are
obtained from OEMs and are manufactured to Spacelabs Healthcare's
specifications.
- --------------------------------------------------------------------------------
11
PART 1 -- INFORMATION ON THE GROUP
- --------------------------------------------------------------------------------
The following table sets out the key medical products currently offered by
Spacelabs Healthcare:
POTENTIAL AREAS FOR
MODEL (TECHNOLOGY) APPLICATIONS INSTALLATIONS
- ------------------------------- ---------------------------------- --------------------------------
Intesys(TM) Clinical Suite Solutions to make patient data All hospital care areas
ICS(TM) available anytime to those
locations where required
Maternal Obstetrical Monitoring of mother and Labour and delivery areas
Monitor foetus, as well as newborn within hospitals
Ultraview SL(TM) 2400 Patient monitoring at the All hospital care areas
bedside and in transport
Ultraview SL(TM) 2700 Patient monitoring at the All hospital care areas
bedside
Ultraview SL(TM) 2800 High-end patient monitoring at All hospital care areas
the bedside
Ultraview SL(TM) 3800 Centralised, real-time Central nurses' stations within
monitoring surveillance of hospitals
patients
Ultracare(TM) ADS 180* Anaesthesia machine/ventilator Operating rooms in public and
with low performance ventilator private hospitals
Ultracare(TM) ADS 190* Anaesthesia machine/ventilator Operating rooms in public
with high performance hospitals
ventilator
Ultracare(TM) SLP 100* Patient monitoring Operating rooms and post
anaesthesia care units in
hospitals
TruLink(TM) Pulse oximetry sensors All hospital care areas
Datum(TM) Vapouriser Vaporisation of inhalational Ambulatory surgery centres
anaesthesia Operating rooms
Focus(TM) Anaesthesia Anaesthesia machine/ventilator Ambulatory surgery centres
Delivery System for delivery of inhalational Operating rooms
anaesthesia
Genius(TM) MRI Anaesthesia machine/ventilator Anaesthesia induction areas
Anaesthesia Delivery for delivery of inhalational within hospitals MRI scanning
System anaesthesia facilities
Sirius(TM) Anaesthesia Anaesthesia machine/ventilator Ambulatory surgery centres
Delivery System for delivery of inhalational Operating rooms
anaesthesia
Model 2100/2150 Pulse Vital signs monitoring of Critical care units within
Oximeters critically ill patients hospitals
Voyager(TM) Pulse Oximeter Spot check assessment of Critical care units within
critically ill patients hospitals
Model 2000/3000 Pulse Sensors that are compatible Recurring sales for use with
Oximetry Sensors with products made by other pulse oximeters and monitors
manufacturers of pulse oximetry
products
DexaCare(R) G4 DEXA Detection, diagnosis, and follow Physician offices
Bone Densitometer up of treatment of osteopenia Integrated practice groups
and osteoporosis Medical clinics
Small hospitals
DTX-200 (TM) DEXA Bone Detection, diagnosis, and follow Physician offices
Densitometer up of treatment of osteopenia Integrated practice groups
and osteoporosis Medical clinics
Small hospitals
DTU-One (TM) Ultrasound Detection of osteopenia and Physician offices
Scanner osteoporosis Integrated practice groups
Medical clinics
Small hospitals
* UltracareTM products are GE Healthcare OEM products and can be sold by the
Group only in the EEA
- --------------------------------------------------------------------------------
12
PART 1 -- INFORMATION ON THE GROUP
- --------------------------------------------------------------------------------
CUSTOMERS
The Group's medical monitoring, anaesthesia systems and pulse oximetry products
are manufactured and distributed internationally for use in critical care,
emergency and perioperative areas within hospitals. In addition, the Group's ABP
monitors, pulse oximetry products and bone densitometers are sold to clinics and
physicians' offices. The Group's medical data business provides ECG laboratory
services for drugs under clinical trials.
The following is a representative list of customers, (some of whom have been
customers in excess of twenty years) and/or installations that have purchased
the Group's patient monitoring and anaesthesia products:
EUROPEAN UNITED STATES ASIA/PACIFIC OTHER REGIONS
- -------- ------------- ------------ -------------
Diaconessenhuis Albany Medical Center, Beijing People Hospital, AMS Turkey,
Meppel, Netherlands Albany, NY China Turkey
Evangelisches Krankenhaus Condell Medical Center, Shanghai Public Al Faisaliah, Saudi Arabia
Bethesda, Germany Liberty, IL Health Centre,
China
Klinik St. Josef, Duke Univ. Medical Center,
Belgium Durham, NC Chi Mei Hospital, Taiwan
LKW Villach, Harborview Medical Center, Amrita Institute of Medical
Austria Seattle, WA Sciences & Research Centre,
India
St. Elisabeth Lakeland Regional
Ziekenhuis, Netherlands Medical Center, John Hunter Hospital,
Lakeland, FL Australia
Ulleval Sjukhus,
Norway Methodist Hospital, Prince of Wales Hospital,
Houston, TX Australia,
Universitatsspital
Zurich, Switzerland, Northside Hospital, St Vincent's Hospital,
Atlanta, GA Australia
The Royal London Hospital,
East Mount Street, Spartanburg Reg.
UK Healthcare System,
Spartanburg, SC
Norfolk & Norwich
University, Hospitals, UK Tulane Univ. Hospital
and Clinic,
New Orleans, LA
Women & Infants Hospital,
Providence, RI
MARKET OPPORTUNITIES
Many factors such as a nursing shortage in both the US and Europe, stricter
government requirements affecting the staffing and accountability of healthcare
providers, and shrinking reimbursements from health insurance organisations are
forcing healthcare providers to do more with less, i.e. improve patient safety
and economic efficiency with fewer resources. The Group designs, manufactures
and markets products that address these economic forces by helping hospitals
reduce costs whilst maintaining or improving the quality of care their
physicians and nurses are able to deliver.
PATIENT MONITORING
The worldwide hospital based patient monitoring market is estimated by Frost &
Sullivan, an independent research organisation, to be in excess of US$2.3
billion (including ambulatory telemetry) and is growing at approximately 4 per
cent. annually. This market can be divided into two broad product segments:
multi-parameter patient monitors and patient worn ambulatory telemetry
monitoring. The multi-parameter monitoring segment comprises a variety of care
environments including emergency departments, operating and recovery rooms,
intensive care units and transport monitoring. The Group was a pioneer in
patient worn ambulatory telemetry monitoring which is growing more rapidly than
the broader patient monitoring market, especially in the US where telemetry
monitoring alone is worth over US$300 million and is growing in excess of 15 per
cent. per year. Telemetry monitoring is used in intensive care units, many
cardiac care units and some emergency departments where patients often need to
be ambulatory and, therefore, detached from their monitors.
The major vendors in this market include Phillips, GE Healthcare, Spacelabs
Medical, Datascope, Nihon Koden, Welch Allyn and a number of smaller companies.
- --------------------------------------------------------------------------------
13
PART 1 -- INFORMATION ON THE GROUP
- --------------------------------------------------------------------------------
ANAESTHESIA
The market for anaesthesia delivery products in the US and Europe is estimated
by Frost & Sullivan to be worth in excess of US$700 million. This market is
categorised by the Executive Directors into three major segments.
In the Executive Directors' view, the largest market segment is comprised of
full system producers who sell complete anaesthesia systems marketing their
total package products globally. This segment is currently dominated by
Dragerwerk AG and GE Healthcare. Blease Medical Equipment Limited is a full
system producer, selling its anaesthesia systems under the brand names "Focus
(TM) " and "Sirius (TM) ". OEM anaesthesia products distributed by Blease
Medical Holdings in the European Union are marketed under the "Ultracare (TM) "
brand name.
The second segment is comprised of local producers or assemblers of anaesthesia
systems, with anaesthesia delivery systems being supplied not as a single
solution but assembled from components manufactured by other companies. Blease
Medical Equipment Limited is a supplier of components to this market segment.
The third segment is the supply of anaesthesia vapourisers to pharmaceutical
companies to support their promotion of anaesthetic agents; such supply is
typically to pharmaceutical companies which have provided vapourisers to their
customers, often on a gratis basis, to promote the introduction of anaesthetic
agents to hospitals. Blease Medical Equipment Limited sells products to such
pharmaceutical companies.
Blease Medical Holdings's principal competitor in the UK in the second and third
market segments referred to above is Penlon Limited.
PULSE OXIMETRY
The pulse oximetry market comprises two principal components:
o the sale of Pulse Oximetry devices, which is a market estimated by Frost &
Sullivan to be approximately US$350 million in the US; and
o the sale of Pulse Oximetry sensors which is a market estimated by Frost &
Sullivan and the Executive Directors to be worth approximately US$429
million in the US.
The US market is estimated by the Executive Directors to represent between 60-70
per cent. of the world-wide sensor market in value and is growing at a rate of
approximately 6 per cent. in the US.
Nellcor (a division of Tyco International, Inc.) is regarded by the Executive
Directors to be the largest company in this field and its sales of oximetry
sensors represent approximately 80 per cent. of the US market. Key markets for
pulse oximetry sensors and devices include, but are not limited to, the US, the
UK, France, Italy, Germany, and Japan.
AMBULATORY BLOOD PRESSURE
The market for Spacelabs Healthcare's ABP products is presently centred on drug
company co-marketing programmes, CROs, independent and government sponsored
clinical research studies, university hospitals and medical teaching centres,
specialists in the treatment of hypertension and private office-based physicians
from various medical specialties including cardiology, family/general practice,
internal medicine, endocrinology, nephrology, obstetrics, and paediatrics. The
Directors believe that growth opportunities exist within the government, managed
care, disease state management, sleep management, and employer health sectors.
Based upon the Company's internal estimates, the total US and international
markets for ABP products is estimated at US$22 million and is evenly split
between the US and international markets. In 2004 in the US, Medicare raised the
ABP reimbursement rate charged to physicians from US$45 to US$75 per ABP
procedure, involving screening for white coat hypertension. Other insurers
reimbursement rates range from US$75 to US$250 for ambulatory blood pressure
monitoring. Physicians now have a greater incentive to prescribe procedures that
require ABP monitors. The Executive Directors believe that the Group has sold
approximately 35,000 units into the global market in the last 12 years.
US unit sales of ABP systems have grown over the past four years with sales to
drug marketing programmes, CROs and large government grant research projects
providing growth opportunities.
MEDICAL DATA SERVICES
The market for cardiovascular testing services is estimated by the Executive
Directors to have grown from US$90 million to US$238 million per year, from 2000
to 2003. There are 8,000 to 10,000 clinical trials
- --------------------------------------------------------------------------------
14
PART 1 -- INFORMATION ON THE GROUP
- --------------------------------------------------------------------------------
conducted each year, with over 12 million electrocardiograms performed during
the course of clinical trials, and historically only 10 per cent. of those ECGs
have been interpreted through core laboratories such as those operated by
Spacelabs Medical Data.
Certain US-based equity analysts estimate the market to be between US$850
million and US$1.3 billion with estimated growth rates to be between 30 and 50
per cent. annually until end December 2006. The expected growth results from the
use of centralised digital ECG processing, instead of traditional paper based
methods. In addition, the anticipated market growth is as a result of US Food
and Drug Administration regulations and initiatives that require data to be
collected, analysed, interpreted, and reported in a prescribed electronic
format, as well as the standards being created by the International Committee on
Harmonisation. The FDA recommendations include requirements for all new drugs to
undergo ECG testing, and that the data must be acquired digitally and
interpreted by a cardiologist operating from a central location.
BONE DENSITOMETRY
The global market size for bone densitometry equipment is approximately
US$180-200 million annually, with the US market accounting for approximately 70
per cent. of this market.
The market can be split into axial (also called full-body) and peripheral (which
scans arms, hands and feet) bone densitometers. The axial market size is
approximately US$126-140 million, and the peripheral market is US$54-60 million.
The Group only supplies the peripheral market.
Many western populations are aging. As a population ages it becomes increasingly
susceptible to osteoporosis; the market size is therefore expected to grow. The
current market growth rate is estimated to be 5-6 per cent. annually.
The Executive Directors consider that there is an on going clinical debate as to
which technology should be used for diagnosis of osteoporosis, and to what
extent peripheral densitometry should be used for follow-up scans to determine
efficacy of treatment. This debate has had an impact on the adoption rate of
peripheral densitometers. Due to the slow adoption of the peripheral
densitometry technology by medical insurers in the US and Western Europe, market
sizes have been curtailed.
SERVICE SUPPLIES AND ACCESSORIES
The Group sells service maintenance contracts for most of its equipment and also
provides a replacement parts service. The Group derived approximately 12 per
cent. of revenue at 30 June 2005 from this activity. In addition, the Board
believes that a substantial market exists for disposable supplies such as
patient electrodes, specialty graph paper, sensors and connecting lead wires
that are used with medical equipment.
RESEARCH AND DEVELOPMENT
The Directors are committed to continuing the Group's history of technical
innovation by continuing to invest in research and development. The Group's
patient monitoring, pulse oximetry and bone densitometry solutions are designed
and engineered at facilities in Issaquah, Washington and in Hawthorne,
California (US). Such systems include mechanical, electrical, digital electronic
and software subsystems, all of which are designed by the Group. The Group's
anaesthesia products are designed and engineered in Issaquah, Washington (US)
and in Chesham, Buckinghamshire (UK). Additionally, the Company employs design
and development engineers in Hyderabad, India to support its efforts in the US
and UK.
- --------------------------------------------------------------------------------
15
PART 1 -- INFORMATION ON THE GROUP
- --------------------------------------------------------------------------------
CORPORATE STRATEGY
The Group's primary objective is to be a leading provider of innovative,
reliable and cost-optimised patient care solutions, through a focused
development of open standards, connectivity and networking to provide `on
demand' care to help care providers improve their quality of care and patient
safety.
Key elements of this strategy include:
IMPROVING EXISTING PATIENT CARE TECHNOLOGIES -- In March 2004, the Group's
activities were significantly enhanced through the acquisition of Spacelabs
Medical, a manufacturer and distributor of patient monitoring and clinical
information solutions for use primarily in hospitals. Spacelabs Medical develops
patient monitoring systems and solutions aimed at lowering false alarm rates,
thereby reducing time demands on physicians and nurses, improving patient
identification accuracy, thereby reducing physician and nursing errors and
providing them with more time to care for their patients. In connection with
these efforts, Spacelabs Medical is also pursuing cable-free medical sensors and
other wireless solutions that will allow for medical monitoring, patient data,
transmission, alarm notification, and other information to be instantly
transmitted at any time to those locations where the data will be needed. The
Group also continues to improve and develop patient monitors and accessories
that utilise pulse oximetry technologies. Overall, the Group's efforts at
improving existing medical diagnostic technologies will continue to concentrate
on the development of devices that make it possible for institutions from large
hospitals to small clinics and physicians' offices to obtain accurate, precise,
reliable and cost-effective results.
ACQUIRING NEW COMPANIES AND TECHNOLOGIES -- The Group has acquired new companies
and technologies which the Executive Directors believed would provide
opportunities to reduce manufacturing costs, enhance research and development
efforts, open new sales and service channels or otherwise leverage existing
products against complementary systems and markets. For example, the Group's
strategy is to undertake demand-flow manufacturing techniques developed by
Spacelabs Medical in its manufacturing locations worldwide. It is also planning
research and development projects aimed at developing perioperative solutions
that combine "Spacelabs Medical (TM) " monitoring systems with "Blease (TM) "
anaesthesia machines. Since April 2005, "Dolphin Medical (Trade Mark) "
manufactured pulse oximetry sensors are being sold by Spacelabs Medical with its
patient monitors.
CAPITALISING ON GLOBAL PRESENCE -- The Group operates from locations in North
America, Europe and Asia and also has a distribution network in Latin America
and the Middle East. The Executive Directors believe that the Group's
international operations provide important strategic and operational benefits.
Firstly, international manufacturing facilities allow the Business to take
advantage of competitive labour rates in order to be a low cost producer.
Secondly, the Directors believe that having a local presence in major markets
strengthens the Business's ability to provide a more customer-oriented,
localised service and provides direct access to growing global markets and to
its existing international customer base. In future, the Group intends to
further develop its manufacturing and sales capabilities to maintain and enhance
the benefits of the Business's international presence.
SELECTIVELY ENTERING NEW MARKETS -- The Group intends to target new markets that
complement its capabilities in the design, development, distribution and
manufacture of existing medical solutions. The Directors believe that the Group
can utilise its existing integrated design and manufacturing infrastructure to
capture greater margins and to build a larger presence in those new medical
device markets that present attractive opportunities. The Directors believe that
this strategy can be achieved through internal growth and through acquisitions
of and partnerships with other medical device companies.
In addition to the strategies outlined above, it is intended that future revenue
growth will be derived from the continuation of the Group's strategy to capture
the replacement business from its installed base of patient monitors, the sale
of pulse oximetry sensors to this installed base, cross-selling anaesthesia and
monitoring solutions and by introducing anaesthesia products into the North
American and Japanese markets.
FUTURE TRADING BETWEEN OSI SYSTEMS & SPACELABS HEALTHCARE
Following Admission, OSI Systems and UDT Sensors will own 65 per cent. of the
Shares of Common Stock of Spacelabs Healthcare. Although Spacelabs Healthcare
will be an OSI subsidiary, and there will be some overlap of management and the
sharing of IT, certain leasehold premises and head office costs, Spacelabs
Healthcare will be run as a free-standing discrete entity.
- --------------------------------------------------------------------------------
16
PART 1 -- INFORMATION ON THE GROUP
- --------------------------------------------------------------------------------
A relationship agreement has been entered into governing the future trading
relationship between Spacelabs Healthcare and OSI, details of which are provided
in paragraph 9.1(ix) of Part 7 of this document, requiring the parties to trade
on an arm's length basis.
In addition, a master intercompany agreement has been entered into between
Spacelabs Healthcare and OSI which includes terms in respect of potential
manufacturing proposals between the companies which are likely to involve the
provision of electronic and opto-electronic components, sensor cables,
microchips and printed circuit boards. Certain head office and administrative
functions will also be performed by OSI on behalf of Spacelabs Healthcare under
this agreement. This agreement also governs the terms of the loan from OSI to
Spacelabs. Further details of the agreement are provided in paragraph 9.1(ii) of
Part 7 of this document.
MANUFACTURING
The Company has manufacturing facilities in Hawthorne, (California) Issaquah
(Washington), Chesham (UK) and Hyderabad (India). Much of the Group's high
volume, labour intensive manufacturing and assembly is performed either in India
or by OSI's subsidiaries in Malaysia and California. Since most of the Company's
customers currently are located in Asia, Europe and the United States, its
ability to assemble products in these markets and provide follow-on service from
offices located in these regions is an important component of the Company's
overall corporate strategy.
DISTRIBUTION
The Group markets and sells its medical monitoring and anaesthesia systems using
a direct sales force and has marketing staff of approximately 240 personnel and
service personnel of approximately 260. The Group has direct marketing and sales
organisations in the US, UK, Canada, France and Germany. In addition, the Group
has a network of independent distributors in approximately 90 countries, managed
from offices located in the US, UK, Finland, France, Germany, Italy, Greece,
Singapore and Australia. It also supports these sales and customer service
efforts by providing software updates and upgrades, and service training for
customers' biomedical staff and distributors.
The Directors consider the Group's maintenance service operations to be an
important element of its business. The Group provides a variety of service and
support options for its customers globally, ranging from complete on-site repair
and maintenance service and telephone support, to part exchange programmes for
customers with the internal expertise to perform a portion of their own service
needs.
COMPETITION
In the markets in which the Group operates competition is based on a variety of
factors including product performance, functionality, value, breadth of sales
and service organisation. The Executive Directors believe that the Group's
principal competitors in the market for patient monitoring, pulse oximetry and
anaesthesia products are Philips Medical Systems, GE Medical Systems, Dragerwerk
AG, Datascope Corp., Nihon Kohden Corporation, Nellcor, a division of Tyco
International, Inc. and Massimo Corporation. Key competitors of the Medical Data
business include eResearch, Inc., Biomedical Systems and Covance Inc.
The Executive Directors believe that the Group's patient monitoring products are
easier to use than the products of many of its competitors as they offer a
consistent user interface throughout many product lines. Furthermore, the
monitors of Spacelabs Medical are backward/forward compatible, meaning that new
Spacelabs Medical's monitors can interface with existing Spacelabs Medical's
monitor models, thus offering investment protection to the Group's customers.
Whilst some of the Company's competitors are beginning to introduce portal
technology, allowing remote access to data from the bedside monitor, central
station or other point of care, the Executive Directors believe that the
Company's version is superior in bringing instant access to labs, radiology and
charting at the point of care. The Company's strategy is to protect its
installed base of systems, through improving technology and providing superior
customer service, thus protecting customer investments and capturing replacement
sales.
PULSE OXIMETRY
Nellcor is regarded by the Executive Directors to be the major company in this
field, producing oximetry sensors representing approximately 80 per cent. of the
US market. Key markets for pulse oximetry sensors and devices include, but are
not limited to the US, UK, France, Italy, Germany, and Japan.
- --------------------------------------------------------------------------------
17
PART 1 -- INFORMATION ON THE GROUP
- --------------------------------------------------------------------------------
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS
SIR JOHN MICHAEL MIDDLECOTT BANHAM, (aged 65), Chairman, (Non-executive)
John is a successful businessman and a former management consultant who has held
senior business and public sector appointments in the UK for over 20 years. John
recently retired as chairman of Whitbread PLC and is currently chairman of ECI
Ventures Group, a leading provider of venture capital for mid-market management
buyouts and of Cyclacel Limited, a cancer biopharmaceutical company. He is also
the senior non-executive director of AMVESCAP PLC, and a non-executive director
of Merchants Trust PLC.
John was the chairman of Geest plc from August 2002 to March 2005 when the
business was acquired by Bakkav|f-r, and the chairman of Kingfisher PLC from
February 1996 to December 2001, when he stood down following a successful
sale/de-merger of the group's general merchandise business and property
business. He was chairman of Tarmac PLC from February 1994 until March 2000 when
the Group was acquired by Anglo American PLC in an agreed bid following the
de-merger of Carillion PLC. John was the first chairman of the Local Government
Commission for England from 1992-1995 and was founding chairman for Westcountry
Television Limited (now part of ITV plc). John was director general of the
Confederation of British Industry (CBI) from 1987 to 1992. He was the first
controller (chief executive) of the Audit Commission when it was established in
1983. The Audit Commission was set up to monitor efficiency and seek better
value for money in local government. Under John's leadership it identified
improvements worth over (pounds)2 billion a year and launched a number
of reforms. He held that position until 1987 when he left to become
director-general of the CBI. In 1969 John joined the management consultants,
McKinsey & Co, becoming a principal in 1975 and director in 1980. During this
period he was responsible for major consultancy assignments in the health
sectors in the UK, North America and continental Europe.
GEORGE MACDONALD KENNEDY, CBE (aged 65), Vice Chairman, (Non-executive)
George Kennedy holds a number of senior and non-executive roles that combine to
provide an insight into business operations worldwide. Following a career in the
healthcare industry with Smiths Group plc (formerly Smiths Industries) from 1973
to 2000, George was appointed to the board of Smiths Group in 1983, later
becoming executive director and chairman of the medical division. In 1997 he was
awarded a CBE for services to the UK healthcare industry and exports. George
also holds other directorships including, Chairman of Eschmann Holdings Limited,
a family business manufacturing high quality operating tables, electrosurgery,
sterilisation and suction equipment; deputy chairman of Vernalis, a UK
biotechnology company with priority developments in acute migraine, stroke and
Parkinson's disease: non-executive chairman of Carclo PLC a specialist in
technical plastics for the automotive, optical medical and teletronics
industries; non-executive director of Isotron PLC, Europe's foremost
sterilisation services provider; chairman of E2V Technologies PLC, a leading
supplier of industrial electronics; chairman of the Trade Advisory Group for
Africa and the Middle East, Department of Trade and Industry and president of
the Association of British Healthcare Industries. George is also the chairman of
Inprint Labels Ltd., a global specialist booklet and labelling business.
DEEPAK CHOPRA, (aged 54), Chief Executive Officer
Deepak Chopra is the founder of OSI and has served as president, chief executive
officer and a director of that company since OSI's inception in May 1987. He has
served as OSI's chairman since February 1992. Deepak also serves as the
president and chief executive officer of the Company's major subsidiaries. From
1976 to 1979 and from 1980 to 1987, Deepak held various positions with ILC
Technology, Inc. ("ILC"), a publicly-held manufacturer of lighting products,
including serving as chairman chief executive officer, president and chief
operating officer of its United Detector Technology division. In 1990, OSI
acquired certain assets of ILC's United Detector Technology division. Deepak has
also held various positions with Intel Corporation, TRW Semiconductors and RCA
Semiconductors. Deepak holds a Bachelor of Science degree in Electronics and a
Master of Science degree in Semiconductor Electronics.
RALPH EDWARD HUNTER, (aged 42), Chief Financial Officer
Ralph Hunter brings extensive financial and operational experience to Spacelabs
Healthcare, where he is responsible for company-wide financial management,
analysis and strategic planning. Ralph is a Chartered Accountant and member of
the ICAEW. Ralph began his career in public accounting, working with Coopers &
Lybrand in both the UK and the US before moving to the healthcare industry with
Schering-Plough
- --------------------------------------------------------------------------------
18
PART 1 -- INFORMATION ON THE GROUP
- --------------------------------------------------------------------------------
Pharmaceuticals in New Jersey. He joined Datex-Ohmeda in 1997 and played a key
role in the acquisition and subsequent restructuring of the Spacelabs Medical
business before ultimately joining the Spacelabs Healthcare management team.
NIKHIL ATUL MEHTA, (aged 48), Vice President Business Development
Nikhil Mehta joined OSI in 2002, and has been actively involved in several
acquisitions made by OSI since then. Prior to joining OSI, Nikhil was the chief
financial officer of Advanced Tissue Sciences, Inc., a NASDAQ listed
bio-technology company. His previous experience include managing director,
strategy and business development for Citibank Global Capital Markets; and vice
president/director, North American finance and also vice president finance, for
global document services at Xerox Corporation where he spent over 15 years. He
has a bachelor of commerce from Bombay University and an MBA from The Wharton
School, University of Pennsylvania.
STEVE CARY GOOD, (aged 63), Non-executive Director
Steve has served as a director of OSI since September 1987. He is a senior
partner in the accounting firm of Good, Swartz, Brown & Berns, which he founded
in 1976, and has been active in consulting and advisory services for businesses
in various sectors including the manufacturing, garment, medical services and
real estate development industries. He has extensive experience in acquisitions,
merger transactions and business valuations. Steve founded California United
Bancorp and served as its chairman between 1982 and 1992. In 1997, Steve was
appointed as a director of Arden Realty Group, Inc., a publicly--held real
estate investment trust (listed on the New York Stock Exchange: ARI). Since
October 1997, Steve has also served as a director of Big Dogs, Inc., a
corporation listed on NASDAQ: BDOG). Steve holds a bachelor of science degree in
business administration from the University of California, Los Angeles and
attended its graduate school of business. Steve is an active member of the
American Institute of Certified Public Accountants, the California Society of
Certified Public Accountants and the Nevada State Board of Accountancy. In
addition to his professional career, Steve is very active in the Los Angeles
community and has devoted a significant amount of his time to charitable
endeavours.
MEYER LUSKIN, (aged 80), Non-executive Director
Meyer has served as a director of OSI since February 1990. Since 1961, Meyer has
served as the president, chief executive officer and chairman of Scope
Industries Inc., which is engaged in the business of recycling and processing
food waste products into animal feed. Meyer has also served as a director of
Scope Industries Inc. since 1958 and currently serves as a director of Stamet,
Inc., an industrial solid pump manufacturer, Chromagen, Inc., a biotechnology
company, Alerion Biomedical, Inc. a biotechnology company, and Myricom, Inc. a
computer and network infrastructure company. Meyer holds a bachelor of arts
degree from the University of California, Los Angeles, and a MBA from Stanford
University.
SENIOR MANAGEMENT
DAVID TILLEY, (aged 55), President Spacelabs Medical
David is in charge of the Group's patient monitoring business and is also
responsible for developing and implementing manufacturing, supply chain and
distribution channel integration across the Group. He has a strong background in
finance as well as experience in manufacturing, operations and supply chain
management. David worked previously within Datex-Ohmeda (a division of
Instrumentarium Corp., acquired by General Electric in 2003) and its predecessor
companies for more than two decades.
JIM ROOP, (aged 50), President Medical Solutions
Jim is president of four companies within the Group and is in charge of the
Medical Solutions business. Jim served as vice president and general manager of
US monitoring sales for Spacelabs Medical and, following the acquisition by
Instrumentarium Corp., as vice president of corporate accounts for
Instrumentarium and Datex-Ohmeda. In his current capacity, Jim is also
responsible for identifying synergies amongst the companies he heads in
California and Washington.
NICHOLAS ONG, (aged 40), President Blease Medical Holdings
Nicholas is in charge of the Group's anaesthesia business. Prior to this
appointment, Nicholas was responsible for Spacelabs Medical's strategic
marketing and business development. He was the president of Asia-Pacific for
Datex-Ohmeda before joining Spacelabs Medical, and during the GE Healthcare's
acquisition of Instrumentarium, led the integration team for Asia-Pacific.
Nicholas has 16 years experience
- --------------------------------------------------------------------------------
19
PART 1 -- INFORMATION ON THE GROUP
- --------------------------------------------------------------------------------
in the diagnostics and medical equipment industry and is a member of the
Singapore Institute of Management and the Singapore Institute of International
Affairs. In his current capacity, Nicholas is also responsible for identifying
synergies between Spacelabs Medical and Blease operations.
ROY HAYS, (aged 54), Chief Technology Officer
Roy is responsible for the acquisition and development of technology that
supports business outcomes, productivity and growth. Part of his role is to
ensure that the technology visions of all the Group are aligned where
appropriate and that all Group companies employ best practices. In addition, Roy
has direct responsibility for Spacelabs Medical's regulatory and quality
affairs. Roy has more than 25 years experience in the medical products field,
including 18 years at Spacelabs Medical, where he served as Vice President of
Product Development.
JOSEPH DAVIN, (aged 50), President Global Sales and Marketing, Spacelabs Medical
Joe brings strong leadership experience to his role as president of global sales
and marketing for the Group. He currently directs Spacelabs Medical's worldwide
marketing, sales, service, and customer support teams and was previously
president, Spacelabs Medical North America, where his focus was on strengthening
US and Canadian operations. This organisation sells Spacelabs Medical, Blease
and Dolphin Medical products. Joe helped facilitate the acquisition of Spacelabs
Medical by OSI and was also responsible for the earlier incorporation of
Spacelabs Medical's North American sales channels by Instrumentarium. Joe
originally joined Instrumentarium in 1992 as the Datex US vice president of
North American sales. He later served as general manager of the Datex-Ohmeda US
Critical and emergency care business.
VICTOR SZE, (aged 38) Company Secretary and General Counsel
Victor Sze was appointed General Counsel, vice president of corporate affairs of
OSI in March, 2002. In November, 2002, Victor was appointed Secretary of the
Company and in 2003 he was named executive vice president of OSI. From 1999
through November 2001, Victor served as in-house counsel to Interplay
Entertainment Corp., a developer and worldwide publisher of interactive
entertainment software, holding the title of Director of Corporate Affairs.
Prior to joining Interplay Entertainment Corp., Victor practiced law with the
firm of Wolf, Rifkin & Shapiro in Los Angeles. Victor holds a bachelors' degree
in economics from the University of California, Los Angeles and a juris
doctorate from Loyola Law School. Victor is general counsel and company
secretary of Spacelabs Healthcare.
KARITA SALOKANGAS, (aged 35) Associate General Counsel
Karita is responsible for Spacelabs Healthcare's legal affairs worldwide. She
also acts as the associate general counsel for OSI. Her experienced team
consists of two US-based legal counsels and three assistants. In addition to
Spacelabs Medical, her team covers legal affairs for the other Spacelabs
Healthcare companies, as well as supporting other OSI businesses jointly with
the OSI corporate legal team. Karita was formerly legal counsel, responsible for
international legal matters for Instrumentarium (Finland) from December 1996 to
May 1998 and was formerly Director of Legal Affairs for Datex-Ohmeda worldwide.
Karita holds a Master of Laws from Helsinki University Law School, Finland.
EMPLOYEES
As at 30 June 2005, the Group employed approximately 1,050 full-time employees,
including those of the Directors appointed at such time. As the business
develops, the Directors intend to recruit additional staff with appropriate
experience.
EMPLOYEE STOCK OPTION SCHEMES
The Directors recognise the vital role of its staff in contributing to the
overall success of the Group and the importance of the Group's ability to
incentivise and motivate its employees. Therefore, the Directors believe that
employees should be given the opportunity to participate and take a financial
interest in the success of the Group.
Details of stock options to be granted to the Executive Directors and a summary
of the New Stock Option Scheme are set out in paragraph 5 of Part 7 of this
document.
CORPORATE GOVERNANCE
The Directors support high standards of corporate governance and confirm that
following Admission the Company intends, where practicable, having regard to the
current stage of development of the Company, to
- --------------------------------------------------------------------------------
20
PART 1 -- INFORMATION ON THE GROUP
- --------------------------------------------------------------------------------
comply with the main principles of the Combined Code. The Company will adopt and
operate a Common Stock dealing code for Directors and senior employees on
substantially the same terms as the Model Code.
The Board has established an Audit Committee and a Governance and Governance and
Remuneration Committee with formally delegated duties and responsibilities. Upon
Admission, Sir John Banham, George Kennedy and Meyer Luskin will be members of
the Governance and Remuneration Committee. Sir John Banham, George Kennedy and
Steve Good will be members of the Audit Committee. Sir John Banham will chair
the Audit Committee and George Kennedy will chair the Governance and
Remuneration Committee.
The Audit Committee will normally meet three times a year and has responsibility
for, amongst other things, planning and reviewing the Group's annual report and
accounts and interim statements and involve, where appropriate, the Group's
auditors. The Committee will focus particularly on compliance with legal
requirements and accounting standards. It is also responsible for ensuring that
an effective system of internal controls is maintained. The ultimate
responsibility for reviewing and approving the annual accounts and interim
statement remains with the Board.
The Governance and Remuneration Committee, which will meet three times a year,
has responsibility for making recommendations to the Board on the compensation
of senior executives and determining, within agreed terms of reference, the
specific remuneration packages for each of the Executive Directors. It also
operates the Stock Option Schemes and sets performance conditions which must be
satisfied before options can be exercised. It will also have responsibility for
reviewing the size and composition of the Board and appointment of replacement
and/or additional directors and making appropriate recommendations to the Board.
The Combined Code states that the board of directors of a UK public company
should include a balance of executive and non-executive directors. Smaller UK
public companies (being those that are below the FTSE 350 throughout the year
immediately prior to the reporting year) should have at least two independent
non-executive directors and one of those independent non-executive directors
shall be appointed the senior non-executive director, which, on Admission, will
be Sir John Banham. The Combined Code further provides that a majority of
non-executive directors should be independent of management and free from any
business or other relationship which could materially interfere with the
exercise of their independent judgement. The Directors are satisfied that the
Group will, on Admission, comply with the requirements of the Combined Code so
far as possible having regard to the size and current state of development of
the Group.
FINANCIAL INFORMATION ON THE GROUP
The table below sets out a summary financial information for the Group for the
year ended 30 June 2005. This information has been extracted from the audited
financial information set out in Part 3 of this document.
Prospective investors should read the whole of this document and should not rely
solely on this summary.
SUMMARY STATEMENT OF OPERATIONS
US$
Revenues ....................................................... 195.7 million
Gross Profit ................................................... 89.7 million
Income from operations ......................................... 7.1 million
Net Income ..................................................... 4.6 million
The Group generated revenues of US$195.7 million for the fiscal year ended 30
June 2005. This included revenues of Blease Medical Holdings from 8 February
2005, the date of the acquisition of Blease Medical Holdings Ltd by OSI. Pre-tax
income was US$7.1 million, with net income of US$4.6 million.
CURRENT TRADING AND PROSPECTS
Since 30 June 2005, Spacelabs Healthcare has continued to trade in line with the
Executive Directors' expectations. In particular, patient monitoring has
experienced a sales growth of 11 per cent. for fiscal year ended 30 June 2005.
The Group uses a management tool which tracks the "sales funnel" of the patient
monitoring business, i.e. tracks sales opportunities for equipment sales through
to actual sales. This sales funnel has grown from
- --------------------------------------------------------------------------------
21
PART 1 -- INFORMATION ON THE GROUP
- --------------------------------------------------------------------------------
US$471 million (US$446 million in North America) in April 2004, the month
following OSI's acquisition of Spacelabs Medical, to US$837 million (US$665
million in North America) in July 2005 and to US$964 million (US$775 million in
North America) in September 2005.
The newly introduced Ultraview SLTM series of monitors launched in the fiscal
year ended 30 June 2005 have gross margins of approximately 5 percentage points
higher than the products they have replaced. These new products have gained
market acceptance in the US and represented over 90 per cent. of the Group's US
patient monitoring sales in the month of June 2005. The Board believes that the
Group's gross margins will benefit as these products gain international market
acceptance.
The Board is confident that the Admission will allow the Group to position
itself in the UK in a market that will allow it to increase awareness of the
Group and its activities in the UK and Europe and will facilitate acquisition
opportunities.
PROPERTIES
The Group's manufacturing facilities are based in Issaquah, Washington US,
Chesham UK and Hyderabad India, all of which are leased facilities. In addition,
the Group leases sales offices in several countries. The Group shares office and
manufacturing space with OSI in Hawthorne California, US. Further details of the
Group's properties are set out in paragraph 15 of Part 7 of this document.
DIVIDEND POLICY
The Executive Directors anticipate that they will retain any available funds for
the benefit of the Group in the operation of the Business. The Board does not
currently intend to pay any cash dividends for the foreseeable future. OSI's
current bank credit facilities restrict the payment of cash dividends by OSI,
certain of its subsidiaries, the Company, and certain of its subsidiaries, the
Company and certain members of the Group and future borrowing may contain
similar restrictions.
REASONS FOR THE PLACING AND USE OF PROCEEDS
The Placing, if fully subscribed, will raise approximately (pounds) o
million (US$ o million), net of expenses, for the Company.
The Executive Directors believe that the Admission and raising of new funds
through AIM is an important step in achieving the Group's objective in building
a leading healthcare business in the growing healthcare market. (pounds)o (US$ o
million) of the proceeds of the Placing will initially be used to repay part of
Spacelabs Healthcare's debt to OSI Systems. At 30 June 2005 the debt owed by the
Group to OSI amounted in aggregate to approximately (pounds) o million (US$57
million) and additionally, to provide capital for organic growth, research and
development and future acquisitions for the benefit of Spacelabs Healthcare. The
terms on which OSI Systems provides loan facilities to the Company are set out
in the master intercompany agreement summarised in paragraph 9.1(ii) of Part 7
of this document.
The Directors believe that Admission will provide the Group with a currency, in
the form of its Shares of Common Stock, additional to cash, for any potential
future acquisitions and will also allow the Group to incentivise its employees
through its Stock Option Schemes, which will assist the Group in continuing to
attract, retain and motivate high calibre employees.
BANK CREDIT FACILITY
Certain of the Group's assets are included with those of OSI as collateral under
a credit facility from the Bank of the West.
The Company has access to working capital through inter-company funding from
OSI, including funds available under the credit facility from Bank of the West.
The Group intends to seek an independent credit facility as soon as practicably
possible after the Placing and Admission. Details of this sharing arrangement
are included in the master intercompany agreement between Spacelabs Healthcare
and OSI Systems set out in paragraph 9.1(ii) of Part 7 of this document.
DETAILS OF THE PLACING
The Company is issuing [up to] o Placing Shares by way of the Placing to
institutional investors to raise approximately (pounds)35 million
(US$[65] million), net of expenses (assuming full subscription).
- --------------------------------------------------------------------------------
22
PART 1 -- INFORMATION ON THE GROUP
- --------------------------------------------------------------------------------
The Placing Shares, if fully subscribed, will represent approximately 35 per
cent. of the Enlarged Share Capital of the Company.
Details of the Placing Agreement are set out in paragraph 9.1(viii) of Part 7 of
this document.
On Admission, the Placing Shares will be issued credited as fully paid and will,
on issue, rank pari passu with the Shares of Common Stock already in issue,
including the right to receive, in full, all dividends and other distributions
thereafter declared, made or paid.
ADMISSION
It is expected that Admission will become effective on o October 2005 and that
definitive stock certificates in respect of the Placing Shares will be
despatched on or before o 2005.
LOCK-IN/ORDERLY MARKET ARRANGEMENTS
The Directors, OSI Systems and UDT Sensors have entered into lock-in agreements
with Collins Stewart in respect of o Shares of Common Stock (representing 65 per
cent. of the issued Shares of Common Stock following the Placing) preventing
such shareholders, subject to certain limited exceptions, making a disposal of
Shares of Common Stock held by them (or entering into a transaction with the
same economic effect) during the period of 12 months after Admission save with
the prior written consent of the Company and Collins Stewart. After this time
they will be required for a further period of 12 months to trade in the Shares
of Common Stock only through Collins Stewart (or the Company's then broker) for
the purpose of preserving an orderly market in the Shares of Common Stock.
US TRANSFER RESTRICTIONS
The Shares of Common Stock will not be registered under the US Securities Act or
qualify under any US state securities laws and, thus, may not be offered or sold
in the United States or to, or for the account or benefit of, any US persons as
defined in Regulation S. Accordingly, the issue of the Placing Shares is being
made in reliance on Regulation S to non-US persons in off-shore transactions.
The Placing Shares are subject to the restrictions on transfer set out in
paragraph 17 of Part 7 of this document including a restriction against hedging
transactions involving the Placing Shares unless conducted in compliance with
the US Securities Act, and share certificates will be endorsed with reference to
such transfer restrictions. Regulation S prohibits the resale or re-distribution
of the Placing Shares into the US or to a US Person (as defined therein) for a
period of one year from the date of issue. Persons subscribing for Placing
Shares and subsequent purchasers of Shares of Common Stock will be deemed to
have agreed to the transfer restrictions set out in paragraph 17 of Part 7 of
this document and to have agreed not to effect transfers of the Shares of Common
Stock except to transferees who also agree to the restrictions, where the
restrictions are still applicable.
Further details of the transfer restrictions applying to the Shares of Common
Stock are set out in paragraph 17 of Part 7 of this document.
CREST
CREST is a paperless settlement procedure enabling securities to be evidenced
otherwise than by a certificate and transferred otherwise than by a written
instrument in accordance with the Uncertificated Securities Regulations 2001.
Due to the restrictions imposed by the US Securities Act explained above, the
Shares of Common Stock will be settled in certificated form and will not be
settled through CREST. Accordingly, the Company has not applied for the Shares
of Common Stock to be admitted to CREST. The Directors intend to apply for the
Shares of Common Stock to be settled in CREST once the transfer restrictions set
out above cease to remain in effect.
TAXATION
Further information regarding United Kingdom and US taxation is set out in
paragraph 13 of Part 7 of this document. If you are in any doubt as to your tax
position, you should contact your professional adviser immediately.
TAKEOVER OFFERS (KNOWN AS TENDER OFFERS IN THE US)
US Federal securities laws regulate certain takeover activities. The Williams
Act regulates tender offers. The Williams Act is intended to provide
shareholders with adequate notice of the sale or purchase of significant
- --------------------------------------------------------------------------------
23
PART 1 -- INFORMATION ON THE GROUP
- --------------------------------------------------------------------------------
amounts of a company's capital stock, including a battle for control of a
corporation in order to allow shareholders the opportunity to make an informed
decision.
The Williams Act requires a person or persons in the process of acquiring a
substantial number of equity securities of a company to notify the target
company and the SEC that they have made such acquisitions, and to notify their
intentions to control the target company. Under these provisions, one person or
persons acquiring outstanding shares of a class of securities registered under
the Securities Act who thereby become the owner of more of the outstanding
shares, must file a schedule giving details of this acquisition with the SEC and
transmit a copy to the target company within 10 days of triggering the purchase.
In general, before the commencement of a tender offer subject to Section 14(d)
of the Williams Act, the bidder must file a tender offer statement with the SEC
which must identify the bidder, the source of the bidder's funds and purpose in
making the offer, and any securities of the target company previously acquired
by the bidder, among other information. This information must also be disclosed
to the target company's shareholders. The rules permit a tender offer to be made
without any prior announcement or notice.
The above is qualified in its entirety by Section 14(d) of the Williams Act and
the rules and regulations promulgated under it which prescribe specific filing
and disclosure requirements and exceptions and exemptions therefrom. This is a
complex area of the law with many requirements and exclusions depending upon the
nature of the tender offer and the facts and circumstances involved. Depending
upon the size of the transaction and nature of the parties involved, tender
offers may also trigger compliance with the US federal anti-trust statutes known
as the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
The By-laws contain provisions which incorporate certain of the rules and
arrangements set out in the UK City Code on Takeovers and Mergers further
details of which are summarised in paragraph 4.2 of Part 7.
FURTHER INFORMATION
Your attention is drawn to the further information set out in Parts 2 to 7 of
this document.
- --------------------------------------------------------------------------------
24
- --------------------------------------------------------------------------------
PART 2 -- RISK FACTORS
An investment in the Placing Shares is subject to a number of risks. The
investment offered in this document may not be suitable for all of its
recipients. An investment in the Group is only suitable for investors who are
capable of evaluating the risks and merits of such investments and who have
sufficient resources to bear any loss which might result from such investment.
The risks described below are not exhaustive and may not be the only risks faced
by the Group. Additional risks which are not presently known or are currently
deemed immaterial may also impair the Group's business, financial condition or
results of operations and as a result its prospects could suffer and in which
case investors could lose all or part of their investment. The Executive
Directors consider the following risks to be the most significant for potential
investors in the Company.
ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO THE GROUP OR TO THE
DIRECTORS OR THAT THE DIRECTORS CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR THE
GROUP'S BUSINESS OPERATIONS. THE BUSINESS FINANCIAL CONDITION OR RESULT OF
OPERATIONS OF THE GROUP COULD BE MATERIALLY AND ADVERSELY AFFECTED BY ANY OF
THESE RISKS. THE TRADING PRICE OF THE SHARES OF COMMON STOCK COULD DECLINE DUE
TO ANY OF THESE RISKS AND INVESTORS COULD LOSE ALL OR PART OF THEIR INVESTMENT.
AIM
The value of the Shares of Common Stock may go down as well as up. Furthermore,
an investment in a share that is traded on AIM is likely to carry a higher risk
than an investment in a share listed on the Official List.
The market price of the Shares of Common Stock may not reflect the underlying
value of the assets of the Group. The market in the Shares of Common Stock may
be illiquid or subject to sudden or large fluctuations and it may be difficult
for investors to sell their Shares of Common Stock and they may receive less
than the amount originally invested.
STOCK VOLATILITY AND LIQUIDITY
The stock price of AIM companies can be highly volatile. The price at which the
Shares of Common Stock will be quoted and the price which investors may realise
for their Shares of Common Stock will be influenced by a large number of
factors, some specific to the Group and its operations and some which may affect
the quoted healthcare and pharmaceutical sector, or quoted companies generally.
These factors could include the performance of the Group's research and
development programmes, large purchases or sales of the Shares of Common Stock,
legislative changes in the healthcare environment and general economic
conditions.
Admission should not be taken as implying that there will be a liquid market for
the Shares of Common Stock. It may be more difficult for an investor to realise
his investment on AIM than to realise an investment in a company whose Shares of
Common Stock are quoted on the Official List. The Shares of Common Stock will
not be traded in uncertificated form through CREST. Trading shares in
certificated form is inevitably a slower and more cumbersome process.
Fluctuations in operating results may cause the Company's stock price to
decline.
Given the nature of the markets in which the Company participates, the Executive
Directors cannot reliably predict future revenues and profitability. Changes in
competitive, market and economic conditions may cause the Group to adjust its
operations. A high proportion of the Business's costs are fixed, due in part to
significant sales, research and development, and manufacturing costs. Thus,
relatively small changes in revenue disproportionately affect the Group's
operating results. Factors that may affect the Group's operating results and the
market price of the Common Stock include:
o demand for and market acceptance of the Group's products;
o competitive pressures resulting in lower selling prices;
o adverse changes in the level of economic activity in regions in which the
Group operates;
o adverse changes in industries, such as semiconductors and electronics, on
which the Business is particularly dependent;
o changes in the portions of the Group's revenue represented by various
products and customers;
o delays or problems in the introduction of new products;
o the announcement or introduction of new products, services or technological
innovations by the Group's competitors;
- --------------------------------------------------------------------------------
25
PART 2 -- RISK FACTORS
- --------------------------------------------------------------------------------
o variations in the Group's product mix;
o the timing and amount of expenditure in anticipation of future sales;
o increased costs of raw materials or supplies; and
o changes in the volume or timing of product orders.
THE COMPANY FACES AGGRESSIVE COMPETITION IN MANY AREAS OF ITS BUSINESS
ACTIVITIES. IF THE BUSINESS DOES NOT COMPETE EFFECTIVELY, IT WILL BE HARMED.
The markets in which the Group operates are highly competitive and characterised
by evolving customer needs and rapid technological change. The Group competes
with a number of other manufacturers, some of which have significantly greater
financial, technical and marketing resources than Spacelabs Healthcare Group. In
addition, these competitors may have the ability to respond more quickly to new
or emerging technologies, adapt more quickly to changes in customer
requirements, have stronger customer relationships, have greater name
recognition, and may devote greater resources to the development, promotion and
sale of their products than the Group.
In the markets in which the Group operates, competition is also based on a
variety of factors including product performance, functionality, value, and
breadth of sales and service organisation. The Executive Directors believe that
the principal competitors are Philips Medical Systems, GE Medical Systems,
Dragerwerk AG, Datascope Corp., Nihon Kohden Corporation and Nellcor, a division
of Tyco International, Inc. Competition could result in price reductions,
reduced margins, and loss of market share. Although the Company has established
relationships with a number of large hospitals, there can be no assurance that
Spacelabs Healthcare Group will be able to successfully compete for their
business in the future with existing competitors or with new entrants.
IF THE BUSINESS DOES NOT INTRODUCE NEW PRODUCTS IN A TIMELY MANNER, ITS PRODUCTS
COULD BECOME OBSOLETE AND THE OPERATING RESULTS WOULD SUFFER.
The Company sells many of its products in industries characterised by rapid
technological changes, frequent new product and service introductions and
evolving industry standards. Without the timely introduction of new products and
enhancements, the Group's products could become technologically obsolete over
time, in which case the Business's revenue and operating results would suffer.
The success of new product offerings will depend upon several factors, including
the Group's ability to:
o accurately anticipate customer needs;
o innovate and develop new technologies and applications;
o successfully commercialise new technologies in a timely manner;
o price the Group's products competitively and manufacture and deliver
products in sufficient volumes and on time; and
o differentiate the Group's offerings from competitors' offerings.
The Business therefore must anticipate industry trends and develop products in
advance of the commercialisation of customers' products. In developing any new
product, the Business may be required to make a substantial investment before
determining the commercial viability of a new product. If the Group fails to
accurately foresee customers' needs and future activities, it may invest heavily
in research and development of products that do not lead to significant
revenues.
THE GROUP'S ACQUISITION AND ALLIANCE ACTIVITIES COULD DISRUPT THE ONGOING
BUSINESS.
The Directors intend to continue to make investments in companies, products, and
technologies, either through acquisitions, investments or alliances.
Acquisitions and alliance activities often involve risks, including: (i)
difficulty in assimilating the acquired operations and employees; (ii)
difficulty in managing product co-development activities with the Group's
alliance partners; (iii) retaining the key employees of the acquired operation;
(iv) disruption of the ongoing business; (v) inability to successfully integrate
acquired technologies and operations into the Group's businesses and maintain
uniform standards, controls, policies, and procedures; and (vi) lacking the
experience necessary to enter into new product or technology markets. In
addition, from time to time, the Group's competitors acquire or enter into
exclusive arrangements with
- --------------------------------------------------------------------------------
26
PART 2 -- RISK FACTORS
- --------------------------------------------------------------------------------
companies with whom the Group transacts business or may transact business in the
future. Reductions in the number of partners with whom the Group may do business
in a particular context may reduce the Group's ability to enter into critical
alliances on attractive terms or at all, and the termination of an existing
alliance by a business partner may disrupt the Group's operations.
One of the strategies of the Directors is to supplement internal growth by
acquiring businesses and technologies that complement or augment existing
product lines. This growth has placed, and may continue to place, significant
demands on management, working capital, and financial resources. The Business
may be unable to identify or complete promising acquisitions for many reasons,
including:
o competition among buyers;
o the need for regulatory approvals, including antitrust approvals; and
o the high valuations of businesses.
Some of the businesses that may be acquired may be marginally profitable or
unprofitable. For these acquired businesses to achieve acceptable levels of
profitability, the Board must improve its management, operations, products and
market penetration. The Board may not be successful in this regard and may
encounter other unexpected difficulties in integrating acquired businesses into
existing operations.
FINANCIAL REPORTING
The Group reviews internal controls over financial reporting procedures from
time to time. However, because of their inherent limitations, internal controls
over financial reporting may not prevent or detect misstatments. Also, internal
controls may not be adequate at any particular time because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Accordingly, internal controls over financial reporting cannot
provide absolute assurance of achieving financial reporting objectives.
MANUFACTURING AND MATERIALS MANAGEMENT
The Group has manufacturing facilities for its medical systems in Hawthorne,
California and Issaquah, Washington (US) and in Chesham (UK) and Hyderabad
(India). Much of the Business's high volume, labour intensive manufacturing and
assembly is performed either in India or by OSI's subsidiary in Malaysia. Since
most of the Group's customers currently are located in Asia, Europe and the
United States, its ability to assemble products in these markets and provide
follow-on service from offices located in these regions is an important
component of the Group's corporate strategy.
The Group purchases certain raw materials and sub-components from third parties
pursuant to purchase orders placed from time to time. Purchase order terms range
from three months to one year at fixed costs, but the Business does not have
guaranteed long-term supply arrangements with its suppliers. Any material
interruption in the Group's ability to purchase necessary raw materials or
sub-components could have a material adverse effect on the Group's business,
financial condition and results of operations.
REGULATION OF MEDICAL PRODUCTS
The medical monitoring and anaesthesia systems manufactured and marketed by the
Group are subject to regulation by numerous federal government agencies,
including the US Food and Drug Administration, and equivalent agencies in other
countries. They are also subject to various US and international electrical
safety standards.
The FDA has broad regulatory powers with respect to pre-clinical and clinical
testing of new medical products and the manufacturing, marketing and advertising
of medical products. It requires that all medical devices introduced to the
market be preceded either by a pre-market notification clearance order under
section 510(k) of the US Food, Drug and Cosmetic Act, or an approved pre-market
approval application. The process of obtaining 510(k) clearance typically takes
between three and six months, but can take substantially longer. The pre-market
approval application review process, on the other hand, can last more than a
year. To date, all of the medical monitoring and anaesthesia systems
manufactured and sold in the United States have required only 510(k) pre-market
notification clearance.
Such regulatory approvals, when granted, may require limitations on the
indicated uses for which a product may be marketed, and such product approvals,
once granted, may be withdrawn if problems occur after
- --------------------------------------------------------------------------------
27
PART 2 -- RISK FACTORS
- --------------------------------------------------------------------------------
initial marketing. Manufacturers of FDA-regulated products are subject to
pervasive and continuing governmental regulation, including extensive
record-keeping requirements and reporting of adverse experiences associated with
a product's manufacture and use. Compliance with these requirements is costly,
and failure to comply can result in, among other things, fines, total or partial
suspension of production, product recalls, failure of the FDA to review pending
marketing clearances or approval applications, withdrawal of marketing
clearances or approvals or even criminal prosecution.
Spacelabs Healthcare Group is also subject to regulation in the countries in
which it manufactures and markets its medical monitoring and anaesthesia
systems. For example, the commercialisation of medical devices in the European
Union is regulated under a system that presently requires all medical devices
sold in the European Union to bear the CE mark-an international symbol of
adherence to quality assurance standards, demonstrated fulfilment of the
essential requirements and clinical effectiveness. Spacelabs Healthcare's
manufacturing facilities in Hawthorne, California, Issaquah, Washington and
Chesham, United Kingdom are all certified to the International Organisation for
Standardisation's ISO 13485 standard for medical device companies. They are also
certified to the requirements of the European Medical Device Directive 93 / 42
EEC, which certification allows them to self-certify that newly manufactured
products can bear the CE mark.
FAILURE TO PROTECT THE BUSINESS'S INTELLECTUAL PROPERTY COULD IMPAIR ITS
COMPETITIVE POSITION.
Whilst the Group owns certain patents and trademarks, some aspects of the
Business cannot be protected by patents or trademarks. Accordingly, in these
areas there are few legal barriers that prevent potential competitors from
copying certain of the Group's products, processes, and technologies or from
otherwise entering into operations in direct competition with the Business.
The Group's products may infringe the intellectual property rights of others,
and resulting claims against the Business could be costly and prevent it from
making or selling certain products.
Third parties may seek to claim that the Group's products and operations
infringe their patent or other intellectual property rights. The Business may
incur significant expense in any legal proceedings to protect its proprietary
rights or to defend infringement claims by third parties. In addition, claims of
third parties against the Business could result in awards of substantial damages
or court orders that could effectively prevent the Group from making, using or
selling its products in the US or elsewhere.
The Group's ability to compete effectively depends, inter alia, on its
exploitation of technology. However, competitors may have already developed or
may develop substantially equivalent information or techniques or otherwise gain
access to the Group's technology. The Group's patent applications now pending or
which may be applied for in the future may not lead to patents being granted and
those patents already granted to the Group may not be sufficiently broad in
their scope to provide protection for the Group's intellectual property rights
against third parties. There cannot be any assurance as to the ownership,
validity or scope of any patents which have been, or may in the future be,
issued to the Group or that claims with respect thereto will not be asserted by
other parties. Substantial costs may be incurred and resources diverted if the
Group challenges the proprietary rights of others or is required to defend its
own proprietary rights.
The commercial success of the Group will also depend upon non-infringement of
patents granted to third parties who may have filed applications or who have
obtained or may obtain patents which might inhibit the Group's ability to
develop and exploit its own products. If this is the case, the Group may have to
obtain alternative technology or reach commercial terms on the exploitation of
other parties' intellectual property rights. There can be no assurance that the
Group will be able to obtain alternative technology or, if any licences are
required, that the Group will be able to obtain any such licence on terms
acceptable to the Group, if at all. This would have a material adverse effect on
the business of the Group.
Certain of the Group's proprietary technology is protected as confidential
know-how. Whilst the Group endeavours to maintain the confidentiality of such
information, there can be no guarantee that it will not be disclosed by
employees or third parties and thereby become available for use by competitors
or that competitors will not independently develop similar technology.
The Directors believe that certain patents, trademarks, and licenses are
important to the Business. The loss of some patents, trademarks, or licenses
might have a negative impact.
REQUIREMENT FOR ADDITIONAL FUNDS
The Directors believe that the net proceeds of the Placing will meet the Group's
current funding requirements, that is for at least the next twelve months. If
additional funds should be raised by issuing equity securities, dilution to the
then existing Stockholders may result.
- --------------------------------------------------------------------------------
28
PART 2 -- RISK FACTORS
- --------------------------------------------------------------------------------
ATTRACTION AND RETENTION OF KEY EMPLOYEES
Whilst the Group has entered into employment and/or consulting arrangements with
each of its key personnel with the aim of securing their services, the retention
of their services cannot be guaranteed. The loss of any member of the Group's
senior management or key consultants could harm or delay the plans of the
Business either whilst management time is directed to finding suitable
replacements or no suitable replacement is available to the Group. In either
case, this may have a material adverse effect on the future of the Business.
CURRENCY RISK
The Group will present its financial information in US dollars. In addition,
Spacelabs Healthcare is a company resident for tax purposes in the US and incurs
the majority of its costs in US dollars. The proceeds of the Placing will be
received in pounds sterling. This may give rise to an exchange rate risk against
the US$, the Group's functional currency. The Group's share price will be quoted
in pounds sterling. However, its reporting currency and the market for its
products and services are denominated in currencies other than (pounds)
sterling. As a result, movements in foreign exchange rates may cause a mismatch
between actual returns and investors' expectations of returns, and also affect
the share price.
The Group maintains the accounts of its operations in Canada, India, Singapore,
and the United Kingdom in Canadian dollars, Indian rupees, Singapore dollars,
and pounds sterling, respectively. The Group maintains the accounts of its
operations in Austria, Finland, France, Germany, and Greece in euros. Foreign
currency financial statements are translated into US dollars at current rates,
with the exception of revenues, costs and expenses, which are translated at
average rates during the reporting period. Gains and losses resulting from
foreign currency transactions are included in income, while those resulting from
translation of financial statements are excluded from income and accumulated as
a component of Shareholder's equity.
The Group may use derivatives consisting primarily of foreign exchange contracts
and interest rate swaps in the future. The Business may purchase forward
contracts to hedge foreign exchange exposure relating to commitments to acquire
inventory for sale.
ECONOMIC, POLITICAL, AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS COULD ADVERSELY AFFECT SALES
Since the Company sells products worldwide, the Business is subject to risks
associated with doing business internationally. The Directors anticipate that
revenues from international operations will continue to represent a substantial
portion of total revenue. In addition, many of the Group's manufacturing
facilities, employees and suppliers are located outside the United States.
Accordingly, the Group's future results could be harmed by a variety of factors,
including:
o changes in foreign currency exchange rates;
o changes in a country's or region's political or economic conditions,
particularly in developing or emerging markets;
o longer payment cycles of foreign customers and difficulty in collecting
receivables in foreign jurisdictions;
o trade protection measures and import or export licensing requirements;
o differing tax laws and changes in those laws;
o difficulty in staffing and managing widespread operations;
o differing labour laws and changes in those laws;
o differing protection of intellectual property and changes in that
protection; and
o differing regulatory requirements and changes in those requirements.
A CLAIM FOR DAMAGES COULD MATERIALLY AND ADVERSELY AFFECT THE FINANCIAL
CONDITION OR RESULTS OF OPERATIONS
The Business is exposed to potential product liability risks. There are many
factors beyond the Group's control that could lead to product liability claims,
such as the reliability of the customers' operators of relevant equipment, and
the maintenance of relevant units by the customers. There can be no assurance
that in future adequate insurance cover will be available to the Group at an
acceptable cost, if at all, nor that in
- --------------------------------------------------------------------------------
29
PART 2 -- RISK FACTORS
- --------------------------------------------------------------------------------
the event of any claim, the level of insurance carried by the Group now or in
the future will be sufficient or that a product liability or other claim would
not materially and adversely affect the financial position or results of
operations of the Group.
THE GROUP'S FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS MAY CREATE
SIGNIFICANT ENVIRONMENTAL LIABILITIES AND FORCE IT TO MODIFY MANUFACTURING
PROCESSES
Spacelabs Healthcare is subject to environmental laws, ordinances and
regulations throughout the world relating to the use, storage, handling and
disposal of certain hazardous substances and wastes used or generated in the
manufacturing and assembly of products. Under such laws, Spacelabs Healthcare
may become liable for the costs of removal or remediation of certain hazardous
substances or wastes that have been or are being disposed of offsite as wastes
or that have been or are being released on or in facilities. Such laws may
impose liability without regard to whether Spacelabs Healthcare knew of, or
caused, the release of such hazardous substances or wastes. Any failure to
comply with present or future regulations could subject Spacelabs Medical to the
imposition of substantial fines, suspension of production, alteration of
manufacturing processes, or cessation of operations, any of which could have a
material adverse effect on the Group's business, financial condition, and
results of operations.
CHANGES IN GOVERNMENTAL REGULATIONS MAY REDUCE DEMAND FOR PRODUCTS OR INCREASE
EXPENSES
Spacelabs Healthcare competes in markets in which the Group and its customers
must comply with international regulations, such as environmental, health,
safety, and food and drug regulations. Spacelabs Healthcare develops,
configures, and markets its products to meet customer needs created by these
regulations. Any significant change in these regulations could reduce demand for
its products.
RISKS RELATED TO THE COMPANY'S CAPITAL STRUCTURE AND THE SHARES OF COMMON STOCK
The Company's Certificate of Incorporation and other agreements contain
provisions that could discourage a takeover.
The Company's Certificate of Incorporation authorise the Board of Directors to
issue up to 10,000 shares of preferred stock in one or more series, to fix the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued shares of preferred stock, to fix the number of shares
constituting any such series, and to fix the designation of any such series,
without further vote or action by Shareholders. The terms of any series of
preferred stock, which may include priority claims to assets and dividends and
special voting rights, could adversely affect the rights of the holders of
Shares of Common Stock and thereby reduce the value of the Shares of Common
Stock. Spacelabs Healthcare has no present plans to issue shares of preferred
stock and the Company has agreed with Collins Stewart that it will not issue any
shares of preferred stock without the prior consent of its nominated advisor.
The issuance of preferred stock, coupled with the concentration of ownership in
OSI, could discourage certain types of transactions involving an actual or
potential change in control of the Company, including transactions in which the
holders of Shares of Common Stock might otherwise receive a premium for their
stock over then current prices, otherwise dilute the rights of holders of Shares
of Common Stock, and may limit the ability of such stockholders to cause or
approve transactions which they may deem to be in their best interests, all of
which could have a material adverse effect on the market price of the Shares of
Common Stock. Spacelabs Healthcare has in place a stockholder rights plan,
adopted in 2000, under which stockholders are entitled to purchase shares of
preferred stock under certain circumstances. These circumstances include the
purchase of [20] per cent. or more of the outstanding Shares of Common Stock by
a person or group, or the announcement of a tender or exchange offer to acquire
[20] per cent. or more of the outstanding Common Stock. The stockholder rights
plan may have the effect of impeding or preventing certain types of transactions
involving a change in control of the Company that could be beneficial to the
stockholders.
TRANSFER RESTRICTIONS
The Shares of Common Stock are subject to restrictions on transfer as described
in this document. These restrictions may affect adversely the desirability of
the Shares of Common Stock and, accordingly, may affect adversely their value.
Whilst the US trading restrictions referred to in this document remain in
effect, the Shares of Common Stock will be settled in certificated form and will
not be settled through CREST. As a
- --------------------------------------------------------------------------------
30
PART 2 -- RISK FACTORS
- --------------------------------------------------------------------------------
result of this, it may be more difficult for Shareholders to sell their Shares
of Common Stock. Settlement in certificated form may adversely affect the
liquidity of the Shares of Common Stock and may affect adversely the
desirability of the Shares of Common Stock and, accordingly, their value.
CERTAIN SHAREHOLDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER THE COMPANY
FOLLOWING THE PLACING
Following completion of the Placing, OSI and UDT Sensors will own beneficially,
in aggregate approximately 65 per cent. of the Enlarged Share Capital. As a
result, OSI will be able to exercise significant control over all matters
requiring shareholder approval, which could delay or prevent an outside party
from requiring or merging with the Company. The ability of such shareholders to
prevent or delay these transactions could cause the price of the Shares of
Common Stock to decline.
TRADING RELATIONSHIP BETWEEN OSI & SPACELABS HEALTHCARE
Based on the master intercompany agreement entered into between OSI and
Spacelabs, OSI is likely to be a significant supplier of certain products and
services as detailed in paragraph 9.1(ii) of Part 7 of this document. Given the
potential reliance on OSI as a major manufacturing supplier and service
provider, there is a higher business risk attached to this arrangement.
TAKEOVER REGULATIONS
The Company is incorporated in and subject to the laws of the State of Delaware
in the US. Accordingly, the Company and transactions in shares of its stock are
not subject to the provisions of the City Code of Takeovers and Mergers (the
"Code"). The Company has attempted to afford the protections of the Code to its
stockholders by including provisions in its by-laws which seek to replicate the
main provisions of the Code. However, there can be no certainty that these
provisions would be upheld in a US court or that a US court would construe the
provisions in the same way as the Panel on Takeovers and Mergers in the UK.
In an attempt to replicate the provisions of the Code, the Company's by-laws
provide that if a person (or a group of persons acting in concert) owns or
controls Shares of Common Stock carrying between 30 per cent. and 50 per cent.
of the voting rights of the Company and such person (or group of persons)
acquires additional Shares of Common Stock which increase their percentage share
of voting rights that person (or group of persons) will be required to make a
general offer to the other stockholders of the Company to acquire the balance of
the stock at the highest price per share paid by him (or any person acting in
concert with him) in the previous 12 months.
As OSI will be interested in over 50 per cent. of the voting rights of the
Company at Admission, it will be able to acquire further Shares of Common Stock
without incurring any obligation to make a mandatory bid under the By-laws.
However, if for any reason OSI's interest falls below 30 per cent. and then
increases at any time to 30 per cent. or above, then it will become subject to
the restrictions outlined above (although the By-laws also provide that the
Non-Executive Directors of the Company may waive this requirement).
THE COMPANY'S CERTIFICATE OF INCORPORATION AND INDEMNIFICATION AGREEMENTS
ENTERED INTO BETWEEN THE COMPANY AND THE DIRECTORS LIMIT THE LIABILITY OF ITS
DIRECTORS, WHICH MAY LIMIT THE REMEDIES THE COMPANY OR ITS STOCKHOLDERS HAVE
AVAILABLE.
The Company's Certificate of Incorporation provides that, pursuant to the
Delaware General Corporation Law of the State of Delaware, US, the liability of
the Directors for monetary damages shall be eliminated to the fullest extent
permissible under Delaware law. This is intended to eliminate the personal
liability of a Director for monetary damages in an action brought by a third
party, or in the Company's right, for breach of a Director's duties and may
limit the remedies available to the Company's stockholders. This provision does
not eliminate the Directors' fiduciary duty and does not apply to liabilities
for:
(a) acts or omissions done or made in bad faith or that a Director ought
reasonably to have known were violations of law;
(b) claims initiated or brought voluntarily by a Director and not by way
of defence;
(c) expenses incurred by a Director in connection with a claim in respect
of which a court determines that each of the material assertions made
by the Director was not made in good faith or was frivolous;
- --------------------------------------------------------------------------------
31
PART 2 -- RISK FACTORS
- --------------------------------------------------------------------------------
(d) expenses or liabilities of any type whatsoever which have been paid
directly to a Director by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the
Company; or
(e) expenses and the payment of profits arising from the purchase and sale
by a Director of securities in violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, or any similar successor
statute.
APPLICATION OF US AND UK LEGISLATION
The Company is incorporated under the laws of the State of Delaware, USA.
Accordingly, a significant amount of the legislation in England and Wales
regulating the operation of companies does not apply to the Company. In
addition, the laws of the State of Delaware will apply in respect of the Company
and these laws may provide for mechanisms and procedures that would not
otherwise apply to companies incorporated in England and Wales.
REGISTRATION REQUIREMENTS AND TAX RISKS RELATING TO THE ACQUISITION OF COMPANIES
FROM OSI AND UDT SENSORS
The Company entered into a stock transfer agreement with OSI and UDT Sensors on
o 2005. Pursuant to this agreement OSI and UDT Sensors agreed to sell to the
Company various companies owned at that time by OSI and UDT Sensors (as listed
in paragraph 3.3 of Part 7). As this agreement was entered into immediately
prior to the date of this document, it has not been possible to complete all of
the formalities required to register the transfers of the shares of each
relevant company in each jurisdiction prior to publication of this document.
Therefore, at the date of this document, the Company is only the beneficial, and
not the legal owner, of the shares in each of the following companies in the
Group: Blease Medical Holdings Ltd., Spacelabs Healthcare Solutions Pvt Ltd.,
Spacelabs (Singapore) Pte. Ltd., Spacelabs Medical (Canada), Inc., Spacelabs
Medical Finland Oy, Spacelabs Medical Germany GmbH, Spacelabs Medical SAS,
Spacelabs Medical UK Ltd. The Company intends to complete such registration
formalities as quickly as possible but this process may be delayed due to
unforseen factors. Pending completion of such formalities, OSI or UDT Sensors
(as the case may be) will remain registered as the legal owner of the relevant
shares.
The Company intends to submit applications for exemption from tax in respect of
the transfers of shares referred to above in jurisdictions where tax would
normally be payable on the transfer of shares. However, there can be no
guarantee that such applications will be accepted by the relevant tax
authorities. In such event, tax may become payable on the value of the stock
allotted to OSI and UDT Sensors as consideration for the transfer to the Company
of various companies in the Group.
FORWARD LOOKING STATEMENTS
ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT, CONTAINED IN THIS
ADMISSION DOCUMENT CONSTITUTE "FORWARD LOOKING STATEMENTS". IN SOME CASES
FORWARD LOOKING STATEMENTS CAN BE IDENTIFIED BY TERMS SUCH AS "MAY", "INTEND",
"MIGHT", "WILL", "SHOULD", "COULD", "WOULD", "BELIEVE", "ANTICIPATE", "EXPECT",
"ESTIMATE", "PREDICT", "PROJECT", "POTENTIAL", OR THE NEGATIVE OF THESE TERMS,
AND SIMILAR EXPRESSIONS. SUCH FORWARD LOOKING STATEMENTS ARE BASED ON
ASSUMPTIONS AND ESTIMATES AND INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS
WHICH MAY CAUSE THE ACTUAL RESULTS, FINANCIAL CONDITION, PERFORMANCE OR
ACHIEVEMENTS OF THE COMPANY, THE GROUP OR INDUSTRY RESULTS, TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN PART 2 "RISK
FACTORS". NEW FACTORS MAY EMERGE FROM TIME TO TIME THAT COULD CAUSE THE
COMPANY'S BUSINESS NOT TO DEVELOP AS IT EXPECTS, AND IT IS NOT POSSIBLE FOR THE
COMPANY TO PREDICT ALL SUCH FACTORS. GIVEN THESE UNCERTAINTIES, PROSPECTIVE
INVESTORS ARE CAUTIONED NOT TO PLACE ANY UNDUE RELIANCE ON SUCH FORWARD LOOKING
STATEMENTS EXCEPT AS REQUIRED BY LAW. THE COMPANY DISCLAIMS ANY OBLIGATION TO
UPDATE ANY SUCH FORWARD LOOKING STATEMENTS IN THIS ADMISSION DOCUMENT TO REFLECT
FUTURE EVENTS OR DEVELOPMENTS.
- --------------------------------------------------------------------------------
32
- --------------------------------------------------------------------------------
PART 3 -- ACCOUNTANTS' REPORT ON SPACELABS MEDICAL, INC.
AND RELATED COMPANIES
The Directors
Spacelabs Healthcare, Inc.
5150 220th Avenue SE,
Issaquah,
Washington 98029
United States of America
o October 2005
Dear Sirs,
SPACELABS MEDICAL, INC. (THE "COMPANY") AND RELATED COMPANIES
We report on the financial information on Spacelabs Medical Inc. and Related
Companies set out in Part 3 of the AIM Admission Document dated o October of the
Company (the "Admission Document"). This financial information has been prepared
for inclusion in the Admission Document on the basis of the accounting policies
set out in Note 1 to the Combined Financial Statements for Spacelabs Medical,
Inc. and Related Companies. This report is required by paragraph (a) of Schedule
Two to the AIM Rules as if Annex I item 20.1 of the Prospectus Rules applied and
is given for the purpose of complying with that requirement and for no other
purpose.
RESPONSIBILITIES
The Directors of the Company and Related Companies are responsible for preparing
the financial information on the basis of preparation set out in note 1 to the
financial information and in accordance with accounting standards generally
accepted in the United States ("US GAAP").
It is our responsibility to form an opinion as to whether the financial
information gives a true and fair view, for the purposes of the Admission
Document, and to report our opinion to you.
BASIS OF OPINION
We conducted our work in accordance with Standards for Investment Reporting
issued by the Auditing Practices Board in the United Kingdom. Our work included
an assessment of evidence relevant to the amounts and disclosures in the
financial information. It also included an assessment of significant estimates
and judgments made by those responsible for the preparation of the financial
information and whether the accounting policies are appropriate to the entity's
circumstances, consistently applied and adequately disclosed.
We planned and performed our work so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial information
is free from material misstatement whether caused by fraud or other irregularity
or error.
OPINION
In our opinion, the financial information gives, for the purposes of the
Admission Document, a true and fair view of the state of affairs of the
Spacelabs Medical, Inc. and Related Companies as at the dates stated and of its
income, cash flows and changes in parent's investment for the periods then ended
in accordance with the basis of preparation set out in note 1 and in accordance
with US GAAP as described in note 1.
DECLARATION
For the purposes of Paragraph (a) of Schedule Two of the AIM Rules we are
responsible for this report as part of the AIM admission document and declare
that we have taken all reasonable care to ensure that the information contained
in this report is, to the best of our knowledge, in accordance with the facts
and contains no omission likely to affect its import. This declaration is
included in the AIM admission document in compliance with Schedule Two of the
AIM Rules.
Yours faithfully
DELOITTE & TOUCHE LLP
Chartered Accountants
- --------------------------------------------------------------------------------
33
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
SPACELABS MEDICAL, INC. AND RELATED COMPANIES
COMBINED BALANCE SHEET AS AT
JUNE 30, 2005
(IN THOUSANDS)
ASSETS
Current Assets: US$'000
Cash and cash equivalents 7,875
Marketable securities, available for sale 816
Accounts receivable, net of allowance for doubtful accounts of $1,168 44,110
Other receivables 947
Inventory 38,205
Prepaid expenses 1,743
Deferred income taxes 4,586
-------
Total current assets 98,282
Property and equipment, net 7,068
Goodwill 5,853
Intangible assets, net 19,052
Other assets 1,006
-------
Total assets 131,261
=======
LIABILITIES AND PARENT'S INVESTMENT
Current Liabilities: US$'000
Accounts payable 18,710
Payables to related parties, net 9,147
Accrued payroll and related expenses 7,249
Deferred revenue 3,936
Accrued warranties 3,706
Income taxes payable 4,051
Other accrued expenses and current liabilities 12,421
-------
Total current liabilities 59,220
Loan from Parent 57,310
Accrued pension 604
Deferred income taxes 2,057
-------
Total liabilities 119,191
Commitments and contingencies (Notes 3 and 6)
Parent's investment:
Combined parent's investment 13,544
Accumulated deficit (768)
Accumulated other comprehensive loss (706)
Total Parent's investment 12,070
-------
Total liabilities and Parent's investment 131,261
=======
- --------------------------------------------------------------------------------
34
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
SPACELABS MEDICAL, INC. AND RELATED COMPANIES
COMBINED INCOME STATEMENT
YEAR ENDED JUNE 30, 2005
(IN THOUSANDS)
US$'000
Revenues 195,731
Cost of goods sold 106,078
-------
Gross profit 89,653
Operating expenses:
Selling, general and administrative 64,528
Research and development 15,892
Management retention bonus 1,824
Write off of in-process research and development 300
-------
Total operating expenses 82,544
-------
Income from operations 7,109
Interest and other expense 84
-------
Income before provision for income taxes and minority interest 7,025
Provision for income taxes 2,430
-------
Income before minority interest 4,595
Minority interest 6
-------
Net Income 4,601
=======
- --------------------------------------------------------------------------------
35
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
SPACELABS MEDICAL, INC. AND RELATED COMPANIES
COMBINED STATEMENT OF CHANGES IN PARENT'S INVESTMENT
YEAR ENDED JUNE 30, 2005
(IN THOUSANDS)
ACCUMULATED
OTHER TOTAL
PARENT'S COMPREHENSIVE ACCUMULATED PARENT'S
INVESTMENT LOSS DEFICIT INVESTMENT
US$'000 US$'000 US$'000 US$'000
Balance, July 1, 2004 13,299 (43) (5,318) 7,938
Comprehensive income:
Net income 4,601 4,601
Foreign currency translation (817) (817)
Unrealized gain on available-for-sale securities 154 154
------- ------- -------
Total comprehensive income (663) 4,601 3,938
Acquisition of Blease Medical Holdings 200 200
Issuance of stock options to OSI employees 51 (51) --
Exercise of Dolphin Medical stock Options 106 106
Repurchase of Dolphin Medical shares (112) (112)
------- ------- ------- -------
Balance at June 30, 2005 13,544 (706) (768) 12,070
======= ======= ======= =======
- --------------------------------------------------------------------------------
36
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED
COMPANIES
- --------------------------------------------------------------------------------
SPACELABS MEDICAL, INC. AND RELATED COMPANIES
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 2005
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES: US$'000
Net income 4,601
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortisation 3,304
Write off of in-process research and development 300
Deferred income taxes (2,199)
Write down of marketable securities available for sale 182
Gain on sale of assets (32)
Other 21
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable (1,345)
Other receivables 1,749
Inventory 1,493
Prepaid expenses (53)
Accounts payable 3,962
Payables from related parties, net (1,149)
Accrued payroll and related expenses (44)
Deferred Revenue (4,016)
Accrued warranties (3,792)
Income taxes payable 3,948
Other accrued expenses and current liabilities (1,388)
-------
Net cash provided by operating activities 5,542
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (3,900)
Cash paid for Blease acquisition, net of cash acquired (9,121)
Acquisition of Dolphin minority interest (488)
Proceeds from sale of assets 40
Other (30)
-------
Net cash used in investing activities (13,499)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from Parent 9,858
Proceeds from exercise of Dolphin stock options 106
Repurchase of Dolphin Medical Shares (112)
Net cash provided by financing activities 9,852
-------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (241)
-------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,654
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,221
-------
CASH AND CASH EQUIVALENTS, END OF YEAR 7,875
=======
- --------------------------------------------------------------------------------
37
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
SPACELABS MEDICAL, INC. AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 2005
1. BASIS OF COMBINATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL -- On August 2, 2005, OSI Systems, Inc. ("OSI") formed Spacelabs
Healthcare, Inc. ("Spacelabs Healthcare"), which is the combination of the
following OSI healthcare division subsidiaries: (a) Spacelabs Medical, Inc.
(U.S.A.) and its affiliates in Austria, Canada, China, Finland, France, Germany,
Italy, Singapore and the U.K (collectively, "Spacelabs Medical"); (b) Blease
Medical Holdings Ltd. (U.K.) and its wholly-owned subsidiaries Blease Medical
Equipment Limited and Blease Medical Service Limited (collectively, "Blease");
(c) Dolphin Medical, Inc. (U.S.A.) and its subsidiary, Dolphin Medical Products
Limited (Singapore), (collectively, "Dolphin Medical"); and (d) Osteometer
MediTech, Inc. ("Osteometer"). The companies listed above are currently 100%
directly or indirectly owned by OSI except for Dolphin Medical, Inc. (U.S.A),
which is 89% owned by OSI and 11% owned by third parties. OSI anticipates
completing an initial public offering of Spacelabs Healthcare prior to December
31, 2005.
Spacelabs Medical is a global manufacturer and distributor of patient monitoring
and clinical information systems for use primarily in hospitals. It designs,
manufactures and markets patient monitoring solutions for critical care,
emergency and perioperative areas of the hospital, wired and wireless networks
and connectivity solutions, ambulatory blood pressure monitors and medical data
services, all aimed at providing caregivers with instant patient information.
Spacelabs Medical was acquired by OSI in March 2004. Blease is a global
manufacturer and distributor of anesthesia delivery systems, ventilators and
vaporisers. Blease sells its products primarily to hospitals for use in
operating rooms and anesthesia induction areas as well as in magnetic resonance
imaging facilities. In addition, as pharmaceutical companies develop new
anesthesia agents for the worldwide market, or as generic alternatives to
patented anesthesia formulas become available, Blease works closely with them to
support their new product introductions. As a result, Blease also sells its
systems and components, such as anesthesia vaporisers and ventilators, directly
to pharmaceutical companies and other manufacturers of anesthesia delivery
systems. Blease was acquired by OSI in February 2005 and accordingly, its
results of operations are included in the accompanying combined financial
statements from the date of acquisition. Dolphin Medical designs, manufactures
and markets pulse oximetry instruments and compatible pulse oximetry sensors,
which are used to non-invasively monitor oxygenation levels in a patient's
blood. Osteometer designs, manufactures and markets x-ray and ultrasound
densitometers, which are used to diagnose osteoporosis as well as to provide
follow-up bone density measurements.
BASIS OF COMBINATION -- The accompanying combined financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and include the accounts of Spacelabs Medical, Blease,
Dolphin Medical and Osteometer (collectively, "the Company"). All significant
intercompany transactions within the combined group have been eliminated.
Because this is a combined presentation of the Company, the accompanying
combined financial statements as of June 30, 2005 and for the year then ended,
are not necessarily indicative of the financial position, results of operations
or cash flows of Spacelabs Healthcare, Inc. in the future or what the financial
position, results of operations or cash flows would have been if the Company had
been a separate, stand-alone entity for the period presented. See Note 8 --
Related Party Transactions.
CASH EQUIVALENTS -- The Company considers all highly liquid investments
purchased with maturity of three months or less as of the acquisition date, to
be cash equivalents.
MARKETABLE SECURITIES -- Marketable securities consist of equity securities
categorised as available-for-sale and carried at fair value. Unrealised holding
gains and losses on marketable securities are included in accumulated other
comprehensive loss until realized. Unrealised holding losses that are deemed to
be other-than-temporary are recognized in the combined statement of operations.
Losses are determined to be other-than-temporary based on the length of time
(generally nine months) and extent to which the market value has been less than
cost (generally 10%) and the financial condition and near-term prospects of the
issuer. Fair value of marketable securities is determined by the quoted market
prices of each marketable security. For purposes of determining gross realised
gains and losses, the cost of the securities sold is based upon specific
identification. See Note 2 -- Marketable Securities.
CONCENTRATIONS OF RISK -- The Company's financial instruments that are exposed
to concentrations of credit risk consist primarily of its cash, cash
equivalents, available-for-sale securities and accounts receivable. The Company
restricts investments in cash equivalents to financial institutions with high
credit standing. At
- --------------------------------------------------------------------------------
38
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
June 30, 2005, approximately 75% of the Company's cash equivalents were held at
three financial institutions. Credit risk on accounts receivable is minimised as
a result of the large and diverse nature of the Company's worldwide customer
base. No one customer accounted for more than 10% of accounts receivable or
revenue as of June 30, 2005. The Company performs ongoing credit evaluations of
its customers' financial condition and maintains allowances for potential credit
losses.
The Company's trade receivables, prior to any allowance for doubtful accounts,
as of June 30, 2005, were distributed geographically by location of the customer
as follows:
%
North America 63
Europe 24
Asia-Pacific 8
Other 5
---
100
===
As the Company continues to trade internationally, a portion of its receivables
are expected to be with customers located in foreign countries. While the
Company attempts to secure payments with banking instruments such as letters of
credit, some export sales are transacted with credit terms, and therefore
collection of receivables is affected by local economic conditions. Also, in the
event of default with respect to foreign export sales, collection may be more
difficult in foreign countries than in the US.
The Company depends on single-source vendors for certain integral component
parts. The Company's largest vendor supplies printed circuit board assemblies to
Spacelabs Medical and represented approximately 27% of total manufacturing
purchases during the year ended June 30, 2005 and 18% of accounts payable at
June 30, 2005. While this or any other vendor could be replaced over time,
abrupt disruption in the supply of printed circuit board assemblies or other
single-source parts could have an adverse effect on the Company's manufacture of
the products of which such items are a component.
ACCOUNTS RECEIVABLE -- The allowance for doubtful accounts involves estimates
based on management's judgment, review of individual receivables and analysis of
historical bad debts. The Company adjusts customer credit limits based upon each
customer's payment history and current credit worthiness, as determined by
credit information available at that time. The Company continuously monitors
collections and payments from its customers and maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. During the year ended June
30, 2005, the Company recovered $1,952,000 from accounts that were written off
at the time of the Spacelabs Medical acquisition in March 2004. This amount
reduced selling, general and administrative expenses in the accompanying
combined income statement.
INVENTORY -- Inventory is stated at the lower of cost or market. Cost is
determined on the first-in, first-out method. The Company writes down inventory
for slow-moving and obsolete inventory based on assessments of future demands
and market conditions. If these factors are less favorable than those projected,
additional inventory write-downs may be required.
Inventory consisted of the following at June 30, 2005:
US$'000
Raw materials and components 17,636
Work in progress 1,215
Finished products 8,817
Demonstration inventories 2,796
Customer service inventories 7,741
------
38,205
======
Demonstration inventories represent the Company's products being utilised in the
sales and marketing process. While such inventories are available for sale to
customers, some may not be sold within the next twelve months. Customer service
inventories represent spare parts maintained by the Company to fulfill its
warranty and service contract obligations. Customer service inventories are
generally maintained for seven
- --------------------------------------------------------------------------------
39
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
years following the last commercial shipment of a product. During the year ended
June 30, 2005, the Company sold inventory that had been written down prior to
July 1, 2004, resulting in gross profit that exceeded normal gross profit for
this inventory by approximately $1,250,000.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation and amortisation are computed using the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are amortised
on the straight-line basis over the shorter of the useful life of the asset or
the lease term.
Property and equipment consisted of the following at June 30, 2005 (in
thousands):
ESTIMATED
USEFUL LIVES US$'000
Equipment ........................................ 4-8 years 4,446
Leasehold improvements ........................... 3-10 years 1,162
Tooling .......................................... 3-5 years 1,287
Furniture and fixtures ........................... 4-10 years 1,028
Computer equipment and software .................. 3-4 years 2,908
Vehicles ......................................... 3-5 years 23
------
Total ............................................ 10,854
Less accumulated depreciation and amortisation ... (3,786)
------
7,068
======
Depreciation expense totaled $1,648,000 for the year ended June 30, 2005.
IMPAIRMENT OF LONG-LIVED ASSETS -- The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. If the sum of the expected
future cash flows, undiscounted and without interest charges is less than the
carrying amount of the asset, the Company recognises an impairment loss based on
the estimated fair value of the asset.
OTHER ASSETS -- Included in Other Assets is a restricted investment account in
the amount of euro 500,000 ($604,000 at June 30, 2005) being held by the Company
under a pension arrangement for an employee. The corresponding liability in the
same amount is recorded as a pension liability in the accompanying balance
sheet.
INCOME TAXES -- The Company follows the asset and liability approach whereby
deferred income taxes are provided for temporary differences between the
financial statement and income tax basis of the Company's assets and
liabilities, based on enacted tax rates. A valuation allowance is provided when
it is more likely than not that some portion or all of the deferred income tax
assets will not be realised.
For the year ended June 30, 2005, the Company is part of the consolidated US
federal and California state income tax filings of OSI Systems. Spacelabs
Medical files separate state income tax returns for other states. The Company's
tax expense and deferred taxes as of June 30, 2005 and for the year then ended
have been computed as if the Company were filing separate, stand-alone, federal
and state income tax returns. Accordingly, any settlement of U.S. federal income
taxes payable will be to OSI rather than to the Internal Revenue Service.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The Company's financial instruments
consist primarily of cash, marketable securities, accounts receivable, accounts
payable and loan from parent. The carrying values of financial instruments,
except loan from parent are representative of their fair values due to their
short-term maturities. See Note 8 -- Related Party Transactions for discussion
of the loan from parent.
REVENUE RECOGNITION -- The Company recognises revenue upon shipment of products
when title and risk of loss passes, and when terms are fixed and collection is
probable. In accordance with the terms of Staff Accounting Bulletin No. 104,
"Revenue Recognition," and Emerging Issues Task Force ("EITF") Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables," where installation services,
if provided, are essential to the functionality of the equipment, the portion of
revenue for the sale attributable to installation is deferred and recognised
when the installation services is provided. In an instance where terms of sale
include subjective customer acceptance criteria, revenue is deferred until the
acceptance criteria are met. Concurrent with the shipment of the product, the
Company accrues estimated product return reserves and
- --------------------------------------------------------------------------------
40
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
warranty expenses. Critical judgments made by management related to revenue
recognition include the determination of whether or not customer acceptance
criteria are perfunctory or inconsequential. The determination of whether or not
the customer acceptance terms are perfunctory or inconsequential impacts the
amount and timing of revenue recognised.
Revenues from separate service maintenance contracts are recognised ratably over
the term of the agreements. For other services, service revenues are recognised
as the services are performed. Deferred revenue for services arises from advance
payments received from customers for services not yet performed.
The Company's software products are subject to revenue recognition in accordance
with AICPA Statement of Position 97-2 "Software Revenue Recognition" ("SOP
97-2"), whereby revenue from multi-element arrangements is allocated to
different elements based upon vendor-specific objective evidence. Revenue from
the sale of software licenses is recognised upon shipment as the Company's
software products are deemed to be off-the-shelf and do not require complex
implementation. Revenue from software implementation services is recognised as
the services are provided. Software maintenance revenue is deferred and
recognised on a straight-line basis over the life of the maintenance agreement.
SHIPPING AND HANDLING -- Amounts billed to customers for shipping and handling
costs are included as a component of revenue and the corresponding costs are
included in cost of sales in accordance with EITF Issue No. 00-10, "Accounting
for Shipping and Handling Fees and Costs."
RESEARCH AND DEVELOPMENT COSTS -- Research and development costs are charged to
operations as incurred. Software development costs are capitalised when a
product's technological feasibility has been established through the date the
product is available for general release to customers. The Company amortises
these costs on a straight-line basis over a five-year period, once it is put
into use. During the year ended June 30, 2005, the Company capitalised $25,000
of software development costs.
IN-PROCESS RESEARCH AND DEVELOPMENT COSTS -- The combined financial statements
include a $300,000 write-off of the estimated fair value of in-process research
and development costs at the February 2005 date of the Blease acquisition. The
amount consists of two anesthesia products that were under development and
awaiting regulatory approvals at the time of the acquisition. Each of these
projects is subject to risks and uncertainties relating to completion and market
acceptance and have no alternative future use.
ADVERTISING COSTS -- The Company expenses the production costs of advertising
the first time the advertising takes place. Advertising expense totaled $542,000
for the year ended June 30, 2005. Advertising costs are included in selling,
general and administrative expenses in the accompanying combined income
statement.
FOREIGN CURRENCY TRANSLATION -- The accounts of the Company's operations in
Canada, China and the United Kingdom are maintained in Canadian dollars, Chinese
Yuan and U.K. pounds, respectively. The accounts of the Company's operations in
Austria, Finland, France, Germany, Greece and Italy are maintained in Euros.
Assets and liabilities are translated into U.S. dollars at rates in effect at
the balance sheet date. Revenues, costs and expenses are translated at weighted
average rates during the reporting period. Gains and losses resulting from
foreign currency transactions are included in income, while those resulting from
translation of financial statements are excluded from income and accumulated as
a component of accumulated other comprehensive loss. Transaction losses of
approximately $413,000 were included in operating expenses on the combined
income statement for the year ended June 30, 2005.
GOODWILL AND INTANGIBLE ASSETS
SFAS No. 142, "Goodwill and Other Intangible Assets," requires testing goodwill
for impairment on an annual basis and on an interim basis if an event occurs or
circumstances change that may reduce the fair value of a reporting unit below
its carrying value. The Company performed its annual impairment test during the
second quarter of fiscal year 2005 and concluded that there is no impairment of
goodwill at the balance sheet date. The change in the carrying amount of
goodwill for the year ended June 30, 2005, is as follows:
US$'000
Balance as of July 1, 2004 1,269
Goodwill acquired during the period, net of
June 30, 2005 translation adjustment 4,739
Foreign currency translation adjustment (155)
-----
5,853
=====
- --------------------------------------------------------------------------------
41
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
SFAS No. 142 requires that intangible assets that meet the criteria for
recognition apart from goodwill be reclassified and that intangibles with
indefinite lives are not to be amortised but rather shall be tested for
impairment at least annually or more frequently when impairment indicators are
present. The Company has intangible assets for tradenames, which have indefinite
lives and are therefore not subject to amortisation. The carrying value of these
tradenames was $7,083,000 at June 30, 2005.
Intangible assets subject to amortisation consisted of the following at June 30,
2005:
WEIGHTED GROSS
AVERAGE CARRYING ACCUMULATED INTANGIBLES
LIVES VALUE AMORTIZATION NET
US$'000 US$'000 US$'000
Core technology 10 years 8,074 811 7,263
Customer relationships/backlog 9.5 years 4,004 457 3,547
Software development costs 5 years 1,997 1,119 878
Patents 11 years 416 158 258
Developed technology 5 years 150 127 23
------ ----- ------
14,641 2,672 11,969
====== ===== ======
Amortisation expense for the year ended June 30, 2005 was $1,456,000. At June
30, 2005, estimated future amortisation expense is as follows:
US$'000
2006 1,701
2007 1,658
2008 1,364
2009 1,278
2010 1,275
2011 and thereafter 4,690
------
11,969
======
ACCRUED WARRANTIES -- The Company offers its customers warranties on products
sold to them. These warranties typically provide for repairs and maintenance of
its products for a specified time period. Warranties covering software and
software products do not include updates or upgrades to software functionality.
Concurrent with the sale of products, a provision for estimated warranty
expenses is recorded with a corresponding increase in cost of goods sold. This
provision is adjusted periodically based on historical and anticipated
experience. During the year ended June 30, 2005, income from operations was
increased by $2,134,000 due to revisions to prior year estimates. Actual
expenses of repairs under warranty, including parts and labour are charged to
this provision when incurred.
The change in accrued warranties for the year ended June 30, 2005 is as follows:
US$'000
Balance at July 1, 2004 7,025
Additions -- charged to cost of sales 2,612
Reductions for warranty repair costs (4,261)
Increase as a result of Blease acquisition 464
Release to combined income statement (2,134)
------
Balance at June 30, 2005 3,706
======
STOCK-BASED COMPENSATION -- The Company applies the intrinsic value-based method
of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations to
account for its stock-based employee compensation plans. These interpretations
include FASB Interpretation No. 44, "Accounting for Certain Transactions
involving Stock Compensation an interpretation of APB Opinion No. 25," issued in
March 2000. Under this method, compensation expense is generally recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. The Company has adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," and SFAS No. 148,
"Accounting for
- --------------------------------------------------------------------------------
42
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
Stock-Based Compensation-Transition and Disclosure," which was released in
December 2002 as an amendment to SFAS No. 123. These statements established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans.
Stock options granted to employees of OSI are accounted for using the guidance
of SFAS No. 123, as amended by SFAS No. 148, and Issue 21 of EITF No. 00-23,
"Issues Related to the Accounting for Stock Compensation under APB Opinion No.
25 and FASB Interpretation No. 44 -- Options Granted to Entities Under Common
Control," whereby the fair value of such options is determined using the
Black-Scholes option pricing model at the date of grant and the grant is treated
as a dividend to the parent company.
The Company applies APB Opinion No. 25 in accounting for substantially all of
its stock-based awards as well as for awards of OSI stock options to Company
employees and, accordingly, no compensation expenses using the intrinsic value
method has been recognised for its stock option grants in the accompanying
financial statements.
If the fair value based method had been applied in measuring stock compensation
expense under SFAS No. 123, as amended by SFAS No. 148, the pro forma effect on
net earnings for the year ended June 30, 2005 would have been as follows (in
thousands except for per share amounts):
US$'000
Net income, as reported 4,601
Less stock-based employee compensation
expense under fair value based method --
net of tax related effects (384)
-----
Pro forma net income 4,217
=====
The Company has two employee stock options plans: the 2004 Spacelabs Medical
Stock Option Plan (the "2004 Spacelabs Plan") and the 2001 Dolphin Medical Stock
Option Plan (the "2001 Dolphin Plan") (see Note 7). The weighted-average fair
value of stock options granted during 2005 under the 2004 Spacelabs Plan was
$0.33 per option on the date of grant. There were no grants during 2005 under
the 2001 Dolphin Plan.
The fair value of option grants is determined using the Black-Scholes option
pricing model with the following weighted average assumptions for the 2004
Spacelabs Plan for the year ended June 30, 2005:
2004 SPACELABS MEDICAL STOCK OPTION PLAN
Expected dividend 0.0%
Risk free interest rate 3.2%
Expected volatility 51.2%
Expected life (in years) 3.6
As noted below, SFAS 123R is effective beginning in fiscal year 2006. SFAS 123R
applies to new awards and to awards modified, repurchased, or cancelled after
the effective date, as well as to the unvested portion of awards outstanding as
of the effective date. Upon adoption, prior periods may be, but are not required
to be, restated. The Company expects that the adoption of SFAS 123R will have an
adverse impact on its net earnings. Though the Company has not completed
evaluation of the effect that SFAS 123R will have on its financial statements,
the Company currently expects the impact of the adoption of SFAS 123R to be
consistent with the pro forma effect on net earnings as represented above.
EARNINGS PER SHARE -- Because the accompanying financial statements are
presented on a combined basis, earnings per share information is not meaningful
and has not been presented.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS -- In November 2004, the FASB issued SFAS No. 151,
"Inventory Costs" ("SFAS 151"), an amendment of Accounting Research Bulletin No.
43, Chapter 4. SFAS 151 clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material. SFAS 151 is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company does not believe the adoption of SFAS 151 will have a
material impact on its financial statements.
- --------------------------------------------------------------------------------
43
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS
123R"), which is effective for the annual periods beginning after June 15, 2005.
SFAS 123R therefore becomes effective for the Company on July 1, 2005. SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options and purchases under employee stock purchase plans, to be
recognised as an operating expense in the income statement. The cost is
recognised over the requisite service period based on fair values measured on
grant dates. The new standard may be adopted using either the modified
prospective transition method or the modified retrospective transition method.
The Company expects the adoption of this statement will have an adverse impact
on its combined financial position and results of operations. The Company has
not yet completed its evaluation of the effect that SFAS 123R will have on its
financial statements.
In December 2004, the FASB issued two FSP's: FSP SFAS 109-1, "Application of
FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004," and FSP SFAS 109-2, "Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision Within the American Jobs Creation Act of 2004."
FSP SFAS 109-1 clarifies that the tax deduction for domestic manufacturers under
the American Jobs Creation Act of 2004 (the "Act") should be accounted for as a
special deduction in accordance with SFAS No. 109, "Accounting for Income Taxes"
("SFAS 109"). FSP SFAS 109-2 grants additional time to evaluate the Act's impact
on the Company's plan for reinvestment or repatriation of foreign earnings for
purposes of applying SFAS 109. The Company is currently evaluating whether to
repatriate any foreign earnings and the impact has not yet been determined.
In June 2005, the EITF modified its consensus on Issue No. 04-10, "Determining
Whether to Aggregate Operating Segments That Do Not Meet the Quantitative
Thresholds." This guidance creates stricter standards for aggregating operating
segments that do not meet the quantitative thresholds provided within SFAS 131,
"Disclosures About Segments of an Enterprise and Related Information." The
guidance will be effective for fiscal years ending after September 15, 2005. The
Company does not anticipate that adoption of this guidance will impact the
presentation of its reportable segments.
In June 2005, the FASB issued an exposure draft of a proposed standard entitled
"Business Combinations -- a replacement of FASB Statement No. 141." The proposed
standard, if adopted, would provide new guidance for evaluating and recording
business combinations and would be effective on a prospective basis for business
combinations whose acquisition dates are on or after January 1, 2007. Upon
issuance of a final standard, which is expected in 2006, the Company will
evaluate the impact of this new standard and its effect on the process for
recording business combinations.
In July 2005, the FASB issued an exposure draft of a proposed interpretation,
"Accounting for Uncertain Tax Positions." The proposed interpretation clarifies
the accounting for uncertain tax positions in accordance with SFAS 109. The
proposed interpretation requires that a tax position meet a "probable
recognition threshold" for the benefit of the uncertain tax position to be
recognised in the financial statements. A tax position that fails to meet the
probable recognition threshold will result in either reduction of current or
deferred tax asset or receivable, or recording a current or deferred tax
liability. The proposed interpretation also provides guidance on measurement,
derecognition of tax benefits, classification, interim period accounting
disclosure, and transition requirements in accounting for uncertain tax
positions. The proposed interpretation has a 60-day comment period and shall be
effective for all companies as of the first fiscal year ending after December
15, 2005. Upon issuance of a final standard, which is expected in 2006, the
Company will evaluate the impact that the interpretation will have on its
combined financial statements.
2. MARKETABLE SECURITIES
In June 2004, the Company received approximately 459,000 restricted shares of
QuadraMed Corp., a publicly traded company, as partial consideration for the
sale of an investment in a privately-held company. In March 2005, the Company
concluded that an other-than-temporary decline in the value of its QuadraMed
investment had occurred based on a large and extended decline in the market
price of the stock and recorded a $182,000 loss in its combined statement of
operations in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity" ("SFAS 115"). As of June 30, 2005, the market price of
QuadraMed's shares had recovered and the restrictions on selling the shares had
lapsed. Accordingly, at June 30, 2005, the Company recorded an unrealised gain
of $154,000 as a component of other comprehensive income to mark the QuadraMed
investment to market based on the quoted market price of the shares in
accordance with SFAS 115.
- --------------------------------------------------------------------------------
44
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
In addition to the 459,000 shares noted above, the Company also received into an
escrow account $115,000 in cash and certain additional unregistered shares in
QuadraMed, pending the resolution of certain purchase price adjustments. The
Company has not yet assigned a value to the cash and shares held in escrow as
uncertainties remain as to the amounts the Company will ultimately receive.
3. ACQUISITIONS
BLEASE MEDICAL HOLDINGS LIMITED -- In February 2005, the Company completed the
acquisition of all of the outstanding shares of Blease for $9,279,000 in cash
(net of cash acquired), including acquisition costs. Furthermore, during the
three years following the close, contingent consideration is payable based on
Blease's net revenues, provided certain requirements are met. The contingent
consideration is capped at (pounds)6.25 million (approximately $11.2
million as of June 30, 2005) and will be satisfied through the issuance of notes
payable by OSI. The results of operations of Blease have been included in the
Company's combined statement of operations from the acquisition date, February
8, 2005.
The preliminary allocation of the acquisition cost was based on an estimate of
fair values of the assets and liabilities acquired. The final determination of
the purchase price is pending finalisation of the amount of contingent
consideration that may become payable and may result in asset fair values and
liabilities assumed that differ from the preliminary estimates of these amounts.
The following table summarises the preliminary purchase price allocation of the
Blease assets acquired and liabilities assumed:
US$'000
Accounts receivable 2,070
Inventory 3,126
Other current assets, less cash acquired 260
Property and equipment 677
Goodwill 4,251
Customer relationships 750
Core technology 2,500
Tradenames 1,200
In-process research and development 300
Accounts payable (2,941)
Accrued expenses and other current liabilities (2,026)
Net deferred taxes (888)
------
Total consideration paid, net of cash acquired 9,279
======
Customer relationships will be amortised over a seven year period. Core
technology will be amortised over a ten year period. The weighted average
amortisation period for amortisable intangibles is 9.3 years. Tradenames and
goodwill have indefinite lives and are not amortised. Goodwill is not deductible
for tax purposes. Acquired in-process research and development was charged to
expense as of the acquisition date in accordance with FASB Interpretation No. 4,
"Applicability of FASB Statement No. 2 to Business Combinations Accounted for by
the Purchase Method."
The Company believes that the Blease acquisition resulted in the recognition of
goodwill primarily due to projected operating synergies of the combined
businesses, including, utilising the Spacelabs Medical distribution channels and
expanding the Company's portfolio of products to reach more areas of the
hospital.
Supplemental pro-forma disclosures of the results of operations for the fiscal
year ended June 30 2005 as though the Blease acquisition had been completed as
of July 1, 2004 are as follows (unaudited):
US$'000
Revenue 204,779
Income before taxes and minority interest 5,723
Net income 3,690
DOLPHIN MEDICAL MINORITY INTEREST -- During fiscal year 2005, the Company
purchased approximately 4.1 million shares or 4% in Dolphin Medical from
minority shareholders for an aggregate of $488,000, increasing its controlling
ownership interest in this entity from 85% to 89%. In accordance with SFAS 141,
"Business Combinations," this was recorded as an increase in goodwill of
$488,000.
- --------------------------------------------------------------------------------
45
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
SPACELABS MEDICAL ACQUISITION -- In March 2004, OSI completed the acquisition of
Spacelabs Medical from Instrumentarium Corporation, now a subsidiary of General
Electric Company. The acquisition price was approximately $47,929,000 in cash
(net of cash acquired), including acquisition costs. In June 2004, OSI notified
General Electric Company of a working capital and retention bonus adjustment
resulting in what OSI and the Company believe to be a downward adjustment of the
purchase price in the amount of $25,900,000. In September 2004, General Electric
Company responded that it believes the amount of the downward adjustment to be
$7,800,000. In June 2005, OSI filed suit in Delaware seeking specific
performance of the purchase agreement with respect to an independent
determination of the amount of the purchase price adjustment. The action is
currently pending. No amounts have been recorded in the financial statements in
relation to the expected reduction in the purchase price.
Pursuant to the terms of the purchase agreement, the Company assumed management
retention bonus agreements for key personnel of Spacelabs Medical. Approximately
$400,000 of the retention bonuses were earned following the acquisition date and
were paid in June 2004. The remaining retention bonuses vest over a two-year
period beginning either October 9, 2003 or March 19, 2004. The remaining amounts
expected to be paid under these agreements is approximately $2,675,000, all
payable during the fiscal year ending June 30, 2006. An analysis of the amount
accrued under these retention bonus agreements as of June 30, 2005 and for the
year then ended is as follows:
US$'000
Balance -- July 1, 2004 2,603
Accruals 1,824
Payments 2,375
-----
Balance -- June 30, 2005 2,052
=====
The accrual is included in accrued payroll and related expenses on the
accompanying combined balance sheet.
4. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES
Other accrued expenses and current liabilities consisted of the following at
June 30, 2005:
US$'000
Deferred rent 5,468
Sales returns reserves 1,982
Accrued commissions 1,486
Customer advances 638
State and local taxes 537
Other 2,310
------
Total 12,421
======
5. INCOME TAXES
For financial reporting purposes, income before provision for income taxes and
minority interest includes the following components for the year ended June 30,
2005:
US$'000
United States 6,283
Foreign 742
-----
Total pre-tax income 7,025
=====
- --------------------------------------------------------------------------------
46
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
The Company's provision for income taxes is composed of the following for the
year ended June 30, 2005:
US$'000
Current:
Federal 3,998
State 271
Foreign 223
-----
4,492
Change in valuation allowance 137
Deferred (2,199)
------
Total provision for income taxes 2,430
======
The Company does not provide for U.S. income taxes on the undistributed earnings
of the foreign subsidiaries, as it is the Company's intention to utilise those
earnings in the foreign operations for an indefinite period of time. At June 30,
2005, undistributed earnings of the foreign subsidiaries amounted to
approximately $1,922,000. It is not practical to determine the amount of income
or withholding tax that would be payable upon remittances of those earnings.
Deferred income tax assets (liabilities) at June 30, 2005 consisted of the
following (in thousands):
US$'000
Deferred income tax assets:
Net operating loss carryforwards 2,060
Inventory capitalisation 1,823
Accrued bonuses 744
Inventory reserves 659
Accrued warranty 587
Bad debt reserves 439
Inter-company profits 404
Sales returns allowance 269
Accrued vacation 202
Other 396
-----
Total deferred income tax assets 7,584
Valuation allowance (1,571)
------
Net deferred income tax asset 6,013
------
Deferred income tax liabilities:
Depreciation (1,719)
Intangible assets (956)
Deferred rent (632)
Other (176)
------
Total deferred income tax liabilities (3,484)
------
Net deferred income taxes 2,529
======
The Company has established a valuation allowance in accordance with the
provisions of SFAS No. 109. The valuation allowance relates to the net operating
loss of a subsidiary, subject to Separate Return Limitation Year ("SRLY") rules,
and net operating losses of certain foreign operations. The SRLY net operating
loss totals $4,096,000 and expires beginning in 2013 through 2017. The foreign
net operating losses total $2,007,000 of which $300,000 expires in 2012 and
$1,707,000 do not have expiration dates. The increase in the valuation allowance
for the year ended June 30, 2005 was $137,000 due to losses in foreign
jurisdictions where there are no offsetting deferred liabilities. The Company
continually reviews the adequacy of valuation allowances and releases the
allowances when it is determined that is more likely than not that the benefits
will be realised.
- --------------------------------------------------------------------------------
47
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
The combined effective income tax rate differs from the federal statutory income
tax rate due primarily to the following:
US$'000 %
Provision for income taxes at US federal statutory rate 2,459 35.0
State income taxes -- net of federal benefit 147 2.1
Research and development tax credits (205) (2.9)
Foreign income subject to tax at other than US federal
Statutory rate (208) (3.0)
Nondeductible expenses 100 1.4
Change in valuation allowance 137 2.0
----- ----
2,430 34.6
===== ====
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES -- The Company leases certain property and equipment under
long-term operating leases expiring on various dates through 2014, some of which
contain renewal options. Certain of these leases contain clauses for escalations
and payment of real estate taxes, maintenance, insurance and certain other
operating expenses of the properties. Net rental expense under these leases was
$4,570,000 for the year ended June 30, 2005.
In October 2004, Spacelabs Medical amended two real property leases covering
office and manufacturing facilities in Issaquah, Washington. Under the
amendments, Spacelabs Medical extended the term of such leases by approximately
two years and relinquished certain options it held to terminate portions of such
leases early. As a result, the leases now expire in December 2014. In
consideration, the landlord paid the Company $2.0 million in cash which has been
included in operating cash flows and recorded as deferred rent to be amortized
over the remaining term of the lease. The leases are accounted for as operating
leases.
Minimum aggregate future rentals are as follows:
US$'000
Fiscal year:
2006 6,947
2007 5,878
2008 5,089
2009 4,418
2010 4,150
2011 and thereafter 19,131
------
Total 45,613
======
DOLPHIN MEDICAL PURCHASE OPTION -- In December 2003, Dolphin Medical entered
into a stock purchase and option agreement and a distribution agreement with
ConMed Corporation. Under these agreements, in exchange for $2,000,000 in cash,
ConMed received a 9% interest in Dolphin Medical, exclusive distribution rights
for certain products of Dolphin Medical in the United States and an option to
purchase substantially all of the operating assets and liabilities of the
Dolphin Medical business related to certain specified products. The Company
recorded $1,200,000 as minority interest and $800,000 as consideration for the
distribution rights based on estimated fair value. The distribution rights
liability is being amortized over the five-year term of the distribution
agreement. No consideration was allocated to the option as the fair value of the
Dolphin Medical assets and liabilities subject to the option was less than the
minimum purchase price of the option. The option terminates upon the earlier of
December 31, 2008 or the termination of the related distribution agreement with
the customer. The option price is set at a multiple of Dolphin Medical's revenue
for the twelve months prior to the exercise of the option but not to be less
than $30,000,000 through December 31, 2007 and $40,000,000 from January 1, 2008
through December 31, 2008. At June 30, 2005, the remaining liability for the
distribution rights totaled $547,000 and is included in deferred revenue in the
accompanying combined balance sheet. In addition, the value of the option at
June 30, 2005 was not significant.
- --------------------------------------------------------------------------------
48
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
PURCHASE COMMITMENT -- In November 2004, an agreement was entered into with an
OEM manufacturer to design and manufacture a patient monitor for Spacelabs
Medical. The agreement specifies that we will buy a minimum number of monitors
from the manufacturer during each year of the contract at a fixed price. We may
provide 12 months notice to terminate the agreement without cause after the
second year of the contract. Given this termination clause, our minimum purchase
commitment under this agreement is three years of purchases, which totals
approximately $8.9 million. We expect to take delivery on the first units under
this contract during the 2006 fiscal year.
Minimum future purchases under this agreement are as follows (in thousands):
US$'000
Fiscal year:
2006 1,490
2007 2,980
2008 2,980
2009 1,490
2010 --
2011 and thereafter --
-----
Total 8,940
=====
LETTERS OF CREDIT -- Spacelabs Medical has an arrangement with a bank in the
United States that provides for up to $100,000 in letters of credit and $400,000
for overdrafts borrowings. As of June 30, 2005, a $58,400 standby letter of
credit was outstanding under the letter of credit portion of the facility. The
overdraft borrowings portion bears interest at the bank's prime rate (6.25% at
June 30, 2005) plus 3%. There were no outstanding amounts under the overdraft
borrowing portions of the facility as of June 30, 2005. The facility is
collateralised by a guarantee from OSI.
PLEDGE OF ASSETS -- Substantially all of the assets of the Company's U.S.
subsidiaries are pledged as collateral to OSI's bank in connection with their
senior revolving line of credit. In addition, OSI's senior revolving line of
credit agreement contains certain restrictive covenants that impact the Company.
These include restrictions on the payment of dividends, incurrence of additional
indebtedness, incurrence of liens and mergers and acquisitions.
LITIGATION -- In March 2004, certain individuals named Spacelabs Medical, and
OSI Systems Inc., and a hospital in a petition claiming that the individuals
suffered injuries in March 2003 caused, in part, by a defective monitoring
system manufactured by Spacelabs Medical. The amount of the claim has not yet
been specified.
In April 2004, certain individuals named Spacelabs Medical, as well as several
other defendants, in a petition that alleges, among other things, that a product
possibly manufactured by Spacelabs Medical failed to properly monitor a hospital
patient thereby contributing to the patient's death in November 2001. The amount
of the claim has not yet been specified.
In accordance with SFAS No. 5, "Accounting for Contingencies," the Company has
not accrued for loss contingencies relating to the above matters because it
believes that, although unfavorable outcomes in the proceedings or unasserted
claims may be possible, they are not considered by management to be probable or
reasonably estimable. If one or more of these matters are resolved in a manner
adverse to the Company, the impact on the Company's results of operations,
financial position and/or liquidity could be material.
In August 2004, the former president of Spacelabs Medical submitted an
arbitration claim against both Spacelabs and OSI alleging breach of a retention
and severance agreement seeking approximately $1.5 million and punitive damages.
This claim was settled subsequent to June 30, 2005 for $950,000, with $578,000
being paid by Spacelabs Medical and $372,000 by OSI. The Company's $578,000
share of the settlement amount was determined based on the retention component
of the settlement and is included in payroll and related accruals in the
combined balance sheet as of June 30, 2005.
In February 2005, a Greek distribution company filed an action in the courts of
Greece claiming that Spacelabs orally agreed to appoint them as Spacelabs'
exclusive Greek distributor in 1999, but failed to do so. The distribution
company claims that it incurred significant expenses as a result of Spacelabs'
actions, and demands euro 872,414 (approximately $1,054,000 as of June 30, 2005)
in compensation. The Company has
- --------------------------------------------------------------------------------
49
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
accrued a $250,000 loss contingency for this claim which represents the
Company's best estimate of the probable loss that may be incurred. This amount
is included in other accruals in the consolidated balance sheet as of June 30,
2005.
Various lawsuits and claims are pending against the Company, including product
liability claims which are generally covered by insurance policies. Although the
outcome of such lawsuits and claims cannot be predicted with certainty, the
expected disposition thereof will not, in the opinion of management both
individually and in the aggregate, result in a material adverse effect on the
Company's results of operations and financial position.
7. STOCK OPTION PLANS
THE 2004 SPACELABS MEDICAL STOCK OPTION PLAN -- The 2004 Spacelabs Plan was
established in April 2004 and authorizes the grant of up to 10,000,000 shares of
Spacelab Medical common stock in the form of nonqualified options. Employees,
consultants and non-employee directors of Spacelabs Medical, the Company, OSI or
OSI's subsidiaries, are eligible under this plan, which is administered by the
board of directors of Spacelabs Medical, who determine the terms and conditions
of each grant. Exercise periods for the options granted under the 2004 Spacelabs
Plan may not exceed ten years from the grant date, or such lesser period of time
as is set forth in each individual stock option agreement. All stock options
granted to date have an expiration period of five years.
The following summarises stock option activity for the 2004 Spacelabs Plan for
the year ended June 30, 2005:
OPTION PRICE
------------------------
NUMBER OF WEIGHTED TOTAL
OPTIONS AVERAGE $'000
-------------- ---------- -----------
Outstanding -- July 1, 2004 4,887,500 $ 0.58 2,834,750
Granted 4,188,500 0.80 3,362,075
Exercised -- -- --
Forfeited (1,152,500) 0.59 (674,250)
------------- -------- -----------
Outstanding -- June 30, 2005 7,923,500 $ 0.70 5,522,575
============= ======== ===========
The following summarises pricing and term information for 2004 Spacelabs Plan
options outstanding as of June 30, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE CONTRACTUAL LIFE EXERCISE OPTIONS EXERCISE
PRICES (YEARS) PRICE EXERCISABLE PRICE
- ----------------- ------------------ ----------- ------------- ----------
$0.58 -- $0.95 4.18 $0.70 943,750 $0.58
THE 2001 DOLPHIN MEDICAL STOCK OPTION PLAN -- The 2001 Dolphin Plan was
established in 2001 and authorises the grant of up to 10,000,000 shares of
Spacelab Medical common stock in the form of nonqualified options. Employees,
consultants and non-employee directors of Dolphin Medical, the Company or the
Company's subsidiaries, are eligible under this plan, which is administered by
the board of directors of Dolphin Medical, who determine the terms and
conditions of each grant. Exercise periods for the options granted under the
2001 Dolphin Plan may not exceed ten years from the grant date, or such lesser
period of time as is set forth in each individual stock option agreement. All
stock options granted to date have an expiration period of five years.
The following summarises stock option activity for the 2001 Dolphin Plan for the
fiscal years ended June 30:
OPTION PRICE
--------------------------
NUMBER OF WEIGHTED TOTAL
OPTIONS AVERAGE $'000
--------------- ---------- -------------
Outstanding -- July 1, 2004 6,760,000 $ 0.05 338,000
Granted -- -- --
Exercised (2,187,500) 0.05 (109,375)
Forfeited (2,937,500) 0.05 (146,875)
---------- -------- --------
Outstanding -- June 30, 2005 1,635,000 $ 0.05 81,750
========== ======== ========
- --------------------------------------------------------------------------------
50
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
The following summarises pricing and term information for 2001 Dolphin Plan
options outstanding as of June 30, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE CONTRACTUAL LIFE EXERCISE OPTIONS EXERCISE
PRICES (YEARS) PRICE EXERCISABLE PRICE
- -------------- ------------------ ----------- ------------- ----------
$0.05 1.75 $0.05 1,226,250 $0.05
8. RELATED-PARTY TRANSACTIONS
ALLOCATIONS -- All operating expenses associated with the Company are included
in the accompanying combined financial statements, including expenses incurred
by OSI on behalf of the Company. Certain corporate expenses incurred by OSI that
are not practicable to be specifically identified as costs of the Company, which
include human resources, treasury, accounting, information technology and
executive officer costs, have been allocated by OSI. Management has allocated
these costs based on percentage estimates of time or departmental effort devoted
to working on Company related matters in relation to overall OSI matters.
Allocated costs of $1,479,000 for the year ended June 30, 2005 are included in
selling, general and administrative expenses in the accompanying combined
statement of operations. Management of the Company believes these methods of
allocation are reasonable, and approximate what these expenses would have been
on a stand-alone basis.
LOAN FROM PARENT -- OSI provides loans to the Company for working capital and to
fund acquisitions. Through June 30, 2005, the loans were non-interest bearing
and have unspecified repayment terms. Prior to completion of the public offering
the Company intends to enter into a formal loan agreement with OSI that will
specify that interest will accrue on the loans at the Prime Rate and will allow
OSI to call for full or partial repayment of the loans with a notice period of
367 days. Accordingly, the loans are recorded as long term on the accompanying
combined balance sheet. If the proposed public offering is completed, the
Company intends to use approximately $45,000,000 of the proceeds to repay a
portion of this loan. The Company believes the carrying value of the loan from
parent approximates its fair value as the loan will bear a market rate of
interest.
SUPPLY ARRANGEMENTS -- Spacelabs Medical purchases printed circuit board
assemblies from a subsidiary of OSI. Dolphin Medical purchases sub-assemblies
and finished goods from various OSI subsidiaries. For the year ended June 30,
2005, inventory purchases from OSI affiliates totaled $10,840,000. Management of
the Company believes the costs of these purchases are equivalent to what the
Company could purchase from third party suppliers.
MANUFACTURING AND OFFICE FACILITIES -- Certain of the Company's businesses share
manufacturing and office space with OSI and its subsidiaries. The cost of these
facilities is charged to the Company based on square-footage of the shared
facility. The total amount charged to the Company for the year ended June 30,
2005 was $365,000.
INSURANCE -- The Company is covered under OSI's various liability and property
insurance coverages. The actual costs of these coverages are charged to the
Company on a specific identification basis. The total amount charged to the
Company for the year ended June 30, 2005 was $1,631,000.
OTHER -- OSI and certain of its subsidiaries also perform other activities on
behalf of the Company including accounting, legal, information technology, and
engineering. For the year ended June 30, 2005, OSI charged the Company $508,000
related to these services based on the actual costs of the services provided.
TAX SHARING AGREEMENT -- Prior to completion of the public offering, the Company
intends to enter into a tax sharing agreement with OSI. The terms of this
agreement are expected to assign responsibility to the Company for all taxes
arising in the pre-separation period attributable to the Company. OSI is
expected to retain, and indemnify the Company for, among other things, the tax
liabilities incurred as a result of transferring assets to the Company. Any
other separation-related tax liabilities generally will be paid by the party
legally responsible and OSI and the Company will agree to cooperate in the
resolution of such taxes. The tax sharing agreement is also expected to deal
with the allocation of obligations and responsibilities in connection with
certain administrative matters relating to taxes.
- --------------------------------------------------------------------------------
51
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLAN -- The U.S. employees of the Company are eligible to
participate in OSI qualified employee retirement savings plan. The plan provides
for a contribution by the Company, which is determined annually by the Board of
Directors. In addition, the plan permits voluntary salary reduction
contributions by employees. The Company contributed $604,000 to the plan for the
fiscal year ended June 30, 2005.
OSI EMPLOYEE STOCK PURCHASE PLAN -- The U.S. Employees of the Company who have
been regular employees for at least six months and who meet certain other
criteria, are eligible to purchase through regular payroll deductions shares of
OSI Common Stock. The plan is administered by the Board of Directors of OSI or a
committee of the board and qualifies as an "employee stock purchase plan" as
defined in Section 423 of the Internal Revenue Code. The Company's liability to
the plan was $326,000 at June 30, 2005, representing payroll deductions from the
Company's employees that have not yet been used to purchase OSI Common Stock.
10. SEGMENT INFORMATION
The Company operates in two reportable segments as defined by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"). The Monitoring Solutions segment includes two operating segments Patient
Monitoring/Anaesthesia and Dolphin Medical. "All Other" includes the Company's
medical data services business. The Patient Monitoring/Anaesthesia and Dolphin
Medical operating segments have been aggregated pursuant to the rules of FAS
131. The aggregated businesses provide products and services within the medical
products market and have similar economic characteristics, including similar
operating margins. The businesses have similar production processes, similar
types and classes of customers, and sell through similar distribution channels.
In addition, the different businesses operate within the same overall regulatory
environment. The accounting policies of the two segments are identical to the
policies in Note 1. There were no inter-segment revenues during the year ended
June 30, 2005.
The following tables present the operations and identifiable assets by segment
as of June 30, 2005 and for the year then ended:
MONITORING
SOLUTIONS ALL OTHER TOTAL
----------- ----------- ----------
US$'000 US$'000 US$'000
External customer revenue 190,205 5,526 195,731
======= ===== =======
Income from operations 6,450 659 7,109
======= ===== =======
Total assets 128,382 2,879 131,261
======= ===== =======
Capital expenditures 3,676 305 3,981
======= ===== =======
Depreciation and amortisation expense 3,276 28 3,304
======= ===== =======
Revenues from external customers by geographic region, based on location of the
end-customer, and by product group are as follows for the year ended June 30,
2005:
UNITED STATES FOREIGN TOTAL
--------------- --------- ----------
US$'000 US$'000 US$'000
Capital equipment 93,778 40,034 133,812
Services, spare parts, supplies and
accessories 36,604 25,315 61,919
------- ------ -------
Total revenue 130,382 65,349 195,731
======= ====== =======
No single country outside of the United States represents more than 10% of total
revenue.
The Company's long-lived assets are distributed as follows as of June 30, 2005:
UNITED STATES FOREIGN TOTAL
--------------- --------- --------
US$'000 US$'000 US$'000
Total long-lived assets 22,524 10,455 32,979
====== ====== ======
Long-lived assets in the U.K. totaled $9,188,000 as of June 30, 2005.
- --------------------------------------------------------------------------------
52
PART 3 -- FINANCIAL INFORMATION ON SPACELABS MEDICAL, INC. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
11. SUPPLEMENTAL CASH FLOW INFORMATION
The following provides additional information concerning cash flow activities
for the year ended June 30, 2005:
US$'000
Interest paid 30
Income taxes paid 592
Unrealised gain on marketable securities 154
12. SUBSEQUENT EVENTS
PUBLIC OFFERING -- OSI has engaged Collins Stewart, a London-based investment
bank to pursue the public offering and listing of approximately 30% to 35% of
the equity in the Company. This offering and listing is planned in the United
Kingdom on the AIM Exchange, which is owned and administered by the London Stock
Exchange. The shares in Spacelabs Healthcare will not be offered or sold in the
United States. Under SEC Regulation S, U.S. residents are prohibited from
participating in this proposed offering of shares in the newly formed company,
and any shares offered cannot be acquired by U.S. residents for a period of
twelve months from the date of the offering.
HURRICANE KATRINA -- Certain customers of Spacelabs Medical in the Gulf Coast
region of the United States may have incurred significant damage in August 2005
as a result of Hurricane Katrina which may impair or delay their ability to pay
the Company for amounts owing. In addition, service and demonstration
inventories of the Company's field service engineers and sales representatives
may have been damaged or lost in the storm and resulting flooding. The Company
does not expect that this damage will have a material impact on financial
results but is in the process of assessing the extent of the damage and is
unable at this time to determine the related costs. The Company is currently
reviewing the terms of its insurance coverages with its broker and carriers.
STOCK OPTIONS -- On July, 11 2005, Spacelabs Medical granted stock options for
739,000 shares under the 2004 Spacelabs Plan to employees and directors at an
exercise price of $10.
- --------------------------------------------------------------------------------
53
- --------------------------------------------------------------------------------
PART 4 -- ACCOUNTANTS' REPORT ON SPACELABS HEALTHCARE, INC.
The Directors
Spacelabs Healthcare, Inc.
5150 220th Avenue SE,
Issaquah,
Washington 98029
[o] October 2005
Dear Sirs,
SPACELABS HEALTHCARE, INC. ("THE COMPANY")
INTRODUCTION
We report on the financial information relating to the Company, as set out
below, prepared for inclusion in the Admission Document dated [ o ] October,
2005 of the Company ("the Admission Document") relating to the admission of
Spacelabs Healthcare, Inc.'s share capital to trading on AIM, a market operated
by London Stock Exchange plc. This financial information has been prepared for
inclusion in the Admission Document on the basis of the accounting policies set
out in the Notes to the financial information in Part 4 of the Admission
Document. This report is required by paragraph (a) of Schedule Two to the AIM
Rules as if Annex I item 20.1 of the Prospectus Rules applied and is given for
the purpose of complying with that requirement and for no other purpose.
RESPONSIBILITY
The Directors of the Company are responsible for preparing the financial
information on the basis of preparation set out in note 1 to the financial
information in part 4 of the Admission Document and are in accordance with
accounting standards generally accepted in the United States ("US GAAP").
It is our responsibility to form an opinion as to whether the financial
information gives a true and fair view, for the purposes of the Admission
Document, and to report our opinion to you.
BASIS OF OPINION
We conducted our work in accordance with Standards for Investment Reporting
issued by the Auditing Practices Board in the United Kingdom. Our work included
an assessment of evidence relevant to the amounts and disclosures in the
financial information. It also included an assessment of significant estimates
and judgments made by those responsible for the preparation of the financial
information and whether the accounting policies are appropriate to the entity's
circumstances, consistently applied and adequately disclosed.
We planned and performed our work so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial information
is free from material misstatement whether caused by fraud or other irregularity
or error.
OPINION
In our opinion, the financial information gives, for the purposes of the
Admission Document, a true and fair view of the state of affairs of the
Spacelabs Healthcare, Inc. as at the date stated in accordance with the basis of
preparation set out in note 1 and in accordance with US GAAP as described in
note 1.
DECLARATION
For the purposes of Paragraph (a) of Schedule Two of the AIM Rules we are
responsible for this report as part of the AIM admission document and declare
that we have taken all reasonable care to ensure that the information contained
in this report is, to the best of our knowledge, in accordance with the facts
and contains no omission likely to affect its import. This declaration is
included in the AIM admission document in compliance with Schedule Two of the
AIM Rules.
Yours faithfully
Deloitte & Touche LLP
Chartered Accountants
- --------------------------------------------------------------------------------
54
- --------------------------------------------------------------------------------
PART 4 -- FINANCIAL INFORMATION ON SPACELABS HEALTHCARE, INC.
BALANCE SHEET
AS AT
31 AUGUST 2005
NOTE $
------ --------------
CURRENT LIABILITIES
Accounts Payable 2 687
---
Net Assets 687
===
SHAREHOLDERS' FUNDS
Share capital 3 1
Paid-in-capital 999
Receivable from OSI (1,000)
Current year loss 687
------
687
======
NOTES TO THE FINANCIAL INFORMATION
(1) ACCOUNTING POLICIES
The financial information has been prepared under the historical cost convention
and in accordance with generally accepted accounting standards in the United
States of America ("US GAAP").
(2) HISTORY
The Company was incorporated on 2 August 2005 under the name Spacelabs
Healthcare, Inc. The Company has not traded and no dividends have been declared
or paid. Accordingly no profit and loss account or cash flow statement is
presented. The only transaction reflected is a payable to OT Corporation for the
set-up costs involved in establishing a legal entity in Delaware.
(3) SHARE CAPITAL
The Company was incorporated with an authorised share capital of $250,000
represented by 250,000,000 ordinary shares of $0.001 each and $10 represented by
10,000 shares of Preferred stock with a par value of $0.001 each. At 31 August
2005, the Company had issued 1,000 ordinary shares of $0.001 each at par.
(4) POST BALANCE SHEET EVENTS
PUBLIC OFFERING -- OSI has engaged Collins Stewart, a London-based investment
bank to pursue the public offering and listing of approximately 30% to 35% of
the equity in the Company. This offering and listing is planned in the United
Kingdom on the AIM Exchange, which is owned and administered by the London Stock
Exchange. The shares in Spacelabs Healthcare will not be offered or sold in the
United States. Under SEC Regulation S, U.S. residents are prohibited from
participating in this proposed offering of shares in the newly formed company,
and any shares offered cannot be acquired by U.S. residents for a period of
twelve months from the date of the offering.
- --------------------------------------------------------------------------------
55
- --------------------------------------------------------------------------------
PART 5 -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS
The following are financial statements of Blease Medical Holdings for the years
ended 31 May 2003 and 31 May 2004. The financial information contained in this
Part 5 has been derived from financial statements delivered to Companies House.
No separate financial information is presented in respect of each subsidiary
undertaking of Blease Medical Holdings, as the accounts of those subsidiary
undertakings are not considered to be reasonably necessary for the purposes of
making an informed assessment of the Group's assets and liabilities, financial
position, profits and losses and prospects, or of the securities being offered.
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS
REPORT OF THE INDEPENDENT AUDITORS TO THE MEMBERS OF BLEASE MEDICAL HOLDINGS
LIMITED
We have audited the financial statements of Blease Medical Holdings Limited for
the period ended 31 May 2003 which comprise the consolidated profit and loss
account, the consolidated and company balance sheets and the consolidated notes
1 to 29. These financial statements have been prepared under the accounting
policies set out therein.
This report is made solely to the company's members, as a body, in accordance
with Section 235 of the Companies Act 1985. Our audit work has been undertaken
so that we might state to the company's members those matters we are required to
state to them in an auditors' report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone
other than the company and the company's members as a body, for our audit work,
for this report, or for the opinions we have formed.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors' responsibilities for preparing the directors' report and the
financial statements in accordance with United Kingdom law and accounting
standards are set out in the statement of directors' responsibilities.
Our responsibility is to audit the financial statements in accordance with
relevant legal and regulatory requirements and United Kingdom auditing
standards.
We report to you our opinion as to whether the financial statements give a true
and fair view and are properly prepared in accordance with the Companies Act
1985. We also report to you if, in our opinion, the directors' report is not
consistent with the financial statements, if the company has not kept proper
accounting records, if we have not received all the information and explanations
we require for our audit, or if information specified by law regarding
directors' remuneration and transactions with the company is not disclosed.
We read other information contained in the chairman's and directors' reports,
and consider whether it is consistent with the audited financial statements. We
consider the implications for our report if we become aware of any apparent
misstatements or material inconsistencies with the financial statements. Our
responsibilities do not extend to any other information.
BASIS OF OPINION
We conducted our audit in accordance with United Kingdom auditing standards
issued by the Auditing Practices Board. An audit includes examination, on a test
basis, of evidence relevant to the amounts and disclosures in the financial
statements. It also includes an assessment of the significant estimates and
judgements made by the directors in the preparation of the financial statements,
and of whether the accounting policies are appropriate to the company's
circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
- --------------------------------------------------------------------------------
56
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2003
- --------------------------------------------------------------------------------
REPORT OF THE INDEPENDENT AUDITORS TO THE MEMBERS OF
BLEASE MEDICAL HOLDINGS LIMITED
FUNDAMENTAL UNCERTAINTY
In forming our opinion we have considered the adequacy of disclosures made in
the financial statements concerning the borrowing facilities which are available
to the group. The financial statements have been prepared on a going concern
basis, the validity of which depends on the Group being able to operate within
the existing bank facilities. The financial statements do not include any
adjustments that would result from a failure to operate within these facilities.
Details of the circumstances relating to this fundamental uncertainty are
described on page 56 of this document. Our opinion is not qualified in this
respect.
OPINION
In our opinion the financial statements give a true and fair view of the state
of affairs of the group and the company at 31 May 2003 and of the group loss for
the year then ended and have been properly prepared in accordance with the
Companies Act 1985.
GRANT THORNTON
REGISTERED AUDITORS
CHARTERED ACCOUNTANTS
LONDON THAMES VALLEY OFFICE
SLOUGH
11 MAY 2004
- --------------------------------------------------------------------------------
57
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2003
- --------------------------------------------------------------------------------
PRINCIPAL ACCOUNTING POLICIES
The financial statements have been prepared under the historical cost
convention.
Subsequent to the year end the group carried out a refinancing programme through
the issue of (pounds)529,412 Secured Loan Notes 2009 with warrants
attached covering the subscription at par for a further 105,882 ordinary shares
at a price of (pounds)1 per share.
The group has continuing bank facilities to 31 August 2004 and is actively
pursuing plans agreed with the bank to reduce the required facilities by that
date. The group is currently operating within its facilities and the directors
are confident that provided the groups trading and working capital are in line
with expectations the existing facility will be sufficient.
If the group does not achieve requisite profitability or working capital
requirements exceed expectation the directors may then seek to obtain further
funds. The financial statements do not therefore include any adjustment that
might arise from the inability of the group to trade as a going concern.
The principal accounting policies of the group are set out below and have
remained unchanged from previous years, apart from deferred taxation.
BASIS OF CONSOLIDATION
The group financial statements consolidate those of the company and its
subsidiary undertakings (see note 11) drawn up to 31 May 2003. All of a
subsidiary's assets and liabilities which exist at the date of acquisition are
recorded at their fair values reflecting their condition at that date and
profits or losses on intra-group transactions are eliminated in full on
consolidation
TURNOVER
Turnover is the total amount receivable by the group in the ordinary course of
business with outside customers for goods supplied as a principal and for
services provided, excluding VAT and trade discounts. In the case of income from
maintenance agreements, recognition of sales is taken over the period of the
contract.
DEPRECIATION
Depreciation is calculated to write down the cost less estimated residual value
of all tangible fixed assets by equal annual instalments over their expected
useful lives.
The periods generally applicable are:
Plant and machinery 2 -- 5 years
Fixtures and fittings 4 -- years
Motor vehicles 4 years
RESEARCH AND DEVELOPMENT
Development costs incurred on specific projects are capitalised when
recoverability can be assessed with reasonable certainty and amortised once the
product has come to commercial production over a period of five years, which is
expected to be in line with sales arising from the projects. All other
development and all research costs are written off as incurred.
INTANGIBLE FIXED ASSETS
Goodwill on acquisition is calculated as being the difference between the
consideration paid and the fair value of the assets purchased. This is
capitalised and amortised over its estimated useful life, considered to be ten
years.
Identifiable intellectual property purchased separately from a business is
included at cost and amortised over its expected useful economic life.
INVESTMENTS IN SUBSIDIARIES
Investments in subsidiaries are stated at cost, less amounts written off.
- --------------------------------------------------------------------------------
58
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2003
- --------------------------------------------------------------------------------
STOCK AND WORK IN PROGRESS
Stock and work in progress is stated at the lower of cost and net realisable
value.
DEFERRED TAX
Deferred tax is recognised on all timing differences where the transactions or
events that give the group an obligation to pay more tax in the future, or a
right to pay less tax in the future, have occurred by the balance sheet date.
Deferred tax assets are recognised when it is more likely than not that they
will be recovered. Deferred tax is measured using rates of tax that have been
enacted or substantively enacted by the balance date.
FOREIGN CURRENCIES
Monetary assets and liabilities in foreign currencies are translated at the
rates of exchange ruling at the balance sheet date. The accounting policy for
foreign currency translation is as prescribed by Statement of Standard
Accounting Practice No. 20.
LEASED ASSETS
Where assets are financed by leasing agreements which give risk and rewards
approximate to ownership ("finance leases") they are treated as if they had been
purchased outright on credit. They are therefore initially recorded as a fixed
asset and a liability at a sum equal to the fair value of the asset. Leasing
payments on such assets are regarded as consisting of a capital element which
reduces the outstanding liability and an interest charge (calculated using the
straight-line method).
All other leases are regarded as operating leases and the total payments made
under them are charged to the profit and loss account on a straight line basis
over the lease term.
CONTRIBUTIONS TO PENSION FUNDS
DEFINED CONTRIBUTION SCHEME
The pension costs charged against profits represent the amount of the
contributions payable to the scheme in respect of the accounting period.
- --------------------------------------------------------------------------------
59
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2003
- --------------------------------------------------------------------------------
CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MAY 2003
NOTE 2003 2002
(pounds) (pounds)
Turnover 1 11,009,125 10,702,900
Cost of sales (8,191,164) (7,747,539)
---------- ----------
Gross profit 2,817,961 2,955,361
Distribution costs (1,369,618) (1,100,049)
Administrative expenses (2,019,838) (1,569,518)
---------- ----------
OPERATING (LOSS)/PROFIT (571,495) 285,794
Interest receivable and similar income 2 3,827 1,473
Interest payable and similar charges 3 (59,451) (80,983)
---------- ----------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE
TAXATION 1 (627,119) 206,284
Tax on (loss)/profit on ordinary activities 5 81,018 (75,174)
---------- ----------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION 20 (546,101) 131,110
Appropriations -- equity 7 (7,920) (51,213)
---------- ----------
(LOSS)/PROFIT TRANSFERRED (FROM)/TO RESERVES 20 (554,021) 79,897
========== ==========
There were no recognised gains or losses other than the (loss)/profit for the
financial year.
The accompanying accounting policies and notes form an integral part of these
financial statements.
- --------------------------------------------------------------------------------
60
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2003
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AT 31 MAY 2003
NOTE 2003 2002
(pounds) (pounds)
FIXED ASSETS
Intangible assets 9 174,454 227,650
Tangible assets 10 723,273 564,623
------- -------
897,727 792,273
CURRENT ASSETS
Stocks 12 1,796,213 2,356,743
Debtors 13 2,091,419 2,418,949
Cash at bank and in hand 216,832 4,891
--------- ---------
4,104,464 4,780,583
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 14 (3,542,925) (3,448,424)
---------- ----------
NET CURRENT ASSETS 561,539 1,332,159
---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 1,459,266 2,124,432
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN
ONE YEAR 15 (244,630) (319,690)
PROVISION FOR LIABILITIES AND CHARGES 17 -- (28,165)
---------- ----------
1,214,636 1,776,577
========== ==========
CAPITAL AND RESERVES
Called up share capital 19 529,412 529,412
Capital redemption reserve 20 75,000 75,000
Share premium account 20 1,045,588 1,045,588
Profit and loss account 20 (435,364) 126,577
---------- ----------
SHAREHOLDERS' FUNDS 1,214,636 1,776,577
========== ==========
The financial statements were approved by the Board of Directors on 11 May 2004.
Mr A J D Ferguson -- Director
The accompanying accounting policies and notes form an integral part of these
financial statements.
- --------------------------------------------------------------------------------
61
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2003
- --------------------------------------------------------------------------------
COMPANY BALANCE SHEET AT 31 MAY 2003
NOTE 2003 2002
(pounds) (pounds)
FIXED ASSETS
Investments 11 1,000,000 1,000,000
CURRENT ASSETS
Debtors 13 -- 650,000
Cash at bank and in hand 1 1
--------- ---------
1 650,001
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 14 (1) (1)
--------- ---------
NET CURRENT ASSETS -- 650,000
--------- ---------
1,000,000 1,650,000
========= =========
CAPITAL AND RESERVES
Called up share capital 19 529,412 529,412
Capital redemption reserve 20 75,000 75,000
Share premium account 20 1,045,588 1,045,588
Profit and loss account 20 (650,000) --
--------- ---------
SHAREHOLDERS' FUNDS 1,000,000 1,650,000
========= =========
The financial statements were approved by the Board of Directors on 11 May 2004.
Mr A J D Ferguson -- Director
The accompanying accounting policies and notes form an integral part of these
financial statements.
- --------------------------------------------------------------------------------
62
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2003
- --------------------------------------------------------------------------------
CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MAY 2003
NOTE 2003 2003 2002 2002
(pounds) (pounds) (pounds) (pounds)
NET CASH (OUTFLOW)/INFLOW FROM OPERATING
ACTIVITIES 21 (5,952) 797,935
RETURNS ON INVESTMENTS AND SERVICING OF
FINANCE
Interest received 3,827 --
Interest paid (59,451) (70,280)
Dividends paid (15,840) --
------- -------
NET CASH OUTFLOW FROM RETURNS ON
INVESTMENTS AND SERVICING OF FINANCE (71,464) (70,280)
CORPORATION TAX PAID (39,397) --
CAPITAL EXPENDITURE AND FINANCIAL
INVESTMENT
Purchase of tangible fixed assets (359,300) (258,947)
Sale of tangible fixed assets 2,133 777
-------- --------
NET CASH OUTFLOW FROM CAPITAL EXPENDITURE
AND FINANCIAL INVESTMENT (357,167) (258,170)
FINANCING
Repayment of borrowing (53,900) (46,779)
Capital element of finance lease rentals (23,923) (32,943)
-------- --------
NET CASH OUTFLOW FROM FINANCING (77,823) (79,722)
(DECREASE)/INCREASE IN CASH 22 -------- --------
(551,803) 389,763
======== ========
The accompanying accounting policies and notes form an integral part of these
financial statements.
- --------------------------------------------------------------------------------
63
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2003
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MAY 2003
1. TURNOVER AND (LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
Turnover and (loss)/profit before taxation are attributable to the continuing
operations and principal activity of the design, manufacture, and distribution
of medical ventilation and anaesthetic equipment and associated equipment.
2003 2002
(pounds) (pounds)
United Kingdom 4,908,331 4,817,836
Overseas 6,100,794 5,885,064
---------- ----------
11,009,125 10,702,900
========== ==========
Further analysis of sales and operating loss before tax by geographical area has
not been provided as in the opinion of the directors this would be seriously
prejudicial to the interests of the group.
The (loss)/profit on ordinary activities is stated after charging:
2003 2002
(pounds) (pounds)
Auditors' remuneration 16,650 16,550
Depreciation of tangible fixed assets:
- -- owned 174,650 134,232
- -- held under finance leases 26,000 33,751
Amortisation of intangible fixed assets:
- -- goodwill 19,797 19,797
- -- development costs 26,479 26,479
- -- intellectual property 6,920 6,920
Operating lease rentals:
- -- hire of plant and machinery 157,392 138,130
- -- land and buildings 176,085 154,736
Research and development:
- -- current year expenditure 600,319 488,851
Exchange loss/(gain) 31,432 (28,308)
======= =======
2. INTEREST RECEIVABLE AND SIMILAR INCOME
2003 2002
(pounds) (pounds)
Bank interest receivable 3,827 1,473
===== =====
3. INTEREST PAYABLE AND SIMILAR CHARGES
2003 2002
(pounds) (pounds)
On bank loans and overdrafts 59,451 80,983
====== ======
4. DIRECTORS AND EMPLOYEES
The average number of employees of the group during the year and their aggregate
emoluments are shown below:
2003 2002
(pounds) (pounds)
Wages and salaries 2,944,720 2,506,387
Social security costs 282,605 237,148
Other pension costs 55,437 43,926
--------- ---------
3,282,762 2,787,461
========= =========
- --------------------------------------------------------------------------------
64
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2003
- --------------------------------------------------------------------------------
The average number of employees of the group during the year was 119 (2002:
107).
Staff costs include remuneration in respect of directors, as follows:
2003 2002
(pounds) (pounds)
Management remuneration 96,024 104,667
Pension contributions 12,600 12,600
------- -------
108,624 117,267
======= =======
The amounts set out above include remuneration in respect of the highest paid
director as follows:
2003 2002
(pounds) (pounds)
The highest paid director 108,624 104,667
======= =======
5. TAX ON (LOSS)/PROFIT ON ORDINARY ACTIVITIES
The tax (credit)/charge represents:
2003 2002
(pounds) (pounds)
Corporation tax -- 47,009
Deferred taxation (28,165) 28,165
Adjustment in respect of prior periods (52,853) --
------- ------
(81,018) 75,174
======= ======
6. FACTORS AFFECTING THE TAXATION (CREDIT)/CHARGE
2003 2002
(pounds) (pounds)
(Loss)/profit on ordinary activities before taxation (627,119) 206,284
Rate of corporation tax 30% 30%
Expected corporation tax charge (188,136) 61,885
Effect of:
Permanent differences 15,786 21,547
Movement in accelerated capital allowances (15,391) (7,586)
Utilisation of tax losses and advanced corporation
tax brought forward -- (15,414)
Carry back of tax losses 62,072 --
Accumulation of tax losses 125,669 --
Marginal relief adjustment -- (13,423)
Deferred taxation (28,165) 28,165
Adjustments in respect of prior periods (52,853) --
------- -------
Tax (credit)/charge for the year (81,018) 75,174
======= =======
7. APPROPRIATIONS
2003 2002
(pounds) (pounds)
EQUITY APPROPRIATIONS:
Fixed cumulative preferential dividend 7,920 11,880
Cumulative preferential dividend of 30%
of profit after tax -- 39,333
----- ------
7,920 51,213
===== ======
8. PROFIT FOR THE FINANCIAL YEAR
The parent company has taken advantage of section 230 of the Companies Act 1985
and has not included its own profit and loss account in these financial
statements. The loss after taxation but before dividends was (pounds)634,160
(2002: (pounds)nil) and has been dealt with in the financial statements of the
company.
- --------------------------------------------------------------------------------
65
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2003
- --------------------------------------------------------------------------------
9. INTANGIBLE FIXED ASSETS -- GROUP
DEVELOPMENT INTELLECTUAL
TOTAL GOODWILL COSTS PROPERTY
(pounds) (pounds) (pounds) (pounds)
Cost
At 1 June 2002 and at 31 May 2003 364,875 197,977 132,296 34,602
------- ------- ------- ------
Amortisation
At 1 June 2002 137,225 68,488 50,147 18,590
Provided in the year 53,196 19,797 26,479 6,920
------- ------- ------- ------
At 31 May 2003 190,421 88,285 76,626 25,510
------- ------- ------- ------
Net book amount at 31 May 2003 174,454 109,692 55,670 9,092
======= ======= ======= ======
Net book amount at 31 May 2002 227,650 129,489 82,149 16,012
======= ======= ======= ======
10. TANGIBLE FIXED ASSETS -- GROUP
PLANT AND FIXTURES AND MOTOR
TOTAL MACHINERY FITTINGS VEHICLES
(pounds) (pounds) (pounds) (pounds)
Cost
At 1 June 2002 2,022,012 1,260,317 694,659 67,036
Additions 359,300 288,863 70,437 --
Disposals (21,650) -- -- (21,650)
--------- --------- ------- -------
At 31 May 2003 2,359,662 1,549,180 765,096 45,386
--------- --------- ------- -------
Depreciation
At 1 June 2002 1,457,389 914,771 518,931 23,687
Provided in the year 200,650 130,428 58,876 11,346
Eliminated on disposals (21,650) -- -- (21,650)
--------- --------- ------- -------
At 31 May 2003 1,636,389 1,045,199 577,807 13,383
--------- --------- ------- -------
Net book amount at 31 May 2003 723,273 503,981 187,289 32,003
========= ========= ======= =======
Net book amount at 31 May 2002 564,623 345,546 175,728 43,349
========= ========= ======= =======
The figures stated above include assets held under finance leases as follows:
PLANT AND
MACHINERY
(pounds)
Net book amount at 31 May 2003 73,667
=======
Net book amount at 31 May 2002 118,402
=======
11. FIXED ASSETS INVESTMENTS -- COMPANY
Total fixed asset investments comprise:
2003 2002
(pounds) (pounds)
Shares in subsidiary undertakings 1,000,000 1,000,000
At 31 May 2003 the company had the following subsidiaries, all registered in
England and Wales:
ISSUED ORDINARY SHARE
PRINCIPAL ACTIVITY CAPITAL HELD BY THE COMPANY
Blease Medical Equipment Limited Manufacture and distribution of 100%
medical equipment
Blease Medical Services Limited Dormant 100% held by Blease Medical
Equipment Limited
McCrea Engineering Co Limited Dormant 100% held by Blease Medical
Equipment Limited
- --------------------------------------------------------------------------------
66
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2003
- --------------------------------------------------------------------------------
12. STOCKS -- GROUP
2003 2002
(pounds) (pounds)
Raw materials 1,261,530 1,515,521
Work in progress 299,801 654,644
Finished goods 234,882 186,578
--------- ---------
1,796,213 2,356,743
========= =========
13. DEBTORS
GROUP COMPANY GROUP COMPANY
2003 2003 2002 2002
(pounds) (pounds) (pounds) (pounds)
Trade debtors 1,966,601 -- 2,333,524 --
Amounts owed by subsidiary undertakings -- -- -- 650,000
VAT 41,755 -- 40,856 --
Other debtors 45,129 -- 9,860 --
Prepayments and accrued income 37,934 -- 34,709 --
--------- ------- --------- -------
2,091,419 -- 2,418,949 650,000
========= ======= ========= =======
14. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
GROUP COMPANY GROUP COMPANY
2003 2003 2002 2002
(pounds) (pounds) (pounds) (pounds)
Bank loan and overdrafts 1,010,693 -- 246,945 --
Trade creditors 1,442,416 -- 2,396,537 --
Current taxation -- -- 49,123 --
Social security and other taxes 133,686 -- 139,505 --
Other creditors 2,100 1 12,324 1
Accruals and deferred income 932,874 -- 580,067 --
Amounts due under finance leases 21,156 -- 23,923 --
--------- ------- --------- -------
3,542,925 1 3,448,424 1
========= ======= ========= =======
The bank loan and overdrafts are secured by an unlimited debenture over all the
assets of the group.
15. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR -- GROUP
2003 2002
(pounds) (pounds)
Bank loan 100,444 154,348
Amounts due under finance leases 44,186 65,342
Other loan 100,000 100,000
------- -------
244,630 319,690
======= =======
- --------------------------------------------------------------------------------
67
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2003
- --------------------------------------------------------------------------------
16. BORROWINGS -- GROUP
Borrowings are repayable as follows:
2003 2002
(pounds) (pounds)
Within one year:
Bank loans and overdrafts 1,010,693 246,945
Finance leases 21,156 23,923
After one and within two years:
Bank loan 50,000 50,000
Finance leases 23,236 21,156
Between two and within five years:
Bank loan 50,444 104,348
Finance leases 20,950 44,186
After five years:
Other loan 100,000 100,000
--------- -------
1,276,479 590,558
========= =======
17. PROVISION FOR LIABILITIES AND CHARGES
DEFERRED
TAXATION
(pounds)
At 1 June 2002 28,165
Released during the year (28,165)
-------
At 31 May 2003 --
=======
18. DEFERRED TAXATION
Deferred taxation provided for the financial statements is set out below.
AMOUNT AMOUNT
PROVIDED PROVIDED
2003 2002
(pounds) (pounds)
Accelerated capital allowances -- 28,165
======= =======
There is an unprovided deferred taxation liability of (pounds)15,360 at 31 May
2003 (2002: (pounds)nil), which arises due to accelerated capital allowances,
and which is not provided due to carried forward tax losses.
19. SHARE CAPITAL
2003 2002
(pounds) (pounds)
AUTHORISED
750,000 Preference shares of 10p each 75,000 75,000
45,000 `A' preferred ordinary shares of (pounds)1 each 45,000 45,000
79,412 `B' preferred ordinary shares of (pounds)1 each 79,412 79,412
463,823 Ordinary shares of (pounds)1 each 463,823 463,823
------- -------
663,235 663,235
======= =======
2003 2002
(pounds) (pounds)
ALLOTTED, CALLED UP AND FULLY PAID
45,000 `A' preferred ordinary shares of (pounds)1 each 45,000 45,000
79,412 `B' preferred ordinary shares of (pounds)1 each 79,412 79,412
405,000 Ordinary shares of (pounds)1 each 405,000 405,000
------- -------
529,412 529,412
======= =======
- --------------------------------------------------------------------------------
68
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2003
- --------------------------------------------------------------------------------
SHARE CAPITAL (CONTINUED)
PREFERENCE SHARES
The preference shares are non-equity shares which carry an entitlement to a
fixed cumulative preferential dividend of 8% of the issue price per share per
annum. They were redeemed at the issue price.
`A' PREFERRED ORDINARY SHARES
The `A' preferred ordinary shares are equity shares which carry an entitlement
of a fixed cumulative preferential dividend of (pounds)7,920 per annum to be
apportioned pro rata according to the issue price, a participating dividend,
which when added to the fixed cumulative preferential dividend is equal to 1.5%
of the profit before tax for each year, to be apportioned pro rata according to
the issue price, and a further dividend equal to the amount payable as dividends
on each `B' preferred ordinary shares and ordinary shares which is in excess of
the fixed cumulative preferential dividend and the participating dividend paid
on each `A' preferred ordinary share. Holders of `A' preferred ordinary shares
have one vote for every share held. `A' preferred ordinary shareholders have the
right on a winding-up to receive, after preference shareholders and `B'
preferred ordinary shareholders a sum equal to the issue price of `B' preferred
ordinary shares together with any arrears of dividends. Each `A' preferred
ordinary share can be converted into one ordinary share only if the holder
wishes to convert its entire holding and serves notice accordingly.
`B' PREFERRED ORDINARY SHARES
The `B' preferred ordinary shares are equity shares which carry an entitlement
to a cumulative preferential dividend of 30% of profit after tax, for each
financial year commencing on or after 1 June 2000, which will be apportioned pro
rata among holders of `B' preferred ordinary shares and ordinary shares. Holders
of `B' preferred ordinary shares have one vote for every share held. `B'
preferred shareholders have the right on a winding-up to receive, after
preference shareholders, a sum equal to the issue price. Each `B' preferred
ordinary share can be converted to one ordinary share but only if any class of
the issued share capital is admitted to the official list of the London Stock
Exchange or to trading on the Alternative Investment Market or any other
recognised investment exchange, or if the holder wishes to convert its entire
holding and serves notice accordingly.
ORDINARY SHARES
The ordinary equity shares are shares which carry an entitlement to a cumulative
preferential cash dividend of 30% of profit after tax, for each financial year
commencing on or after 1 June 2001, which will be apportioned pro rata among the
holders of ordinary shares and `B' preferred ordinary shares. Holders of
ordinary shares have one vote for every share held.
Any excess of assets on winding-up shall be distributed amongst the holders of
the preferred ordinary shares and the ordinary shares as if they constituted one
class of share.
CONTINGENT RIGHTS TO THE ALLOTMENTS OF SHARES
The company has granted options to J Rayner and R Cooke. Each option relates to
10,000 ordinary (pounds)1 shares at (pounds)5.78 per share exercisable at any
time between 14 October 2001 and 14 October 2005.
- --------------------------------------------------------------------------------
69
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2003
- --------------------------------------------------------------------------------
20. SHAREHOLDERS' FUNDS
CAPITAL SHARE
REDEMPTION SHARE PREMIUM PROFIT AND
RESERVE CAPITAL ACCOUNT LOSS ACCOUNT TOTAL
(pounds) (pounds) (pounds) (pounds) (pounds)
GROUP
At 1 June 2001 75,000 529,412 1,045,588 (4,533) 1,645,467
Profit for the year -- -- -- 131,110 131,110
Appropriations -- -- -- (51,213) (51,213)
------ ------- --------- ------- ---------
75,000 529,412 1,045,588 75,364 1,725,364
Preferential dividend not declared -- -- -- 51,213 51,213
------ ------- --------- ------- ---------
At 31 May 2002 75,000 529,412 1,045,588 126,577 1,776,577
Loss for the year -- -- -- (546,101) (546,101)
Dividends -- -- -- (7,920) (7,920)
------ ------- --------- -------- ---------
75,000 529,412 1,045,588 (427,444) 1,222,556
Dividends appropriated in prior
periods -- -- -- (7,920) (7,920)
------ ------- --------- -------- ---------
At 31 May 2003 75,000 529,412 1,045,588 (435,364) 1,214,636
====== ======= ========= ======== =========
CAPITAL SHARE
REDEMPTION SHARE PREMIUM PROFIT AND
RESERVE CAPITAL ACCOUNT LOSS ACCOUNT TOTAL
(pounds) (pounds) (pounds) (pounds) (pounds)
COMPANY
At 1 June 2001 75,000 529,412 1,045,588 -- 1,650,000
------ ------- --------- -- ---------
Profit for the year
Appropriations -- -- -- -- --
-- -- -- (51,213) (51,213)
------ ------- --------- ------- ---------
Preferential dividend not declared 75,000 529,412 1,045,588 (51,213) 1,598,787
-- -- -- 51,213 51,213
------ ------- --------- ------- ---------
At 31 May 2002 75,000 529,412 1,045,588 -- 1,650,000
Loss for the year -- -- -- (634,160) (634,160)
Dividends -- -- -- (7,920) (7,920)
------ ------- --------- -------- ---------
-- -- -- (642,080) 1,007,920
Dividend appropriated in prior
periods -- -- -- (7,920) (7,920)
------ ------- --------- -------- ---------
At 31 May 2003 75,000 529,412 1,045,588 (650,000) 1,000,000
====== ======= ========= ======== =========
Cumulative dividends to holders of ordinary shares, `A' and `B' preferred
ordinary shares are (pounds)123,708 (2002: (pounds)131,628) in arrears, and are
not included in creditors.
21. NET CASH INFLOW FROM OPERATING ACTIVITIES
2003 2002
(pounds) (pounds)
Operating (loss)/profit (571,495) 285,794
Depreciation and amortisation 253,846 221,179
Profit on sale of tangible fixed assets (2,133) (777)
Decrease/(increase) in stocks 560,530 (500,835)
Decrease/(increase) in debtors 370,657 (248,988)
(Decrease)/increase in creditors (617,357) 1,041,562
-------- ---------
Net cash (outflow)/inflow from operating activities (5,952) 797,935
======== =========
- --------------------------------------------------------------------------------
70
PART 5(A) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2003
- --------------------------------------------------------------------------------
22. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
2003 2002
(pounds) (pounds)
(Decrease)/increase in cash in the year (551,807) 389,763
Cash outflow from financing 77,827 79,722
---------- ----------
Change in net debt resulting from cash flow
in the year (473,980) 469,485
Net debt at 1 June 2002 (585,667) (1,055,152)
---------- ----------
Net debt at 31 May 2003 (1,059,647) (585,667)
========== ==========
23. ANALYSIS OF CHANGES IN NET DEBT
AT 1 JUNE AT 31 MAY
2002 CASH FLOW 2003
(pounds) (pounds) (pounds)
Overdrafts (196,945) (763,744) (960,689)
Cash in hand and at bank 4,891 211,941 216,832
-------- -------- ----------
(192,054) (551,803) (793,861)
Debt (304,348) 53,900 (250,448)
Finance leases (89,265) 23,923 (65,342)
-------- -------- ----------
(585,667) (473,980) (1,059,647)
======== ======== ==========
24. CAPITAL COMMITMENTS
The group and company had no capital commitments at 31 May 2003 and 31 May 2002.
25. GUARANTEES AND OTHER FINANCIAL COMMITMENTS
The company participates in the group bank overdraft facility and is a party to
the unlimited multilateral guarantee which secures this facility.
The group and company had no other guarantees or financial commitments at 31 May
2003 or 31 May 2002.
26. PENSIONS
Defined contribution scheme
The group operates a defined contribution pension scheme. The assets of the
scheme are administered by trustees in a fund independent from the group.
27. LEASING COMMITMENTS
Operating lease payments amounting to (pounds)323,132 (2002: (pounds)225,041)
are due within one year. The leases to which these amounts relate expire as
follows:
2003 2002
LAND AND LAND AND
BUILDINGS OTHER BUILDINGS OTHER
(pounds) (pounds) (pounds) (pounds)
In one year or less 19,000 21,636 -- 16,206
Between one and five years 106,480 113,044 61,000 51,735
In five years or more 62,500 472 96,100 --
------- ------- ------- ------
187,980 135,152 157,100 67,941
======= ======= ======= ======
28. ULTIMATE CONTROLLING PARTY
The company's ultimate controlling party is Mr A J D Ferguson, a director of the
company.
29. RELATED PARTY TRANSACTIONS
During the year the company waived a loan amounting to (pounds)650,000 due from
Blease Medical Equipment Limited, a subsidiary undertaking.
The group rents the Deansway property from Duncan Property Investments Limited,
which is under the common control of Mr A J D Ferguson. Rent charged is
considered to be a realistic reflection of market rent, this amounted to
(pounds)62,500 (2002: (pounds)62,500), all of which was paid in the relevant
year.
- --------------------------------------------------------------------------------
71
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
REPORT OF THE INDEPENDENT AUDITORS TO THE MEMBERS OF
BLEASE MEDICAL HOLDINGS LIMITED
We have audited the financial statements of Blease Medical Holdings Limited for
the period ended 31 May 2004 which comprise the principal accounting policies,
consolidated profit and loss account, the consolidated and company balance
sheets, the consolidated cash flow statement and the consolidated notes 1 to 27.
These financial statements have been prepared under the accounting policies set
out therein.
This report is made solely to the company's members, as a body, in accordance
with Section 235 of the Companies Act 1985. Our audit work has been undertaken
so that we might state to the company's members those matters we are required to
state to them in an auditors' report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone
other than the company and the company's members as a body, for our audit work,
for this report, or for the opinions we have formed.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors' responsibilities for preparing the directors' report and the
financial statements in accordance with United Kingdom law and accounting
standards are set out in the statement of directors' responsibilities.
Our responsibility is to audit the financial statements in accordance with
relevant legal and regulatory requirements and United Kingdom auditing
standards.
We report to you our opinion as to whether the financial statements give a true
and fair view and are properly prepared in accordance with the Companies Act
1985. We also report to you if, in our opinion, the directors' report is not
consistent with the financial statements, if the company has not kept proper
accounting records, if we have not received all the information and explanations
we require for our audit, or if information specified by law regarding
directors' remuneration and transactions with the company is not disclosed.
We read other information contained in the chairman's and directors' reports,
and consider whether it is consistent with the audited financial statements. We
consider the implications for our report if we become aware of any apparent
misstatements or material inconsistencies with the financial statements. Our
responsibilities do not extend to any other information.
BASIS OF OPINION
We conducted our audit in accordance with United Kingdom auditing standards
issued by the Auditing Practices Board. An audit includes examination, on a test
basis, of evidence relevant to the amounts and disclosures in the financial
statements. It also includes an assessment of the significant estimates and
judgements made by the directors in the preparation of the financial statements,
and of whether the accounting policies are appropriate to the company's
circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
FUNDAMENTAL UNCERTAINTY
In forming our opinion we have considered the adequacy of disclosures made in
the financial statements concerning the borrowing facilities which are available
to the group. The financial statements have been prepared on a going concern
basis, the validity of which depends on the Group being able to operate within
existing bank facilities, and being able to renew such facilities on expiry of
the agreed terms. The financial statements do not include any adjustments that
would result from a failure to operate within these facilities. Details of the
circumstances relating to this fundamental uncertainty are described on page
[ o ]. Our opinion is not qualified in this respect.
- --------------------------------------------------------------------------------
72
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
REPORT OF THE INDEPENDENT AUDITORS TO THE MEMBERS OF
BLEASE MEDICAL HOLDINGS LIMITED
OPINION
In our opinion the financial statements give a true and fair view of the state
of affairs of the group and the company at 31 May 2004 and of the group loss for
the year then ended and have been properly prepared in accordance with the
Companies Act 1985.
GRANT THORNTON UK LLP
REGISTERED AUDITORS
CHARTERED ACCOUNTANTS
LONDON THAMES VALLEY OFFICE
SLOUGH
23 DECEMBER 2004
- --------------------------------------------------------------------------------
73
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
PRINCIPAL ACCOUNTING POLICIES
The financial statements have been prepared under the historical cost
convention. The principal accounting policies of the group are set out below and
have remained unchanged from previous years.
The group changed its bankers to Barclays Bank plc and on 1st December 2004 has
drawn down a (pounds)400,000 five year loan repayable by 60 equal monthly
installments and additionally agreed a (pounds)400,000 overdraft facility for
review 31 August 2005. The group is currently cash positive and the directors
are confident it can trade within its loan and overdraft facility, although
headroom will remain tight if forecast sales increases are not achieved.
If the group does not achieve requisite profitability or working capital
requirements exceed expectations the directors may then seek to obtain further
funds. The financial statements do not therefore include any adjustment that
might arise from the inability of the group to trade as a going concern.
BASIS OF CONSOLIDATION
The group financial statements consolidate those of the company and its
subsidiary undertakings (see note 11) drawn up to 31 May 2004. All of a
subsidiary's assets and liabilities which exist at the date of acquisition are
recorded at their fair values reflecting their condition at that date and
profits or losses on intra-group transactions are eliminated in full on
consolidation
TURNOVER
Turnover is the total amount receivable by the group in the ordinary course of
business with outside customers for goods supplied as a principal and for
services provided, excluding VAT and trade discounts. In the case of income from
maintenance agreements, recognition of sales is taken over the period of the
contract.
DEPRECIATION
Depreciation is calculated to write down the cost less estimated residual value
of all tangible fixed assets by equal annual instalments over their expected
useful lives.
The periods generally applicable are:
Plant and machinery 2 -- 5 years
Fixtures and fittings 4 -- 5 years
Motor vehicles 4 years
RESEARCH AND DEVELOPMENT
Development costs incurred on specific projects are capitalised when
recoverability can be assessed with reasonable certainty and amortised once the
product has come to commercial production over a period of five years, which is
expected to be in line with sales arising from the projects. All other
development and all research costs are written off as incurred.
INTANGIBLE FIXED ASSETS
Goodwill on acquisition is calculated as being the difference between the
consideration paid and the fair value of the assets purchased. This is
capitalised and amortised over its estimated useful life, considered to be ten
years.
Identifiable intellectual property purchased separately from a business is
included at cost and amortised over its expected useful economic life.
INVESTMENTS IN SUBSIDIARIES
Investments in subsidiaries are stated at cost, less amounts written off.
STOCK AND WORK IN PROGRESS
Stock and work in progress is stated at the lower of cost and net realisable
value.
- --------------------------------------------------------------------------------
74
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
DEFERRED TAX
Deferred tax is recognised on all timing differences where the transactions or
events that give the group an obligation to pay more tax in the future, or a
right to pay less tax in the future, have occurred by the balance sheet date.
Deferred tax assets are recognised when it is more likely than not that they
will be recovered. Deferred tax is measured using rates of tax that have been
enacted or substantively enacted by the balance date.
FOREIGN CURRENCIES
Monetary assets and liabilities in foreign currencies are translated at the
rates of exchange ruling at the balance sheet date. The accounting policy for
foreign currency translation is as prescribed by Statement of Standard
Accounting Practice No. 20.
LEASED ASSETS
Where assets are financed by leasing agreements which give risk and rewards
approximate to ownership ("finance leases") they are treated as if they had been
purchased outright on credit. They are therefore initially recorded as a fixed
asset and a liability at a sum equal to the fair value of the asset. Leasing
payments on such assets are regarded as consisting of a capital element which
reduces the outstanding liability and an interest charge (calculated using the
straight-line method).
All other leases are regarded as operating leases and the total payments made
under them are charged to the profit and loss account on a straight line basis
over the lease term.
CONTRIBUTIONS TO PENSION FUNDS
The pension costs charged against profits represent the amount of the
contributions payable to the personal pension arrangements of its employees.
- --------------------------------------------------------------------------------
75
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 MAY 2004
2004 2004
DISCONTINUED CONTINUING 2004
OPERATIONS OPERATIONS TOTAL 2003
NOTE (pounds) (pounds) (pounds) (pounds)
Turnover 1 718,624 9,194,082 9,912,706 11,009,125
Cost of sales (327,370) (7,177,403) (7,504,773) (8,191,164)
-------- ---------- ---------- ----------
Gross profit 391,254 2,016,679 2,407,933 2,817,961
Distribution costs -- (1,043,168) (1,043,168) (1,369,618)
Administrative expenses (310,620) (1,597,138) (1,907,758) (2,019,838)
-------- ---------- ---------- ----------
OPERATING (LOSS)/PROFIT 80,634 (623,769) (542,993) (571,495)
Interest receivable and similar income 2 33 3,827
Interest payable and similar charges 3 (84,304) (59,451)
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION 1 ---------- ----------
Tax on loss on ordinary activities 5 (627,264) (627,119)
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION 18 -- 81,018
Appropriations -- equity 7 ---------- ----------
LOSS TRANSFERRED FROM RESERVES 18 (627,264) (546,101)
-- (7,920)
---------- ----------
(627,264) (554,021)
========== ==========
There were no recognised gains or losses other than the loss for the financial
year.
The accompanying accounting policies and notes form an integral part of these
financial statements.
- --------------------------------------------------------------------------------
76
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AT 31 MAY 2004
2004 2003
NOTE (pounds) (pounds)
FIXED ASSETS
Intangible assets 9 123,278 174,454
Tangible assets 10 530,511 723,273
------- -------
653,789 897,727
CURRENT ASSETS
Stocks 12 1,770,848 1,796,213
Debtors 13 2,028,640 2,091,419
Cash at bank and in hand 101,832 216,832
--------- ---------
3,901,320 4,104,464
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 14 (3,182,156) (3,542,925)
---------- ----------
NET CURRENT ASSETS 719,164 561,539
---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 1,372,953 1,459,266
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR 15 (785,582) (244,630)
---------- ----------
587,371 1,214,636
========== ==========
CAPITAL AND RESERVES
Called up share capital 17 529,412 529,412
Capital redemption reserve 18 75,000 75,000
Share premium account 18 1,045,588 1,045,588
Profit and loss account 18 (1,062,629) (435,364)
---------- ----------
SHAREHOLDERS' FUNDS 587,371 1,214,636
========== ==========
FIXED ASSETS
Investments 11 1,000,000 1,000,000
CURRENT ASSETS
Debtors 13 533,004 --
Cash at bank and in hand -- 1
---------- ----------
533,004 1
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 14 (3,572) (1)
---------- ----------
NET CURRENT ASSETS 529,432 --
---------- ----------
CREDITORS: AMOUNTS FALLING AFTER ONE YEAR (529,412) --
---------- ----------
1,000,020 1,000,000
========== ==========
CAPITAL AND RESERVES
Called up share capital 17 529,412 529,412
Capital redemption reserve 18 75,000 75,000
Share premium account 18 1,045,588 1,045,588
Profit and loss account 18 (649,980) (650,000)
---------- ----------
SHAREHOLDERS' FUNDS 1,000,020 1,000,000
========== ==========
The financial statements were approved by the Board of Directors 23 December
2004.
A J D Ferguson -- Director
The accompanying accounting policies and notes form an integral part of these
financial statements.
- --------------------------------------------------------------------------------
77
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MAY 2004
2004 2004 2003 2003
NOTE (pounds) (pounds) (pounds) (pounds)
NET CASH OUTFLOW FROM OPERATING ACTIVITIES 19 (122,881) (5,952)
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 33
Interest paid (84,304) 3,827
Dividends paid -- (59,451)
------- (15,840)
NET CASH OUTFLOW FROM RETURNS ON -------
INVESTMENTS AND SERVICING OF FINANCE
CORPORATION TAX PAID (84,271) (71,464)
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT -- (39,397)
Purchase of tangible fixed assets (40,019)
Sale of tangible fixed assets -- (359,300)
------- 2,133
NET CASH OUTFLOW FROM CAPITAL EXPENDITURE AND --------
FINANCIAL INVESTMENT
FINANCING (40,019) (357,167)
Loan advances 719,412
Repayment of borrowing (155,224) --
Capital element of finance lease rentals (21,156) (53,900)
-------- (23,923)
NET CASH INFLOW/(OUTFLOW) FROM FINANCING --------
INCREASE/(DECREASE) IN CASH 20 543,032 (77,823)
-------- --------
295,861 (551,803)
======== ========
The accompanying accounting policies and notes form an integral part of these
financial statements.
- --------------------------------------------------------------------------------
78
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MAY 2004
1. TURNOVER AND LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION
Turnover and loss before taxation are attributable to the continuing operations
and principal activity of the design, manufacture, and distribution of medical
ventilation and anaesthetic equipment and associated equipment.
2004 2003
(pounds) (pounds)
United Kingdom 3,413,663 4,908,331
Overseas 6,499,043 6,100,794
--------- ----------
9,992,706 11,009,125
========= ==========
Further analysis of sales and operating loss before tax by geographical area has
not been provided as in the opinion of the directors this would be seriously
prejudicial to the interests of the group.
The loss on ordinary activities is stated after charging:
2004 2003
(pounds) (pounds)
Auditors' remuneration 17,500 16,650
Depreciation of tangible fixed assets:
- -- owned 206,781 174,650
- -- held under finance leases 26,000 26,000
Amortisation of intangible fixed assets:
- -- goodwill 19,797 19,797
- -- development expenditure 26,459 26,479
- -- intellectual property 4,920 6,920
Operating lease rentals:
- -- hire of plant and machinery 158,537 157,392
- -- land and buildings 180,730 176,085
Research and development:
- -- current year expenditure 667,442 600,319
Exchange loss 27,064 31,432
======= =======
2. INTEREST RECEIVABLE AND SIMILAR INCOME
2004 2003
(pounds) (pounds)
Bank interest receivable 33 3,827
===== =====
3. INTEREST PAYABLE AND SIMILAR CHARGES
2004 2003
(pounds) (pounds)
On bank loans and overdrafts 84,304 59,451
====== ======
- --------------------------------------------------------------------------------
79
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
4. DIRECTORS AND EMPLOYEES
The average number of employees of the group during the year and their aggregate
emoluments are shown below:
2004 2003
(pounds) (pounds)
Wages and salaries 2,478,969 2,944,720
Social security costs 263,220 282,605
Other pension costs 45,641 55,437
--------- ---------
2,787,730 3,282,762
========= =========
The average number of employees of the group during the year was 110 (2003:
119).
Staff costs include remuneration in respect of directors, as follows:
2004 2003
(pounds) (pounds)
Management remuneration 96,851 96,024
Pension contributions 8,750 12,600
------- -------
105,601 108,624
======= =======
The amounts set out above include remuneration in respect of the highest paid
director as follows:
2004 2003
(pounds) (pounds)
Emoluments 96,851 120,846
Pension contributions 8,750 12,600
====== =======
5. TAX ON LOSS ON ORDINARY ACTIVITIES
The tax credit represents:
2004 2003
(pounds) (pounds)
Deferred taxation -- (28,165)
Adjustment in respect of prior periods -- (52,853)
----- -------
-- (81,018)
===== =======
The group has tax losses carried forward of approximately (pounds)920,000 (2003:
(pounds)390,000).
- --------------------------------------------------------------------------------
80
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
6. FACTORS AFFECTING THE TAXATION (CREDIT)/CHARGE
2004 2003
(pounds) (pounds)
Loss on ordinary activities before taxation (627,264) (627,119)
Rate of corporation tax (%) 19 30
Expected corporation tax charge (119,180) (188,136)
Effect of:
Permanent differences -- 15,786
Movement in accelerated capital allowances 15,297 (15,391)
Carry back of tax losses -- 62,072
Accumulation of tax losses 103,883 125,669
Deferred taxation -- (28,165)
Adjustments in respect of prior periods -- (52,853)
-------- --------
Tax charge/(credit) for the year -- (81,018)
======== ========
7. APPROPRIATIONS
2004 2003
(pounds) (pounds)
Fixed cumulative preferential dividend -- 7,920
====== =====
8. PROFIT FOR THE FINANCIAL YEAR
The parent company has taken advantage of section 230 of the Companies Act 1985
and has not included its own profit and loss account in these financial
statements. The profit after taxation but before dividends was (pounds)20 (2003:
loss (pounds)634,160) and has been dealt with in the financial statements of the
company.
9. INTANGIBLE FIXED ASSETS -- GROUP
DEVELOPMENT INTELLECTUAL
COSTS GOODWILL PROPERTY TOTAL
(pounds) (pounds) (pounds) (pounds)
Cost
At 1 June 2003 and at 31 May 2004 132,296 197,977 34,602 364,875
------- ------- ------ -------
Amortisation
At 1 June 2003 76,626 88,285 25,510 190,421
Provided in the year 26,459 19,797 4,920 51,176
------- ------- ------ -------
At 31 May 2003 103,085 108,082 30,430 241,597
------- ------- ------ -------
Net book amount at 31 May 2004 29,211 89,895 4,172 123,278
======= ======= ====== =======
Net book amount at 31 May 2003 55,670 109,692 9,092 174,454
======= ======= ====== =======
- --------------------------------------------------------------------------------
81
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
10. TANGIBLE FIXED ASSETS -- GROUP
PLANT AND FIXTURES AND MOTOR
MACHINERY FITTINGS VEHICLES TOTAL
(pounds) (pounds) (pounds) (pounds)
Cost
At 1 June 2003 1,549,180 765,096 45,386 2,359,662
Additions 37,689 2,330 -- 40,019
--------- ------- ------ ---------
At 31 May 2004 1,586,869 767,426 45,386 2,399,681
--------- ------- ------ ---------
Depreciation
At 1 June 2003 1,045,199 577,807 13,383 1,636,389
Provided in the year 158,284 63,151 11,346 232,781
--------- ------- ------ ---------
At 31 May 2004 1,203,483 640,958 24,729 1,869,170
--------- ------- ------ ---------
Net book amount at 31 May 2004 383,386 126,468 20,657 530,511
========= ======= ====== =========
Net book amount at 31 May 2003 503,981 187,289 32,003 723,273
========= ======= ====== =========
The figures stated above include assets held under finance leases as follows:
PLANT AND
MACHINERY
(pounds)
Net book amount at 31 May 2003 47,667
======
Net book amount at 31 May 2002 73,667
======
11. FIXED ASSETS INVESTMENTS -- COMPANY
Total fixed asset investments comprise:
2004 2003
(pounds) (pounds)
Shares in subsidiary undertakings 1,000,000 1,000,000
========= =========
At 31 May 2004 the company had the following subsidiaries, all registered in
England and Wales:
ISSUED ORDINARY SHARE
PRINCIPAL ACTIVITY CAPITAL HELD BY THE COMPANY
Blease Medical Equipment Limited Manufacture and distribution 100%
of medical equipment
Blease Medical Services Limited Dormant 100% held by Blease Medical
Equipment Limited
McCrea Engineering Co Limited Dormant 100% held by Blease Medical
Equipment Limited
12. STOCKS -- GROUP
2004 2003
(pounds) (pounds)
Raw materials 1,248,578 1,261,530
Work in progress 360,342 299,801
Finished goods 161,928 234,882
--------- ---------
1,770,848 1,796,213
========= =========
- --------------------------------------------------------------------------------
82
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
13. DEBTORS
GROUP COMPANY GROUP COMPANY
2004 2004 2003 2003
(pounds) (pounds) (pounds)
Trade debtors 1,844,773 -- 1,966,601 --
Amounts owed by subsidiary undertakings -- 533,004 -- --
Social security and other taxes 77,219 -- 41,755 --
Other debtors 48,910 -- 45,129 --
Prepayments and accrued income 57,738 -- 37,934 --
--------- ------- --------- ------
2,028,640 533,005 2,091,419 --
========= ======= ========= ======
14. CREDITORS: AMOUNTS FAILING DUE WITHIN ONE YEAR
GROUP COMPANY GROUP COMPANY
2004 2004 2003 2003
(pounds) (pounds) (pounds) (pounds)
Bank loan and overdrafts 599,832 2,039 1,010,693 --
Trade creditors 1,504,558 -- 1,442,416 --
Social security and other taxes 102,904 1,533 133,686 --
Other creditors -- -- 2,100 1
Accruals and deferred income 951,626 -- 932,874 --
Amounts due under finance leases 23,236 21,156 --
--------- ----- --------- ------
3,182,156 3,572 3,542,925 1
========= ===== ========= ======
The bank loan and overdrafts are secured by an unlimited debenture over all the
assets of the group.
15. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
GROUP COMPANY GROUP COMPANY
2004 2004 2003 2003
(pounds) (pounds) (pounds) (pounds)
Bank loan 45,220 -- 100,444 --
Amounts due under finance leases 20,950 -- 44,186 --
Other loans 719,412 529,412 100,000 --
------- ------- ------- ------
785,582 529,412 244,630 --
======= ======= ======= ======
The bank loan is repayable in equal monthly instalments as represented by the
disclosure in note 16 below. Interest is charged at base rate plus 2.25%.
The bank loan and overdraft has been repaid by 1 December 2004 and replaced by
the new banking arrangements referred to on page 6.
Other loans have been provided to the company and group during the year and are
subject to an interest charge of 12% per year. They are repayable as follows:
o loan of (pounds)190,000 provided to Blease Medical Equipment
Limited has no fixed repayment terms
o loans of (pounds)529,412 provided to Blease Medical Holdings
Limited are repayable in five equal annual instalments commencing October
2005.
- --------------------------------------------------------------------------------
83
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
16. BORROWINGS - GROUP
Borrowings are repayable as follows:
2004 2003
(pounds) (pounds)
Within one year:
Bank loans and overdrafts 599,832 1,010,693
Finance leases 23,236 21,156
After one and within two years:
Bank loan 45,220 50,000
Finance leases 20,950 23,236
Other loans 105,882 --
Between two and within five years:
Bank loan -- 50,444
Finance leases -- 20,950
Other loans 317,647 --
After five years:
Other loans 305,883 100,000
------- ---------
1,408,650 1,276,479
========= =========
17. SHARE CAPITAL
2004 2003
(pounds) (pounds)
Authorised
750,000 Preference shares of 10p each 75,000 75,000
45,000 `A' preferred ordinary shares of (pounds)1 each 45,000 45,000
79,412 `B' preferred ordinary shares of (pounds)1 each 79,412 79,412
463,823 Ordinary shares of (pounds)1 each 463,823 463,823
------- -------
663,235 663,235
======= =======
2004 2003
(pounds) (pounds)
Allotted, called up and fully paid
45,000 `A' preferred ordinary shares of (pounds)1 each 45,000 45,000
79,412 `B' preferred ordinary shares of (pounds)1 each 79,412 79,412
405,000 Ordinary shares of (pounds)1 each 405,000 405,000
------- -------
529,412 529,412
======= =======
PREFERENCE SHARES
The preference shares are non-equity shares which carry an entitlement to a
fixed cumulative preferential dividend of 8% of the issue price per share per
annum. They were redeemed at the issue price.
`A' PREFERRED ORDINARY SHARES
The `A' preferred ordinary shares are equity shares which carry an entitlement
of a fixed cumulative preferential dividend of (pounds)7,920 per
annum to be apportioned pro rata according to the issue price, a participating
dividend, which when added to the fixed cumulative preferential dividend is
equal to 1.5% of the profit before tax for each year, to be apportioned pro
rata according to the issue price, and a further dividend equal to the amount
payable as dividends on each `B' preferred ordinary shares and ordinary shares
which is in excess of the fixed cumulative preferential dividend and the
participating dividend paid on each
- --------------------------------------------------------------------------------
84
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
`A' preferred ordinary share. Holders of `A' preferred ordinary shares have one
vote for every share held. `A' preferred ordinary shareholders have the right
on a winding-up to receive, after preference shareholders and `B' preferred
ordinary shareholders a sum equal to the issue price of `B' preferred ordinary
shares together with any arrears of dividends. Each `A' preferred ordinary
share can be converted into one ordinary share only if the holder wishes to
convert its entire holding and serves notice accordingly.
`B' PREFERRED ORDINARY SHARES
The `B' preferred ordinary shares are equity shares which carry an entitlement
to a cumulative preferential dividend of 30% of profit after tax, for each
financial year commencing on or after 1 June 2000, which will be apportioned
pro rata among holders of `B' preferred ordinary shares and ordinary shares.
Holders of `B' preferred ordinary shares have one vote for every share held.
`B' preferred shareholders have the right on a winding-up to receive, after
preference shareholders, a sum equal to the issue price. Each `B' preferred
ordinary share can be converted to one ordinary share but only if any class of
the issued share capital is admitted to the official list of the London Stock
Exchange or to trading on the Alternative Investment Market or any other
recognised investment exchange, or if the holder wishes to convert its entire
holding and serves notice accordingly.
ORDINARY SHARES
The ordinary equity shares are shares which carry an entitlement to a
cumulative preferential cash dividend of 30% of profit after tax, for each
financial year commencing on or after 1 June 2001, which will be apportioned
pro rata among the holders of ordinary shares and 1`B' preferred ordinary
shares. Holders of ordinary shares have one vote for every share held.
Any excess of assets on winding-up shall be distributed amongst the holders of
the preferred ordinary shares and the ordinary shares as if they constituted
one class of share.
CONTINGENT RIGHTS TO THE ALLOTMENTS OF SHARES
The company has granted an option to J Rayner, which relates to 10,000 ordinary
(pounds)1 shares at (pounds)5.78 per share exercisable at
any time between 14 October 2001 and 14 October 2005.
WARRANTS ATTACHED TO ISSUED LOAN NOTES
The company has issued warrants to holders of loan notes which relate to the
issue of 105,882 ordinary (pounds)1 shares at (pounds)1
per share.
- --------------------------------------------------------------------------------
85
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
18. SHAREHOLDERS' FUNDS
CAPITAL SHARE
REDEMPTION SHARE PREMIUM PROFIT AND
RESERVE CAPITAL ACCOUNT LOSS ACCOUNT TOTAL
(pounds) (pounds) (pounds) (pounds) (pounds)
GROUP
At 1 June 2002 75,000 529,412 1,045,588 126,577 1,776,577
Loss for the year -- -- -- (546,101) (546,101)
Dividends -- -- -- (7,920) (7,920)
------ ------- --------- -------- ---------
75,000 529,412 1,045,588 (427,444) 1,222,556
Dividends appropriated in prior periods -- -- -- (7,920) (7,920)
------ ------- --------- -------- ---------
At 31 May 2003 75,000 529,412 1,045,588 (435,364) 1,214,636
Loss for the year -- -- -- (627,264) (627,264)
------ ------- --------- -------- ---------
At 31 May 2004 75,000 529,412 1,045,588 (1,062,628) 587,372
====== ======= ========= ========== =========
CAPITAL SHARE
REDEMPTION SHARE PREMIUM PROFIT AND
RESERVE CAPITAL ACCOUNT LOSS ACCOUNT TOTAL
(pounds) (pounds) (pounds) (pounds) (pounds)
COMPANY
At 1 June 2002 75,000 529,412 1,045,588 -- 1,650,000
Loss for the year -- -- -- (634,160) (643,160)
Dividends -- -- -- (7,920) (7,920)
------ ------- --------- -------- ---------
75,000 529,412 1,045,588 (642,080) (1,007,920)
Dividend appropriated in prior periods -- -- -- (7,920) (7,920)
------ ------- --------- -------- ----------
At 31 May 2003 75,000 529,412 1,045,588 (650,000) 1,000,000
Profit for the year -- -- -- 20 20
------ ------- --------- -------- ----------
At 31 May 2004 75,000 529,412 1,045,588 (649,980) 1,000,020
====== ======= ========= ======== ==========
Cumulative dividends to holders of ordinary shares, `A' and `B' preferred
ordinary shares are (pounds)131,628 (2003: 123,708) in arrears, and
are not included in creditors.
19. NET CASH INFLOW FROM OPERATING ACTIVITIES
2004 2003
(pounds) (pounds)
Operating loss (542,993) (571,495)
Depreciation and amortisation 283,957 253,846
Profit on sale of tangible fixed assets -- (2,133)
Decrease in stocks 25,365 560,530
Decrease in debtors 62,779 370,657
Increase/(decrease) in creditors 48,011 (617,357)
-------- --------
Net cash outflow from operating activities (122,881) (5,952)
======== ========
- --------------------------------------------------------------------------------
86
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
20. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
2004 2003
(pounds) (pounds)
Increase/(decrease) in cash in the year 295,861 (551,807)
Cash inflow/(outflow) from financing (543,032) 77,827
-------- --------
Change in net debt resulting from cash flow in the year (247,171) (473,980)
Net debt at 1 June 2003 (1,059,647) (585,667)
---------- --------
Net debt at 31 May 2004 (1,306,818) (1,059,647)
========== ==========
21. ANALYSIS OF CHANGES IN NET DEBT
AT 1 JUNE AT 31 MAY
2002 CASH FLOW 2003
(pounds) (pounds) (pounds)
Overdrafts (960,689) 410,861 (549,828)
Cash in hand and at bank 216,832 (115,000) 101,832
-------- -------- --------
(743,857) 295,861 (447,996)
Debt (250,448) (564,188) (814,636)
Finance leases (65,342) 21,156 (44,186)
-------- -------- --------
(1,059,647) (247,171) (1,306,818)
========== ======== ==========
22. CAPITAL COMMITMENTS
The group and company had no capital commitments at 31 May 2004 and 31 May 2003.
23. GUARANTEES AND OTHER FINANCIAL COMMITMENTS
The company participates in the group bank overdraft facility and is a party to
the unlimited multilateral guarantee which secures this facility. The group and
company had no other guarantees or financial commitments at 31 May 2004 or 31
May 2003.
24. PENSIONS
The company pays contributions to the personal pension arrangements of its
employees.
25. LEASING COMMITMENTS
Operating lease payments amounting to (pounds)304,731 (2003: (pounds)323,132)
are due within one year. The leases to which these amounts relate expire as
follows:
2004 2003
LAND AND LAND AND
UILDINGS OTHER BUILDINGS OTHER
(pounds) (pounds) (pounds) (pounds)
In one year or less -- 9,975 19,000 21,636
Between one and five years 118,230 114,027 106,480 113,044
In five years or more 62,500 -- 62,500 472
------- ------- ------- -------
180,730 124,001 187,980 135,152
======= ======= ======= =======
26. ULTIMATE CONTROLLING PARTY
The company's ultimate controlling party is Mr A J D Ferguson, a director of
the company.
27. RELATED PARTY TRANSACTIONS
In the prior year the company waived a loan amounting to (pounds)650,000 due
from Blease Medical Equipment Limited, a subsidiary undertaking.
- --------------------------------------------------------------------------------
87
PART 5(B) -- FINANCIAL INFORMATION ON BLEASE MEDICAL HOLDINGS 2004
- --------------------------------------------------------------------------------
The group rents the Deansway property from Duncan Property Investments Limited,
which is under the common control of Mr A J D Ferguson. Rent charged is
considered to be a realistic reflection of market rent, and amounted to
(pounds)62,500 (2003: (pounds)62,500), all of which was paid
in the relevant year.
During the year Duncan Property Investments Limited provided loans of
(pounds)190,000 to Blease Medical Equipment Limited, and (pounds)240,883 to
Blease Medical Holdings Limited. Interest is payable at a rate of 12% per annum
on the loans.
During the year Mr A J D Ferguson, together with his wife, provided a loan of
(pounds)135,000 to Blease Medical Holdings Limited. Interest is
payable at a rate of 12% per annum on the loan.
During the year Mr J E Everitt provided a loan of (pounds)882 to
Blease Medical Holdings Limited. Interest is payable at a rate of 12% per annum
on the loan.
- --------------------------------------------------------------------------------
88
- --------------------------------------------------------------------------------
PART 6 -- UNAUDITED PRO FORMA STATEMENT OF NET ASSETS OF THE GROUP
The unaudited pro forma statement of net assets of the Group is provided for
illustrative purposes only to show the effect on the balance sheet of the Group
had the Placing occurred on 30 June 2005. It has been compiled on the basis
described below from the balance sheet of the Group as at 30 June 2005 as set
out in Part 3 of this document. Due to its nature, the pro forma statement of
net assets may not give a true picture of the financial position of the Group
and is designed to give only an indication of the net assets of the Group.
30 JUNE 2005 PRO FORMA
GROUP ADJUSTMENT GROUP
US$'000 US$'000 US$'000
FIXED ASSETS
Intangible fixed assets 19,052 19,052
Tangible fixed assets 7,068 7,068
Goodwill 5,853 5,853
Investments 1,006 1,006
------ ------- ------
32,979 32,979
CURRENT ASSETS
Inventory 38,205 38,205
Debtors 44,110 44,110
Cash at bank and in hand 7,875 20,000 27,875
Other 8,092 8,092
------ ------- ------
98,282 20,000 118,282
CREDITORS: amounts falling due within one year 59,220 59,220
------ ------- -------
NET CURRENT ASSETS/(LIABILITIES) 39,062 20,000 59,062
------ ------ -------
TOTAL ASSETS LESS CURRENT LIABILITIES 72,041 20,000 92,041
CREDITORS: amounts falling due after one year 59,971 (45,000) 14,971
------ ------- -------
NET ASSETS 12,070 65,000 77,070
====== ======= =======
Notes:
1. Financial information relating to the Group has been extracted, without
adjustment, from the audited combined balance sheet of Spacelabs Medical,
Inc. and related companies as at 30 June 2005, which is included in the
accountants' report set out in Part 3 of this document.
2. The adjustment reflects the gross proceeds of US$70 million, less estimated
expenses of US$5 million, receivable by the Company. The adjustment
reflects the Director's intention to utilise US$45 million of the net cash
received of US$65 million to repay the inter-company loan from OSI
Systems.
3. No adjustment has been made to reflect any trading or changes in working
capital since 30 June 2005.
- --------------------------------------------------------------------------------
89
- --------------------------------------------------------------------------------
PART 7 -- ADDITIONAL INFORMATION
1. RESPONSIBILITY STATEMENT
The Directors, whose names appear on page 3 of this document, accept
responsibility for the information in this document including individual
and collective responsibility for compliance with the AIM Rules. To the
best of the knowledge and belief of the Directors (who have taken all
reasonable care to ensure that such is the case) the information contained
in this document is in accordance with the facts and does not omit
anything likely to affect the import of such information.
2. INCORPORATION AND PRINCIPAL ACTIVITIES
2.1 The Company was incorporated on August 2, 2005, under the laws of the
State of Delaware, US with charter number 4009030 under the name
"Spacelabs Healthcare, Inc."
2.2 The principal place of business of the Company is 5150 220th Avenue SE,
Issaquah, Washington 98029 USA.
2.3 The liability of the members of the Company is limited.
2.4 The Company, which is the parent company of the Group, has the following
subsidiaries:
COUNTRY OF PROPORTION OF
REGISTRATION OR TYPE OF VOTING RIGHTS
NAME OF COMPANY INCORPORATION SHARES HELD AND SHARES HELD NATURE OF BUSINESS
Blease Medical Holding Ltd.+ UK Ordinary and A and 100% Holding company
("BMH") B Preferred
Blease Medical Equipment UK Ordinary 100% indirectly Design, manufacture,
Limited ("BME") (BMH owns 100%) sale and service of
anaesthesia systems
to the UK and export
markets
Blease Medical Services Limited UK Ordinary 100% indirectly Dormant company
(BMH owns 100%)
Dolphin Medical, Inc. ("DM") USA Common 89% Medical equipment
manufacturing and
distribution
Dolphin Medical Pte. Ltd.+ Singapore Ordinary 89% Traders and
(100% owned by manufacturer of
DM) medical equipment
Dolphin Merger Corporation USA Common 100% Dormant company
Osteometer Meditech, Inc. USA Common 100% Medical equipment
manufacturing and
distribution
Spacelabs Healthcare Solution India Equity 100% Medical equipment
Pvt. Ltd. manufacturing and
distribution
Spacelabs Medical, Inc. USA Common 100% Medical equipment
manufacturing and
distribution
Spacelabs Medical (Canada), Canada Common 100% Supplies patient
Inc.+ monitoring systems
and related medical
equipment
Spacelabs Medical Finland, Oy+ Finland Ordinary 100% Supplies patient
monitoring systems
and related medical
equipment
Spacelabs Medical Germany+ Germany Ordinary 100% Supplies patient
GmbH monitoring systems
and related medical
equipment
- --------------------------------------------------------------------------------
90
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
COUNTRY OF PROPORTION OF
REGISTRATION OR TYPE OF VOTING RIGHTS
NAME OF COMPANY INCORPORATION SHARES HELD AND SHARES HELD NATURE OF BUSINESS
Spacelabs Medical SAS+ France Ordinary 100% Supplies patient
monitoring systems
and related medical
equipment
Spacelabs (Singapore) Pte. Ltd.+ Singapore Common 100% Supplies patient
monitoring systems
and related medical
equipment
Spacelabs Medical Trading+ China Ordinary 100% Supplies patient
(Shanghai) Co., Ltd. monitoring systems
and related medical
equipment
Spacelabs Medical UK Ltd.+ UK Ordinary 100% Supplies patient
monitoring systems
and related medical
equipment
+ The formalities relating to the transfer of the shares of the companies
indicated above have not been completed at the date hereof. The Company,
OSI and UDT Sensors are obligated to procure the completion of the
formalities as soon as practicable following Admission pursuant to the
Stock Transfer Agreement (details of which are set out at paragraph 3.3
of this Part 7). Prior to such completion, these shares are held
beneficially only by the Company.
3. SHARE CAPITAL OF THE COMPANY
3.1 The Directors are authorised to issue 250,000,000 Shares of Common Stock
with a par value of US$.001 per share and 10,000 shares of preferred stock
with a par value of US$.001 per share.
3.2 On 16 September 2005 the Company issued 1,000 Shares of Common Stock to
OSI Systems.
3.3 On o 2005 the Company entered into a stock transfer agreement ("Stock
Transfer Agreement") with OSI Systems and UDT Sensors. Pursuant to this
agreement the Company issued o Shares of Common Stock to OSI Systems in
exchange for OSI Systems' capital contribution to the Company of the
entire equity share capital of each of the following companies (save for
Dolphin Medical Inc. and Dolphin Medical Pte Ltd.):
NAME OF COMPANY NUMBER OF SHARES TYPE OF STOCK
Blease Medical Holdings Limited 417,529 Ordinary Shares
Blease Medical Holdings Limited 45,000 A Preferred Shares
Blease Medical Holdings Limited 79,412 B Preferred Shares
Dolphin Medical Inc. 19,902,750 Common Stock
Dolphin Merger Corporation 100 Common Stock
Osteometer Meditech, Inc. 10 Common Stock
Spacelabs Healthcare Solutions Pvt Ltd. 9,500 Equity Stock
Spacelabs Medical, Inc. 90,000,000 Common Stock
Spacelabs Medical (Canada), Inc. 3,953,532 Common Shares
Spacelabs Medical Finland Oy 80 Ordinary Shares
Spacelabs Medical Germany GmbH o o
Spacelabs Medical SAS 2,050,000 Ordinary Shares
Spacelabs Medical UK Ltd. 14,001 Ordinary Shares
Spacelabs (Singapore) Pte. Ltd. 100,000 Common Shares
Pursuant to the Stock Transfer Agreement OSI Systems assigned the benefit
of the warranties under the Blease Acquisition Agreement (further details
of which are set out at paragraph 9(vii) of Part 7) to the Company and the
Company agreed with OSI Systems to pay any deferred sums due to the
vendors under that agreement.
The above share issue was authorised by the Directors pursuant to
unanimous written consent of the Board of Directors of the Company, dated
o , 2005.
Pursuant to the terms of the Stock Transfer Agreement the Company issued
o Shares of Common Stock to UDT Sensors, Inc. in exchange for UDT
Sensors, Inc.'s capital contribution to the Company
- --------------------------------------------------------------------------------
91
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
of 65,906,250 shares of common stock in Dolphin Medical, Inc. This issue
of shares was authorised by the Directors pursuant to a unanimous written
consent of the Board of Directors of the Company, dated as of o , 2005.
3.4 The Company has not issued any shares of its preferred stock as of the
date of this document.
3.5 There are o options over shares of common stock in Spacelabs Medical
held by various employees or directors within OSI's group (the "Medical
Options").
All of the Medical Options vest over a three year period (one quarter in
the first year, one quarter in the second year and the remainder in the
third year) and are exercisable up until the fifth anniversary of the date
of grant of the options. The exercise price for each option ranges from
US$0.58 to US$1.10.
It is intended that following Admission the Medical Options will be
converted into o options over Shares of Common Stock in the Company
("Conversion").
The Medical Options currently vested will remain vested following
Conversion. The vesting dates and expiration dates of the converted
Medical Options will remain the same following conversion.
The Directors intend that the exercise price and the number of shares of
common stock under the Medical Options will be converted using a
Conversion ratio of o : o (subject to adjustment to ensure that the
converted options have the same value as the existing options).
4. CERTIFICATE OF INCORPORATION AND BY-LAWS
4.1 Certificate of Incorporation
(a) The purpose of the Company is to engage in any lawful act or
activity for which corporations may be organised under the
General Corporation Law of the State of Delaware USA.
(b) The Company is authorised to issue 250,000,000 Shares of Common
Stock with a par value of US$.001 per share and 10,000 shares
of preferred stock with a par value of US$.001 per share.
(c) The Directors are expressly authorised to make, alter or repeal
the by-laws of the Company.
(d) In all elections of Directors, each stockholder is entitled to
as many votes as shall be equal to the number of shares held by
such stockholder multiplied by the number of Directors to be
elected, and such stockholder may cast all of such votes for a
single Director or may distribute them among the number to be
voted for, or any two or more of them, as such stockholder may
see fit, which right, when exercised, is called "cumulative
voting."
(e) Any action required or permitted to be taken at a meeting of
stockholders may be taken without a meeting only if eighty
percent (80%) or more of the voting power of the stockholders
entitled to vote thereon consent thereto in writing.
(f) Whenever a compromise or arrangement is proposed between the
Company and its creditors or any class of them, and/or between
the Company and its stockholders or any class of them, any
court of equitable jurisdiction within the State of Delaware
may, on the application in a summary way of the Company or of
any creditor or stockholder thereof, or on the application of
any receivers appointed for the Company under the provisions of
Section 279 of Title 8 of the Delaware Code, order a meeting of
the creditors or class of creditors, and/or of the stockholders
or class of stockholders of the Company, as the case may be, to
be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or
class of stockholders of the Company, as the case may be, agree
to any compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be
binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of the Company,
as the case may be, and also on the Company.
4.2 By-laws
The By-laws, which were adopted by the Directors of the Company pursuant
to a unanimous written consent of the Board dated o October, 2005,
contain provisions, inter alia, to the following effect:
- --------------------------------------------------------------------------------
92
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
(a) Voting Rights
Each holder of Shares of Common Stock shall be entitled to one (1) vote
for each Share of Common Stock held by such holder of Shares of Common
Stock. The Company has not issued any shares of preferred stock as of the
date of this document. Except as otherwise provided by law, only persons
in whose names shares entitled to vote stand on the stock records of the
Company on the record date for determining the stockholders entitled to
vote at a meeting shall be entitled to vote at such meeting.
At all meetings of stockholders except where otherwise provided by law,
the Certificate of Incorporation or the by-laws, the presence, in person
or by proxy duly authorized, of the holders of a majority of the
outstanding shares of stock entitled to vote shall constitute a quorum for
the transaction of business. Except as otherwise provided by law, the
Certificate of Incorporation or these by-laws, all action taken by the
holders of a majority of the voting power represented at any meeting at
which a quorum is present shall be valid and binding upon the corporation.
(b) Alteration of Stockholders Rights
Stockholders rights may be altered by amendment to the Certificate of
Incorporation. The Certificate of Incorporation is amended by (i) adoption
of such amendment by the Board of Directors followed by (ii) the approval
of the requisite percentage of the stockholders at a meeting (which is
generally a majority of the issued and outstanding shares entitled to vote
on such amendment).
(c) Amendments to By-laws
The By-laws may be repealed, altered or amended or new By-laws of the
Company adopted at any meeting of the stockholders, either annual or
special, by the affirmative vote of a majority of the stock entitled to
vote at such meeting, unless a larger vote is required by the By-laws or
the certificate of incorporation of the Company. The By-laws (other than a
By-laws changing the authorised number of directors) also may be adopted,
amended, or repealed by the Directors.
(d) Transfer of Stock
Transfers of stock must be made in accordance with all United States
local, state, federal and foreign securities laws governing such
transfers, as applicable.
(e) Directors
The powers of the Company shall be exercised, its business conducted and
its property controlled by or under the direction of the Directors.
The number of Directors which shall constitute the whole Board of
Directors shall be seven (7). The Board of Directors shall be divided into
three classes: Class I, Class II and Class III. The number of Directors in
each class shall be as nearly equal as possible. At the first election of
Directors by the Incorporator, the Incorporator shall elect a Class III
Director for a term expiring at the Company's third Annual Meeting of
Stockholders. The Class III Director shall then elect additional Class I,
Class II and Class III Directors. The Directors in Class I shall be
elected for a term expiring at the first annual meeting of stockholders,
the Directors in Class II shall be elected for a term expiring at the
second annual meeting of stockholders and the Directors in Class III shall
be elected for a term expiring at the third annual meeting of
stockholders. Commencing at the first annual meeting of stockholders, and
at each annual meeting thereafter, Directors elected to succeed those
Directors whose terms expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after their
election. All Directors shall hold office until the expiration of their
respective terms of office and until their successors shall have been
elected and qualified. As provided in the Certificate of Incorporation, at
all elections of Directors, each stockholder having the right to vote
shall be entitled to as many votes as the number of shares so held by such
stockholder of record multiplied by the number of Directors to be elected,
and such stockholder may cast all of such votes for a single Director, or
may distribute them among any two or more of the Directors to be voted
for, as such stockholder may see fit.
Vacancies and newly created directorships resulting from any increase in
the authorised number of Directors may be filled by a majority of the
Directors then in office (even if less than a quorum) or by a sole
remaining Director, and each Director so elected shall hold office for the
unexpired portion of the term of the Director whose place became vacant
and until such Director's successor shall have
- --------------------------------------------------------------------------------
93
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
been duly elected and qualified. A vacancy in the Board of Directors shall
be deemed to exist in the case of the death, removal or resignation of any
Director, or if the stockholders fail at any meeting of stockholders at
which Directors are to be elected to elect the number of Directors then
constituting the whole Board of Directors.
(f) New issues of stock
Unless determined by stockholders holding 75 per cent. of the then
outstanding shares of stock of the corporation, any issue of new
securities for cash shall first be offered to existing holders of stock on
a pre-emptive basis pro rata to existing holdings. Any issue of stock
which (i) carries rights to participate only up to a specified amount in a
distribution; (ii) which is held or allotted pursuant to an employee stock
option scheme; or (iii) is a right to subscribe for such stock referred to
in (i) and (ii), shall not be subject to such pre-emption rights. The
pre-emption provisions also do not apply to securities allotted for cash
where the nominal amount of such stock during any 12 month period does not
exceed in aggregate 20 per cent. of the outstanding shares of stock of the
corporation, or to the allotment in connection with a rights issue.
(g) Takeover provisions
In the event that (i) any person acquires securities in the Company that
(taken with securities held or acquired by persons acting in concert with
him) represent 30 per cent. or more of the voting rights attaching to the
Company's stock; or (ii) any person who, together with persons acting in
concert with holds not less than 30 per cent. nor more than 50 per cent.
of the voting rights attaching to the Company's stock, then such person
(and any person acting in concert) is required to extend an offer to the
holders of all issued and outstanding capital stock of the corporation.
Such offer must be conditional only on the offeror having received
acceptances in respect of securities which together with securities
already held or acquired by him (and any persons acting in concert with
him) represent more than 50 per cent. of the voting rights attaching to
the Company's stock. The offer must be in cash (or have a cash
alternative) at not less than the highest price paid by the offeror for
capital stock during the period following an announcement of a proposed or
possible offer and the 12 months prior to such period.
The requirement to make a mandatory offer may be waived with the consent
of holders of 75 per cent. of the voting rights attaching to the Company's
securities who are not the acquirer or proposed allottee. In the event
that the acquirer or proposed allottee of the relevant securities is a
person that has (either alone or with connected persons) previously held
50 per cent. or more of the voting rights then:
(a) the requirement to make a mandatory offer referred to at (i)
above may be waived by certain of the non-executive directors
of the Company; and
(b) the requirement to make a mandatory offer referred to in (ii)
above will not apply.
The requirement to make a mandatory offer ceases to apply as soon as any
securities of the Company become listed on a US national securities
exchange or NASDAQ or as soon as the Company becomes a reporting company
under the US Securities Exchange Act of 1934.
(h) Annual Meetings
The annual meetings of the stockholders of the corporation, for the
purpose of election of Directors and for such other business as may
lawfully come before it, shall be held on such date and at such time as
may be designated from time to time by the Board of Directors, or, if not
so designated, then at 10:00 a.m. on November 15 in each year if not a
legal holiday, and, if a legal holiday, at the same hour and place on the
next succeeding day not a holiday.
(i) Indemnity
Each person who was or is a party, or is threatened to be made a party to,
or is involved in any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative by
reason of the fact that he, or a person of whom he is the legal
representative, is or was a Director, officer, employee, or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee, or agent of another corporation or of a partnership,
joint venture, trust, or other enterprise, including service with respect
to employee benefit plans, whether the basis of the proceeding is alleged
action in an official capacity as a director, officer,
- --------------------------------------------------------------------------------
94
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
employee, or agent or in any other capacity while serving as a director,
officer, employee, or agent, shall be indemnified and held harmless by the
Company to the fullest extent authorized by the Delaware General
Corporation Law against all expenses, liability, and loss reasonably
incurred or suffered by such person in connection with investigating,
defending, being a witness in, or participating in (including on appeal),
or preparing for any of the foregoing in, any proceeding.
5. 2005 EQUITY PARTICIPATION PLAN OF THE COMPANY
5.1 Adoption
The Directors adopted the 2005 Equity Participation Plan of the Company
(the "Plan") pursuant to a unanimous written consent of the Board, dated
16 September, 2005. The Plan is effective as of 16 September, 2005, and is
administered by the Governance and Remuneration Committee appointed by the
Directors (the "Administrator").
5.2 Participation
Every person who, at the date of grant of a stock option under the Plan
("Option") and/or the issuance of restricted Company common stock
("Restricted Stock") under the Plan, is an employee of the Company or of
any Affiliate (as defined in the Plan) of the Company is eligible to
receive nonqualified options ("NQO"), incentive stock options and/or
Restricted Stock under the Plan. Every person who, at the date of grant,
is a consultant to, or non-employee director of, the Company or any
Affiliate of the Company is eligible to receive NQOs and/or Restricted
Stock under the Plan.
5.3 Awards
The total number of shares of Company common stock which may be granted as
Restricted Stock and/or issued upon the exercise of Options granted
pursuant to the Plan shall not exceed o shares of common stock in the
aggregate (including the Medical Options to be converted into options over
shares of Common Stock in the Company following Admission) as set out in
paragraph 3.5 of this Part 7). This cap represents o % of the issued
Shares of Common Stock or Admission and shareholder approval will be
required for an increase in this cap. No eligible person shall be granted
Options during any twelve-month period covering more than 1,000,000
shares.
If the stock of the Company is changed by reason of a stock split, reverse
stock split, stock dividend, or recapitalisation, combination or
recapitalisation, appropriate adjustments shall be made by the
Administrator in (a) the number and class of shares of stock subject to
this Plan and each Option outstanding under this Plan, and (b) the
exercise price of each outstanding Option; provided, however, that the
Company is not required to issue fractional shares as a result of any such
adjustments. Each such adjustment is subject to approval by the
Administrator in its sole discretion.
In the event of the proposed dissolution or liquidation of the Company,
the Administrator shall notify each option holder at least thirty (30)
days prior to such proposed action. To the extent not previously
exercised, all Options will terminate immediately prior to the
consummation of such proposed action; provided, however, that the
Administrator, in the exercise of its sole discretion, may permit exercise
of any Options prior to their termination, even if such Options were not
otherwise exercisable. In the event of a merger or consolidation of the
Company with or into another corporation or entity in which the Company
does not survive, or in the event of a sale of all or substantially all of
the assets of the Company in which the stockholders of the Company receive
securities of the acquiring entity or an affiliate thereof, all Options
shall be assumed or equivalent options shall be substituted by the
successor corporation (or other entity) or a parent or subsidiary of such
successor corporation (or other entity); provided, however, that if such
successor does not agree to assume the Options or to substitute equivalent
options therefor, the Administrator, in the exercise of its sole
discretion, may permit the exercise of any of the Options prior to
consummation of such event, even if such Options were not otherwise
exercisable.
Except with the express written approval of the Administrator which
approval the Administrator is authorized to give only with respect to
NQOs, no Option granted under this Plan shall be assignable or otherwise
transferable by the optionee except by will or by the laws of descent and
distribution. During the life of the optionee, an Option shall be
exercisable only by the optionee.
The Plan does not limit the power of the Company to adopt such other
incentive or equity participation arrangements as it may deem desirable,
including, without limitation, the granting of stock options or the
issuance of shares of common stock other than under the Plan.
- --------------------------------------------------------------------------------
95
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
5.4 Restricted Stock
The Administrator may grant Restricted Stock to such employees,
consultants and non-employee directors, in such amounts, and subject to
such terms and conditions as the Administrator may determine in its sole
discretion, including such restrictions on transferability and other
restrictions as the Administrator may impose, which restrictions may lapse
separately or in combination at such times, under such circumstances, in
such instalments, or otherwise, as the Administrator shall determine. The
Administrator shall, in its sole discretion, determine the purchase price,
if any, and form of payment for Restricted Stock.
6. DIRECTORS
INTERESTS IN THE COMMON STOCK AND PREFERRED STOCK OF THE COMPANY
6.1 Save as disclosed herein, no Director (nor any member of his immediate
family nor any person connected with any of them) has any interest,
beneficial or non-beneficial, in the Common Stock or preferred stock of
the Company.
6.2 There is no director or member of a Director's family who has a related
financial product (as defined in the AIM Rules) referenced to the Shares
of Common Stock or preferred stock.
DIRECTORSHIPS
6.3 The Directors currently hold the following directorships (other than in
Group companies) and have held the following directorships within the five
years prior to the publication of this document:
NAME CURRENT PAST
Deepak Chopra Advanced Micro Electronics AS
Aristo Medical Products, Inc.
Centro Vision
Corrigan Canada, Ltd.
Dolphin Medical Pte. Ltd.
Dolphin Medical, Inc.
Ferson Technologies, Inc.
Rapiscan Systems Oy
Metorex Security Products, Inc. (US)
OSI Systems Pvt. Ltd.
Opto Sensors (Malaysia) Sdn, Bhd.
Opto Sensors (Singapore) Pte, Ltd.
OSI Electronics, Inc.
OSI Fibercomm, Inc.
OSI Systems, Inc.
Osteometer Meditech, Inc.
Rapiscan Security Products, Inc.
Rapiscan Systems Limited
Rapiscan Security Products (U.S.A.), Inc.
Rapiscan Systems Hong Kong Limited
Rapiscan Systems, Inc.
Rapiscan Systems Holdings, Inc.
Rapitec, Inc.
Spacelabs Medical, Inc.
Spacelabs Medical UK Ltd.
UDT Sensors, Inc.
Nikhil Mehta Blease Medical Holdings
Blease Medical Equipment Ltd.
Blease Medical Services Ltd.
Ralph Hunter Spacelabs Medical (Canada) Inc.
Spacelabs Medical Finland Oy
Dolphin Merger Corporation
- --------------------------------------------------------------------------------
96
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
NAME CURRENT PAST
Meyer Luskin OSI Systems, Inc. Scope Industries Inc
Scope Industries Inc Myricom
Myricom Alerion Biomedical
Alerion Biomedical Stamet
Stamet Chromagen
Chromagen Santa Monica UCLA Hospital
Santa Monica - UCLA Hospital
Steve Good OSI Systems, Inc. None
Big Dog Holdings, Inc.
Arden Realty, Inc.
Kayne Anderson MLG investment Co.
Kayne Anderson Energy Total Return Fund
California Pizza Kitchen
Sir John Amvescap PLC Whitbread PLC
Michael Merchants Trust PLC Kingfisher PLC
Middlecott ECI Ventures LLP Geest PLC
Banham Cyclacel Ltd Cyclacel Limited
George Eschmann Holdings Ltd, Smiths Industries PLC
MacDonald Vernalis PLC,
Kennedy Carclo PLC,
Isotron PLC,
E2V Technologies PLC,
Inprint Labels Ltd
Steve Good is also a senior partner in the firm Good Swartz Brown & Berns.
6.4 Save as set out in paragraph 6.3 above, none of the Directors:
(i) has any unspent convictions in relation to any indictable
offence;
(ii) had a bankruptcy order made against him or entered into any
individual voluntary arrangements;
(iii) has been subject to any public criticism by any statutory or
regulatory authority (including any recognised professional
body) and no Director has been disqualified by a court from
acting as a director or from acting in the management or
conduct of affairs of a company;
(iv) was a director of any company at the time of, or in the twelve
months preceding, any compulsory liquidation, creditors'
voluntary liquidation, administration or company voluntary
arrangement or any composition or arrangement with its
creditors generally or any class of its creditors, or any
receivership over any asset of such company; or
(v) has had any asset belonging to him placed in receivership or
been a partner of a partnership whose assets have been placed
in receivership whilst he was a partner at the time of, or
within twelve months preceding, such receivership;
(vi) save as disclosed in this document, no Director is or has been
interested in any transactions which is or was unusual in its
nature, or significant in relation to the business of the Group
and which was effected by the Group and remains in any respect
outstanding or underperformed;
(vii) no loans or guarantees have been granted or provided to, of for
the benefit of, any of the Directors and which have not been
repaid, or released as at the date of this document; or
(viii) has been disqualified by a court from acting as a director of a
company or from acting in the management or conduct of the
affairs of any company.
Save for the directorships in OSI held by Deepak Chopra, Steve Good and
Meyer Luskin and the stock options held by these individuals and Nikhil
Mehta and Ralph Hunter in OSI, there are no potential conflicts of the
duties owed by the Directors to the Company and their respective private
interests.
6.5 There are no outstanding loans granted or guarantees provided by the
Company to or for the benefit of any of the Directors.
- --------------------------------------------------------------------------------
97
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
6.6 As of the date of this document, the Directors hold the following options
to purchase common shares pursuant to the Plan:
EXERCISE NUMBER
PRICE PER DATE OF DATE FIRST DATE OF OF SHARES
(a) OPTION HOLDER SHARE GRANT EXERCISABLE EXPIRATION UNDER OPTION
Sir John Michael Middlecott Banham o o o o 50,000
George MacDonald Kennedy o o o o 50,000
Deepak Chopra -- -- -- -- nil
Ralph Hunter -- -- -- -- nil
Nikhil Atul Mehta -- -- -- -- nil
Steve Good -- -- -- -- nil
Meyer Luskin -- -- -- -- nil
As at the date of this document, the Directors held the following options
to purchase common shares of Spacelabs Medical which it is intended,
following Admission, will be converted into options to purchase Shares of
Common Stock of the Company*:
EXERCISE NUMBER
PRICE PER DATE OF DATE FIRST DATE OF OF SHARES
(b) OPTION HOLDER SHARE GRANT EXERCISABLE EXPIRATION UNDER OPTION
Deepak Chopra US$0.62 26 October 2004 26 October 2005 26 October 2009 800,000
US$1.10 11 July 2005 11 July 2006 11 July 2010 500,000
Ralph Hunter US$0.58 1 April 2004 1 April 2005 1 April 2009 180,000
US$0.72 8 December 2004 8 December 2005 8 December 2009 120,000
US$0.95 5 April 2005 5 April 2006 5 April 2010 75,000
Nikhil Atul Mehta US$0.58 1 April 2004 1 April 2005 1 April 2009 125,000
US$0.95 5 April 2005 5 April 2006 5 April 2010 100,000
Steve Good US$0.62 26 October 2004 26 October 2005 26 October 2009 100,000
US$1.10 11 July 2005 11 July 2006 11 July 2010 50,000
Meyer Luskin US$0.62 26 October 2004 26 October 2005 26 October 2009 100,000
US$1.10 11 July 2005 11 July 2006 11 July 2010 50,000
* Further details of the Conversion are set out in paragraph 3.5 of
Part 7.
6.7 Except as disclosed above, none of the Directors (nor any member of his
immediate family nor any person connected with any of them) has any
interest, beneficial or non-beneficial, in the Common Stock or Preferred
Stock of the Company.
7. SUBSTANTIAL SHAREHOLDERS
7.1 The Directors are aware of the following persons who as at o October
2005 (being the most recent practicable date prior to the publication of
this document), were interested, directly or indirectly in 3 per cent o
or more of the Company's share capital:
NUMBER OF SHARES OF PERCENTAGE OF ISSUED
NAME COMMON STOCK SHARE CAPITAL
OSI Systems o o %
UDT Sensors o o %
---
100%
---
7.2 The Directors are further aware of the following interests which will
amount to 3 per cent or more of the issued share capital of the Company
immediately following Admission:
NUMBER OF SHARES OF PERCENTAGE OF ISSUED
NAME COMMON STOCK SHARE CAPITAL
OSI Systems o o
UDT Sensors o o
---------------------
65%
--
- --------------------------------------------------------------------------------
98
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
7.3 As far as the Directors are aware, there are no arrangements relating to
the Group the operation of which may at a subsequent date result in a
change of control of the Company.
7.4 As far as the Directors are aware, no substantial shareholders will have
different voting rights to other shareholders in the company.
7.5 The Company, following Admission, will be 65% owned by OSI Systems and UDT
who will hold a controlling interest.
8. DIRECTORS' SERVICE AGREEMENTS/LETTERS OF APPOINTMENT
8.1 SIR JOHN MICHAEL BANHAM
Sir John Banham was appointed pursuant to a letter of appointment with the
Company dated o 2005 for an initial term of 1 year thereafter terminable on
12 months' rolling notice. Fees currently payable are (pounds)35,000 per
annum and a further (pounds)15,000 per annum after the first year payable
in options over Shares of Common Stock. Pursuant to his letter of
appointment Sir John Banham has been granted options over 50,000 Shares of
Common Stock.
8.2 GEORGE MACDONALD KENNEDY
George Kennedy was appointed pursuant to a letter of appointment with the
Company dated o 2005 for an initial term of 1 year thereafter terminable on
12 months' rolling notice. Fees currently payable are (pounds)30,000 per
annum and a further (pounds)15,000 per annum after the first year payable
in options over Shares of Common Stock. Pursuant to his letter of
appointment George Kennedy has been granted options over 50,000 Shares of
Common Stock.
8.3 DEEPAK CHOPRA
Deepak Chopra is engaged pursuant to a letter of appointment with OSI
Systems dated 18 July 2005 (as amended by a side letter between Mr.
Chopra, OSI and the Company on o 2005) as the Chief Executive Officer
and President of OSI and Chief Executive Officer of the Company. The term
of the agreement is for the later of either the fifth anniversary of
execution or upon the close of business 3 years following the date on
which either party notifies the other in writing that the notifying party
elects to end the term of employment. Pursuant to the side letter, the
Company will pay Deepak Chopra a maximum of US$237,500 and a maximum of
US$427,500 per annum (to be determined based on the allocation of his time
between OSI and the Company). In addition to a bonus payable at the
discretion of the Board. Shares of Common Stock may be awarded at the
discretion of the Board pursuant to the Company 2005 Equity Participation
Plan.
8.4 RALPH HUNTER
Ralph Hunter is party to a service agreement with the Company dated o
2005. Under the agreement Ralph Hunter is paid US$178,725 per annum in
addition to a bonus payable at the discretion of the Board. Shares of
Common Stock may be awarded at the discretion of the Board pursuant to the
Company 2005 Equity Participation Plan. The agreement is for a term of 1
year continuing thereafter until terminated by either party upon immediate
notice.
8.5 NIKHIL ATUL MEHTA
Nikhil Atul Mehta is engaged pursuant to a letter of appointment with OSI
Systems dated 11 July 2005 as the Vice President of Business Development.
On o October 2005 the agreement was transferred to the Company. Nikhil
Mehta is paid US$175,000 per annum in addition to a bonus payable at the
discretion of the Board. Shares of Common Stock may be awarded at the
discretion of the Board pursuant to the Company 2005 Equity Participation
Plan. The agreement is for a term of 1 year continuing thereafter until
terminated by either party on immediate notice
8.6 MEYER LUSKIN
Meyer Luskin was appointed pursuant to a letter of appointment with the
Company dated o 2005 for an initial term of 1 year thereafter terminable
on 12 months' rolling notice. Fees currently payable are US$20,000 per
annum. Meyer Luskin has been granted options over 50,000 shares of common
stock in Spacelabs Medical pursuant to the 2004 Spacelabs Medical stock
option plan which are intended to be converted into options over Shares of
Common Stock (as set out in paragraph 3.5 of this Part 7).
- --------------------------------------------------------------------------------
99
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
8.7 STEVE GOOD
Steve Good was appointed pursuant to a letter of appointment with the
Company dated o 2005 for an initial term of 1 year thereafter terminable
on 12 months' rolling notice. Fees currently payable are US$20,000 per
annum. Steve Good has been granted options over shares of common stock in
Spacelabs Medical pursuant to the 2004 Spacelabs Medical stock option plan
which are intended to be converted into options over Shares of Common
Stock (as set out in paragraph 3.5 of this part 7).
9. MATERIAL CONTRACTS
9.1 The following material contracts (not being contracts entered into in the
ordinary course of business) have been entered into by a member of the
Group within the two years immediately preceding the date of this
document:
(i) Stock purchase and option agreement dated 10 December 2003
between Dolphin Medical, Inc. ("Dolphin Medical USA") and
Conmed Corporation ("Conmed").
The agreement authorised Dolphin Medical USA to sell to Conmed
8,787,500 shares of Dolphin Medical USA's common stock for a total
purchase price of US$2,000,000. This issuance took place on 11
December 2003. Pursuant to the agreement, Conmed has the option to
purchase and Dolphin Medical USA is obligated to sell to Conmed all
of the operating assets and business, with certain limitations,
necessary to, related to, or utilised in the manufacturing of the
Dolphin products for a purchase price equal to two times the sales
revenue (for the year prior to the exercise of the option) from the
sale of the products Dolphin Medical USA sold to Conmed plus two
times all other sales revenue of Dolphin products (for the year prior
to the exercise of the option). The price shall be no less than
US$30,000,000 from 1 January 2004 through 31 December 2007, and
US$40,000,000 from 1 January 2008 through 31 December 2008.
Notwithstanding the foregoing, if at any time during the option
period, a third party makes an offer to acquire Dolphin Medical USA
(by way of an asset sale, share purchase, merger or otherwise) and
Dolphin Medical USA wishes to accept the offer, Conmed will have the
option to purchase the business and/or assets related to the product
line at a price equal to the lesser of (i) the option purchase price
or (ii) the purchase price offered by the third party acquirer
provided, however, if Conmed does not elect to exercise the purchase
option set forth in the agreement within 30 days of the written
notice, the option to purchase shall terminate.
If an unaffiliated third party purchases the business and/or assets
of Dolphin Medical USA by way of an asset sale, Conmed has the right,
but not the obligation, to sell to Dolphin Medical USA its purchased
shares for an aggregate purchase price in an amount equal to ten
percent of the net proceeds received by Dolphin Medical USA from the
sale of the business and/or assets. If Conmed purchases Dolphin
Medical USA's assets and business, neither Dolphin Medical USA nor
any of its affiliates can sell, manufacture or market, directly or
indirectly, anywhere in the world, any product that would compete
with the products covered in the distribution agreement, entered into
on 11 December 2003, by and between Dolphin Medical USA and Conmed,
for five years after the sale with certain exceptions.
(ii) master intercompany agreement, between the Company and OSI
System.
The Company entered into a master intercompany agreement, on o
October 2005, with its parent company OSI Systems. The agreement
provides a framework by which OSI Systems and its subsidiaries (other
than the Group) may render services to the Group, and by which the
may render services to OSI Systems and its other subsidiaries, such
services to include (i) subleasing space to the service recipient;
(ii) administrative, IT and other support services; and/or (iii)
making loans, evidenced by promissory notes, to the service
recipient; provided, however, that as of the date upon which OSI
Systems becomes a minority stockholder of the Company, no further
mutual financial support or funding shall be extended between the
parties.
If the Company requires the manufacture of a product or component, or
manufacturing services, the Company shall allow OSI Systems to bid on
the manufacture of products, components or manufacturing services
which OSI Systems or its other subsidiaries are capable
- --------------------------------------------------------------------------------
100
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
of providing. OSI Systems or its other subsidiaries shall win the bid
process so long as its quote is no more than 5% in excess of the
lowest quotation provided by a competitor for such product or service
on comparable terms. In the event that OSI Systems' proposal meets
the delivery, quality, regulatory and documentation requirements for
such product or component but is more than 5% in excess of the lowest
quotation, then the Company shall advise OSI Systems of the same and
provide an opportunity for OSI Systems to revise its pricing in the
proposal. The parties intend to adhere to the arm's length standard
set forth in Section 482 of the United States Internal Revenue Code
and related regulations.
The agreement provides for the Company and OSI to report taxes on a
consolidated basis where permitted and details tax payment
obligations as between the Company and OSI.
The agreement will terminate on 31 August 2015, and will renew
automatically for successive 12-month periods unless terminated by
mutual agreement of the parties in writing, or either party giving
notice to the other party at least 30 days prior to the beginning of
the next term. The agreement may not be assigned by either party
without the prior written consent of the other party.
The agreement provides for a dispute resolution procedure whereby:
(i) the parties agree to negotiate in good faith to resolve disputes,
and if such negotiation does not resolve the dispute, the parties are
required to appoint members of their respective senior management
representatives to address the dispute, (ii) if consultation between
the respective senior management representatives of the parties does
not result in a resolution of the dispute, the parties are required
to appoint members of their respective Boards of Directors (which
have overlapping members) to consult with respect to the dispute, and
(iii) all disputes remaining unresolved 30 days after the appointment
of the Board of Directors' representatives may be submitted to
arbitration. The agreement provides that until such time that a new
credit facility (separate from the existing Facility) has been
obtained by the Group from the Bank of the West or from any other
bank, the Group and OSI will agree that each will only use the
Facility (referred to in paragraph (iii) below) to the extent of
their proportional share of the combined assets of OSI Systems (and
its subsidiaries (not including the Company and its subsidiaries))
and the Group.
(iii) The Facility Agreement (the "Facility")
On 18 May 2005, OSI Systems and Bank of the West ("BOW") entered into
a Second Amended and Restated Credit Agreement and an Amendment and
Master Reaffirmation Security Agreement for a $50 million Senior
Credit Facility (collectively, the "Amended Line"), amending OSI's
pre-existing line of credit with BOW. The changes effected by the
Amended Line included: (i) increase of OSI's cash borrowing limit
from $20 million to $50 million; (ii) addition of multicurrency
funding, up to $18 million; (iii) removal of a $10 million limit on
capital expenditures; (iv) increase in OSI's acquisition purchase
price limit from $15 million to $20 million; (v) research and
development technology investments related to any acquisition, up to
$5 million; (vi) foreign exchange facility up to $45 million; (vii)
one time, non-refundable BOW's agent fee of $85,000; and (viii)
Rapiscan Security Products Limited (UK) and Opto Sensors (Malaysia)
were added to the list of guarantors which previously included all
OSI's domestic subsidiaries.
(iv) Agreement with Equilateral
There is a letter of agreement between OSI Systems and Equilateral
Limited ("Equilateral") dated 21 February 2005 pursuant to which
Equilateral assists OSI Systems with, amongst other elements, the
flotation of its healthcare businesses to include assistance with due
diligence, negotiating terms for investments and completing the
proposed transaction; and certain other related functions. Pursuant
to the agreement Equilateral will be paid by the Company a fee of 1
per cent of the funds raised pursuant to the Placing payable in cash
or upon Admission.
(v) Lock-in Agreements
Pursuant to agreements dated o 2005 made between Collins Stewart
the Company and each of OSI and UDT Sensors, OSI and UDT Sensors
agreed not to dispose of any Shares of Common Stock for a period of
12 months from Admission without the consent of Collins Stewart, and
- --------------------------------------------------------------------------------
101
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
for the next following period of 12 months, not to dispose of any
Shares of Common Stock other than through the Company's broker.
(vi) Agreement (the "Blease Acquisition Agreement") between OSI
Systems and Andrew Ferguson & others dated 8 February 2005 for
the acquisition of Blease Medical Holdings Limited ("BMH") (the
parent company of the Blease group).
Pursuant to the agreement, OSI acquired the entire issued share
capital of BMH for (pounds)4.5m in cash less an amount
equal to certain liabilities at completion. Further contingent
payments of up to (pounds)1m for each of the years ending
on 30 June 2006, 2007 and 2008 are to be paid if certain targets are
met in respect of non-US turnover and a further contingent sum of up
to (pounds)2.25m is to be paid in respect of targets for US
turnover for the years ended June 2006, 2007 and 2008. Deferred
payments are to be satisfied by the issue of loan notes by OSI
Systems to the vendors. Standard warranties were given by the
non-institutional vendors in favour of OSI Systems and claims under
such warranties can be made until August 2006.
(vii) Placing Agreement
Pursuant to a Placing Agreement entered into between the Company, the
Directors, OSI Systems and Collins Stewart, Collins Stewart agreed
(conditionally, inter alia, upon admission taking place not later
than o 2005, or such date as Collins Stewart and the Company may
agree, not being later than o ), as agent for the Company, to use
reasonable endeavours to procure subscribers for the Placing Shares
at the Placing Price and, failing which, to subscribe for the Placing
Shares itself.
Collins Stewart has also conditionally agreed to submit an
application to the London Stock Exchange and to act as the Company's
nominated adviser in respect of that Application.
The Placing Agreement contains certain representation, warranties,
undertakings and indemnities given by the Company, certain warranties
given by the Directors and certain warranties and indemnities given
by OSI, in each case in favour of Collins Stewart.
The Placing Agreement contains an indemnity from the Company in
favour of Collins Stewart in respect of all changes, costs, damages,
expenses, liabilities and other losses which Collins Stewart may
offer in respect of the Placing and Admission.
The Company had agreed to pay to Collins Stewart (i) a corporate
finance fee of (pounds)100,000 (plus any applicable VAT),
(ii) a commission of an amount equal to 4 per cent. of the aggregate
amount equal to the Placing Price multiplied by the number of Placing
Shares placed; and (iii) an additional commission of 0.25 per cent.
of such aggregate amount in the event that the market capitalisation
of the Company on Admission is not less than (pounds)120
million.
The Placing Agreement contains certain provisions for the payment of
other costs by the Company to include all costs, charges and expenses
relating to or incidental to the Placing and/or Admission, including
registrars fees, printing and advertising expenses, postage, legal,
accounting and other professional fees.
The Placing Agreement contains undertakings (subject to certain
exceptions) from the Directors to Collins Stewart not to dispose of
any Common Stock for the period expiring 12 months from the date of
Admission and thereafter for a further period of 12 months only to
dispose of any Common Stock through the Company's broker on an
orderly market basis.
(viii) Nominated Adviser and Broker Agreement
Under an agreement made between the Company, the Directors, OSI and
Collins Stewart dated o October 2005 conditional upon Admission,
Collins Stewart has agreed to act as nominated adviser and broker to
the Company for the purposes of the AIM Rules. The Company has agreed
to pay Collins Stewart a fee for its services as nominated adviser
and broker of (pounds)40,000 per annum (excluding VAT).
Either party may terminate Collins Setwart's appointment by giving to
the other not less than 3 month's notice of termination, such notice
not to expire before the period of twelve months from the date of
Admission. The agreement contains an indemnity from the Company in
respect of the services to be provided by Collins Stewart.
- --------------------------------------------------------------------------------
102
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
(ix) Relationship Agreement
The Company is party to a relationship agreement with its parent
company OSI dated o October 2005 (the "Relationship Agreement").
Under the Relationship Agreement for as long as OSI (and its
associates) remain a controlling shareholder ("Controlling
Shareholder") (being a shareholder that is entitled to exercise or to
control the exercise of 30 per cent or more of the rights to vote at
general meetings of the Company) OSI shall (and shall procure that
its associates shall) so far as it is able to do so by exercising its
control ensure that:
(a) the Company is capable of carrying on its business independently
of OSI (and associates) and all arrangements between them are carried
on an arms length basis; (b) any non-independent Director will
abstain from voting on matters where the interests of both parties
conflict; and (c) independent directors will deal with unresolved
disputes between the parties.
For as long as OSI (and its associates) remains a Controlling
Shareholder OSI shall (and shall procure that its associates shall)
not: (a) undertake any activity which may render the Company
incapable of carrying on its business independently, or enter into
any transactions and relationships between the parties which are not
at arm's length or on a normal commercial basis, and (b) propose or
vote in favour of any resolution amending the Certificate of
Incorporation or By-laws unless such resolution is voted in favour of
a majority of the independent directors of the Company or is proposed
by virtue of a resolution of the Board to approve a dual listing or
listing on another recognised investment exchange.
(x) Directors' Indemnity Agreement
Pursuant to an indemnification agreement dated o 2005 entered into
by the Company and each of the Directors, in order to attract and
retain high quality individuals the Company indemnifies each of the
Directors against third party proceedings or claims by reason of the
Director's service as a Director. The indemnification is subject to
the Directors acting in good faith in the interests of the Company.
The Directors are also indemnified in respect of proceedings in which
they are joined brought by or in the right of the Company. The
indemnity is subject to certain exceptions such as where a claim is
already recovered under a policy insurance.
(xi) Stock Transfer Agreement
A Summary of the Stock Transfer Agreement between OSI, UDT Sensors
and the Company is set out in paragraph 3.3 of this part 7.
10. LITIGATION
There have been no governmental, legal or arbitration proceedings
(including any such proceedings which are pending or threatened of which
the Company is aware) during the period covering the last 12 months which
may have, or have had in the recent past significant effects on the
Company and/or the Group's financial position or profitability.
Various lawsuits and claims are pending against the Company, including
those in note 6 to the Accountant's Report on Spacelabs Medical, Inc. and
Related Companies set out in Part 3 of this document which includes
product liability claims which are generally covered by insurance
policies. Although the outcome of such lawsuits and claims cannot be
predicted with certainty, the expected disposition thereof will not in the
opinion of the Board both individually and in the aggregate, result in a
material adverse effect on the Company's results of operations and
financial position.
11. SIGNIFICANT CHANGE
Other than as set out in this document there has been no significant
change in the financial or trading position of the Group which has
occurred since the end of the last financial period for which the audited
financial information has been published.
12. WORKING CAPITAL
The Directors are of the opinion, having made due and careful enquiry and
having taken into account the net proceeds of the Placing, that following
Admission the Group will have sufficient working capital for at least the
twelve months from the date of Admission.
- --------------------------------------------------------------------------------
103
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
13. TAXATION
United Kingdom
The following is general in nature and only a summary of the main UK tax
consequences which are expected to apply to shareholders of the Company who are
resident or ordinary resident individuals for UK tax purposes or companies
which are in the UK. It does not purport to be a comprehensive analysis of all
the tax consequences applicable to all types of shareholders and is based on
current law and practice. It should be noted that the UK tax treatment
applicable to shareholders is impacted by their residence status, whether they
are regarded as domiciled in the UK for tax purposes and other factors. If you
are in any doubt as to your own tax position or are resident or subject to tax
in a jurisdiction outside the UK, you should seek independent professional
advice without delay.
(a) DIVIDENDS
The Company will not be obliged to make any withholding on account of UK
tax on payment of any dividends. UK resident individuals who are domiciled
in the UK will be liable to UK tax on the gross dividend paid by the
Company. However, relief may be available for any US withholding tax
suffered, with the proviso that the relief cannot exceed the amount of UK
payable on the dividend. One exception to this general rule is that UK
resident individual shareholders who are not domiciled within the UK will
generally be subject to UK income tax on the dividend receipt only if the
dividend is remitted to the UK. In such cases, it should be noted that
advantage can be taken if the reduced rate of withholding tax under the
Double Tax Treaty between the US and the UK treaty only if the dividends
are remitted to the UK and therefore subject to UK tax.
UK resident companies will, where double tax relief is claimed be liable
to UK tax on the gross dividend paid by the Company, subject to credit for
US withholding tax deducted at source. The credit given in the UK for the
US tax suffered on the dividend cannot exceed the UK corporation tax
liability on the dividend.
A UK resident company may also seek relief for any underlying tax (tax
borne by the Company and its subsidiaries on the profits out of which the
dividend is paid) associated with the dividend where the UK company owns
10 per cent. or more of the voting rights in the Company.
As the credit given for US tax suffered on the dividend cannot exceed the
UK corporation tax liability on the dividend, a UK company may, subject to
satisfying the provisions within the UK Double Tax regulations, be
entitled to claim credit for any excess unrelieved US tax (both
withholding, and where available, underlying tax) against dividends
received from other sources.
For both individuals and companies having insufficient taxable income to
give rise to a UK tax charge on which relief may be obtained for the
withholding tax deducted under US law, the taxpayer can elect to treat the
US withholding tax as an expense to be deducted from the gross dividend so
that the taxable receipt is reduced to the amount of the dividend net of
withholding tax.
(b) TAXATION ON CAPITAL GAINS FOR SHAREHOLDERS
An individual, who is resident and ordinarily resident and domiciled in
the UK shall be liable to capital gains tax where a gain arises on the
disposal of chargeable assets situated anywhere in the world (including
shares in the Company held as an investment) subject to the application of
relevant reliefs and exemptions. Capital gains tax is charged at the rate
equivalent to the rate of income tax applied to an individual's top slice
of income. An individual who is resident and ordinarily resident but not
domiciled in the UK is liable to capital gains tax on a disposal of non-UK
assets (including shares in the Company held as an investment) if the
proceeds of disposal are remitted to the UK. A company resident in the UK
for corporation tax purposes will be liable to corporation tax in respect
of gains on the disposal of shares in the Company, subject to the
availability of allowance for inflation and the substantial shareholding
exemption.
If a shareholder who is not resident for tax purposes in the United
Kingdom disposes of all or any shares of Common Stock, he or it generally
will incur no liability to United Kingdom taxation on chargeable gains.
However, if any such person has previously been tax resident in the United
Kingdom and resumes residence within five years of ceasing tax residence
in the United Kingdom, a chargeable gain may arise from the disposal of
Common Stock and be taxed in the tax year in which United Kingdom tax
residence is resumed.
- --------------------------------------------------------------------------------
104
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Non-United Kingdom tax resident shareholders may also be subject to
taxation in their country of tax residence on chargeable gains (or
equivalent) arising from a disposal of Common Stock.
(c) STAMP DUTY AND STAMP DUTY RESERVE TAX ("SDRT")
No UK stamp duty or SDRT will be payable on the issue of shares save that
special rules may apply to persons operating clearance services or
depository receipt services.
As the Company is incorporated in Delaware, USA and its share register is
kept in the USA, there should be no charges to UK stamp duty or SDRT in
respect of transfers of the shares of Common Stock.
The above statements are intended only as a general guide to the current
tax position under UK taxation law and practice. A Shareholder who is in
any doubt as to his or her tax position or is subject to tax in any
jurisdiction other than the United Kingdom should consult his or her
professional adviser without delay. They do not deal with the position of
certain classes of Shareholders, such as dealers in securities or pension
funds.
In the event that a shareholder elects to hold his shares of Common Stock
in certificated form, and the Company is deemed to have a branch register
located in the UK, a transfer or sale of certificated shares of Common
Stock will generally be subject to ad valorem stamp duty at the rate of
0.5 per cent. rounded up to the nearest multiple of (pounds)5 or
value of the consideration paid by the purchaser. If an unconditional
agreement for the transfer of such shares of Common Stock is not completed
by a duly stamped transfer to the transferee by the seventh day of the
month following the month in which the agreement becomes unconditional,
SDRT will be payable on the agreement at the rate of 0.5 per cent. of the
amount or value of consideration paid. Liability to SDRT is generally that
of the transferee. Where a purchase or transfer is effected through a
member of the London Stock Exchange or a qualified dealer, the said member
or dealer will normally account for the SDRT. Any SDRT paid will be
refunded if stamp duty is duly paid within six years of agreement to sell.
When shares of Common Stock are held in certificated form, but the Company
is not deemed to have a branch register located in the UK, or when
instruments representing shares of Common Stock are transferred to a CREST
member who holds those shares in uncertificated form as a nominee for the
transferor, no stamp duty or SDRT will generally be payable providing
there is no change in beneficial ownership.
When instruments representing shares are transferred by a CREST member to
the beneficial owner (on whose behalf it has held them as nominee), no
stamp duty or SDRT will generally be payable.
(d) INHERITANCE TAX ("IHT") RELIEF
IHT is chargeable in respect of assets on the death of, or gift by, a
shareholder who is domiciled (or is deemed to be domiciled) in the United
Kingdom. However , the charge to IHT is subject to various exemptions.
Unquoted shares in a qualifying trading company such as the Company
ordinarily qualify for 100 per cent. IHT Business Property Relief
exemption provided they have been held for two years prior to the event
giving rise to IHT. Shares traded on AIM are regarded as unquoted for
these purposes and are therefore in principle eligible for IHT Business
Property Relief (subject to the Company meeting all of the relevant
qualifying conditions).
United States
The following is a general discussion of the material US federal income
consequences of the ownership and disposition of shares of Common Stock by
a non-US holder that acquires these shares pursuant to this offering. The
discussion is based on provisions of the Internal Revenue Code of 1986 as
amended, ("the Code"), applicable US Treasury regulations promulgated
thereunder and administrative and judicial interpretations, all as in
effect on the date of this document, and all of which are subject to
change, possibly on a retroactive basis. The discussion is limited to
non-US holders that hold our shares of Common Stock as a "capital asset"
within the meaning of Section 1221 of the Code - generally, property held
for investment. As used in this discussion, the term "non-US holder" means
a beneficial owner of shares of Common Stock that is not, for US federal
income tax purposes:
o an individual who is a citizen or resident of the United States;
o a corporation or partnership, including any entity treated as a
corporation or partnership for
- --------------------------------------------------------------------------------
105
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
US federal income tax purposes, created or organised in or under the
laws of the United States or any state of the United States or the
District of Columbia, other a partnership treated as foreign under US
Treasury regulations;
o an estate the income of which is includible in gross income for US
federal income tax purposes regardless of its source; or
o a trust (1) if a US court is able to exercise primary supervision
over the administration of the trust and one or more US persons have
authority to control all substantial decisions of the trust, or (2)
that has a valid election in effect under applicable US Treasury
regulations to be treated as a US person.
This discussion does not consider:
o US federal gift tax consequences, or US state or local or non-U.S.
tax consequences;
o specific facts and circumstances that may be relevant to a particular
non-US holder's tax position, including, if the non-US holder is a
partnership that the US tax consequences of holding and disposing of
shares of Common Stock may be affected by certain determinations made
at the partner level;
o the tax consequences for partnerships or persons who hold their
interests through a partnership or other entity classified as a
partnership for US federal income tax purposes;
o the tax consequences for the shareholders or beneficiaries of a
non-US holder
o all of the US federal tax considerations that may be relevant to a
non-US holder in light of its particular circumstances or to non-US
holders that may be subject to special treatment under US federal tax
laws, such as financial institutions, insurance companies, tax-exempt
organisations, certain trusts, hybrid entities, certain former
citizens or residents of the United States, holders subject to US
federal alternative minimum tax, broker-dealers, trade in securities,
pension plans and regulated investment companies; or
o special tax rules that may apply to a non-US holder that holds Shares
of Common Stock as part of a "straddle," "hedge," "conversion
transaction," "synthetic security," or other integrated investment.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE US FEDERAL, STATE, LOCAL, AND NON-US INCOME AND OTHER TAX
CONSIDERATIONS WITH RESPECT TO OWNING AND DISPOSING OF OUR SHARES OF
COMMON STOCK.
(a) DIVIDENDS
The Company does not anticipate paying dividends on its shares of
Common Stock in the foreseeable future (see "Dividend Policy"). If
the Company makes distributions on the shares of Common Stock, those
payments will constitute dividends for US federal income tax purposes
to the extent paid from our current or accumulated earnings and
profits, as determined under US federal income tax principles. To the
extent those distributions exceed the Company's current and
accumulated earnings and profits, the excess will constitute a return
of capital and first reduce the non-US holder's basis, but not below
zero, and then will be treated as gain from the sale of stock.
The Company will have to withhold US federal income tax at a rate of
30 per cent, or a lower rate under an applicable income tax treaty,
from the gross amount of the dividends paid to a non-US holder,
unless the dividend is effectively connected with the conduct of a
trade or business of the non-US holder within the United States or,
if an income tax treaty applies, attributable to a permanent
establishment or fixed base of the non-US holder within the United
States. Under applicable US Treasury regulations, a non-US holder,
including, in certain cases of non-US holders that are entities, the
owner or owners of such entities, will be required to satisfy certain
certification requirements in order to claim a reduced rate of
withholding pursuant to an applicable income tax treaty Non-US
holders should consult their tax advisors regarding their
entitlement to benefits under a relevant income tax treaty.
- --------------------------------------------------------------------------------
106
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Dividends that are effectively connected with a non-US holder's
conduct of a trade or business in the United States and, if an income
tax treaty applies, attributable to a permanent establishment or
fixed base of the non-US holder within the United States, are taxed
on a net income basis at the regular graduated US federal income tax
rates in the same manner as if the non-US holder were a resident of
the United States. In such cases, the Company will not have to
withhold US federal income tax if the non-US holder complies with
applicable certification and disclosure requirements. In addition, a
"branch profits tax" may be imposed at a 30 per cent, or a lower rate
under an applicable income tax treaty, on dividends received by a
foreign corporation that are effectively connected with the conduct
of a trade or business in the United States.
In order to claim the benefit of an income tax treaty or to claim
exemption from withholding because the income is effectively
connected with the conduct of a trade or business in the United
States, the non-US holder must provide a property executed IRS Form
W-8BEN, for treaty benefits, or W-8ECI, for effectively connected
income, respectively, or such successor forms as the IRS designates
prior to the payment of dividends. These forms must be periodically
updated.
A non-US holder that is eligible for a reduced rate of US federal
withholding tax under an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for a refund
together with the required information with the IRS.
(b) GAIN ON DISPOSITION OF SHARES OF COMMON STOCK
A non-US holder generally will not be subject to US federal income
tax or withholding tax with respect to gain realised on a sale or
other disposition of our shares of Common Stock unless one of the
following applies:
o the gain is effectively connected with the non-US holder's
conduct of a trade or business in the United States and, if an
income tax treaty applies, is attributable to a permanent
establishment or fixed base maintained by the non-US holder in
the United States; in these cases, the non-US holder will
generally be taxed on its net gain derived from the disposition
in the manner and at the regular graduated US federal income tax
rates applicable to United States persons, as defined in the
Code, and, if the non-US holder is a foreign corporation, the
"branch profits tax" described above may also apply;
o the non-US holder is a non-resident alien individual who is
present in the United States for 183 days or more in the taxable
year of the disposition and meets certain other requirements; in
this case, the non-US holder will be subject to a 30 per cent,
tax on the gain derived from the disposition which may be offset
by US source capital losses of the non-US holder, if any; or
o the Company's shares of Common Stock constitutes a United States
real property interest by reason of our status as a "United
States real property holding corporation," or a USRPHC, for US
federal income tax purposes at any time during the shorter of
the 5-year period ending on the date of such disposition or the
period that the non-US holder held the Company's shares of
Common Stock.
o However, because the determination of whether the Company are a
USRPHC depends on the fair market value of the Company's United
States real property interests relative to the fair market value
of the Company's other business assets, there can be no
assurance that the Company will not become a USRPHC in the
future. As long as the Company's shares of common stock is
"regularly traded on an established securities market" within
the meaning of Section 897(c)(3) of the Code, however, such
shares of Common Stock will be treated as United States real
property interests only if a non-US holder owned directly or
indirectly more than 5 per cent. of such regularly traded shares
of Common Stock during the shorter of the 5-year period ending
on the date of disposition or the period that the non-US holder
held our shares of Common Stock and the Company were a USRPHC
during such period. If the Company is or were to become a USRPHC
and a non-US holder owned directly or indirectly more than 5 per
cent. of the Company's shares of Common Stock during the period
described above or the Company's shares of Common Stock are not
"regularly traded on an established
- --------------------------------------------------------------------------------
107
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
securities market," then a non-US holder would generally be
subject to US federal income tax on its net gain derived from
the disposition of the Company's shares of Common Stock at the
regular graduated US federal income tax rates applicable to
United States persons, as defined in the Code.
(c) INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The Company must report annually to the IRS and to each non-US holder
the gross amount of the distributions paid to that holder and the tax
withheld from those distributions. These reporting requirements apply
regardless of whether withholding was reduced or eliminated by an
applicable income tax treaty. Copies of the information returns
reporting those distributions and withholding may also be made
available under the provisions of an applicable income tax treaty or
agreement to the tax authorities in the country in which the non-US
holder is a resident or incorporated.
Under some circumstances, US Treasury regulations require backup
withholding and additional information reporting on reportable
payments on Shares of Common Stock. The gross amount of dividends
paid to a non-US holder that fails to certify its non-US holder
status in accordance with applicable US Treasury regulations
generally will be reduced by backup withholding at the applicable
rate, currently 28 per cent. Dividends paid to non-US holders subject
to the US withholding tax at a rate of 30 per cent., described above
in "Dividends," generally will be exempt from US backup withholding.
The payment of the proceeds of the sale or other disposition of
shares of Common Stock by a non-US holder effected by or through the
US office of any broker, US or non-US, generally will be reported to
the IRS and reduced by backup withholding unless the non-US holder
either certifies its status as a non-US holder under penalties of
perjury or otherwise establishes an exemption. The payment of the
proceeds of the sale or other disposition of shares of Common Stock
by a non-US holder effected by or through a non-US office of any
broker US or non-US generally will be reported to the IRS and reduced
by backup withholding, unless the non-US broker has certain
enumerated connections with the United States. In general, the
payment of proceeds from the disposition of shares of Common Stock
effected by or through a non-US office of a broker that is a US
person or has certain enumerated connections with the United States
will be reported to the IRS and may be reduced by backup withholding
unless the broker receives a statement from the non-US holder that
certifies its status as a non-US holder under penalties of perjury or
the broker has documentary evidence in its files that the holder is a
non-US holder.
Backup withholding is not an additional tax. Any amounts withheld
under the backup withholding rules from a payment to a non-US holder
can be refunded or credited against the non-US holder's US federal
income tax liability, if any, provided that the required information
is furnished to the IRS in a timely manner. These backup withholding
and information reporting rules are complex and non-US holders are
urged to consult their own tax advisors regarding the application of
these rules to them.
THE FOREGOING DISCUSSION OF US FEDERAL INCOME TAX CONSIDERATIONS IS
NOT TAX ADVICE AND IS NOT BASED ON AN OPINION OF COUNSEL.
ACCORDINGLY, EACH PROSPECTIVE NON-US HOLDER OF SHARES OF COMMON STOCK
SHOULD CONSULT THEIR OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL,
STATE, LOCAL AND NON-US TAX CONSEQUENCES OF THE OWNERSHIP AND
DISPOSITION OF SHARES OF COMMON STOCK.
- --------------------------------------------------------------------------------
108
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
14 LICENCES TECHNOLOGIES AND CONSENTS
TECHNOLOGY
The principal details of the relevant patents, trademarks and licences are
described below:-TRADEMARKS -- The Business has used, registered, and
applied to register certain trademarks and service marks to distinguish
its products, technologies and services from those of its competitors in
the US and in foreign countries. The Group enforces its trademark, service
mark, and trade name rights in the US and abroad.
PATENTS -- The Business holds a number of US and foreign patents relating
to various aspects of its medical imaging and monitoring systems. The
Group's current patents will expire at various times between 2006 and
2021.
LICENSES -- In December 1998, as part of the settlement of certain
litigation, OSI and Lunar Corporation ("Lunar") entered into a license
agreement pursuant to which OSI was granted a fully paid up worldwide,
non-exclusive license under US Patent Nos. 4,626,688 (the "688 patent")
and 5,138,167 (the "167 patent") in the non-medical field. Prior to the
acquisition of Osteometer in September 1998, Osteometer had also been
involved in litigation with Lunar regarding the 688 and 167 patents. In
December 1998, the parties to this litigation entered into a settlement
agreement. As a part of the settlement, the parties entered into a license
agreement pursuant to which Osteometer was granted a worldwide,
non-exclusive license under the 688 and 167 patents for certain bone
densitometers. The Group makes royalty payments on sales of the licensed
products.
The Group's products have generally received section 510(k) approvals from
the US Food and Drug Administration, (part of the US Department of Health
and Human Services) in respect of its sales in the United States.
15. PROPERTIES
The following table lists the principal physical properties occupied by
Spacelabs Healthcare as at 30 June 2005:
LOCATION DESCRIPTION OF FACILITY EXPIRATION OF LEASE
- ------------------------------- -------------------------------------------- --------------------
Hawthorne, California, US Manufacturing, engineering, sales and 2006
marketing and service for Dolphin Medical
and the Osteometer businesses. Marketing
and engineering for Dolphin Medical pulse
Oximetry business. Shared with OSI
Issaquah, Washington, US Manufacturing, engineering, sales and 2014
marketing and service for the medical
monitoring systems group
Secunderabad, India Manufacturing and engineering for pulse 2005
oximetry products and engineering for
monitoring products. Shared with OSI
Chesham, UK Manufacturing, engineering, sales and 2006-2009
marketing for the medical monitoring and
anaesthesia systems group
Salford, UK Pan-European logistics centre. Shared with 2009-2011
OSI
16. OTHER INFORMATION
16.1 There are no arrangements in force for the waiver of future dividends.
16.2 There are no specific dates on which entitlement to dividends or interest
thereon on Shares of Common Stock or the preferred stock arises.
- --------------------------------------------------------------------------------
109
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
16.3 The total costs and expenses payable by the Company in connection with
or incidental to the Placing and Admission (including professional fees,
printing, advertising costs and commissions payable under the Placing) are
estimated to be approximately (pounds) o excluding VAT. The gross proceeds
expected to be raised by the Placing are (pounds) o and the net proceeds of
the Placing (after expenses and excluding VAT) are estimated to be
(pounds)o.
16.4 Definitive share certificates in registered form for the Placing Shares
are expected to be despatched by o 2005.
16.5 The Placing Price of (pounds) o per Placing Share is at a
premium of o pence for each Share of Common Stock above the nominal
value of each such shares.
16.6 Deloitte & Touche LLP, London, UK has given and not withdrawn its written
consent to the issue of this document with the inclusion of the
Accountant's Reports in Parts 3 and 4 of this document and the references
to the report and to its name in the form and context in which they are
included.
16.7 Collins Stewart has given and not withdrawn its written consent to the
issue of this document with references to its name in the form and context
in which such references are included.
16.8 The accounting reference date of the Company is 30 June 2005
16.9 The Company's auditors are Deloitte & Touche LLP, Seattle, USA.
16.10 Except as disclosed in this document, as far as the Directors are aware:
(a) there are no patents, licences or commercial contracts or new
manufacturing processes which are material to the Group's
business as currently conducted or profitability;
(b) there are no environmental issues that may affect the issuer's
utilisation of its tangible fixed assets;
(c) there are no known trends, uncertainties, demands or events
that are reasonably likely to have a material adverse effect on
the Group's prospects for at least the current financial year;
and
(d) there are no exceptional factors that have influenced the
Company's activities.
16.11 The Company complies with relevant US state corporate governance
requirements.
16.12 The International Security Identification Number for the Shares of Common
Stock is o
16.13 As at 30 June 2005 the group employed approximately 1,050 full-time
employees.
16.14 Except as disclosed in this document, as far as the Directors are aware,
no person (excluding professional advisers otherwise disclosed in this
document and trade suppliers) has received, directly or indirectly, from
the Company in the twelve months prior to the application for Admission or
entered into contractual arrangements (not otherwise disclosed in this
document) to receive, directly or indirectly, from the Company after
Admission:
(i) fees totalling (pounds)10,000 or more;
(ii) securities in the Company with a value of (pounds)10,000; or
(iii) any other benefit with a value of (pounds)10,000 or
more at the date of Admission.
16.15 Save as disclosed in this document, the Company has no principal
investments for the financial year covered by the historic financial
information in this document and there are no principal investments in
progress and there are no principal future investments on which the board
has made a firm financial commitment.
17. US SECURITIES LAW AND TRANSFER RESTRICTIONS
Regulation S promulgated under the US Securities Act governs offers and
sales of securities made outside of the United States. The Placing Shares
have not been and will not be registered under the US Securities Act or
under the relevant securities laws of any state of the United States or
any other jurisdiction. The Placing Shares may not be directly or
indirectly offered, sold, resold or otherwise transferred within the
United States or to, or for the account or benefit of, US persons (as
defined in Regulation S), or in any country where to do so may contravene
local securities laws or regulations and may not be acquired by any US
person in any resale transactions, except in accordance with Regulation S
or pursuant to registration, or an exemption therefrom, under the US
Securities Act. In addition, hedging transactions with regard to the
Placing Shares may only be conducted in accordance with the US Securities
Act.
- --------------------------------------------------------------------------------
110
PART 7 -- ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
The above restrictions preclude purchasers of the Placing Shares from
reselling the Placing Shares in the US or to a US person until the
expiration of a period of one year following the placing.
The Placing Shares have not been approved or disapproved by the Securities
and Exchange Commission, any state securities commission in the United
States or any other US regulatory authority, nor have any of the foregoing
authorities passed on or endorsed the merits of the Placing or the
accuracy or adequacy of this document. Any representation to the contrary
is a criminal offence in the United States.
US Transfer Restrictions
No actions have been taken to register or qualify the Placing Shares
offered hereby or otherwise permit a public offering of the Placing Shares
offered hereby in any jurisdiction other than the United Kingdom. The
Placing Shares are being offered outside of the United States pursuant to
Regulation S promulgated under the US Securities Act. The Placing Shares
offered hereby have not been, and will not be, registered under the US
Securities Act and may not be offered, sold or resold or otherwise
transferred within, or to persons in, the United States except in
accordance with Regulation S, pursuant to a registration statement under
the US Securities Act, or pursuant to an applicable exemption from
registration under the US Securities Act. The above restrictions preclude
purchasers of the Placing Shares from reselling the Placing Shares in the
US or to a US person until the expiration of a period of one year
following the Placing. The certificates of all Placing Shares subscribed
in the Placing will bear a legend to the following effect:
"THIS SECURITY HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR APPLICABLE
STATE SECURITIES LAWS. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY,
AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS SECURITY MAY NOT BE
OFFERED, SOLD, PLEDGED, OR OTHERWISE TRANSFERRED BY SUCH HOLDER OTHER THAN
(1) TO THE COMPANY, (2) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH ANY APPLICABLE LAWS OF ANY
STATE OF THE UNITED STATES, (3) IN AN OFFSHORE TRANSACTION COMPLYING WITH
REGULATION S UNDER THE SECURITIES ACT, (4) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144, IF APPLICABLE,
UNDER THE SECURITIES ACT OR (5) IN A TRANSACTION THAT DOES NOT REQUIRE
REGISTRATION UNDER THE SECURITIES ACT BUT IS IN ACCORDANCE WITH APPLICABLE
STATE SECURITIES LAWS, AND IN EACH CASE IN RELATION TO WHICH THE HOLDER
HAS FURNISHED TO THE COMPANY AN OPINION TO SUCH EFFECT FROM COUNSEL OF
RECOGNISED STANDING IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY
PRIOR TO SUCH OFFER, SALE, PLEDGE OR TRANSFER. THE HOLDER HEREOF, BY
PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE
COMPANY THAT IT IS A NON-US PERSON, AND ACKNOWLEDGES THAT HEDGING
TRANSACTIONS INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED UNLESS
CONDUCTED IN COMPLIANCE WITH THE SECURITIES ACT."
Collins Stewart has agreed that, (i) it will not engage in hedging
transactions in relation to the Placing Shares and (ii) will comply with
the provisions of Regulation S that are applicable to them.
PRIOR TO INVESTING IN THE PLACING SHARES OR CONDUCTING ANY TRANSACTIONS IN
THE PLACING SHARES, INVESTORS ARE ADVISED TO CONSULT PROFESSIONAL ADVISERS
AND COUNSEL REGARDING THE ABOVE RESTRICTIONS ON TRANSFER.
18. COPIES OF THIS DOCUMENT
Copies of this document will be available to the public free of charge
during normal business hours on any week day (except for Saturday, Sunday
and public holidays) until the date following one month after the date of
Admission at the offices of Collins Stewart, 9th Floor, 88 Wood Street,
London, EC2V 7QR.
Dated: o October, 2005
- --------------------------------------------------------------------------------
111
