Lok’nStore Group Plc Annual Report & Accounts 2011 L o k ’ n S t o r e G r o u p P l c A n n u a l R e p o r t & A c c o u n t s 2 0 1 1 THE BiG FRiEndLy SToRAGE ComPAny ConTEnTS 01 Highlights 02 Chairman’s Review 04 Chief Executive’s operating Review 09 Property Review 12 Financial Review 18 Board of directors and Advisers 20 directors’ Report 26 Corporate Governance 28 directors’ Responsibilities in the Preparation of Financial Statements 29 independent Auditor’s Report to the members of Lok’nStore Group Plc 30 Consolidated Statement of Comprehensive income 31 Consolidated Statement of Changes in Equity 32 Company Statement of Changes in Equity 33 Statements of Financial Position 34 Consolidated Statement of Cash Flows 35 Accounting Policies 41 notes to the Financial Statements highlights Financial Highlights Revenue £10.85 million up 4.1% (2010: £10.42 million) Group EBITDA £3.28 million up 11.8% (2010: £2.93 million) Net profit £0.89 million up 301% (2010: £0.22 million) Adjusted NAV £2.29 per share up 2.4% to (2010: £2.24 per share) Final dividend proposed 2.67 pence per share up 250% (2010: 0.67 per share) Revenue £10.85m Successful refinancing of £40 million bank facility after the gRoup eBitDA1 reporting date Operational Highlights Store EBITDA £4.85 million up 9.7% (2010: £4.42 million) Acquisition of document storage business for £3.7 million Store EBITDA profit margins up to 45.5% (2010: 42.6%) Property Highlights Planning permissions renewed at Reading, Southampton and Portsmouth Lease extended – saving costs and extending average portfolio lease length to over 15 years Agreement with Lidl to share Lok’nStore’s Maidenhead site (subject to planning) Key Metrics Loan to value ratio of 30.7%1 (2010: 28.1%) FFO2 £3 million = 12.0 pence per share (2010: 10.6 pence per share) £3.28m ADJusteD net Asset vAlue peR shARe2 £2.29 loAn to vAlue RAtio 30.7% 1 Calculation based on net debt of £24.4 million (2010: £22.7 million) and total property value of £79.5 million as set out on page 11. 2 Funds from Operations (‘FFO’) calculated as EBITDA minus Net Finance Cost on operating assets. FunDs FRom opeRAtions3 Andrew Jacobs CEO of Lok’nStore Group said, “I am delighted to report this period of strong profit growth against the challenging economic background, the third year in a row of double digit profit growth. Lok’nStore has proved again that it can thrive through these difficult economic times and we are looking forward to delivering future increases in profit in the coming years.” “Our attractive new banking facility through to 2016 allows us to plan with more certainty and as a sign of our confidence the Board are recommending increasing the annual dividend to 3 pence from 1 penny a share in previous years.” £3m 1 EBITDA is defined as profits from operations before all depreciation charges, losses or profits on disposal, share-based payments, acquisition costs, finance income, finance costs and taxation. 2 Based on Cushman & Wakefield LLP valuation, before deferred taxation. 3 12 pence per share. 01 Annual Report & Accounts 2011 Lok’n’Store Group Plc simon g thomAs chAiRmAn chAiRmAn’s Review Strong Performance Economic conditions remain challenging; however we have planned accordingly and are pleased to report robust results for the financial year to July 2011. Lok’nStore has increased revenue and reduced operating costs in the self-storage business again, margins, profits and cash flow have all increased as a result and we have now doubled Group EBITDA (earnings before interest, depreciation, tax and amortisation) since 2006. Store EBITDA and Group EBITDA are sharply higher to record levels demonstrating that self-storage can continue to perform well even in a weak economy. Capital expenditure remains tightly controlled and interest costs remain low so cash continues to grow. Our loan to value ratio is low and our interest coverage is high which has helped us secure attractive new funding through to 2016. New £40 Million Five Year Facility with Lloyds TSB plc Underlining the strength of the cash flow and the statement of financial position, after the reporting date the Group has signed a new five year £40 million revolving credit facility with Lloyds TSB plc. The facility is effective from 20 October 2011 and runs until 19 October 2016. The new facility is flexible and does not require any amortisation prior to maturity. The loans bear interest at the London Inter-Bank Offer Rate (LIBOR) plus 2.35%–2.65% margin based on a loan to value covenant test (2.35% at Lok’nStore’s current LTV level). The interest cover and loan to value covenants are broadly in line with the previous facility. The net interest charge in the coming year will rise to reflect the increase in the margin on this facility which is initially 1.1%. During the year the Group complied comfortably with all banking covenants. At 31 July, we had £11.9 million of the facility undrawn and £3.8 million of cash. (2010: £5.4 million). This new banking facility allows us to plan with certainty for the next five year period. Expansion of Document Storage Business Another notable achievement in the year was the purchase of Saracen Datastore Limited, a serviced document storage company. Lok’nStore has for some years been achieving around 10% of its revenue from self-serviced document storage, and has been keen to grow this area of its business. On 30 June 2011 Lok’nStore acquired 90.6% of the issued share capital of Saracen Datastore Limited (‘Saracen’), a serviced archive and records management company to help with this objective. The price was £3.7 million paid from existing cash resources. Leo Kane, the Managing Director of Saracen who has been with the business since 1995, retains a 9.4% stake in Saracen and will continue in his current role. Andrew Jacobs and Ray Davies of the Lok’nStore Group will join the Saracen Board. Based in Leatherhead, Saracen was established in 1991 and has four sites across the South East of England providing over 100,000 sq ft of offsite records, document and tape storage. For the year ended 31 December 2010, Saracen achieved turnover of £1.6 million and adjusted EBITDA of £0.4 million. The acquisition broadens the offering to our customers and the purchase of Saracen is an excellent entry point to a wider market segment complimenting Lok’nStore’s existing self-storage activities. This acquisition extends our existing self-serve archive service which we provide to around 500 customers and Saracen adds over 300 document storage customers. Properties and Net Asset Value The year-end property valuation equates to a total value of properties held of £79.5 million, down 1.8% on the year (2010: £81.0 million). This small decline in property values was offset by the cash inflow of the business so the adjusted net asset value per share has increased to £2.29 from £2.24 last year (see Financial Review). The Board continues to examine the portfolio for asset management opportunities as demonstrated by its recent agreement to extend the leases on another of the Group’s stores, the third such transaction over the last two years. Our property team remains alert to the opportunities that can appear in the current volatile property market and an update of the current property opportunities is set out in the Property Review and in Note 30, Events after the reporting date. 02 Lok’n’Store Group Plc Annual Report & Accounts 2011 stoRe eBitDA mARgin 45.5% FinAl DiviDenD pence peR shARe 2.67p Conditions in the UK Self-storage Market The Drivers Jonas Deloitte 2011 report for the Self-Storage Association says “demand drivers have allowed the sector to remain in relatively good health”. Despite this “New development has slowed right down: only 15% of operators expanded their portfolios in 2010, and less than 10% expect to open more than one store before 2014 Operators have paused their expansion plans whilst they concentrate on growing income from their existing outlets.” This reduction in the rate of increased supply is beneficial to incumbent operators such as Lok’nStore, which is the fourth largest operator in the UK. Dividend Over the past few years we have maintained a steady, if modest dividend payout of one penny per share. Given the strength and the growth of the cash flow the Directors feel it is appropriate to implement a rather more substantial dividend payout. In respect of the current year the Board recommends that a final dividend of 2.67 pence per share be paid on 16 December 2011 to shareholders on the register on 18 November 2011, making a full year pay-out of 3 pence per share. Going forward, the dividend policy will be to pay a progressive dividend with reference to the growth in EBITDA and the capital expenditure requirements of the business. The interim will be paid in, or about, June and the final paid in, or about, December of each year. The interim dividend will represent approximately one third of the expected total annual dividend. The total estimated final dividend to be paid in the current financial year is £667,331 based on the number of shares currently in issue as adjusted for shares held in the Employee Benefit Trust and for shares held on treasury. This dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. Outlook Lok’nStore is a robust business with a strong and consistent record of both profit growth and cash generation and has opportunities for growth from several areas. With Group EBITDA of £3.3 million up 11.8% on the previous year, the strength of the Group’s business model has been proven in the face of a severe economic downturn. Increasing the annual dividend by 200% and initiating a progressive dividend policy demonstrates the Board’s confidence that the Group will continue to generate a growing cash flow. We will continue to grow revenue against tightly controlled costs, and this will provide momentum to EBITDA. Turning to the future the Board’s target is to continue the increase of EBITDA over the coming years whilst anticipating no significant improvement in the operating environment. We have carefully evaluated the opportunities and believe there is significant further growth to pursue focused on five key areas: 1. Developing new stores on a self-funded basis as at Reading and Maidenhead 2. Developing the other new sites we already own when appropriate 3. Opportunistic site acquisitions (as some banks look to reduce their exposure to property in the future) 4. Increasing the number of stores we manage for third parties 5. Building our document storage offering These areas represent tangible growth opportunities that we can fund from our existing cash flow and debt facility, and where we have the operating experience to execute effectively. Lok’nStore’s efficient operating business, strong cash flow, secure asset base and its new £40 million bank facility leaves it well placed to grow and prosper within the UK self-storage market. Simon G Thomas Chairman 4 November 2011 03 Annual Report & Accounts 2011 Lok’n’Store Group Plc AnDRew JAcoBs chieF executive oFFiceR chieF executive’s opeRAting Review Sales and Earnings Up, Costs Down Revenue for the year was £10.85 million, up 4.1% year on year (2010: £10.42 million), and with costs firmly under control this translated into strong profit growth. Total store EBITDA, a key performance indicator of the profitability and cash flow of the operating business, has increased 9.7% to £4.85 million (2010: £4.42 million). Operating profit for the year is up 70.2% to £1.57 million (2010: £0.92 million) and pre-tax profit for the year was up 118% to £938,280 (2010: £430,524). Performance of Stores During the year we increased pricing by 1.9% against lower costs increasing the overall EBITDA margin across all stores from 42.6% to 45.5%. The EBITDA margins of the freehold stores were 58.8% and the leasehold stores achieved 29.0% (2010: 56.6% and 25.2% respectively). The occupancy of the stores was down 2.8% to 56.4% of currently lettable area. At the end of July 2011 36.2% of Lok’nStore’s revenue was from business customers (2010: 36.8%) and 63.8% was from household customers, (2010: 63.2%). By number of customers this breakdown was 22.5% business customers (2010: 22.4%) and 77.5% household customers (2010: 77.6%). Pricing Lok’nStore takes an active approach to yield management, balancing price increases with occupancy growth as we evaluate various customer offers. This has proved to be an effective strategy and we are confident that with our yield management system we will be able to increase prices by more than inflation over the medium term, while retaining our competitive pricing position in the market. Our average price achieved for self-storage space was £18.82 per sq ft per annum at 31 July 2011, up 1.9% (2010: £18.47 per sq ft per annum). This compares with the average of £21.97 for the UK industry and £21.87 for the South East region (source Self-Storage Association Survey 2011). This positions Lok’nStore as the price competitive operator in a value conscious market, but with room to continue increasing prices as economic conditions continue to stabilise. We have increased pricing by 3.3% per annum compound over the last six years – a great result through a difficult economic period. By this careful management of prices we have managed to increase self-storage turnover by 2.6% despite the small decline in physical occupancy. Ancillary sales, namely packing materials, insurance and other sales, increased by 1.2% over the year (2010: 11.6%) accounting for 9.9% of storage revenues (2010: 10.1%). These ancillary sales are increasingly focused on insurance, which increases the overall margin of these sales. We continue to heavily promote our insurance to new customers with the result that over 86% (2010: 80%) of new customers over the year took our insurance. This compares with 68% (2010: 66.5%) of our total customer base who buy our insurance, and this provides us with built-in growth in our insurance sales as the customer base rolls over. 04 Lok’n’Store Group Plc Annual Report & Accounts 2011 opeRAting costs 2010/11 2009/10 2008/09 2007/08 £ MILLION 7.17 7.26 7.28 7.80 Marketing During the year our marketing budget was increasingly focused on the internet with approximately 3.6% of revenue spent on advertising and marketing (including postage, printing and stationery) (2010: 3.6%). The internet produces an increasing proportion of our enquiries (38% in the year) and printed directories a decreasing proportion. We continue to allocate more of our marketing budget towards the internet with 46.5% of marketing spend now internet based (2010: 34.5%). For this year, internet enquiries were up 22.8% year on year and total enquiries up 0.2%. We will continue to manage our marketing budget with a strong focus on cost control and value for money. Around 41% (2010: 44%) of our business still comes from passing traffic, so work on the visibility of our stores is also important in our marketing effort. With prominent positions, distinctive design and orange elevations, our stores help the profile of the whole Lok’nStore brand. Our store personnel are closely involved with sales and marketing initiatives and work with our Head Office team to ensure our marketing expenditure remains targeted and effective. Systems Centralisation of our store management computer system continues to yield marketing and other management information benefits and we remain committed to continuing systems centralisation, greater audit capability and the delivery of efficient and timely data. We continue to enhance our systems, analysis and reporting and over the coming year we will be integrating Saracen into our existing reporting systems. Our stores and head office are connected via a web-enabled system to deliver more automated and integrated processes and this has delivered cost efficiencies particularly in areas such as petty cash and expenses handling as well as invoice processing and stock reporting. We continue to increase the penetration of our internal audits, which is effective in terms of improved security, credit control and store presentation and is continually monitored and upgraded to ensure its effectiveness. Security The safety and security of our customers and their goods remains our highest priority. We invest in CCTV, intruder and fire alarm systems and the remote monitoring of our stores out of hours. We also have rigorous security procedures in relation to customers. 05 Annual Report & Accounts 2011 Lok’n’Store Group Plc chieF executive’s opeRAting Review continueD Corporate and Social Responsibilities Lok’nStore conducts its business in a manner that reflects honesty, integrity and ethical conduct. We believe that the long-term success of the business is best served by respecting the interests of all our stakeholders. Management of social, environmental and ethical issues is of high importance to Lok’nStore. These issues are dealt with on a day-to-day basis by the Group’s managers with principal accountability lying with the Board of Directors. We look actively for opportunities to address our responsibility to the environment, and we pay close attention to our energy use, carbon dioxide emissions, water use and waste production. Each year Lok’nStore commissions a full assessment of the Group’s environmental impact and this is included elsewhere in the Director’s Report. Customers We believe in clarity and transparency. Brochures and literature are written in plain English, explaining clearly our terms of business without hiding anything in the ‘small print’. We are open and honest about our products and services and do not employ pressure selling techniques or attempt to take advantage of any vulnerable groups. If we make a mistake we acknowledge it, deal with the problem quickly, and learn from our error. We listen to our customers as we know that they can help us improve our service to them. In return, 22% (2010: 21%) of our business comes from previous customers, existing customers taking more space, and customer referrals. Suppliers We are committed to conducting our business with suppliers in a fair and honest manner, with openness and integrity, operating in accordance with the terms and conditions agreed upon. We expect our suppliers to operate to these same principles. pRoFit gRowth (eBitDA) pRoFits exceeDeD 2007 peAK £ MILLION 3.28 2.93 2.45 2.73 2.90 2011 2010 2009 2008 2007 2006 2005 1.59 1.36 06 Lok’n’Store Group Plc Annual Report & Accounts 2011 Employees At 31 July 2011 we had 128 employees (2010: 102). This increase is largely due to the acquisition of Saracen and we welcome these new personnel to the Lok’nStore Group. We treat our employees with dignity and respect and are committed to providing a positive attitude in the business and an enjoyable working environment. We have a professional, open culture where staff can exchange ideas and offer suggestions for work and business improvement. This encourages our staff to build on their skills, through appropriate training and regular performance reviews. Weekly training courses at our Farnborough Head Office support these objectives where we have a large conference room which can accommodate all our training requirements for the foreseeable future. This reduces outgoings and increases and improves contact between Head Office and the stores by bringing staff into Head Office for regular training. This in turn contributes to attracting and retaining the right people which is key to the success of Lok’nStore. Additionally the Group supports employees undertaking National Vocational Qualifications. All employees are eligible to participate in share ownership plans and 13% of our employees have Employee Benefit Trust shares (scheme now closed) (2010: 17%) and 20% hold options (2010: 19%). 33% of the personnel are members of the contributory pension scheme (2010: 46%). Lok’nStore operates a Share Incentive Plan with 73% of employees participating in the Scheme (2010: 72%). This high level of participation is testament to the loyalty and commitment of our staff. Our personnel are committed and motivated and help maintain the exemplary levels of friendly service that Lok’nStore provides to its customers. I would like to thank all of our staff for their commitment to our business and for their hard work and efforts over the year to which the Group owes its continuing success. Andrew Jacobs Chief Executive Officer 4 November 2011 07 Annual Report & Accounts 2011 Lok’n’Store Group Plc chieF executive’s opeRAting Review continueD Pricing 2005–2011 3.3% Compound Price Growth t i n u e g a r o t s f l e s t f q s r e p e c i r P £19.00 £18.00 £17.00 £16.00 £15.00 £14.00 £13.00 £12.00 £11.00 £10.00 Jan July Jan July Jan July Jan July Jan July Jan July Jan July 2005 2006 2007 2008 2009 2010 2011 Operational Performance of Stores store analysis weeks old at 31 July 2011 Year-ended 31 July 2011 Revenue1 (£’000) stores eBitDA (£’000) eBitDA margin (%) As at 31 July 2011 maximum Area (‘000 sq ft) Freehold and long leasehold (‘000 sq ft) short leasehold (‘000 sq ft) number of stores Freehold and long leasehold short leasehold total stores July 2011 over 250 9,932 4,635 46.7 972 565 407 10 9 19 100 to 250 under 100 pipeline total 729 218 29.9 111 69 42 1 1 2 – – – – – – – – – – – – 10,661 4,853 45.5 143 143 – 2 – 2 1,226 777 449 13 10 23 1 In respect of the Farnborough store revenue includes a contribution receivable from Group Head Office in respect of the space and facilities the store provides for the Head Office function. This income to the store and the corresponding charge to Head Office is netted down in the Group revenue figures. Revenue from sites under development is excluded. 08 Lok’n’Store Group Plc Annual Report & Accounts 2011 pRopeRtY Review Strong Cash Flows Underpin Opportunities Given the current economic and financial uncertainty the property market remains in a volatile state. Lok’nStore’s strong cash flow and tactical approach to its property portfolio provides opportunities to take advantage of these conditions. Lok’nStore has both freehold and leasehold properties. Leaseholds provide the opportunity to buy in freeholds, and to renegotiate leases on more favourable terms. Asset Management Given current circumstances and Lok’nStore’s strong covenant some landlords are keen to extend lease terms providing them with greater security on their future income stream. Further opportunities to negotiate improved rental terms on other leases may exist. During the year we extended the leases on one of our existing stores while reducing the rent. The agreement, backdated to 25 March 2010, extends the leases to 24 March 2025 with an option to extend it for a further 10 years. It resulted in an immediate cash inflow of £40,000 and will produce additional annual cash savings of £40,000 annually until 24 March 2015 for the Group. The average length of the seven leases which have been valued in this period is 15 years and two months, an increase of two years over last year. Nine out of the 10 leasehold stores are inside the Landlord and Tenant Act providing us with a strong degree of security of tenure. The leasehold sites produced 28.3% of the store EBITDA in the year to July 2011 (2010: 26.3%). Our property team will continue to pursue further such value creating asset management opportunities to secure our trading operations, to improve cash flow and to lock in lower or to cap property costs. Development Sites Lok’nStore owns four development sites, two of which are for replacement stores and two for new locations. These sites all have the relevant planning permissions and three of these have recently been renewed. New Location Stores Portsmouth North Harbour This is a freehold site extending to almost two acres with planning permission to build a new self-storage centre of around 60,000 sq ft. The site fronts the A27 to the north of Portsmouth, is opposite a busy retail area and is prominent to the M27. The planning permission is for a six-storey building to capitalise on the high level of visibility of the site. Maidenhead This is a long leasehold site of 1.6 acres for which there is a current planning permission for a store up to 83,000 sq ft of self-storage space when completed. The lease term runs until April 2076. During the year the Group executed an agreement, subject to planning permission, for the shared use of this site with Lidl, a major international supermarket retailer. The substantial proceeds of the lease sale will help finance the development of the store. Subject to receiving the required planning permission, Lok’nStore will build a new state of the art self-storage centre which also provides space on the ground floor for Lidl’s store. The new self-storage centre will have around 58,000 sq ft of self-storage space, taking Lok’nStore’s total space to 1.2 million sq ft. Lok’nStore will create a new lease to Lidl concurrent with Lok’nStore’s own lease. Lidl will share the ground floor space with Lok’nStore’s operation, increasing the footfall by an estimated 1,000 cars a day. Lok’nStore will occupy and trade from its share of the ground floor and the entirety of the three floors above. The site is close to Maidenhead town centre and railway station and will be very prominent to the retail park on the main road joining the town centre with the M4 motorway. The store AveRAge leAse length (YeARs) YEARS 2011 2010 2009 2008 15.1 13.1 11.3 12.3 09 Annual Report & Accounts 2011 Lok’n’Store Group Plc computeR geneRAteD imAge oF pRoposeD mAiDenheAD Development pRopeRtY Review continueD will be of similar style and appearance to other recently opened Lok’nStore centres, with Lok’nStore’s strong branding along with Lidl’s brand adding to the visual attractiveness of the site. This collaboration will increase the visual prominence, brand recognition, passing traffic and footfall of the storage centre which are key criteria for success. Replacement Stores Reading On 8 January 2008, Lok’nStore obtained planning permission for high-density residential development on the freehold site of its existing Reading store. The permission is for 112 flats on the 0.66 hectare site. This permission has recently been renewed providing a further three years to execute on this project. The Group also has planning permission for a new larger 53,500 sq ft store on its site opposite the existing store, an increase in space of 29%. The prominence and modern look of the new store with its distinctive orange livery will position Lok’nStore in a highly visible and easily accessible location adjacent to the A33 at the gateway to Reading. The existing self-storage business will be moved into the new store once it is complete. When market circumstances are appropriate the site of the existing store will be sold with the benefit of its permission for residential development and the proceeds will be reinvested in the new store. Southampton We also own a freehold site on Third Avenue, Millbrook, in Southampton. The site of 2.16 acres fronts the main access road to Southampton city centre. It will replace the existing Southampton Lok’nStore which is located a few hundred metres away and currently provides up to 84,000 sq ft in a freehold property. On 30 September 2008, we secured planning permission on this new site and it can provide up to 100,000 sq ft of self- storage space. The purpose-built store will capitalise on the prominent main roadside position using the strong Lok’nStore branding similar in design to the successful flagship Farnborough store. The increased prominence and modern look of the building will allow the business to leverage off the existing business, increasing both the volume of space rented and the rates achieved on those rentals. The store will carry the distinctive orange livery and neon lighting which is proving an effective generator of business at our other stores. This planning permission has also recently been renewed. Option to acquire a site in Southend On 24 September 2010, the Group announced the acquisition of an option to acquire a site in Southend. The site extends to 1.2 acres and fronts the busy Eastern Avenue near the town centre. When developed, the site will provide up to 60,000 sq ft of storage space in a prominent, modern building. The project is subject to planning permission. On 2 March 2011 Planning permission was refused by the Local Authority and a planning appeal against that decision is awaited. The Option remains live pending the determination of the Planning Appeal. These projects are part of our strategy of continually reviewing and actively managing our operating portfolio, to ensure we are maximising its value for shareholders. This includes strengthening our distinctive brand, increasing or decreasing the size and number of our stores and moving or selling stores or sites when it will increase shareholder value. Portfolio We currently own 21 stores with capacity of around 1.1 million sq ft of storage space when fully fitted. 11 stores are held freehold and 10 are leasehold, and one further store is run on a management contract. With the new freehold sites at Portsmouth North Harbour, Southampton and Maidenhead total capacity rises to around 1.2 million sq ft. Of this 64% will be held freehold and 36% leasehold. By valuation 85% of the total property portfolio is freehold. We prefer to acquire freeholds if possible, and where 10 Lok’n’Store Group Plc Annual Report & Accounts 2011 opportunities arise we will seek to acquire the freehold of our leasehold stores. However as discussed above we are happy to take leases on appropriate terms and benefit from the advantages of a lower entry cost, with further options to create value later in the store’s development. Given the current property market we are carefully monitoring land prices. Transactions are few and far between and prices may come down further. We will adapt our acquisition strategy when the market stabilises, although we still believe that acquiring land, and building and opening new stores can add to shareholder value. Property Assets and Net Asset Value Lok’nStore’s freehold and operating leasehold properties have been independently valued by C&W at £68.0 million as of 31 July 2011 (July 2010: £70.2 million) compared to a historic cost value of £32.5 million (2010: £33.9 million). This is referred to further in the Financial Review and is detailed in note 11 of the notes to the financial statements. Adding our stores under development at cost, our total property valuation of £79.5 million (historic cost value £44.8 million) (2010: £81.0 million; historic cost value £45.2 million) translates into an adjusted net asset value of £2.29 per share (2010: £2.24 per share), an increase of 2.4% compared to last year. The value of all properties valued showed a decrease of 3.1%. ADJusteD net Asset vAlue up 2.4% Andrew Jacobs Chief Executive Officer 4 November 2011 Change in Valuation Metrics weighted exit yield in 10th year Discounted rate on future cash flow Average occupancy achieved at stabilisation purchasers costs purchasers and sellers costs on assumed exit (10th year) central management cost Breakdown of property values Freehold leasehold subtotal sites in development at cost Total 2011 % 8.51 12.2 70.2 5.8 7.8 6 2010 % 8.44 12.2 72.1 5.75 7.75 6 no. of stores July 2011 valuations no. of stores July 2010 valuations 11 7 18 4 22 55,670 12,310 67,980 11,532 79,512 12 7 19 3 59,390 10,800 70,190 10,795 22 80,985 11 Annual Report & Accounts 2011 Lok’n’Store Group Plc RAY DAvies FinAnce DiRectoR FinAnciAl Review Financial Review Trading Total revenue for the year was £10.85 million (2010: £10.42 million), an increase of 4.1%. Group EBITDA was £3.28 million, up 11.8% over the previous year (2010: £2.93 million). Operating profit for the year was £1.57 million, up 70.2% compared with £0.92 million in 2010 and pre-tax profit for the year was £938,280 up 118% (2010: £430,524). There is no current corporation tax liability to pay due to the availability of tax losses. Tax losses available to carry forward for offset against future profits amount to £2.63 million. Basic earnings per share were 3.57 pence (2010: 0.88 pence per share). Diluted earnings per share were 3.54 pence (2010: 0.88 pence per share). Operating Costs Operating costs (excluding cost of sales of retail products) amounted to £7.34 million for the year including the post-acquisition expenses of Saracen Datastore acquired on 30 June 2011. Excluding Saracen costs, operating costs (excluding cost of sales of retail products) amounted to £7.17 million for the year (2010: £7.26 million) a decrease of 1.3%. Property costs are the least variable cost and accounted for 47.3% of these costs (2010: 47.8%). Staff costs accounted for 38.6% (2010: 37.2%) and overheads for 14.1% (2010: 15.0%) of the total. This is the third consecutive year in which costs have been reduced. Increase/ (decrease) in costs % 2011 £ Increase/ (decrease) in costs % 2011 £ Excluding Saracen costs 2010 £ 1.0 6.8 (6.8) 3,434,558 2,885,424 1,017,030 (2.2) 2.4 (7.7) 3,392,281 2,766,792 1,007,128 3,467,011 2,702,965 1,090,818 1.0 7,337,012 (1.3) 7,166,201 7,260,794 Property costs Staff costs Overheads Total administration expenses Cash Flow, Interest and Financing At 31 July 2011, the Group had cash balances of £3.78 million (2010: £5.36 million) after spending £3.7 million of cash on the purchase of Saracen Datastore Limited. Net debt increased from £22.7 million to £24.4 million so the majority of the cost of Saracen was met from operating cash flow. There was £28.1 million of gross borrowings (2010: £28.1 million) representing gearing of 62.8% on net debt of £24.4 million (2010: 58.1%). After adjusting for the uplift in value of leaseholds which are stated at depreciated historic cost in the statement of financial position, gearing is 52.1% (2010: 50.3%). After adjusting for the deferred tax liability carried at year-end of £11.0 million gearing drops to 42.5% (2010: 40.6%). Cash inflow from operating activities before interest and capital expenditure was £3.6 million (2010: £3.47 million). As well as using cash generated from operations to fund some capital expenditure, the Group has a five year revolving credit facility. This provides sufficient liquidity for the Group’s current needs. Undrawn committed facilities at the year-end amounted to £11.9 million (2010: £11.9 million). 12 Lok’n’Store Group Plc Annual Report & Accounts 2011 The Group has agreed a new five year £40 million revolving credit facility with Lloyds TSB plc. The revolving credit facility is for a five-year term is effective from 20 October 2011 and expires on 19 October 2016. The facility will be used to repay the existing RBS facility and provide working capital for the development of the business over the medium term. The Group is not obliged to make any repayments prior to expiration. The loans bear interest at the London Inter-Bank Offer Rate (LIBOR) plus 2.35%–2.65% margin based on a loan to value covenant test (2.35% at Lok’nStore’s current LTV level). The interest cover and loan to value covenants are broadly in line with the previous facility. FunDs FRom opeRAtions (‘FFo’) £3m Prevailing economic conditions have caused LIBOR rates to remain at very low levels. Lok’nStore has managed its debt aggressively and the average interest rate paid since July 2010 was 1.84% compared to 1.81% for the year to 31 July 2010. Interest on bank borrowings for the year increased slightly to £522,513 from £508,687 in 2010. The net interest charge, defined as total finance costs less total finance income, increased from £489,708 to £498,450. From 1 August 2009 under IAS 23 (‘Borrowing Costs’) we are required to capitalise interest against our development pipeline in accordance with changes to International Financial Reporting Standards. The Group’s date of adoption was 1 August 2009, (the first annual year commencing after the IAS 23 effective date of 1 January 2009). All of the Group’s current qualifying assets predate the date of adoption and accordingly under the transitional adoption arrangements no borrowing costs have been capitalised against them in the year. A component of the interest cost incurred by the Group arises from the £11.5 million of development sites that the Group is currently carrying. The interest against this cost has not been capitalised but if it was the Group’s adjusted profit would have been approximately £212,330 higher for the year on the assumption that the £11.5 million is fully funded by borrowings. By excluding the interest costs of carrying the development sites from the total net interest charge of £498,450 this means that the interest on the operating portfolio is £286,120 for the year. Funds from operations (‘FFO’) represented by EBITDA minus interest on the operating portfolio is therefore £3 million equating to 12.0 pence per share, up 13% on last year (2010: 10.6 pence per share). While the Group has grown its business through a combination of new site acquisition, existing store improvements and relocations, it has placed any further site acquisition and development on hold while the current economic conditions persist. Consequently, capital expenditure (‘capex’) during the year totalled only £0.7 million (excluding the acquisition of Saracen Datastore Limited), including limited capex at existing stores, roof renovation with solar power at the Poole store and planning and other professional costs incurred in maximising the potential of the existing planning permissions. The Company has no further capital commitments beyond minor works to existing properties. We will consider conditions in the wider economy and the UK self-storage market in particular before acquiring new sites or committing to any new developments. 13 Annual Report & Accounts 2011 Lok’n’Store Group Plc FinAnciAl Review continueD Statement of Financial Position Net assets at the year-end were £38.8 million (2010: £39.1 million). The movement was mainly as a result of the profits earned during the year offset by a decrease in property values. Freehold property values at 31 July 2011 were £55.7 million compared to £59.4 million at 31 July 2010. Market Valuation of Freehold and Operating Leasehold Land and Buildings Our 11 freehold properties are held in the statement of financial position at fair value, and have been valued externally by Cushman and Wakefield (‘C&W’). Refer to note 11(b) – property, plant and equipment and also to the accounting policies for details of the fair value of trading properties. The leasehold stores are held as ‘operating leases’ and the valuations of these are not taken onto the statement of financial position. However seven of these have also been externally valued and these external valuations have been used to calculate the adjusted net asset value position of the Group. On 31 July 2011, professional valuations were prepared by external valuers Cushman & Wakefield (C&W) in respect of 11 freehold and seven operating leasehold properties. The valuation was prepared in accordance with RICS Appraisal and Valuation Standards Global and the UK 7th Edition. The valuation has been provided for accounts purposes and, as such, is a Regulated Purpose Valuation as defined in the Red Book. The external valuation methodology provides for a purchaser acquiring a centre incurring purchase costs of 5.80% initially and sale plus purchaser’s costs totalling 7.80% are assumed on the notional sales in the 10th year in relation to the freehold stores. In practice we believe that it is unlikely that the bulk of Lok’nStore’s properties would be acquired other than in a corporate structure, in which case transaction costs would likely be lower (see note 11(b) in the notes to the financial statements for a more detailed description of the valuation methodology). The valuation report indicates a total for properties valued of £68.0 million (NBV £32.5 million) (2010: £70.2 million: NBV £33.9 million). In relation to the existing store at Reading there is a prospect of redevelopment for residential use although it has been valued as a trading store. The valuations do not account for any further investment in existing stores since 31 July 2011. The development sites at Reading, Maidenhead, Portsmouth North Harbour and Southampton have not been valued and their asset value (stated at cost) of £11.5 million combined with the C&W valuation provides an aggregate property value of £79.5 million (2010: £81.0 million). 14 Lok’n’Store Group Plc Annual Report & Accounts 2011 During the year we extended the leases on one of our existing stores while reducing the rent. The property comprises four leases on FRI terms and was to expire on 24 March 2015. A reversionary lease was negotiated and granted in December 2010 extending the lease term by 10 years to 24 March 2025. The reversionary lease also includes an option to renew the lease for a further 10 years to 24 March 2035 providing all four units are renewed. This option is personal to Lok’nStore and any successor provided the successor is a major self-storage operator. This leasehold store has therefore been valued including this special assumption and on the basis of a lease term extending to 24 March 2035. A deferred tax liability arises on the revaluation of the properties and on the rolled over gain arising from the disposal of the Kingston and Woking sites. In due course the site of the existing Reading store is likely to be sold with the benefit of its permission for residential development and the proceeds will be reinvested in our new store pipeline. It is not the intention of the Directors to make any other significant disposals of operational self-storage centres. At present it is not envisaged that any tax will become payable in the foreseeable future due to the trading losses brought forward and the availability of rollover relief. The Board will continue to commission independent valuations on its trading stores annually to coincide with its year-end reporting. Both historically and currently we have valued our freehold and our leasehold property assets. Under IFRS, the valuations of our freehold property assets are now formally included in the Statement of Financial Position at their fair value, but the IFRS rules do not permit the inclusion of any valuation in respect of our leasehold stores to the extent that they are classified as operating leases. The value of our operating leases in the valuation totals £12.3 million (2010: £10.8 million). Instead we have reported by way of a note the underlying value of these leasehold stores in future revaluations and adjusted our Net Asset Value (‘NAV’) calculation accordingly to include their value. This will ensure comparable NAV calculations. Analysis of Total Property Value Freehold valued by C&W Leasehold valued by C&W Subtotal Sites in development at cost Total No. of stores 31 July 2011 Valuation £ No. of stores 31 July 2010 Valuation £ 113 55,670,000 7 12,310,000 18 4 67,980,000 11,531,582 122 59,390,000 10,800,000 7 19 3 70,190,000 10,794,944 221 79,511,582 221 80,984,944 1 Three Leasehold stores were not valued (2010: three) as their remaining unexpired terms were insufficient to yield a value under the Cushman & Wakefield valuation methodology. 2 3 Includes both the current Reading store with residential planning permission and the Reading site with planning permission for a new store. Includes the current Reading store at its trading store valuation. The Reading site with planning permission for a new store is stated at cost and is included in sites in development at cost. 15 Annual Report & Accounts 2011 Lok’n’Store Group Plc FinAnciAl Review continueD Adjusted Net Asset Value per Share Net assets per share are net assets adjusted for the valuation of the freehold and operating leasehold stores divided by the number of shares at the year end. The shares currently held in the Group’s employee benefits trust (own shares held) and in treasury are excluded from the number of shares. Analysis of net asset value (‘NAV’) Total non-current assets Adjustment to include leasehold stores at valuation Add: C&W leasehold valuation1 Deduct: leasehold properties and their fixtures and fittings at NBV Add: current assets Less: current liabilities Less: non-current liabilities (excluding deferred tax provision) Adjusted net assets before deferred tax provision Deferred tax Deferred tax arising on revaluation of leasehold properties2 Adjusted net assets Shares in issue Opening shares Shares issued for the exercise of options Closing shares in issue Shares held in treasury Shares held in EBT Closing shares for NAV purposes Adjusted net asset value per share after deferred tax provision Adjusted net asset value per share before deferred tax provision 31 July 2011 £ 31 July 2010 £ 76,537,369 75,040,880 12,310,000 (4,338,607) 10,800,000 (4,765,871) 84,508,762 81,075,009 5,709,940 (32,839,442) (26,342) 6,624,872 (3,674,438) (28,036,885) (27,155,844) (25,086,451) 57,352,918 55,988,558 (10,846,123) (10,555,101) (1,629,215) (1,992,848) 44,804,969 43,513,220 Number Number 26,758,865 26,758,865 – – 26,758,865 (1,142,000) (623,212) 26,758,865 (1,142,000) (623,212) 24,993,653 24,993,653 £1.79 £2.29 £1.74 £2.24 1 The seven leaseholds valued by Cushman & Wakefield are all within the terms of the Landlord and Tenant Act (1954) giving a degree of security of tenure. The average length of the leases on the leasehold stores valued was 15 years and two months at the date of the 2011 valuation (2010 valuation: 13 years and two months). 2 A deferred tax adjustment in respect of the uplift in the value of the leasehold properties has been included. Although this is a memorandum adjustment as leasehold properties are included in the Group’s financial statements at cost and not at valuation, this deferred tax adjustment is included in the adjusted Net asset value calculation in order to maintain a consistency of treatment between freehold and leasehold properties. 16 Lok’n’Store Group Plc Annual Report & Accounts 2011 Summary Lok’nStore has a flexible business model with relatively low credit risk, and tightly controlled operating costs which generates increasing cash from a strong asset base. Ray Davies Finance Director 4 November 2011 17 Annual Report & Accounts 2011 Lok’n’Store Group Plc BoARD oF DiRectoRs AnD ADviseRs 1 3 5 7 18 2 4 6 8 Lok’n’Store Group Plc Annual Report & Accounts 2011 Executive Directors 1. Andrew Jacobs (52) Chief Executive Officer Andrew established Lok’nStore in February 1995 after eight years’ experience as a stockbroker at Nomura International in London. He has a MPhil in Economics from Cambridge University and a BSc in Economics from the London School of Economics. Andrew is President and Deputy Chairman of Trucost plc, an environmental data company. Andrew is responsible for strategy, corporate finance and property. 2. Simon Thomas (51) Chairman Simon has been a Director of Lok’nStore since 1997 after a successful career in the publishing and finance sectors. He co-founded the emerging markets investment trust business at LCF Edmond de Rothschild. He has also worked at Swiss Bank Corporation, Nomura International and Reed International. Simon is a Non-Executive Director of Trucost plc, an environmental data company. Simon is responsible for the composition and performance of the Board. 3. Ray Davies (54) Finance Director Ray, a chartered accountant, has held a number of senior finance positions in the construction, and health and fitness sectors. In 1992, he was appointed Group Finance Director and Company Secretary of Dragons Health Clubs plc during a period of rapid and sustained growth. Following its acquisition by Crown Sports plc in 2000, he was appointed Finance Director of Crown Sports Clubs Division and Company Secretary of Crown Sports plc, a company listed on the London Stock Exchange. From 1984 to 1992 Ray was Group Finance Director and Company Secretary of Mark Scott Construction Group. Ray is responsible for finance, administration and risk management. 4. Colin Jacobs (47) Director Prior to joining Lok’nStore Colin worked for the Courts Group of Companies in sales and marketing functions. Colin is responsible for identifying and negotiating new sites for Lok’nStore, and for business development. Non-Executive Directors 5. Edward Luker (62) Senior Non-Executive Director Edward is a well-known figure in the UK property industry, having worked for CB Richard Ellis for 34 years, where he has been a Director and Partner for over 20 years. In 1997/8 Edward was Chairman of the Investment Property Forum, the industry body, and has acted for a number of pensions in the creation of property investment funds. Edward is a Fellow of the Royal Institute of Chartered Surveyors and is currently the discretionary portfolio manager of one of the UK’s largest public sector pension funds investing in property. Chief Executive Officer Finance Director Directors and Advisers Directors SG Thomas Chairman A Jacobs RA Davies CM Jacobs Director E Luker RJ Holmes Non-Executive Director Non-Executive Director CP Peal Non-Executive Director I Wright Senior Non-Executive Director Secretary and Registered Office Secretarial Solutions Limited c/o Maclay Murray Spens LLP One London Wall London EC2Y 5AB Edward sits on the Remuneration Committee and heads the Audit Committee. Registered in England and Wales No. 4007169 6. Richard Holmes (51) Non-Executive Director Richard is currently Marketing Director of Specsavers. Nominated Adviser and Broker Matrix Corporate Capital LLP 1 Vine Street London W1J 0AH Previously, Richard held a number of senior positions within the Boots organisation, including Director of Offer Development at Boots e-commerce business, Marketing Director of Boots the Chemist and Director of Health & Beauty. Richard was also Head of Strategy Development for Unilever’s worldwide dental business and holds an MSc in Economics from Warwick University and a BSc in Economics from the London School of Economics. Richard heads the Remuneration Committee. 7. Charles Peal (56) Non-Executive Director Charles started his career in 1977 at 3i Group, the leading UK quoted Venture Capital Company. He was the Chief Executive of Legal and General Ventures from 1988 to 2000 and was a Director of various quoted private equity investment trusts and management buyouts. He is currently a Director of Warnborough Asset Management, an independent fund management business and Chairman of BLME Sharia’a Umbrella Fund SICAV-SIF. Charles sits on the Audit Committee. 8. Ian Wright (35) Non-Executive Director Ian is an investment manager and Head of Real Estate equities at Laxey Partners (UK) Ltd where he has worked since 2004. He also sits on the board of a number of other UK and European property companies, including Spazio Investment NV. Ian has an MA in Mathematics from Oxford University and is a qualified Chartered Accountant. Panmure Gordon (UK) Limited (Appointed November 2011) Moorgate Hall 155, Moorgate London EC2M 6XB Auditor Baker Tilly UK Audit LLP Chartered Accountants 25, Farringdon Street London EC4A 4AB Solicitors Maclay Murray Spens LLP One London Wall London EC2Y 5AB Registrars Capita Registrars Capita Group plc The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Bankers The Royal Bank of Scotland plc Thames Valley Corporate Business Centre Abbey Gardens, 4 Abbey Street Reading Berkshire RG1 3BA Lloyds TSB plc Lloyds Bank Corporate Markets 3rd Floor, 2 City Place Beehive Ring Road Gatwick West Sussex RH6 0PA 19 Annual Report & Accounts 2011 Lok’n’Store Group Plc Directors’ report The Directors submit their report and the audited financial statements of the Company and of the Group for the year ended 31 July 2011. Principal Activity The principal activity of the Group during the year was that of providing self-storage and related services. Review of the Business and Future Developments A detailed account of the Group’s progress during the year and its future prospects are set out in the Chairman’s Review on pages 2 and 3. A detailed Operating Review, Property Review and a Financial Review have been prepared and are set out on pages 4 to 8, 9 to 11 and 12 to 17 respectively. The key performance indicators are included within the Highlights on page 1 and the Financial Review on pages 12 to 17. Financial Instruments The financial risk management objectives and policies of the Group, along with details of exposure to liquidity and cash flow risk are set out below and in note 16 to the financial statements. Principal Business and Operating Risks Finance Lok’nStore finances its current needs through a combination of strong operational cash flows and debt. All cash deposits during the year were placed with The Royal Bank of Scotland plc on treasury deposit utilising either one-day or two-day money funds. The Group’s cash position is reviewed daily and cash is transferred daily between these accounts and the Group’s operational current accounts as required. The Group has successfully renewed a £40 million bank facility after the reporting date to finance committed and future development programme, secured against the property portfolio with debt serviced by our operational cash earnings. The previous bank facility which was in place at 31 July 2011 was due to expire in February 2012 and is therefore presented as a current liability in these financial statements. The level of bank debt in the business is monitored to ensure that the ratio of net debt to freehold property assets is not greater than 75% and interest cover not less than 1.25 times based on Group net operating EBITDA, which were our principal banking covenants during the year. At the year-end the Group was comfortably within these covenants. The main risks arising from the Group’s financial instruments are interest rate risk and liquidity risk. The policies for managing these risks are regularly reviewed and agreed by the Board. No trading in financial instruments has been undertaken. Further information on our treasury arrangements is set out in note 16. Risk Management Risk management is a fundamental part of how we have controlled the development of Lok’nStore since its formation. We maintain a risk register which identifies and categorises our risks and provides an assessment of risk based on a combination of ‘likelihood’ and ‘consequences and impact’ on the business. 20 This is reviewed regularly by management and the Board and underpins our structured approach to identifying, assessing and controlling risks that emerge during the course of operating the business. Its purpose is to support better decision-making through understanding the risks inherent in both the day-to-day operations and the strategic direction of the Group and their likely impact. This is a continuing and evolving process as we continually review and monitor the underlying risk elements relevant to the business. Market Risk Self-storage is a developing market with further opportunities for significant growth. Awareness of self-storage and how it can be used by customers is well understood in the United States, but historically has been relatively low throughout the UK. Survey and anecdotal evidence suggest this awareness is rising quickly in the UK now. The rate of growth in branded self-storage operations in good trading locations continues to be limited by the challenge of acquiring sites at appropriate prices and obtaining planning permission. Lok’nStore invests in prime locations where its site criteria are met and which will enable it to develop high quality stores which are prominent with high visibility and strong branding. We believe this will place us in a strong trading position and may discourage competitors from entering that local market. However it is possible that Lok’nStore may be unable to execute this strategy which will inhibit its growth. Further it is possible that an increasing number of competitors in the industry may negatively impact Lok’nStore’s existing operations. We have a large customer base spread across 221 stores including those customers who have used Lok’nStore regularly over the years. Many of these periodically return as their circumstances and their storage needs change. Our customers are a broad mix of both domestic and business, generating around 64%:36% respectively of our revenue (2010: 63%:37%). 1 One store is managed by Lok’nStore under a Management Services Agreement for another owner. Property Risk The acquisition of new sites for development into self-storage centres is a key strategic objective of the business. We will continue to face significant competition for site locations from other uses such as hotels, car showrooms and offices as well as from the other self-storage operators. The planning process remains challenging. Lok’nStore may take on the risk of getting planning permission when acquiring sites in the face of competitive bids. In these cases we undertake the planning, environmental and other property due diligence under tight timescales. Lok’nStore’s management has gained significant experience in operating in this property environment, acquiring sites on main roads in prominent locations and obtaining appropriate planning permissions. We manage the construction of our properties carefully, ensuring that the build-out of each site is handled through a design and build contract with established contractors. We employ our Lok’n’Store Group Plc Annual Report & Accounts 2011 external team of professionals to monitor the progress of each development. The fit-out of mezzanine floors and steel units is generally project managed in-house using an established external professional team of sub-contractors who move from site to site and understand Lok’nStore’s specification. Credit Risk Lok’nStore’s business model is strong with customers paying four weekly in advance in addition to an initial four weeks rental deposit. We retain a legal lien over customers’ goods which can then be sold to cover any unpaid bills. Credit control remains tight with only £37,793 of bad debts written off during the year representing around 0.35% of revenue (2010: 0.13%). There was £4,091 of additional costs associated with recovery (2010: £4,669). Given the tight credit conditions in the wider economy our own credit control indicators are resilient showing no signs of weakening during the year with the number of late letters declining and bad debts remaining at very low levels. Tax Risk We regularly monitor proposed and actual changes in legislation in the tax regime affecting principally corporation tax, capital gains tax, VAT and Stamp Duty Land Tax (‘SDLT’). We work with our professional advisors and through trade bodies to understand and, if possible, mitigate or benefit from their effects. Corporate Social Responsibility and Employee Risk The Corporate Social Responsibility and Employee Risk within the business are discussed within the Operating Review on page 6. Reputational Risk Lok’nStore’s business reputation is very important to the Group. Our management and staff work hard to protect and develop it. We always try to communicate clearly with our customers, suppliers, local authorities and communities, employees and shareholders and to listen and take account of their views. The Lok’nStore websites (www.loknstore.co.uk www.loknstore.com and www.saracendatastore.co.uk) are important avenues of communication and a source of information for employees, customers and investors. Employee communication is augmented by regular staff newsletters. Dividend In respect of the current year, the Directors propose that a final dividend of 2.67 pence per share will be paid to the shareholders on 16 December 2011 to shareholders on the register on 18 November 2011. The total estimated dividend to be paid is £667,331 based on the number of shares currently in issue as adjusted for shares held in the Employee Benefits Trust and for shares held on treasury. This dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. Events after the Reporting Date Events after the reporting date are fully described in note 30. Directors The following Directors held office during the year and subsequently: SG Thomas A Jacobs RA Davies CM Jacobs E Luker RJ Holmes CP Peal I Wright1 1 I Wright was appointed to the Board on 5 May 2011. Details of the interests of the Directors in the shares of the Company are set out below and details of their remuneration are disclosed in note 6 of the financial statements. Biographical details of the Directors are set out on page 19. Reappointment of Directors In accordance with the Company’s Articles of Association, Simon Thomas and Andrew Jacobs retire by rotation and each being eligible; offer themselves for re-election at the next Annual General Meeting (AGM). Richard Holmes who has over nine years tenure as a non-executive is now required under the Companies Act 2006 to offer himself for re-election at every Annual General Meeting and accordingly offers himself for election at the next AGM. Ian Wright, a Board appointee during the year, offers himself for election at the next Annual General Meeting. Directors’ Interests in Shares Directors’ interests in the shares of the Company, including family interests, were as follows: SG Thomas A Jacobs RA Davies CM Jacobs RJ Holmes E Luker CP Peal I Wright Ordinary Shares of 1p each 31 July 2011 31 July 2010 2,147,500 5,314,000 40,000 – 134,000 13,800 125,000 – 2,147,500 5,314,000 30,000 – 134,000 13,800 75,000 – Andrew Jacobs is a beneficiary of “The Jacobs Family Directors Pension Scheme” that holds 310,350 Ordinary Shares and Simon Thomas is a beneficiary of a pension fund “The Thomas Family Directors Pension Scheme” that holds 190,075 Ordinary Shares. The figures set out in the table above do not include the Ordinary Shares held in these pension funds. Simon Thomas’ and Andrew Jacobs’ overall beneficial holdings remain unchanged. The Aylestone Pension Fund has a holding of 20,000 (2010: 20,000) Ordinary Shares representing less than 0.1% of the issued share capital. Colin Jacobs, a Director of Lok’nStore is interested in this transaction as one of the beneficiaries of the Aylestone Pension Fund. Details of Directors’ share options are disclosed in notes 20, 21, 23 and 24. 21 Annual Report & Accounts 2011 Lok’n’Store Group Plc Directors’ report CONTINUED Directors’ and Officers’ Liability Insurance The Company has liability insurance covering the Directors and Officers of the Company and its subsidiaries. Substantial Shareholdings The Directors have been notified or are aware that the following are interested in 3% or more of the issued Ordinary Share capital of the Company as at 27 October 2011: Total shares in issue (excluding treasury shares) Current rank 1 2 3 4 5 Number of shares 7,437,959 5,314,000 2,147,500 1,483,571 1,245,934 Laxey Partners Andrew Jacobs Simon Thomas Duart Capital Management LLC Charles Stanley, Stockbrokers % at 27/10/11 29.04 20.74 8.38 5.79 4.86 17,628,964 68.81 25,616,865 Policy on Payment of Suppliers The Company does not follow any formal code or standard on payment practice. The Company’s policy, which is also applied by the Group, is to ensure that, in the absence of dispute, all suppliers are dealt with in accordance with standard payment practice, whereby all outstanding trade accounts are settled within the terms agreed with the supplier at the time of the supply or otherwise 30 days from invoice date. At the year-end the credit taken from suppliers by the Group was 67 days (2010: 65 days). Market Valuation of Freehold Land and Buildings The changes in property, plant and equipment during the year and details of property valuations at 31 July 2011 are shown in note 11 to the Financial Statements. Further commentary on the property portfolio is contained in the Property Review and in the Financial Review. 22 Environment Environmental Policy Our Environmental Policy is to manage our waste, control our polluting emissions and to encourage our suppliers to minimise their impact on the environment. Environmental Management and Performance Lok’nStore has been measuring its environmental impacts for the last seven consecutive years. Monitoring focuses on environmental key performance indicators (KPIs), namely greenhouse gas emissions (GHG), water use and waste. Due to the extended cold period this winter, the Group saw an increase in gas consumption, which also translated into our direct carbon footprint. However, as a result of a significant reduction of fuel use in our car fleet, our operations carbon footprint decreased slightly – from 144 CO2e tonnes to 142 CO2e tonnes. The main driver of the reduction in vehicle fuel use by our car fleet was the introduction of locally based training and management programmes. This year all of the Group’s electricity was supplied by Green Energy plc which acquired 36% of its supply from renewable sources and the remaining 64% from combined heat and power (CHP) accredited generators. Due to the change in Green Energy’s fuel mix since last year, the Group’s emissions from electricity use has risen by 14%, even though we have reduced our electricity consumption from 2,459 MWh in 2010 to 2,366 MWh in 2011, which is a reduction of 4%. Figure 1 shows absolute and normalised GHG emissions from electricity consumption over the last seven years. Figure 1: GHG emissions from electricity consumption 1200 1000 s e n n o t e 2 O C 800 600 400 200 0 140 120 100 80 60 40 20 0 r e v o n r u T m 1 £ r e p t e 2 O C 2005 2006 2007 2008 2009 2010 2011 Absolute GHG emissions GHG Emissions Intensity, CO2e tonnes per million Turnover In line with the Company’s waste management strategy, we continue to monitor waste generation and recycling levels. This year Lok’nStore continued to find opportunities to reduce the quantity of waste produced. As a result, the Group’s total waste sent to landfill and recycled fell from 599 tonnes to 475 tonnes, a reduction in the total waste generated of 21%. The proportion of waste recycled has risen to 49% (2010: 40%). We also monitor hazardous (sanitary) waste, but the amount is negligible. Lok’n’Store Group Plc Annual Report & Accounts 2011 Figure 2: Landfill waste Figure 3: Water use 1000 800 s e n n o t 600 400 200 0 2005 2006 2007 2008 2009 2010 2011 Absolute waste sent for disposal Waste Intensity, tonnes per million Turnover 120 100 80 60 40 20 0 r e v o n r u T m 1 £ r e p s e n n o t r e t e m c b u c i 6000 4500 3000 1500 0 2005 2006 2007 2008 2009 2010 2011 Absolute water use Water Intensity, cubic meter per million Turnover 700 600 500 400 300 200 100 0 r e v o n r u T f o m 1 £ r e p ³ m In 2011 we consumed 2,661 m3 of water, which is 259 m3 less than in the previous year, which amounts to a 9% decrease. This reduction has been realised as a result of routine performance monitoring and rectification works where required. The Group will continue to look for opportunities to reduce water losses and wastage. Direct Impacts (Operational) Greenhouse Gases Definition Data Source and Calculation Methods Gas Emissions from utility boilers Vehicle Fuel Petrol and diesel used by staff Yearly consumption in kWh collected from fuel bills, converted according to Defra Guidelines Expense claims & MOT recorded mileage, converted according to Defra Guidelines Total CO2 Total Greenhouse Gases Includes Carbon Dioxide (CO2), Methane (CH4) and Nitrous Oxide (N2O) Calculated according to Defra Guidelines Waste Landfill Recycled Definition Data Source and Calculation Methods General office waste, which includes a mixture of paper, card, wood, plastics and metals. General office waste recycled, primarily cardboard, and fluorescent lights. Volume of waste generated per annum, calculated by recording the number of bins & skips removed, converted to tonnes according to Defra Guidelines. Volume of waste recycled per annum, calculated by recording the number of bins & skips removed for recycling, converted to tonnes according to Defra Guidelines. Quantity Absolute tonnes CO2e 2010 55 89 144 144 2011 63 79 142 142 Normalised1 tonnes CO2e per £m turnover 2010 2011 5 9 14 14 6 7 13 13 Quantity Absolute tonnes 2010 360 2011 242 Normalised1 tonnes per £m turnover 2010 35 2011 23 239 233 23 22 23 Annual Report & Accounts 2011 Lok’n’Store Group Plc Directors’ report CONTINUED Indirect Impacts (Supply Chain) Greenhouse Gases Definition Data Source and Calculation Methods Energy Use Directly purchased electricity, which generates Greenhouse Gases including CO2 emissions Yearly consumption of directly purchased electricity in kWh collected, converted according to Defra Guidelines Water Definition Data Source and Calculation Methods Supplied water Consumption of piped water. No water directly abstracted by the Group. Yearly consumption of purchased water Indirect Impacts – Downstream Greenhouse Gases Definition Data Source and Calculation Methods Vehicle Fuel Petrol and diesel used by customers in van hire fleet Recorded mileage, converted according to Defra Guidelines Total Greenhouse Gases Includes Carbon Dioxide (CO2), Methane (CH4) and Nitrous Oxide (N2O) Calculated according to Defra Guidelines Quantity Absolute tonnes CO2e 2010 252 2011 288 Normalised1 tonnes CO2e per £m turnover 2010 24 2011 27 Quantity Absolute m3 2010 2,920 2011 2,661 Normalised1 m3 per £m turnover 2010 280 2011 249 Quantity Absolute tonnes CO2e 2010 67 67 2011 55 55 Normalised1 tonnes CO2e per £m turnover 2010 2011 6 6 5 5 1 Normalised based on annual revenue for the respective years. The above information is based on UK Government Environmental Key Performance Indicators: Reporting Guidelines for UK Business (2006). Figures are rounded up. Health and Safety The Board recognises the prime importance of maintaining high standards of health and safety and healthy working conditions for staff, customers, visitors, contractors and other people who may be affected by our business activities. Lok’nStore has a Health and Safety Committee which meets to discuss issues relevant to Health and Safety within the Group under the overall supervision of Ray Davies, who carries Board responsibility for risk management. This meeting is chaired by the Facilities Manager, with the Committee comprising of three other staff members who each hold the position for one year. The Health and Safety policy is reviewed by the Facilities Manager on an annual basis. It is also amended to include changes to Health and Safety Law as they occur. The Health and Safety policy clearly sets out the duties and responsibilities of the Chief Executive Officer, Managers and all staff within the Group. Employee Benefit Trust The Employee Benefit Trust owns 623,212 shares (2010: 623,212), the costs of which are shown as a deduction from shareholders’ funds. The Company is holding in treasury a total of 1,142,000 of its own Ordinary Shares of 1 pence each with an aggregate nominal value of £11,420 for an aggregate cost of £2,092,902. At 31 July 2011 these treasury shares represent 4.27% of the Company’s issued share capital (2010: 4.27%). The total number of Ordinary Shares in issue is 26,758,865 (2010: 26,758,865). 24 Lok’n’Store Group Plc Annual Report & Accounts 2011 Share Buy-back Authority At the Company’s AGM on 3 December 2010 shareholders approved renewal of the existing share buyback authority. This authority will be sought at the Company’s Annual General Meeting again this year. The authority is restricted to a maximum of 5,845,299 Ordinary Shares, which is equivalent to 21.8% of the Company’s issued share capital and is equal to the number of shares available for purchase under the previous authority. The buy-back authority will only be exercised in circumstances where the Directors regard such purchases to be in the best interests of shareholders as a whole. Further details of share capital are given in note 19. Statement of Disclosure of Information to the Auditor The Directors who were in office at the date of approval of these financial statements have confirmed that, as far as they are aware, there is no relevant audit information of which the auditor is unaware. Each of the Directors has confirmed that they have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the auditor. Annual General Meeting The Company’s Annual General Meeting will be held on 9 December 2011 at 11.00 am at the offices of Maclay Murray Spens LLP, One London Wall, London EC2Y 5AB. Auditor A resolution to reappoint Baker Tilly UK Audit LLP, Chartered Accountants, as auditor will be put to the members at the Annual General Meeting. A formal notice together with explanatory circular and Form of Proxy will be sent to shareholders. On behalf of the Board Simon G Thomas Chairman 4 November 2011 25 Annual Report & Accounts 2011 Lok’n’Store Group Plc corporate Governance Introduction The Combined Code is intended to promote the principles of openness, integrity and accountability. The Group and Board fully support these principles. However, in view of the size and nature of the Group, the Directors have taken into consideration the recommendations of the Guidance for Smaller Quoted Companies on the Code produced by the Quoted Companies Alliance and applied the principles that they consider relevant to the Group. Shareholders’ Relations The Board has always sought good relations with the Company’s shareholders. The Directors meet and discuss the performance of the Group with shareholders during the year. Queries raised by a shareholder, either verbally or in writing, are promptly answered by whoever is best placed on the Board to do so. All Directors are individually introduced to shareholders at the Annual General Meeting. Narrative Statement Directors There is a Board of Directors, which is set up to control the Group and consists of four Executive and four Non-Executive Directors. The Board considers all of the Non-Executive Directors to be independent of the Group. SG Thomas is Chairman of the Board and the Board has a formal schedule of matters reserved for its consideration and decision. This schedule includes approval of financial strategy, major investments, review of performance, monitoring risk, ensuring adequate capital resources are available and reporting to shareholders. The Chairman is not independent, as he is a substantial shareholder of the Company and was formerly the Chief Executive. The full Board meets every three months to discuss a range of significant matters including strategic decisions, major acquisitions and Group performance. A procedure to enable Directors to take independent professional advice if required has been agreed by the Board and formally confirmed by all Directors. Each Board meeting receives the latest financial information available, which consists of detailed management accounts with the relevant comparisons to budget. A current trading appraisal is given by the Executive Directors. Each member of the Board is subject to the re-election provisions of the Articles of Association, which requires them to offer themselves for re-election at least once every three years. In the event of a proposal to appoint a new Director, this is discussed at a full Board meeting with each member being given the opportunity to meet the individual concerned prior to any formal decision being taken. Directors’ Remuneration The Remuneration Committee consists of RJ Holmes (Chairman of the Committee) and E Luker. The Committee meets and considers, within existing terms of reference, the remuneration policy and makes recommendations to the Board for each Executive Director. The Committee’s remuneration policy aims to design a package that will align the interests of Executive Directors and those of shareholders. The Executive Directors’ remuneration consists of a package of basic salary, bonuses and share options, which are linked to corporate achievements and these levels are determined by the Remuneration Committee. The details of each Director’s remuneration are set out in note 6 in the notes to the Financial Statements. The Committee meets once a year and considers proposals from the Chairman and Chief Executive Officer. Accountability and Audit The Board believes that the Annual Report and Accounts play an important part in presenting all shareholders with an assessment of the Group’s position and prospects. The Chairman’s Review contains a detailed consideration of the Group’s position and prospects. Internal Control The Board is responsible for ensuring that the Group has in place a system of internal control. In this context, control is defined as those policies and processes established to ensure that business objectives are achieved cost effectively, assets and shareholder value are safeguarded, and laws, regulations and policies are complied with. Controls can provide reasonable but not absolute assurance that risks are identified and adequately managed to achieve business objectives and to minimise material errors, losses and fraud or breaches of laws and regulations. The Group operates a strict system of internal financial control, which is designed to ensure that the possibility of misstatement or loss is kept to a minimum. There is a comprehensive system in place for financial reporting and the Board receives a number of reports to enable it to carry out these functions in the most efficient manner. These procedures include the preparation of management accounts, forecast variance analysis and other ad hoc reports. There are clearly defined authority limits throughout the Group. The Group continues to develop the internal audit function utilising operational management to make unannounced store visits as part of a process supported by audit control checklists and other procedures. This undertaking has contributed to sales by promoting efficient store management, but also addresses risk and credit control, cash and store banking, and space and customer management. The internal audit checks are designed to ensure any fraud or mismanagement is quickly identified. The Group has a whistle blowing procedure within its staff handbook, which is issued to all staff. All employees may raise concerns about malpractice or improper or potentially illegal behaviour in confidence without concern of victimisation or disciplinary action. Going Concern The Directors can report that, based on the Group’s budgets and financial projections, they have satisfied themselves that the business is a going concern. The Board has a reasonable expectation that the Company and the Group have adequate resources and facilities to continue in operational existence for the foreseeable future based on cash balances of £3.8 million, 26 Lok’n’Store Group Plc Annual Report & Accounts 2011 undrawn committed facilities at 31 July 2011 of £11.9 million and cash generated from operations in the year to 31 July 2011 of £3.6 million (2010: £3.47 million). The financial statements show net current liabilities due to the previous bank facility being presented as a current liability at 31 July 2011. This facility has been renewed following the reporting date, as described in Note 30. The financial statements are therefore prepared on a going concern basis. Audit Committee The Company has an established Audit Committee, to whom the external auditor, Baker Tilly UK Audit LLP, reports. The Committee consists of E Luker (Chairman of the Committee) and CP Peal. It is responsible for the relationship with the Group’s external auditor and the review of the Group’s financial reporting and internal controls. The Committee meets a minimum of twice a year, prior to the announcement of interim and annual results and would, should it be necessary, convene at other times. The Audit Committee also undertakes a formal assessment of the auditor’s independence each year, which includes: a review of non-audit services provided to the Group and related fees; discussion with the auditor of a written report detailing all relationships with the Company and any other parties that could affect independence or the perception of independence; a review of the auditor’s own procedures for ensuring the independence of the audit firm and partners and staff involved in the audit, including the regular rotation of the audit partner every five years; and obtaining written confirmation from the auditor that, in their professional judgement, they are independent. An analysis of the fees payable to the external audit firm in respect of both audit and non-audit services during the year is set out in note 5 to the financial statements. The Company is satisfied that the external auditor remains independent in the discharge of their audit responsibilities. The Board supports the highest standards in corporate governance, appropriate to its size, and continues to consider the Combined Code on Corporate Governance (June 2006) as well as the Company’s procedures to maintain proper control and accountability. In common with many small companies, a nomination committee has not been established and appointments to the Board are decided on by the Board as a whole. On behalf of the Board Simon G Thomas Chairman 4 November 2011 27 Annual Report & Accounts 2011 Lok’n’Store Group Plc Directors’ responsibilities in the preparation of financial statements The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Company Financial Statements for each financial year. The Directors are required by the AIM Rules of the London Stock Exchange to prepare Group financial statements in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union (‘EU’) and have elected under company law to prepare the Company financial statements in accordance with IFRS as adopted by the EU. The financial statements are required by law and IFRS as adopted by the EU to present fairly the financial position of the Group and the Company and the financial performance of the Group. The Companies Act 2006 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing the Group and Company financial statements, the Directors are required to: a. select suitable accounting policies and then apply them consistently; b. make judgements and accounting estimates that are reasonable and prudent; c. state whether they have been prepared in accordance with IFRSs as adopted by the EU; and d. prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are also responsible for the maintenance and integrity of the corporate and financial information on the Lok’nStore Group plc websites. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 28 Lok’n’Store Group Plc Annual Report & Accounts 2011 inDepenDent auDitor’s report to the members of lok’nstore Group plc Matters on which we are Required to Report by Exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Euan Banks (Senior Statutory Auditor) For and on behalf of BAKER TILLY UK AUDIT LLP, Statutory Auditor Chartered Accountants 25 Farringdon Street EC4A 4AB 4 November 2011 We have audited the group and parent company financial statements (“the financial statements”) on pages 32 to 68. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective Responsibilities of Directors and Auditor As more fully explained in the Directors’ Responsibilities Statement on page 28, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the Audit of the Financial Statements A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/ private.cfm. Opinion on the Financial Statements In our opinion: the financial statements give a true and fair view of the state of the group’s and the parent’s affairs as at 31 July 2011 and of the group’s profit for the year then ended; the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on Other Matter Prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. 29 Annual Report & Accounts 2011 Lok’n’Store Group Plc consoliDateD statement of comprehensive income for the year enDeD 31 July 2011 Revenue Cost of sales of retail products Property and premises costs Staff costs General overheads EBITDA2 Depreciation based on historic cost Additional depreciation based on revalued assets Loss on sale of motor vehicle Equity settled share-based payments Operating profit1 Professional costs of acquisition of Saracen Datastore Limited Profit before interest Finance income Finance cost Profit before taxation Income tax expense Profit for the financial year Profit/(loss) attributable to: Owners of the parent Non-controlling interest Other Comprehensive Income (Decrease)/increase in asset valuation Deferred tax relating to decrease/(increase) in asset valuation Other comprehensive income for the year net of tax Total comprehensive income for the year Attributable to: Owners of the parent Non-controlling interest Earnings per share Basic Diluted 1 The presentation of these figures has been amended as fully explained in note 2(b). 2 EBITDA and operating profit are defined in the accounting policies section of the notes to the financial statements. 30 Year ended 31 July 2011 £ Year ended 31 July 2010 £ Notes 1a 2a 2b1 2b1 2b1 10,845,926 (227,469) (3,434,558) (2,885,424) (1,017,030) 10,420,440 (225,049) (3,467,011) (2,702,965) (1,090,818) 3,281,445 2,934,597 (1,354,088) (261,780) (1,574,470) (258,007) (1,615,868) – (99,639) (1,832,477) (452) (181,436) 20 (1,715,507) (2,014,365) 1,565,938 920,232 2c (129,208) – 1,436,730 920,232 3 4 5 7 24,063 (522,513) 18,979 (508,687) 938,280 (51,977) 430,524 (209,400) 886,303 221,124 26 892,514 (6,211) 221,124 – 886,303 221,124 (2,494,416) 1,216,374 2,454,580 (388,426) (1,278,042) 2,066,154 (385,528) (6,211) 2,287,278 – (391,739) 2,287,278 9 9 3.57p 3.54p 0.88p 0.88p Lok’n’Store Group Plc Annual Report & Accounts 2011 consoliDateD statement of chanGes in equity for the year enDeD 31 July 2011 Share capital £ Share premium £ Other reserves £ Revaluation reserve £ Retained earnings £ Attributable to owners of the parent £ Non controlling interest £ 1 August 2009 267,589 698,044 13,159,539 19,758,314 3,088,522 36,972,008 Profit for the year Other comprehensive income: Increase in asset valuation Deferred tax relating to increase in asset valuation Total comprehensive income Transactions with owners: Dividend paid Transfer additional dep’n on revaluation net of deferred tax Equity settled share-based payments – – – – – – – – – – – – – – – – – – – – – – – – 221,124 221,124 2,454,580 (388,426) 2,066,154 – – – 2,454,580 (388,426) 2,066,154 2,066,154 221,124 2,287,278 (332,416) (332,416) – – – – (332,416) (332,416) – (188,346) 188,346 – 181,436 – – 181,436 31 July 2010 267,589 698,044 13,008,559 21,636,122 3,497,992 39,108,306 – – – – – – – – – – – Total equity £ 36,972,008 221,124 2,454,580 (388,426) 2,066,154 2,287,278 (332,416) (332,416) – 181,436 39,108,306 Profit/(loss) for the year Other comprehensive income: Decrease in asset valuation Deferred tax relating to decrease in asset valuation Total comprehensive income Transactions with owners: Non-controlling interest arising on acquisition of subsidiary Dividend paid Transfer additional dep’n on revaluation net of deferred tax Equity settled share-based payments – – – – – – – – – – – – – – – – – – – – – – – – – 892,514 892,514 (6,211) 886,303 (2,494,416) 1,216,374 (1,278,042) – – – (2,494,416) 1,216,374 (1,278,042) – – - (2,494,416) 1,216,374 (1,278,042) – (1,278,042) 892,514 (385,528) (6,211) (391,739) – (249,936) (249,936) – – – – – – – (249,936) 260,154 – 260,154 (249,936) (249,936) 260,154 10,218 – (196,335) 196,335 – 99,639 – – 99,639 – – – 99,639 31 July 2011 267,589 698,044 12,858,262 20,161,745 4,586,841 38,572,481 253,943 38,826,424 31 Annual Report & Accounts 2011 Lok’n’Store Group Plc company statement of chanGes in equity for the year enDeD 31 July 2011 1 August 2009 Loss for the year Dividend paid Total transactions with owners Equity settled share-based payments 31 July 2010 Loss for the year Dividend paid Total transactions with owners Equity settled share-based payments 31 July 2011 Share capital £ Retained earnings £ Share premium £ Other reserves £ Total £ 267,589 – 698,044 6,864,244 7,829,877 – (168,652) – – – – – – – – – – – (168,652) (332,416) (332,416) (332,416) (332,416) 181,436 181,436 267,589 (168,652) 698,044 6,713,264 7,510,245 – (168,886) – – – – – – – – – – – (168,886) (249,936) (249,936) (249,936) (249,936) 99,639 99,639 267,589 (337,538) 698,044 6,562,967 7,191,062 32 Lok’n’Store Group Plc Annual Report & Accounts 2011 statements of financial position 31 July 2011 company reGistration no. 4007169 Assets Non-current assets Intangible assets Property, plant and equipment Property lease premiums Investments Amounts due from subsidiary undertakings Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Liabilities Current liabilities Trade and other payables Current tax liabilities Borrowings Non-current liabilities Borrowings Deferred tax Total liabilities Net assets Group 31 July 2011 £ Group 31 July 2010 £ Company 31 July 2011 £ Company 31 July 2010 £ Notes 11a 4,418,718 11b 69,174,548 11c 2,944,103 12 – 31 – – 72,180,099 2,860,781 – – – – – 1,590,121 5,600,941 – – – 1,490,482 6,019,763 76,537,369 75,040,880 7,191,062 7,510,245 13 14 110,414 1,821,002 3,778,524 70,085 1,190,756 5,364,031 5,709,940 6,624,872 – – – – – – – – 82,247,309 81,665,752 7,191,062 7,510,245 15 (4,655,796) (59,605) 17 (28,124,041) (3,674,438) – – (32,839,442) (3,674,438) 17 (26,342) 18 (10,555,101) (28,036,885) (10,846,123) (10,581,443) (38,883,008) (43,420,885) (42,557,446) – – – – – – – – – – – – – – – – 38,826,424 39,108,306 7,191,062 7,510,245 Equity Equity attributable to owners of the parent Called up share capital Share premium Other reserves Retained earnings Revaluation reserve 19 25 26 267,589 698,044 267,589 698,044 12,858,262 13,008,559 3,497,992 21,636,122 4,586,841 20,161,745 267,589 698,044 6,562,967 (337,538) – 267,589 698,044 6,713,264 (168,652) – Total equity attributable to owners of the parent 38,572,481 39,108,306 7,191,062 7,510,245 Non-controlling interests Total equity 253,943 – – – 38,826,424 39,108,306 7,191,062 7,510,245 Approved by the Board of Directors and authorised for issue on 4 November 2011 and signed on its behalf by: A Jacobs Chief Executive Officer R Davies Finance Director 33 Annual Report & Accounts 2011 Lok’n’Store Group Plc consoliDateD statement of cash flows for the year enDeD 31 July 2011 Operating activities Cash generated from operations Net cash from operating activities Investing activities Purchase of property, plant and equipment and property lease premiums Acquisition of subsidiary (net of cash acquired) Proceeds from disposal of property, plant and equipment Interest received Net cash used in investing activities Financing activities Repayment of borrowings – subsidiary bank loan Interest paid Equity dividends paid Net cash used in financing activities Net (decrease) / increase in cash and cash equivalents in the year Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year No statement of cash flows is presented for the Company as it had no cash flows in either year. Year ended 31 July 2011 £ Year ended 31 July 2010 £ Notes 28a 3,599,559 3,466,294 3,599,559 3,466,294 (786,678) (3,563,254) 10 – 24,063 (555,104) – 2,900 18,979 (4,325,869) (533,225) (39,458) (569,803) (249,936) – (465,353) (332,416) (859,197) (797,769) (1,585,507) 5,364,031 2,135,300 3,228,731 3,778,524 5,364,031 34 Lok’n’Store Group Plc Annual Report & Accounts 2011 accountinG policies General Information Lok’nStore plc is an AIM listed company incorporated and domiciled in England and Wales. The address of the registered office is One London Wall, London EC2Y 5AB, UK. Copies of this Annual Report and Accounts may be obtained from the Company’s head office at 112, Hawley Lane, Farnborough, Hants, GU14 8JE, or the investor section of the Company’s website at http://www.loknstore.com. Basis of Accounting The annual financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) and International Financial Reporting Interpretations Committee (‘IFRIC’) Interpretations as adopted by the European Union and comply with those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS. The Group has applied all accounting standards and interpretations issued by the International Accounting Standards Board and International Financial Reporting Interpretation Committee relevant to its operations and effective for accounting periods beginning on or after 1 August 2010. The financial statements have been prepared on the historic cost basis except that certain trading properties are stated at fair value. Adoption of New and Revised Standards Standards Effective for the Current Year The adoption of the following standards and amendments has not had any significant impact on the financial statements of the Group: IFRS 1 First-time Adoption of IFRS – Amendment; Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters IAS 24 Revised IAS 24 Related Party Disclosures IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments IFRIC 14 Amendment – Prepayments of a Minimum Funding Requirement Annual improvements projects April 2009 and May 2010. Standards in Issue but Not Yet Effective At the date of approval of these financial statements, the following Standards and Interpretations which were in issue but not yet effective: IFRS 71 Financial Instruments: Disclosures – Amendments; Disclosures – Transfers of Financial Assets. Effective for accounting periods commencing on or after 1 July 2011. IFRS 11 First-time Adoption of IFRS – Amendment; Severe IAS 121 Hyperinflation and Removal of Fixed Dates for First-Time Adopters. Effective for accounting periods commencing on or after 1 July 2011. Income Taxes – Amendment; Deferred Tax: Recovery of Underlying Assets. Effective accounting periods commencing on or after 1 January 2012. IFRS 91 Financial Instruments. Effective accounting periods commencing on or after 1 January 2013. IFRS 101 Consolidated Financial Statements. Effective accounting periods commencing on or after 1 January 2013. IFRS 111 Joint Arrangements. Effective accounting periods commencing on or after 1 January 2013. IFRS 121 Disclosure of Interests in Other Entities. Effective accounting periods commencing on or after 1 January 2013. IFRS 131 Fair Value Measurement. Effective accounting periods IAS 271 IAS 281 commencing on or after 1 January 2013. Separate Financial Statements (as amended 2011). Effective accounting periods commencing on or after 1 January 2013. Investments in Associates and Joint Ventures (as amended 2011). Effective accounting periods commencing on or after 1 January 2013. 1 Not yet endorsed by the EU. The Directors do not anticipate that the adoption of these Standards will have a significant impact on the financial statements of the Group. There were no other Standards or Interpretations, which were in issue but not yet effective at the date of authorisation of these financial statements, that the Directors anticipate will have a material impact on the financial statements of the Group. Basis of Consolidation The consolidated financial statements of the Group incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 July each year. Subsidiaries Subsidiaries are entities over which the Group has the power to govern the financial and operating policies so as to obtain economic benefits from their activities. Subsidiaries are consolidated from the date on which control is obtained (the acquisition date) up until the date that control ceases. The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued, contingent consideration and liabilities incurred or assumed at the date of exchange. Costs directly attributable to the acquisition are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are initially measured at fair value at the acquisition date. Provisional fair values are adjusted against goodwill if additional information is obtained within one year of the acquisition date, about facts or circumstances existing at the acquisition date. Subsequent changes in provisional fair values are recognised through profit or loss. Changes in contingent consideration arising from additional information, obtained within one year of the acquisition date, about facts or circumstances that existed at the acquisition date are recognised as an adjustment to goodwill. Other changes in contingent consideration are recognised through profit or loss, unless the contingent consideration is classified as equity. In such circumstances, changes are recognised within equity. Non-controlling interests are measured at the proportionate share of its identifiable net assets. 35 Annual Report & Accounts 2011 Lok’n’Store Group Plc accountinG policies CONTINUED Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. Intra-group transactions, balances, and unrealised gains and losses on transactions between Group companies are eliminated on consolidation, except to the extent that intra-group losses indicate an impairment. Goodwill Goodwill arising on consolidation represents the excess of the consideration transferred, the amount of any non-controlling interest and the fair value of any previous interest in the acquired entity over the fair value of the identifiable assets and liabilities of a subsidiary at the date of acquisition. Goodwill is recognised as an asset. Going Concern The Directors can report that, based on the Group’s budgets and financial projections, they have satisfied themselves that the business is a going concern. The Board has a reasonable expectation that the Company and the Group have adequate resources and facilities to continue in operational existence for the foreseeable future based on cash balances and cash equivalents of £3.8 million, and drawn committed bank facilities at 31 July 2011 of £11.9 million and cash generated from operations in the year to 31 July 2011 of £3.6 million (2010: £3.47 million). The financial statements show net current liabilities due to the previous bank facility being presented as a current liability at 31 July 2011. This facility has been renewed following the reporting date, as described in Note 30. The financial statements are therefore prepared on a going concern basis. Any deficiency of the consideration transferred, the amount of any non-controlling interest and the fair value of any previous interest in the acquired entity below the fair value of identifiable assets and liabilities of a subsidiary (i.e. discount on acquisition) is recognised directly in profit or loss. Revenue Recognition Revenue comprises the fair value of the consideration received or receivable for goods and services provided in the ordinary course of the Group’s activities, net of discount, VAT and after eliminating sales within the Group. Goodwill is reviewed for impairment at least annually. For the purposes of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable cash flows, known as cash generating units, and goodwill is allocated to these units. If the recoverable amount of the cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. Impairment losses in relation to goodwill are recognised immediately in profit or loss and are not reversed in the subsequent period. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset for which the estimate of future cash flows have not been adjusted. When determining whether goodwill is impaired, the carrying value of the cash generating unit is adjusted to include the goodwill attributable to the non-controlling interest when the non-controlling interest has been measured as a proportionate share of the net identifiable assets of the subsidiary. Non-controlling Interests Profit or loss and each component of other comprehensive income are allocated between the owners of the parent and non-controlling interests even if this results in the non-controlling interest having a deficit balance. Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions. Any differences between the adjustment to the non-controlling interest and the fair value of consideration paid or received are recognised in equity. The Group recognises revenue when the amount of the revenue can be reliably measured and when goods are sold and title has passed. Revenue from services provided is recognised evenly over the period in which the services are provided. a) Self-storage revenue Self-storage services are provided on a time basis. The price at which customers store their goods is dependent on size of unit and store location. Customers are invoiced on a four- weekly cycle in advance and revenue is recognised based on time stored to date within the cycle. When customers vacate they are rebated the unexpired portion of their four weekly advance payment (subject to a seven day notice requirement). b) Retail sales The Group operates a ‘pack shop’ within each of its storage centres for selling storage related goods such as boxes, tape and bubble-wrap. Sales include sales to the public at large as well as self-storage customers. Sales of goods are recognised at point of sale when the product is sold to a customer. c) Insurance Customers may choose to insure their goods in storage. The weekly rate of insurance charged to customers is calculated based on the tariff per week for each £1,000 worth of goods stored by the customer. This charge is retained by Lok’nStore and covers the cost of Lok’nStore purchase of the block policy and other costs. This total amount is credited to revenue and forms a proportion of the ‘Other storage related revenue’ disclosed in Note 1a of the financial statements. Customers are invoiced on a four-weekly basis for the insurance cover they use and revenue is recognised based on time stored to date within the cycle. 36 Lok’n’Store Group Plc Annual Report & Accounts 2011 d) Van hire The utilisation of vans and their hire to customers is solely to promote and encourage prospective customers to use our self-storage centres and to facilitate their moves as efficiently as possible. Vans are hired out typically for a day and only to Lok’nStore customers and are not hired out to the general public at large. Revenue is recognised at the point of hire when the deposit is taken. e) Management fee income Management fees earned for managing stores not owned by the Group are recognised over the period for which the services are provided. f) Serviced archive and records management Customers are invoiced typically monthly in advance for the archive storage of their boxes, tape and files and revenue is recognised based on time stored to date within the monthly cycle. In respect of the provision of additional services, such as document box or tape collection and retrieval from archive, customers are invoiced typically monthly in arrears and revenue is recognised in line with the provision of these services. Segmental Information In accordance with the requirements of IFRS8 Operating Segments, the Group has reviewed its identifiable business segments and the information used and provided internally to the Board, which is considered to be the Chief Operating Decision Maker, in order to make decisions about resource allocation and performance management. Historically, there has been one business segment as the Group’s net assets, revenue and profit before tax were attributable to one principal activity operating under one unified business, being the provision of self-storage accommodation and related services. These all arise in the United Kingdom. Following the acquisition of Saracen Datastore Limited on 30 June 2011 the Group is now also involved in offsite records storage and document and tape archiving. Financial information is reported to the Board with revenue and profit analysed between self-storage activity and serviced archive and records management activity. Accordingly this has required a modification to the presentation of the segmental information as disclosed under note 1b. Bank Borrowings and Finance Costs Interest-bearing bank loans are recorded at the proceeds received net of direct issue costs. Fees payable on arrangement are accounted for on an accruals basis in profit or loss and are amortised against the carrying value amount of the loan over the entire period of the loan. Borrowing costs are recognised in profit or loss in the year in which they are incurred, unless the costs are incurred as part of the development of a qualifying asset, when they will be capitalised. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use. Commencement of capitalisation is the date when the Group incurs expenditure for the qualifying asset, incurs borrowing costs and undertakes activities that are necessary to prepare the assets for their intended use. In the case of suspension of activities during extended periods, the Group suspends capitalisation. The Group ceases capitalisation of borrowing costs when substantially all of the activities necessary to prepare the asset for use are complete. The Group’s date of adoption was 1 August 2009, (the first annual period commencing after the IAS 23 (Revised) Borrowing Costs effective date of 1 January 2009). All of the Group’s current qualifying assets predate the date of adoption and accordingly, under the transitional adoption arrangements, no borrowing costs have been capitalised in the current year or in prior years. EBITDA Earnings before interest, tax, depreciation and amortisation (‘EBITDA’), is defined as profits from operations before all depreciation charges, losses or profits on disposal, share-based payments, acquisition costs, finance income, finance costs and taxation. Store EBITDA Store EBITDA is defined as EBITDA (see above) but before central and head office costs. Operating Profit Operating profit is defined as profits from operations after all costs except acquisition costs, finance income, finance costs and taxation. Taxation Income tax expense represents the sum of the current tax payable and deferred tax. Current tax payable or recoverable is based on taxable profit for the year. Taxable profit differs from profit as reported in the statement of comprehensive income because some items of income or expense are taxable or deductible in different years or may not be taxable or deductible. The Group’s liability for current tax is calculated using tax rates and laws that have been enacted or substantively enacted by the reporting date. Deferred tax is the tax expected to be payable or recoverable in the future arising from the temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. It is accounted for using the ‘balance sheet liability method’. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences are utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised, based on tax rates that have been enacted or substantively enacted by the reporting date. Tax is charged or credited to profit or loss, except when it relates to items charged or credited directly to other comprehensive income, in which case the tax is also recognised directly in other comprehensive income. 37 Annual Report & Accounts 2011 Lok’n’Store Group Plc accountinG policies CONTINUED Retirement Benefits The amount charged to profit or loss in respect of pension costs is the contributions payable to money purchase schemes in the year. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the statement of financial position. There are no defined benefits schemes. Equity Share-based Payments The cost of providing share-based payments to employees is charged to profit or loss over the vesting period of the related share options. The cost is based on the fair value of the options determined using the Black-Scholes pricing model, which is appropriate given the vesting and other conditions attaching to the options. The value of the charge may be adjusted to reflect expected and actual levels of vesting. Advantage has been taken of the exemption available in IFRS2 – Share-based payments to exclude share options granted before 7 November 2002. Property Lease Premiums Costs relating to the acquisition of long leases are classified as a non-current asset in the statement of financial position. Costs may include lease premiums paid on entering such a lease and other related costs. Property, Plant and Equipment Freehold properties and long leasehold properties (classified as finance leases) are measured at fair value. A comprehensive external valuation is performed at each reporting date. Fixtures, fittings and equipment, computer equipment and motor vehicles are carried out at cost less accumulated depreciation. Assets in the course of construction and land held for pipeline store development (‘development property assets’) are carried at cost, less any recognised impairment loss. Depreciation of these assets commences when the assets are ready for their intended use. Depreciation is provided on all property, plant and equipment other than freehold land and development property assets at rates calculated to write each asset down to its estimated residual value evenly over its expected useful life as follows: Freehold property Long leasehold property Short leasehold improvements Fixtures, fittings and equipment Computer equipment Motor vehicles over 50 years straight line over unexpired lease period or renewal term over unexpired lease period or renewal term 10% to 15% reducing balance over two years straight line 25% reducing balance The assets’ residual values, useful lives and methods of depreciation are reviewed and adjusted if appropriate on an annual basis. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. The additional depreciation arising from the revaluation of freehold and long leasehold properties is separately presented on the face of the statement of comprehensive income and transferred from the revaluation reserve to retained earnings each year. Intangible Assets Customer relationships acquired in a business combination are measured initially at fair value and are subsequently amortised on a straight-line basis over their estimated useful lives (20 years). Customer relationship assets are impaired if the relationship with the customer ceases. Impairment of Property, Plant and Equipment and Intangible Assets At each reporting date, the Group reviews the carrying amounts of its property, plant and equipment to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent, if any, of the impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss. Where an impairment loss subsequently reverses, the carrying amount of the assets or cash-generating unit is increased to the revised estimate of its recoverable amount, not to exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognised immediately in profit or loss. Leased Assets and Obligations Where assets are financed by leasing agreements that give rights approximating to ownership (‘finance leases’), the assets are treated as if they had been purchased outright. The amount capitalised is the present value of the minimum lease payments payable during the lease term. The corresponding leasing commitments are shown as obligations to the lessor. Lease payments are treated as consisting of capital and interest elements, and the interest is charged to profit or loss in proportion to the remaining balance outstanding. All other leases are ‘operating leases’ and the annual rentals are charged to profit or loss on a straight-line basis over the lease term. Payments made on entering into or acquiring a leasehold that is accounted for as an operating lease are amortised over the lease term once the property is brought into use. 38 Lok’n’Store Group Plc Annual Report & Accounts 2011 Investments Shares in subsidiary undertakings are considered long-term investments and are classified as non-current assets. All investments are stated at cost. Provision is made for any impairment in the value of non-current asset investments. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined on a first in, first out basis. Net realisable value is based upon estimated selling prices less any costs of disposal. Provision is made for obsolete and slow moving items. Financial instruments Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provision of the instrument. Derivative Financial Instruments and Hedge Accounting The Group’s activities expose it primarily to the financial risks of interest rates. Currently the Group does not undertake any hedging activities or use any derivative financial instruments, although the Board keeps hedging policy actively under review in order to maintain a balance between flexibility and the hedging of interest rate risk. Loans and Receivables Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are initially recognised at fair value less transaction costs and subsequently measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. Liabilities and Equity Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities and includes no obligation to deliver cash or other financial assets. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Interest bearing loans and overdrafts are initially measured at fair value net of direct transaction costs and are subsequently measured at amortised cost, using the effective interest rate method. Any difference between the proceeds net of transaction costs and the settlement or redemption of borrowings is recognised over the term of the borrowing. Trade payables are initially recognised at fair value and are subsequently stated at amortised cost using the effective interest rate method. Impairment of Financial Assets Financial assets are assessed for indications of impairment at each reporting date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows from the asset have been reduced. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. Cash and Cash Equivalents Cash and cash equivalents comprises cash and short-term deposits and other short term highly liquid investments that are readily convertible to a known amount of cash. The carrying amounts of these assets approximate to their fair value and the risk of changes in value is not significant. Net Debt Net debt comprises the borrowings of the Group less cash and liquid resources. Provisions Provisions are recognised when the Group has a present obligation as a result of a past event which it is probable will result in an outflow of economic benefits that can be reliably estimated. Employee Benefit Trust The Group operates an employment benefit trust and has de facto control of the shares held by the trust and bears their benefits and risks. The Group records certain assets and liabilities of the trust as its own. Finance costs and administrative expenses are charged as they accrue. Own Shares The cost of own shares held by the employee benefit trust (‘ESOP shares’) and treasury shares is shown as a deduction from retained earnings. Earnings per share are calculated on the net shares in issue. Critical Accounting Estimates and Judgements The preparation of consolidated financial statements under IFRS requires management to make estimates and assumptions that may affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual outcomes may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. 39 Annual Report & Accounts 2011 Lok’n’Store Group Plc accountinG policies CONTINUED a) Estimate of Fair value of Trading Properties The Group values its self-storage stores using a discounted cash flow methodology which is based on projections of net operating income. Principal assumptions underlying management’s estimation of the fair value are those relating to stabilised occupancy levels; expected future growth in storage rents and operating costs, maintenance requirements, capitalisation rates and discount rates. A more detailed explanation of the background and methodology adopted in the valuation of the Group’s trading properties is set out in note 11(b). The carrying value of freehold properties held at valuation at the reporting date was £55.7 million (2010: £59.4 million) as shown in the table on page 15. Cushman & Wakefield’s (‘C&W’s’) valuation report comments on valuation uncertainty resulting from the recent global banking crisis coupled with the economic downturn which have caused a low number of transactions in the market for self-storage property. C&W note that although there were a number of transactions in 2007, the only two significant transactions since 2007 are the sale of a 51% share in Shurgard Europe which was announced in January 2008 and completed on 31 March 2008 and the sale of the former Keepsafe portfolio by Macquarie to Alligator Self- Storage which was completed in January 2010. C&W observe that in order to provide a rational opinion of value at the present time it is necessary to assume that the self-storage sector will continue to perform in a way not greatly different from that being anticipated prior to the ‘credit crunch’. However, (‘C&W’) have reflected negative sentiment in their capitalisation rates and they have reflected current trading conditions in their cash flow projections for each property. C&W state that there is therefore greater uncertainty attached to their opinion of value than would be anticipated during more active market conditions. The Board concur with this view. b) Assets in the Course of Construction and Land Held for Pipeline Store Development (‘Development property assets’) The Group’s development property assets are held in the statement of financial position at historic cost and are not valued externally. In acquiring sites for redevelopment into self-storage facilities, the Group estimates and makes judgements on the potential net lettable storage space that it can achieve in its planning negotiations, together with the time it will take to achieve maturity occupancy level. In addition, assumptions are made on the storage rent that can be achieved at the store by comparison with other stores within the portfolio and within the local area. These judgements, taken together with estimates of operating costs and the projected construction cost, allow the Group to calculate the potential net operating income at maturity, projected returns on capital invested and hence to support the purchase price of the site at acquisition. Following the acquisition, regular reviews are carried out taking into account the status of the planning negotiations, and revised construction costs or capacity of the new facility, for example, to make an assessment of the carrying value of the development property at historic cost. The Group reviews all development property assets for impairment at each reporting date in the light of the results of these reviews. Once a store is opened, then it is valued as a trading store. Freehold stores are carried at valuation in the statement of financial position. Stores in short leasehold properties are held under operating leases and are carried at cost rather than valuation in accordance with IFRS. 40 The Group holds planning permissions on all of its pipeline sites as a result of the painstaking and detailed work undertaken to complete the pre-planning and planning phases required on each site. During this year it has been engaged with the four sites to see how the potential of the existing permissions could be further maximised. The movement in costs is as a result of this work. The carrying value of development property assets at the reporting date was £11.5 million (2010: £10.8 million) of which £2.94 million relating to the long lease at Maidenhead was classified as a property lease premium in the reporting (2010: £2.86 million). c) Estimate of Fair Value of Intangible Assets Acquired in Business Combination The relative size of the Group’s intangible assets, excluding goodwill, makes the judgements surrounding the estimated useful lives important to the Group’s financial position and performance. At 31 July 2011 intangible assets, excluding goodwill, amounted to £3.3 million (2010: £ nil) and represented 4.3% of the Group’s total reported assets. The valuation method used and key assumptions are described in note 11(b). The useful life used to amortise intangible assets relates to the expected future performance of the assets acquired and management’s judgement of the period over which economic benefit will be derived from the asset. The estimated useful life of customer relationships of 20 years principally reflects management’s view of the average economic life of the customer base and is assessed by reference to customer churn rates. Typically, the customer base for a serviced archive business is very inert. Corporate customers do not tend to switch service providers and indeed they incur box withdrawal charges should they do so. An increase in churn rates may lead to a reduction in the estimated useful life and an increase in the amortisation charge. d) Dilapidations The Group has a number of stores operating under leasehold tenure. From time to time, in accordance with the Group’s stated objective to maximise shareholder value, it may choose not to renew a lease, particularly where alternative premises have been sourced and customers can be moved into the new premises. In these circumstances the Group may incur repairing and decoration liabilities (‘dilapidations’) based on the tenant’s obligation to the landlord to keep the leasehold premises in good repair and decorative condition. Landlords in these circumstances will normally serve a schedule of dilapidations on the tenant setting out a list of items to be remedied. This may also refer to obligations on the tenant to reinstate any alterations works previously undertaken by the tenant under a Licence for Alterations. Such claims will always be negotiated robustly by Lok’nStore and may require legal, valuation and surveyors’ expertise, particularly if it can be shown that the landlord’s interest in the premises has not been diminished by the dilapidations. As such, evaluations of actual liabilities are always a critical judgement and any sums provided to be set aside can only be an estimate until a settlement is concluded. The carrying value of the provision for dilapidations at the reporting date was £nil (2010: £nil). Lok’n’Store Group Plc Annual Report & Accounts 2011 notes to the financial statements for the year enDeD 31 July 2011 1a Revenue Analysis of the Group’s operating revenue is shown below: Stores trading Self-storage revenue Other storage related revenue Ancillary store rental revenue Management fees Subtotal Stores under development Non-storage income Subtotal Serviced archive and records management revenue Total revenue per statement of comprehensive income 2011 £ 2010 £ 9,522,818 1,059,990 5,217 21,220 9,259,949 1,034,889 5,217 21,622 10,609,245 10,321,677 92,450 98,763 10,701,695 10,420,440 144,231 – 10,845,926 10,420,440 1b Segmental Information IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Board to allocate resources to the segments and to assess their performance. Historically, there has been one business segment as the Group’s net assets, revenue and profit before tax were attributable to one principal activity, the provision of self-storage accommodation and related services. Following the purchase of Saracen Datastore Limited on 30 June 2011, the Group also provides offsite records storage and document and tape archiving services. The acquisition broadens the offering to clients and is seen as an excellent entry point to a wide market segment complimenting Lok’nStore’s existing self-storage activities. All of the Group’s activities occur in the United Kingdom. Financial information is reported to the Board with revenue and profit analysed between self-storage activity and serviced archive and records management activity. Segment revenue comprises of sales to external customers and excludes gains arising on the disposal of assets and finance income. Segment profit reported to the Board represents the profit earned by each segment before acquisition costs, finance income, finance costs and tax. For the purposes of assessing segment performance and for determining the allocation of resources between segments, the Board uses a measure of adjusted EBITDA (as defined in the accounting policies) and reviews the non-current assets attributable to each segment as well as the financial resources available. All assets are allocated to reportable segments. Assets that are used jointly by segments are allocated to the individual segments on a basis of revenues earned. All liabilities are allocated to individual segments other than borrowings and tax. Information is reported to the Board of Directors on a product basis as management believe that the activity of self-storage and the activity of serviced archive and records management exposes the Group to differing levels of risk and rewards due to the length, nature seasonality and customer base of their respective operating cycles. The segment information for the year ended 31 July 2011 is as follows: Total segment revenue Revenue from external customers Adjusted EBITDA Depreciation Equity settled share-based payments Segment profit Central costs not allocated to segments: Acquisition costs Finance income Finance costs Income tax expense Consolidated profit for the financial year Serviced archive & records management 2011 £ Self-storage 2011 £ Total 2011 £ 10,701,695 144,231 10,845,926 10,701,695 144,231 10,845,926 3,324,938 (1,608,652) (99,639) (43,493) (7,216) – 3,281,445 (1,615,868) (99,639) 1,616,647 (50,709) 1,565,938 (129,208) 24,063 (522,513) (51,977) 886,303 41 Annual Report & Accounts 2011 Lok’n’Store Group Plc notes to the financial statements continueD for the year enDeD 31 July 2011 1b Segmental Information continued Sales between segments are carried out at arm’s length. The serviced archive segment with over 300 customers has a greater customer concentration with its 10 largest corporate customers accounting for 40% of revenue and its top 50 delivering 71.1% of revenue. The self-storage segment with over 6,700 customers has no individual self-storage customer accounting for more than 1% of total revenue and no group of entities under common control (e.g. Government) accounts for more than 10% of total revenues. Segment and total assets Segment liabilities Borrowings (not allocated to segment liabilities) Total liabilities Capital expenditure Serviced archive & records management 2011 £ Self-Storage 2011 £ Total 2011 £ 77,153,652 5,093,657 82,247,309 (14,503,317) (28,071,905) (767,185) (78,478) (15,270,502) (28,150,383) (42,575,222) (845,663) (43,420,885) 673,812 29,543 703,355 The amounts presented to the Board with respect to total assets and total liabilities are measured in a manner consistent with the financial statements and are allocated based on the operations of the segment. The Group’s interest bearing liabilities are not considered to be segment liabilities but rather are managed by the treasury function. 2a Cost of Sales of Retail Products Cost of sales represents the direct costs associated with the sale of retail products (boxes, packaging etc.), the ancillary sales of insurance cover for customer goods and the provision of van hire services, all of which fall within the Group’s ordinary activities. Retail Insurance Van Hire Serviced archive consumables 2b Other Costs Property and premises costs Staff costs General overheads 2011 £ 132,936 21,639 55,980 210,555 16,914 2010 £ 144,337 21,190 59,522 225,049 – 227,469 225,049 2011 £ 2010 £ 3,434,558 2,885,424 1,017,030 3,467,011 2,702,965 1,090,818 7,337,012 7,260,794 The presentation of these costs in the Consolidated Statement of Comprehensive Income has been amended. These costs were previously grouped in a single line called ‘administrative expenses’. The Directors consider the amended presentation to provide more useful information and to be more appropriate to the business. 2c Costs of Acquisition of Saracen Datastore Limited Legal and professional fees 2011 £ 129,208 129,208 2010 £ – – 42 Lok’n’Store Group Plc Annual Report & Accounts 2011 3 Finance Income Bank interest Other interest All interest receivable arises on cash and cash equivalents (see note 16). 4 Finance Costs Bank interest Other interest 2011 £ 24,063 – 24,063 2010 £ 15,456 3,523 18,979 2011 £ 2010 £ 520,599 1,914 508,687 – 522,513 508,687 All interest payable arises on bank loans classified as financial liabilities measured at amortised cost (see note 17). 5 Profit Before Taxation Profit before taxation is stated after charging: Depreciation and amounts written off property, plant and equipment: – owned assets Operating lease rentals: – land and buildings Amounts payable to Baker Tilly UK Audit LLP and their associates for audit and non-audit services Audit services – UK statutory audit of the Company and consolidated accounts Other services The auditing of accounts of associates of the Company pursuant to legislation – audit of subsidiaries where such services are provided by Baker Tilly UK Audit LLP or its associates Other services supplied pursuant to such legislation – interim review Tax services – compliance services – advisory services Other services – work in respect of Company Share Incentive Plan (SIP)/CSOP – acquisition and due diligence services Comprising Audit services Non-audit services: Company and UK subsidiaries 6 Employees The average monthly number of persons (including Directors) employed by the Group during the year was: Store management Administration 2011 £ 2010 £ 1,615,868 1,832,477 1,397,032 1,427,264 41,000 45,000 16,000 5,000 7,000 7,000 16,290 33,383 1,000 40,750 16,000 55,290 5,093 – 155,423 133,383 57,000 98,423 50,000 83,383 155,423 133,383 2011 No. 87 21 108 2010 No. 83 19 102 43 Annual Report & Accounts 2011 Lok’n’Store Group Plc notes to the financial statements continueD for the year enDeD 31 July 2011 6 Employees continued Costs for the above persons: Wages and salaries Social security costs Pension costs Share-based remuneration (options) 2011 £ 2010 £ 2,260,115 207,881 36,891 2,504,887 99,639 2,160,026 200,439 25,563 2,386,028 181,436 2,604,526 2,567,464 Share-based remuneration is separately disclosed in the statement of comprehensive income. Wages and salaries of £105,066 (2010: £104,259) have been capitalised as additions to property, plant and equipment as they are directly attributable to the acquisition of these assets. All other employee costs are included in administrative expenses in the statement of comprehensive income. In relation to pension contributions, there was £3,408 (2010: £4,167) outstanding at the year-end. Directors’ Remuneration 2011 Executive A Jacobs SG Thomas RA Davies CM Jacobs Non-Executive RJ Holmes ETD Luker CP Peal I Wright 2010 Executive A Jacobs SG Thomas RA Davies CM Jacobs Non-Executive RJ Holmes RW Jackson ETD Luker C P Peal Emoluments £ Bonuses £ Benefits £ Sub total £ 200,000 50,000 96,750 54,500 20,000 25,000 20,000 – 14,000 3,500 10,000 4,500 – – – – 2,562 2,674 1,732 2,182 – – – – 216,562 56,174 108,482 61,182 20,000 25,000 20,000 – 466,250 32,000 9,150 507,400 Gains on share options £ – – – – – – – – – Emoluments £ Bonuses £ Benefits £ Sub total £ Gains on share options £ 190,000 47,500 96,750 51,775 19,000 7,500 23,750 19,000 8,000 2,000 4,000 2,000 – – – – 2,157 2,321 1,499 1,917 – – – – 200,157 51,821 102,249 55,692 19,000 7,500 23,750 19,000 455,275 16,000 7,894 479,169 – – – – – – – – – Total £ 216,562 56,174 108,482 61,182 20,000 25,000 20,000 – 507,400 Total £ 200,157 51,821 102,249 55,692 19,000 7,500 23,750 19,000 479,169 During the year services totalling £302,896 (2010: £276,920) were provided by Value Added Services Limited (‘VAS’), a company in which Andrew Jacobs and Simon Thomas have a beneficial interest. The amount paid to Value Added Services Limited which is directly attributable to Andrew Jacobs and Simon Thomas is shown in the Directors’ emoluments table above but not included in the total employee costs above. There were performance bonuses earned and payable to VAS for the year of £17,500 (2010: £10,000). See note 31 on ‘Related Party Transactions’ for further information. Pension contributions of £14,663 (2010: £8,944) were paid by the Group on behalf of RA Davies. The highest paid Director did not accrue any pension rights during the year. The benefits in kind all relate to medical insurance premiums paid on behalf of the Directors. The number of Directors to whom retirement benefits are accruing under money purchase pension schemes in respect of qualifying service is one (2010: one). 44 Lok’n’Store Group Plc Annual Report & Accounts 2011 7 Taxation Current tax: UK corporation tax at 27% (2010: 28%) Deferred tax: Origination and reversal of temporary differences Impact of change in tax rate on closing balance Adjustments in respect of prior periods Total deferred tax Income tax expense for the year The charge for the year can be reconciled to the profit for the year as follows: Profit before tax Tax on ordinary activities at the standard rate of corporation tax in the UK of 27% (2010: 28%) Expenses not deductible for tax purposes Depreciation of non-qualifying assets Share-based payment charges in excess of corresponding tax deduction Impact of change in tax rate Amounts not recognised in deferred tax Utilisation of loss against pre-acquisition profits Adjustments in respect of prior periods – deferred tax Other Income tax expense for the year Effective tax rate 2011 £ 2010 £ (13,054) – 451,412 (230,580) (155,802) 65,031 51,977 2011 £ 938,280 253,336 3,263 87,736 26,903 (230,580) 44,104 27,653 (155,802) (4,636) 310,269 (102,742) 1,873 209,400 209,400 2010 £ 430,524 120,547 7,823 94,367 50,802 (102,742) 36,730 – 1,873 – 51,977 209,400 6% 49% Non-deductible expenses consist mainly of depreciation charges on the Group’s properties which do not qualify for tax allowances. In addition to the amount charged to profit or loss for the year, deferred tax relating to the revaluation of the Group’s properties amounting to £1,216,374 (2010: £388,426 debit) has been recognised as a credit directly in other comprehensive income (see note 18 on deferred tax). 8 Dividends Amounts recognised as distributions to equity holders in the year: Final dividend for the year ended 31 July 2009 (1 pence per share) Interim dividend for the six months to 31 January 2010 (0.33 pence per share) Final dividend for the year ended 31 July 2010 (0.67 pence per share) Interim dividend for the six months to 31 January 2011 (0.33 pence per share) 2011 £ 2010 £ – – 167,457 82,479 249,937 82,479 – – 249,936 332,416 In respect of the current year, the Directors propose that a final dividend of 2.67 pence per share will be paid to the shareholders. The total estimated dividend to be paid is £667,331 based on the number of shares currently in issue as adjusted for shares held in the Employee Benefits Trust and for shares held on treasury. This is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The ex-dividend date will be 16 November 2011; the record date 18 November 2011; with an intended payment date of 16 December 2011. 45 Annual Report & Accounts 2011 Lok’n’Store Group Plc notes to the financial statements continueD for the year enDeD 31 July 2011 9 Earnings per Share The calculations of earnings per share are based on the following profits and numbers of shares. Profit for the financial year attributable to owners of the Parent Weighted average number of shares For basic earnings per share Dilutive effect of share options For diluted earnings per share 2011 £ 2010 £ 892,514 221,124 2011 No. of shares 2010 No. of shares 24,993,653 201,741 24,993,653 49,502 25,195,394 25,043,155 623,212 (2010: 623,212) shares held in the Employee Benefit Trust and 1,142,000 (2010: 1,142,000) treasury shares are excluded from the above. Earnings/(loss) per share Basic Diluted 2011 2010 3.57p 3.54p 0.88p 0.88p 10 Acquisition of Subsidiary On 30 June 2011, Lok’nStore Limited acquired 90.6% of the issued share capital of Saracen Datastore Limited (‘Saracen’), a company incorporated in England & Wales. Saracen provides serviced archive and records management solutions. The cash consideration was £3.7 million. Leo Kane, the incumbent Managing Director of Saracen who has been with the business since 1995, retains a 9.4% stake in Saracen and will continue in his current role. Andrew Jacobs and Ray Davies have joined the Saracen Board to provide the majority of the directors of the board of Saracen Datastore Limited which, together with Lok’nStore’s majority shareholding, gives it control. Saracen, which is headquartered in Leatherhead, was established in 1991 and has four sites across the South East of England providing over 100,000 sq ft of offsite records storage and document and tape archiving space. For the year ended 31 December 2010, Saracen achieved turnover of £1.6 million and adjusted EBITDA of £0.4 million. The acquisition broadens the offering to clients and the acquisition of Saracen is seen as an excellent entry point to a wide market segment complimenting Lok’nStore’s existing self-storage activities. This acquisition extends our existing self-serve archive service which we provide to around 500 customers. The acquisition will add over 300 customers and the Directors believe that this will enhance the Group’s focus on increasing cash generation from the business and value to shareholders. The transaction has been accounted for using the acquisition method of accounting. The goodwill is attributable to the synergies that are expected to arise in the post-acquisition period and the skilled labour force of the acquired business. The Contractual customer relationships have been separately valued and included an assessment of the value of the skilled labour force. None of the goodwill is expected to be deductible for income tax purposes. The following table summarises the consideration paid for Saracen and the amounts of assets and liabilities assumed recognised at the acquisition date, as well as the fair value at the acquisition date of the non-controlling interest in Saracen. 46 Lok’n’Store Group Plc Annual Report & Accounts 2011 10 Acquisition of Subsidiary continued Net assets acquired Assets Property, plant and equipment Intangible assets – customer relationships Inventories Trade and other receivables Cash and cash equivalents Total assets Liabilities Trade and other payables Other payables Current tax liabilities Deferred tax liabilities (note 18) Deferred tax liabilities arising on initial recognition of intangible assets (note 18) Bank loan Finance leases Total liabilities Fair value of identifiable assets and liabilities Non-controlling interest Goodwill Total consideration Book Value £ 401,377 – 8,956 596,000 87,156 Fair Value Adjustments £ – 3,308,839 – – – 31 July 2011 £ 401,377 3,308,839 8,956 596,000 87,156 1,093,489 3,308,839 4,402,328 (528,833) (20,682) (69,485) (33,111) – (39,458) (82,864) – – – – (827,210) – – (528,833) (20,682) (69,485) (33,111) (827,210) (39,458) (82,864) (774,433) (827,210) (1,601,643) 319,056 (29,991) – 2,481,629 (230,163) 1,109,879 2,800,685 (260,154) 1,109,879 289,065 3,361,345 3,650,410 All of the gross contractual trade receivables at the acquisition date are expected to be collected. Saracen Datastore Limited contributed £144,231 of revenue and £66,075 net loss for the period between the date of acquisition and the reporting date. Had the Saracen acquisition occurred on 1 August 2010 the Group’s consolidated statement of comprehensive income would show revenue of £12.5 million and the Group’s profit before tax would be £1.2 million. 11a Intangible Assets Group Net book value at 1 August 2009 and 1 August 2010 Acquisition of subsidiary – Saracen Datastore Limited (see Note 10) Amortisation charge1 Net book value at 31 July 2011 Contractual customer relationships £ – 3,308,839 – Goodwill £ – 1,109,879 – Total £ – 4,418,718 – 1,109,879 3,308,839 4,418,718 All goodwill is allocated to the serviced archive cash-generating units (CGUs) identified as a separate business segment. 1 Due to the proximity of the acquisition to the reporting date, no amortisation was provided for in these financial statements. Amortisation for financial year 2012 will be charged based on a 20 year amortisation profile on cost less any impairment. The fair value of the contractual customer relationships was estimated by using an income based approach and applying principles set down by the International Valuation Standards Council in Guidance Note 4 (Valuation of Intangible Assets). The fair value estimates are based on: – an assumed discount rate of 11% – estimated useful lives of customer relationships of 20 years based on a substantially inert and contractually committed customer base. Customer relationship assets are/shall be subject to impairment if specific relationships with individual customers cease. long term sustainable growth rates of 2.75% – – an application of contributory asset charges (‘CAC’) recognising the contributions to cash flow from tangible assets, working capital and the workforce. – a corporation tax rate of 26% 47 Annual Report & Accounts 2011 Lok’n’Store Group Plc notes to the financial statements continueD for the year enDeD 31 July 2011 11b Property, Plant and Equipment Group Cost or valuation 1 August 2009 Additions Reclassification Disposals Revaluations 31 July 2010 Depreciation 1 August 2009 Depreciation Revaluations Disposals 31 July 2010 Development property assets at cost £ Land and buildings at valuation £ Short leasehold improvements at cost £ Fixtures, fittings and equipment at cost £ Motor vehicles at cost £ Total £ 7,953,749 36,114 (55,700) – – 51,946,049 161,297 55,700 – 1,967,897 2,492,338 47,231 – – – 15,331,550 275,329 – – – 161,974 550 – (5,000) – 77,885,660 520,521 – (5,000) 1,967,897 7,934,163 54,130,943 2,539,569 15,606,879 157,524 80,369,078 – – – – – – 486,683 (486,683) – 1,156,558 193,475 – – 5,647,369 1,125,870 – – 40,904 26,449 – (1,646) 6,844,831 1,832,477 (486,683) (1,646) – 1,350,033 6,773,239 65,707 8,188,979 Net book value at 31 July 2010 7,934,163 54,130,943 1,189,536 8,833,640 91,817 72,180,099 Cost or valuation 1 August 2010 Additions Assets acquired on acquisition of subsidiary Reclassification Disposals Revaluations 31 July 2011 Depreciation 1 August 2010 Depreciation Revaluations Disposals 31 July 2011 7,934,163 261,329 – 391,987 – – 54,130,943 278,101 – (391,987) – (2,986,700) 2,539,569 57,018 – – – – 15,606,879 77,365 343,739 – – – 157,524 29,543 57,639 – – – 80,369,078 703,356 401,378 – – (2,986,700) 8,587,479 51,030,357 2,596,587 16,027,983 244,706 78,487,112 – – – – – – 492,284 (492,284) – 1,350,033 116,671 – – 6,773,239 984,088 – – 65,707 22,826 – – 8,188,979 1,615,869 (492,284) – – 1,466,704 7,757,327 88,533 9,312,564 Net book value at 31 July 2011 8,587,479 51,030,357 1,129,883 8,270,656 156,173 69,174,548 If all property, plant and equipment was stated at historic cost the carrying value would be £44.8 million (2010: £45.2 million). Additions of £0.3 million to development property assets includes professional costs incurred in maximising the potential of existing planning permissions on the Portsmouth North Harbour and Reading sites and additions of £0.3 million to land and buildings includes the costs of roof renovation with new solar power to the Poole store. Property, plant and equipment (non-current assets) with a carrying value of £69.2 million (2010: £72.2 million) is pledged as security for bank loans (see note 17). The Maidenhead property (see note 11c) is also pledged as security for the bank loans. The Swindon East and Swindon West units are leasehold stores, under common management, and are held at a combined carrying cost of £132,983 (2010: £206,861).The Swindon East/West stores remain under-performing relative to its peer group of stores over 250 weeks and all goodwill attaching to these stores was fully written off in 2008. Management has made an assessment of the current carrying value of its leasehold assets based on the likely cash flows generated by the stores over the next 20 years (the recoverable amount of a leasehold cash-generating unit based on a typical occupational lease term) as recorded in the Group’s budgets and forecasts and based on a discount rate of 12% and an annual growth rate of 3%. Revenue and cost inflation was ignored. Accordingly it was determined that the carrying value of the Swindons’ property plant and equipment is not impaired. Management will continue to keep this matter under review. The net book value of assets held under finance leases at 31 July 2011 was £136,674 (2010: £nil) and the depreciation charge includes £2,908 in relation to these assets. 48 Lok’n’Store Group Plc Annual Report & Accounts 2011 11b Property, Plant and Equipment continued Market Valuation of Freehold and Operating Leasehold Land and Buildings On 31 July 2011, a professional valuation was prepared by external valuers Cushman & Wakefield LLP (‘C&W’) in respect of 11 freehold and seven leasehold properties. All of the leasehold properties are classified as operating leases and not revalued in the financial statements. The valuation was prepared in accordance with the RICS Valuation Standards, Global and UK 7th Edition, published by The Royal Institution of Chartered Surveyors (‘the Red Book’). The valuations were prepared on the basis of Market Value or Market Value as a fully equipped operational entity having regard to trading potential, as appropriate. The valuation was provided for accounts purposes and as such, is a Regulated Purpose Valuation as defined in the Red Book. In compliance with the disclosure requirements of the Red Book C&W have confirmed that: The members of the RICS who have been the signatories to the valuation provided to the Company for the same purposes as this valuation have been the signatories since January 2004. C&W have prepared seven previous valuations for the same purpose as this valuation on behalf of the Company. C&W do not provide other significant professional or agency services to the Company. In relation to the preceding financial year of C&W the proportion of the total fees payable by the Company to the total fee income of the firm is less than 5%. The valuation report indicates a total valuation for all properties valued of £68.0 million (2010: £70.2 million) of which £55.7 million (2010: £59.4 million) relates to freehold properties, and £12.3 million (2010: £10.8 million) relates to properties held under operating leases. Freehold land and buildings are carried at valuation in the statement of financial position. Short leasehold improvements at properties held under operating leases are carried at cost rather than valuation in accordance with IFRS. For the trading properties, the valuation methodology explained in more detail below is based on market value as fully equipped operational entities, having regard to trading potential. The total valuation of trading properties has therefore been allocated by the Directors between freehold properties and the fixtures, fittings and equipment in the valued properties which are held at cost. Of the £55.7 million valuation of the freehold properties £4.7 million relates to the net book value of fixtures, fittings and equipment, and the remaining £51.0 million relates to freehold properties. The 2011 valuation includes and reflects movements in value which have resulted from the operational performance of the stores and movements in the investment environment. In relation to the existing store at Reading, although it currently has residential development potential following the grant of planning permission for 112 apartments with associated car parking and landscaping it remains an operating self-storage facility and has been valued as such. Additionally the freehold development land site in Reading situated opposite the existing store, which has the benefit of an appropriate planning consent for a self-storage facility, has been stated at cost and any additional uplift based on the assumption that a substantial number of the existing store’s customers will transfer to the new store when built has been ignored. A reclassification has been made in the PPE note to include the cost of the Reading development site in development assets. The valuations do not account for any further investment in existing stores since July 2011. Valuation Methodology Background The USA has around 50,000 self-storage facilities trading in a highly fragmented market with the largest five operators accounting for less than 20% of market share based on net rentable square footage. The vast majority of stores are owned and managed individually or in small portfolios. These properties have a well established track record of being traded and are therefore considered as liquid property assets. Many valuations of this asset class are undertaken by appraisers in the USA and the accepted valuation approach is to value the properties on the basis of market value as fully equipped operational entities, having regard to trading potential. This approach is recognised in the Red Book and is adopted for other categories of property that are normally bought and sold on the basis of their trading potential. Examples include hotels, student accommodation, licensed properties, marinas and petrol stations. The UK self-storage sector differs from the USA in that the larger multiples control in the region of 50% of the market by net rentable storage space. The scope for active trading of these property assets is therefore likely to be less; however there was evidence of an increased number of transactions in 2007, albeit as corporate transactions rather than individual property sales. However, there have been very few transactions in 2008 and 2009 although there has been a renewal in activity in 2010. C&W believe that the valuation methodology adopted in the USA is also the most appropriate for the UK market. Methodology C&W have adopted different approaches for the valuation of the leasehold and freehold assets as follows: Freehold Property The valuation is based on a discounted cash flow of the net operating income projected over a 10-year period and a notional sale of the asset at the end of the 10th year. 49 Annual Report & Accounts 2011 Lok’n’Store Group Plc notes to the financial statements continueD for the year enDeD 31 July 2011 11b Property, Plant and Equipment continued Assumptions a. Net operating income is based on projected revenue received less projected operating costs together with a central administration charge representing 6% of the estimated annual revenue subject to a cap and a collar. The initial net operating income is calculated by estimating the net operating income in the first 12 months following the valuation date. b. The net operating income in future years is calculated assuming straight-line absorption from day one actual occupancy to an estimated stabilised/mature occupancy level. In the valuation the assumed stabilised occupancy level for the 17 trading stores (both freeholds and leaseholds) averages 70.16% (2010: 72.14%). The projected revenues and costs have been adjusted for estimated cost inflation and revenue growth. c. The capitalisation rates applied to existing and future net cash flow have been estimated by reference to underlying yields for industrial and retail warehouse property, yields for other trading property types such as hotels and student housing, bank base rates, 10-year money rates, inflation and the available evidence of transactions in the sector. On average for the 17 stores the yield (net of purchaser’s costs) arising from the first year of the projected cash flow is 5.49% (2010: 5.68%). This rises to 11.72% (2010: 11.81%) based on the projected cash flow for the first year following estimated stabilisation in respect of each property. d. The future net cash flow projections (including revenue growth and cost inflation) have been discounted at a rate that reflects the risk associated with each asset. The weighted average annual discount rate adopted (for both freeholds and leaseholds) is 12.18% (2010: 12.20%). e. Purchaser’s costs of 5.80% have been assumed initially and sale plus purchaser’s costs totalling 7.80% are assumed on the notional sales in the 10th year in relation to the freehold stores. Leasehold Property The same methodology has been used as for freehold property, except that no sale of the assets in the 10th year is assumed, but the discounted cash flow is extended to the expiry of the lease. The average unexpired term of the Group’s operating leaseholds is approximately 15 years and two months as at 31 July 2011 (13 years and two months as at 31 July 2010). Valuations for stores held under operating leases are not reflected in the statement of financial position and the assets in relation to these stores are carried at cost less accumulated depreciation. Special Assumption – Lease Extension One of the Group’ leases has been renegotiated during the year and includes a 10 year option to renew the lease from March 2025 to March 2035. The option to extend is only operable in the event that all four of the leases are extended and is personal to Lok’nStore or another ‘major self-storage operator’, to be approved by the landlord (approval not to be unreasonably withheld). The valuation on the Special Assumption that the option to extend the lease for 10 years is reflected. Market Uncertainty C&W’s valuation report comments on valuation uncertainty resulting from the recent global banking crisis coupled with the economic downturn which have caused a low number of transactions in the wider property market and in particular in the market for self-storage property. Although there were a number of self-storage transactions in 2007, C&W have noted that the only significant transactions since 2007 are: 1. The sale of a 51% share in Shurgard Europe which was announced in January 2008 and completed on 31 March 2008; 2. The sale of the former Keepsafe portfolio by Macquarie to Alligator Self-Storage which was completed in January 2010; and 3. The purchase by Shurgard Europe of 80% interests held by its joint venture partner (Arcapita) in its two European joint venture vehicles, First Shurgard and Second Shurgard. The price paid was €172 million and the transaction was announced in March 2011. The two joint ventures owned 72 self-storage properties; Due to the lack of comparable market information in the self-storage sector, C&W have therefore had to exercise more than the usual degree of judgement in arriving at their opinion of value. It has been held that valuers may properly conclude within a range of values. This range is likely to be greater in an illiquid market where inherent uncertainty exists and a greater degree of judgement must therefore be applied. Prudent Lotting C&W have assessed the value of each property individually. However, with regard to those stores with negative or low initial cash flow C&W have prepared their valuation on the assumption that were these properties to be brought to the market then they would be lotted or grouped for sale with other more mature assets of a similar type owned by the Company in such a manner as would most likely be adopted in the case of an actual sale of the interests valued. This lotting assumption has been made in order to alleviate the issue of negative or low short-term cash flow. C&W have not assumed that the entire portfolio of properties owned by the Group would be sold as a single lot and the value for the whole portfolio in the context of a sale as a single lot may differ significantly from the aggregate of the individual values for each property in the portfolio, reflecting prudent lotting as described above. 50 Lok’n’Store Group Plc Annual Report & Accounts 2011 11c Property Lease Premiums £2.9 million of costs relating to the long lease at Maidenhead is classified as a non-current asset in the statement of financial position (2010: £2.9 million). This represents a lease premium paid on entering the lease and other related costs. The lease runs until 31 March 2076. A peppercorn rent is payable until 2027 and a market rent thereafter. Property lease premiums Balance 1 August Additions during the year Balance 31 July 12 Investments Investment in subsidiary undertakings 1 August 2009 Capital contributions arising from share-based payments 31 July 2010 Capital contributions arising from share-based payments 31 July 2011 31 July 2011 £ 31 July 2010 £ 2,860,781 83,322 2,826,199 34,582 2,944,103 2,860,781 £ 1,309,046 181,436 1,490,482 99,639 1,590,121 The Company holds more than 20% of the share capital of the following companies, all of which are incorporated in England and Wales: Class of shareholding Directly Indirectly Nature of business % of shares and voting rights held Lok’nStore Limited Lok’nStore Trustee Limited1 Southern Engineering and Machinery Company Limited Semco Machine Tools Limited2 Semco Engineering Limited2 Saracen Datastore Limited3 Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 – 100 – – – – 100 – 100 100 90.6 Self-storage Trustee Land Dormant Dormant Records Management & Serviced Archive Services 1 This company is a subsidiary of Lok’nStore Limited. 2 These companies are subsidiaries of Southern Engineering and Machinery Company Limited and did not trade during the year. 3 This company is a subsidiary of Lok’nStore Limited. The fair value of these investments has not been disclosed because it cannot be measured reliably as there is no active market for these equity instruments. The Company currently has no plans to dispose of these investments. 13 Inventories Consumables and goods for resale Group 2011 £ Group 2010 £ Company 2011 £ 110,414 70,085 – Company 2010 £ – The amount of inventories recognised as an expense during the year was £149,843 (2010: £144,337). 51 Annual Report & Accounts 2011 Lok’n’Store Group Plc notes to the financial statements continueD for the year enDeD 31 July 2011 14 Trade and Other Receivables Trade receivables Other receivables Prepayments and accrued income Group 2011 £ 1,164,497 166,734 489,771 Group 2010 £ 794,131 47,483 349,142 1,821,002 1,190,756 Company 2011 £ Company 2010 £ – – – – – – – – The Directors consider that the carrying amount of trade and other receivables approximates their fair value. Trade Receivables In respect of its self-storage business, the Group does not typically offer credit terms to its customers and hence the Group is not exposed to significant credit risk. All customers are required to pay in advance of the storage period. A late charge of 10% is applied to a customer’s account if they are greater than 10 days overdue in their payment. The Group provides for receivables as a general provision based upon sales levels. There is a right of lien over the customers’ goods, so if they have not paid within a certain time frame, we have the right to sell the items they store to recoup the debt owed by the customer. Trade receivables that are overdue are provided for based on estimated irrecoverable amounts from the sale of goods, determined by reference to past default experience. For individual self-storage customers, the Group does not perform credit checks, however this is mitigated by the fact that all customers are required to pay in advance, and also to pay a deposit of four weeks’ storage income. Before accepting a new business customer who wishes to use a number of the Group’s stores, the Group uses an external credit rating to assess the potential customer’s credit quality and defines credit limits by customer. There are no customers who represent more than 5% of the total balance of trade receivables. In respect of its serviced archive and records management business, customers are invoiced typically monthly in advance for the archive storage of their boxes, tape and files and the provision of additional services, such as document box or tape collection and retrieval from archive, customers are invoiced typically monthly in arrears. The serviced archive segment with over 300 customers has a greater customer concentration with its 10 largest corporate customers accounting for 40% of revenue. Included in the Group’s trade receivables balance are receivables with a carrying amount of £249,239 (2010: £54,568) which are past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the amounts are still considered recoverable. The Group holds a right of lien over the customers’ goods if these debts are not paid. The average age of these receivables is 40 days past due (2010: 52 days past due). Ageing of past due but not impaired receivables 0–30 days 30–60 days 60+ days Total Movement in the allowance for doubtful debts Balance at the beginning of the year Impairment losses recognised Amounts written off as uncollectible Balance at the end of the year Group 2011 £ 114,326 93,044 41,869 249,239 Group 2011 £ 81,040 42,860 (23,147) Group 2010 £ 13,826 3,784 36,958 54,568 Group 2010 £ 91,846 12,758 (23,564) 100,753 81,040 The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the Directors believe that there is no further provision required in excess of the allowance for doubtful debts. 52 Lok’n’Store Group Plc Annual Report & Accounts 2011 14 Trade and Other Receivables continued Ageing of impaired trade receivables 0–30 days 30–60 days 60+ days Total 15 Trade and Other Payables Trade payables Taxation and social security costs Other payables Accruals and deferred income Group 2011 £ 1,083,889 449,059 912,805 2,210,043 Group 2011 £ – – 100,753 100,753 Group 2010 £ – – 81,040 81,040 Group 2010 £ Company 2011 £ Company 2010 £ 460,527 391,743 957,352 1,864,816 4,655,796 3,674,438 – – – – – – – – – – The Directors consider that the carrying amount of trade and other payables and accruals and deferred income approximates fair value. 16 Financial Instruments The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debts, which includes the borrowings disclosed in note 18, cash and cash equivalents and equity attributable to the owners of the parent, comprising issued capital, reserves and retained earnings as disclosed in the Consolidated Statement of Changes in Equity on page 30. The Group’s banking facilities require that management give regular consideration to interest rate hedging strategy. The Group has complied with this during the year. The Group’s Board reviews the capital structure on an ongoing basis. As part of this review, the Board considers the cost of capital and the risks associated with each class of capital. The Group seeks to have a conservative gearing ratio (the proportion of net debt to equity). The Board considers at each review the appropriateness of the current ratio in light of the above. The Board is currently satisfied with the Group’s gearing ratio. The gearing ratio at the year-end is as follows: Debt Cash and cash equivalents Net Debt Statement of financial position equity Net debt to equity ratio Group 2011 £ Group 2010 £ (28,167,894) 3,778,524 (28,089,416) 5,364,031 (24,389,370) 38,826,424 62.8% (22,725,385) 39,108,306 58.1% The increase in the Group’s gearing ratio arises through the combined effect of a decrease in net cash balances arising from the purchase of the Saracen Datastore business for cash of £3.65 million and partially offset by the cash generated from operations, and a decrease in the valuation of its freehold properties. Exposure to credit and interest rate risk arises in the normal course of the Group’s business. There are no foreign currency risks. A Derivative Financial Instruments and Hedge Accounting The Group’s activities expose it primarily to the financial risks of interest rates. Currently the Group does not undertake any hedging activities or use any derivative financial instruments although the Board keeps hedging policy in respect of interest rates actively under review in order to maintain a balance between flexibility and the hedging of interest rate risk. B Debt Management Debt is defined as non-current and current borrowings, as detailed in note 17. Equity includes all capital and reserves of the Group attributable to the owners of the parent. The Group is not subject to externally imposed capital requirements. 53 Annual Report & Accounts 2011 Lok’n’Store Group Plc notes to the financial statements continueD for the year enDeD 31 July 2011 16 Financial Instruments continued The Group borrows through a senior five year term revolving credit facility, arranged through The Royal Bank of Scotland plc secured on its existing store portfolio and other Group assets with a net book value of £82.2 million (2010: £81.7 million). Borrowings are arranged to ensure the Group fulfils its strategy of growth and development of its store portfolio and to maintain short-term liquidity. As at the reporting date the Group has a committed revolving credit facility of £40 million (2010: £40 million). This facility expires on 5 February 2012. Undrawn committed facilities at the year-end amounted to £11,910,584 (2010: £11,910,584). On 20 October 2011, the Group agreed a new senior five year term revolving credit facility with Lloyds TSB plc (see note 30, Events after the reporting date). C Interest Rate Risk Management The Group’s policy on interest rate management is agreed at Board level and is reviewed on an ongoing basis. All borrowings are denominated in Sterling and are detailed in note 18. The Group has a number of revolving loans within its overall revolving credit facility and as such is exposed to interest rate risks at the time of renewal arising from any upward movement in the LIBOR rate. The following interest rates applied during the financial year: 1 LIBOR plus a 1.25%–1.35% margin for the revolving advances amounting to £28.1 million. 2 0.25% for non-utilisation (i.e. that part of the facility which remains undrawn from time to time). From 30 June 2011, the non-utilisation charge increased from 0.25%–0.5% Cash balances held in current accounts attract no interest but surplus cash is transferred daily to ‘one-day’ or ‘two-day’ treasury deposits which attract interest at the prevailing money market rates. All amounts are denominated in Sterling. The balances at 31 July 2011 are as follows: Variable rate treasury deposits1 Bank deposits Total deposits Group 2011 £ Group 2010 £ 3,537,605 65,000 5,185,624 – 3,602,605 5,185,624 1 Money market rates for the Group’s variable rate treasury deposit track RBS base rate minus 0.05%. The rate attributable to the variable rate deposits at 31 July 2011 was 0.45%. The Group reviews the current and forecast projections of cash flow, borrowing and interest cover as part of its monthly management accounts review. In addition, an analysis of the impact of significant transactions is carried out regularly, as well as a sensitivity analysis of the impact of movements in interest rates on gearing and interest cover. The Group is exposed to interest rate risk as entities in the Group borrow funds at floating interest rates. Hedging policy is kept under review to align with interest rate view and defined risk appetite. The Group has no interest rate derivatives in place. D Interest Rate Sensitivity Analysis In managing interest rate risk the Group aims to reduce the impact of short-term fluctuations on the Group’s earnings, without jeopardising its flexibility. Over the longer term, permanent changes in interest rates may have an impact on consolidated earnings. At 31 July 2011, it is estimated that an increase of one percentage point in interest rates would have reduced the Group’s annual profit before tax by £276,266 (2010: £281,339) and conversely a decrease of one percentage point in interest rates would have increased the Group’s annual profit before tax by £276,266 (2010: £281,339). There would have been no effect on amounts recognised directly in other comprehensive income. The sensitivity has been calculated by increasing by 1% the average variable interest rate applying to the variable rate borrowings in the year, namely 1.84% (2010: 1.81%). E Cash Management and Liquidity Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Included in note B above is a description of additional undrawn facilities that the Group has at its disposal to further reduce liquidity risk. Short-term money market deposits are used to manage liquidity whilst maximising the rate of return on cash resources, giving due consideration to risk. F Foreign Currency Management The Group operates solely in the United Kingdom and as such all of the Group’s financial assets and liabilities are denominated in Sterling and there is no exposure to exchange risk. 54 Lok’n’Store Group Plc Annual Report & Accounts 2011 16 Financial Instruments continued G Credit Risk The credit risk management policies of the Group with respect to trade receivables are discussed in note 14. The Group’s self-storage business has no significant concentration of credit risk, with exposure spread across 6,700 customers in our stores and no individual customer accounts for more than 1% of revenue. The serviced archive business with over 300 customers has a greater concentration of credit risk with its 10 largest corporate customers accounting for 40% of revenue and its top 50 delivering 71.1% of revenue. The credit risk on liquid funds is limited because the counterparty is a bank with high credit ratings assigned by international credit-rating agencies, in line with the Group’s policy which is to borrow from major institutional banks when arranging finance. The Group’s maximum exposure to credit risk at 31 July 2011 was £1,208,122 (2010: £833,185) on receivables and £3,778,524 (2010: £5,364,031) on cash and cash equivalents. H Maturity Analysis of Financial Liabilities The undiscounted contractual cash flow maturities are as follows: 2011 – Group From two to five years From one to two years Due after more than one year Due within one year Trade and other payables £ – – Borrowings £ – 26,342 – 2,817,741 26,342 28,141,552 Interest on borrowings £ – 6,093 6,093 282,001 Total contractual undiscounted cash flows 2,817,741 28,167,894 288,094 2010 – Group From two to five years From one to two years Due after more than one year Due within one year Trade and other payables £ Borrowings £ – – – 28,089,416 – 2,037,007 28,089,416 – Interest on borrowings £ – 770,870 770,870 507,884 Total contractual undiscounted cash flows 2,037,007 28,089,416 1,278,754 The Group’s only borrowings are through a senior five year term revolving credit facility of £40 million secured by legal charges and debentures over the freehold and leasehold properties and other assets of the business with a net book value of £82.2 million together with cross-company guarantees of Lok’nStore Limited. I Fair Values of Financial Instruments Categories of financial assets and financial liabilities Financial assets Trade and other receivables Cash and cash equivalents Financial liabilities Trade and other payables Bank loans Finance leases 2011 £ 2010 £ 1,208,122 3,778,524 833,185 5,364,031 (2,817,741) (28,071,905) (78,478) (2,037,007) (28,036,885) – The fair values of the Group’s cash and short-term deposits and those of other financial assets equate to their carrying amounts. The Group’s receivables and cash and cash equivalents are all classified as loans and receivables and carried at amortised cost. Further details are set out in note 14. The amounts are presented net of provisions for doubtful receivables and allowances for impairment are made where appropriate. Trade and other payables and bank borrowings are all classified as financial liabilities measured at amortised cost. 55 Annual Report & Accounts 2011 Lok’n’Store Group Plc notes to the financial statements continueD for the year enDeD 31 July 2011 16 Financial Instruments continued J Company’s Financial Instruments The Company’s only financial assets are amounts owed by subsidiary undertakings amounting to £5.6 million (2010: £6.02 million) which are classified as loans and receivables. These amounts are denominated in Sterling, are non-interest bearing, are unsecured and fall due for repayment within one year. No amounts are past due or impaired. The Company has no financial liabilities. 17 Borrowings Non-current Bank loans repayable in more than two years but not more than five years Gross Deferred financing costs Bank loans repayable in more than two years but not more than five years Net borrowings Finance lease liabilities Non-current borrowings Current Bank loans repayable in less than one year Gross Deferred financing costs Bank loans repayable in more than two years but not more than five years Net borrowings Finance lease liabilities Current borrowings Group 2011 £ Group 2010 £ Company 2011 £ Company 2010 £ – – 28,089,416 (52,531) – 28,036,885 26,342 – 26,342 28,036,885 28,089,416 (17,511) 28,071,905 52,136 28,124,041 – – – – – – – – – – – – – – – – – – – – – – – – – The bank loans are secured by legal charges and debentures over the freehold and leasehold properties and other assets of the business with a net book value of £82.2 million together with cross-company guarantees of Lok’nStore Limited. The revolving credit facility is for a five-year term and expires on 5 February 2012. The Group is not obliged to make any repayments prior to expiration. The loans bear interest at the London Inter-Bank Offer Rate (LIBOR) plus 1.25%–1.35% Royal Bank of Scotland plc margin. Refinancing of Banking Facilities After the reporting date, the Group has negotiated a new five year £40 million revolving credit facility with Lloyds TSB plc. The revolving credit facility is for a five-year term and expires on 19 October 2016. The facility will be used to repay the existing RBS facility and provide working capital for the development of the business over the medium term. The Group is not obliged to make any repayments prior to expiration. The loans bear interest at the London Inter-Bank Offer Rate (LIBOR) plus 2.35%–2.65% margin based on a loan to value covenant test while the interest cover and loan to value covenants are broadly in line with the previous facility. Finance Lease Liabilities Lease liabilities are effectively secured as the rights to the leased asset revert to the lessor in the event of default and are as follows: Group 2011 £ 66,323 32,434 – 98,757 (20,279) 78,478 Group 2010 £ Company 2011 £ Company 2010 £ – – – – – – – – – – – – – – – – – – Gross finance liabilities – minimum lease payments Within one year Later than one year and no later than five years Later than five years Future finance charges on finance leases 56 Lok’n’Store Group Plc Annual Report & Accounts 2011 17 Borrowings continued The present value of finance lease liabilities is as follows: Gross finance liabilities – minimum lease payments Within one year Later than one year and no later than five years Later than five years 18 Deferred Tax Deferred tax liability Liability at start of year Charge to income for the year Tax credited directly to other comprehensive income Saracen acquisition – Initial recognition Intangibles Saracen – other deferred tax recognised on acquisition Liability at end of year Group 2011 £ 52,136 26,342 – 78,478 Group 2010 £ Company 2011 £ Company 2010 £ – – – – – – – – – – – – 2011 £ 2010 £ 10,846,123 65,031 (1,216,374) 827,210 33,111 10,248,297 209,400 388,426 – – 10,555,101 10,846,123 The following are the major deferred tax liabilities and assets recognised by the Group and the movements during the year: At 1 August 2009 Charge/(credit) to income for the year Charge to other comprehensive income At 31 July 2010 Charge/(credit) to income for the year Charge to other comprehensive income Saracen – Initial recognition Intangibles – Recognised on acquisition Tax losses £ Intangible Assets £ Accelerated capital allowances £ 1,461,400 18,271 – (1,463,333) 370,607 – 1,479,671 (1,092,726) (206,073) – 494,084 – Other temporary differences £ 18,825 (18,825) – Revaluation of properties £ Rolled over gain on disposal £ Total £ 7,683,637 (69,662) 388,426 2,547,768 (90,991) – 10,248,297 209,400 388,426 – 8,002,401 2,456,777 10,846,123 24,449 – (65,445) (1,216,374) (181,984) – 65,031 (1,216,374) – – – – – – – 33,111 – – 827,210 – – – – – – – 827,210 33,111 At 31 July 2011 1,306,709 (598,642) 827,210 24,449 6,720,582 2,274,793 10,555,101 At the reporting date, the Group has unused revenue tax losses of approximately £2.63 million (2010: £4.8 million) available to carry forward against future profits of the same trade. A deferred tax asset of £0.62 million (2010: £1.09 million) has been recognised in respect of such losses. This asset offsets against the deferred tax liability position in respect of accelerated capital allowances and other temporary differences. The losses can be carried forward indefinitely. A potential deferred tax asset of £39,195 (2010: £8,000) arises in respect of the share options in existence at 31 July 2009 but has not been recognised in the accounts. No deferred tax asset arises in relation to the remainder of the share options as at 31 July 2011 as the share price at the year-end is below the exercise price of the options. The UK’s main rate of corporation tax is expected to reduce from 26% to 25% from 1 April 2012, thereafter tax rates are expected to reduce by 1% per year to 23% in 2014. Due to the difficulty of predicting the amount of capital expenditure over this period, it is not possible to accurately quantify the effect of the rate change on the deferred tax position over this period. 57 Annual Report & Accounts 2011 Lok’n’Store Group Plc notes to the financial statements continueD for the year enDeD 31 July 2011 19 Share Capital Authorised: 35,000,000 Ordinary Shares of 1 pence each (2010: 35,000,000) Allotted, issued and fully paid Ordinary Shares Movement in issued share capital Number of shares at 31 July 2010 and 31 July 2011 2011 £ 2010 £ 350,000 350,000 £ £ 267,589 267,589 Called up, allotted and fully paid £ Number 26,758,865 267,589 The Company has one class of Ordinary Shares which carry no right to fixed income. Following approval by shareholders of a special resolution at the AGM on 3 December 2010, the Company has authority to make market purchases of up to 5,845,299 shares. The authority expires at the conclusion of the next AGM, but is expected to be renewed at the next AGM. 20 Equity Settled Share-Based Payment Plans The Group operates two equity-settled share-based payment plans, an approved and an unapproved share option scheme, the rules of which are similar in all material respects. The Enterprise Management Initiative Scheme (‘EMI’) is closed to new grants of options as the Company no longer meets the HMRC small company criteria. The Company has the following share options: Summary Enterprise Management Initiative Scheme (refer note 22) Approved Share Options Scheme (refer note 23) Unapproved Share Options (refer note 24) Approved CSOP Share Options (refer note 25) As at 31 July 2010 491,901 – 2,192,213 179,019 Granted Exercised – – 240,517 62,983 Lapsed/ surrendered (142,735) – (268,344) (10,000) As at 31 July 2011 349,166 – 2,164,386 232,002 (421,079) 2,745,554 – (421,079) 1,830,000 915,554 (421,079) 2,745,554 – – – – – – – – – – – – – – – – – (5,837) (21,674) – 491,901 – 2,192,213 179,019 (27,511) 2,863,133 (10,000) (17,511) 1,655,000 1,208,133 (27,511) 2,863,133 Granted Exercised Lapsed/ surrendered As at 31 July 2010 2,863,133 303,500 1,655,000 1,208,133 175,000 128,500 2,863,133 303,500 As at 31 July 2009 491,901 5,837 2,086,906 – – – 126,981 179,019 2,584,644 306,000 1,490,000 1,094,644 175,000 131,000 2,584,644 306,000 Total Options held by Directors Options not held by Directors Total Summary Enterprise Management Initiative Scheme (refer note 22) Approved Share Options Scheme (refer note 23) Unapproved Share Options (refer note 24) Approved CSOP Share Options (refer note 25) Total Options held by Directors Options not held by Directors Total 58 Lok’n’Store Group Plc Annual Report & Accounts 2011 20 Equity Settled Share-Based Payment Plans continued The following table shows options held by Directors under all schemes. 2011 Executive Directors A Jacobs SG Thomas RA Davies CM Jacobs Non-Executive Directors RJ Holmes ETD Luker CP Peal I Wright 2010 Executive Directors A Jacobs SG Thomas RA Davies CM Jacobs Non-Executive Directors RJ Holmes ETD Luker CP Peal EMI Scheme Note 22 Approved Scheme Note 23 Unapproved Scheme Note 24 Approved CSOP share options Note 25 – – 98,039 79,173 – – – – 177,212 – – – – – – – – – 450,000 450,000 478,431 191,082 10,000 15,000 10,000 – – – 23,530 24,745 – – – – 1,604,513 48,275 1,830,000 Total 450,000 450,000 600,000 295,000 10,000 15,000 10,000 – EMI Scheme Note 22 Approved Scheme Note 23 Unapproved Scheme Note 24 – – 98,039 79,173 – – – 177,212 – – – – – – – – 400,000 400,000 428,431 166,082 10,000 15,000 10,000 Approved CSOP share options Note 25 – – 23,530 24,745 – – – Total 400,000 400,000 550,000 270,000 10,000 15,000 10,000 1,429,513 48,275 1,655,000 The grant of options to Executive Directors and senior management is recommended by the Remuneration Committee on the basis of their contribution to the Group’s success. The options vest after three years. No options have been granted under the EMI approved scheme in the year (2010: nil). The exercise price of the options is equal to the closing mid-market price of the shares on the trading day previous to the date of the grant. The exercise of options awarded has been subject to a key non-market performance condition being the achievement of an annual revenue target of £10 million. This condition has now been achieved. Exercise of an option is subject to continued employment. The life of each option granted is seven years. There are no cash settlement alternatives. The expected volatility is based on a historical review of share price movements over a period of time, prior to the date of grant, commensurate with the expected term of each award. The expected term is assumed to be six years which is part way between vesting (three years after grant) and lapse (10 years after grant). The risk free rate of return is the UK gilt rate at date of grant commensurate with the expected term (i.e. six years). The total charge for the year relating to employer share-based payment schemes was £99,639 (2010: £181,436), all of which relates to equity-settled share-based payment transactions. In total a ‘Share-based payments reserve’ at 31 July 2011 of £1,375,558 results (2010: £1,275,919). The Group has taken advantage of the exemption available under IFRS2 to exclude options granted before 7 November 2002 from the share-based payment charge so not all of the Group’s options are included in the share-based payment calculations detailed below. The total fair value of the options granted in the year was £121,353 (2010: £90,652). 59 Annual Report & Accounts 2011 Lok’n’Store Group Plc notes to the financial statements continueD for the year enDeD 31 July 2011 21 Enterprise Management Initiative Scheme The Company operates a share option scheme under the Enterprise Management Initiative (‘EMI’). The share options granted will only be exercisable upon the achievement of one of the following performance criteria: 1 The revenue for any period commencing after the date of grant has exceeded £10 million. 2 The profits for any period commencing after the date of grant has exceeded £3 million. 3 The share price has exceeded £5. 4 Control of the Company changes. Since the year ended 31 July 2007, revenue has exceeded £10 million and therefore the performance criteria has been met. Movements in the year are shown in the table below. Outstanding at 1 August Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at 31 July Exercisable at 31 July Weighted2 average exercise price 2011 pence 121.23 – 102.81 – n/a1 121.23 121.23 Options 2011 number 491,901 – (91,655) – (51,080) 349,166 349,166 Weighted1 average exercise price pence 129.91 – – – – 129.31 129.31 Options 2010 number 491,901 – – – – 491,901 491,901 1 Options granted prior to November 2002. 2 Weighted average price excludes options that were granted prior to November 2002. The share price at the year-end was 107.0 pence per share. The share price ranged from 83.0 pence per share to 144.0 pence per share during the year. The exercise prices for shares exercisable at 31 July ranged from 93.0 pence per share to 176.5 pence per share. The options outstanding at 31 July 2011 had a weighted average contractual life of 2.7 years (2010: 4.5 years).The inputs into the Black- Scholes model used by our remuneration consultants, Hewitt New Bridge Street Consultants, are as follows: Expected volatility (%) 26.82 34.48 33.82 33.80 32.31 30.46 29.53 29.18 As at 31 July 2011 25,000 22,759 31,414 98,039 Expected dividend yield (%) Risk free interest rate (%) Fair value charge per award 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.05 4.95 4.60 4.60 5.11 4.24 4.62 4.72 14.90 49.81 41.05 41.04 47.20 56.94 68.21 60.22 Exercise price (pence) 102 113 152 102 Date from which exercisable 20/01/07 30/07/07 30/07/08 19/01/07 Expiry date 20/01/14 30/07/14 30/07/15 19/01/14 Date of grant 21 July 2003 27 November 2003 19 January 2004 20 January 2004 30 July 2004 29 July 2005 24 April 2006 31 July 2006 Expected life (years) Share price at date of grant (pence) 6 6 6 6 6 6 6 6 66.50 105.50 100.00 100.00 113.00 150.00 176.50 156.00 Exercise price (pence) 93.00 93.50 102.00 102.00 113.00 152.00 176.50 156.00 The following table shows options held by Directors under this scheme. As at 31 July 2010 25,000 22,759 31,414 98,039 Granted Surrendered – – – – – – – – CM Jacobs CM Jacobs CM Jacobs RA Davies 60 Lok’n’Store Group Plc Annual Report & Accounts 2011 22 Approved Share Option Scheme The Company issues approved share options. The share options granted will only be exercisable upon the achievement of one of the following performance criteria: 1 Group revenue exceeds £5 million. 2 Share price exceeds 150 pence. 3 Control of the Company changes. Since year ended 31 July 2002, the Company’s revenue has exceeded £5 million and therefore the performance criteria has been met. Movements in the year are shown in the table below. Outstanding at 1 August Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at 31 July Exercisable at 31 July Weighted average exercise price 2011 pence Options 2011 number – – – – – – – – – – – – – – Weighted average exercise price 2010 pence 175.00 – – – 175.00 – – Options 2010 number 5,837 – – – (5,837) – – There were no options outstanding at the end of the year and the scheme closed on 31 May 2010. 23 Unapproved Share Options The Company issues unapproved share options. The share options exercisable from 8 July 2002 and 31 May 2003 will only be exercisable upon the achievement of one of the following performance criteria: 1 Group revenue exceeds £5 million. 2 Share price exceeds 150 pence. 3 Control of the Company changes. Since year ended 31 July 2002, the Company’s revenue has exceeded £5 million and therefore the performance criteria has been met. All other options will only be exercisable upon achievement of one of the following performance criteria: 1 The revenue for any period commencing after the date of grant has exceeded £10 million. 2 The profits for any period commencing after the date of grant has exceeded £3 million. 3 The share price has exceeded £5. 4 Control of the Company changes. Since year ended 31 July 2007, the Company’s revenue has exceeded £10 million and therefore the performance criteria has been met. 61 Annual Report & Accounts 2011 Lok’n’Store Group Plc notes to the financial statements continueD for the year enDeD 31 July 2011 23 Unapproved Share Options continued Movements in the year are shown below: Outstanding at 1 August Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at 31 July Exercisable at 31 July Weighted average exercise price 2011 pence 136.18 107.00 182.84 – – Options 2010 number 2,086,906 126,981 (10,000) – (11,674) Options 2011 number 2,192,2132 240,517 (268,344) – – 2,164,3862 127.09 2,192,213 1,458,888 149.69 1,351,232 Weighted1 average exercise price 2010 pence 136.18 85.00 56.50 – 71.00 136.18 162.16 1 Weighted average price excludes options that were granted prior to November 2002. 2 Figures to do not include 15,000 options that were granted prior to November 2002. The options outstanding at 31 July 2011 had a weighted average remaining contractual life of 6.2 years (2010: 6.8 years). The exercise prices for shares exercisable at 31 July 2010 ranged from 93.0 pence per share to 269.5 pence per share. The inputs into the Black-Scholes model used by our remuneration consultants, New Bridge Street Consultants, are as follows: Share price at date of grant (pence) Expected life (years) 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 100.00 113.00 145.00 150.00 176.50 156.00 203.50 272.00 213.50 211.00 211.00 211.00 211.00 130.50 56.50 85.00 107.00 Exercise price (pence) 102.00 113.00 148.00 152.00 176.50 156.00 148.00 269.50 213.50 178.15 93.00 113.00 152.00 130.50 56.50 85.00 107.00 Expected volatility (%) Expected dividend yield (%) Risk free interest rate (%) 33.80 32.31 30.95 30.46 29.53 29.18 29.32 29.47 29.96 29.97 29.97 29.97 29.97 30.60 40.21 39.22 40.20 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.37 0.47 0.47 0.47 0.47 0.47 0.77 1.77 1.56 0.93 4.60 5.11 4.32 4.24 4.62 4.72 4.75 5.29 5.38 5.36 5.36 5.36 5.36 4.77 3.14 2.29 1.87 Fair value charge per award 41.04 47.20 55.48 56.94 68.21 60.22 103.85 105.52 82.24 94.44 140.00 127.77 106.64 47.40 20.49 29.62 39.98 Date of grant 20 January 2004 30 July 2004 16 May 2005 29 July 2005 24 April 2006 31 July 2006 28 November 2006 24 April 2007 31 July 2007 01 August 2007 01 August 2007 01 August 2007 01 August 2007 31 July 2008 31 July 2009 31 July 2010 31 July 2011 62 Lok’n’Store Group Plc Annual Report & Accounts 2011 23 Unapproved Share Options continued The following unapproved share options have been granted to Directors of the Company1. A Jacobs A Jacobs A Jacobs A Jacobs A Jacobs A Jacobs A Jacobs A Jacobs A Jacobs Total A Jacobs S Thomas S Thomas S Thomas S Thomas S Thomas S Thomas S Thomas S Thomas S Thomas Total S Thomas R Davies R Davies R Davies R Davies R Davies R Davies R Davies R Davies R Davies Total R Davies C Jacobs C Jacobs C Jacobs C Jacobs C Jacobs C Jacobs C Jacobs C Jacobs C Jacobs Total C Jacobs E Luker Total E Luker R Holmes Total R Holmes C Peal Total C Peal As at 31 July 2010 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 – 400,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 – 400,000 1,961 50,000 100,000 100,000 50,000 50,000 50,000 26,470 – 428,431 2,241 25,000 18,586 25,000 25,000 45,000 25,000 255 – 166,082 15,000 15,000 10,000 10,000 10,000 10,000 Granted £ – – – – – – – – 50,000 50,000 – – – – – – – – 50,000 50,000 – – – – – – – – 50,000 50,000 – – – – – – – – 25,000 25,000 – – – – – – Exercised/ lapsed £ – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – As at 31 July 2011 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 450,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 450,000 1,961 50,000 100,000 100,000 50,000 50,000 50,000 26,470 50,000 478,431 2,241 25,000 18,586 25,000 25,000 45,000 25,000 255 25,000 191,082 15,000 15,000 10,000 10,000 10,000 10,000 Exercise price (pence) 102 113 152 156 213.5 130.5 56.5 85.0 107.0 102 113 152 156 213.5 130.5 56.5 85.0 107.0 102 113 152 156 213.5 130.5 56.5 85.0 107.0 113 148 152 205 269.5 130.5 56.5 85.0 107.0 Date from which exercisable 20/01/07 30/07/07 30/07/08 31/07/09 31/07/10 31/07/11 31/07/12 30/07/13 31/07/14 20/01/07 30/07/07 30/07/08 31/07/09 31/07/10 31/07/11 31/07/12 30/07/13 31/07/14 20/01/07 30/07/07 30/07/08 31/07/09 31/07/10 31/07/11 31/07/12 30/07/13 31/07/14 30/07/07 16/05/08 30/07/08 28/11/09 24/04/10 31/07/11 31/07/12 30/07/13 31/07/14 Expiry date 20/01/14 30/07/14 30/07/15 31/07/16 31/07/17 31/07/18 31/07/19 30/07/20 31/07/21 20/01/14 30/07/14 30/07/15 31/07/16 31/07/17 31/07/18 31/07/19 30/07/20 31/07/21 20/01/14 30/07/14 30/07/15 31/07/16 31/07/17 31/07/18 31/07/19 30/07/20 31/07/21 30/07/14 16/05/15 30/07/15 28/11/16 24/04/17 31/07/18 31/07/19 30/07/20 31/07/21 56.5 31/07/12 31/07/19 56.5 31/07/12 31/07/19 56.5 31/07/12 31/07/19 1 In addition, 50,000 options are held by Value Added Services Limited, a company in which Andrew Jacobs and Simon Thomas have a beneficial interest. 63 Annual Report & Accounts 2011 Lok’n’Store Group Plc notes to the financial statements continueD for the year enDeD 31 July 2011 24 CSOP Approved Share Options On 2 June 2010 the Group adopted a Company Share Option Plan (‘CSOP’). The CSOP subsequently achieved HMRC approval on 28 June 2010. There are no performance conditions attached to share options issued under CSOP. Movements in the year are shown below: Outstanding at 1 August Granted during the year Forfeited during the year Exercised during the year Expired during the year Outstanding at 31 July Exercisable at 31 July Weighted average exercise price 2011 pence 85.00 107.00 85.00 – – Options 2010 number – 179,019 – – – 90.97 179,019 Options 2011 number 179,019 62,983 (10,000) – – 232,002 – – – Weighted average exercise price 2010 pence – 85.00 – – – 85.00 – The options outstanding at 31 July 2011 had a weighted average remaining contractual life of 9.3 years (2010: 10 year). There were no options exercisable at 31 July 2011. The inputs into the Black-Scholes model used by our remuneration consultants, New Bridge Street Consultants, are as follows: Date of grant 30 July 2010 31 July 2011 Share price at date of grant (pence) 85.00 107.00 Expected life (years) 6 6 Exercise price (pence) 85.00 107.00 Expected volatility (%) 39.22 40.20 Expected dividend yield (%) 1.56 0.90 Risk free interest rate (%) 2.29 1.87 Fair value charge per award 29.62 39.98 The following CSOP approved share options have been granted to Directors of the Company. R Davies C Jacobs 25 Other Reserves Group 1 August 2009 Share-based remuneration (options) Dividend paid 1 August 2010 Share-based remuneration (options) Dividend paid 31 July 2011 As at 31 July 2010 23,530 24,745 Granted £ – – Exercised/ lapsed £ – – As at 31 July 2011 23,530 24,745 Exercise price (pence) 85.0 85.0 Date from which exercisable 30/07/13 30/07/13 Expiry date 30/07/20 30/07/20 Merger reserve £ 6,295,295 – – Other distributable reserve £ 5,735,556 – (332,416) Capital redemption reserve £ 34,205 – – Share-based payment reserve £ 1,094,483 181,436 – Total £ 13,159,539 181,436 (332,416) 6,295,295 5,403,140 34,205 1,275,919 13,008,559 – – – (249,936) – – 99,639 – 99,639 (249,936) 6,295,295 5,153,204 34,205 1,375,558 12,858,262 The merger reserve represents the excess of the nominal value of the shares issued by Lok’nStore Group plc over the nominal value of the share capital and share premium of Lok’nStore Limited as at 31 July 2001. The other distributable reserve and the capital redemption reserve arose in the year ended 31 July 2004 from the purchase of the Company’s own shares and a cancellation of share premium. 64 Lok’n’Store Group Plc Annual Report & Accounts 2011 25 Other Reserves continued Company 1 August 2009 Share-based remuneration (options) Dividend paid 1 August 2010 Share-based remuneration (options) Dividend paid 31 July 2011 26 Retained Earnings Group 1 August 2009 Profit for the financial year Transfer from revaluation reserve 1 August 2010 Other distributable reserve £ Capital redemption reserve £ Share-based payment reserve £ Total £ 5,735,556 34,205 1,094,483 6,864,244 – (332,416) – – 181,436 – 181,436 (332,416) 5,403,140 34,205 1,275,919 6,713,264 – (249,936) – – 99,639 – 99,639 (249,936) 5,153,204 34,205 1,375,558 6,562,967 Retained earnings before deduction of own shares £ Own shares (note 27) £ Retained earnings Total £ 5,681,334 221,124 188,346 (2,592,812) – – 3,088,522 221,124 188,346 6,090,804 (2,592,812) 3,497,992 Profit attributable to owners of Parent for the financial year Transfer from revaluation reserve (additional dep’n on revalued assets net of deferred tax) 892,514 196,335 – – 892,514 196,335 31 July 2011 7,179,653 (2,592,812) 4,586,841 The Own Shares Reserve represents the cost of shares in Lok’nStore Group plc purchased in the market and held in the Employee Benefit Trust to satisfy awards made under the Group’s share incentive plan and shares purchased separately by Lok’nStore Limited for Treasury Account. These treasury shares have not been cancelled and were purchased at an average price considerably lower than the Group’s adjusted net asset value. These shares may in due course be released back into the market to assist liquidity of the Company’s stock and to provide availability of a reasonable line of stock to satisfy investor demand as and when required. The Company has taken advantage of the exemption available under the Companies Act 2006 not to present the Company income statement. The Company loss for the year was £168,886 (2010: £168,652). 27 Own Shares 1 August 2009 Transfer out of scheme 31 July 2010 Transfer out of scheme 31 July 2011 ESOP shares Number 623,212 – 623,212 – ESOP shares £ 499,910 – 499,910 – Treasury shares Number 1,142,000 – 1,142,000 – Treasury shares £ 2,092,902 – 2,092,902 – Own shares total £ 2,592,812 – 2,592,812 – 623,212 499,910 1,142,000 2,092,902 2,592,812 Lok’nStore Limited holds a total of 1,142,000 of Lok’nStore Group plc Ordinary Shares of 1 pence each for treasury with an aggregate nominal value of £11,420 purchased for an aggregate cost of £2,092,902 at an average price of £1.818 per share. These shares represent 4.27% of the Parent Company’s called-up share capital. The maximum number of shares held by Lok’nStore Limited in the year was 1,142,000. No shares were disposed of or cancelled in the year. Distributable reserves are reduced by £2,092,902 reflecting the purchase cost of these treasury shares (See note 26). The Group operates an Employee Benefit Trust (‘EBT’) under a settlement dated 8 July 1999 between Lok’nStore Limited and Lok’nStore Trustee Limited, constituting an employees’ share scheme. 65 Annual Report & Accounts 2011 Lok’n’Store Group Plc notes to the financial statements continueD for the year enDeD 31 July 2011 27 Own Shares continued Funds are placed in the trust by way of deduction from employees’ salaries on a monthly basis as they so instruct for purchase of shares in the Company. Shares are allocated to employees at the prevailing market price when the salary deductions are made. As at 31 July 2011, the Trust held 623,212 (2010: 623,212) Ordinary Shares of 1 pence each with a market value of £666,837 (2010: £529,730). No shares were transferred out of the scheme during the year (2010: nil). No dividends were waived during the year. No options have been granted under the EBT. 28 Cash flows (a) Reconciliation of profit before tax to cash generated from operations Profit before tax Depreciation Professional costs – Acquisition of Saracen Equity settled share-based payments Loss on sale of fixed assets Interest receivable Interest payable Increase in inventories Decrease in receivables Increase in payables Cash generated from operations 2011 £ 2010 £ 938,280 1,615,868 129,208 99,639 – (24,063) 522,513 (40,329) (630,246) 988,689 430,524 1,832,477 – 181,436 452 (18,979) 508,687 (2,980) 10,140 524,537 3,599,559 3,466,294 (b) Reconciliation of Net Cash Flow to Movement in Net Debt Net debt is defined as debt on non-current and current borrowings, as detailed in note 18 less cash balances held in current accounts and surplus cash transferred daily to ‘one-day’ or ‘two-day’ treasury deposits. (Decrease)/increase in cash in the year Change in net debt resulting from cash flows Movement in net debt in year Net debt brought forward Net debt carried forward 31 July 2011 £ 31 July 2010 £ (1,585,507) (78,478) 2,135,300 – (1,663,985) (22,725,385) 2,135,300 (24,860,685) (24,389,370) (22,725,385) 29 Commitments Under Operating Leases At 31 July 2011 the total future minimum lease payments under non-cancellable operating leases were as follows: The Group as a Lessee: The minimum lease payments under non-cancellable operating lease rentals are in aggregate as follows: Land and buildings Amounts due: Within one year Between two and five years After five years Group 2011 £ Group 2010 £ Company 2011 £ Company 2010 £ 1,578,307 5,919,772 8,404,878 1,287,352 4,709,408 7,018,703 15,902,957 13,015,463 – – – – – – – – Operating lease payments represent rentals payable by the Group for certain of its properties. Leases are negotiated for a typical term of 20 years and rentals are fixed for an average of five years. 66 Lok’n’Store Group Plc Annual Report & Accounts 2011 29 Commitments Under Operating Leases continued The Group as Lessor: Property rental income earned during the year was £92,450 (2010: £98,763). This income is considered as ancillary and relatively short-term to the Group’s trading activities as these properties are sites held for their development potential as self-storage centres and the rental income ceases when the buildings are demolished. These tenancies are therefore of a short-term nature since tenants are served notice to vacate pending redevelopment of the site or if very short the leases run off to the end of their term. At the reporting date, the Group had contracted with tenants, under non-cancellable leases, for the following future minimum lease payments: Within one year Group 2011 £ Group 2010 £ Company 2011 £ 76,945 57,413 – Company 2010 £ – 30 Events After the Reporting Date a) Refinancing of Banking Facilities – Lloyds Banking Group The Group has negotiated a new five year £40 million revolving credit facility with Lloyds TSB plc. The revolving credit facility is for a five-year term is effective from 20 October 2011 and expires on 19 October 2016. The facility will be used to refinance the existing RBS facility and provide working capital for the development of the business over the medium term. The Group is not obliged to make any repayments prior to expiration. The loans bear interest at the London Inter-Bank Offer Rate (LIBOR) plus 2.35%–2.65% margin based on a loan to value covenant test while the interest cover and loan to value covenants are broadly in line with the previous facility. b) Renewal of Planning Permission at Reading On 4 October 2011, the planning permission originally granted for demolition of existing building and erection of 112 flats with associated car parking and landscaping at 5-9 Berkeley Avenue, Reading in accordance with the terms of the application Ref 10/01567/EXT, dated 7 September 2010 was renewed on appeal. There were no substantive additional conditions imposed by the Inspector which materially impact on the existing Permission. 31 Related Party Transactions The following balances existed between the Company and its subsidiaries at 31 July: Net amount due from Lok’nStore Limited 2011 £ 2010 £ 5,600,941 6,019,763 The amount due from Lok’nStore Limited is interest free. The balance is repayable on demand, however the Company has no present intention to demand repayment within one year and so the amount has been presented as a non-current asset as at 31 July 2011. The Company provides share options for the employees of Lok’nStore Limited. The capital contributions arising from these share-based payments are separately disclosed under investments in note 12. The aggregate remuneration of the Directors, who are the key management personnel of the Group, is set out below. Further information on the remuneration of individual Directors is found in note 6 of the Notes to the Financial Statements. Short-term employee benefits Post-employment benefits Share-based payments Total 2011 £ 507,400 14,663 66,182 2010 £ 479,169 8,944 99,318 588,245 587,431 67 Annual Report & Accounts 2011 Lok’n’Store Group Plc notes to the financial statements continueD for the year enDeD 31 July 2011 31 Related Party Transactions continued The Group maintains a service agreement for strategic services with Value Added Services Limited, a company in which Andrew Jacobs and Simon Thomas have a beneficial interest. The total fees payable to Value Added Services Limited are as shown in note 6. Fees are settled monthly and there were no outstanding amounts due to Value Added Services Limited at the year-end (2010: £nil). The maximum balance outstanding at any time during the year was £24,252 (ex VAT) (2010: £24,252). The Group uses Trucost plc, an environmental research company, to provide information and undertake performance assessment of the environmental effect of its business activities. Trucost plc is a company in which Andrew Jacobs and Simon Thomas have a beneficial interest. The total fees payable to Trucost plc in respect of its environmental assessment and reporting for the year was £6,000 (2010: £6,000). The balance outstanding to Trucost plc at year-end was £nil (2010: £nil). The Group has an agreement with Keith Jacobs, a brother of Andrew Jacobs and Colin Jacobs, for the provision of marketing services and support on a consultancy basis. The fees payable to Keith Jacobs during the year under this arrangement were £20,741 (2010: £21,434). There was £3,427 outstanding due to Keith Jacobs at the year-end (2010: £1,791). The maximum balance outstanding at any time during the year is £3,427 (ex VAT) (2010: £1,791). 32a Capital Commitments and Guarantees The Group has capital expenditure contracted but not provided for in the financial statements of £343,327 (2010: £84,984) relating to minor works. 32b Bank Borrowings The Company has guaranteed the bank borrowings of Lok’nStore Limited. As at the year-end, that company had gross bank borrowings of £28.1 million (2010: £28.1 million). 32c Contingent Liability – Value Added Tax As an ancillary activity, Lok’nStore acts as an intermediary in relation to supplies of exempt insurance to customers for which it receives a commission. In November 2007, Lok’nStore originally approached HMRC, on a purely voluntary and unprompted basis, to request the implementation of a Partial Exemption Special Method (‘PESM’). Lok’nStore, advised by Baker Tilly Tax & Accounting Limited, maintained that the standard partial exemption method, i.e. one based on the values of the various different income streams, resulted in a wholly distortive restriction of input tax. Lok’nStore remains of the view that revenue is a poor proxy for the ‘use’ of the majority of the input tax incurred by Lok’nStore and, as a consequence, the standard method does not provide a fair result. Current Dealings with HMRC On 25 February 2008, HMRC determined that it was appropriate to raise an assessment in the amount of £140,902.95 in respect of Lok’nStore’s partial exemption calculations, under the Standard Partial Exemption Method (‘standard method’) for the VAT periods April 2005 through April 2007. Lok’nStore rejected the basis of this assessment and has advanced a number of other proposals and arguments in a bid to resolve this now long-running dispute. Again, these have been rejected. Following the formal rejection of the various proposals which were submitted for a PESM, a local review of the decision was requested which upheld the rejection of a PESM. This decision was appealed by Lok’nStore to the Tax Tribunal in September 2009. Counsel also confirmed that Lok’nStore should carry out a Standard Method Override Calculation (‘SMO’) and that this should be calculated on the same basis as the proposed mixed floor space and values based method. Position at Year End There are two appeals lodged at the Tax Tribunal; one in respect of the proposed PESM going forward and the other in respect of the SMO calculations for the past VAT periods. It has been agreed with the Tribunal and HMRC that the second appeal (i.e. the SMO appeal) will be stood over pending the outcome of the first appeal in respect of the proposed PESM. It is expected that a Tribunal Hearing will take place in January 2012 to determine the matter. On a range of outcomes, on a worst case scenario, the overall liability in relation to input tax claimed up to the end of July 2011 which may become repayable to HMRC totals £369,193 (2010: £327,765) based on the standard method restriction. Of this £203,386 (2010: £192,830) relates to capital expenditure inputs and £165,807 (2010: £134,935) relates to income statement items. Alternatively, If a special method is agreed, this may give a restriction of around 1%, in which case the total amount of VAT (plus interest) to be assessed by HMRC would on the figures above give a special method restriction of £83,910 (2010: £77,005). On a pro rata basis this potential liability between restricted inputs gives a liability of £55,217 (2010: £51,472) relating to capital expenditure inputs and £28,693 (2010: £25,533) relating to income statement items. Interest would be added to both totals. It is not impossible that there should be no restriction of input tax incurred as calculations indicate that the proposed PESM, using a mixed floor space and values based method, gives a minimal restriction. As a result, no restriction of input tax will be required under this method on the basis that the de minimis limits are not breached. While this remains an ongoing dispute with HMRC and while the outcome at present remains uncertain it is not considered that any material provision is necessary. 68 Lok’n’Store Group Plc Annual Report & Accounts 2011 oUR SToRES Swindon (West), Wiltshire 16–18 Caen View Rushy Platt Industrial Estate Swindon Wiltshire SN5 8WQ Tel 01793 878222 Fax 01793 878333 swindonwest@loknstore.co.uk Tonbridge, Kent Unit 6 Deacon Trading Estate Vale Road Tonbridge Kent TN9 1SU Tel 01732 771007 Fax 01732 773350 tonbridge@loknstore.co.uk Under development Southampton, Hampshire Third Avenue Millbrook Southampton SO15 0JX North Harbour, Port Solent, Hampshire Southampton Road Portsmouth PO6 4RH Maidenhead, Berkshire Stafferton Way Maidenhead Berkshire SL6 1AY Reading, Berkshire A33 Reading Relief Road Reading Berkshire RG1 6EL Head office Lok’nStore plc 112 Hawley Lane Farnborough Hampshire GU14 8JE Tel 01252 521010 www.loknstore.com Central Enquiries 0800 587 3322 info@loknstore.co.uk www.loknstore.co.uk Ashford, Kent Wotton Road Ashford Kent TN23 6LL Tel 01233 645500 Fax 01233 646000 ashford@loknstore.co.uk Basingstoke, Hampshire Crockford Lane Chineham Basingstoke Hampshire RG24 8NA Tel 01256 474700 Fax 01256 477377 basingstoke@loknstore.co.uk Crayford, Kent Block B Optima Park Thames Road Crayford Kent DA1 4QX Tel 01322 525292 Fax 01322 521333 crayford@loknstore.co.uk Eastbourne, East Sussex Unit 4, Hawthorn Road Eastbourne East Sussex BN23 6QA Tel 01323 749222 Fax 01323 648555 eastbourne@loknstore.co.uk Fareham, Hampshire 26 + 27 Standard Way Fareham Industrial Park Fareham Hampshire PO16 8XJ Tel 01329 283300 Fax 01329 284400 fareham@loknstore.co.uk Farnborough, Hampshire 112 Hawley Lane Farnborough Hampshire GU14 8JE Tel 01252 511112 Fax 01252 744475 farnborough@loknstore.co.uk Poole, Dorset 50 Willis Way Fleetsbridge Poole Dorset BH15 3SY Tel 01202 666160 Fax 01202 666806 poole@loknstore.co.uk Harlow, Essex Unit 1 Dukes Park Edinburgh Way Harlow Essex CM20 2GF Tel 01279 454238 Fax 01279 443750 harlow@loknstore.co.uk Horsham, West Sussex Blatchford Road Redkiln Estate Horsham West Sussex RH13 5QR Tel 01403 272001 Fax 01403 274001 horsham@loknstore.co.uk Luton, Bedfordshire 25 Brunswick Street Luton Bedfordshire LU2 0HG Tel 01582 721177 Fax 01582 721188 luton@loknstore.co.uk Milton Keynes, Buckinghamshire Etheridge Avenue Brinklow Milton Keynes Buckinghamshire MK10 0BP Tel 01908 281900 Fax 01908 281700 miltonkeynes@loknstore.co.uk Northampton Central 16 Quorn Way Grafton Street Industrial Estate Northampton NN1 2PN Tel 01604 629928 Fax 01604 627531 nncentral@loknstore.co.uk Northampton Riverside Units 1–4 Carousel Way Northampton Northamptonshire NN3 9HG Tel 01604 785522 Fax 01604 785511 northampton@loknstore.co.uk Portsmouth, Hampshire Rudmore Square Portsmouth PO2 8RW Tel 02392 876783 Fax 02392 821941 portsmouth@loknstore.co.uk Reading, Berkshire 5–9 Berkeley Avenue Reading Berkshire RG1 6EL Tel 0118 958 8999 Fax 0118 958 7500 reading@loknstore.co.uk Southampton, Hampshire Manor House Avenue Millbrook Southampton Hampshire SO15 0LF Tel 02380 783388 Fax 02380 783383 southampton@loknstore.co.uk Staines, Middlesex The Causeway Staines Middlesex TW18 3AY Tel 01784 464611 Fax 01784 464608 staines@loknstore.co.uk Sunbury on Thames, Middlesex Unit C, The Sunbury Centre Hanworth Road Sunbury Middlesex TW16 5DA Tel 01932 761100 Fax 01932 781188 sunbury@loknstore.co.uk Swindon Kembrey Park, Wiltshire Kembrey Street Elgin Industrial Estate Swindon Wiltshire SN2 8AZ Tel 01793 421234 Fax 01793 422888 swindoneast@loknstore.co.uk L o k ’ n S t o r e G r o u p P l c A n n u a l R e p o r t & A c c o u n t s 2 0 1 1 Head office Lok’nStore Group Plc 112 Hawley Lane Farnborough Hampshire GU14 8JE Tel 01252 521010 www.loknstore.co.uk www.loknstore.com