Preliminary Results

9th Dec 2008 07:01



For Immediate Release

9 December 2008

CareTech Holdings PLC

("CareTech" or "the Group" or "the Company")

Preliminary Results for the year ended 30 September 2008

CareTech Holdings PLC (AIM: CTH), a leading UK provider of learning disabilities care services, is pleased to announce its preliminary results for the year ended 30 September 2008. These are the first results that the Company has reported under IFRS.

Commenting on the results, Farouq Sheikh, Executive Chairman said:

"CareTech has enjoyed another successful year maintaining our track record of delivering strong growth through a combination of organic growth developments and acquisitions. It is pleasing to report that both the Beacon Care and Valeo acquisitions have performed well, widening our geographic cover, improving operating margins and expanding the range of services we offer to our customers.

A great deal has been achieved in the year; we have strengthened our balance sheet through a successful equity fundraising concluded in July. We have created a platform for growth from the additional debt facilities secured earlier in the year together with a strengthened management team and exciting care pathway initiatives.

Looking ahead CareTech continues to be able to deliver growth in revenues and earnings from both organic and acquisitive initiatives from its operating cash flows. Our business is not impacted by the wider macroeconomic issues affecting the UK and we therefore look forward with confidence to another successful year".

  For further information place contact

CareTech Holdings PLC	01707 652 053
Farouq Sheikh
Brewin Dolphin Investment Banking	0845 213 4730
Matt Davis
Sean Wyndham-Quin
Buchanan Communications	0207 466 5000
Tim Anderson
Isabel Podda

CareTech Holdings PLC

Chairman's Statement

Introduction

I am pleased to report that CareTech has had another excellent year with significant growth in revenues and underlying earnings.  CareTech continues to be a market leader in the provision of creative "person-centred" services. During the year we have developed our care pathways approach and strengthened our clinical expertise to ensure that we continue to expand the range of services we offer.

Results

The results to 30 September 2008 demonstrate further significant growth with revenues 27% up at £67.7m and adjusted  EBITDA 59% up at £17.3m

Profit before tax, intangible amortisation and exceptional items increased by 69% to £10.5m. Adjusted diluted earnings per share increased by 57% to 21.6p. Profit before tax increased by 34% to £7.7m (2007: £5.7m) and diluted basic earnings per share were 13.5p (2007: 12.4p).

Growth and market opportunity

The Group has recorded further capacity growth in the year, adding a further 279 beds in total. Organic growth was 97 beds, including the development of services in new geographic areas of Portsmouth, Milton Keynes, Leicester and Essex.

Our markets remain extremely fragmented and we have made further progress in our strategy of making selective acquisitions. In the year we made two acquisitions adding a further 182 beds to our capacity. The second acquisition,  Valeo, gave us access to the market opportunities in the Yorkshire conurbations.

A stronger capital base

The Group has strengthened its balance sheet during the year as a result of the additional bank debt facilities agreed in April (giving the Group facilities of £120m) and through the £30m equity placing which was successfully concluded in July. The Group has a valuable base of freehold assets and considerable headroom in its debt facilities.

Dividend

In July 2008 we announced an interim dividend to shareholders of 1.025p per share (2007: 1.0p). Given the strong performance of the Group together with our confidence in the Group's future prospects the Board is recommending a final dividend of 2.725p per share subject to approval by shareholders at the forthcoming Annual General Meeting. The total dividend per share is therefore 3.75p (2007: 3.0p), an increase of 25% and the Board will look to continue growing dividends, whilst maintaining a dividend cover appropriate to meet the Group's growth objectives.

  

Employees

The success of the Group is based on the quality and commitment of its employees. Our workforce has grown in line with our expansion and we now employ more than 2,500 people on either a full time or a more flexible basis. The Board recognises the contribution made by all employees and I would like to thank them for their hard work during the year.

Board appointments

We reported in October that Christa Echtle has joined the board as a non-executive director. We also announced earlier this year that David Spink will be retiring from CareTech having been Finance Director for six years. During these formative years, David's dedication and contribution to the business has been significant and the Board would like to thank him and wish him well in his retirement. I am delighted to confirm that David Pugh joined the board as an executive director with effect from today and will become Finance Director once David Spink formally steps down later in the month.

Outlook

The performance of the underlying business remains strong with good growth and improved profitability. The successful integration of Beacon Care and Valeo, together with the acquisitions from 2007 creates a solid foundation for the continued development of innovative services enabling us to provide a wider, high quality offering to care commissioners. Our markets remain highly fragmented and we continue to progress our strategy of being a market consolidator.

I look forward to reporting further progress in 2009 and remain confident that CareTech is well positioned to sustain its success.

   

2008 has been another year of significant achievement and our financial statements reflect the continuing progress that we have made.

Business fundamentals

CareTech is an increasingly influential operator in its markets. Its business model benefits from the following key fundamentals:

The core market for people with a learning disability is large and continuing to grow.

The market remains highly fragmented with the majority of places being provided by small independent operators with three or less homes.

CareTech's service users are predominantly quite young and CareTech expects to retain its clients for many years. Visibility of future revenue streams remains very high.

The business is efficiently operated and is cash generative in nature.

Business development has been predicated on an accepted annual growth of 1% in the population of learning disabled people. This was adjusted to show higher growth among those with a greater need for support. Research this year by academics at Lancaster University has shown that this figure seriously understates the expected rise in people with learning disability who are likely to require care and support. Current estimates predict growth in a range up to 5.5% annually. The researchers say that this equates to 86% uplift in the learning disability user population by 2026. We are already planning our business response to this research and anticipate renewed demand for a wide spectrum of services in the medium and longer term.

We are increasingly aware of the complex psychological needs of our service users and it has been estimated by the charity MIND that up to 40% of people with learning disabilities will have an additional mental health problem. The complex need that we observe, and anticipate for the future, reinforces the demand for sophisticated provision, embracing innovative service responses.

Strategic objectives

Our strategy for growth within the PLD sector continues unchanged and is characterised by our commitment to provide first class services to people with a learning disability. We continue to develop our person-centred approach in conjunction with the evolving commissioning strategies and offer commissioners solutions by way of services for:

i) residential care

ii) supported living schemes

iii) day centre activities

iv) care of disabled children

v) transition services for school and college leavers

 

Growth in the year

During the year we have added 97 beds through organic development, including both residential and supported living services. These developments are mainly in areas of existing coverage, but include new opportunities in Milton Keynes, Leicester, Portsmouth and Essex. Organic development remains an essential element of our growth objectives and we have strengthened our regional teams in respect of property purchasing and refurbishment in order to underpin further progress.

Acquisitions

It is pleasing to note good full year performances from those acquisitions made during 2007. The Counticare residential  services are now fully integrated into our operations in the South and provide us with important management and day centre facilities. The One-Step supported living method is beginning to roll out across our network and commissioners find its pathways approach to be very appealing.

During the year we made two further acquisitions:

Beacon Care

In April 2008 we purchased 17 homes which trade as Beacon Care for a total of £20.8m plus acquisition costs. These homes are mainly situated in the South of England and have integrated well with our existing services in that area. Beacon Care has brought valuable business development resource and the management team is focused on further growth for both residential care and supported living services.

Valeo

In July we purchased Valeo for a total consideration of £11.2m plus acquisition costs. Valeo is an exciting opportunity based in Yorkshire providing services to clients with challenging needs. We see this as a springboard acquisition from which we can build a substantial client base, from both organic development and further acquisition in this area.

High quality service provision

We remain strongly focused on the quality of services that we provide and we have further strengthened our regional teams through the leadership of our Quality and Performance Director.

Our services are increasingly tailored to meeting the needs of highly demanding service users and people with very complex support needs. Meeting the challenges this presents and continuing to deliver the CareTech quality brand means that we will strengthen our clinical infrastructure through the coming year.

In addition to the demand for high quality direct services, local authorities are increasingly keen to measure company's ethical and green credentials. We have wholeheartedly embraced this agenda, building on an established track record as a company with integrity in service provision.

Pathway of services

Commissioners have become very focussed on effective service delivery that reduces dependency - "the pathway". Anticipating this trend, we have established innovative services that equip our clients with the skills required to live more independently; moving wherever possible into supported living units using the One Step model. This is also an issue for young people preparing to leave school or college and who, like other young people, must be prepared for a home of their own.

The financial statements to 30 September 2008 again demonstrate significant progress. Revenues are up 27% at £67.7m, adjusted EBITDA is up 59% up at £17.3m and underlying profit before tax (being profit before tax, non-recurring items and amortisation) is up 69% at £10.5m.

Outlook

The opportunities for creation of new services are considerable. There remains a significant shortfall of capacity for people with a learning disability and commissioners are eager to work with trusted partners, capable of delivering innovative, person-centred solutions. Our regional development teams have better relationships with local purchasers and we are in a strong position to continue to grow the business.

Conclusion

2008 has been another extremely successful year for CareTech and I would like to add my thanks to all our staff for their achievement this year. I also welcome the staff that are now part of CareTech as a result of the Beacon Care and Valeo acquisitions. On a personal note I would also like to offer my thanks to David Spink for his contribution to our success since IPO.

  CareTech Holdings PLC

Finance Director's Review

Overview

The Group has performed well in the year, with solid results from underlying core activities, strong full year performance from the acquisitions made in 2007 and stronger than forecast contributions from the acquisitions made in the year. The Group has good cash flow performance and an increasingly strong base of freehold assets. The additional debt facilities negotiated in the year, together with the successful equity placing in July give the Group a significant platform for further growth, both organic and through selective acquisition.

Revenue and operating profit

Revenue increased by 27% to £67.7m, including £4.6m from the Beacon Care and Valeo acquisitions. For core activities therefore the uplift was 19%.

Adjusted EBITDA of £17.3m was up 59% from £10.9m in 2007. This represents a margin of 25.5% compared with 20.5% in 2007 and is reflective of the efficiencies achieved as a result of the Group's operational gearing. Underlying operating profit (i.e. before non-recurring items and amortisation) increased by 59% to £15.8m, including a contribution from the new acquisitions of £1.4m. Excluding the acquisitions the operating profit uplift was 44%. Operating profit increased by 58% to £14.8m.

Administrative expenses, including intangible amortisation of £0.2m (2007: £0.1m) increased to £5.7m (2007: £4.8m), reflecting the full year effect of the regional structure which was established in 2007.

Exceptional operating items

The financial statements reflect the cost of certain non-recurring costs attributable to the integration of the Beacon Care and Valeo acquisitions, together with business restructuring costs attributable to the development of an "in-house" recruitment and staff management centre for agency and flexible working staff. Total operating exceptional costs are £751,000, comprising acquisition integration costs of £456,000 and business restructuring costs of £295,000. The tax effect of these costs amounts to £218,000.

Financial expenses

In April 2008, the Group concluded an increased term loan and revolving debt facility of £120m. As a result of the new facility, exceptional costs of £1.9m have been written off, as set out in note 2.

Taxation

The provision for taxation is explained in note 3. The Group's underlying tax rate in the year was 20.1% (2007: 19.1%) which is lower than the standard rate due to the benefit of capital allowances. As a consequence of reporting under IFRS, deferred taxation has been provided on this benefit to produce a headline rate of tax of 31%, which represents the standard rate of tax, adjusted for permanently disallowed expenses.

Earnings per share

Basic earnings per share have increased from 12.6p in 2007 to 13.7p in 2008. Basic earnings per share before exceptional items and amortisation have increased from 13.9p to 21.8p and from 13.7p to 21.6p on a fully diluted basis.

Dividend

During the year the Group made an interim dividend payment to shareholders of 1.025p per share (2007: 1.0p). The directors are proposing the payment of a final dividend of 2.725p per share (2007: 2.0p), subject to approval by shareholders at the Annual General Meeting.

Cashflow and net debt

The operating cashflows of the Group remain strong with net operating inflows at £13.7m (2006: £8.6m). Cash outflows from investing activities amounted to £49.2m, partly funded by operating cashflow, together with further utilisation of debt facilities of £14.4m and net proceeds from the issue of share capital of £29.0m. At 30 September 2008, net debt was £85.3m (2007: £70.4m), against facilities of £120m.

The balance sheet reflects £8.4m of deferred and contingent consideration in respect of acquisitions, which are payable within twelve months.

The Board believes that the Group's continuing strong operational cashflows will enable it to fund significant organic investment within the Group and provide further headroom to capitalise on acquisition opportunities. As a matter of course, the Board regularly monitors the cost of maintaining unutilised debt facilities within the context of its overall strategic plans. As such the Company may, in the near term, adjust its banking arrangements in order to avoid incurring unnecessary financing costs where facilities are not likely to be used. The Company's unique and compelling business model means that alongside its strong organic growth, it will inevitably continue to identify sector consolidation opportunities that have the potential to deliver long term benefits to shareholders. Naturally, the Board will continue to ensure that the Company has access to the most appropriate capital so that it can take full advantage of such strategic opportunities as and when they arise.

Key performance indicators

The Group uses the following financial and non financial key performance indicators to measure the operational and strategic performance of the business.

Earnings before interest, tax, depreciation and amortisation (EBITDA)

The Group monitors the progress of each home through the measurement of its operating contribution against its targets. This combines with the cost of central operational management to reflect EBITDA. During 2008, the EBITDA margin increased from 20.5% to 25.5%, reflecting the increasing economies of scale within the Group.

Earnings per share (EPS)

The primary performance indicator is the Group's earnings per share. Our strategic objective is to increase earnings per share each year through organic growth of the core business and through acquisitions. The 2008 results show improved basic and diluted earnings per share.

Occupation levels 

All homes are closely monitored to achieve the appropriate balance between full occupation and client compatibility (which is required for long-term occupation). During the year we maintained occupation levels in mature services (being homes open for more than 12 months) at 95% with an overall blend across all services at the year end of 90%.

 

 

International financial reporting standards ("IFRS")

The Group is reporting its full year results for the first time under adopted IFRS. Conversion to IFRS is an accounting change and has no effect on cash flows or debt position. The conversion also has no effect on the underlying business, on risk management or the Group's strategy.

  

Consolidated income statement

for year ended 30 September 2008

	Note	2008			2007
		Before other items	Non-recurring and other items	Total	Before  other  items	Non-recurring and other items	Total
		£000	£000	£000	£000	£000	£000
Revenue		67,713	-	67,713	53,119		53,119
Cost of sales		(47,196)	-	(47,196)	(38,830)	(100)	(38,930)
Gross profit		20,517	-	20,517	14,289	(100)	14,189
Administrative expenses		(4,732)	(969)	(5,701)	(4,375)	(441)	(4,816)
Operating profit		15,785	(969)	14,816	9,914	(541)	9,373
EBITDA		17,255	-	17,255	10,879	-	10,879
Depreciation		(1,357)	-	(1,357)	(878)	-	(878)
Amortisation of intangible assets		-	(218)	(218)	-	(76)	(76)
Goodwill adjustment		-	-	-	-	(157)	(157)
Share based payments charge		(113)	-	(113)	(87)	-	(87)
Exceptional items	2	-	(751)	(751)	-	(308)	(308)
Operating profit		15,785	(969)	14,816	9,914	(541)	9,373
Financial income		71	-	71	62	-	62
Financial expenses	2	(5,318)	(1,915)	(7,233)	(3,741)	-	(3,741)
Profit before tax		10,538	(2,884)	7,654	6,235	(541)	5,694
Taxation	2/3	(2,122)	(261)	(2,383)	(1,192)	67	(1,125)
Profit for the year attributable to equity holders of the parent		8,416	(3,145)	5,271	5,043	(474)	4,569
Earnings per share
Basic	4/5	21.82p		13.67p	13.89p		12.59p
Diluted	4/5	21.58p		13.52p	13.73p		12.44p

  Consolidated statement of recognised income and expense

for year ended 30 September 2008

		2008	2007
		£000	£000
Effective portion of changes in fair value of cash flow hedges		(359)	(201)
Net change in fair value of cash flow hedges transferred to profit or loss		564	-
Deferred tax on hedge reserve movement		(61)	60
Deferred tax on share based payment		-	204
Net income recognised directly in equity		144	63
Profit for the year		5,271	4,569
Total recognised income and expense attributable to equity holders of the parent		5,415	4,632

  Consolidated balance sheet

at 30 September 2008

	Note	2008	2007
		£000	£000
Non-current assets
Property, plant and equipment		148,576	88,008
Other intangible assets		1,149	948
Goodwill		15,574	11,674
		165,299	100,630
Current assets
Trade and other receivables		11,433	8,394
Cash and cash equivalents	8	2,126	1,093
		13,559	9,487
Total assets		178,858	110,117
Current liabilities
Loans and borrowings	8	350	431
Trade and other payables		3,981	3,244
Tax payable		3,208	2,051
Financial instruments		1,264	205
Deferred and contingent consideration payable		8,361	-
Deferred income		7,792	7,213
		24,956	13,144
Non-current liabilities
Loans and borrowings	8	87,089	71,035
Deferred tax liabilities		13,102	8,693
		100,191	79,728
Total liabilities		125,147	92,872
Net assets		53,711	17,245
Equity attributable to equity holders of the parent
Share capital		223	183
Share premium		38,543	9,569
Merger reserve		5,037	1,998
Hedging reserve		-	(144)
Retained earnings		9,908	5,639
Total equity		53,711	17,245

These financial statements were approved by the board of directors on 9 December 2008 and were signed on its behalf by:

F. Sheikh D. Spink

Director Director

  Consolidated cash flow statement

for year ended 30 September 2008

	Note	2008	2007
		£000	£000
Cash flows from operating activities
Profit before tax		7,654	5,694
Adjustments for:
Financial income		(71)	(62)
Financial expenses		7,233	3,741
Depreciation		1,356	878
Amortisation		218	76
Share-based payment expenses		113	87
Interest received		71	62
Tax paid		(670)	(369)
Operating cash flows before movement in working capital		15,904	10,107
(Increase) in trade and other receivables		(2,160)	(3,826)
(Decrease)/Increase in trade and other payables		(38)	2,288
Net cash from operating activities		13,706	8,569
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired		(30,637)	(23,927)
Acquisition of property, plant and equipment		(18,181)	(15,667)
Acquisition of software		(419)	-
Net cash from investing activities		(49,237)	(39,594)
Cash flows from financing activities
Proceeds from the issue of share capital (net of costs)		29,012	-
Proceeds from new loan (net of costs)		96,454	34,903
Interest paid		(5,318)	(3,717)
Repayment of borrowings		(82,024)	-
Payment of finance lease liabilities		(445)	(184)
Dividends paid		(1,115)	(362)
Net cash from financing activities		36,564	30,640
Net increase/(decrease) in cash and cash equivalents		1,033	(385)
Cash and cash equivalents at 1 October		1,093	1,478
Cash and cash equivalents at 30 September	8	2,126	1,093

  Notes

(forming part of the financial statements)

 

CareTech Holdings PLC (the 'Company') is a company registered and domiciled in England and Wales. The consolidated financial statements of the Company for the year ended 30 September 2008 comprise the Company and its subsidiaries (together referred to as the 'Group').

These preliminary results have been prepared in accordance with all International Financial Reporting Standards, as adopted by the EU ("adopted IFRSs"), as required to be adopted by AIM listed companies.

These are the Group's first annual results to be reported under the IFRS as adopted by the EU and IFRS1 has been applied. The group previously reported under UK Generally Accepted Accounting Principles ("UK GAAP"). An explanation of how the transition from UK GAAP to IFRS has affected the results of the Group is shown in note 9. In preparing these preliminary results, consistent accounting policies in accordance with IFRS have been applied.

The financial information in this announcement does not constitute statutory financial statements for the year ended 30 September 2008 but is derived from those financial statements. The auditors have reported on the consolidated Group financial statements for the year ended 30 September 2008 and their report was unqualified.

The preliminary announcement for the year ended 30 September 2008 was approved by the Board for release on 9 December 2008.

 

Notes (continued)

 

	Note	2008	2007
		£000	£000
Acquisition integration costs	(i)	456	308
Business restructuring costs	(ii)	295	-
Included in operating expenses		751	308
Loan finance costs written off on refinancing during the year	(iii)	650	-
Exceptional movements in hedging provisions following refinancing during the year	(iv)	1,265	-
Included in financial expenses		1,915	-
Exceptional items tax effect (see note 3)
Current tax		(402)	(92)
Deferred tax		(354)	-
		(756)	(92)

		2008			2007
		Before other items	Non-recurring and other items	Total	Before  other  items	Non-recurring and other items	Total
	Note	£000	£000	£000	£000	£000	£000
Current tax expense
Current year		2,047	-	2,047	1,020	-	1,020
Current tax adjustment for exceptional items (note 2)		-	(402)	(402)	-	(92)	(92)
Adjustment for prior years		-	-	-	-	(800)	(800)
Total current tax		2,047	(402)	1,645	1,020	(892)	128
Deferred tax expense
Current year	(i)	75	1,017	1,092	172	1,230	1,402
Deferred tax adjustment for exceptional items (note 2)		-	(354)	(354)	-	-	-
Deferred tax adjustment for change in tax rate		-	-	-	-	(405)	(405)
Total deferred tax		75	663	738	172	825	997
Total tax in income statement		2,122	261	2,383	1,192	(67)	1,125

Note:

(i) The calculation of the Group's deferred tax charge is significantly impacted because of the fact that IAS 12 does not permit discounting of deferred tax liabilities. The net impact of £1,017,000 (2007: £1,230,000) has been separately analysed in order to present earnings measures on a comparable basis.

 

(b) Reconciliation of effective tax rate

	2008	2007
	£000	£000
Profit before tax for the period	7,654	5,694
Tax using the UK corporation tax rate of 29% (2007: 30%)	2,220	1,708
Non-deductible expenses	163	217
Over provided in prior years	-	(800)
Total tax in income statement	2,383	1,125

		2008	2007
		£000	£000
Profit attributable to ordinary shareholders		5,271	4,569
Weighted number of shares in issue for basic earnings per share		38,566,397	36,298,178
Weighted number of shares for diluted earnings per share		38,991,559	36,737,180

Diluted earnings per share is the basic earnings per share adjusted for the dilutive effect of the conversion into fully paid shares of the weighted average number of share options outstanding during the period.

Earnings per share (pence per share)
Basic		13.67p	12.59p
Diluted		13.52p	12.44p

 

		2008	2007
		£000	£000
Profit attributable to ordinary shareholders		5,271	4,569
Amortisation	(i)	218	76
Goodwill adjustment	(ii)	-	157
Exceptional items (note 2)		2,666	308
Tax effect of exceptional items (note 3)		(756)	(92)
Tax adjustment in respect of prior years		-	(800)
Deferred tax credit on change in tax rate		-	(405)
Deferred tax charge without discounting	(iii)	1,140	1,438
Deferred tax charge after discounting	(iii)	(123)	(208)
Adjusted profit attributable to ordinary shareholders		8,416	5,043
Adjusted earnings per share (pence per share)
Basic		21.82p	13.89p
Diluted		21.58p	13.73p

Notes

(i) Amortisation is charged on intangible software and customer relationship assets established in accordance with IFRS 3 : Business Combinations. As a non-cash charge it is added back to adjusted earnings.

(ii) An adjustment to goodwill in respect of the benefit of tax losses during 2007 which had not previously been recognised in the determination of goodwill.

(iii) The calculation of the Group's deferred tax charge is significantly impacted because of the fact that IAS 12 does not permit discounting of deferred tax liabilities. The net impact of £1,017,000 (2007: £1,230,000) has been separately analysed in order to present earnings measures on a comparable basis.

Notes (continued)

	2008	2007
	£000	£000
Final dividends paid in respect of prior year but not recognised as liabilities in that year	732	-
Interim dividends paid in respect of the current year	383	362
Aggregate amount of dividends paid in the financial year	1,115	362
Dividends in respect of the year recognised as a liability at the year end	-	-
	1,115	362

The aggregate amount of dividends proposed and not recognised as liabilities as at the year end is 2.725p per share, £1,213,685 (2007 :2.0p per share ) £732,000.

 

 

Notes (continued)

7 Acquisitions of subsidiaries

 

(a) Acquisition of Beacon Care

On 28 April 2008, CareTech Holdings PLC acquired the entire share capital of Beacon Care Holdings Limited and Beacon Care Investments Limited, together with their wholly owned subsidiary companies and certain associated freehold properties. The provisional fair values attributed by the directors to the recognisable net assets are as follows:

	Book value	Properties acquired	Fair value adjustment	Fair value
	£000	£000	£000	£000
Property, plant and equipment		21,258	2,064	23,322
Debtors	418			418
Cash	799			799
Creditors:
Trade creditors	(113)			(113)
Corporation tax	(88)			(88)
Accruals and deferred income	(547)			(547)
Other creditors	(218)			(218)
Deferred tax	(62)		(578)	(640)
	189			22,933
Consideration:
Cash consideration				18,625
Shares				2,211
Cost of acquisition				2,675
Total cost of acquisition				23,511
Goodwill arising on acquisition				578

The book values of assets and liabilities were extracted from the underlying accounting records of the company at the date of acquisition. The provisional fair value adjustments made to property, plant and equipment were to reflect their value on a going concern market value basis. The fair value of the share consideration is based on the share price on the day of acquisition.

Goodwill arises due to the requirement to recognise deferred tax in respect of the fair value adjustments to property, plant and equipment.

Contingent consideration is payable on the achievement of certain performance targets. The maximum amount of contingent consideration payable is £3,900,000. The amount recorded within cash consideration is stated at the current best estimate of the amount expected to be paid.

Following acquisition, Beacon contributed EBITDA of £949,000 to the Group's result for the year ended 30 September 2008. 

Notes (continued)

7 Acquisitions of subsidiaries (continued)

(b) Acquisition of Valeo Limited

On 17 June 2008 CareTech Holdings PLC acquired the entire share capital of Valeo Limited. The provisional fair values attributed by the directors to the recognisable net assets are as follows:

	Book value	Fair value adjustment	Fair value
	£000	£000	£000
Property, plant and equipment	3,924	10,341	14,265
Debtors	461		461
Cash	16		16
Creditors:
Trade creditors	(114)		(114)
Accruals and deferred income	(726)		(726)
Other creditors	(308)		(308)
Bank loans and overdrafts	(1,185)		(1,185)
Corporation tax	(187)		(187)
Deferred tax	-	(2,896)	(2,896)
	1,881		9,326
Consideration:
Cash consideration			10,402
Shares			830
Costs of acquisition			990
Total cost of acquisition			12,222
Goodwill arising on acquisition			2,896

The book values of assets and liabilities were extracted from the underlying accounting records of the company at the date of acquisition. The provisional fair value adjustments made to property, plant and equipment were to reflect their value on a going concern market value basis. The fair value of the share consideration is based on the share price on the day of acquisition. 

 

Goodwill arises due to the requirement to recognise deferred tax in respect of the fair value adjustments to property, plant and equipment.

Contingent consideration is payable on the achievement of certain performance targets. The maximum amount of contingent consideration payable is £2,800,000. The amount included within cash consideration is stated at the current best estimate of the amount expected to be paid.

Following acquisition, Valeo contributed EBITDA of £428,000 to the Group's result for the year ended 30 September 2008.

Notes (continued)

 

8 Net Debt

	1 October 2007	New Borrowings	New  Leases	Repaid	30 September 2008
	£000	£000	£000		£000
Bank debt	(70,462)	(15,715)	-	-	(86,177)
Finance leases	(905)		(802)	445	(1,262)
Other loans	(100)	-	-	100	-
	(71,467)	(15,715)	(802)	545	(87,439)
Cash balances	1,093				2,126
	(70,374)				(85,313)

Notes (continued)

 

9 Explanation of transition to Adopted IFRSs 

In preparing its opening IFRS balance sheet, the Group has adjusted amounts reported previously in financial statements prepared in accordance with its old basis of accounting (UK GAAP). An explanation of how the transition from UK GAAP to Adopted IFRSs has affected the Group's financial position and financial performance is set out below and in the following tables.

The following are the most significant adjustments arising from transition to IFRS:

(a) Business Combinations

IFRS 3 - Business Combinations does not permit the amortisation of goodwill through the income statement. Instead, goodwill is carried at cost and reviewed for impairment annually and also when there is any indication that the carrying value may not be recoverable. Under the transitional arrangements of 'IFRS 1 - First Time Adoption of IFRS', the Group has decided to apply the standard prospectively from 1 October 2006. Consequently periodic amortisation of goodwill through the income statement has ended. Under UK GAAP goodwill was amortised over its estimated useful life, which did not exceed twenty years.

New intangible assets created under 'IFRS 3 - Business Combinations' relate to customer relationships and are deemed to have a finite life and no residual value. Customer relationships are amortised over their estimated useful economic lives, which does not exceed ten years. Under UK GAAP, intangible assets were not separately recognised from goodwill.

The UK GAAP goodwill balance of £7,408,000, as reported at 30 September 2006, has been included in the IFRS consolidated opening balance sheet and is no longer amortised. This gives rise to a credit of £452,000 to operating profit in the Group's consolidated income statement for the year ended 30 September 2007. 

An impairment analysis was conducted at 30 September 2006, 31 March 2007 and 30 September 2007. This did not give rise to an impairment charge under IAS 36 'Impairment of Assets'.

b) Interest rate swaps

Under IAS 39, the Group must recognise its financial instruments at fair value at each balance sheet date.

The Group has chosen to apply hedge accounting under IAS 39 to financial instruments at 1 October 2006.  As such, movements in the fair value of these instruments are taken to the Statement of Recognised Income and Expenses. At transition their fair value represented a liability of £4,000. At 30 September 2007 this had increased to a liability of £205,000, with the movement being charged through the Statement of Recognised Income and Expenses.

There is no change to the economic consequences or cash flows arising as a result of having entered into the swaps, and there is no impact of this accounting on covenant compliance - covenants are set with reference to cash interest payable, not the accounting charge.

Notes (continued)

 

9 Explanation of transition to Adopted IFRSs (continued)

c) Taxation

IAS 12 - Income Taxes differs from UK GAAP by using a balance sheet based methodology. Changes in the accounting treatment of a number of balance sheet items will impact the deferred tax charge and liability. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited to equity, in which case the deferred tax is also dealt with in equity. Deferred tax adjustments are also required in respect of certain of the adopted IFRS transitional accounting adjustments noted above, principally due to the prohibition against discounting deferred tax balances, against fair value adjustments in respect of acquisitions and the amounts recognised when accounting for IAS 39.

The effect on the income statement has been to increase the tax charge by £789,000 in the year to September 2007 and by £235,000 in the six months to 31 March 2007.

Furthermore, under UK GAAP deferred tax was not required to be provided where proceeds on the sale of assets had been reinvested into qualifying business assets and gains rolled over. Under IFRS deferred tax on such rolled over gains is required to be recognised even where the liability will not crystallise until the new assets are sold. The effect of this adjustment was to reduce net assets by £5,213,000 at date of transition. This was reduced to £4,866,000 as at 30 September 2007 due to changes in the underlying corporation tax rate.

d) Purchased software

Various reclassifications of balance sheet items have been made to ensure compliance with IFRS. The most notable is that under IFRS, the cost of purchased software, which was previously presented within 'Property, plant and equipment' under UK GAAP, is reclassified to 'Intangible assets' under IFRS. The effect of this transfer is to reduce property plant and equipment by £256,000 and increase intangible assets by the same value as at 30 September 2007.

An impairment analysis was conducted at each of the Balance Sheet dates. This did not indicate impairment under IAS 36 'Impairment of Assets'.

Notes (continued)

9 Explanation of transition to Adopted IFRSs (continued)

Reconciliation of equity - at 1 October 2006 (transition date)

	Note	UK GAAP previously reported	Presentation adjustments	Accounting adjustments	Restated in accordance with IFRS
		£000	£000	£000	£000
Non-current assets
Property, plant and equipment		48,401	-	-	48,401
Intangible assets	(a)	7,408	-	861	8,269
		55,809	-	861	56,670
Current assets
Trade and other payables		2,766	-	-	2,766
Cash and cash equivalents		1,478	-	-	1,478
		4,244	-	-	4,244
Total assets		60,053	-	861	60,914
Current liabilities		(6,851)	6,851	-	-
Trade and other payables	(b)	-	(2,916)	(185)	(3,101)
Tax liabilities		-	(2,036)	-	(2,036)
Deferred income		-	(2,691)	-	(2,691)
Financial instruments	(c)	-	-	(4)	(4)
		(6,851)	(792)	(189)	(7,832)
Non-current liabilities		(36,984)	36,984	-	-
Loans and borrowings		-	(36,192)	-	(36,192)
Deferred tax	(a-e)	-	-	(6,002)	(6,002)
		(36,984)	792	(6,002)	(42,194)
Total liabilities		(43,835)	-	(6,191)	(50,026)
Net assets		16,218	-	(5,330)	10,888
Called up share capital		181	-	-	181
Share premium account		9,569	-	-	9,569
Hedging reserve	(c)	-	-	(3)	(3)
Retained earnings	(b,d,e)	6,468	-	(5,327)	1,141
Total equity		16,218	-	(5,330)	10,888

The key accounting changes are summarised as follows:

(a) deferred tax on fair value adjustments

(b) additional accruals under IAS 19

(c) fair value of financial instruments adjustment

(d) deferred tax on rolled over gains

(e) other adjustments to deferred tax arising from IFRS

 

Notes (continued)

9 Explanation of transition to Adopted IFRSs (continued)

Reconciliation of profit for the year ended 30 September 2007

	Note	UK GAAP previously reported	Presentation adjustments	Accounting adjustments	Restated in accordance with IFRS
		£000	£000	£000	£000
Revenue		53,119			53,119
Cost of sales	(a)	(38,890)	-	(40)	(38,930)
Gross profit		14,229	-	(40)	14,189
Administrative expenses		(5,109)	-	293	(4,816)
Operating profit		9,120	-	253	9,373
EBITDA		10,909	-	(30)	10,879
Depreciation	(c)	(942)	64	-	(878)
Amortisation	(b,c)	(452)	(64)	440	(76)
Goodwill adjustment	(d)	-	-	(157)	(157)
Share-based payments		(87)	-	-	(87)
Exceptional items		(308)	-	-	(308)
Operating profit		9,120	-	253	9,373
Financial income		62	-	-	62
Financial expense		(3,741)	-	-	(3,741)
Profit before tax		5,441	-	253	5,694
Income tax expense	(a,e,f)	(336)	-	(789)	(1,125)
Profit for the period		5,105	-	(536)	4,569

Notes (continued)

9 Explanation of transition to Adopted IFRSs (continued)

Reconciliation of equity - at 30 September 2007

	Note	UK GAAP previously reported	Presentation adjustments	Accounting adjustments	Restated in accordance with IFRS
		£000	£000	£000	£000
Non-current assets
Property, plant and equipment		88,264	(256)	-	88,008
Intangible assets
Goodwill	(a)	9,253	(692)	3,113	11,674
Software		-	256	-	256
Contracts		-	692	-	692
		97,517	-	3,113	100,630
Current assets
Trade and other receivables		8,394	-	-	8,394
Cash and cash equivalents		1,093	-	-	1,093
		9,487	-	-	9,487
Total assets		107,004	-	3,113	110,117
Current liabilities		(12,713)	12,713	-	-
Loans and borrowings		-	(431)	-	(431)
Trade and other payables	(b)	-	(3,018)	(226)	(3,244)
Tax liabilities		-	(2,051)	-	(2,051)
Deferred income		-	(7,213)	-	(7,213)
Financial instruments	(c)	-	-	(205)	(205)
		(12,713)	-	(431)	(13,144)
Non-current liabilities
Loans and borrowings		(71,035)	-	-	(71,035)
Deferred tax	(a-f)	(208)	-	(8,485)	(8,693)
		(71,243)	-	(8,485)	(79,728)
Total liabilities		(83,956)	-	(8,916)	(92,872)
Net assets		23,048	-	(5,803)	17,245
Called up share capital		183	-	-	183
Share premium account		9,569	-	-	9,569
Merger reserve		1,998	-	-	1,998
Hedging reserve	(c)	-	-	(144)	(144)
Retained earnings	(a,b,d,e,f)	11,298	-	(5,659)	5,639
Total equity		23,048	-	(5,803)	17,245

 

The key accounting changes are summarised as follows: (a) deferred tax on fair value adjustments 

(b) additional accruals under IAS 19 (c) fair value of financial instruments adjustment (d) deferred tax on rolled over gains 

(e) other adjustments to deferred tax arising from IFRS (f) deferred tax on share based payments

 

Notes (continued)

 

10 Copies of the Annual Report and Accounts

Copies of the Annual Report and Accounts will be sent to shareholders shortly and will be available to members of the public from the Company's registered office located at Leighton House, 33-37 Darkes Lane, Potters Bar, Herts, EN6 1BB and on the Company's website: www.caretech-uk.com.

ENDFR DGBDDXXGGGII

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