REG - Circle Holdings PLC - Half Yearly Report <Origin Href="QuoteRef">CIRC.L</Origin> <Origin Href="QuoteRef">MRON.L</Origin> - Part 1

Melrose IndustriesAnnouncement

29/10/2014 15:49

RNS Number : 1812Q
Circle Holdings PLC
28 August 2014
Circle Holdings plc
("Circle", the "Company" or "Group")
Interim results
For the six months ended 30 June 2014
London, 28 August 2014: Circle Holdings plc (LSE: CIRC), the employee co-owned hospital group, today announces its interim results for the six months ended 30 June 2014
Financial Highlights
 Revenue under management1 up 5.5% to 102.9m (2013: 97.5m)
 Group revenue up 11.4% to 48.9m (2013: 43.9m)
 Positive EBITDAR2 of 0.4m (2013: loss of 1.0m)
 Operating loss before exceptional items for the financial period improved by 28.0% to 7.2m (2013: loss of 10.0m)
 Basic and diluted loss per share of 3.8p (2013: 4.7p loss per share)
 Cash balance of 31.6m at 30 June 2014 (2013: 16.8m).
 Revenue growth in CircleBath of 32.5% to 10.6m (2013: 8.0m). Revenue growth in CircleReading of 60.0% to 10.4m (2013: 6.5m).
 CircleReading's margins are behind plan as cost base efficiencies have lagged behind the strong pace of growth.
 6.5m of revenue generated under the first three months of the new Bedfordshire MSK contract which became fully operational in April 2014.
.
Operational Highlights
 Day case and inpatient volumes, excluding Hinchingbrooke, up 6% to 21,520 (2013: 20,244)
 Strong demand from NHS at independent facilities; NHS patient volumes up 52% in Bath and 235% in Reading
 Hinchingbrooke hospital won leading National award for patient care in England
 At Hinchingbrooke, the Group expects the commissioning environment to remain highly challenging for 2014-15, as the NHS funding mechanism has produced higher than normal tariff reductions for NHS hospitals despite our record of delivering nationally recognised quality of care for patients.
 Patient recommendation, at Circle's independent facilities and its Nottingham NHS Treatment Centre, remains at 99%
 Successfully commenced operation of the five-year integrated musculoskeletal ("MSK") service contract in Bedfordshire
 Group ownership restructure ("Project Reset"), to give all partners including NHS staff access to tradable shares in Circle Holdings plc progresses towards completion before the end of the year.
1 includes revenue generated at Hinchingbrooke which is managed by the Group, but not included in the Group's consolidated revenue
2  defined as Earnings Before Interest, Tax, Depreciation, Amortisation and Rent


Michael Kirkwood, CMG, Chairman of Circle Holdings, commented:
'"We have seen increased revenues at CircleBath and CircleReading, a strong first year in our renewed contract in Nottingham, and widespread accolades for the transformed performance of Hinchingbrooke Health Care NHS Trust."
"Our work on MSK services in Bedfordshire has begun well, and is already attracting attention from health leaders across the country for its potential to deliver better, and more sustainable, care to patients."
"We consistently face new hurdles as our business expands and enters new territory. We believe the Circle model of engaged staff, clinical leadership and a relentless pursuit of excellence continues to overcome these hurdles and deliver world-class, efficient care. We are confident this will continue in the future."
"I would like to thank the outgoing members of the board, Tony Bromovsky and Tim Bunting, for their support and work, and welcome our newly appointed Non-Executive Directors, Lord Hutton and Justin Jewitt."
Steve Melton, Chief Executive Officer of Circle Holdings, commented:
'"Circle's ambitions are high: to redefine healthcare as we know it, with a differential management model and an excellent experience for patients. Achieving this ambition is the work of years, but the past six months have seen strong progress towards that goal."
"Our sites in Bath and Reading have seen strong year-on-year revenue growth and significant increases in the numbers of NHS patients. We are seeing a number of competitors following our model by seeking to build new assets and work closer with the NHS."
"Hinchingbrooke's reputation for high quality was confirmed by an award in May for the best patient care in England. The financial pressures on the NHS remain intense, and have seen the impact of very tight commissioning frameworks, while the commissioning environment is expected to remain highly challenging for 2014-15." 
"In Nottingham and Bedfordshire, we are helping the NHS address one of its biggest challenges: integration, and giving patients seamless care. In Nottingham, patients who require elective care now receive an efficient and joined-up experience, while in Bedfordshire, we have started our task of uniting previously disparate services into a single, unified pathway."
"In both our independent hospitals and NHS sites, Circle's offer of excellent, efficient care remains extremely attractive."
For further information, please contact:
Circle Holdings plc Tel: +44 207 034 5250
Steve Melton, Chief Executive Officer 
Paolo Pieri, Chief Financial Officer 
Gordon Hector, Head of Communications
Numis Securities Limited Tel: +44 207 260 1000
Michael Meade, Nominated Adviser 
Alex Ham, Corporate Broking
An analyst briefing and live conference call will be held at 11:30am BST today at the offices of Numis Securities Limited.

Chief Executive Officer's operating overview
We are pleased with the Group's overall progress over the last six months. Hinchingbrooke remains an outstanding example of a transformed NHS service, our other NHS work has grown steadily, and our independent hospitals continue to progress towards profitability. The operating environment, however, is challenging, particularly as a result of political uncertainty in the lead-up to next spring's general election and its impact on new nationally led NHS opportunities.
Operating environment
The NHS as a whole continues to come under increasing pressure in the face of an ageing society and increased demand for services, but public expectations of excellent care remain high. Circle's model, which is proven to offer both excellent and cost-effective care, is well-placed to prosper in this increasingly turbulent environment. 
The effect of political uncertainty leading up to an election is indirect, but the desire of government to avoid significant attention on the NHS could create some delay in the procurement of NHS services throughout the country. We do, however, expect more musculoskeletal contracts to come to market over the next year.
Any effect of political uncertainty is likely to be a short-term trend. Whichever party or coalition is in power from next year, the challenges will remain the same - and an employee co-owned provider, dedicated to its patients and to improving care, remains an attractive service partner for the NHS.
The private market has seen several significant developments. The Competition and Markets Authority ("CMA") published its final report into UK private healthcare in April. While its remedies were more modest than expected, it was clear about its concerns over historic bad practices in the sector. Our competitors have been barred from offering "cash-for-patients", while the CMA expressly recognised the importance of clinical ownership in models such as ours. Additionally, we have seen investment by competitors looking to expand into the UK.
Hinchingbrooke Health Care NHS Trust
Hinchingbrooke continues to deliver outstanding quality of care. In 2013/14, Accident and Emergency performance was ranked top-10 in England. The hospital is meeting all main cancer targets, it has hit the 18-week waiting time targets for the last 26 months running, and won a respected national prize for the quality of its care.
Hinchingbrooke ended its 2013-14 financial year with a 1.3 million deficit, marginally higher than expected, due to unanticipated contractual deductions stipulated by the local Clinical Commissioning Group. This still represents year-on-year efficiency improvements of 6%, compared to the 4% required, on average, of NHS trusts and an approximate 90% reduction of the deficit Circle inherited. To date, Circle has made cumulative support payments to Hinchingbrooke of 4.85m. Under the franchise agreement, both parties must agree the basis for the continuation of the franchise if the cumulative losses exceed 5 million. 
The Group expects the local commissioning environment to remain challenging for 2014-15. NHS funding mechanisms have changed, with higher than normal reductions in national and local tariffs, partially replaced with new payments designed to ease short-term systemic pressures. These could have a disproportionately negative impact on small and successful trusts like Hinchingbrooke, as they redirect NHS funds towards struggling hospitals. 
Consequently, the Group has commenced discussions with the NHS as to its commissioning and contract intentions in relation to Hinchingbrooke and the wider system. The impact of changed funding mechanisms currently leaves a degree of uncertainty over Hinchingbrooke's profitability over the next year, but the Group believe that our patient-centred and innovative approach should ensure the long-term sustainability of the contract.
MSK contracts
We have commenced our contract to manage musculoskeletal ("MSK") services in Bedfordshire. Previously, patients were attending up to 50 different providers for MSK conditions, with no coordination between them, poorly integrated clinical pathways and limited patient choice. After just a few months, we estimate over 50% are now being cared for through our single referral hub and receive clear information about their clinical choices. 
Other Clinical Commissioning Groups ("CCGs") are studying the model closely. Commissioning along a pathway like MSK is attractive, as it enables CCGs both to reduce costs and integrate care. We are in a strong position to take advantage of any emergent opportunities in this exciting area.
Circle Nottingham NHS Treatment Centre
The renewed Nottingham contract, centred around integrated care pathways treating more patients at home or in the community, is progressing well. Although the new contract has no guaranteed minimum volume levels, Nottingham has sustained year-on-year activity levels. The Group is now looking to expand the range of services offered.
Independent Hospitals
CircleBath has experienced steady growth in patient volumes as it expands its catchment area further, with overall year-on-year volume growth of 23% in the first six months of 2014. NHS demand has grown, and CircleBath has gradually built up trust and respect in the wider area (including Bristol), and has benefitted from more patients. The ownership of the CircleBath property also changed. The property asset was recently acquired by a US-based Real Estate Investment Trust ("REIT"), following which CircleBath entered into a new long-term lease that has reduced the annual rent payable by the hospital by 1 million from 1 July 2014.
CircleReading has realised encouraging year-on-year growth, with revenues up 60% in the first half of 2014. This increase largely stems from increased NHS activity, as private volumes (insured and self-pay) have remained comparatively stable. The significant growth has resulted in some recruitment lags, due partly to a national shortage of nurses, and delivery of certain cost efficiencies.
We are currently re-evaluating our options on the type of operation we develop in Manchester, as Spire, Nuffield and HCA have all recently announced plans to expand in the city. We continue to make very positive progress for the development and / or acquisition of other sites within the UK.
Partnership Structure
The Group announced plans last year to alter its ownership structure. Due to the accumulation of debt owed by Circle Health Limited (and its operating subsidiaries) to the Company and to Circle International, the value of Circle Partnership is limited in the near-term and therefore the effectiveness of the current incentivisation scheme is undermined. Accordingly, the Company and Circle Partnership have agreed a corporate reorganisation of the Group. This reorganisation, called Project Reset, involves the Company acquiring Circle Partnership and issuing a new class of convertible shares to existing Circle Partnership shareholders in exchange for their partnership shares. These shares will be held by a new Partnership Benefit Trust that will also hold additional ordinary shares of the Company, to be used to satisfy future options issued under a new share scheme. We expect Project Reset to complete in the fourth quarter this year.
Board changes
Tony Bromovsky and Tim Bunting, two of our Non-Executive Directors, left the board earlier this year. At the same time, we welcomed two new Non-Executive Directors to the board: Lord John Hutton and Justin Jewitt.
Steve Melton
Chief Executive Officer


Financial review
Introduction
Total revenue under management has increased by 5.5% to 102.9m compared with the same period in 2013. This is despite the renewed Nottingham NHS Treatment Centre contract which rebased the price per episode downwards to national tariff from July 2013. Excluding Nottingham results in both years, revenue under management growth has been 19.4%. Some of this growth stems from the new Bedfordshire MSK contract, the first of its kind, which became operational in April, along with continuing growth in Reading and Bath. This enhances the Group's solidity and strength as revenue distribution becomes more uniform across a number of sites.
Group EBITDA before exceptional items has improved 23.3% from the previous year's results to a loss of 5.9m. Year-on-year improvement in performance in CircleBath and CircleReading has more than compensated for the revised contract terms seen in Nottingham. Early indicators from the Bedfordshire MSK contract show it to be delivering results in line with expectations.
The Group generated an operating loss before exceptional items of 7.2m, an improvement of 28.0% on the previous year's result, while the loss per share now stands at 3.8 pence, improved from a loss per share in 2013 of 4.7 pence.
The 27.5m proceeds (before fees) from the January fundraise and the ever improving performance within the independent hospitals have assisted in demonstrating to the Government, NHS, and real-estate investors the strength of the Group's balance sheet.
In July 2014 the Group refinanced the Bath Hospital, which is discussed further below. The financial stability seen in the Group has also facilitated the release in July 2014 of 2.0m cash previously held in escrow, under a condition attached to the Hinchingbrooke contract.
The Group ceased all operations at its Stratford Clinic from March 2014, as part of its reconfiguration to exit its smaller clinics businesses and streamline the Group's focus on its independent hospitals and on winning further NHS bids. 
The Group is committed to implementing Project Reset, a corporate restructure of the Group planned for the fourth quarter of 2014 to give all partners, including NHS staff, access to tradable shares in Circle Holdings plc for the first time. It is expected that Project Reset will complete towards the end of the year, with estimated costs to deliver of approximately 1m, largely related to the issuance of the new shares.
As a result of all option schemes awarded there will be a large share-based payment charge booked in the second half of the year. These option schemes will be valued on a standard IFRS 2 basis using fair market value calculations.
Highlights




Six months to
30 June 2014

Six months to
30 June 2013




'000

'000







Revenue under management*

102,907

97,506







Group revenue

48,866

43,918







Operating loss

(10,012)

(10,563)







Earnings before interest, tax, depreciation and amortisation ('EBITDA') before exceptional items** 

(5,851)

(7,629)







Total operating loss before exceptional items** 

(7,230)

(10,023)







Loss for the period attributable to equity holders of the parent

(7,050)

(6,084)







Net assets 

43,517

33,428
*  includes revenue generated at Hinchingbrooke which is managed by the Group, but not included in the Group's consolidated revenue
**  exceptional items in the six months ended 30 June 2014 relate to the impairment of assets under construction. Exceptional items in the six months ended 30 June 2013 of 0.5m consist largely of share-based charges in respect of warrants issued and restructuring costs offset in part with a gain on the release of the Ashford onerous lease provision
Patient numbers* (excluding Hinchingbrooke)




Six months to
30 June 2014

Six months to
30 June 2013




Number

Number







Day case and inpatients 


21,520

20,244







Outpatients*


141,526

125,946







Total patients


163,046

146,190
*each appointment is counted as an additional patient number. 2013 outpatient volumes have been restated to reflect this.
Review of performance
CircleBath revenues have increased by 32.5% to 10.6m and patient volumes by 22.9% to 27,783, with the majority of increased revenues coming from NHS work, which has been a continuing focus. CircleReading has achieved encouraging year-on-year growth with revenues up 60.0% in the first half of 2014 to 10.4m, largely as a result of increased NHS activity which now accounts for 45% of total revenues, whilst private volumes have remained stable. Total volumes have risen by 40.6% compared with 2013. The benefit of this significant growth has been partially eroded by some recruitment lags and delivery of certain cost efficiencies, due partly to a national shortage of nurses. We believe that this short-term impact temporarily puts CircleReading behind track in achieving EBITDA break-even.
The renewed Nottingham NHS Treatment Centre contract rebased the pricing paid by commissioners and allowed greater flexibility in the procurement of staff and clinical services. Despite minimum volume guarantees no longer existing, the business has remained stable, volumes being consistent with the same period last year, and patient feedback has continued to value the high level care offered. Increasing revenues will be driven in future by expanding services and optimising our new inpatient wards. Revenue for the first six months of the year was as expected at 21.3m (2013: 29.2m).
The Group commenced operation of the innovative five-year integrated musculoskeletal ('MSK') service contract in Bedfordshire in April 2014. Revenue to date has totalled 6.5m, in line with expectations and early indications are that the contract is operating in line with plan.
For accounting purposes, the Group is not deemed to control Hinchingbrooke and therefore does not consolidate the net assets and results of the Company. Until such time that surpluses are generated by Hinchingbrooke, the Group will not recognise any income associated with the running of the contract and meanwhile revenue generated by Hinchingbrooke will be presented as proforma 'revenue under management', which is a non-statutory term.
In the six months to 30 June 2014, Hinchingbrooke revenue has totalled 54.0m. Following a protracted dispute with the local Clinical Commissioning Group ("CCG"), referred to in the Company's full year results for the 2013 financial year, Hinchingbrooke ended its 2013-14 financial year with an operating deficit of 1.3 million. To date, Circle has made cumulative support payments to Hinchingbrooke totalling approximately 4.85 million. Under the franchise agreement, Circle has an obligation to fund up to a maximum of 5 million.
Financing
In December 2013, the Group successfully raised 27.5 million (before fees) by way of equity funding. This was finalised in January 2014. The Group intends to use the proceeds for: growth and potential expansion into large markets where the opportunity to develop new sites or acquire divested assets present themselves with independent hospitals; pursuing growth opportunities in current operating assets, for example, expansion of service offerings; and set-up costs, commissioning and working capital for a mix of generic service lines and/or hospital franchises.
In July 2014, Medical Properties Trust ("MPT"), the specialist hospital Real Estate Investment Trust based in the US, completed the purchase of the Bath Hospital asset for 28.3m. The asset was previously owned by Health Properties (Bath) Limited, a joint venture of which the Group controlled 38.7%. This sale fully extinguished the loans held by Health Properties (Bath) Limited with Santander and Lehman Brothers as well as an interest rate swap held in conjunction with the Santander loan. CircleBath have signed a 15 year lease agreement with MPT, with a 15 year extension, which will see their rent reduce by 1.0m to 2.5m a year. As part of the repayment of the mezzanine debt, Circle Holdings plc had to make a payment related to a guarantee to Lehman Brothers of 625,000.
As noted we have seen increased activities from competitors opening new sites. Consequently the Group has provided for the carrying costs on the design development costs on its Manchester site as it re-evaluates the model appropriate for that market. This impairment to assets under construction has resulted in an exceptional charge of 2.8m in the profit and loss account, but has no cash impact. At this current time, management considers that the capitalised costs associated with the Birmingham site development of 0.5m are recoverable, and therefore no impairment is required at this time.
Paolo Pieri
Chief Financial Officer
Consolidated income statement
For the six months ended 30 June 2014



Unaudited

Unaudited

Audited



Sixmonthsto
30 June 2014

Six months to
30 June 2013

Year to 31
December 2013


Notes
'000

'000

'000








Revenue

48,866

43,918

84,252
Cost of sales

(34,063)

(30,633)

(56,861)







Gross profit 

14,803

13,285

27,391







Administrative expenses before exceptional items

(22,033)

(23,308)

(45,117)








Operating loss before exceptional items
4
(7,230)

(10,023)

(17,726)








Exceptional operating items
4
(2,782)

(540)

3,860








Operating loss

(10,012)

(10,563)

(13,866)








Finance income
5
24

1,748

2,035
Finance costs
6
(465)

(1,922)

(2,774)
Exceptional finance items
4
-

850

1,113
Provision for joint venture deficit

(132)

233

(1,738)








Loss before taxation

(10,585)

(9,654)

(15,230)
Tax

-

-

-







Loss and total comprehensive loss for the financial period / year 

(10,585)

(9,654)

(15,230)








Loss and total comprehensive loss for the financial period / year attributable to:










- 
Equity holders of the parent

(7,050)

(6,084)

(6,678)








- 
Non-controlling interests

(3,535)

(3,570)

(8,552)











(10,585)

(9,654)

(15,230)








Basic and diluted loss per ordinary share (pence)
7
(3.8)

(4.7)

(5.1)








There is no other comprehensive income arising in the joint venture (six months ending 30 June 2013: nil, year ending 31 December 2013: nil).
Consolidated balance sheet
As at 30 June 2014

Unaudited

Unaudited

Audited

30 June 2014

30 June 2013

31 December 2013
Non-current assets
'000

'000

'000






Intangible assets
5,813

6,351

5,982
Property, plant and equipment
17,430

23,868

20,675
Trade and other receivables
4,839

673

3,840







28,082

30,892

30,497
Current assets











Inventories
1,625

1,382

1,645
Trade and other receivables
19,064

63,316

14,184
Cash and cash equivalents
31,551

16,753

12,397







52,240

81,451

28,226
Total assets
80,322

112,343

58,723






Current liabilities











Trade and other payables
(18,648)

(11,458)

(11,818)
Loans and other borrowings 
(1,625)

(50,462)

(1,547)
Provisions for other liabilities and charges
(395)

(1,804)

(605)







(20,668)

(63,724)

(13,970)
Non-current liabilities











Trade and other payables
(2,122)

(2,209)

(2,169)
Loans and other borrowings 
(9,148)

(10,005)

(9,982)
Provision for joint venture deficit
(4,817)

(2,714)

(4,685)
Provisions for other liabilities and charges
(50)

-

(50)
Derivative financial instruments
-

(263)

-







(16,137)

(15,191)

(16,886)
Total liabilities
(36,805)

(78,915)

(30,856)
Net assets
43,517

33,428

27,867






Shareholders' equity











Share capital
3,717

2,614

2,616
Share premium
218,265

193,145

193,145
Other reserve
22,182

22,182

22,182
Warrant reserve
22,703

22,704

22,703
Share-based charges reserve
165

137

151
Retained deficit
(170,591)

(169,386)

(169,980)






Equity attributable to equity holders of the parent
96,441

71,396

70,817
Non-controlling interests
(52,924)

(37,968)

(42,950)






Total shareholders' equity
43,517

33,428

27,867
Consolidated statement of changes in equity 
(unaudited at 30 June 2014 and 2013)
For the six months ended 30 June 2014


Share capital
Share premium
Other reserve
Warrant reserve
Share-based charges reserve
Retained deficit
Total equity attributable to equity holders of the parent
Non-controlling interests
Total share-holders' equity


'000
'000
'000
'000
'000
'000
'000
'000
'000











At 1 January 2013
2,614
193,145
22,182
22,390
96
(170,612)
69,815
(27,088)
42,727
Loss and total comprehensive loss for the period
-
-
-
-
-
(6,084)
(6,084)
(3,570)
(9,654)
Transactions with owners:









Issue of shares in respect of awards to Non-Executive Directors
-
-
-
-
41
-
41
-
41
Share-based charges in respect of warrants issued
-
-
-
314
-
-
314
-
314
Effect of shares vesting in the period
-
-
-
-
-
7,310
7,310
(7,310)
-











At 30 June 2013
2,614
193,145
22,182
22,704
137
(169,386)
71,396
(37,968)
33,428
Loss and total comprehensive loss for the period
-
-
-
(1)
-
(594)
(595)
(4,982)
(5,577)
Transactions with owners:









Issue of shares in respect of awards to Non-Executive Directors
2
-
-
-
14
-
16
-
16










At 31 December 2013
2,616
193,145
22,182
22,703
151
(169,980)
70,817
(42,950)
27,867
Loss and total comprehensive loss for the period





(7,050)
(7,050)
(3,535)
(10,585)
Transactions with owners:









Issue of shares
1,100 
26,400 
-
-
-
-
27,500 
-
27,500 
Capitalised costs in relation to fundraising

(1,280)




(1,280)

(1,280)
Issue of shares in respect of awards to Non-Executive Directors
1
-
-
-
14
-
15
-
15
Effect of shares vesting in the period
-
-
-
-
-
6,439
6,439
(6,439)
-











At 30 June 2014
3,717
218,265
22,182
22,703
165
(170,591)
96,441
(52,924)
43,517
Consolidated statement of cash flows
For the six months ended 30 June 2014



Unaudited

Unaudited

Audited



Six months to
30 June 2014

Six months to
30 June 2013

Year to 31
December 2013


Notes
'000

'000

'000








Cash flows from operating activities






Cash used in operating activities
8
(5,122)

(19,714)

(22,062)
Interest paid

(465)

(1,904)

(2,400)
Interest received

24

1,748

2,035








Net cash used in operating activities
(5,563)

(19,870)

(22,427)








Cash flows from investing activities






Additional consideration for Circle Clinic Windsor

-

-

(366)
Purchase of computer software

(44)

-

(57)
Purchase of property, plant and equipment

(703)

(355)

(881)








Net cash used in investing activities

(747)

(355)

(1,304)








Cash flows from financing activities






Proceeds from issuance of ordinary shares

27,500

-

-
Capitalised costs in relation to fundraising

(1,280)

-

-
Repayment of borrowings

-

(398)

(430)
Repayment of finance lease

(756)

(653)

(1,471)
Restricted cash:






- 
Release of minimum balance - GE Capital Equipment Finance Limited ('GE')
-

-

1,300








Net cash inflow / (outflow) from financing activities

25,464

(1,051)

(601)








Net increase / (decrease) in unrestricted cash and cash equivalents

19,154

(21,276)

(24,332)
Unrestricted cash and cash equivalents at the beginning of the period / year
8,597

32,929

32,929








Unrestricted cash and cash equivalents at the end of the period / year
27,751

11,653

8,597








Cash and cash equivalents consist of:






Cash at bank and in hand

31,551

16,753

12,397
Restricted cash:






- 
Minimum balance - GE & DOH

-

(1,300)

-
- 
CircleBath GE letter of Credit 

(1,800)

(1,800)

(1,800)
- 
Hinchingbrooke deposit

(2,000)

(2,000)

(2,000)








Unrestricted cash at bank and in hand

27,751

11,653

8,597
Notes to the consolidated interim financial information 
For the year ended 30 June 2014
1. General information
Circle Holdings plc (the 'Company') and its subsidiaries and joint venture (together the 'Group') provide healthcare services in the UK.
The Company is a public limited company and is incorporated in Jersey, however is resident in the UK for tax purposes. The registered office is 12 Castle Street, St Helier, Jersey, JE2 3RT.
2. Basis of preparation and accounting policies
Basis of preparation
The Interim report and financial information for the six months ended 30 June 2014 has been prepared on a going concern basis in line with projections of the Group's anticipated results, which show that the Group has adequate resources to continue in existence for the foreseeable future. The Interim report and financial information should be read in conjunction with the Annual Report and financial statements for the year ended 31 December 2013, which were prepared in accordance with IFRS and IFRIC interpretations as endorsed by the EU, under the historical cost convention, as modified by the revaluation of derivative financial instruments and the fair valuing of share-based charges and certain loans. As the Group is listed on AIM, it is not required to adopt IAS 34 'Interim Financial Reporting' in preparing the consolidated interim financial information and therefore it is not fully compliant with IFRS.
The Interim report and financial information is unaudited and has not been reviewed by external auditors. The condensed set of financial information in the Interim report does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The Group's Annual Report and financial statements for the year ended 31 December 2013 were approved by the Board of Directors on 19 March 2014. The report of the auditors on those accounts was unqualified and did not contain an emphasis of matter paragraph or a statement under Section 498 of the Companies Act 2006. The Interim report and financial information was approved by the Board of Directors on 27 August 2014. The 2013 interim numbers for the non-controlling interest and the number of shares vested at the start of the period have been restated due to updated share register information becoming available.
Going concern
The consolidated financial statements have been prepared on a going concern basis which assumes that the Group will continue in operational existence for the foreseeable future. The Directors have prepared cash flow forecasts for a period of not less than 12 months from signing the financial statements for the six months ended 30 June 2014. Existing cash balances and cash flows from the operating businesses are sufficient to fund head office costs necessary to sustain the current operations, cost of financing (as detailed in the Financial review) over the next 12 months and future growth plans. These plans include the development of new sites and new contracts for provisions of healthcare services. On this basis, the Directors conclude that it is appropriate for these accounts to be prepared on a going concern basis.
Significant accounting policies
The accounting policies adopted in the preparation of the Interim report and financial information are consistent with those of the Group's Annual Report and financial statements for the year ended 31 December 2013. In addition, at interim periods, taxes on income are accrued using the tax rate that is expected to be applicable for the full financial year and the impact of other relevant taxes.
Significant accounting judgements and estimates
The judgements and estimates which have the most significant effect on the amounts recognised in the Interim report and financial information are consistent with those reported in the Annual Report and financial statements for the year ended 31 December 2013.
3. Segmental reporting
The chief operating decision-maker has been identified as the Board. The Board reviews the Group's internal reporting in order to assess performance and allocate resources, and to date has divided the Group into three reportable business segments based on the Group's management and internal reporting structure. The Board assesses the performance of the segments based on revenue, gross profit, EBITDA before exceptional items and operating (loss) / profit. These are all measured on a basis consistent with that of the consolidated income statement. Revenue charged between segments has been charged at arm's length and eliminated from the Group financial statements.
Revenue from external customers in the segmental analysis is also measured in a manner consistent with the income statement. This is split by hospital rather than by patient. CircleReading and CircleBath are contained within the "Circle Independent" sector, while revenue earned from the Nottingham NHS Treatment Centre is categorised within "Circle NHS". Geographic factors are not considered as all of the Group's operations take place within the United Kingdom.
Six months ended 30 June 2014
(unaudited)
Circle NHS

Circle Independent

Other Segments and Unallocated Items

Total Group


'000

'000

'000

'000









Revenue from external customers
27,802

21,045

19

48,866
Gross profit
7,421

7,363

19

14,803
EBITDA before exceptional items
1,094

(2,633)

(4,312)

(5,851)
Operating profit / (loss)
899

(3,587)

(7,324)

(10,012)









Finance income 






24
Finance costs






(465)
Provision for joint venture deficit






(132)









Loss before taxation 






(10,585)


Six months ended 30 June 2013
(unaudited)
Circle NHS

Circle Independent 

Other Segments and Unallocated Items

Total Group


'000

'000

'000

'000









Revenue from external customers
29,158

14,719

41

43,918
Gross profit
9,492

3,755

38

13,285
EBITDA before exceptional items
4,028

(6,315)

(5,342)

(7,629)
Operating profit / (loss)
2,861

(7,244)

(6,180)

(10,563)









Finance income 






1,748
Finance costs






(1,922)
Exceptional finance income






850
Provision for joint venture deficit






233









Loss before taxation 






(9,654)
Year ended 31 December 2013
(audited)
Circle NHS

Circle Independent

Other Segments and Unallocated Items

Total Group


'000

'000

'000

'000









Revenue from external customers
51,675

32,525

52

84,252
Gross profit
17,715

9,627

49

27,391
EBITDA before exceptional items
6,351

(11,088)

(9,075)

(13,812)
Operating profit / (loss)
4,851

(13,153)

(5,564)

(13,866)









Finance income 






2,035
Finance costs






(2,774)
Exceptional finance income






1,113
Provision for joint venture deficit






(1,738)









Loss before taxation 






(15,230)
4. EBITDA and exceptional items
Exceptional operating items
Unaudited

Unaudited

Audited


Six months to
30 June 2014

Six months to
30 June 2013

Year to 31
December 2013


'000

'000

'000
Impairment of property, plant and equipment
2,782

-

152
Share-based charges in respect of warrants issued
-

314

313
Share-based charges in respect of awards to Non-Executive Directors
-

41

55
Deconsolidation of Health Properties Edinburgh
-

-

(4,384)
Revaluation of finance lease payments
-

-

136
Provision for under declared VAT in prior periods
-

-

115
Restructuring costs
-

312

312
Decrease in provision for onerous leases, including dilapidations
-

(146)

(579)
Other exceptional expense
-

19

20









2,782

540

(3,860)
The Group has provided for the carrying costs on the current design development costs which were historically spent on its Manchester site as it re-evaluates the model appropriate for that market. This impairment to assets under construction has resulted in an exceptional charge of 2.782 million in the profit and loss account.
Exceptional finance items
Unaudited

Unaudited

Audited


Six months to
30 June 2014

Six months to
30 June 2013

Year to 31
December 2013


'000

'000

'000







Gain on fair value of interest rate derivative
-

(850)

(1,113)









-

(850)

(1,113)
The Barclays swap was tied to the PFI loan of 41,768,000. This was extinguished in full on 1 July 2013 when the Group exercised their unconditional right to receive cash from the construction of Circle's Nottingham NHS Treatment Centre and the PFI operating asset was handed to the Department of Health.
Operating loss, EBITDA and EBITDAR before exceptional items
Unaudited

Unaudited

Audited


Six months to
30 June 2014

Six months to
30 June 2013

Year to 31
December 2013


'000

'000

'000







Operating loss before exceptional items
(7,230)

(10,023)

(17,726)
Depreciation
1,166

1,363

2,290
Amortisation of intangibles
213

17

443
Charge recognised in respect of amounts recoverable on contracts 
-

1,014

1,181







EBITDA before exceptional items
(5,851)

(7,629)

(13,812)






Operating lease rental
809

2,196

3,988
Building rental
5,423

4,408

9,681







EBITDAR before exceptional items
381

(1,025)

(143)







This information is included here as it provides useful insight to the reader of the accounts for understanding operational performance.


5
Finance income







Unaudited

Unaudited

Audited


Six months to
30 June 2014

Six months to
30 June 2013

Year to 31
December 2013


'000

'000

'000







Bank interest receivable
24 
59 
65 
Interest receivable on operating financial asset
 - 
1,689 
1,970 









 24 

 1,748 

 2,035 
6
Finance costs







Unaudited

Unaudited

Audited


Six months to
30 June 2014

Six months to
30 June 2013

Year to 31
December 2013

'000

'000

'000
Interest on Barclays Bank loan
-
 
1,225

1,466
Interest on Allied Irish Bank ('AIB') loan
-

195

317
Finance lease interest
465

484

973
Interest unwind of discount on deferred consideration of Circle Clinic Windsor
-

18

18









465

1,922

2,774
7
Loss per share
















Basic loss per ordinary share is calculated by dividing the loss attributable to equity holders of the parent by the weighted average number of ordinary shares in issue during the year. Diluted loss per ordinary share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume the conversion of all potentially dilutive ordinary shares. Share warrants in issue represent the only category of dilutive ordinary shares for the Group.









The following table sets out the computation for basic and diluted net loss per share for the six months ended 30 June 2014 and 2013 and the year ending 31 December 2013:













Unaudited

Unaudited

Audited




Six months
to 30 June
2014

Six months
to 30 June
2013

Year to
31 December 2013









Loss attributable to equity holders of parent (000's)
(7,050)

(6,084)

(6,678)









Weighted average number of ordinary shares in issue
185,789,480

130,706,658

130,748,362









Basic and diluted loss per ordinary share (pence)
(3.8)

(4.7)

(5.1)









There is no difference in the weighted average number of ordinary shares used for basic and diluted net loss per ordinary share as the effect of all potentially dilutive ordinary shares outstanding is anti-dilutive.


8
Net cash outflow from operating activities









Unaudited

Unaudited

Audited




Six months
to 30 June
2014

Six months to 30 June 2013

Year to 31 December 2013




'000

'000

'000









Loss before tax


(10,585)

(9,654)

(15,230)
Provision for joint venture deficit 

132

(233)

1,738
Exceptional finance items

-

(850)

(1,113)
Finance costs

465

1,922

2,774
Finance income

(24)

(1,748)

(2,035)
Depreciation of property, plant and equipment

1,166

1,363

2,290
Amortisation of intangible assets

213

17

443
Recognised in respect of amounts recoverable under contracts

-

1,014

1,181
Impairment of property, plant and equipment

2,782

-

152
Restructuring Costs

-

312

-
(Decrease) / increase in provision for onerous leases

-

(146)

(579)
Share-based charges in respect of warrants issued

-

314

313
Share-based charges in respect of awards to Non-Executive Directors

14

41

55
Re-scheduling of Birmingham finance lease payments

-

-

136
Deconsolidation of Health Properties Edinburgh

-

-

(4,384)
Provision for VAT

-

-

115
Provision of debtor with Health Properties Bath

-

-

40
Movements in working capital:






- 
Decrease / (increase) in inventories 

20

(84)

(347)
- 
Increase in trade and other receivables

(5,879)

(7,262)

(2,804)
- 
Increase / (decrease) in trade and other payables

6,784

(4,318)

(3,229)
- 
Decrease in provisions

(210)

(402)

(1,578)









Cash flows from operating activities

(5,122)

(19,714)

(22,062)
9
Reconciliation of net debt











6 months to 30 June 2014

6 months to 30 June 2013

year to 31 December 2013





'000

'000

'000










Increase / (decrease) in unrestricted cash in the period / year

19,154

(21,276)

(24,332)
Decrease in restricted cash in the year

-

-

(1,300)
Repayment of borrowings

-

398

430
Repayment of loan notes

-

-

366
Repayment of finance lease

756

653

1,471









Movement in net debt from cash flow

19,910

(20,225)

(23,365)









Other non-cash movements



-

(18)

47,704









Movement in net debt



19,910

(20,243)

24,339









Net debt at 1 January



868

(23,471)

(23,471)









Net debt at 30 June / 31 December

20,778

(43,714)

868










June 2014

At 1 January 2014

 Cash flow

Transfers

At 30 June 2014



'000

'000

'000

'000










Liquid resources








Unrestricted cash

8,597

19,154

-

27,751
Restricted cash

3,800

-

-

3,800










Debt due within one year








Finance leases

(1,547)

756

(834)

(1,625)










Debt due after one year








Finance leases

(9,982)

-

834

(9,148)










Net debt

868

19,910

-

20,778
June 2013
At 1 January 2012

 Cash flow

Reclassifi-cations

Other non-cash changes

At 30 June 2013


'000

'000

'000

'000

'000











Liquid resources









Unrestricted cash
32,929

(21,276)

-

-

11,653
Restricted cash
5,100

-

-

-

5,100











Debt due within one year









AIB
(7,380)

-

-

-

(7,380)
Barclays
(41,768)

398

-

-

(41,370)
Loan notes
(348)

-

-

(18)

(366)
Finance leases
(1,340)

653

(659)

-

(1,346)











Debt due after one year









Finance leases
(10,664)

-

659

-

(10,005)











Net debt
(23,471)

(20,225)

-

(18)

(43,714)











December 2013
At 1 January 2012

 Cash flow

Transfers

Other non-cash changes

At 31 December 2013


'000

'000

'000

'000

'000











Liquid resources









Unrestricted cash
32,929

(24,332)

-

-

8,597
Restricted cash 
5,100

(1,300)

-

-

3,800




.






Debt due within one year









AIB
(7,380)

-

-

7,380

-
Barclays
(41,768)

430

-

41,338

-
Loan notes
(348)

366

-

(18)

-
Finance leases
(1,340)

1,471

(1,409)

(269)

(1,547)











Debt due after one year









Finance leases
(10,664)

-

1,409

(727)

(9,982)











Net debt
(23,471)

(23,365)

-

47,704

868
10. Related party transactions
There have been no material changes to the principal subsidiaries and joint ventures as listed in the Annual Report and financial statements for the year ended 31 December 2013.
All related party transactions between subsidiaries and joint ventures arose during the ordinary course of business and were on an arm's length basis.
11. Events after the balance sheet date
Refinance of Health Properties (Bath) Limited
On 1 July Medical Properties Trust ("MPT"), the specialist hospital Real Estate Investment Trust based in the US, completed the purchase of the Bath Hospital asset for 28.3m. The asset was previously owned by Health Properties (Bath) Limited, a joint venture of which the Group controlled 38.7%. This sale fully extinguished the loans held by Health Properties (Bath) Limited with Santander and Lehmans as well as an interest rate swap held in conjunction with the Santander loan. CircleBath have signed a 15 year lease agreement with MPT, with a further 15 year extension, which will see their rent reduce by 1.0m to 2.5m a year. As part of the repayment of the mezzanine debt, Circle Holdings plc had to pay a final recourse guarantee to Lehman Brothers of 625,000.
Release of 2,000,000 escrow amount
In July 2014, an amount of 2,000,000 was released from escrow in Circle Hinchingbrooke Limited as a result of the Group meeting certain conditions set out within the contract.
In July 2014, an amount of 2,000,000 was released from escrow in Circle Hinchingbrooke Limited as a result of the Group meeting certain conditions set out within the contract.
Statement of directors' responsibilities
The directors confirm that the condensed set of consolidated financial information in the Interim report has not been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' as adopted by the European Union and that the Interim report includes a fair review of the information, including:
 an indication of important events that have occurred during the first six months and their impact on the condensed set of consolidated financial information;
 a description of the principal risks and uncertainties for the remaining six months of the financial year; and
 material related party transactions in the first six months and any material changes in the related party transactions described in the last Annual Report and financial statements.
The directors and their positions held during the period were as published in the Annual Report and financial statements for the year ended 31 December 2013.
On behalf of the Board
Steve Melton Paolo Pieri
Chief Executive Officer   Chief Financial Officer

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