Serviced Office Group (AIM: SVO) Preliminary Results for the year ended 31 December 2013

Transcription

1 Serviced Office Group (AIM: SVO) 25 April 2014 Preliminary Results for the year ended 31 December 2013 Serviced Office Group plc ( SVO or the Group ) is an AIM-listed provider of flexible office space, currently operating 36 business centres, predominantly in the London area. Highlights 2013 was a transformational year for the Group Completion in July of the 15 million acquisition of Avanta, part funded by an 11.5 million (net) placing of new shares - Substantially increased the size of the business - Accelerated the Group s strategic focus on the central London market - Brought an additional experienced management team; Alan Pepper, Avanta CEO, was appointed CEO of the enlarged Group on 1 January 2014 and the Group announces today the intention to appoint Paul Alexander, Avanta Finance Director, as Finance Director of the Group - The integration has proceeded to plan and was substantially complete by the year end; annual synergies of c 1 million are expected to be delivered Continued successful organic development of the business - 4 new sites opened in 2013 (King William Street, Euston, Sackville Street, North Row) - The Group has commenced a staged expansion plan to add 8-10 sites over the next 3 years - Since the year end, leases have been extended on Covent Garden and Vauxhall properties, and two new agreements have been signed for centres at Tenterden Street and Warwick Street which should open in Q The Group has an active pipeline of additional new projects - The disposal of the Group s freehold properties is expected to be completed in 2014 Subject to shareholder approval at its Annual General Meeting, the Group proposes to change its name to Avanta Serviced Office Group plc in recognition of the strong brand of the acquired business. Revenues for the year increased by 149% to 30.5 million; on an unaudited proforma basis the enlarged group grew revenues by 7.1% Group EBITDA for the year was 1.4 million (; loss of 3.6 million); the pre-tax loss for the year from continuing operations was 2.8 million (: pre-tax profit of 3.8 million) The Group is well financed with net cash at the year end of 3.4 million (: net debt of 3.7 million); operating cash inflow for the year was 1.7 million (: 0.4 million). The Group has agreed in principle to retire its remaining debt with HSBC in order to remove the complexity of the current property debt financing at which point the Group will become debt free. Dan Taylor, Chairman, commented: 2013 was another significant year for Serviced Office Group, with the acquisition of Avanta significantly increasing the size of the business and making us the second largest serviced office operator in London and the UK. The business is now well placed to embark on an accelerated expansion plan with the benefit of sound financial bearings and a strong and experienced management team. Enquiries: Serviced Office Group Tel: Daniel Taylor, Chairman

2 Alan Pepper, Chief Executive Shore Capital & Corporate Tel: Stephane Auton / Patrick Castle Weber Shandwick Tel: Nick Oborne

3 CHAIRMAN S STATEMENT I am pleased to be reporting on the conclusion of another transformational year for Serviced Office Group plc ( the Group ) following on from the recapitalisation in. On 29 July 2013 we completed the acquisition of Avanta Managed Offices Limited ( Avanta ). Avanta substantially increases the size of the business, making us the second largest serviced office operator in London and the UK. In addition, the acquisition added key senior management. Following a quick transition and integration period I can now say with confidence that the business is well placed to embark on an accelerating expansion plan with the benefit of sound financial bearings and a strong and experienced management team. As reported in the various shareholder circulars, Avanta was acquired for a total consideration of 15 million of which 12.5m was paid in cash and a further 2.5m in deferred shares, the issue of which are deferred to between August 2014 and May The equity fundraising that we undertook to fund the acquisition was oversubscribed and all major shareholders participated in the 12m share placing. Avanta adds 39m of annualised revenue to the Group; 17 buildings comprising some 470,000 sq. ft. of additional serviced office space; and 6,204 workstations. The resulting 36 buildings at 31 December 2013 and circa. 1 million sq. ft. with annualised sales of circa. 53m places us as the number two provider of serviced offices in the UK. Having said this, it is worthy of mention that the acquisition has significantly shifted the focus of the Group into the London market. Along with the acquisition of the Avanta business, we acquired a seasoned management team. Led by Alan Pepper, with support in operations from David Kinnaird, in sales & marketing from Geraint Evans, and in finance from Paul Alexander, this team had run Avanta for some 10 years together. As of 1st January 2014 the Board welcomed the promotion of Alan Pepper to the role of Chief Executive. As vendors of Avanta they accepted part of their consideration in shares in the Group. Following on from the well-executed integration of the businesses, further share options in the Group have been issued to these executives, establishing a clear alignment with shareholders in the interest of enhancing share value. Following the acquisition the Board undertook a strategic review which resulted in a number of important decisions as outlined in the Strategic Report. Looking forward, the Group has now commenced a staged expansion plan with a target to add 8-10 new sites in the next 3 years. The Group has already entered into commitments to open 2 new centres during Tenterden St. (Hanover Sq.) comprising 20,500 sq ft. was signed in March and 48 Warwick St. (Piccadilly) comprising 33,000 sq ft. was signed this month. These sites will add approximately 850 workstations in high margin locations. The Board is currently in advanced negotiations for a further two sites in central London. All in all, I see a promising future ahead for the Group, which the general recovery of the UK economy should only serve to encourage. Following on from the recent stewardship of the finance role within the Group, I am delighted to now report that, subject to the completion of the relevant formalities, the Group intends to appoint Paul Alexander to the Board as Finance Director. As mentioned above, Paul was previously Finance Director of Avanta and has over 10 years experience in the serviced office sector. In parting, on behalf of all shareholders and colleagues, a sincere thanks should be extended to Michael Kingshott for the many years of firm and determined stewardship of the Group. Michael stepped down from his executive role at the year end. Michael led the Group from its genesis in 2005 through the very difficult years of the recession and onwards to our recent recovery. He should be rightly credited with saving the business from ruin, by aggressively expanding the number of sites under leasehold and management contracts in favour of freeholds in the bleak period. It was from this foundation that the Group could manage a recapitalisation and stage the turn around it has achieved. With due thanks, we welcome Michael s continued support and advice as a nonexecutive director. Further, the Board wishes to thank Peter Duffy, who will not be standing for reelection, for his very helpful contribution as a non-executive director since As Chairman, I am satisfied that the resulting composition of the Board is adequate, though adding one further nonexecutive director is under consideration and may be confirmed in due course. Dan Taylor Chairman

4 24 April 2014

5 STRATEGIC REPORT Organisational overview The Group is engaged in the provision of short to medium term serviced office workspace and related services including virtual offices, meeting and conference room facilities and IT and telephony services. Following on from the acquisition of Avanta and the resultant strategic review, the Group disposed of its third party IT contract and services business ( Streamwire ) to its management in October 2013 and decided not to continue its business line of providing project and facilities management services and undertaking refurbishment contracts for third parties. In addition the Group accelerated the disposal of its freehold assets in the latter part of 2013 and has started the process of exiting a number of out of London centres operated on management contracts. All except one of the Group s freehold buildings has now either been sold or is under unconditional contract for sale. The Group expects to close a further three out of London centres operated under management contracts during Consequently the Group s activities are now focussed entirely on the provision of serviced offices under a leasehold or management contract property model, primarily in London. Any services provided in addition to this (as noted above) are entirely related to the provision of the office space and so are no longer reported on separately. During the year the Group opened four new centres (King William Street, Euston, Sackville Street and North Row the latter two being opened by Avanta prior to its acquisition by the Group). Following the acquisition of Avanta the Group expanded its operations at 17 Hanover Square. The integration of the Group s existing business and that of Avanta has gone well and was substantially complete by year end. In addition to the changes highlighted above relating to the Group s previous IT and refurbishment/facilities management business; management, central and support functions and supplier arrangements, in particular in IT, have been amalgamated and rationalised. The Group expects to deliver 1m of integration savings over time and is now focussed on optimising the performance of the combined business together with expansion. Subsequent to year end the Group extended the leases on its centres in Covent Garden and at Vauxhall and has signed agreements to lease new properties in Tenterden Street and Warwick Street which should open in Q The Group is in advanced negotiations on two further properties which, if agreed, should also open in Q In recognition of the concentration of the Group s business towards London and the resultant operational concentration around the Avanta business, the Group now trades under the name Avanta Serviced Office Group and as a consequence it will be proposed at the Annual General Meeting that the Group s name is changed to Avanta Serviced Office Group plc. Business model The Group s business model is relatively straightforward. Having acquired a leasehold or managed property, this is then refurbished by an external contractor to the Group s specification and design. The resultant refurbished office space is then offered on short to medium term licence agreements (usually 1 year or less) to potential occupants, which are typically small to medium sized businesses. Clients generally pay a contracted monthly fee for all property related activities (office, furniture, reception, heat, light, power, property taxes) and a separate contracted monthly fee for the bulk of the ancillary services provided. Most income is collected monthly in advance. Whilst the Group employs all its front of house and key support staff, its aim is to outsource as many activities as possible to specialist contractors (e.g. facilities services, IT provision, refurbishment works) so as to reduce the Group s employment numbers and reduce risk. Whilst the Group s clients are on relatively short term contracts, the Group enters into longer term contracts with its landlords and the owners of its properties (average lease length at 31 December 2013 was 6.3 years). In addition, the Group typically (but not always) bears the operating costs of a centre (including business rates, utilities, repairs and maintenance, etc). Depending on the nature of the agreement with the property owner the Group may or may not fund the refurbishment of the centre to its specification.

6 Strategy The overall aims of the Group are to increase shareholder value by expanding a London-centric serviced office business. The key elements to our strategy are as follows: Focusing and growing a London centric business: Existing out of London operations are being reduced over time and all bar one will have been exited by the end of 2014; All recent new centres have been in Zones 1 & 2 of the London Underground; Subsequent to year end the Group signed agreements to lease new buildings at 3 Tenterden Street, London W1 and 48 Warwick Street, London W1. The Group is currently in the advanced negotiations to lease two further buildings within Central London. Disposing of the remainder of our freehold buildings: Three centres were disposed of in 2013; The disposals of a further three centres are due to complete in the first half of 2014; The remaining freehold is also expected to be sold in 2014; Acquire further properties which are leasehold or management contracts: The four centres opened in 2013 were either leasehold or management contracts; The two recently acquired properties are leasehold and of the two additional properties in advanced negotiations, one is leasehold and one is a long term management contract. Grow and maximise income from mature centres: Through active management of client occupation including assisting them to grow their business; Maximising use of the Group s network in London to redeploy clients to meet their office requirements; Being recognised as a quality but value for money offering in London. Actively manage central overhead: Synergies of 1.0m expected post acquisition of Avanta; Ongoing review of central functions and support activities and structures as the business grows. Train and manage our employees to deliver excellent customer service: All staff have completed Institute of Customer Service training courses. Continuous development through our internal Learning and Advancement Programme. Excellence in managing our people - annual staff satisfaction survey, excellent benefits package and rigorous recruitment selection procedures. Successful validations lead to promotion through the roles from Service Co-ordinator up to Business Centre Manager. Provide reliable, efficient and high quality IT services to our clients: Gigabit connectivity to key business centres supporting increased bandwidth heavy activities by clients and their staff; Standard shared 100mbps service offered in 3 centres in 2014, and to become base offer in 2015 with no additional customer charges. New outsourced IT supplier across all key London centres in 2013 enabling instant service provision for telephones and internet access. Further development in 2014 will include increased wireless coverage across whole buildings. It should be noted that the establishment of a new business centre often incurs significant capital costs and start-up losses as the centre grows to maturity. These are exacerbated by the need to account for future rents payable during a rent free period under IAS 17. As a consequence management s view is that it takes two years from opening for a centre to reach maturity.

7 Key Performance Indicators, Performance assessment and financial review In order to be able to better understand the impact on the Group s results following the acquisition of Avanta, some statistics for the combined Group from 1 January are shown here using proforma unaudited financial information: Key Performance Indicators 2013 Year on year movement % Group Revenue m % See below for breakdown between Mature and New centres. Workstations- average in year 11,020 10, % This includes Managed Centres but excludes Closed Centres Licence fee / occupied foot % This excludes Managed Centres, Closed Centres and Associated Centres REVPOW 6,198 5, % Revenue per Occupied Workstation. This excludes Virtual Office, Managed Centres, Closed Centres and Associated Centres revenue. Occupancy % - average in year 83.8% 88.9% (5.7%) Adversely impacted by New Centres. Mature Centres down 2%.This excludes Managed Centres, Closed Centres and Associated Centres Business Centre EBITDA m (25.3%) Measures operational profit contribution by centres towards central costs. Impacted by 2.0m opening losses (: 0.1m profit) on New Centres. Capital Expenditure 000 3,301 1, % 2013 includes 1.8m on King William Street and 0.6m on Euston. Central Costs EBITDA m % Central costs are not allocated to centres. Central Costs / Revenue % 11.1% 11.5% (3.5%) Turnover per employee ( '000) (1.3%) Average lease length % This excludes Closed Centres. Mature centres are those that were open on or before 31 December Those opened after this date are shown as new. Performance assessment 2013 was another significant year for the Group. The Group acquired Avanta in July 2013 and successfully raised 11.5m net of fees through a placing of new ordinary shares to part fund the acquisition. The Group has increased its net asset position from 11.7m in to 22.2m and had 8.4m in cash balances at 31 December 2013.

8 The Group s loss before tax for the year of 3.7m included freehold revaluation profits of 0.9m net of deferred consideration payable to RBS, 0.6m of acquisition expenses, refinancing costs of 0.2m, share based payments of 0.2m, loss from discontinued operations of 0.9m and intangible asset amortisation of 0.5m. Excluding these items, the Group made an underlying loss before tax of 2.2m (: 0.2m underlying profit excluding 9.4m gain on refinancing, revaluation loss of 4.8m, share based payments of 1.0m and profit from discontinued operations 0.5m). The movement in underlying loss before tax of 2.4m from primarily arises from: Avanta profit of 1.1m Opening losses on the King William Street and Euston centres of 2.8m Negative impact from closed centres: 0.5m IT Termination costs 0.4m Reduction in management fees 0.1m During the year the Group purchased the share capital of Avanta Managed Offices Limited for a price of 15m. Of this price 2.5m was funded by deferred shares and the balance of 12.5m was funded through the successful placement of ordinary shares raising 11.5m net of fees and through the sale of its Chiswick building for 2.7m. The net cash outflow on the purchase of Avanta was 10.5m due to cash held by Avanta of 2.0m at acquisition. The acquisition added 6,204 workstations to the Group and significantly increases the Group s presence in its strategically chosen location of London. At 31 December 2013 the Group operated 11,835 workstations (31 December : 5,678) in 36 centres (: 22). To fully understand the fundamental underlying performance of the Group it is necessary to look at our mature and new centres separately as well as consider the Group s annualised performance. By way of illustration, had the acquisition of Avanta completed on 1 January, the performance of the Group would have been as follows: Unaudited Proforma 2013 Proforma Increase / (Decrease) Increase / (Decrease) REVPOW 6,238 5, % REVPAW 5,180 5,253 ( 73) (1.4)% Rate per foot % Occupancy 83.0% 88.6% (5.6)% (6.3)% Average no centres Avg remaining lease length % k k k % Revenue 52,947 49,425 3, % Gross Profit 8,188 11,219 (3,031) (27.0)% EBITDA 2,644 5,786 (3,142) (54.3)% Operating (Loss) / Profit (535) 3,137 (3,672) (117.0)% (Loss) / Profit before tax Continuing operations (882) 2,238 (3,120) (139.4)% Discontinued Operations (921) 467 (1,388) (297.2)% Exceptional Items (1,421) 1,518 (2,939) (193.6)% Loss / (profit) before tax (3,224) 4,223 (7,447) (176.3)% REVPOW Revenue per occupied workstation REVPAW Revenue per available workstation 2013 pre and post acquisition exceptional items include freehold revaluation profits of 0.9m net of deferred consideration payable to RBS, 0.6m of acquisition expenses, refinancing costs of 0.2m, share based payments of 0.2m, IT termination payments of 0.4m, amortisation of intangible assets of 0.5m and dilapidation expense on closed centres of 0.5m. exceptional items include 9.4m gain on refinancing, revaluation loss of 4.8m and share based payments of 1.0m and losses on disposal of closed centres of 2.1m.

9 The movements relating to Mature Centres and New Centres are shown below: Mature Centres Unaudited Proforma 2013 Proforma Increase / (Decrease) Increase / (Decrease) REVPOW 5,938 5, % REVPAW 5,168 5,207 ( 39) (0.7)% Rate per foot % Occupancy 86.9% 88.8% (1.9)% (2.2)% No Centres Avg remaining lease length k k k % Revenue 43,464 43, % Gross Profit 9,986 10,237 (251) (2.5)% EBITDA 9,737 10,002 (265) (2.6)% Operating Profit 7,352 7,815 (463) (5.9)% License fee rates increased 2.1% although this was offset by reduced occupancies of 2.2% albeit still at a very good level of 86.9%. Since the year end rate per square foot has been 86.3 and occupancy 85.3%. New Centres Increase / Unaudited Proform a 2013 Proform a Increase / (Decrease) (Decrease ) REVPOW 8,596 6,884 1, % REVPAW 5,351 6,446 ( 1,095) (17.0)% Rate per foot % Occupancy 60.3% 92.9% (32.6)% (35.1)% No Centres % Avg remaining lease length % k k k % Revenue 6,528 1,079 5, % Gross Profit (1,898) 154 (2,052) (1,332.5)% EBITDA (2,021) 137 (2,158) (1,575.2)% Operating (Loss) / Profit (2,253) 132 (2,385) (1,806.8)% New Centres includes any centre that opened in the two years preceding 31 December 2013 in line with management s view that it takes two years for a centre to achieve maturity. Included in New Centres is King William Street which made a first year operating loss of 2.5m. This includes 1.9m of non cash rent charges as required under IFRS to take account of the rent free period. Also included is Euston which also made a first year operating loss of 0.3m. Euston has started 2014 making an operating profit and King William Street is projected to turn profitable towards the latter part of North Row and Sackville Street which opened in early 2013 contributed with operating profits of 0.3m. Cavendish Square and 17 Hanover Square, which made operating profits of 0.3m in the year ending 2013 will form part of the mature segment in the year ending Financial Review The acquisition of Avanta generated additional post acquisition revenue of 16.5m and pre tax profits of 0.6m (net of intangible asset amortisation of 0.5m) both of which were favourable. The accounting standard IFRS 3 requires identifying acquisition intangible assets totalling 4.8m. These

10 have a limited useful economic life and need to be amortised annually unlike goodwill which is subject to an annual impairment review. The amortisation of intangibles resulted in the additional charge to the profit and loss account of 0.5m in the year noted above. During the year the Group completed the freehold disposals of its Chiswick, Kingston and Bournemouth properties which generated 7.9m in cash net of disposal costs. Post year end the Harrow property was sold for 2.4m generating a profit of 0.3m and the proceeds of this sale were used to repay a proportion of the term loan from HSBC (2013: 4.9m; : 6.25m). Also post year end, contracts were exchanged for the sale of the Beckenham property for 5.1m (being its carrying value at the balance sheet date) and for the sale of the Hayes property for 3m. The sale of the Hayes property will generate a profit in 2014 of 0.5m net of RBS fees. On completion the proceeds from the sale of the Beckenham and Hayes properties will be used to repay the remaining balance on the HSBC loan facility of 2.4m, pay RBS its profit share and fees ( 2.8m), with the balance being transferred to cash. The Group s operating cash inflow for the year was 1.7 million (: 0.4 million) and the Group ended the year with a healthy cash balance of 8.4 million (: 2.7 million). As a result of the reduced loan balance, the Group s interest charge for the year decreased to 0.3 million (: 0.9 million). The Group generated a loss per share of 14.1p in the year ended 31 December 2013 (: 66.0p profit). The movement on the prior year was significantly impacted by the one off items referred to above. Excluding these items and the one-off items incurred in, underlying earnings per share was 8.4p loss (: 4.8p profit). At the year end the Group has a strong balance sheet with net assets of 22.2m (: 11.7m). On 29 January 2014 approval was obtained from the Companies Court to cancel and convert the Group Share Premium Account and Deferred Shares into distributable reserves. Whilst this would have had no impact on the Group s net assets, had this been implemented prior to the year end the Group would have had distributable reserves of 8.4m rather than a retained loss of 12.4m. Signed on behalf of the board by: Alan Pepper Chief Executive 24 April 2014

11 Consolidated statement of comprehensive income Note s 2013 '000 '000 Restated Continuing operations Revenue 2 30,548 12,266 Cost of sales (26,671) (8,126) Gross profit 3,877 4,140 Net gain / (loss) from investment properties 1,881 (4,772) Administrative expenses (7,096) (3,971) Loss from operations 3 (1,338) (4,603) Finance Income 4-9,407 Finance Expense 5 (1,485) (984) (Loss) / profit before income tax (2,823) 3,820 Income tax credit (Loss) / profit from continuing operations (2,655) 3,942 (Loss) / profit from discontinued operations 8 (920) 488 (Loss)/profit for the year and total comprehensive (loss)/ income for the year (3,575) 4,430 Earnings per share: (Loss) or profit from continuing operation Basic 7 (10.5)p 58.7p Diluted 7 (10.5)p 57.6p (Loss) or profit from discontinued operation Basic 8 (3.6)p 7.3p Diluted 8 (3.6)p 7.1p (Loss) or profit Basic 7 (14.1)p 66.0p Diluted 7 (14.1)p 64.7p

12 Consolidated statement of financial position Notes 2013 '000 '000 ASSETS Non-current assets Investment property 9-15,000 Property, plant & equipment 13,986 2,974 Goodwill & intangibles 11 17,882 1,343 Deferred tax asset ,868 19,439 Current assets Inventories Trade and other receivables 12 8,731 3,177 Cash and cash equivalents 8,388 2,694 17,193 6,005 Non-current assets held for sale 10 9,043 - Total assets 58,104 25,444 EQUITY Capital and reserves attributable to equity holders of the Company Called up share capital 13,233 9,540 Share premium account 17,188 9,422 Reserves (8,206) (7,285) Total equity 22,215 11,677 LIABILITIES Non-Current liabilities Borrowings 4,512 5,996 Provisions for liabilities 14 6, Trade and other payables ,256 Deferred tax liability ,979 7,285 Current liabilities Trade and other payables 13 24,439 6,070 Borrowings ,910 6,482 Total liabilities 35,889 13,767 Total equity and liabilities 58,104 25,444 These financial statements and notes thereto were approved by the Board of Directors on 24 April 2014 and signed on behalf of the Board. Alan Pepper Director Dan Taylor Director

13 Consolidated statement of changes in equity Attributable to equity holders of the Company Share capital Share Premium Reserves Total '000 '000 '000 '000 Group Balance at 1 January 5,040 5,510 (13,055) (2,505) Profit and total comprehensive income for the year - - 4,430 4,430 Share based payment - - 1,008 1,008 Issue of warrants in the year Issue of shares in the year 4,500 4,500-9,000 Share issue cost - (588) - (588) Balance at 31 December 9,540 9,422 (7,285) 11,677 Balance at 1 January ,540 9,422 (7,285) 11,677 Loss and total comprehensive income for the - - (3,575) (3,575) year Share based payment Deferred share consideration in regard to Avanta acquisition - - 2,500 2,500 Issue of shares in the year 3,693 8,308-12,001 Share issue cost - (542) - (542) At 31 December ,233 17,188 (8,206) 22,215

14 Consolidated Cash Flow Statement 2013 '000 '000 (Loss) / profit after tax (3,575) 4,430 Adjustment for : Interest expense Depreciation of plant and equipment 2,476 1,054 Amortisation of intangibles (Decrease) / increase in dilapidation provision - 17 Revaluation (gain) / loss on investment properties (1,243) 4,772 Profit on disposal of investment property (638) - Amortisation of loan arrangement costs Provision for other financial liabilities 976 1,250 Warrants issued during the year Professional fees associated with financing activities Forgiveness of loan - (10,168) Forgiveness of interest - (1,014) Share based payment 154 1,008 Income tax credit (168) (122) Operating cash flow before movement in working capital (1,030) 2,720 Decrease in inventories Decrease / (increase) in trade receivables 1,285 (144) Increase in other current assets (2,685) (560) Increase / (decrease) in payables 4,069 (1,658) Cash generated from operations 1, Interest paid (315) (794) Net cash from / (used in) operating activities 1,384 (409) Cash flows from investing activities Purchases of plant and equipment (2,951) (758) Disposal of investment property 7,938 - Acquisitions net of cash acquired (10,657) - Net cash used in investment activities (5,670) (758) Cash flows from financing activities Proceeds from issue of shares (net of issue costs) 11,459 8,036 New bank loan - 6,250 Repayment of bank loan (1,350) (12,500) Finance lease capital repayments (129) (203) Net cash generated by financing activities 9,980 1,583 Net increase in cash and cash equivalents 5, Cash and cash equivalents at the beginning of the year 2,694 2,278 Cash and cash equivalents at the end of the year 8,388 2,694

15 NOTES TO THE FINANCIAL STATEMENTS 1 BASIS OF PREPARATION The financial information set out in this announcement does not constitute the Group s statutory accounts for the years to 31 December 2013 or 31 December but is derived from the Group s Annual Report. Statutory accounts for the years ended 31 December 2013 and 31 December which have been reported on by the Independent Auditors. The Independent Auditors' Report on the Financial Statements for 2013 and were both unqualified and did not contain a statement under section 498(2) or 498(3) of the Companies Act Statutory accounts for the year ended 31 December have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2013 will be delivered to the Registrar in due course. The Annual Report, which will contain the financial statements for the year ended to 31 December 2013 and the notice of Annual General Meeting, will be posted to shareholders shortly and will also be available on the Group s website In preparing the financial information in this announcement the Group has applied accounting policies in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial statements are prepared on the historical cost convention, as modified by the revaluation of investment property and the fair valuation of financial instruments. 2 REVENUE ANALYSIS The Group s revenue for the year was comprised as shown below Licence fees & rental income 22,733 10,664 Other services income 7, Management fees Project management fees ,548 12,266 Included within other services income is revenue generated by meeting rooms 1.0m (: 0.2m), client service packages 3.8m (: nil) and virtual office income 0.5m (: 0.1m) and other services 2.0m (: nil) 3 LOSS FROM OPERATIONS The following items have been charged at arriving at the loss from operations: 2013 Depreciation of owned assets 2, Depreciation of assets under finance leases Loss on disposal of fixed assets 49 - Leasehold dilapidation provision - 17 Amortisation of intangibles Employee benefit expense 5,281 3,183 Additional costs relating to acquisition of Avanta Telecom termination settlement 421 -

16 4 FINANCE INCOME The refinancing of the Group in the prior year resulted in a profit after fees of nil (: 9.4 million). This was derived as shown below Debt forgiven by bank - 11,182 Provision for warrant - (332) Provision for other financial liabilities - (1,250) Amortisation of remaining arrangement fee - (12) Professional fees and associated costs - (181) Profit on refinancing - 9,407 5 FINANCE EXPENSE 2013 Provision for other financial liabilities Amortisation of loan arrangement fee Interest expense on bank borrowings Interest expense on finance lease , INCOME TAX Current tax: 2013 UK Corporation tax on (loss)/profit in the period - - Adjustments in respect of previous years - - Deferred tax credit (168) (122) (168) (122) The tax on the Group's profit before tax differs from the theoretical amount that would arise using the tax rate of 23% (:24.5%) applicable to profits of the UK companies as follows: 2013 (Loss) / profit before tax (2,823) 3,820 Tax calculated at domestic rate applicable to profits in the UK (649) 936 Movement in fair value losses not recognised as deferred tax assets - 1,169 Depreciation for period in excess of capital allowances Recognition of deferred tax assets - (118) Expenses not deductible for tax purposes Income not taxed - (2,620) Impact of deferred tax rate on temporary difference (21) Profit on disposal of investment property (148) -

17 Net gain on fair value adjustment of investment properties (288) - Deferred tax not recognised on losses Small companies rates relief (3) - Tax credit (168) (122) 7 EARNINGS PER SHARE 2013 Earnings used for calculating earnings per share () (Loss)/profit attributable to equity holders of the Company (3,575) 4,430 Number of shares used for calculating earnings per share (thousands) Weighted average number of shares in issue 25,328 6,711 Dilution due to share option schemes, warrants and deferred shares 4, Weighted average number of shares for diluted earnings per share 29,729 6,849 (Loss) / earnings per share (pence) Basic (14.1)p 66.0p Diluted (14.1)p 64.7p Earnings per share on continuing operations 2013 Earnings used for calculating earnings per share () (Loss)/profit from continuing operations attributable to equity holders of the Company (2,655) 3,942 Number of shares used for calculating earnings per share (thousands) Weighted average number of shares in issue 25,328 6,711 Dilution due to share option schemes, warrants and deferred shares 4, Weighted average number of shares for diluted earnings per share 29,729 6,849 (Loss) / earnings per share (pence) Basic (10.5)p 58.7p Diluted (10.5)p 57.6p Basic earnings per share amounts are calculated by dividing net (loss)/profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. Where the Group has incurred a loss in a year the diluted earnings per share is the same as the basic earnings per share as the loss has an anti-dilutive effect. The diluted loss per share for 2013 is therefore the same as the basic loss per share for the year and the diluted weighted average number of shares is the same as the basic weighted average number of shares. The Company has 4,401,000 (:138,000) potentially issuable shares all of which relate to the potential dilution from deferred shares and warrants and share-options issued to the Directors and certain employees. Earnings used to calculate underlying (loss)/earnings per share (pence) 2013 (Loss)/profit from continuing operations (2,655) 3,942 Provision for other financial liabilities Loss / (profit) from refinancing 164 (9,407)

18 Net (gains) / loss from fair value adjustments of investment properties (1,881) 4,772 Additional costs relating to acquisition of Avanta Share options granted to employees and directors 154 1,008 Amortisation of intangible assets Underlying (loss) / profit before income tax (2,140) 319 Weighted average number of shares in issue 25,328 6,711 Underlying (loss)/earnings per share (pence) (8.4)p 4.8p 8 DISCONTINUED OPERATIONS During the year ending December 2013, the Group sold its IT services, Streamwire, and discontinued its project management segment. These are the only operations presented as discontinued operation in The post-tax gain on disposal of discontinued operations was determined as follows: 2013 Cash consideration received 50 - Property, plant and equipment (3) - Gain on disposal of discontinued operations 47 - The results of discontinued operations were determined as follows: Result of discontinued operations 2013 Revenue 4,043 3,727 Cost of sales (4,338) (2,838) Administrative expenses (672) (401) Gain from selling discontinued operations after tax 47 - (Loss)/profit before income tax Income tax expense (920) - (Loss)/profit for the year (920) The loss for the year of 920,000 is comprised of a total loss of 512,000 for the project management segment and 408,000 for the IT segment. Reconciliation of profit before tax to net cash flow (used in) / generated from discontinued operations: Discontinued operations 2013 Operating activities (653) 558 Investing activities 47 - Financing activities - - Net cash from discontinued operations (606) 558 Earnings per share on discontinued operations 2013 Earnings used for calculating earnings per share () (Loss)/profit attributable to equity holders of the Company (920) 488 Number of shares used for calculating earnings per share (thousands)

19 Weighted average number of shares in issue 25,328 6,711 Dilution due to share option schemes, warrants and deferred shares 4, Weighted average number of shares for diluted earnings per share 29,729 6,849 (Loss) / earnings per share (pence) Basic (3.6)p 7.3p Diluted (3.6)p 7.1p 9 INVESTMENT PROPERTY Fair Value 2013 At 1 January 15,000 19,685 Additions Sales of investment properties (7,300) - Transfer to non-current assets held for sale (9,043) - Net gain / (Loss) from fair value adjustments of investment properties 1,243 (4,772) At 31 December - 15,000 The Group s investment properties were revalued at 31 December 2013 by the Directors with regard to external valuations obtained by the Group during the year and other market evidence. Valuations are based on current prices in an active market where available and where prices are not available, an income based approach from the serviced office business. In the year the Group sold its freeholds at Chiswick, Kingston and Bournemouth. The profits on the transactions net of costs were 638,000 which was recognised within the net gain from investment properties in the Statement of Comprehensive Income together with the 1,243,000 fair value movement totalling 1,881,000.

20 10 ASSETS CLASSIFIED AS HELD FOR SALE The non-current assets held for sale in the year ended 2013 consist of investment properties in Beckenham, Crawley, Harrow and Hayes. The investment properties form part of the serviced office operational segment at the year end. The properties have been transferred to be held for sale in the year ended 2013 due to the intention to sell and active marketing At 1 January - - Transfer from investment property 9,043 - Sale of investment properties - - Net gain / (loss) from fair value adjustments of investment properties held for sale - - At 31 December 9, GOODWILL AND INTANGIBLE ASSETS Goodwill Intangible Assets Total As at 1 January 1,294-1,294 Additions Amortisation charge for the year - (4) (4) As at 31 December 1, ,343 As at 1 January , ,343 Additions Acquired through business combination 12,223 4,766 16,989 Amortisation charge for the year - (479) (479) As at 31 December ,517 4,365 17,882 The goodwill balance at the start of the year relates to the serviced office business which was acquired along with the original properties in 2004 with the addition relating primarily to the acquisition of Avanta Managed Offices Limited on 29 July It represents the premium which was paid to acquire the business in addition to the fair value of its net assets. The goodwill balance is reviewed for impairment at each reporting date. The goodwill is tested for impairment against the cash flows generated by the leased and managed properties as these are generated as a direct result of acquiring the business. Cash flows from owned properties are excluded as they are included within the valuation of investment property. This is a level 3 valuation in the fair value hierarchy. On 29 July 2013 the Group purchased 100% of its ordinary share capital and voting rights of Avanta Managed Offices Limited. The acquisition is in line with the Company's stated strategy to focus on central London. The consideration for the acquisition was 12,500,000 in cash plus 2,500,000 in deferred shares. The acquisition is accounted for using the acquisition method of accounting. The assets and liabilities of Avanta Managed Offices Limited have been consolidated at their fair values to the Group as set out below. Goodwill, being the difference between the fair value of net assets acquired and consideration paid, arises from this transaction. As explained in the accounting policies goodwill has been capitalised and annually reviewed for impairment by the Board. The acquisition of Avanta generated additional post acquisition revenue of 16.5m and pre tax profits of 0.6m. The external acquisition costs of 0.6 million associated with this transaction were expensed as administrative expenses. Had the acquisition of Avanta completed on 1 January 2013, the pre tax loss of the Group would have been 3.2m and the Group revenue would have been 52.9m. Goodwill arising from the acquisition of Avanta is calculated as follows:

21 Initial Book Value Fair value adjustments Fair value on acquisition '000 '000 '000 Intangible assets - 4,766 4,766 Tangible fixed assets 11,671 (1,231) 10,440 Non-current assets 11,671 3,535 15,206 Current assets Stock Trade receivables 1,219-1,219 Prepayments 2,934-2,934 Other Debtors Bank 2,036-2,036 6,189-6,189 Current Liabilities Trade payables (1,239) - (1,239) Client deposits (6,451) - (6,451) Accruals and deferred income (5,438) 2,592 (2,846) Other creditors (509) - (509) Corporation tax (866) - (866) (14,503) 2,592 (11,911) Net current liabilities (8,314) 2,592 (5,722) Provisions Deferred Taxation (433) (322) (755) Provision for leases - (2,604) (2,604) Dilapidations (3,144) - (3,144) (3,577) (2,926) (6,503) Net assets acquired (220) 3,201 2,981 Fair value of consideration: Cash 12,500 Deferred Shares 2,500 15,000 Goodwill capitalised as purchased goodwill 12,019

22 12 TRADE AND OTHER RECEIVABLES 2013 Group Trade receivables Prepayments 7,666 1,259 Other receivables 247 1,035 8,731 3,177 There is little concentration of credit risk with respect to trade receivables as the Group has a large number of customers within its buildings. All amounts are due within one year. 13 TRADE AND OTHER PAYABLES 2013 Group: Current Trade payables 2, Social security and other taxes Corporation tax Customer deposits 8,654 1,940 Accruals 9,285 2,870 Other financial liabilities 2,225-24,439 6, Group: Non current Derivatives used for hedging 1 6 Other financial liabilities - 1, ,256 Other financial liabilities - as part of the refinancing of the Group in the year ended 31 December, the Group s subsidiaries entered into a contract with RBS whereby if the Group s investment properties are sold for more than 12.5 million, the subsidiaries are required to pay to RBS 50% of the difference between this and the sales proceeds. The cost has been recognised as 50% of the difference between the value of the investment property at 31 December 2013 and 12.5 million. The main uncertainty relates to how much the Group s properties will be sold for and accordingly, how much will be payable to RBS.

23 14 PROVISIONS FOR LIABILITIES Group Property lease provisions Leasehold dilapidations provisions Total At 1 January Charged to profit or loss At 31 December At 1 January Increase in leasehold improvements Acquired through business combinations 2,604 3,144 5,748 Charged to profit or loss At 31 December ,604 3,397 6,001 Leasehold dilapidations these relate to the estimated cost of returning a leasehold property to its original state at the end of the lease in accordance with the lease terms. The cost is recognised as depreciation of leasehold improvements over the remaining term of the lease. The main uncertainty relates to estimating the cost that will be incurred at the end of the lease and the element relating to an obligation at the reporting date. Property lease provisions this relates to the fair value of the lease obligations the Avanta Group has committed to across the portfolio at the acquisition date compared with the actual payments required under these leases. These liabilities will unwind over the lease terms of the Avanta lease portfolio 15 POST BALANCE SHEET EVENTS On 22 January 2014 the Group exchanged contracts for the sale of its building at Beckenham for 5.1m being its carrying value at the reporting date. Under the terms of the sale the Group will continue to operate the building as a serviced office until 31 January Completion is expected by the end of Q and, on completion, the proceeds from the sale of the Beckenham property will be used to pay RBS ( 1.3m) and the remaining balance on HSBC of 2.4m. On 29 January 2014 the Companies Court approved the Company s application to cancel its Share Premium Account and the Deferred Shares, converting these into distributable reserves. This was formally implemented on 14 February Had this been implemented prior to year end the Company would have had distributable reserves of 8.3m rather than a retained loss of 12.4m. On 30 January 2014 the Group entered into a new lease to extend its occupation of its Covent Garden business centre at 22 Long Acre. On 6 February 2014 the Group entered into a new lease to extend its occupation of its Vauxhall business centre at Vintage House, Albert Embankment. On 19 February 2014 the Group granted options over 956,000 ordinary shares of 30 pence each in the Company ( Ordinary Shares ) to certain directors and employees of the Company under the Company s Unapproved Option Scheme (the Options ) at an exercise price of 126 pence per Ordinary Share. On 25 March 2014 the Group closed its business centre at 7 Hanover Square, receiving compensation from the landlord of 430,000 net of fees and expenses. On 28 March 2014 the Group entered into an agreement to lease a new property at 3 Tenterden Street, London W1 which once refurbished will result in 20,500 of space and 350 workstations. This is expected to open in Q On 31 March 2014 the Harrow property was sold for 2.4m generating a profit of 0.3m. The proceeds of the sale were used against the term loan from HSBC (2013: 4.9m; : 6.25m). Under the terms of the sale the Group will continue to operate the building as a serviced office until no later than 30 November 2014.

24 On 4 April 2014 the Group exchanged contracts for the sale of its building at Hayes for 3.0m. Under the terms of the sale the Group will continue to operate the building as a serviced office until no later than 30 November Completion is expected by the end of Q and, on completion, the proceeds from the sale of the Hayes property will be used to pay RBS ( 1.5m) with the balance retained as cash. On 11 April 2014 the Group entered into an agreement to lease a new property at 48 Warwick Street, London W1 which once refurbished will result in 33,000 of space and 500 workstations. This is expected to open in Q