Medcare Flaga hf. Consolidated Financial Statements Year Ended December 31, Medcare Flaga hf. Sidumuli Reykjavik Iceland

Transcription

1 Medcare Flaga hf. Consolidated Financial Statements Year Ended December 31, 2004 Medcare Flaga hf. Sidumuli Reykjavik Iceland Reg. no

2 Contents Endorsement by the Board of Directors and the CEO... 3 Consolidated Balance Sheet... 6 Auditors Report... 4 Consolidated Statement of Cash Flow... 8 Consolidated Income Statement... 5 Notes to Consolidated Financial Statements

3 Endorsement by the Board of Directors and the CEO The Consolidated Financial Statements of Medcare Flaga hf. for the year ending December 31, 2004 cover the Parent Company and its subsidiaries, Medcare Systems Inc., USA, SleepTech LLC, USA, Medcare Automation BV., the Netherlands, Medcare GmbH, Germany and Midwest Sleep and Neurodiagnostic Institute, USA. In June 2004 the Company acquired the US based company SleepTech LLC and the operation of SleepTech LLC is included in the Financial Statements from June 4, The Consolidated Financial Statements contain the Company s operations for the calendar year 2004 and the new subsidiary s operations from the time it was bought. Comparative figures for the year 2003 contain the Company s operations for the calendar year, without SleepTech LLC. The accounting principles applied in preparing the Company s Financial Statements are consistent with those used in the previous year except for the change regarding income tax explained in note 23. Medcare Flaga hf. complies in full with the guideline on Corporate Governance set in March 2004 by the Icelandic Stock Exchange, the Icelandic Chamber of Commerce and SA-Confederation of Icelandic Employers. Since 2002 the Board has appointed an Audit Committee and a Compensation Committee which each has a charter that they operate by. The majority of the Board and each of the committees is independent as defined by the above mentioned rules. The Company s operating revenue amounted to USD 26.4 million according to the Consolidated Income Statement and the Company s profit for the year 2004 amounted to USD 30 thousand. According to the Consolidated Balance Sheet assets amounted to USD 56.9 million and the Company s Stockholders equity amounted to USD 37.5 million at year-end Shareholders in Medcare Flaga hf. at year-end 2004 were 633, compared to 724 at the beginning of the year. The Company s capital stock amounted to ISK million at year-end 2004 which equals to USD 8.9 million based on a conversion into USD at the exchange rate of the date of payment. At the year-end one shareholder owned more than 10% of the shares in the Company: Meidur Holding S.A. which owned 23.3% of the shares. The Company s Board of Directors does not propose a payment of dividend to shareholders in the year The Board of Directors and the Chief Executive Officer of Medcare Flaga hf. hereby confirm the Company s Consolidated Financial Statements for the year 2004 by means of their signatures. Reykjavik, February 17 th Board of Directors: Bogi Pálsson, chairman Ágúst Guðmundsson Eggert Dagbjartsson Lýður Guðmundsson Rögnvaldur Sæmundsson CEO: Svanbjörn Thoroddsen 3

4 Auditors Report To the Board of Directors and Shareholders of Medcare Flaga hf. We have audited the accompanying Balance Sheet of Medcare Flaga hf. as of December 31, 2004 and the related Consolidated Income Statement and the Consolidated Statement of Cash Flow for the year then ended. These Consolidated Financial Statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Consolidated Financial Statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Consolidated Financial Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Consolidated Financial Statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Consolidated Financial Statements give a true and fair view of the financial position of Medcare Flaga hf. as of December 31, 2004, and the results of its operations and its cash flow for the year then ended, in accordance with the law and generally accepted accounting principles in Iceland. Reykjavik, February 17 th Eyvindur Albertsson Símon Á. Gunnarsson KPMG Endurskoðun hf. 4

5 Consolidated Income Statement for the Year Ended December 31, 2004 Gross Profit: Notes Q4 Q4 Sales ,445,699 19,133,994 8,590,037 5,391,858 Cost of goods sold... ( 9,614,077 ) ( 7,484,275 ) ( 3,179,311 ) ( 2,739,482 ) Gross profit ,649,719 5,410,726 2,652,376 Operating Expenses: Sales and marketing expenses... ( 7,463,281 ) ( 6,625,571 ) ( 1,958,020 ) ( 1,805,923 ) General and administrative expenses... ( 7,182,225 ) ( 3,074,596 ) ( 2,393,028 ) ( 1,087,027 ) Research and development expenses... ( 2,528,605 ) ( 2,506,552 ) ( 637,820 ) ( 639,273 ) Operating loss before financial income and expenses... ( 342,489 ) ( 557,000 ) 421,858 ( 879,847 ) Net financial income and (expenses) ( 210,027 ) ( 647,104 ) 91,327 28,199 Operating loss before income tax and net worth tax... ( 552,516 ) ( 1,204,104 ) 513,185 ( 851,648 ) Income tax , ,116 ( 11,200 ) 306,593 Net worth tax... ( 84,613 ) ( 90,848 ) ( 21,153 ) ( 90,848 ) Net Profit (loss) ,159 ( 514,836 ) 480,832 ( 635,903 ) Earnings (loss) per Share: Earnings (loss) per USD 1 of share capital ( ) 5

6 Consolidated Balance Sheet Assets Notes Fixed Assets: Intangible assets: Goodwill ,039,452 13,970,660 Property and equipment: Computer and service equipment... 4,125,560 1,874,298 Office equipment and machinery , ,158 Real estate , ,761,666 2,310,456 Investment: Investment in other companies ,857 Deferred income tax asset ,484,018 1,549,839 2,484,018 1,590,696 Current Assets: Total fixed assets 41,285,136 17,871,812 Inventories ,923,917 3,587,930 Accounts receivable ,313,705 7,512,109 Other receivables... 1,364, ,688 Cash and cash equivalents ,041,608 1,395,711 Total current assets 15,644,135 13,314,438 Total assets 56,929,271 31,186,250 6

7 December 31, 2004 Stockholders Equity and Liabilities Notes Stockholders Equity: Share capital ,969,691 6,303,024 Additional paid-in capital... 29,116,901 15,800,374 Unrealized gain on derivatives ,081 0 Accumulated deficit... ( 829,604 ) ( 859,763) Total stockholders equity 43 37,453,069 21,243,635 Subordinated convertible Loan: Subordinated convertible loan ,882,560 2,693,981 Long-Term Liabilities: Term loans ,728,250 2,406,250 Current Liabilities: Bank loans... 3,245,608 0 Accounts payable... 2,556,907 2,517,112 Current maturities of long-term debt ,272,254 1,093,750 Other payables... 1,790,623 1,231,522 9,865,392 4,842,384 Total liabilities 19,476,202 9,942,615 Stockholders equity and total liabilities 56,929,271 31,186,250 Mortgages and Commitments

8 Consolidated Statement of Cash Flow 2004 Cash Flow from (to) Operating Activities: Notes Net profit (loss) ,159 ( 514,836) Adjustments to reconcile net profit (loss) to net cash provided by (paid in) operating activities: Loss (gain) on sale... 40,390 ( 23,692 ) Depreciation ,221, ,254 Exchange rate gain on deferred income tax asset... ( 271,403 ) 0 Interest capitalized on subordinated convertible loan , ,963 Income tax... ( 705,818 ) ( 769,744) Working capital provided by (paid in) operating activities 503,847 ( 191,055) Changes in operating assets and liabilities: Inventories, increase... ( 1,209,787 ) ( 447,577) Receivables, decrease (increase) ,538 ( 2,853,474) Current liabilities, decrease... ( 405,730 ) ( 574,624) Changes in operating assets and liabilities ( 1,097,979 ) ( 3,875,675) Cash Flow to Investing Activities: Net cash paid in operating activities ( 594,132 ) ( 4,066,730) Acquisition of subsidiary SleepTech LLC/MSNI, net of cash acquired ( 21,316,872 ) ( 103,771) Investment in fixed assets ( 3,172,871 ) ( 1,864,294) Proceeds from sale of investment in other companies ,686 Net cash used in investing activities ( 24,489,277 ) ( 1,921,379) Cash Flow from Financing Activities: Proceeds from sale of new shares ,983,194 19,181,316 Subordinated loan, decrease... 0 ( 2,693,982) Long-term investment loan, increase... 5,500,504 0 Short-term investment loan, increase (decrease)... 3,245,608 ( 9,988,537 ) Net cash provided by financing activities 24,729,306 6,498,797 (Decrease) increase in cash and cash equivalents... ( 354,103 ) 510,688 Cash and cash equivalents at the beginning of the year ,395, ,023 Cash and cash equivalents at the end of the year ,041,608 1,395,711 8

9 Notes to Consolidated Financial Statements Summary of Accounting Policies Basis of Preparation 1. Medcare Flaga hf. is a company domiciled in Iceland. The Consolidated Financial Statements of the Company for the year ended December 31, 2004 comprise the Company and its subsidiaries. The Consolidated Financial Statements are prepared in accordance with the Icelandic Financial Statements Act and the Regulation on the Presentation and Contents of Financial Statements and Consolidated Financial Statements. The Financial Statements are presented in USD. They are prepared on the historical cost basis except that derivative financial instruments are stated at their fair value. The accounting policies set out below have been applied consistently to all periods presented in these Consolidated Financial Statements and are consistent with those used in the previous year except for the changes in accounting policy, explained in note 22. Basis of Consolidation 2. Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The Financial Statements of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases. Intra-group balances and any unrealised gains or losses or income and expenses arising from intra-group transactions, are eliminated in preparing the Consolidated Financial Statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Foreign Currency Transactions 3. Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to USD at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the Income Statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to USD at foreign exchange rates ruling at the dates the fair value was determined. Financial Statements of Foreign Operations 4. The Company s foreign operations are closely related to the Parent Company s operations. Accordingly, monetary assets and liabilities relating to the foreign operations are converted to USD using the exchange rate at December 31, Fixed assets and intangible assets are converted to USD based on the exchange rate at the date of purchase. Income and expenses related to the foreign operations, other than depreciation, not in USD, are converted to USD based on the estimated exchange rate at the date of transaction. Exchange difference created by the conversion into USD is posted to exchange fluctuations in the Income Statement. 9

10 Derivative Financial Instruments 5. The Company uses derivative financial instruments to hedge its exposure to foreign exchange risk arising from operational activities. In accordance with its treasury policy, the Company does not hold or issue derivative instruments for trading purposes. Derivative financial instruments are recognised initially at cost. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised as a separate item under Stockholders Equity. Revenue Recognition 6. Revenue from the sale of goods is recognised in the Income Statement when the significant risks and rewards of ownership have been transferred to the buyer. Revenue from services rendered is recognised in the Income Statement in proportion to the stage of completion of the transaction at the balance sheet date. The stage of completion is assessed by reference to surveys of work performed. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods also continuing management involvement with the goods. Operating Lease Payments 7. Payments made under operating leases are recognised in the Income Statement on a straight-line basis over the term of the lease. Earnings per Share 8. Earnings per share are calculated by dividing the year's net profit by the weighted average of capital stock, showing net profit per 1 USD of capital stock. The year's net profit was USD 30 thousand and the weighted average of capital stock was USD 7.9 million, explained in note 30, taking into account the issuance of new stock. Therefore the year's profit per share is USD Goodwill 9. All business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries. In respect of business acquistion that have occurred, goodwill represents the difference between the cost of the acquistion and the fair value of the net identifiable assets acquired. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised systematically but is tested annually for impairment. Property and Equipment 10. Items of property and equipment are stated at cost less accumulated depreciation. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. 10

11 Subsequent Expenditure 11. The Company recognises in the carrying amount of an item of property and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Company and the cost of the item can be measured reliably. All other costs are recognised in the Income Statement as an expense as incurred. Depreciation 12. Depreciation is charged to the Income Statement on a straight-line basis over the estimated useful lives of items of property and equipment, and major components that are accounted for separately. Real estate is not depreciated. The estimated useful lives are as follows: Computer and service equipment years Office equipment and machinery years Income Tax 13. Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the Income statement except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted at the Balance Sheet date, and any adjustment to tax payable in respect of previous years. The Company s deferred income tax asset is capitalized in the Balance Sheet. The calculation is based on the differences between the valuation of Balance Sheet items in the Financial Statements on one hand and the valuation for income tax purposes on the other hand. At year end the Company s expected tax savings from accumulated tax losses that can be carried forward exceed the tax obligation derived from the difference between the book value of Balance Sheet items and their taxable value. Accordingly the deferred income tax asset is shown in the Balance Sheet. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Inventories 14. Inventories are stated at the lower of cost or net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and selling expenses. The cost of inventories is based on the first-in first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity. Accounts Receivable 15. Trade and other receivables are stated at their cost less provision. A provision is made to meet the risk attached to lending operations and does not represent a final write-off. The provision has been deducted from the appropriate Balance Sheet items. 11

12 Cash and Cash Equivalents 16. Cash and cash equivalents comprises cash balances. Impairment 17. The carrying amounts of the Company s assets, other than inventories, are reviewed at each Balance Sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the Income Statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units and then, to reduce the carrying amount of the other assets in the unit on a pro rata basis. Goodwill was tested for impairment at December 31, 2004 and no indication of impairment existed. Calculation of Recoverable Amount 18. The recoverable amount of assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Reversals of Impairment 19. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Equity and Equity-related Compensation Benefits 20. The stock option program allows Company employees to acquire shares of the Company. The option exercise price equals the market price of the underlying shares at the date of the grant and no compensation cost or obligation is recognised. When the options are exercised, equity is increased by the amount of the proceeds received. International Accounting Standards 21. The Company will publish its Financial Statements in full compliance with International Financial Reporting Standards as of The Company has begun preparing for these changes. The changes will have minor effects on the book value of the Company's Stockholder' Equity. 12

13 Changes in Accounting Policies 22. The Company s deferred income tax asset is entered into the Balance Sheet for the first time. Changes in 2004 have led to further certainty about the utilization of income tax losses against future income. Comparative figures have been adjusted accordingly. Due to this change in accounting policy the net income is USD 976 thousand higher and USD 780 thousand higher in 2004 and 2003, respectively, and stockholders equity is USD thousand higher and USD thousand higher at year-end 2004 and 2003, respectively, than if the policy had not been changed. Changes in the Consolidation Acquisitions 23. On June 4, 2004 the Company acquired all the equity in US based SleepTech LLC for USD 21.5 million, paid in cash and shares in the parent company. The company specializes in operating sleep centers for hospitals in New Jersey and nearby states and currently operates for 18 hospitals. The acquisition was accounted for using the purchase method of consolidation. The acquisition of SleepTech LLC has the following effects on the consolidated balance sheet: Tangible Assets... 1,500,279 Current Assets... 1,960,631 Current liabilities...( 1,004,627 ) Net assets... 2,456,283 Goodwill on the acquisitions... 19,068,792 Total investment... 21,525,075 Paid in cash...( 19,025,075 ) Paid by issue of new capital...( 2,500,000 ) Total sources of funds...( 21,525,075 ) Quarterly Statements 24. Quarterly statements of the operation for the year Amounts in thousand of USD: Q Q Q Q Total Sales... 4,361 5,408 8,087 8,590 26,446 Cost of goods sold... ( 1,553 ) ( 1,871 ) ( 3,011 ) ( 3,179 ) ( 9,614 ) Gross profit... 2,808 3,537 5,076 5,411 16,832 Sales, general and admin expenses... ( 3,007 ) ( 3,409 ) ( 3,878 ) ( 4,351 ) ( 14,645 ) Research and development expenses... ( 596 ) ( 662 ) ( 632 ) ( 639 ) ( 2,529 ) (Loss)/profit from operations... ( 795 ) ( 534 ) ( 342 ) Net financial income and (expense)... ( 161 ) 35 ( 175 ) 91 ( 210 ) (Loss)/Profit before taxes... ( 956 ) ( 499 ) ( 553 ) Taxes ( 5 ) ( 32 ) 583 (Loss)/Profit... ( 512 ) ( 323 ) EBITDA... ( 577 ) ( 268 )

14 Operating Expenses 25. Fees to auditors of the Company: Audit of the Financial Statements... 75,464 67,446 Review of interim Financial Statements... 39,596 32,820 Other services... 33,554 18,711 Total , ,977 Whereof payment to the auditors of the parent company is ,150 82,006 Personnel 26. Salaries, salary-related expenses and other payroll expenses are specified as follows: Salaries... 12,327,175 6,491,023 Salary-related expenses... 1,873,270 1,083,235 Total salaries and salary-related expenses... 14,200,445 7,574,258 Number of employees at the year-end Average number of employees Salaries of the Management of the Company, stock options and ownership are specified as follows: Board of directors: Salary and benefits Stock option Ownership USD Number of Number of Shares Shares Bogi Pálsson, Chairman... 36,360,000 Ágúst Guðmundsson, Director ,239,653 Eggert Dagbjartsson, Director... 9,627,895 Lýður Guðmundsson, Director ,239,653 Rögnvaldur J. Sæmundsson, Director... 2,849 10,700,000 Pétur Guðjónsson, Former director... 2,849 Management: Svanbjörn Thoroddsen, CEO ,407 4,000,000 15,000,000 Ownership by Board members and management at year-end represents shares held either in their own names or through companies which they control. The Management s stock options are at share price of 6. The stock options contracts were made in the years and are exercisable in the years , see note

15 Financial Income and (Expenses) 28. Financial income and (expenses) are specified as follows: Interest income... 18,043 10,996 Interest expense... ( 545,296 ) ( 922,027) Currency exchange fluctuation , ,927 Loss on sale of shares... ( 40,390 ) 0 Financial income and (expenses) total... ( 210,027 ) ( 647,104) Income Tax Revenue 29. Recognised in the income statement: Current Tax Expense 2004 Income tax payable... ( 38,530) Deferred Tax Revenues Changes in temporary differences... 53,429 Increased taxable loss , ,818 Total income tax revenue in the income statement ,288 Reconciliation of Effective Tax Rate Mainly because of effects of higher tax rates in foreign jurisdictions and expenses, mainly amortization of goodwill, that are deductable for tax purposes but not recognised in the Income Statement, the calculated tax is USD 568 thousand higher than it would be using the domestic corporation income tax rate. Deferred Tax Recognised Directly in Equity Deferred tax of derivatives recognised directly in equity... ( 43,042) Earnings per Share 30. The calculation of earnings per share in 2004 is based on the profit attributable to ordinary shareholders USD 30 thousand and a weighted average number of ordinary shares outstanding during the year ended December 31, 2004 of USD 7,903 thousand, calculated as follows: Profit (loss) for the year... 30,159 ( 514,836) Issued shares at January ,303,024 2,922,082 Effect of shares issued in June ,600,000 0 Effect of shares issued in November ,490 Weighted average number of ordinary shares... 7,903,024 3,485,572 15

16 Intangible Assets 31. Goodwill is specified as follows: Goodwill at the beginning of the year... 13,970,660 Acquired goodwill during the year... 19,068,792 Goodwill at year-end... 33,039,452 An impairment test is used to test the value of goodwill instead of yearly amortization based on the straight line method. The main result of an impairment test that was performed at year-end 2004 is that the book value of the asset does not call for the recognition of an impairment loss. Fixed Assets 32. Fixed assets are specified as follows: Computer and service equipment Office Equipment and machinery Real estate Total Total value ,905, , ,534,473 Previously depreciated... ( 1,030,764 ) ( 193,253 ) ( 0 ) ( 1,224,017 ) Book value ,874, , ,310,456 Additions due to acquisition, see note ,324, , ,500,279 Additions during the year... 1,996, , ,820 3,172,871 Depreciation during the year... ( 1,069,791 ) ( 152,149 ) 0 ( 1,221,940 ) Book value at ,125, , ,820 5,761,666 Total value at ,224,560 1,172, ,820 8,206,068 Accumulated depreciation... ( 2,099,000 ) ( 345,402 ) ( 2,444,402 ) Book value at ,125, , ,820 5,761,666 Depreciation ratios % 12-33% Depreciation of Fixed Assets 33. Depreciation of fixed assets is not presented as a separate item in the Income Statement but is divided between cost of goods sold and general administrative expenses and is specified as follows: Depreciation posted to cost of goods sold ,623 46,784 Depreciation posted to general administrative expenses , ,470 Depreciation of fixed assets, see note ,221, ,254 Insurance Value 34. Insurance value of computer equipment, tools and machinery at year-end 2004 is USD 4,7 million. 16

17 Investment Subsidiaries 35. At December 31, 2004 the Company s subsidiaries were five and had increased by one from the year end In June 2004 the Company acquired the US based SleepTech LLC. The operations of SleepTech are included from June 4, The five subsidiaries included in the Consolidated Financial Statements are the following: Ownership Medcare Systems Inc., USA % Medcare Automation BV., the Netherlands % Medcare GmbH, Germany % Midwest Sleep & Neurodiagnostic Institute, USA % SleepTech LLC, USA % Deferred Income Tax Asset 36. The Company s deferred income tax asset is specified as follows: Deferred income tax asset at the beginning of ,549,839 Deferred tax reverue in tax income Statement, see note ,818 Deferred tax of derivatives recognised directly in equity, see note ( 43,042 ) Currency fluctations ,403 Calculated deferred income tax asset at year-end ,484, The deferred income tax asset is derived individual Balance Sheet items as follows: Fixed assets... ( 73,960 ) Accounts receivable... 22,514 Short term liabilities ,000 Unrealized gain... ( 43,042 ) Net income tax asset attributable to Balance Sheet items... 38,512 Carry forward tax loss... 2,445,506 Deferred income tax asset at year-end ,484,018 Inventories 38. Inventories are specified as follows: Material and components purchased... 1,505, ,867 Fully processed goods and goods for resale... 3,418,156 2,639,063 Inventories at end of period... 4,923,917 3,587,930 The insurance value of inventories amounted to USD 4.4 million at the year-end

18 Cash Flow Hedging 39. The Company has bought average rate options to hedge the currency risk of ISK against USD. The options entail that if the average exchange rate of ISK in relation to the USD exceeds the average exchange rate of the option the Company receives the difference as payment at the end of the option term. The principal amount of the option is USD 7 million for the year As options are used to hedge against currency exchange risk, any profit or loss of hedging at the end of the option term is entered into the Income Statement. The options are valued initially at cost. Subsequent to initial measure, the options are stated at fair value. Any gain or loss on remeasurement to fair value is recognised directly in equity. The fair value at year-end 2004 exceeded its cost by USD 239 thousand, which was recognised directly in equity, net of tax, see note 29 and 43. Mortgages 40. To secure payments of the Company s debt to its commercial bank the Company has pledged its accounts receivables and inventories as they are at any given time. In addition the Company s subsidiary, Medcare Systems Inc., has guaranteed payment of the Parent Company s debt in a guarantee agreement where accounts receivables and inventories are pledged as collateral. The Company s debt with its commercial bank amounted to USD 11 million at December 31, The Group s property in Kinnelon, New Jersey has been put as collateral to secure a bank loan in the amount of USD 797 thousand. Accounts Receivables 41. Provision for accounts receivables is specified as follows: Provision , ,692 Write down during the year... ( 198,542 ) ( 3,500) Provision for the year ,285 47,878 Provision , ,070 Stockholders Equity 42. The Parent Company s share capital at the beginning of the year was million shares which amounted to USD 6.3 million. In June 2004 the Company issued new shares at the price of ISK 6 per share. According to the Company s Articles of Association the share capital at December 31, 2004 was 670,509,232 shares which equals to USD 8,969,691 based on a conversion at the exchange rate at the payment date. Each share in the Company is of nominal value ISK 1 and carries one vote. Changes in the nominal value of share capital: ISK USD Share capital at the beginning of the year ,055,065 6,303,024 New shares issued ,666,667 2,250,000 New shares issued to sellers of SleepTech... 29,787, ,667 Share capital at ,509,232 8,969,691 18

19 42. Cont.: The Articles of Association of the Company authorize the Board of Directors to issue new shares for the following purposes: - Up to 80 million shares to meet obligations of stock option contracts. - Issue new shares to fulfill the obligations of the convertible bond, see note Issue new shares to fulfill the earnout obligation in the SleepTech Purchase Agreement if the earn out parameters are met, see note Up to 36.3 million shares to offer for sale, valid until June Reconciliation of changes in capital and reserves: Share capital Additional paid in capital Unrealized gain Accumulated deficit Total Stockholders equity ,922, ( 1,125,022 ) 1,797,060 Change in accounting policy , ,095 Adjusted equity ,922, ( 344,927 ) 2,577,155 New shares issued... 2,639,219 12,526, ,166,187 Conversion of convertible notes ,723 3,273, ,015,129 Net loss ( 514,836 )( 514,836) Stockholders equity ,303,024 15,800,374 0 ( 859,763 ) 21,243,635 Stockholders equity ,303,024 15,800,374 0 ( 859,763 ) 21,243,635 New shares issued... 2,666,667 13,316, ,983,194 Unrealized gain on derivatives , ,081 Net profit ,159 30,159 Stockholders equity ,969,691 29,116, ,081 ( 829,604 ) 37,453,069 Subordinated convertible loan 44. The Company was granted a subordinated convertible loan by KB banki hf. in the amount of USD 5.0 million in the year The loan bears a fixed interest of 7% during the loan period and shall be repaid with interest on September 15, In November 2003 part of the loan was converted into shares in accordance with the loan terms. At December 31, 2004 the subordinated convertible loan amounted to USD 2.9 million. Interest capitalized on the loan in the year 2004 amounts to USD 189 thousand. The convertibility right grants the creditor the right to convert the principal and earned interest into shares in the Company as follows: Shares in the Company for a nominal value of ISK 14.5 are received for each USD 1, however a maximum of 1/5 of the original principal plus interest for each year. Commitments Stock Option Contracts 45. Stock option contracts allow Company employees to purchase shares in the Company. In the period from January 1, 2003 to August 31, 2008 employees have the right to purchase up to 62.6 million shares at a weighted average price of ISK 6.0 per share. No entries have been made in the Company s Financial Statements in relation thereto. 19

20 Earnout 46. As part of the acquisition of SleepTech LLC, the Company has agreed to pay an additional purchase price to the former owners, given that certain targets have been met in the operations of SleepTech. The additional purchase price, which will not exceed USD 5,000,000, will be fully paid in the form of additional shares issued by the Company and the capitalized goodwill will be increased accordingly. No provision is made for this additional price in these Financial Statements. Lease Agreements 47. The Company has entered into lease agreements on buildings for its operations in Iceland, USA, Germany and The Netherlands. The total obligation at year-end was USD 2.4 million. Expensed lease payments in the Income Statement for the year 2004 were USD 774 thousand. The lease periods are from 1-5 years. 48. The Company has entered into an operational lease agreements regarding vehicles and machinery. At year-end obligations regarding this lease amounted to USD 192 thousand. Expensed lease payments in the Income Statement for 2004 amounted to a total of USD 71 thousand. Long-Term Liabilities 49. The Company s long-term debt are specified as follows: Long-term loans in USD... 9,000,504 Current maturities of long-term debt... ( 2,272,254 ) Long-term debt in the Balance Sheet total... 6,728, Aggregate annual maturities at year-end are specified as follows: In ,272,254 In ,772,000 In ,756,250 In ,100,000 In ,100,000 Total long-term debt, including current maturities... 9,000,504 Financial Ratios 51. The main financial ratios for the Company are as follows: Income Statement: EBITDA , ,253 EBIT... ( 342,489 ) ( 557,000) Earnings per share - profit (loss)/weighted share capital ( 0.147) Balance Sheet: Current assets/current liabilities Equity/total capital... 66% 68% Equity & subordinated loan/total capital... 71% 77% 20