African Medical Investments plc / Index: AIM / Epic: AMEI / Sector: Healthcare 25 August 2010 African Medical Investments plc (‘African Medical’ or ‘the Group’) Final Results African Medical Investments plc, the AIM listed company operating in the African healthcare sector, announces its results for the year ended 28 February 2010. CHAIRMAN’S STATEMENT During the year, the Group continued its strategy of developing international standard private medical care across Africa, and, as such, our current portfolio of medical facilities now includes a hospital and Well Woman Clinic in both Dar es Salaam and Maputo and a hospital in Harare, which is being upgraded and refurbished and is scheduled to be operational by the end of the 2011 financial year. The primary focus during the year was on the development of our newest facilities, including the 35 bed hospital and Well Woman Clinic in Maputo, which commenced operations in May 2010, as well as improving the operational efficiencies at our other sites. The board is now committed to consolidating its current portfolio, the development of its new 20-bed hospital in Harare and evaluating additional sites in which to continue the hospital roll out programme across Africa. The board remains convinced that the strategy of the Group is robust and can be implemented with the correct structure and roll out programme. The demand for private quality healthcare is growing rapidly and the board is positioning African Medical to take advantage of this. In line with the Group‟s focus on its boutique hospital offering and following the discovery of financial and administrative irregularities outlined below, the board, post year end, has terminated the Group‟s management agreement relating to the Airport Medical & Travel Vaccination Centre at Johannesburg International Airport. The termination of this relationship will enable management to focus on the core business model of constructing and operating private hospitals with integrated Well Woman clinics. As a consequence, the relationship with the Airport Medical & Travel Vaccination Centre at Cape Town International Airport has also been terminated. Corporate As shareholders will be acutely aware, in July 2010 the board was forced to suspend Chief Executive Officer Dr. Vivek Solanki, pending the outcome of an investigation into potential financial and administrative irregularities at its Johannesburg and Harare clinics. This was a huge shock to the board and has been highly distractive from advancing the Group‟s growth strategy. We have had to implement an immediate strategic review in order to ensure that we have the right foundation in which to properly manage African Medical‟s strategy. Indeed, I would suggest that we have had to take a step back to ensure we are correctly positioned to generate the returns expected by our investors. Following his suspension Dr. Solanki then formally resigned as Chief Executive Officer and stepped down from the board. In the interim period, Brett Winstone, the Group‟s Finance Director who was appointed in June 2010, has taken responsibility for the day-to- day running of the Group‟s operations. Subsequent to the discovery of the financial and administrative irregularities, we appointed a team of independent forensic auditors to investigate, with preliminary findings indicating that the Company has a very strong case against Dr. Solanki. As a result of the ongoing investigation commissioned by the board, criminal charges for fraud and theft have now been laid in South Africa against Dr. Vivek Solanki and his appointed manager, Wessel Roets, and separately in Zimbabwe against his appointed manager there, Zarina Dudhia. The board is now focussed on putting together a structure and team capable of managing the business and its development. The board is actively recruiting a new Chief Executive Officer to lead African Medical in its next period of growth, and is in discussions with a number of international leading experts. It is also examining the potential to establish an advisory committee aimed at supporting the development of the business and the private healthcare concept. Financial Performance During the year to 28 February 2010, the Group was involved in the construction and development of the Maputo hospital and Well Woman clinic and the hospital in Harare, and in addition, undertook other operational costs related to the identification of prospective sites for additional facilities. As such, and as a result of the financial irregularities discovered post year end, the Group is reporting a pre-tax loss of $16.2 million on revenues of $4.6 million. In October 2009, African Medical secured an equity line agreement with US based fund Harbinger Capital Partners Master Fund I, Ltd. This agreement will provide the Group with a total of $47.2 million to be drawn down quarterly until Q1 2013. African Medical has completed the first four draw downs of this equity line agreement, which has provided the Group with a total of $28.4 million (after expenses). Outlook In spite of the recent issues, we are highly committed to fulfilling our objectives of providing international standard private healthcare in Africa through private boutique hospitals. The demand from the emerging African middle classes, non-governmental organisations („NGO‟), embassies, international businesses with employees based in Africa and medical insurance companies is clearly evident, and an opportunity remains for a group such as ours to fulfil an increasing void in the provision of quality private healthcare. Africa is developing rapidly, attracting huge investment and associated healthcare is definitely needed. We want to move forward quickly and overcome our recent challenges in order to ensure the future long term success of the Group and fulfil our objectives. To do this, the board has reviewed the Group‟s current operations in order to focus on the areas of the business which have the most potential for growth. In line with this, the board intends to focus specifically on the roll out of our boutique hospital offering with the objective of establishing additional sites in East Africa, replicating the facilities at our Dar es Salaam and Maputo hospitals. In addition, we are also committed to extending our medical evacuation initiative, utilising the latest specially designed aircraft to broaden the reach of our individual hospitals, enabling us to reach patients who would otherwise be out of our catchment area. We have already acquired one aircraft, a Falcon 20 plane, and it is expected that it will be operational from September 2010. Our finance provider, US based fund Harbinger Capital Partners, remain supportive in spite of the recent disruption, and we are working closely with them to execute our strategy. We are particularly grateful to the whole team for their hard work, in particular Brett Winstone, our Finance Director and interim CEO, who has galvanised the team and assisted greatly in navigating the Group through this uncertain period. Phil Edmonds Chairman 24 August 2010 OPERATIONS REVIEW The past few months have been challenging for the Group, however I am pleased to report that the decisions that we have made and positive initiatives we have implemented are beginning to bear fruit for our operations. Since commencing the investigation into alleged financial and administrative irregularities in early July, management procedures and teams at our facilities in Maputo, Dar es Salaam and Harare have been reviewed, and necessary dismissals have been made. Throughout this period of transition we continued to provide high quality healthcare services to our target market in addition to regaining control over the business, with a particular emphasis on improving the Group‟s budget and cash position. Day to day management has been supplemented by a combination of interim managers with many years experience of local operating conditions and carefully selected health industry professionals. We have embarked upon a recruitment programme to source suitably qualified professionals including clinical staff for our hospitals and executive management. The outcomes from this extensive but necessary management overhaul include reduced central overhead, delegated decision making and significant operating efficiencies in our core operating business. Ongoing difficulties with exercising control of our managed clinics in Johannesburg and Cape Town international airports have forced a review of these operations. This has resulted in the termination of the management agreement relating to the Airport Medical & Travel Vaccination Centre at Johannesburg International Airport. This will enable management to focus on the core business model of constructing and operating private hospitals. As a consequence, the relationship with the Airport Medical & Travel Vaccination Centre at Cape Town International Airport has also been terminated. Operations at the Harare Trauma Centre ceased in early July due to construction of the new hospital facility, which is scheduled to open by the end of the 2011 financial year. Having identified and removed the non-core elements of the business, we are now in a position to build upon our model of healthcare provision through private boutique hospitals, to create a more successful and profitable company. We are committed to recruiting quality medical professionals from the areas in which we operate, investing not only in the bricks and mortar of our facilities, but also in the wider community which we believe will bring far reaching and long term benefits. This process has also enabled us to re-engage with the communities in which we operate, which is of paramount importance to the Group as healthcare is driven by reputation and trust. In rebuilding these relationships, we have amassed a greater understanding of the requirements and needs of our potential patients, be they individuals or corporate entities requiring exclusive patronage for their clients and employees, allowing us to develop a more tailored and successful healthcare service. Another recent initiative which will drive the growth of our business and link our hospital operations is our soon to commence Aero-Medical service. Utilising a customised Falcon 20 jet aircraft fitted with two Lifeport aircraft medical station beds, based at Lanseria Airport near Johannesburg, we expect to begin operations in September 2010. With greater range, two patient capacity and lower operating costs, the Group‟s first class Aero-Medical service will be unique in Africa providing patient transfers to existing African Medical facilities and other service providers. Potential customers include mining companies, medical insurers and other foreign companies operating in Africa. Additional opportunities exist in the emergency patient transfer market with hospital groups and medical service providers (where an African Medical facility is not available). The identification and evaluation of new business opportunities is ongoing. There are presently two sites for new hospital developments in East Africa under consideration and the board will evaluate these in greater detail over the coming months. In addition, acquisitions of existing facilities that can be rebranded and fit the African Medical business model will be considered. Expansion into West Africa is highly likely within the next year. The challenges that we have been forced to face over the past few months are being successfully overcome. Our refocused business model is sound, the market remains very attractive and I am confident that African Medical will emerge as a leaner, more focussed and profitable group. I would like to take this opportunity to acknowledge the contribution of clinical and operational staff, particularly over this recent period of change and uncertainty. Their professionalism and dedication to deliver high quality healthcare services has been a highlight during an otherwise dark period in the history of the Group. We remain committed to providing the calibre of leadership and management deserving of our staff, facilities and investors. AMI Harare Hospital Formerly known as the Trauma Centre, AMI Harare Hospital is fast approaching the final stages of building completion and commissioning. It will offer a comprehensive range of world-class services within an integrated healthcare development. The redevelopment of the original Accident & Emergency Section and the establishment of an expanded healthcare facility resulted in the decision in early July 2010 to suspend clinical operations of the Trauma Centre to expedite the final building works and ensure public and our patients‟ safety. Once the renovations and expansion are complete, the AMI Harare Hospital will offer patients a wider range of services and even higher standards of healthcare than previously available. The upgraded facilities will include five private consulting rooms, an on-site pharmacy and dental surgery. The on-site Well Woman Centre will offer bone densitometry, colposcopy and mammography. An occupational health care unit, will specialise in stress echocardiograms, spirometry, audiology and vision screening. State-of- the art equipment exists for video gastro-enterology, minimally invasive access surgery and orthopaedics. There will be on-site clinical laboratories and two state of the art operating theatres capable of handling the most complicated of procedures, which will be the newest and most advanced in Zimbabwe. The two bed haemodialysis unit and renovated original Accident and Emergency unit complete the hospital service offering. Far from being exclusively a medical service centre of excellence, the AMI Harare Hospital could best be described as a boutique offering, with outstanding facilities available on site. These facilities also include a two-bed intensive care unit („ICU‟) and a two-bed neo-natal ICU, six two-bed wards with an en-suite shower, basin and toilet. There are also two single bed VIP wards with a visitor‟s couch, an en-suite bath, shower, basin and toilet. Specific attention to detail in the quality of design and finishes will result in placing visitors and patients at ease in a comforting and nurturing environment. A coffee shop is available to ensure that visitors and relatives of trauma patients are kept comfortable and refreshed. In order to ensure uninterrupted services at the hospital, the Group has made considerable investment into continuity and quality of the utilities supply. UPS backup, ensuring voltage stabilisation and on-site power generation, will secure the supply of power, water and gases to all critical areas in the event of power outages. The AMI Harare Hospital is guaranteed to raise the bar in terms of the standard of healthcare available in Zimbabwe and will determine the future expectations of the local consumer. AMI Dar es Salaam Hospital In recent months we have focussed on improving our level of service in all departments and significant results have already been achieved. On the medical side we have appointed Dr. Rajiv Rao as the new Clinical Manager and Sister Rachel Garcia as the Nursing Manager. Both Dr. Rao and Sister Garcia have a wealth of knowledge and experience and have been busy implementing new systems which have had a huge impact on raising the already high clinical standards that we have set. A new Chief Accountant has been appointed and we have assembled around him a strong administrative team to implement new procedures for preparing accounts, purchasing, stock control and general administration. In early June 2010 the kidney dialysis centre was opened, featuring four of the latest Fresenius 4008S haemodialysis machines, the latest Aqua W tu 250 reverse osmosis plant for producing clean water, a portable reverse osmosis system for private home use, and three massage chairs. The centre can see up to three patients at a time, and each of the haemodialysis machines will be allocated for HIV, hepatitis B, and non infected diseases management. Our marketing has focussed on strengthening our links into the local medical fraternity and improving our services to the ever-expanding local medical insurance industry. We have recently recruited two specialist physicians: Dr. Tosiri (Urologist) and Dr. Faya (Orthopaedic Surgeon) who are both well respected in the local medical fraternity and have been instrumental in forming relationships with other referring hospitals. Our new consultant Chief Medical Officer, Dr. Amit Thakker, has been working in the East African medical insurance industry for several years and is assisting us in strengthening our position with local medical aid companies. A few notable successes on the marketing front have occurred recently with AMI Tanzania Limited signing up several large corporate companies as their preferred hospital and medical provider. These include: the US Peace Corps with over 1,000 members, Sony Ericsson, VSO (a major NGO working in Tanzania) and Helix, the medical insurance company dealing with all British diplomatic staff. In line with policy set by the Tanzanian government, AMI Dar es Salaam Hospital has over the past year been actively training its Tanzanian staff. We are very proud of the results of our in-house training programmes, which have seen the promotion of seven Tanzanian members of staff to take over positions previously held by expatriates. This has been a huge success in both improving our standing as a community investor with the Tanzanian government and local businesses. AMI Maputo Hospital The AMI Maputo Hospital was officially opened by His Excellency Armando Guebuza, the President of Mozambique on 9 June 2010. The event was also attended by a number of ministers from other African nations, in addition to numerous NGOs, insurance company representatives, tourism consultants and local business delegates. The Maputo Trauma Centre has 35 beds, a delivery room, heamodialysis unit, paediatrics department, 24-hour accident and emergency centre, X-ray department, CT scan centre, 4D ultrasound, three ICU beds, two neonatal ICU beds and two theatres. The Well Woman Clinic is the first of its kind in Mozambique and provides a variety of services for women and ancillary services for pregnant women such as anti-natal care, post- natal care and a Well Baby Clinic. The opening of this clinic gives Mozambican mothers and mothers-to-be a viable alternative to travelling to South Africa for anti-natal and post- natal care, which many women have opted for until now due to the lack of suitable facilities in Mozambique. The new facility, which opened to patients on 10 May 2010, has been well received by local residents, businesses, embassies and tourists during its first three months of operation and has experienced extremely encouraging patient numbers. Brett Winstone Interim Chief Executive Officer 24 August 2010 ** ENDS ** For further information please visit www.amiplc.com or contact: Brett Winstone African Medical Investments Plc Tel: +44 (0) 20 7408 9200 Jonathan Wright Seymour Pierce Ltd Tel: +44 (0) 20 7107 8000 David Foreman Seymour Pierce Ltd Tel: +44 (0) 20 7107 8000 Alastair Stratton Matrix Corporate Capital Tel: +44 (0) 20 3206 7000 Hugo de Salis St Brides Media & Finance Ltd Tel: +44 (0) 20 7236 1177 Susie Callear St Brides Media & Finance Ltd Tel: +44 (0) 20 7236 1177 African Medical announces that its Annual Report for the period ended 28 February 2010 has been posted to shareholders today. Copies are also available on the Group's website at www.amiplc.com. CONSOLIDATED INCOME STATEMENT For the year ended 28 February 2010 Year ended 10 months ended 28 February 28 February 2010 2009 Note $‟000 $‟000 Revenue 4,560 502 Cost of sales (3,266) (88) Gross profit 1,294 414 Operating expenses (7,063) (1,688) Loss of power to control entities 7 (490) - Loss from financial irregularities 5 (1,042) - Impairment of intangible asset 6 (4,324) - Impairment of property, plant and equipment 6 (4,742) Operating loss (16,367) (1,274) Other gains and losses 169 (1,748) Net finance income 3 75 Loss before taxation (16,195) (2,947) Income tax expense - - Loss for the year (16,195) (2,947) Loss for the year attributable to equity holders of the parent company (16,195) (2,934) Loss for the year attributable to minority - (13) interests Loss for the year (16,195) (2,947) Loss per share - Basic and diluted (cents) 8 (12.4 cents) (5.5 cents) CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the period ended 28 February 2010 2010 2009 $‟000 $‟000 Foreign exchange translation differences 203 (14) Other comprehensive income for the year 203 (14) Loss for the year (16,195) (2,947) Total comprehensive income for the year (15,992) (2,961) Total comprehensive income attributable to the owners of (15,992) (2,948) the parent company Total comprehensive income attributable to minority - (13) interests Total comprehensive income for the year (15,992) (2,961) CONSOLIDATED BALANCE SHEET As at 28 February 2010 2010 2009 Note $‟000 $‟000 ASSETS Non-current assets Intangible assets - 7,174 Property, plant and equipment 17,656 3,861 Financial asset investment - 196 Total non-current assets 17,656 11,231 Current assets Inventories 134 207 Trade and other receivables 2,575 750 Cash and cash equivalents 6,078 2,378 Total current assets 8,787 3,335 TOTAL ASSETS 26,443 14,566 LIABILITIES Current liabilities Trade and other payables (2,839) (509) Deferred consideration (224) - Total current liabilities (3,063) (509) NET ASSETS 23,380 14,057 EQUITY Issued capital 9 41,607 13,932 Other reserves - 2,850 Share based payment reserve 59 27 Warrant reserve 647 - Translation reserve 189 (14) Retained earnings (19,129) (2,934) Total equity attributable to the owners of the parent company 23,373 13,861 Minority interests 7 196 TOTAL EQUITY 23,380 14,057 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY As at 28 February 2010 Share Other Share-based Warrant Translation Retained Minority Capital Reserves payment reserve reserve earnings interests Total $‟000 $‟000 reserve $‟000 $‟000 $‟000 $‟000 $‟000 $‟000 Balances at 1 March 2008 - - - - - - - - On acquisition - - - - - - 209 209 Loss for the period - - - - - (2,934) (13) (2,947) Other comprehensive income Exchange translation - - - - (14) - - (14) differences on foreign operations Total comprehensive income - - - - (14) (2,934) 196 (2,752) for the year Transactions with owners Deferred consideration - 2,850 - - - - - 2,850 Share-based payment charge - - 27 - - - - 27 Share and warrant issues 13,932 - - - - - - 13,932 Total transactions with 13,932 2,850 27 - - - - 16,809 owners Balances at 28 February 2009 13,932 2,850 27 - (14) (2,934) 196 14,057 On formation of subsidiaries - - - - - - 7 7 Loss for the year - - - - - (16,195) - (16,195) Loss of power to control - - - - 34 - (196) (162) entities Other comprehensive income Exchange translation - - - - 169 - - 169 differences on foreign operations Total comprehensive income - - - - 203 (16,195) (189) (16,181) for the year Transactions with owners Deferred consideration - (2,850) - - - - - (2,850) reversed Share-based payment charge - - 32 - - - - 32 Share and warrant issues 27,675 - - 647 - - - 28,322 Total transactions with 27,675 (2,850) 32 647 - - - 25,504 owners Balance at 28 February 2010 41,607 - 59 647 189 (19,129) 7 23,380 CONSOLIDATED CASH FLOW STATEMENT For the period ended 28 February 2010 2010 2009 Note $‟000 $‟000 OPERATING ACTIVITIES Loss before tax (16,195) (2,947) Adjustments for: - Depreciation of property, plant and 756 61 equipment - Gain on foreign exchange - (14) - Loss on financial asset investment 196 - - Share based payment charge - 27 - Other gains and losses (169) 1,748 - Net interest income (3) (75) - Loss of power to control entities 7 490 - - Impairment of intangible asset 6 4,324 - - Impairment of property, plant and 6 4,742 - equipment Operating cash flow before movements in working capital (5,859) (1,200) Working capital adjustments: - Decrease/ (Increase) in inventories 73 (168) - Increase in receivables (2,057) (29) - Increase in payables 2,308 509 Cash used in operations (5,535) (888) Finance cost - (1) Interest received 3 76 Net cash used in operating activities (5,532) (813) INVESTING ACTIVITIES Purchase of property, plant and equipment (16,616) (3,752) Acquisition of subsidiaries - (125) Loss of power to control entities 7 (18) - Net cash used in investing activities (16,634) (3,877) FINANCING ACTIVITIES Proceeds from issue of share capital 26,460 9,384 Proceeds from issue of warrants 647 - Share issue costs (1,364) (568) Net cash flow from financing activities 25,743 8,816 Net increase in cash and cash equivalents 3,577 4,126 Cash and cash equivalents at start of the 2,378 - period Effect of foreign exchange rate changes 123 (1,748) Cash and cash equivalents at end of the period 6,078 2,378 NOTES TO THE FINANCIAL STATEMENTS For the period ended 28 February 2010 1. Basis of Preparation The financial information set out above for the year ended 28 February 2010 and period ended 28 February 2009 does not constitute the Group's non statutory accounts within the meaning of the Isle of Man Companies Act 2006 (as amended) but is derived from those accounts. The auditors have reported on those accounts (see note 2 for further information). The results have been prepared using accounting policies consistent with those used in the preparation of the non statutory accounts. 2. General Information African Medical Investments plc is incorporated in the Isle of Man under the Isle of Man Companies Act 2006. The nature of the Group‟s operations and its principal activities are set out in the Chairman‟s Statement and Operations Review above. The financial information herein has been presented in US Dollars because this is the currency of the primary economic environment in which the Group operates. The full statutory accounts have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union. The non statutory financial statements for the year ended 28 February 2010 have been reported on by African Medical's auditors and contain a qualified opinion arising from a disagreement about accounting treatment, an emphasis of matter in regard to going concern and an emphasis of matter in regard to losses and impairments arising from financial irregularities. The qualified opinion arising from disagreement about accounting treatment arises as the Group balance sheet reflects the disposal of three clinics as at 28 February 2010 by the Group as a result of a loss of power to control as detailed in note 7 to this announcement. In the auditors opinion the Group has not lost the power to control these clinics until post the year end. However, impairments at the year-end were, in the auditor‟s opinion, appropriate for the net assets detailed in note 6 other than trade and other payables. The net impact of this, in the auditor‟s opinion, is that trade and other payables are understated by $249,000. The loss for the year is, in the auditor‟s opinion, consequentially understated by $249,000. The financial statements have been prepared on the Going Concern basis (see note 3 below). This forms the basis on which the emphasis of matter in regard to going concern is described in the audit report. In regard to losses and impairments arising from financial irregularities, disclosures made in Notes 5 and 6 to this announcement detail significant information in this regard. This forms the basis on which the emphasis of matter in regard to losses and impairments arising from financial irregularities is described in the audit report. The full audit report is contained in the company‟s Annual Report, as available on the company‟s website. The comparative results for the 10 month period ended 28 February 2009 contained an unqualified audit report. 3. Significant accounting policies Going Concern The board has prepared forecasts covering the period of twelve months from the date of approval of these financial statements. The forecasts are based on the latest revised budgets of the entities that comprise the ongoing business of the consolidated Group. The forecast shows additional cash outflows over the next six months during which time expenditure on existing approved capital projects such as the Harare Hospital development, the Air Evacuation business and replacement operating equipment is incurred. This capital and project expenditure is necessary to achieve revenue forecasts. In addition, allowances for working capital have been made on a business by business basis for the period up to when they each become cash flow positive. Forecast central overheads are based on the Group‟s revised operating scenario and organisation structure. Revenue forecasts are based on projections provided by independent health industry experts using benchmark hospital occupancy rates in conjunction with existing pricing policy, service offering and capacity for each of our facilities. Operating costs are forecast based on existing cost structures and are largely fixed at both current and forecast occupancy rates. There is no reliance on significant productivity improvements or operating cost savings. Following this period of net cash outflows as each operating business is completed and stabilised, cash surpluses are forecast. No new projects or developments are included in the forecast as each investment opportunity would be analysed separately including funding strategies by the board prior to approval. The forecasts contain certain assumptions, in addition to those outlined above, regarding the timing and magnitude of the anticipated shortfall and then increase in working capital. African Medical has in place a $47m Equity Line Agreement with Harbinger Capital Partners Masterfund I, Limited (”Harbinger”). To date African Medical has drawn US$28.4m under this facility. The draw down facility with Harbinger, African Medical‟s leading shareholder, remains in place and Harbinger continues to be fully supportive of the Group and its growth objectives. Whilst the board acknowledges that certain details of the Equity Line Agreement may require renegotiation, it is confident that funding will be available to meet the anticipated funding shortfall over the next six months. Should the forecasts not be achieved or renegotiation of the Equity Line Agreement is otherwise not possible in the required timeframes, the Group will be reliant on support from shareholders to enable it to meet its liabilities as and when they fall due. The board has held discussions with shareholders regarding possible future funding requirements. While no formal commitment has been given by the shareholders to provide additional funding, the outcome of the discussions was such that the board is of the opinion that this will be available as necessary and so as such, it is appropriate to prepare the financial statements on a going concern basis. 4. Critical accounting estimates and judgements The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group‟s accounting policies. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: Impairments Impairment reviews on non-current assets are carried out on each cash-generating unit identified in accordance with IAS 36 “Impairment of Assets”. At each reporting date, where there are indicators of impairment, the net book value of the cash generating unit is compared with the associated fair value. The current investigation into alleged financial and administrative irregularities has identified potential overpayments to certain suppliers for plant and equipment in the period to 28 February 2010. Independent experts and forensic auditors were engaged to ascertain the likely extent of any overpayment. In instances where financial irregularities were quantifiable, the financial impact was taken to the income statement as „Loss from financial irregularities‟. Where indicators of overpayment existed, an impairment provision has been made based assessment assisted by the independent experts as to the extent of the overpayments, based on market values of fit comparable for purpose equipment purchased. Due to the nature of the alleged financial irregularities, the precise overpayments cannot be determined, however the directors believe the provision is materially adequate based on the information currently available. 5. Loss from financial irregularities In March 2010 the board became aware that officials from the South African Revenue Service (“SARS”) and the Department of Health had entered the Johannesburg International Airport („JIA Clinic‟) in February 2010 and that approximately $184,000 of foreign currency cash and certain accounting records had been seized pending further investigation. The subsequent investigation, which is yet to be concluded, appears to have been focused on the inappropriate treatment of foreign currency revenues and irregularities pertaining to the acquisition of yellow fever vaccines. Around this time the board had raised concerns with the former Chief Executive Officer (“former CEO”) regarding perceived weaknesses in project cost controls and significant cost overruns on capital projects including the Cape Town Clinic, Maputo Hospital and Harare Hospital Projects which were being carried out under the direct authority and supervision of the former CEO. During April 2010, the board made certain enquiries of the former CEO and African Medical‟s senior finance staff regarding certain of the Group's financial and monetary practices. Advisors familiar with the Group‟s operations were engaged by the board to investigate the possible financial irregularities further. Questions regarding duplicate cash books at the JIA Clinic, favourable supplier terms and inappropriate supplier transactions were raised with the former CEO in May 2010. The former CEO explained to the board which at the time satisfied the board that the irregularities identified were minor in value, attributable to certain members of staff and would cease immediately with the assistance of the newly appointed Finance Director. The Finance Director of African Medical was appointed on 1 June 2010 and was tasked by the board to strengthen internal controls, particularly around cash, and improve the quality and timeliness of financial reporting including project cost reporting. Additional accounting irregularities and severe internal control breaches were identified during further internal reviews in June and reported to the board. On 30 June 2010 on the recommendation of the Finance Director, independent forensic auditors were appointed to undertake a thorough investigation into potential financial and administrative irregularities. On 8 July 2010 the board resolved to suspend the former CEO while the investigation continued, as permitted under the terms of his service agreement. On 9 July 2010 the former CEO was notified of such suspension. Certain members of the hospital management teams at AMI‟s Harare, Dar es Salaam and Maputo operations were also suspended at this time. On 13 July 2010 the former CEO forwarded to the board his letter of resignation under which he resigned as Chief Executive Officer and a board member with immediate effect. The resignation was accepted by the board and an announcement was made by the Company on 14 July 2010. To date the forensic investigation has focused on operations at the JIA Clinic, Harare Trauma Centre and capital project payments administered out of the Johannesburg shared services office. Criminal charges have been laid against the former manager of the Harare Trauma Centre for financial irregularities amounting to approximately US$1 million (the majority of this arose subsequent to balance sheet date). In addition, arrest warrants (for fraud and/ or theft) have been issued in respect of the former CEO and his appointed manager in South Africa, Wessel Roets, by the South Africa Police Service. Notwithstanding this progress, the investigation is ongoing and remains focused on gathering sufficient evidence to lay criminal and civil charges against all employees and suppliers involved in alleged irregularities. Evidence gathered to date pertains to the following alleged irregularities: - Understatement of revenue; - Excessive profits taken by an intermediary supplier; - Supply of goods and services for personal use charged to the company; - Supplier payments to employees; - Payroll irregularities; and - Falsification of supplier invoices. The directors are committed to prosecuting all Group employees and suppliers who participated in and benefitted from any of the alleged financial irregularities. Furthermore the board has resolved to take civil action to seek compensation for the losses suffered, not only in relation to fraud and/ or theft but also in relation to losses suffered as a result of the misstatement of the business at the time of the acquisition of VIP Healthcare Solutions Limited by the Company. Where the Company has been able to quantify the impact of the financial irregularities on the financial performance of the business in the year ended 28 February 2010, this has been taken to the income statement as Loss from financial irregularities. Where evidence from the forensic investigation has been used to estimate the extent of the loss but suggests overpayment to suppliers on capital projects, the Company has taken these to the income statement as an impairment loss. Based on the above principles and on the information currently available to the board, the total financial impact of the Loss from financial irregularities charged to the Income Statement for the year ended 28 February 2010 is US$1,042,000. Note 6 below details the financial impact of the impairment for the year ended 28 February 2010. 6. Asset Impairment At each balance sheet date, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash generating unit (“CGU”) to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using an after tax discount rate that reflects the current market assessments of the time value of money and risks specific to the assets for which estimates of future cash flows have not been adjusted. If the recoverable amount of an asset or CGU is estimated to be less than the carrying amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment is recognised as an expense in the income statement. Where an impairment subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, but so that the increased carrying value does not exceed the carrying amount that would have been determined had no impairment been recognised for the asset or the CGU in prior years. A reversal of an impairment is recognised as a gain in the income statement. The current investigation into alleged financial and administrative irregularities has identified potential overpayments to certain suppliers for plant and equipment in the year ended 28 February 2010. Independent experts and forensic auditors were engaged to ascertain the likely extent of overpayment. Where indicators of overpayment exist an impairment provision has been raised based on an assessment by independent experts of the extent of overpayment, based on market values of fit for purpose equipment acquired. Impairment arising from potential overpayment has been recognised not withstanding that the recoverable amount based on value in use may be in excess of amounts actually paid. Accordingly the impairment provision at the balance sheet date reflects only estimates of overpayments to suppliers complicit in the alleged financial irregularities and carrying values of property, plant and equipment are based on amounts that would have otherwise been paid in arms length transactions or at fair value at the date of acquisition. The review of carrying amounts of property, plant and equipment and intangible assets at 28 February 2010 indicated actual impairment write downs on the following assets: Impairment Asset or Basis of Valuation write down CGU recoverable undertaken 2009 (project) Asset Class Segment amount by $‟000 Note Maputo Assets under Hospitals and Fair value Independent 2,281 (a) construction clinics expert Harare Assets under Hospitals and Fair value Independent 1,755 (a) construction clinics expert Nairobi Assets under Hospitals and Fair value Internal 706 (b) construction clinics assessment Tangible assets Sub- total 4,742 Goodwill Goodwill Hospital Fair value Internal 4,324 (c) Management assessment Intangible assets Sub-total 4,324 Total impairment 9,066 (a) Based on the preliminary findings of the forensic investigation and the analysis of independent experts, payments to Dansk Hospital Supplies and Medical Equipment Limited, Higgins Technical Solutions Limited, Marlene Interiors CC and LM Kitchens and Paint Contractors CC appear to be significantly inflated. Using a sample of invoices and comparable costs from original equipment manufacturers the extent of overpayment has been estimated and raised as a provision for impairment. In certain instances, goods and services from these suppliers have been invoiced to the Group but for the benefit of employees who may be complicit in the alleged financial irregularities. An estimate of such goods and services has also been raised as a provision for impairment. Equipment not fit for purpose or identified as to be replaced has also been fully provided. (b) In August 2010, following a review of operations, the board decided to focus on the core business of hospitals. Accordingly the Nairobi clinic project was abandoned and the carrying value of the project at the balance sheet date is fully impaired. (c) In the prior period, the acquisition of the entire issued share capital of VIP Healthcare Solutions Limited (“VIP”) gave rise to goodwill, attributed to the quality of the management team and their proven strength of their project management skills in building first class health service facilities in Africa. Subsequent to balance sheet date and as a result of the investigation into alleged financial and administrative irregularities, the entire management team of VIP has either resigned or their employment with the Group has otherwise ceased. Further, significant project budget overruns due to the alleged financial irregularities amongst other things and poor financial performance of the operating businesses has raised serious questions about the consideration paid for VIP and the possible misrepresentations on the part of the former shareholders of VIP. As a consequence, an internal assessment of the carrying value of goodwill has concluded that this balance is fully impaired at the balance sheet date. In light of the above the board is considering its remedies against Minerva Trust Company Limited, the seller of VIP. 7. Loss of power to control entities IFRS 3 requires the consolidation of entities where there is the power to control or govern the financial and operating policies of such entities so as to obtain benefits from their activities. In the prior period the directors considered such power to control was in existence in respect of Airport Clinic Johannesburg International (Proprietary) Limited (“JIA Clinic”) and Autoband Investments (Proprietary) Limited (“Harare Trauma Centre”) as a consequence of Management Agreements with VIP Healthcare Solutions Limited (“VIP”). During the current financial period, JIA Clinic established a new wholly owned subsidiary, Airport Clinic and Travel Vaccination Centre Cape Town International Airport (Proprietary) Limited (“CT Clinic”). As described in note 5, in March 2010 the board became aware of possible accounting and administrative irregularities due to an investigation by the South African Revenue Services and the Department of Health which included the seizing of $184,000 of foreign currency cash and certain accounting records. Subsequently forensic auditors were appointed to undertake a thorough investigation into potential financial and administrative irregularities. To date the forensic investigation has focused on operations at JIA Clinic and Harare Trauma Centre and criminal charges for fraud have been laid against the former manager of the Harare Trauma Centre. Subsequent to the year end, the Company has experienced ongoing difficulties exercising control over the JIA Clinic and CT Clinic resulting in the decision to terminate the Management Agreement relating to the JIA Clinic. As a consequence, the relationship with the CT Clinic has also been terminated. These events and the evidence gathered to date by the forensic auditors have prompted a review of the requirements of IFRS 3 and in particular the existence of power to control. The terms of the Management Agreement are of particular relevance and confer no power to VIP to govern the financial and operating policies of JIA Clinic or Harare Trauma Centre. These entities carried on their own business and the VIP had no rights to change the financial or operating policies, resulting in an administrative responsibility rather than conferring power. After careful consideration of the evidence and the requirements of IFRS 3, the board has concluded that loss of power to control occurred on 28 February 2010 and the results, assets and liabilities of JIA Clinic, CT Clinic and Harare Trauma Centre are excluded from the consolidated financial statements from that date. Details of the net assets of these entities at 28 February 2010 are as follows: CT Clinic JIA Clinic Harare Trauma Centre Total $‟000 $‟000 $‟000 $‟000 Property, plant and 418 202 48 668 equipment Inventories 6 25 48 79 Receivables 40 27 69 136 Cash and cash 1 3 14 18 equivalents Trade and other (16) (207) (26) (249) payables Foreign currency translation reserve 19 15 - 34 Minority interests - (47) (149) (196) Loss of power to 468 18 4 490 control entities Total consideration - - - - Net cash outflow arising on disposal: Cash consideration - - - - Cash and cash equivalents disposed of (1) (3) (14) (18) Net cash outflow to the Group (1) (3) (14) (18) The net assets of the companies at 28 February 2009 were as follows: CT Clinic JIA Clinic Harare Trauma Centre Total $‟000 $‟000 $‟000 $‟000 Property, plant and equipment - 45 100 145 Inventories - 17 45 62 Receivables - 16 4 20 Cash and cash equivalents - 47 - 47 Trade and other - (80) - (80) payables Loans - - - - Foreign currency translation reserve - - - - Minority interests - (45) (149) (194) - - - - 8. Loss per share The calculation of the basic and diluted loss per share is based on the following data: 2010 2009 $‟000 $‟000 Loss for the purposes of basic earnings per share (loss for the period attributable to equity holders of the parent) (16,195) (2,934) Number of shares Weighted average number of ordinary shares for the purposes of basic and diluted loss per share 131,044,775 53,343,972 Loss per share (12.4 cents) (5.5 cents) Due to the loss incurred in the year and prior period, there is no dilutive effect of share options. 9. Share capital Ordinary shares of no par value Number Allotted and fully paid $‟000 At 19 May 2008 1 - Issue of shares to fund group activities 79,999,999 13,932 (a) At 1 March 2009 80,000,000 13,932 Issue of shares to fund group activities 30,000,000 4,791 (b) Acquisition of EMP Services Limitada 10,000,000 3,300 (c) Issue of shares to fund group activities 74,001,000 19,584 (d) At 28 February 2010 194,001,000 41,607 (a) On incorporation on 19 May 2008 one Ordinary Share was subscribed by the subscriber in accordance with the memorandum of association, On 20 June 2008 by written special resolution of the subscriber it was resolved to disapply pre-emption in respect of the issue of 4,999,999 Ordinary Shares to founder shareholders and the issue of 51,000,000 Ordinary Shares pursuant to a placing (as described below) and 50% of the total issued share capital following such issues. On 20 June 2008 4,999,999 Ordinary Shares were issued fully paid for cash at a price of 0.1p per Ordinary Share. On 27 June 2008 51,000,000 Ordinary Shares were issued fully paid for cash at a price of 10p per share. At an Extraordinary General Meeting held on 9 December 2008, shareholders disapplied pre-emption rights in respect of 200,000,000 Ordinary Shares of no par value (such authority to expire at the first Annual General Meeting of the Company) and 16,000,000 shares were issued at a price of 12.5p per share as the initial tranche of consideration for the acquisition of the entire issued share capital of VIP Healthcare Solutions Limited. On 20 February 2009, following the opening of the Hospital and Well Woman clinic in Dar Es Salaam, a further 8,000,000 Ordinary Shares were issued at a value of 12.5p per share in accordance with the terms of the agreement to acquire the entire issued share capital of VIP Healthcare Solutions Limited. (b) On 5 June 2009 30,000,000 ordinary shares plus warrants were issued and fully paid for cash at a price of 10p per share and related warrant. (c) On 30 September 2009 the Company purchased 100% of EMP Services Limitada, a Mozambican company whose sole asset is the site of the Company's second boutique hospital, trauma centre and Well Woman Clinic. The purchase consideration was a cash payment of US$2.2 million and the issue of 10 million new ordinary shares in the Company. (d) On the 4 November 2009 74,001,000 ordinary shares were issued to Harbinger Capital Partners Master Fund I, Limited, (”Harbinger”) in terms of a £28.7 million (US$47.2 million) equity line agreement with Harbinger. Further shares were issues pursuant to the Equity Line Agreement (“ELA”) with Harbinger. The ELA sets out the terms for future draw downs by the Company as per the table below: Date of Draw Down Number of Subscription $US fixed Price $US Subscription Notice Shares to be issued per Subscription Share Amount Quarter 4 2010 5,000,000 0.48 2,400,000 Quarter 1 2011 4,500,000 0.53 2,385,000 Quarter 2 2011 4,000,000 0.58 2,320,000 Quarter 3 2011 3,500,000 0.64 2,240,000 Quarter 4 2011 3,000,000 0.70 2,100,000 Quarter 1 2012 2,500,000 0.77 1,925,000 Quarter 2 2012 2,000,000 0.85 1,700,000 Quarter 3 2012 1,500,000 0.93 1,395,000 Quarter 4 2012 1,000,000 1.03 1,030,000 Quarter 1 2013 1,000,000 1.13 1,130,000 In the event that the Company's volume weighted average share price for the 20 trading days prior to the date of a draw down notice served by the Company on Harbinger ("20 day VWAP") is less than the fixed price per subscription share as set out above (the "Fixed Price") the ELA provides that the subscription price per share shall be reduced to the higher of the 20 day VWAP and 90% of the Fixed Price. In these circumstances, the subscription amount will remain as per the table above but the number of subscription shares to be issued to Harbinger will be increased accordingly. 10. Related party disclosures 1) PH Edmonds and AS Groves, directors of the Company, are also directors of African Management Services Limited ("AMS") and Agriterra Limited ("Agriterra"). Related party transactions are entered into at an arm‟s length basis. No provisions have been made in respect of amounts owed by or to related parties. During the year, AMS provided accounting and treasury services to the Group for a management fee of US$207,000 (2009: US$ nil). As at 28 February 2010, the Group owed AMS US$132,000 (2009: US$ nil). During the year, the Group incurred certain expenditures which were settled by Agriterra. As at 28 February 2010, the Group owed Agriterra US$30,000 (2009: US$ nil). 2) During the year a consulting fee of £135,000 (US$211,000) was paid to Ocelot Investment Group Limited, a company in which AS Groves has an interest. 3) Dansk Hospital Supplies and Medical Equipment Limited, Higgins Technical Solutions Limited and Envirosafe Building Systems and Solutions Limited are considered to be related parties by virtue of the following: Control exercised over the companies by the former Chief Executive Officer, Dr Vivek Solanki; and Manon Thamothiram is a director of all of the above entities and the Group company VIP Healthcare Solutions Limited. He is also a director of Minerva Fiduciary Services (Mauritius) Limited, a company that provided professional services to the Group during the year. The amounts paid to these companies during the year was: 2010 $‟000 Dansk Hospital Supplies and Medical Equipment Limited 4,414 Higgins Technical Solutions Limited 818 Envirosafe Building Systems and Solutions Limited 473 5,705 At balance sheet date, the following amounts were owing to these companies: 2010 $‟000 Dansk Hospital Supplies and Medical Equipment Limited 1,250 Higgins Technical Solutions Limited - Envirosafe Building Systems and Solutions Limited 8 1,258 The board does not believe these transactions were conducted on an arm‟s length basis and as a result the assets purchased from these suppliers have been impaired or taken to the income statement as Loss from financial irregularities (see note 6). Envirosafe Building Systems and Solutions Limited also owed US$1.4 million to the Group as at 28 February 2010, which has been received post year end. The board has been unable to ascertain the shareholdings in the companies as at the time of issuing these financial statements. 4) Remuneration of key management personnel The remuneration of the directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 ‘Related Party Disclosures’. 2010 2009 $‟000 $‟000 Short-term employee benefits 400 191 Post-employment benefits - - Other long-term benefits - - Termination benefits - - Share-based payment - 27 400 218 11. Post balance sheet events On 30 April 2010, the Company issued 6,500,000 shares in the Company at 23 pence (US$0.36) per share; and 6,000,000 shares in the Company at 25 pence (US$0.40) per share, raising US$4,739,991. These were the second and third draw downs in terms of the equity line agreement with Harbinger Capital Master Fund I, Limited. On 10 May 2010 AMI Mozambique opened its boutique hospital in Maputo. On 9 July 2010 the Company's Chief Executive Officer, Dr VS Solanki, was suspended by the board pending an investigation into potential financial and administrative irregularities at the Company's Harare and Johannesburg medical facilities. On 13 July 2010, Dr Solanki resigned as Chief Executive Officer and a member of the board. On 22 July 2010, the Company issued 6,111,111 shares in the Company at 25 pence (US$0.40) per share, raising US$2,420,000. This was the fourth draw down in terms of the equity line agreement with Harbinger Capital Master Fund I, Limited. On 17 August 2010, the Company terminated its management agreement relating to the Airport Clinic Johannesburg International (Proprietary) Limited. As a consequence, the relationship with the Airport Clinic and Travel Vaccination Centre Cape Town International Airport (Proprietary) Limited has also been terminated. As discussed in note 5, the board has resolved to take civil action to seek compensation for the losses suffered, not only in relation to fraud and/ or theft but also in relation to losses suffered as a result of the misstatement of the business at the time of the acquisition of VIP Healthcare Solutions Limited (“VIP”) by the Company. In this regard, the board has resolved to take steps to freeze the 24 million shares in the Company (the "Relevant Shares") which are owned by Minerva Trust Company Limited ("Minerva") and were issued in connection with, and as consideration for the acquisition of VIP pursuant to the share purchase agreement dated 3 October 2008 (Minerva being trustee of the Pusan Trust). The decision to take steps to freeze the Relevant Shares has been taken by the board as a result of the initial findings of the ongoing investigation, the issuance of a warrant for the former CEO‟s arrest by the South African Police Service and with a view to protecting the Company's interests pending the resolution of any civil action(s) which may be taken against the former CEO and/or other beneficiaries of the Pusan Trust.
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