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30 May 2008

Healthcare Enterprise Group plc 

Second Interim results

Healthcare Enterprise Group plc (AIM: HCEG, "HCEG", the "Group", the "Company"), the international healthcare products group, today reports results for the 12 months ended 29 February 2008.  

Interim highlights

• Turnover from continuing operations down 42% to £7.3m (2007: £12.7m)

• Normal net operating expenses reduced 23% to £6.1m (2007: £7.8m)

• Operating loss before exceptional items increased by 34% to £3.1m (2007: Loss £2.3m)

• Net loss for the period was £18.2m (2007: Loss £4.1m)

• Loss per share 5.90p (2007: Loss 1.93p)

Mark Tompkins, Group Chairman, said:  

"This has been an eventful 12 months for HCEG including under-performance of the principal operating business Crest Medical, and a challenging bank debt redemption exercise through a successful and complex refinancing package."

"The Board continues to believe in the underlying value of the Group's continuing business operations as demonstrated by the implied value of over £4.8m in aggregate for two of our three subsidiaries, and the investments made by existing and past directors. However, we remain clearly focussed on a programme to realise as much value for shareholders as possible by the introduction of new management and investment into each of these companies."

Enquiries:

Healthcare Enterprise Group PLC                    01925 898 200

Mark Tompkins, Chairman

Lyndon Gaborit, Executive Deputy Chairman

Numis                                                              020 7260 1000

David Poutney / Oliver Cardigan

  Healthcare Enterprise Group Plc

Chairman's Statement

For the 12 months ended 29 February 2008 (unaudited)

Second Interim Results

The Group had a very poor operating performance in the 12 months ended 29 February 2008. Turnover for the period was £7.3m (2007: £12.7m). Operating loss before exceptional items increased 34% to £3.13m (2007: loss £2.33m). Included within the operating loss before exceptional items are losses arising from the Crest Medical business which was disposed of on 4th April 2008, amounting to £1.67m (2007: loss £0.58m) Non exceptional net operating expenses reduced 23% to £6.1m (2007: £7.8m). 

The Board also carried out a detailed impairment review of the carrying value of all the assets which resulted in a non-cash goodwill write off of £13.7m. This reduces the carrying value of goodwill in the balance sheet to £7.4m. 

The Group reported a loss before tax of £18.2m (2007: loss £4.1m).  

The net loss for the 12 months following the goodwill writedown was £18.2m (2007: loss £4.1m).

The Group's loss per share was 5.90p (2007: loss per share 1.93p).  

Refinancing Package

As previously announced it was necessary in the period to refinance the business in order to redeem bank debt and fund continued operating losses pending completion of the disposal of assets.

To remind Shareholders, the refinancing package announced on 26 October 2007 comprised:

• The issue of £1.5 million of Convertible Unsecured Loan Stock ("October Notes") with interest of 8 per cent. per annum and a five year final repayment date. The Company obtained shareholder approval at the General Meeting held on 29 February 2008, to permit the October Notes to be convertible into 120 million New Ordinary Shares at a conversion price of 1.25 pence each should the October Noteholders elect to do so. To the extent they are not converted into New Ordinary Shares, the October Notes will become repayable by the Company on 5 November 2012.

• Options granted to the October Noteholders whereby in exchange for the subscription for an aggregate exercise price of £1,285,715 in cash, the October Noteholders would acquire 38.57 per cent. of the ordinary share capital of Ebiox, a wholly owned subsidiary of the Company. This implied a valuation of Ebiox of £3.3 million.

• Options granted to the October Noteholders whereby in exchange for the subscription for an aggregate exercise price of up to £642,857 in cash, the October Noteholders would acquire 43.71 per cent. of the ordinary share capital of RSL, a wholly owned subsidiary of the Company (the holding company for the Group's 19.8 per cent. holding in Fertiligent Limited ("Fertiligent"), HCEG's option to acquire the majority of Fertiligent, and the entitlement to Fertiligent's sales and marketing rights). This implied a total valuation of RSL of £1.47 million.

The options over the equity in Ebiox and RSL referred to above are exercisable between

one and three years after the date of grant but exercise can be accelerated on the occurrence of certain triggering events, such as the realisation of the Company's holding in these companies.

On 1 February 2008 HCEG announced a further fundraising of £250,000 through the issue of

Convertible Unsecured Loan Stock (the "Tranche 2 Notes"). The £250,000 fundraising comprises the balance of the £1.75 million issue of unsecured loan stock announced on 26 October 2007, and is therefore being issued on substantially similar terms to the initial £1.5 million tranche of the October Notes.

In common with the October Notes:

• The Tranche 2 Notes are interest-bearing at the rate of 8 per cent. per annum.

• The Company obtained shareholder approval at the General Meeting held on 29 February 2008 to permit the Tranche 2 Notes to be convertible into 20,000,000 New Ordinary Shares at a conversion price of 1.25 pence each should the Tranche 2 Noteholders elect to do so. To the extent that they are not converted into New Ordinary Shares, the Tranche 2 Notes will become repayable by the Company on 5 November 2012.

• Options have been granted to the Tranche 2 Noteholders whereby in exchange for the subscription for an aggregate exercise price of £214,285 in cash, the Tranche 2 Noteholders would acquire 6.43 per cent. of the ordinary share capital of Ebiox (a wholly owned subsidiary of the Company).

• Options have been granted to the Tranche 2 Noteholders whereby in exchange for the subscription for an aggregate exercise price of £107,143 in cash, the Tranche 2 Noteholders would acquire 7.29 per cent. of the ordinary share capital of RSL (a wholly owned subsidiary of the Company). The options over the equity in Ebiox and RSL referred to above are exercisable between 5 November 2008 and 5 November 2010 but exercise can be accelerated on the occurrence of certain triggering events, such as the realisation of the Company's holding in these companies.

To supplement the refinancing package announced on 26 October 2007, the Company announced a supplemental financing on 12 December 2007 ("December Notes") comprising:

• The issue of £500,000 December Notes with interest of 8 per cent. per annum and a repayment date of 31 December 2008. The December Notes are not, and are not proposed to be, convertible into Ordinary Shares.

• The December Noteholders have been granted warrants to subscribe for 100 Ordinary Shares at a subscription price of 1 pence per Ordinary Share for every £1 of December Note held by the December Noteholders (the "Investor Warrants"). The Investor Warrants are to be exercisable from their date of grant until 31 December 2008. This would result in the Investor Warrants being exercisable over 50,000,000 Ordinary Shares at an aggregate exercise price of £500,000.

The net effect of actions taken in this refinancing package has been to allow the Group to repay the remaining balances due to Barclays Bank plc in respect of the term loan facility which in October totalled £1.35 million. The fees attached to the term loan due on repayment have been satisfied by the grant of warrants over Ordinary Shares comprising 3 per cent. of the fully diluted issued share capital of the Company for an unlimited term at an exercise price of 2.5 pence per Ordinary Share (the "Barclays Warrants"). The Group has subsequently successfully re-banked with Royal Bank of Scotland plc. The balance of cash proceeds raised by assets sales and the refinancing package have been used for working capital purposes.

Crest Medical

Crest distributes products primarily to the occupational health, first aid and medical markets from a warehouse facility in Warrington. Crest had sales during the 12 months of £6.7m (2007: £12.2m). This resulted in an operating loss of £1.7m (2007: loss £0.6m) for the 12 months.  

On February 1st 2008, the Group announced that it proposed to merge the loss making Crest business with the First Aid Warehouse Group of companies within a new holding company ('First Aid Holdings Limited') in which HCEG would retain a significant holding. 

The Company announced on 7th April 2008 that following shareholder approval for the transaction granted on 3rd April 2008, that the merger of Crest Medical Limited with First Aid Warehouse Ltd and its various affiliated companies First Aid Supplies Ltd, 44 First Aid Ltd and Surgicon Healthcare Ltd was completed on  4 April 2008. Following the completion, HCEG owns approximately 44.1% of First Aid Holdings and plans to keep the majority of its shares in First Aid Holdings Limited for the foreseeable future.

Ebiox

Ebiox Limited ("Ebiox") sells and develops a unique range of patented cleaning and decontamination products.

Ebiox sales in the period were £0.6m (2007 £0.9m) which resulted in an operating loss of £0.4m (2007: £ 0.4m loss)

The agreement with Sultan Healthcare Inc in January 2007 resulted in preliminary work to service that contract and the particular products for Sultan's branded "Solo" range. Sales commenced in the period under review. The Group's divestment of its Thailand subsidiary, Alpha Trading (Asia) Limited to its management was completed in July 2007 and included an ongoing distribution agreement for Ebiox products. Ebiox also signed a distribution agreement with Medtradex in the Benelux.

In April 2007 the Company announced that its wholly-owned subsidiary, Ebiox Limited, has secured U.S. Environment Protection Agency ('EPA') approval for its patented TruKleen surface wipes. This approval followed an earlier announcement in February 2007 of approval for its patented concentrate and spray disinfectants. Approvals for individual U.S. states have now been secured. These approvals will allow Ebiox to distribute TruKleen products in a wide range of markets in the United States. 

Optiscope

The Group has concluded that the risks associated with the continued development of this product outweigh the benefits of further investment and are actively seeking a suitable exit from the investment.  Since Optiscope is in a pre commercialisation phase of development, no revenues were recorded and a loss of £0.03m (2007: £0.10m) incurred.  

Women's Reproductive Health

The Group's interest in women's reproductive health principally comprises Reproductive Sciences Limited ("RSL"), which owns 19.8 per cent. of Fertiligent Limited, an Israeli company which has developed a slow release insemination device to improve the chance of conception.

The Fertiligent product is a high quality, low cost intra-uterine sperm pump to help assist infertile couples conceive and Medilator, which has developed a platform for single-use, disposable cervical dilatation devices.  

Clinical trial results for Fertiligent in Israel, Germany and Turkey have been positive and expanded trials have commenced in Israel. The final prototype was approved and manufacturing production is expected to start shortly. The grant of an option in RSL, above, indicates a valuation of the business' investment in excess of book value.

The Group's other interest in this sector, Medilator, has been the subject of a recapitalisation and the Group's 2.5% interest is regarded as a passive investment of insignificant value.

Other

On 18 December 2007, the company announced that it had disposed of its interest on Ridgecrest Healthcare Group Inc. in exchange for 1,125,000 shares in ValiRx plc, an AIM listed therapeutic and development company, with a contingent further of shares and warrants, as well as shares and warrants in Cancer Therapeutics Inc., a US shell company.

On 21 December 2007, the Company announced that it had sold the business and assets of CICS, its dental business, for a cash sum of £550,000, subject to a final adjustment for the net tangible assets transferred to the purchaser. The disposal was completed on 21 December 2007 with the final consideration received of £517,000.

Current strategy and outlook

Following the completion of the merger of Crest Medical with the First Aid Warehouse Group of Companies, the Group operates with a significantly reduced operating cost base. In addition to its 44.1% interest in First Aid Holdings Limited the Company has two other principal businesses:

• Ebiox, and

• Reproductive Sciences Limited.

Ebiox has, in the view of the Board, an excellent product, but has been restricted by a lack of human and financial resources. HCEG is working on plans to resolve both these restrictions. Similarly, the Directors believe that the realisation of value in RSL would be best achieved if that company were resourced separately.

The Directors believe that Ebiox and RSL should be capable of greater future value with independent dedicated management and access to third party funding. The Directors are therefore seeking to introduce new management and finance into each of these companies. In consequence, the existing 100 per cent. ownership will become part ownership of these two companies, which should be financially and managerially more robust than at present. Following such transactions HCEG will become, in effect, an investment company holding substantial minority interests in a portfolio of healthcare related businesses.

In order to complete the proposed corporate actions, the Board has decided to change the financial year end of the Company and its subsidiaries to 30 June 2008. The Company expects to publish preliminary results for the sixteen month period ended 30 June 2008 during September 2008.

  Healthcare Enterprise Group Plc

Consolidated Income Statement

For the 12 months ended 29 February 2008 (unaudited)

Consolidated Statement of Recognised Income and Expense

For the 12 months ended 29 February 2008 (unaudited)

Healthcare Enterprise Group Plc

Consolidated Balance Sheet

As at 29 February 2008 unaudited

  Healthcare Enterprise Group Plc

Consolidated Cash Flow Statement

For the 12 months ended 29 February 2008 (unaudited)    

NOTES TO THE FINANCIAL STATEMENTS

For the 12 months ended 29 February 2008

• SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PREPARATION

The consolidated financial statements of Healthcare Enterprise Group plc for the 12 months ended 29 February 2008 were authorised for issue by the Directors on 29 May 2008.

The financial information contained in this second interim financial statement is unaudited and has been prepared in accordance with the Group's accounting policies, based on IFRS as adopted by the European Union, that are expected to apply for the 16 month period ending 30 June 2008. IFRS remains subject to amendment and interpretation by the International Accounting Standards Board (IASB) and there is an ongoing process of review and endorsement by the European Commission.

The financial information has not been audited and does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. 

The Company's statutory accounts for the 12 months ended 28 February 2007, prepared under UK GAAP, have been delivered to the Registrar of Companies and were subject to an Emphasis of Matter in the Audit Report dated 26 June 2007 as follows: 

"Emphasis of Matter - Going Concern

In forming our opinion on the financial statements, which is not qualified, we have considered the adequacy of the disclosure made in Note 1 to the financial statements concerning the uncertainty over the Group's ability to continue as a going concern. The financial statements are prepared on a going concern basis which is dependent on the Group managing its cashflows in the foreseeable future by achieving its sales forecasts and realising certain asset and equity inflows. There can be no certainty that the outcome of these assumptions, along with the other matters explained in note 1 to the financial statements, will be as forecast by the Directors. In view of the significance of these uncertainties we consider that they should be drawn to your attention. The financial statements do not include any adjustments that would result if the Group was unable to continue as a going concern."

These consolidated interim financial statements are presented in Sterling and all values are rounded to the nearest thousand (£'000) except when otherwise indicated.

Prior to 2007 the Group prepared its audited financial statements under UK GAAP. For the 16 month period ended 30 June 2008, the Group is required to prepare its annual consolidated financial statements in accordance with International Financial Reporting Standards as adopted in the European Union ('IFRS'). IFRS 1 'First time adoption of International Financial Reporting Standards', requires an entity to comply with each IFRS effective at the reporting date for its first IFRS financial statements. The accompanying financial information has been prepared based on the current status of IFRS or Interpretations issued by the International Financial Reporting Interpretations Committee ('IFRIC').

  NOTES TO THE FINANCIAL STATEMENTS

For the 12 months ended 29 February 2008

It should be noted that there is a possibility that the full year IFRS comparatives may require adjustment before constituting final IFRS accounts. This is because the IFRS standards that will be applicable at 30 June 2008 including those that will be applicable on an optional basis are not known with certainty at the time of preparing this document. 

As a general rule, IFRS 1 requires the standards effective at the reporting date to be applied retrospectively. However retrospective application is prohibited in some areas, particularly where retrospective application would require judgment by management about past conditions after the outcome of the particular transaction is already known. A number of optional exemptions from full retrospective application of IFRS are granted where the cost of compliance is deemed to exceed the benefits to users of the financial statements. Where applicable, the options selected by management are set out in note 9 below. As required by IFRS 1, the effect of transition from UK GAAP to IFRS on the Group's equity and profit has been explained in note 10.

Principal Accounting Policies

Accounting policies detailed below have been adopted and these are in compliance with IFRS.

Basis of consolidation

The consolidated accounts incorporate the financial statements of Healthcare Enterprise Group plc and all of its subsidiary undertakings made up to 29 February 2008. Subsidiaries are fully consolidated from the date on which control is transferred to the Group, and deconsolidated from the date that control ceases. The financial statement of subsidiaries used in the preparation of the consolidated financial statements are prepared for the same reporting period of the parent company and are based on consistent accounting policies.

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated, including unrealised profits or losses.

Revenue

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, VAT and other sales taxes or duty. The following criteria must also be met before revenue is recognised:

Sale of goods

Revenue from sale of goods is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on dispatch of the goods.

Goodwill and business combinations

Business combinations on or after 1 March 2006 are accounted for under IFRS3 using the purchase method. Any excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities is recognised in the balance sheet as goodwill and is not amortised. To the extent that the net fair value of the acquired entity's identifiable assets, liabilities and contingent liabilities is

greater than the cost of the investment, a gain is recognised immediately in the income statement. Goodwill recognised as an asset at 1 March 2006 is recorded at its carrying amount under UK GAAP and is not amortised.

After initial recognition goodwill is stated at cost less any accumulated impairment losses, with the carrying value being reviewed for impairment