Lok'nStore Group Plc
Annual Report 2014

Plain-text annual report

Lok’nStore Group Plc Annual Report and Accounts for the year ended 31 July 2014 www.loknstore.com | Stock code: LOK 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 n d A c c o u n t s f o r t h e y e a r e n d e d 3 1 J u l y 2 0 1 4 23602.04 31 October 2014 11:16 AM Proof 6a In This Report 1 Highlights 2 Chairman’s Review 6 The Strategic Report Our Business Model The Performance of our Stores Operational and marketing Review Stores Property Review Financial Review Principal Risks and Uncertainties in operating our Business 24 Board of Directors and Advisers 28 Directors’ Report 30 Corporate Social Responsibility Report 36 Corporate Governance 38 Directors’ Responsibilities in the Preparation of Financial Statements 39 Independent Auditor’s Report to the Members of Lok’nStore Group Plc 40 Consolidated Statement of Comprehensive Income 41 Consolidated Statement of Changes in Equity 42 Company Statement of Changes in Equity 43 Statements of Financial Position 44 Consolidated Statement of Cash Flows 45 Accounting Policies 52 Notes to the Financial Statements 78 Glossary 79 Our Stores Commenting on the Group’s results, Andrew Jacobs CEO of Lok’nStore Group said: “Trading has been strong and accelerated through the second half of our financial year. Our new store pipeline is changing the balance of our portfolio with new and purpose-built stores increasing from 39.6% of the portfolio to 58.0% of our lettable space. The new flagship store in Maidenhead opened in December and is trading well and the new stores in Reading, Aldershot, Southampton and Bristol opening over the coming eighteen months will add further impetus to sales and earnings growth. These will all be purpose-built stores with our eye-catching modern design in highly prominent positions. “The strong growth of the business and Lok’nStore’s low level of debt means that this can be financed out of our existing bank facilities, while progressively increasing the dividend.” 23602.04 31 October 2014 11:16 AM Proof 6a 1 Welcome to Lok’nStore Group Plc Lok’nStore Group Plc is one of the leading companies in the fast growing UK self-storage market. We opened our first self-storage centre in Horsham, Sussex in February 1995 and have grown consistently over the last 19 years, currently operating 24 self-storage centres and two serviced document stores in Southern England. We have been listed on the Alternative Investment market (AIM) since June 2000. We offer self-storage and serviced document storage and management services. Self-storage is available to both household and business customers at our highly branded Lok’nStore centres. Each centre is prominently located mainly in the affluent South-East of England in large towns and cities. Our Saracen Document Storage service offers businesses anything from secure storage of one media tape to full management of their business documentation with 24 hour retrieval. We excel in offering the best customer service at competitive prices for both our Lok’nStore and Saracen customers. Our Business Strengths • The specific property requirements of self-storage coupled with challenging local planning regimes create significant barriers to entry, especially in Southern England where Lok’nStore operates • Strong and increasing asset base • The self-storage business is highly cash generative with high profit margins on established stores and all customers paying on a rolling 28 day basis • Lok’nStore has a track record of strong and growing cash generation driving a progressive dividend policy • New and replacement store openings over the next year • Significant growth in third party asset management • Experienced Board and Executive management team with clear strategic direction and proven business model “Lok’nStore is a robust business with a consistent record of profit growth and cash generation. We have built a firm base for the coming years.” Simon G Thomas, Chairman 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 20142 Highlights Group Financial Highlights Revenue £13.91 million Adjusted EBITDA1 £4.62 million Annual dividend 7 pence per share 7.2% (2013: £12.97 million) 11.6% (2013: £4.14 million) 16.7% (2013: 6 pence per share) Adjusted Net Asset Value per share2 £2.71 9.6% (2013: £2.48) Operational Highlights Self Storage: Occupied space Unit Pricing 12.4% 5.8% Unit Occupancy 69.5% of current lettable area (2013: 64.5%) Store EBITDA £6.06 million 12.8% (2013: £5.38 million) Store EBITDA margins Ancillary sales 2.0% to 50.7% (2013: 48.7%) 15.5% Document Storage: Year end boxes stored Tapes stored 10.1% 16.2% 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc3 Revenue £13.91m Group Adjusted EBITDA1 £4.62m Adjusted Net Asset Value per share2 £2.71 Loan to Value Ratio3 28.2% Funds from Operations4 £3.97m Property Highlights • Total property values up 14.3% • New and purpose built stores lettable space increasing from 39.6% to 58.0% of portfolio • New Maidenhead store opened in December 2013 — trading well • Sale of old Reading store for residential development for £2.9 million • Construction of new Reading store completed October 2014 • Acquired a site in Bristol in December 2013 for new store • New Aldershot and Southampton stores due to open in 2015 Key Metrics • Loan to value ratio down to 28.2%3 (2013: 28.5%) • Funds from Operations (FFO)4 £3.97 million up 17.5% (2013: £3.4 million) • FFO per share of 16.1 pence per share up 14.4% (2013: 14.1 pence per share) 1. Adjusted EBITDA is defined as profits before depreciation, amortisation, losses or profits on disposal, share-based payments, acquisition costs, non-recurring professional costs, finance income, finance costs and taxation. 2. Adjusted net asset value per share is the net assets adjusted for the valuation of leasehold stores and deferred tax divided by the number of shares at the year end. The shares held in the Group’s employee benefits trust and treasury are excluded from the number of shares. 3. Calculation based on net debt of £25.5 million (2013: £22.5 million) and total property value of £90.5 million (2013: £79.2 million). 4. Funds from Operations (FFO) calculated as EBITDA minus net finance cost on operating assets. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 20144 Chairman’s Review Strong growth, robust capital structure, increased Net Asset Value, increased dividend and rapid new store opening programme Lok’nStore Group has traded well over the last several years and this improved further from the end of calendar year 2013 resulting in robust growth of sales and earnings for the financial year to July 2014. This strong trading has been and will continue to be reinforced by improvements to our existing stores combined with our programme of new, modern, purpose-built store openings including the recent opening of our new Maidenhead store, the replacement stores in Reading and Southampton, and the new stores in Aldershot and Bristol. This will result in a substantial increase in the proportion of our stores’ lettable space which is new or purpose built from 39.6% up to 58.0%. Our trading area will increase by 12.5%. The growth of sales, profit and asset values combined with innovative asset management has combined to achieve a reduction in the loan-to-value (LTV) ratio of borrowing to asset values from 28.5% to 28.2% and an increase in annual dividend by 16.7% despite capital expenditure rising from £0.6 million last year to £6.5 million this year, a remarkable achievement. Two other key performance indicators (KPIs), Funds from Operations (FFO) per share and Net Asset Value per share (NAV) have moved smartly ahead. With the high barriers to entry caused by the strong demand for property in South-East England and the difficulties of the local planning process, Lok’nStore’s growing portfolio of high quality self-storage assets is set to deliver solid and increasing returns to investors. Trading positive Revenue for the year was £13.91 million, up 7.2% year on year (2013: £12.97 million) driven by self-storage unit occupancy which is up 12.4% and prices achieved for rented self- storage units which are up 5.8%. This strong turnover growth led to an 11.6% increase in Group Adjusted EBITDA. With low debt and interest costs this translates into Funds from Operations (FFO) per share growing by 14.4%. Tight control over operating costs has pushed the Group’s margins and profits to record levels. With the interest rate payable on £20 million of our net debt fixed at 3.525% we are currently operating at a blended interest cost of 3.33%, giving us a firm foundation on which to grow the business. Properties and Net Asset Value The year-end property valuation equates to a total value of properties held of £90.5 million (2013: £79.2 million) a 14.3% increase in value. (Note that these values are not fully reflected in the statement of financial position which states the operating leasehold stores at cost less accumulated depreciation.) Our new Maidenhead store opened in December 2013 and is trading well. We have almost completed the development of our new store in Reading, and the Aldershot store commenced development in July 2014. Next year we intend to develop the new Southampton and Bristol stores. These new stores will add further momentum to the growth of sales and profits over the coming years demonstrating Lok’nStore’s ability to create innovative solutions to drive the growth of the operating business within our current financial resources. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group PLC5 “With the high barriers to entry caused by the strong demand for property in South-East England and the difficulties of the local planning process, Lok’nStore’s growing portfolio of high quality self- storage assets is set to deliver solid and increasing returns to investors.” Simon G Thomas, Chairman Dividend It is intended that the Company’s future dividend payments will reflect the growth in the underlying cash generated by the business. The interim dividend will represent approximately one-third of the total for the year and final dividend two-thirds. This year, to reflect the strength of the business, and notwithstanding the one-off impairment charge, we are recommending a full year dividend of 7 pence per share reflecting the strong underlying performance of the business. This is up from 6 pence for the full year last year, an increase of 16.7% which translates into a final dividend of 5 pence per share following payment of an interim dividend of 2 pence per share in June 2014. Resignation of Director On 25 February 2014 Douglas Hampson, a Non-Executive Director of Lok’nStore Group Plc, through his company Montecito Storage Investors LLC (Montecito) sold his entire holding of 4,033,909 ordinary shares in the Company. The shares were acquired by existing and new investors. Mr Charles Peal, a Non-Executive Director, added 450,000 shares to his holding. Following the transaction Montecito and Mr Hampson no longer have an interest in the shares in the Company and Mr Hampson resigned from the Board. The Board thanks Mr Hampson for his valuable contribution during his tenure as a Director. Outlook Lok’nStore is a robust business with a record of consistent profit growth and cash generation and has built a firm base for the coming years. Recent strong trading has been and will continue to be reinforced by our programme of new, modern, purpose-built store openings and upgrades. This will result in a substantial increase in the proportion of our stores which are new or purpose-built combined with a significant increase in our trading space. Given the strong growth of sales, profits and asset values combined with the benefits of innovative asset management we believe we can achieve this without significantly increasing the loan-to-value (LTV) ratio or borrowings while continuing to increase the dividend. Our dedicated and dynamic executive management team have capitalised on the improved economy and are well placed to continue our growth over the coming years. Simon G Thomas Chairman 17 October 2014 Dividend 7 pence per share 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 20146 The Strategic Report The Strategic Report is a new feature of the Lok’nStore Annual Report and its purpose is to inform members of the Group and help them assess how the Directors have performed. Its intention is to provide a balanced and comprehensive analysis of the development and performance of the Group’s business during the financial year and its position at its year-end, consistent with the size and complexity of the business. The Strategic Report covers the following areas of our business: • What we do, our strategy and the way our business works • The UK self-storage market • The performance of our stores • An operational and marketing review • A property review • A financial review • Principal risks and uncertainties in operating our business Our strategy and the way our business works Introduction Lok’nStore Group Plc is one of the leading companies in the fast growing UK self-storage market. We opened our first self-storage centre in Horsham, Sussex in February 1995 and have grown consistently over the last 18 years, currently operating 24 self-storage centres and two serviced document stores in Southern England. Two replacement stores and another new store will open in the coming year. We have been listed on the AlM Market since June 2000 and the Board still accounts for 33% of the ordinary shares of the Company. We offer self-storage serviced document storage and management services to third party store owners. Self-storage is available to both household and business customers at our highly branded Lok’nStore centres. Each centre is prominently located mainly in the affluent South-East of England in large towns and cities. Our serviced document storage service offers businesses anything from secure storage of one media tape to full management of their business documentation with 24 hour retrieval. We excel in offering the best customer service at competitive prices for our customers. Strategy We develop and operate self-storage centres in prominent locations broadly in South-East England. Our tall buildings with their distinctive orange livery create highly visible landmarks which continue to be a big contributor of new business for Lok’nStore. Demand for self-storage by both business and domestic customers is driven by a combination of specific need based on changing circumstances but also linked to local economic activity and prevailing consumer and business confidence. The strong performance of our business since 2008 despite a generally poor economy is testament to its underlying resilience and its ability to grow revenue and earnings in most economic environments. Since the pick-up in the economy we have seen acceleration in our performance and this shows through in our reported numbers. Our stores are located in the more affluent South East. People and businesses are more space constrained in these relatively expensive areas. Barriers to entry in terms of competition for suitable sites and the difficulties in securing appropriate planning consents are also correspondingly higher. The strengths of our business model are summarised in table form on page 8. The UK self-storage market There remains significant opportunity in the UK self-storage market where there are an estimated 830 self-storage facilities providing approximately 30 million square feet of storage space. With a population of 62 million people in the UK this equates to 0.5 square feet per person, compared to 7.3 square feet per person in the USA (Self-Storage Association 2014 UK Annual Survey). The sector remains in good health. The Deloitte 2014 Report for the Self-Storage Association says “there has been growth in the industry over the last 12 months both in terms of additional space and new facilities opening…… Interestingly none of ….the three largest operators opened any new facilities in 2013.” Despite this the total storage space available grew by 4% in 2013. The Report estimates that total annual turnover for the UK self-storage industry in 2013 was £385 million from approximately 420 different operators, and they employed in excess of 2,000 staff (full time equivalent) in their self-storage facilities. As awareness of self-storage continues to grow more businesses and individuals will use self-storage in a market that is supply constrained with very few openings in the coming year. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc7 “Our distinctive orange buildings create highly visible landmarks which are a big contributor of new business for Lok’nStore.” Andrew Jacobs, Chief Executive Officer 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 20148 The Strategic Report Our Business Model Attractive market dynamics Our competitive strength • UK self-storage penetration in key urban conurbations remains relatively low • Very limited new supply coming onto the market — Lok’nStore is bucking the trend with significant growth in site development — Reading, Aldershot, Southampton and Bristol • The specific property requirements of self-storage coupled with challenging local planning regimes create significant barriers to entry, especially in Southern England where Lok’nStore operates • Resilient through economic downturns • Sector is growing • Recognised brand • Newer stores are prominent on arterial or main roads, with extensive frontage and high visibility • Strong internet marketing delivering: — traffic from mobile phones and desktop computers — online booking and reservation; click and collect for retail boxes and packaging • Excellent customer service, customer feedback programme with store level customer satisfaction surveys, mystery shopper programme and quality control procedures • Store portfolio concentrated in the affluent South East • Newer stores have larger average store capacity — economies of scale, higher operating margins • Secure financing structure with strong balance sheet • Strong and increasing store asset base • Experienced and committed Board and executive management team with clear strategic direction, operational skills and a proven and robust business model Stable and rising income streams and strong credit risk model • Over 7,800 customers • Mix of business and domestic customers • High profit margins • Low bad debt expense (0.20% of revenue in the year) • Strong credit risk model (security deposits; customers pay in advance; lien on goods) • Limited local competition Strong growth opportunities • A focus on occupancy growth and: — Yield management as occupancy increases — Demand increasing — Site development out of strong operational cash flow and innovative financing solutions Translation of the business model into high quality earnings • The self-storage business is strongly cash generative with high profit margins on established stores and all customers paying on a rolling 28 day basis • Low technology and product obsolescence; maintenance fully expensed through profit and loss • Fit-out capital expenditure can be phased to align with rate of store fill-up • Lok’nStore has a track record of strong and growing cash generation driving a progressive dividend policy The objective of our strategy is to continue to increase EBITDA per share over the coming years. We believe there is the opportunity for significant further growth and we will continue to focus our efforts on five key areas: • Filling existing stores and improving pricing • Developing new stores on a self-funded basis • Opportunistic site acquisitions • • Developing our document storage offering through organic growth Increasing the number of stores we manage for third parties 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc9 Lok’nStore’s Locations 1 Aldershot 2 Ashford 3 Basingstoke 4 Bristol 5 Crawley 6 Crayford 7 Eastbourne 8 Fareham 9 Farnborough 10 Harlow 11 Horsham 12 Luton 13 Maidenhead 14 Milton Keynes 15 Northampton Central 16 Northampton Riverside 17 Poole 18 Portsmouth 19 Reading 20 Southampton 21 Staines 22 Sunbury 23 Swindon East 24 Swindon West 25 Tonbridge 26 Woking 27 Olney 28 Leatherhead 23602.04 31 October 2014 11:16 AM Proof 6a 92367181101112131415161781920242327212225262845Annual Report and Accounts 201410 “Strong trading is reinforced by improvements to our existing stores combined with our programme of new, modern, purpose-built store openings.” Simon G Thomas, Chairman 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group PlcThe Strategic Report The Performance of our Stores 11 Sales, earnings and occupancy up Our self-storage occupancy rose strongly during the year, up 12.4% and this was combined with price increases of 5.8%. During the year occupancy of the self-storage units increased 5.0% to 69.5% (2013: 64.5%) of current lettable area (CLA). Self-storage revenue for the year was £12.07 million, up 12.4% (2013: £11.14 million). With costs firmly under control this revenue growth translates into strong profit growth. We again managed to increase the overall adjusted EBITDA margin across all stores by 2% from 48.7% to 50.7%. The adjusted EBITDA margins of the freehold stores were 62.7% (2013: 61.2%) and the leasehold stores achieved margins of 36.6% (2013: 30.8%). Total store EBITDA in the self-storage business, a key performance indicator of profitability and cash flow of the business, increased 12.8% to £6.06 million (2013: £5.38 million). At the end of July 2014, 33.3% of Lok’nStore’s self-storage revenue was from business customers (2013: 36.6%) and 66.7% was from household customers (2013: 63.4%). By number of customers 19.0% of our customers were business customers (2013: 20.8%) and 81.0% were household customers (2013: 79.2%). Demonstrating the increased activity of our customers, enquiries were up 23.1% and move-ins were up 20.9% over the year. Ancillary sales Ancillary sales which consist of boxes and packaging materials, insurance and other sales increased 15.5% over the year accounting for 11.4% of self-storage revenues (2013: 10.7%). We continue to promote our insurance to new customers with the result that 93% of our new customers purchased our insurance over the year, and this has resulted in an increase in the percentage of our customers who are insured through Lok’nStore to 78% (2013: 75%). Document storage business In our document storage business revenue has been maintained and profits have fallen slightly. However we are pleased to report that our business’ operating metrics are improving rapidly in response to the Company’s more customer-facing marketing stance. This investment has resulted in excellent customer feedback and puts us in a good position to win new business, with boxes stored increasing 10.1% and tapes stored up 16.2%. Although revenue and profit will take time to respond to this volume growth we are pleased to see this noticeable improvement. We believe this focus will create long term value for customers and shareholders as our customer base grows. We have now consolidated our serviced document warehouse capacity, closing one of the three storage sites which incurred a cost in the period of £25,361, but this will benefit earnings in the future. Following this consolidation and the fit-out of new warehouse racking we have the capacity to double the number of boxes stored within our existing premises. As part of this strategy additions of £0.21 million were made in the current year to fixtures, fittings and equipment (2013: £0.4 million). Acquisition of remaining Saracen shares During the year the Company acquired the remaining 9.6% non-controlling interest in Saracen Datastore Limited under the terms set out in the original Share Purchase Agreement for £nil consideration. 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. Importantly all of our stores are manned during opening hours. Portfolio Analysis and Performance Breakdown As at 31 July 2014 Freehold and long leasehold2 Operating leaseholds1 Pipeline (freehold)2 Managed stores (trading) Managed stores (under development) Total % of store EBITDA Store EBITDA margin (%) % lettable space Lok owned Total % lettable space Number of stores % of valuation 12 9 2 3 1 27 79.6 16.1 4.3 – – 100 66.9 33.1 – – – 100 62.7 36.6 – – – 50.7 56.2 43.8 – – – 100 51.3 40.0 – 8.7 – 100 1. The average unexpired term of the Group’s operating leaseholds is approximately 13 years and 8 months as at 31 July 2014 (31 July 2013: 14 years and 8 months). 2. Total freeholds account for 83.9% of property values. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201412 “59% of our enquiries now come from the Internet. Customers visiting the site are encouraged to book online to take advantage of our online reservation system.” Andrew Jacobs, Chief Executive Officer 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group PlcThe Strategic Report Operational and Marketing Review 13 Marketing During the year our marketing focused on the internet which produces an ever-increasing proportion of our enquiries; 59% of our enquiries now come from the internet (2013: 57%). Printed directories account for a decreasing proportion of business over recent years and are now at a de minimis level. For the year total internet enquiries were up 28.4% on last year and total enquiries were up 24.6% across all stores. We will continue to manage our marketing budget with a strong focus on cost control and value for money. Despite the inexorable rise of internet marketing, around 37% (2013: 37%) of our business still comes from passing traffic and signage, so the visibility of our stores remains very important to our marketing efforts. With their prominent positions, distinctive design and bright orange elevations, our stores raise the profile of the Lok’nStore brand. We continue to invest in new signage and lighting at our existing stores as well as creating striking designs for our new stores to promote and enhance their visual prominence. Our store personnel are closely involved with sales and marketing initiatives and work with the head office team to ensure our marketing expenditure remains targeted and effective. Website The internet has rapidly taken over as the main media channel for our advertising and Lok’nStore has adapted to accommodate this change. Our website at www.loknstore.co.uk is one of the most established self-storage websites in the UK, having been operational since 2001. The website was relaunched in February 2012 and has been extremely successful in driving online traffic. We continue to improve our work in search optimisation and are using social networks to reinforce our various messages. The site has clear navigation making it easy for customers to find their way around. Customers visiting the site are encouraged to book online to take advantage of our online reservation system. We have a ‘state-of-the-art’ space estimator which is a key tool for customers booking online, enabling them to make an informed choice about the size of unit required.  This is a very dynamic area and we are committed to continued rapid development. New features this year include an online chat facility and a ‘click and collect’ box shop. We believe the internet provides a strong competitive advantage for the major operators such as Lok’nStore with large marketing budgets compared with those of the smaller operators. During the year we spent 2.5% of self-storage revenue on marketing. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201414 The Strategic Report Stores Property Review Strong cash flows and solid asset base create opportunities Lok’nStore’s strong operating cash flow, solid asset base, and tactical approach to its store property portfolio provide the Group with opportunities to improve the terms of its property usage in all stages of the economic cycle. Our focus on the trading business gives us many opportunities and our property decisions are always driven by the requirements of the trading business. Lok’nStore has both freehold and leasehold stores and manages four stores on behalf of three different clients. Acquisition of site for new store in Bristol In January 2014 Lok’nStore acquired a site in Longwell Green, Bristol. The site of approximately 0.9 acres is in a busy retail park and has planning permission to build a 50,000 square feet self-storage centre in Lok’nStore’s modern and distinctive design. The total cost of the store when built and fitted out, will be around £4 million and will add to Lok’nStore’s high-quality portfolio of purpose built self- storage centres in prominent trading locations. When open it will take Lok’nStore’s total stores to 26 following the recent opening of the new Maidenhead store and the opening of the new Reading, Southampton and Aldershot stores in the coming year. Sale of previous Reading store and opening of new Reading store In October 2013 Lok’nStore agreed the sale of its store in Reading for an initial consideration of £2.9 million. The consideration is a 7.4% premium to the 31 July 2013 valuation and will be paid in cash on completion when the store is vacated in autumn 2014. The transaction is not yet recognised as a disposal (but is an asset held for sale) in this period since the Group retains the economic interest in revenues and profits in the store while the store continues to trade until legal completion and also continues to retain the economic interest in the business and customers thereafter. Lok’nStore also owns the adjacent site on which it has now substantially completed the building of a new store. The new store will have 48,000 square feet of self-storage space, a 20% increase. The highly prominent location is directly accessible from the busy main road which connects Reading town centre to the M4 motorway. The transaction allows the Group to construct its new store while continuing to operate its existing trading business during this period. The cost of constructing and fitting the new store will be funded from the combination of the sale proceeds and store earnings during the transition period demonstrating the Group’s ability to expand its operating footprint out of existing financial resources. When the new building is complete the existing customers will be transferred to the new store. New Maidenhead store opened In December 2013 Lok’nStore opened a new state-of-the-art store in Maidenhead providing around 60,000 square feet of self-storage space.   This is a long leasehold site (the lease term runs until April 2076) of 1.6 acres close to Maidenhead town centre and railway station and is very prominent to the retail park near the main road joining the town centre with the M4 motorway. The store, which also provides space on the ground floor for a Lidl food store, is of similar style and appearance to other recently opened Lok’nStore centres, with Lok’nStore’s strong branding adding to the visual attractiveness of the site. This collaboration with Lidl will increase the visual prominence, brand recognition and footfall of the store which are key criteria for success. Maidenhead is an excellent location for Lok’nStore, an affluent town with little local competition. The innovative financing of the scheme has required only a modest capital input from Lok’nStore and enables us to continue to expand the Group’s operating footprint without stretching the balance sheet. Management contract — Aldershot In 2012 Lok’nStore signed an agreement to develop and manage a new self-storage centre in Aldershot, Hampshire. The store will be located in a prominent location on the main Aldershot roundabout above the A331 with significant levels of passing traffic, and is expected to commence trading in 2015. The store will be managed for outside investors under the Lok’nStore brand. Lok’nStore will contribute approximately £2.5 million in development funds of the estimated £4.5 million total cost of development and will manage the building and operation of the store. Lok’nStore will generate a return by charging a return on the development capital, and a management fee for the construction, operation and branding of the store. This project is consistent with Lok’nStore’s strategy of expanding the operating footprint of the business while maintaining its strong balance sheet. Impairment of site The Group has no immediate plans to progress works at our site at Portsmouth North Harbour and may not ultimately develop the site as a purpose-built self-storage centre. Accordingly, the carrying cost of the site has been written down by £1.6 million to a level which reflects its alternative use value. Store portfolio These projects are part of our strategy of actively managing our store operating portfolio to ensure we are maximising value. This includes strengthening our distinctive brand, increasing the size and number of our stores and replacing stores or sites where it will increase shareholder value. We prefer to own freeholds if possible, and where opportunities arise we will seek to acquire the freehold of our leasehold stores. However 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 site’s development. Our most important consideration is always the trading potential of the store rather than the type of property tenure. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc15 We currently have 24 stores trading. Of these, 21 stores are owned with 12 freehold or long leasehold – nine leasehold and three further sites operating under individual management contracts. With Aldershot opening in 2015 this will increase the number of stores we operate to 25 and will capitalise on our efficient operating systems and growing internet marketing presence. These arrangements demonstrate Lok’nStore’s ability to attract investment partners and create innovative ownership to drive the growth of the operating business. At the year-end the average length of the seven leases which were valued at July 2014 decreased by 12 months to 13 years and 8 months (2013: 14 years and 8 months). Eight out of nine of our leasehold stores are inside the Landlord and Tenant Act providing us with a strong security of tenure. The leasehold sites produced 33.1% of the store EBITDA in the year (2013: 31.7%). Store property assets and Net Asset Value Lok’nStore’s freehold and operating leasehold stores have been independently valued by Cushman & Wakefield (C&W) at £79.1 million (NBV £30.1 million) as of 31 July 2014 (2013: £67.7 million; NBV £30.6 million). Property valuation is referred to further in the Financial Review section of the Strategic Report and is detailed in note 10b of the notes to the financial statements. Adding our stores under development at cost, our total property valuation is £90.5 million (historic cost value £46.4 million) (2013: £79.2 million; historic cost value £42.6 million). This translates into an adjusted net asset value of £2.71 per share up 9.6% on last year (2013: £2.48 per share). 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201416 “Total revenue for the year grew 7.2% to £13.91 million. Group operating profit for the year is up 20% to £3.08 million.” Ray Davies, Finance Director 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group PlcStrategic Report Financial Review 17 Management of interest rate risk Lok’nStore has £27.7 million of debt currently drawn against its £40 million revolving credit facility. £20 million is at a fixed interest rate with £10 million fixed rate swap at a fixed one month sterling LIBOR rate of 1.2% and £10 million swap at a fixed one month sterling LIBOR rate of 1.15%. With one month LIBOR around 0.5%, this leaves a balance of £7.7 million floating at a current all-in rate of around 2.83% and results in an overall weighted average rate of 3.33%. The £20 million fixed rate is treated as an effective cash flow hedge and its fair value on a mark-to-market basis has fluctuated historically. Its current fair value of £0.05 million is currently stated as a non- current asset (2013: £0.27 million liability). See Note 15. Operating costs For the previous five years we have reduced our Group operating costs year on year. This year, through disciplined management, we have again reduced property costs and contained overhead growth to 2.3%. Staff costs increased by 12.2% through a combination of strong sales bonuses and additional national insurance costs arising on the exercise of employee share options. Group operating costs amounted to £9.0 million for the year, a 5% increase from last year (2013: £8.57 million). Overall operating costs as a percentage of revenue have decreased and represent 64.7% as a cost ratio (2013: 66.1%). This disciplined approach to costs ensures that as much as possible of the revenue growth achieved contributes to increasing our profits. Trading Total revenue for the year grew 7.2% to £13.91 million (2013: £12.97 million). Group operating profit for the year is up 20% to £3.08 million (2013: £2.57 million) after adding back the impairment of a development land asset charged to the Income Statement. Document storage revenue was £1.84 million (2013: £1.84 million). Document storage adjusted EBITDA, before inter-company management charges, was £0.24 million (2013: £0.31 million). Taxation Historically, there has been no corporation tax to pay due to the availability of tax losses. The Group’s tax losses have now been utilised with de minimis tax losses available to carry forward for offset against future profits. The Group will therefore pay tax on the majority of its earnings this year and has made a tax provision in this year of £0.34 million. Earnings per share Earnings per share have been impacted by the £1.6 million impairment to a development land asset and the tax charge. Basic earnings per share before the one-off impairment charge were 7.39 pence (2013: 5.75 pence per share) and diluted earnings per share were 7.21 pence (2013: 5.72 pence per share). Underlying operating profit is 20% higher than last year. Basic earnings per share after impairment were 0.81 pence (2013: 5.75 pence per share). Diluted earnings per share were 0.79 pence (2013: 5.72 pence per share). Treasury shares Although the Group did not purchase any Treasury shares during the year we are proposing to renew our ongoing authority to buy back shares at this year’s AGM to ensure the Group continues to have flexibility to make further purchases should it be considered to be in the best interests of shareholders to do so. Group Adjusted EBITDA £4.62m up 11.6% 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201418 Strategic Report Financial Review Operating costs continued Group Property costs Staff costs Overheads Distribution costs Total Lok’nStore Limited1 Property costs Staff costs Overheads Distribution costs Total Increase/ (decrease) in costs % (1.2) 12.2 2.3 9.1 5.0 Increase/ (decrease) in costs % (1.0) 10.8 6.2 – 4.9 2014 £’000 3,689 3,971 1,153 189 9,002 2014 £’000 3,196 3,298 1,011 – 7,505 1. Includes expenses relating to Southern Engineering and Machinery Company, a wholly owned subsidiary which owns the Southampton development site. Saracen Datastore Limited Property costs Staff costs Overheads Distribution costs Total Increase/ (decrease) in costs % (2.2) 19.9 (19.0) 9.1 4.8 2014 £’000 493 673 142 189 1,497 2013 £’000 3,733 3,538 1,128 173 8,572 2013 £’000 3,228 2,976 952 – 7,156 2013 £’000 504 562 175 173 1,414 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc19 Cash flow and financing At 31 July 2014 the Group had cash balances of £2.2 million (2013: £4.2 million). There was £27.7 million of gross borrowings (2013: £26.8 million) representing gearing of 56.5% (2013: 55.8%) on net debt of £25.5 million (2013: £22.5 million). After adjusting for the uplift in value of leaseholds which is stated at depreciated historic cost in the statement of financial position, gearing is 45.4% (2013: 45.2%). After adjusting for the deferred tax liability carried at period end of £10.9 million gearing drops to 38.0% (2013: 37.8%). Cash inflow from operating activities before investing and financing activities was £5.2 million (2013: £4.3 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 £12.3 million (2013: £13.2 million). By excluding £0.5 million (2013: £0.4 million) of the interest costs of carrying the development sites from the total net interest charge of £1.1 million (2013: £1.1 million), the interest on the operating portfolio is £0.6 million for the year (2013: £0.7 million). Funds from operations (FFO) represented by EBITDA minus interest on the operating portfolio is therefore £3.97 million (2013: £3.38 million) equating to 16.1 pence per share, up 14.4% on last year (2013: 14.1 pence per share). A component of the interest cost incurred by the Group arises from the £11.4 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 £0.5 million higher for the year (2013: £0.4 million) on the assumption that the £11.4 million is fully funded by borrowings. The Group has grown through a combination of new site acquisition, existing store improvements and relocations, and has concentrated on extracting value from its existing assets and developing through collaborative projects and management contracts. Capital expenditure during the year totalled £6.5 million (2013: £0.6 million). This was primarily the construction and fitting out at Maidenhead and Reading, the purchase of our new site in Bristol and also included small expenditures at existing stores and further racking at the Saracen Olney warehouse. It also included planning and other professional costs incurred in maximising the potential of our planning permissions. The Company has no further capital commitments beyond the completion of its Reading store, its £2.5 million development commitment at Aldershot, further racking at the Saracen Olney warehouse and some minor works to existing properties. Refer to note 29a: Capital Commitments. Statement of financial position Net assets at the year-end were £45.2 million (2013: £40.4 million). Freehold property values at 31 July 2014 were £64.5 million (including Maidenhead) compared to £54.5 million at 31 July 2013. Market valuation of freehold and operating leasehold land and buildings Our 11 freehold properties and one long leasehold are held in the statement of financial position at fair value and have been valued by Cushman & Wakefield LLP (C&W). Refer to note 10b — property, plant and equipment and also to the accounting policies for details of the fair value of trading properties. The valuations of the leasehold stores held as ‘operating leases’ are not taken onto the statement of financial position. However seven of these have also been externally valued and these valuations have been used to calculate the adjusted net asset value position of the Group. On 31 July 2014 professional valuations were prepared by valuers C&W in respect of 11 freehold, one long leasehold and seven operating leasehold properties. The valuation was prepared in accordance with the RICS Valuation — Professional Standards, published by The Royal Institute of Chartered Surveyors (the Red Book). The valuation has been provided for accounts purposes and, as such, is a Regulated Purpose Valuation as defined in the “Lok’nStore is a robust business which generates increasing cash flow from its strong asset base. With a low LTV of 28.2% and our interest rate risks substantially hedged through to 2016 we have a firm base for growth.” Ray Davies, Finance Director 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201420 Strategic Report Financial Review Red Book. The external valuation methodology provides for a purchaser acquiring a centre, incurring purchase costs of 5.8% initially, and sale plus purchaser’s costs totalling 7.8% are assumed on the notional sales in the tenth 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 10b in the notes to the financial statements for a more detailed description of the valuation methodology). 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 2007. It is not envisaged that any tax will become payable in the foreseeable future on these disposals due to the availability of rollover relief. It is highly probable that the site of the existing Reading store will 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, although individual disposals may be considered where it is clear that added value can be created by recycling the capital into other opportunities. The Board will continue to commission independent valuations on its trading stores annually to coincide with its year-end reporting. Under IFRS the valuations of our freehold property assets are 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 £14.6 million (2013: £13.2 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 No of stores/ sites 31 July 2014 Valuation £’000 No of stores/ sites 31 July 2013 Valuation £’000 Freehold and long leasehold valued by C&W Short leasehold valued by C&W Subtotal Sites in development at cost Total 121 64,510 7 19 4 23 14,570 79,080 11,409 90,489 11 7 18 4 22 54,460 13,200 67,660 11,517 79,177 Adjusted Net Asset Value per Share Adjusted net assets per share is the net assets of the Group business adjusted for the valuation of leasehold stores and deferred tax 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. At July 2014 the adjusted net asset value per share increased to £2.71 from £2.48 last year, up 9.6%. This increase is a result of higher property values, cash generated from operations, offset in part by an increase in the shares in issue due to the exercise of share options by management and staff during the year. Analysis of Net Asset Value (NAV) Net assets Adjustment to include operating/short leasehold stores at valuation Add: C & W leasehold valuation1 Deduct: leasehold properties and their fixtures and fittings at NBV Deferred tax arising on revaluation of leasehold properties2 Adjusted net assets 31 July 2014 £’000 45,210 31 July 2013 £’000 40,372 14,570 13,200 (3,555) 56,225 (2,203) 54,022 (3,696) 49,876 (2,186) 47,690 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 Number ’000 Number ’000 26,759 382 27,141 (2,467) (623) 24,051 £1.98 £2.48 27,141 668 27,809 (2,467) (623) 24,719 £2.18 £2.71 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 13 years and 8 months at the date of the 2014 valuation (2013 valuation: 14 years and 8 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 tax treatment between freehold and leasehold properties. Summary Lok’nStore is a robust business which generates increasing cash flow from its strong asset base. With a low LTV of 28.2% and our interest rate risks substantially hedged through to 2016 we have a firm base for growth. The value of the Group’s property assets continues to increase, underpinning a flexible business model with relatively low credit risk and tightly controlled operating costs. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc21 “Lok’nStore Group Plc is one of the leading companies in the fast growing UK self- storage market. We opened our first self-storage centre in Horsham, Sussex in February 1995 and have grown consistently over the last 18 years.” Andrew Jacobs, Chief Executive Officer 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201422 Strategic Report Principal Risks and Uncertainties in Operating our Business Finance Lok’nStore finances its current needs through a combination of strong operational cash flows and debt. Cash deposits are placed with Lloyds TSB plc on a no-notice treasury deposit account which tracks base rate and currently yields 0.5% p.a. on all deposited balances. 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 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. Historically, no trading in financial instruments had been undertaken but during 2012 the Group entered into two separate swap arrangements. Full details are set out in the Financial Review. Further information on our treasury arrangements is set out in note 15. 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 15 (Financial Instruments) to the financial statements. Risk management Risk management has been a fundamental part of the development of Lok’nStore. 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. 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 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 criteria for site selection 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 24 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 self-storage customers are a broad mix of both domestic and business customers, generating around 66.7% and 33.3% respectively of our revenue (2013: 63% and 37%). 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 process of gaining planning permissions remains challenging. Lok’nStore may take on the risk of obtaining planning permission when acquiring sites in the face of competitive bids. In these cases we are obliged to undertake the planning, environmental and other property due diligence under tight timescales which creates greater risks in the process. Nevertheless, 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. The building of each store is handled through a design and build contract with established contractors. We employ an external team of professionals to monitor the progress of each development. The fitting of mezzanine floors and steel units is generally project managed in-house using an established external professional team of sub-contractors who understand Lok’nStore’s particular specifications. Credit risk Lok’nStore’s self-storage credit 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 be sold to cover their unpaid bills. Credit control remains tight with £34,692 (2013: £60,709) of bad debts recognised during the year representing around 0.20% of revenue (2013: 0.47%). There was £5,603 of additional costs associated with recovery (2013: £9,097). Given the tight credit conditions in the wider economy our own credit control indicators are resilient, showing no appreciable signs of weakening during the year with the number of late letters issued declining year-on-year and bad debts remaining at low levels. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc23 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 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 Corporate Responsibility Report. 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 quarterly staff newsletters. Approved by the Board of Directors and authorised for issue on 17 October 2014 and signed on its behalf by: Andrew Jacobs Chief Executive Officer Ray Davies Finance Director 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201424 Board of Directors and Advisers 5. 6. 7. Directors SG Thomas Chairman Chief Executive Officer A Jacobs Finance Director RA Davies Director CM Jacobs Senior Non-Executive Director ETD Luker Non-Executive Director RJ Holmes CP Peal Non-Executive Director D Hampson Non-Executive Director (resigned 25 February 2014) Secretary and Registered Office Secretarial Solutions Limited c/o Maclay Murray Spens LLP One London Wall London EC2Y 5AB Nominated Adviser and Broker finnCap Ltd 60 New Broad Street London EC2M 1JJ 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 Lloyds TSB plc Lloyds Bank Corporate Markets 3rd Floor, 2 City Place Beehive Ring Road  Gatwick West Sussex RH6 0PA 1. 2. 3. 4. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc25 Executive Directors 4. Colin Jacobs (50) 7. Charles Peal (59) 1. Andrew Jacobs (55) Chief Executive Officer Andrew established Lok’nStore in February 1995 after eight years’ experience as a stockbroker at Nomura International in London. He has an 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 (54) 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 (57) Finance Director Ray, a chartered accountant, joined Lok’nStore in 2004 and 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. Director Colin has been a director since founding in 1995. 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 Non-Executive Director Joined Lok’nStore in 2007. 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 chairs the Audit Committee. 5. Edward Luker (65) Senior Non-Executive Director Joined Lok’nStore in 2007. Edward is a well-known figure in the UK property industry, having worked for CB Richard Ellis for 33 years, where he has been a Director and Partner for 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 Consultant and Chairman of the Investment Advisory Committee of CBRE Real Estate Finance Limited. Edward sits on the Audit Committee and chairs the Remuneration Committee. 6. Richard Holmes (54) Non-Executive Director Joined Lok’nStore in 2000. Richard is currently Marketing Director of Specsavers. 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 sits on the Remuneration Committee. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201426 Lok’nStore Group Plc “The year-end property valuation equates to a total value of properties held of £90.5 million up 14.3% on last year.” Simon G Thomas, Chairman 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 2014 27 23602.04 31 October 2014 11:16 AM Proof 6a 28 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 2014. 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, and the Strategic Report. The key performance indicators are set out in the Highlights on page 2 and discussed in more detail in the Financial Review and the Performance of our Stores sections of the Strategic Report. Going concern A review of the Group’s business activities, together with the matters likely to influence its future development, performance and its position in the wider market are set out in the Strategic Report. The financial position of the Group, its cash flows and borrowing facilities are shown in the Statement of Financial Position, Cash Flow Statement and corresponding notes and policies contained within the financial statements. Further information concerning the Group’s objectives, policies, its financial risk management objectives as well as details of financial instruments and credit and liquidity risk are also found in this Report and in the notes to the financial statements. 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 Group cash balances of £2.2 million (2013: £4.2 million), undrawn committed facilities at 31 July 2014 of £12.3 million (2013: £13.2 million) and cash generated from operations in the year to 31 July 2014 of £5.2 million (2013: £4.3 million). The Group continues to operate its five year £40 million revolving credit facility with Lloyds TSB plc in full compliance of its covenants and undertakings underlining the strength of the cash flow and the assets of the business. The facility has been in place since 20 October 2011 and runs until 19 October 2016. The Group is not obliged to make any repayments prior to expiration. The financial statements are therefore prepared on a going concern basis. Dividend In respect of the current year, the Directors propose that a final dividend of 5 pence per share (2013: 4.33 pence) will be paid to the shareholders on 22 December 2014 to shareholders on the register on 21 November 2014. The total estimated dividend to be paid is £1.24 million 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 There were no reportable events after the reporting date. Directors The following Directors held office during the year and subsequently: SG Thomas A Jacobs RA Davies CM Jacobs ETD Luker RJ Holmes CP Peal D Hampson (resigned 25 February 2014) 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 pages 24 and 25. 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 ten years tenure as a Non-Executive, is required under the Companies Act 2006 to offer himself for re- election at every AGM and accordingly offers himself for election at the next AGM. Directors’ and Officers’ liability insurance The Company has liability insurance covering the Directors and Officers of the Company and its subsidiaries. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc29 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 2 October 2014: Andrew Jacobs Miton Capital Partners Simon Thomas Cavendish Asset Management Slater Investments Charles Stanley Stockbrokers Henderson Volantis Capital Douglas Hampson1 Current rank 1 2 3 4 5 6 7 – % at 2 Oct 2014 20.95 12.13 8.30 7.25 4.51 3.62 3.17 – Number of shares 5,314,000 3,077,476 2,106,385 1,839,200 1,144,501 918,830 803,984 – Total shares in issue (excluding treasury shares) Total shares in issue (excluding treasury shares) Total shares in issue (excluding treasury shares) 5,314,000 1,361,530 2,106,385 2,102,200 – 1,270,111 – 4,033,909 % at 2 Oct 2013 21.50 5.51 8.52 8.50 – 5.14 – 16.32 25,364,7392 24,718,026 1. On 25 February 2014, Douglas Hampson, a Non-Executive Director, resigned from the Board. 2. Represents total shares in issue (excluding treasury shares) at 2 October 2014. Annual General Meeting The Company’s Annual General Meeting will be held on 28 November 2014 at 11.00 am at the offices of Goodman Derrick LLP, 10 St Bride Street, London EC4A 4AD. 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. Ray Davies Director 17 October 2014 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 2014 are shown in note 10b to the Financial Statements. Further commentary on the property portfolio is contained in the Property Review and in the Financial Review. Share buy-back authority Authority will be sought at the Company’s AGM on 28 November 2014 from shareholders to approve a share buy-back 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. 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. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201430 Corporate Social Responsibility Report through appropriate training and regular performance review. Regular training courses at our Farnborough Head Office support these objectives. 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 their training. This in turn contributes to attracting and retaining the right people which is key to the success of Lok’nStore. All employees are eligible to participate in our share ownership plans. Lok’nStore operates a Share Incentive Plan with 102 members, a total of 71% of employees participating in the Scheme (2013: 68%). 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. Our Corporate Social Responsibility Report sets out our environmental policy and how we manage our impact on the environment, our policies and principles in relation to our responsibilities to stakeholders including suppliers, customers and employees. Policy on payment of suppliers The Group 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 shorter, influenced by the shorter payment period terms associated with payments to contractors performing development works on new sites and was 46 days (2013: 70 days). 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 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. A full assessment is set out below in our environmental policy. 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, a substantial amount 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. Employees At 31 July 2014 we had 143 employees (2013: 131). 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, 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. The meetings are chaired by the Finance Director. The Health and Safety policy is reviewed by the Committee 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 (2013: 623,212), the costs of which are shown as a deduction from shareholders’ funds. The Company is holding in treasury a total of 2,466,869 of its own Ordinary Shares of 1 pence each with an aggregate nominal value of £2,467 for an aggregate cost of £3,741,036. At 31 July 2014 these treasury shares represent 8.87% of the Company’s issued share capital (2013: 9.09%). The total number of Ordinary Shares in issue is 27,809,108 (2013: 27,141,193). 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group PlcEnvironmental performance 31 Our environmental policy is to effectively manage our waste, control our polluting emissions and to encourage our suppliers to minimise their impact on the environment. Trucost, the environmental reporting company has reviewed Lok’nStore Group Plc’s reporting of environmental matters in its Annual Report for the year ended 31 July 2014. From October 2013, all UK quoted companies are required to report on their greenhouse gas emissions as part of the annual directors’ report under the Companies Act 2006. Lok’nStore welcomes this new regulation and will continue to report in line with established guidelines. The Group’s environmental report is fully in accordance with Government Guidelines, Environmental Key Performance Indicators: Reporting Guidelines for UK Business (2006). Environmental management and performance Lok’nStore Group has been measuring its environmental impacts for the last ten years. Monitoring focuses on environmental key performance indicators (KPIs), namely greenhouse gas emissions (GHG), water use and waste. Highlights for the year ended 31 July 2014: • Overall total GHG emissions dropped 10% to 319 tonnes in 2014 (2013: 353 tonnes). Over the ten-year period GHG emissions reduced by 73% from 1,189 tonnes in 2005. When normalised to turnover, this year there has been a 15% reduction, from 27 tCO2e/£m to 23 tCO2e/£m. • Following the effective elimination of indirect emissions from electricity at its Lok’nStore facilities by purchasing 100% renewable source electricity, the Group’s direct emissions, which result from natural gas and vehicle fuel consumption, now account for 81% of overall GHG emissions. As direct gas and fuel use is now the largest source of GHG emissions, Lok’nStore has concentrated on reducing this impact. This year direct GHG emissions decreased to 258 tonnes (2013: 292 tonnes), a reduction of 17% when normalised to turnover. • Electricity generation from PV installations rose by 64% to 78MWh (2013: 48MWh), equivalent to 39 tonnes of CO2e when supplied to the national grid. • Total waste sent to landfill reduced for the tenth successive year to 181 tonnes (2013: 188 tonnes), a 10% reduction on a normalised basis. • With water consumption intensity reduced from 662 m3/£m in 2005 to 170 m3/£m last year, this KPI is now an extremely sensitive and useful indicator of anomalous use or leakage. On a normalised basis this year’s increase to 187 m3/£m, represents a 10% rise, due to problems at two stores, which were corrected during the year. Overall GHG emissions The total of GHG emissions (direct and indirect) has reduced this year to 319 tonnes (2013: 353 tonnes). Since the start of reporting in 2005, when emissions were 1,189 tonnes in the year, the current level represents a 73% reduction. When normalised to turnover, there has been an 85% reduction over that time. Figure 1 shows the level of overall GHG emissions since the start of reporting. The figures include direct emissions from vehicles and gas boilers, indirect emissions from electricity and indirect emissions from customer use of hire vehicles. Figure 1: Direct and indirect GHG emissions Indirect GHG emissions (electricity) For the sixth year running all of Lok’nStore Ltd’s electricity was supplied by Green Energy plc. It has been confirmed by Green Energy that 100% of the electricity supplied to Lok’nStore Ltd by Green Energy has been from renewable sources. Since 2013 reporting, an emission factor of zero is applied to Lok’nStore’s electricity consumption to account for its usage of renewables. That change effectively eliminates Lok’nStore Ltd’s indirect emissions from electricity consumption, which now only reflect Saracen’s electricity consumption. Absolute indirect GHG emissions from electricity consumption increased from 36 tCO2e to 55 tCO2e. This increase of emissions is due to the fitting of the second half of the Saracen store in 2014, doubling the capacity of operations. Additional lighting required contributed to increased electricity consumption. When normalised to turnover, the impact increased from 3 tCO2e per £m turnover to 4 tCO2e per £m turnover. Figure 2 shows absolute and normalised GHG emissions from electricity consumption over the last ten years. Figure 2: GHG emissions from electricity consumption s e n n o t e 2 O C 1,500 1,100 500 0 200 150 100 50 0 r e v o n r u T m r e p e 2 O C t s e n n o t e 2 O C 1,200 1,000 800 600 400 200 0 140 120 100 80 60 40 20 0 r e v o n r u T m r e p e 2 O C t 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Absolute GHG emissions GHG Emissions Intensity, CO2e tonnes per million Turnover 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Absolute GHG emissions GHG Emissions Intensity, CO2e tonnes per million Turnover In previous years, indirect GHG emissions from electricity consumption have been higher than direct emissions. However, due to using 100% renewable energy at its Lok’nStore facilities, direct GHG emissions in 2013 and 2014 are higher than indirect GHG emissions. Lok’nStore will continue identifying opportunities to reduce its GHG emissions with a particular focus on natural gas consumption and fuel use. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 2014 32 Environmental performance Electricity generation Where it is appropriate Lok’nStore equips new stores with solar panel arrays. At the newly opened Maidenhead building, Lok’nStore has installed a 50kWp array to enhance the sustainability of the Company’s investment there. This is the second such installation, and joins the Poole store in generating from photovoltaics. The Maidenhead store uses underfloor heating from an air source heat pump and ventilation heat recovery systems. In its first six months, the Maidenhead photovoltaic (PV) system generated 27MWh of electricity, with part used on site to provide 45% of the store’s energy requirement. The balance of 11MWh was exported back to the grid. During the reporting period, the Poole system generated 51MWh of electricity (2013: 48MWh). Of this the bulk was used on site, providing 34% of the store’s annual electricity needs, with a balance of 8MWh exported back to the grid (2013: 7MWh). The figure and tables below show the overall 2014 electricity generation from the PV system, the consumption of this electricity at each site and the electricity exported to the national grid. Figure 3: Lok’nStore’s photovoltaic installations — electricity generation h W M 60 50 40 30 20 10 0 Lok’nStore Poole (12 months) Lok’nStore Maidenhead (6 months) Total electricity used on site Total electricity exported Table 1: Lok’nStore’s photovoltaic installations — electricity generation Generation (MWh) — Poole Generation (MWh) — Maidenhead Total generation, MWh tCO2e of generated electricity at national standard mix 2013 48 48 21 2014 % change 6% 64% Due to the additional solar panels installed at Maidenhead, operational for six months in the reporting period, Lok’nStore was able to increase electricity generation by 64% compared to 2013. The total generation of 78MWh would represent 39 tCO2e if drawn from the national grid1. Table 2: Lok’nStore’s photovoltaic installations — electricity exported Generation (MWh) — Poole Generation (MWh) — Maidenhead Total exported, MWh tCO2e of exported electricity at national standard mix 2013 7 7 3 2014 % change 9% 164% 51 27 78 39 8 11 19 9 Lok’nStore exported 19MWh to the national grid in 2014, which is an increase of 164% when compared to last year (2013: 7MWh). Direct GHG emissions In 2011, Lok’nStore acquired the Saracen records management business which includes a document delivery and collection service. Increased activity in this area means overall emissions from vans and cars operated have increased from 215 to 223 tonnes CO2e. The Group has introduced a new van fleet fitted with Euro V compliant diesel engines which greatly improve fuel efficiency. Overall, vehicle fuel GHG emissions were reduced by 3% on a normalised basis to 16 tCO2e/£m. Emissions from gas boilers more than halved in absolute terms from 76 to 35 CO2e tonnes, and normalised to turnover from 6 to 3 CO2e tonnes per £m turnover. This significant reduction is due to decommissioning of gas boilers at Lok’nStore’s Luton store, replacing them with electric heating. Furthermore, the reduced gas consumption also reflects a mild winter2, resulting in less gas consumed for heating across all stores. The natural gas consumption includes the gas consumed by office space tenants. Lok’nStore is currently exploring options to improve the tenants’ consumption and to monitor their consumption separately. Overall, the Group’s direct carbon footprint has decreased from 292 to 258 CO2e tonnes. Normalised to turnover, direct GHG emissions decreased from 22 to 19 CO2e tonnes per £m, which is a 17% reduction. 1. Using DEFRA 2014 factor for UK electricity. 2. http://www.metoffice.gov.uk/climate/uk/summaries/2014/winter 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc33 Figure 4 shows absolute and normalised GHG emissions from natural gas consumption and vehicle fuel consumption over the last ten years. Figure 4: GHG emissions from natural gas and vehicles s e n n o t e 2 O C 350 300 250 200 150 100 50 0 30 25 20 15 10 5 0 Figure 5 shows absolute and normalised landfill waste produced over the last ten years. Figure 6 shows absolute and normalised water use over the last ten years. Figure 6: Water use Figure 5: Landfill waste 1,000 800 600 400 200 0 s e n n o t r e v o n r u T m r e p e 2 O C t 6,000 4,500 3,000 1,500 0 r e t e m c b u C i r e v o n r u T m r e p s e n n o t 120 100 80 60 40 20 0 r e v o n r u T m r e p 3 m 600 500 400 300 200 100 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Absolute water use Water Intensity, water use per million Turnover Absolute waste sent for disposal Waste Intensity, tonnes per million Turnover 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Absolute GHG emissions GHG Emissions Intensity, CO2e tonnes per million Turnover Waste generation and recycling In line with the Group’s waste management strategy, we continue to monitor waste generation and recycling levels. For the tenth successive year Lok’nStore reduced the quantity of waste produced. Waste sent to landfill fell to 181 tonnes in 2014, from 188 tonnes in the previous period, a 10% reduction when normalised to turnover. Total waste sent to landfill and recycled fell from 416 tonnes to 404 tonnes, a reduction in the total waste generated of 3% when normalised to turnover. The proportion of waste recycled has increased from 52% to 53%. We also monitor hazardous (sanitary) waste, but the amount is negligible. Since the acquisition of Saracen, the Group also monitors its contracted waste produced (i.e. consumer waste sent to Saracen for disposal). In 2014, Saracen recycled 182 tonnes of shredded paper on behalf of its customers, compared to 244 tonnes in 2013. It also disposed of small quantities of microfiche, and media and exhibition items, but these amounts are negligible. Water consumption With water consumption intensity reduced from 662 m3/£m in 2005 to 170 m3/£m last year, this KPI is now an extremely sensitive and useful indicator of any anomalous use or leakage. On a normalised basis this year’s increase to 187 m3/£m, represents a 10% rise. The 2014 consumption of 2,603 m3 of water (2013: 2,213 m3) represents an 18% increase. A water leakage at one of the stores, and a metering error at another, has contributed to an increase in recorded water consumption. Due to continuous and consistent monitoring, Lok’nStore is able to timely detect any anomalies in water consumption, identify causes and take corrective actions. The Group will continue to look for opportunities to reduce water losses and wastage. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 2014 34 Environmental performance Direct Impacts (Operational) Quantity Absolute Tonnes CO2e Normalised* Tonnes CO2e Per £m Turnover Greenhouse Gases Definition Data Source and Calculation Methods Gas Emissions from utility boilers Yearly consumption in kWh 2013 76 2014 35 2013 6 2014 3 % change in normalised quantity –57% Vehicle Fuel Total Greenhouse Gases Diesel and petrol used in company vans and by employees on company business Includes Carbon Dioxide (CO2), Methane (CH4) and Nitrous Oxide (N2O) collected from fuel bills, converted according to Defra Guidelines Fuel invoices, recorded mileage or satellite tracking converted according to Defra Guidelines Calculated according to Defra Guidelines Waste Landfill Recycled Definition General office waste, which includes a mixture of paper, card, wood, plastics and metals General office waste recycled, primarily cardboard, and fluorescent lights Data Source and Calculation Methods Volume of waste generated per annum, calculated by recording the number of bins and skips removed, converted to tonnes according to Defra Guidelines Volume of waste recycled per annum, calculated by recording the number of bins and skips removed for recycling, converted to tonnes according to Defra Guidelines 215 223 17 16 –3% 292 258 22 19 –17% Quantity Absolute Tonnes Normalised* Tonnes Per £m Turnover 2013 188 2014 181 2013 14 2014 13 % change in normalised quantity –10% 228 223 18 16 –9% 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc35 % change in normalised quantity 43% % change in normalised quantity 10% % change in normalised quantity –78% Indirect Impacts (Supply Chain) Greenhouse Gases Energy Use Definition Data Source and Calculation Methods 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 Supplied Water Consumption of piped water. No water directly abstracted by the Group Data Source and Calculation Methods Yearly consumption of purchased water Indirect Impacts — Downstream Quantity Absolute Tonnes CO2e Normalised* Tonnes CO2e Per £m Turnover 2013 36 2014 55 2013 3 2014 4 Quantity Absolute m3 Normalised* m3 Per £m Turnover 2013 2,213 2014 2,603 2013 170 2014 187 Quantity Absolute Tonnes CO2e Normalised* Tonnes CO2e Per £m Turnover Greenhouse Gases Vehicle Fuel Definition Data Source and Calculation Methods Petrol and diesel used by customers in van hire fleet Recorded mileage, converted according to Defra Guidelines 2013 25 2014 6 2013 2 2014 0.4 Figures are rounded up * Normalised based on annual turnover for the respective years. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201436 Corporate Governance Introduction The UK Corporate Governance Code is intended to promote the principles of openness, integrity and accountability. The Group and Board fully support these principles. 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 produced by the Quoted Companies Alliance and applied the principles that they consider relevant to the Group. Narrative statement Directors There is a Board of Directors, which is set up to control the Group and consists of four Executive and three Non-Executive Directors. The Board considers all of the Non-Executive Directors to be independent of the Group save for Richard Holmes who by virtue of over nine years tenure as a non-executive is not considered to be independent. 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 at least 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. Richard Holmes who has over nine year’s 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. Directors’ remuneration The Remuneration Committee consists of Edward Luker (Chairman of the Committee) and Richard Holmes. 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 financial statements. The Committee meets once a year and considers proposals from the Chairman and Chief Executive Officer. Shareholders’ relations 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. At the AGM the Board give a presentation of events and progress during the year and Directors are individually introduced to shareholders at the Meeting. Attendee shareholders are encouraged to mix and engage with the Directors after the formal business of the AGM has concluded. 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, internal 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. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc37 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 Committee 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 UK Corporate Governance Code as well as the Group’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 17 October 2014 Audit Committee The Company has an established Audit Committee, to whom the external Auditor, Baker Tilly UK Audit LLP, reports. The Committee consists of Charles Peal (Chairman of the Committee) and Edward Luker. 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 prior to the announcement of annual results to consider the Auditor’s Findings Report and consider any corresponding recommendations, and would convene at other times should it be necessary. 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. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201438 Directors’ Responsibilities in the Preparation of Financial Statements The Directors are responsible for preparing the Strategic Report and 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 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 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 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. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group PlcAnnual Report and Accounts 2014 39 Independent Auditor’s Report to the Members of Lok’nStore Group plc We have audited the group and parent company financial statements (“the financial statements”) on pages 40 to 77. 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 38, 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 Financial Reporting Council’s website at http:// www.frc.org.uk/auditscopeukprivate 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: Opinion on 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 2014 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 matters prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. • 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. David Clark (Senior Statutory Auditor) For and on behalf of BAKER TILLY UK AUDIT LLP Statutory Auditor Chartered Accountants 25 Farringdon Street EC4A 4AB 17 October 2014 23602.04 31 October 2014 11:16 AM Proof 6a 40 Consolidated Statement of Comprehensive Income For the year ended 31 July 2014 Revenue Total property, staff, distribution and general costs Adjusted EBITDA1 Amortisation of intangible assets Depreciation based on historic cost Additional depreciation based on revalued assets Loss on sale of motor vehicle Equity settled share based payments Loss on sale of property Impairment of development land asset Operating profit1 Finance income Finance cost Profit before taxation Income tax (expense)/credit Profit for the year Profit attributable to: Owners of the parent Non-controlling interest Other Comprehensive Income Items that will not be reclassified to profit and loss Increase in property valuation Deferred tax relating to change in property valuation Items that may be subsequently reclassified to profit and loss Increase in fair value of cash flow hedges Deferred tax relating to cash flow hedges Other comprehensive income Total comprehensive income for the year Attributable to: Owners of the parent Non-controlling interest Earnings per share Basic Diluted Notes 1a 2a 2c 2c 3 4 5 7 24 9 9 2014 £’000 13,910 (9,294) 4,616 (165) (965) (258) (28) (119) – (1,604) (3,139) 1,477 26 (1,136) 367 (170) 197 197 – 197 6,281 (1,261) 5,020 322 (72) 250 5,270 5,467 5,467 – 5,467 0.81p 0.79p 2013 £’000 12,974 (8,838) 4,136 (165) (954) (250) (18) (94) (86) – (1,567) 2,569 33 (1,175) 1,427 2 1,429 1,421 8 1,429 2,025 426 2,451 225 (60) 165 2,616 4,045 4,037 8 4,045 5.75p 5.72p 1. Adjusted EBITDA and operating profit are defined in the accounting policies section of the notes to the financial statements. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group PlcConsolidated Statement of Changes in Equity For the year ended 31 July 2014 1 August 2012 Profit for the year Other comprehensive income: Increase in property valuation Deferred tax relating to increase in property valuation Increase in fair value of cash flow hedges Deferred tax relating to cash flow hedges Total comprehensive income for the year Transactions with owners: Purchase of own shares into treasury Asset disposal Dividend paid Total transactions with owners Transfer additional dep’n on revaluation net of deferred tax Equity settled share based payments Exercise of share options 31 July 2013 Profit for the year Other comprehensive income: Increase in property valuation Deferred tax relating to increase in property valuation Increase in fair value of cash flow hedges Deferred tax relating to cash flow hedges Total comprehensive income for the year Transactions with owners: Dividend paid Total transactions with owners Transfer additional dep’n on revaluation net of deferred tax Equity settled share based payments IFRS 2 transfer share options to which the equity relates have either been exercised or lapsed Acquisition of non-controlling interests Exercise of share options 31 July 2014 Share capital £’000 268 – Share premium £’000 Other reserves £’000 Revaluation reserve £’000 698 – 11,651 – 20,527 – Retained earnings £’000 5,545 1,421 Attributable to owners of the parent £’000 38,689 1,421 Non- controlling interest £’000 272 8 – – – – – – – – – – – 4 272 – – – – – – – – – – – – – – – – – – – – – 315 1,013 – – – – – – – – – – – – 7 279 – – 788 1,801 – 2,025 – 2,025 – 225 (60) 165 – – (1,399) (1,399) – 94 – 10,511 – 426 – – 2,451 – (1,120) – (1,120) (193) – – 21,665 – – – – 1,421 (1,648) 1,120 – (528) 193 – – 6,631 197 426 225 (60) 4,037 (1,648) – (1,399) (3,047) – 94 319 40,092 197 – 6,281 – 6,281 – – – 197 – – 207 – (1,261) 322 (72) 5,467 (1,543) (1,543) – 119 – 322 (72) 250 (1,543) (1,543) – 119 (742) – – 8,595 (1,261) – – 5,020 – – (207) – – – – 26,478 – – – – 8 – – – – – – – 280 – – – – – – – – – – 742 280 – 8,057 – 280 795 45,210 – (280) – – – – 795 45,210 41 Total equity £’000 38,961 1,429 2,025 426 225 (60) 4,045 (1,648) – (1,399) (3,047) – 94 319 40,372 197 6,281 (1,261) 322 (72) 5,467 (1,543) (1,543) – 119 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 2014 42 Company Statement of Changes in Equity For the year ended 31 July 2014 1 August 2012 Loss for the year Dividend paid Equity settled share based payments Exercise of share options 31 July 2013 Loss for the year Dividend paid Equity settled share based payments IFRS 2 transfer share options to which the equity relates have either been exercised or lapsed Exercise of share options 31 July 2014 Share capital £’000 Share premium £’000 Retained deficit £’000 Other reserves £’000 268 – – – 4 272 – – – – 7 279 698 – – – 315 1,013 – – – – 788 1,801 (532) (203) – – – (735) (174) – – 742 – (167) 5,738 – (1,399) 94 – 4,433 – (1,543) 119 (742) – 2,267 Total £’000 6,172 (203) (1,399) 94 319 4,983 (174) (1,543) 119 – 795 4,180 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group PlcStatements of Financial Position 43 31 July 2014 Company Registration No. 04007169 Assets Non-current assets Intangible assets Property, plant and equipment Property lease premiums Investments Amounts due from subsidiary undertakings Derivative financial instruments Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets (excluding non-current assets classified as held for sale) Non-current assets classified as held for sale Total assets Liabilities Current liabilities Trade and other payables Current tax liabilities Borrowings Non-current liabilities Borrowings Derivative financial instruments Deferred tax Total liabilities Net assets Equity Equity attributable to owners of the parent Called up share capital Share premium Other reserves Retained earnings/(deficit) Revaluation reserve Total equity attributable to owners of the parent Non-controlling interests Total equity Notes 10a 10b 10c 11 28 16b 12 13 15 10d 14 7 16a 16a 16b 17 18 23 24 Group 2014 £’000 3,923 77,679 – – – 51 81,653 131 2,901 2,178 5,210 2,900 89,763 (5,900) (338) – (6,238) (27,445) – (10,870) (38,315) (44,553) 45,210 279 1,801 8,595 8,057 26,478 45,210 – 45,210 Group 2013 £’000 Company 2014 £’000 Company 2013 £’000 4,088 67,886 2,800 – – – 74,774 138 2,417 4,244 6,799 – 81,573 (4,798) – (5) (4,803) (26,422) (271) (9,705) (36,398) (41,201) 40,372 272 1,013 10,511 6,631 21,665 40,092 280 40,372 – – – 1,895 2,285 – 4,180 – – – – – 4,180 – – – – – – – – – 4,180 279 1,801 2,267 (167) – 4,180 – 4,180 – – – 1,776 3,207 – 4,983 – – – – – 4,983 – – – – – – – – – 4,983 272 1,013 4,433 (735) – 4,983 – 4,983 Approved by the Board of Directors and authorised for issue on 17 October 2014 and signed on its behalf by: Andrew Jacobs Chief Executive Officer Ray Davies Finance Director 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 2014 44 Consolidated Statement of Cash Flows For the year ended 31 July 2014 Operating activities Cash generated from operations Net cash from operating activities Investing activities Purchase of property, plant and equipment Purchase additions to property lease premiums Proceeds from disposal of property, plant and equipment Interest received Net cash (used in)/from investing activities Financing activities Purchase of shares for treasury Proceeds from new borrowings Repayment of borrowings Finance costs paid Equity dividends paid Proceeds from issuance of ordinary shares (net) 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. Notes 26a 2014 £’000 5,241 5,241 (6,485) – 19 26 (6,440) – 919 (5) (1,033) (1,543) 795 (867) (2,066) 4,244 2,178 2013 £’000 4,286 4,286 (603) (1,171) 4,459 33 2,718 (1,648) – (2,922) (1,071) (1,399) 319 (6,721) 283 3,961 4,244 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group PlcAccounting Policies 45 General Information Lok’nStore Group 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.co.uk 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 2013. The financial statements have been prepared on the historic cost basis except that certain trading properties and derivative financial instruments are stated at fair value. Adoption of new and revised standards IFRS 13: Fair Value Measurement has been adopted in the year but has had no material impact in these financial statements. Standards in issue but not yet effective At the date of approval of these financial statements, the following principal standards and interpretations which were in issue but not yet effective: Financial Instruments Standards Not Yet Endorsed IFRS 9 IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture IFRS11 IFRS15 IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation IAS 19 IAS 27 Employee Benefits — Amendment; Defined Benefit Plans: Employee Contributions Equity Method in Separate Financial Statements Accounting for Acquisitions of Interests in Joint Operations Revenue from Contracts with Customers Effective date: Periods commencing on or after 1 Jan 18 1 Jan 16 1 Jan 16 1 Jan 17 1 Jan 16 1 July 14 1 Jan 16 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 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 a non-current asset. 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. 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 subsequent periods. 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. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201446 Accounting Policies 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 Non-controlling interests are measured at the proportionate share of the non-controlling interest’s identifiable net assets in the relevant subsidiary. 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. 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 Group cash balances and cash equivalents of £2.2 million (2013: £4.2 million), undrawn committed bank facilities at 31 July 2014 of £12.3 million (2013: £13.2 million), and cash generated from operations in the year to 31 July 2014 of £5.2 million (2013: £4.3 million). The Group continues to operate its five year £40 million revolving credit facility with Lloyds TSB plc. The facility has been in place since 20 October 2011 and runs until 19 October 2016. The Group is fully compliant with all bank covenants and undertakings and is not obliged to make any repayments prior to expiration. The financial statements are therefore prepared on a going concern basis. 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. 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 the block policy and other costs. 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. d. 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. e. Serviced archive and records management Customers are invoiced typically monthly in advance for the archive storage of their boxes, tapes 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 IFRS 8 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 solutions and related services. Following the acquisition of Saracen Datastore Limited on 30 June 2011 the Group operates offsite records management, storage and document and tape archiving and this activity is identified as a separate business segment. Financial information is reported to the Board with revenue and profit analysed between self-storage activity and serviced archive and records management activity. All activities arise in the United Kingdom. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc47 Adjusted EBITDA Earnings before interest, tax, depreciation and amortisation (EBITDA) is defined as profits from operations before all depreciation and amortisation charges, share-based payments and other non-recurring costs, finance income, finance costs and taxation. Store adjusted EBITDA Store adjusted EBITDA is defined as adjusted EBITDA (see above) but before central and head office costs. Operating profit Operating profit is defined as profit after all costs except 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 can be 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. 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. 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. Following the opening of a store during the year amounts held under lease premiums are transferred to property plant and equipment (see note 10c). Property, plant and equipment Freehold properties and long leasehold properties (classified as finance leases) are measured at fair value which represents the Group’s assessment of the highest and best use of the asset. A comprehensive external valuation is performed at each reporting date. Once a store is opened lease premiums are transferred to property, plant and equipment and carried at their transferred cost less any accumulated depreciation. Short leasehold improvements, fixtures, fittings and equipment, and motor vehicles are carried at cost less accumulated depreciation. Assets in the course of construction and land held for development of new stores (‘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. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201448 Accounting Policies 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: over 50 years straight line Freehold property Long leasehold property and lease premium over unexpired lease period or renewal term over unexpired lease period or renewal term Short leasehold improvements 5% to 15% reducing balance Fixtures, fittings and equipment over two years straight line Computer equipment 25% reducing balance Motor vehicles 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 (other than goodwill) 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). Impairment of property, plant and equipment and intangible assets (other than goodwill) At each reporting date the Group reviews the carrying amounts of its property, plant and equipment and intangible assets 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 is subsequently reversed, 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. Investments Shares in subsidiary undertakings are considered long term investments and are classified as non-current assets in the Parent Company’s statement of financial position. 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. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc49 Bank borrowings and finance costs Interest-bearing bank loans are recorded at the proceeds received net of direct issue costs. Issue costs are amortised against the carrying value amount of the loan over the period of the loan with the cost recognised in profit and loss as part of finance costs. 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. 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. Derivative financial instruments and hedge accounting The Group’s activities expose it to interest rate risk. The Group uses interest rate swap contracts to hedge these exposures. The Group does not use derivative financial instruments for speculative or for any other purposes. The use of financial derivatives is governed by the Group’s policies as approved by the Board of Directors. The Group documents its risk management objectives and strategy for undertaking hedging transactions within the Group’s Risk Register. The Group also documents its assessment both at hedge inception and on an ongoing basis to assess whether the derivatives that are used are effective in offsetting changes in fair value or cash flows of the hedged items. Derivative financial instruments are measured at fair value and the fair values of the hedged derivative instruments are disclosed in note 16b. Movements on the hedging reserve in other comprehensive income are shown in note 23a. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining hedged item has more than 12 months to run, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Instruments quoted in an active market are measured at their current bid price.  For instruments that are not quoted in an active market, the fair value is estimated using a valuation technique. Techniques that are used by the Group include comparisons to recent market transactions or reference to other instruments which are substantially the same, discounted cash flow analysis and option pricing models. Inputs to such techniques rely on market inputs where such information is readily available. Where such information is not available entity-specific inputs are used. Cash flow hedges Hedges of exposures to variable cash flows attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss are accounted for as cash flow hedges when the hedging criteria have been achieved. The Group designates certain derivative instruments as hedges of the variable rate borrowings. The effective portion of changes in the fair value is recognised in other comprehensive income whilst the gain or loss on the ineffective portion is recognised immediately in profit or loss. Amounts accumulated in other comprehensive income are recycled to profit or loss in the periods when the hedged item affects profit or loss.  However when a forecast transaction that is hedged results in the recognition of a non-financial asset, the gains and losses previously deferred into other comprehensive income are transferred from other comprehensive income and included in the initial measurement of the cost of the asset. 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. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201450 Accounting Policies 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. 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. 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 uncollectable, 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. 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 EU-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. 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 current and projected 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 10b. The carrying value of land and buildings held at valuation at the reporting date was £51.4 million (2013: £50.8 million) as shown in the table in note 10b. In their report to us, our valuers Cushman & Wakefield LLP (C&W) have drawn attention to valuation uncertainty resulting from a lack of transactions in the self-storage investment market. Please see note 10b for more details. The Board concurs with this view. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc51 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 recoverable amount of the development property. 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, it is valued as a trading store. The Group holds planning permissions on its entire pipeline of sites as a result of the work undertaken to complete the pre-planning and planning phases required. During this year it has been engaged with the four sites to examine whether 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 £11.4 million (2013: £11.5 million —£2.8 million of which was classified as property lease premiums). Please see note 10c for more details. 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 2014 intangible assets, excluding goodwill, amounted to £2.81 million (2013: £2.98 million). The valuation method used and key assumptions are described in note 10a. 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 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 relatively 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) Non-current assets held for sale Non-current assets are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value if their carrying amount is to be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201452 Notes to the Financial Statements For the year ended 31 July 2014 1a Revenue Analysis of the Group’s 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 2014 £’000 10,510 1,349 4 128 11,991 79 12,070 1,840 13,910 2013 £’000 9,776 1,168 4 94 11,042 94 11,137 1,837 12,974 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. 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 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 and other non-recurring set-up 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 expose 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 2014 is as follows: 2014 Revenue from external customers Adjusted EBITDA Management charges Segment Adjusted EBITDA Depreciation Amortisation of intangible assets Loss on disposal — motor vehicles Equity settled share based payments Impairment of development land asset Segment profit/(loss) Central costs not allocated to segments: Finance income Finance costs Profit before taxation Income tax expense Consolidated profit for the financial year Serviced archive and records management 2014 £’000 Self-storage 2014 £’000 12,070 4,378 25 4,403 (1,127) – (8) (119) (1,604) 1,545 1,840 238 (25) 213 (96) (165) (20) – – (68) Total 2014 £’000 13,910 4,616 – 4,616 (1,223) (165) (28) (119) (1,604) 1,477 26 (1,136) 367 (170) 197 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc 53 Total 2013 £’000 12,974 4,136 – 4,136 (1,204) (165) (18) (94) (86) 2,569 33 (1,175) 1,427 2 1,429 Serviced archive and records management 2013 £’000 Self-storage 2013 £’000 11,137 3,822 100 3,922 (1,093) – (9) (94) (86) 2,640 1,837 314 (100) 214 (111) (165) (9) – – (71) 1b Segmental information continued 2013 Revenue from external customers Adjusted EBITDA Management charges Segment Adjusted EBITDA Depreciation Amortisation of intangible assets Loss on disposal – motor vehicles Equity settled share based payments Loss on sale of property Segment profit/(loss) Central costs not allocated to segments: Finance income Finance costs Profit before taxation Income tax credit Consolidated profit for the financial year Corporate transactions and the treasury function are managed centrally and therefore are not allocated to segments. Sales between segments are carried out at arm’s length. The serviced archive segment with over 360 customers has a greater customer concentration with its ten largest corporate customers accounting for 31.4% (2013: 32.5%) of revenue its top 50 accounting for 59.3% (2013: 62.4%) and its top 100 accounting for 74.7% (2013: 77.6%) of revenue. The self-storage segment with over 7,750 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. 2014 Segment assets Segment liabilities Borrowings Total liabilities Capital expenditure1 1. Capital expenditure includes fixed asset additions (note 10b). 2013 Segment and total assets Segment liabilities Borrowings Derivative financial instruments Total liabilities Capital expenditure1 Serviced archive & records management 2014 £’000 5,960 (729) Self-storage 2014 £’000 83,803 (16,379) 6,269 215 Serviced archive & records management 2013 £’000 5,643 (925) Self-storage 2013 £’000 75,930 (13,578) 1,412 362 Total 2014 £’000 89,763 (17,108) (27,445) (44,553) 6,484 Total 2013 £’000 81,573 (14,503) (26,427) (271) (41,201) 1,774 1. Capital expenditure includes fixed asset additions (note 10b) and additions to property lease premiums (Note 10c). 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. Borrowings are managed centrally on a Group basis and are therefore not allocated to segments. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 2014 54 Notes to the Financial Statements For the year ended 31 July 2014 2a Property, staff, distribution and general costs Property and premises costs Staff costs General overheads Distribution costs Retail products cost of sales (see note 2b) 2014 £’000 3,689 3,971 1,153 189 292 9,294 2013 £’000 3,733 3,538 1,128 173 266 8,838 2b 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 Other Serviced archive consumables and direct costs 2c Other costs Loss on sale of Ashford store Impairment of development land asset (see note 10b) 3 Finance income Bank interest All interest receivable arises on cash and cash equivalents (see note 15). 4 Finance costs Bank interest Non-utilisation fees and amortisation of bank loan arrangement fees Other interest 2014 £’000 149 32 6 – 187 105 292 2014 £’000 – 1,604 1,604 2014 £’000 26 2014 £’000 912 223 1 1,136 2013 £’000 104 27 22 5 158 108 266 2013 £’000 86 – 86 2013 £’000 33 2013 £’000 962 207 6 1,175 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc 5 Profit before taxation Profit before taxation is stated after charging: Depreciation and amounts written off property, plant and equipment: — owned assets — assets held under finance leases and hire purchase Amortisation of intangible 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 Other services supplied pursuant to such legislation — interim review Tax services — compliance services — advisory services Other services Comprising: Audit services Non-audit services: 6 Employees The average monthly number of persons (including Directors) employed by the Group during the year was: Store management Administration Costs for the above persons: Wages and salaries Social security costs Pension costs Share based remuneration (options) 55 2013 £’000 1,198 6 166 1,619 46 12 9 36 24 2 129 58 71 129 2013 No. 104 27 131 2013 £’000 3,074 301 50 3,425 94 3,519 2014 £’000 1,224 – 165 1,529 43 17 8 48 16 – 132 60 72 132 2014 No. 107 30 137 2014 £’000 3,336 426 54 3,816 119 3,935 Share based remuneration is separately disclosed in the statement of comprehensive income. Wages and salaries of £129,068 (2013: £110,262) 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 staff costs in the statement of comprehensive income. In relation to pension contributions, there was £3,913 (2013: £3,839) outstanding at the year-end. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201456 Notes to the Financial Statements For the year ended 31 July 2014 6 Employees continued Directors’ remuneration 2014 Executive: A Jacobs SG Thomas RA Davies CM Jacobs Non-Executive: RJ Holmes ETD Luker CP Peal D Hampson 2013 Executive: A Jacobs SG Thomas RA Davies CM Jacobs Non-Executive: RJ Holmes ETD Luker CP Peal D Hampson Emoluments £ Bonuses £ Benefits £ Subtotal £ 200,000 50,000 100,000 56,700 20,000 25,000 20,000 11,667 483,367 34,000 8,500 18,250 7,701 – – – – 68,451 3,328 3,702 2,789 3,143 – – – – 12,962 Emoluments £ Bonuses £ Benefits £ 196,564 49,141 100,000 56,700 20,000 25,000 20,000 12,205 479,610 20,010 4,378 6,000 3,000 – – – – 33,388 3,154 3,036 2,380 2,563 – – – – 11,133 237,328 62,202 121,039 67,544 20,000 25,000 20,000 11,667 564,780 Subtotal £ 219,728 56,555 108,380 62,263 20,000 25,000 20,000 12,205 524,131 Gains on share options £ – 222,773 19,822 879 13,286 – – – 256,760 Gains on share options £ 33,937 33,937 54,685 6,643 – – – – 129,202 Total £ 237,328 284,975 140,861 68,423 33,286 25,000 20,000 11,667 821,540 Total £ 253,665 90,492 163,065 68,906 20,000 25,000 20,000 12,205 653,333 Pension contributions of £30,475 (2013: £30,047) were paid by the Group on behalf of RA Davies and are not included in the Directors’ emoluments table above. 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 (2013: one). 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc 7 Taxation Current tax: UK corporation tax at 22.4% (2013: 24%) 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 (credit) Income tax expense/(credit) 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 22.4% (2013: 24%) 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 — deferred tax Adjustments in respect of prior periods — deferred tax Other Impact of change in rate on timing differences Sale of Reading recognised for tax purposes Income tax expense/(credit) for the year Effective tax rate 57 2014 £’000 2013 £’000 338 (311) – 143 (168) 170 2014 £’000 368 82 3 41 26 – 143 – 7 (132) 170 46% – 402 (525) 121 (2) (2) 2013 £’000 1,426 342 4 35 22 (525) 121 (1) – – (2) –% The UK’s main rate of corporation tax has reduced to 21% from 1 April 2014. The applicable rate for this period is 22.4%. In addition to the amount charged to profit or loss for the year, deferred tax relating to the revaluation of the Group’s properties of £1,261,062 (2013: £426,019) and the movement in the fair value of cash flow hedges of £72,051 (2013: £59,827) has been recognised as a debit directly in other comprehensive income (see note 17 on deferred tax). 8 Dividends Amounts recognised as distributions to equity holders in the year: Final dividend for the year ended 31 July 2012 (4.0 pence per share) Interim dividend for the six months to 31 January 2013 (1.67 pence per share) Final dividend for the year ended 31 July 2013 (4.33 pence per share) Interim dividend for the six months to 31 January 2014 (2.00 pence per share) 2014 £’000 – – 1,053 490 1,543 2013 £’000 1,000 399 – – 1,399 In respect of the current year the Directors propose that a final dividend of 5 pence per share will be paid to the shareholders. The total estimated dividend to be paid is £1.24 million 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 20 November 2014; the record date 21 November 2014; with an intended payment date of 22 December 2014. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201458 Notes to the Financial Statements For the year ended 31 July 2014 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 options1 For diluted earnings per share 2014 £’000 197 2013 £’000 1,421 2014 No. of shares 2013 No. of shares 24,392,144 589,427 24,981,571 24,700,318 147,825 24,848,142 623,212 (2013: 623,212) shares held in the Employee Benefit Trust and 2,466,869 (2013: 2,466,869) Treasury shares are excluded from the above (see note 25). 1. Further options that could potentially dilute EPS in the future are excluded from the above because they are not dilutive in the period presented. Full details of share options are included in notes 19 to 22. Earnings per share Basic Diluted 10a Intangible assets Group Cost at 1 August 2012 Amortisation at 1 August 2012 Amortisation charge Amortisation at 31 July 2013 Net book value at 31 July 2013 Cost at 1 August 2013 Amortisation at 1 August 2013 Amortisation charge Amortisation at 31 July 2014 Net book value at 31 July 2014 2014 2013 0.81p 0.79p 5.75p 5.72p Contractual customer relationships £ ‘000 3,309 (166) (165) (331) 2,978 3,309 (331) (165) (496) 2,813 Goodwill £’000 1,110 – – 1,110 1,110 1,110 – – – 1,110 Total £’000 4,419 (166) (165) (331) 4,088 4,419 (331) (165) (496) 3,923 All goodwill and customer relationships are allocated to the serviced archive cash-generating unit (CGU) identified as a separate business segment. The remaining amortisation period of the contractual customer relationships at 31 July 2014 is 16 years and 11 months (2013: 17 years 11 months). The values for impairment purposes are based on estimated future cash flows and the following key assumptions: • a discount rate of 11% • estimated useful lives of customer relationships (20 years) • • a forward corporation tax rate of 20% • sensitivity: the Group has conducted a sensitivity analysis on the impairment test of each CGU’s carrying value. A cut in projected sales growth by long term sustainable growth rates of 2.75% around 6% would result in the carrying value of goodwill being reduced to its recoverable amount. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc59 Total £’000 79,648 603 (3,463) 1,539 78,327 10,178 1,204 (455) (486) 10,441 67,886 78,327 6,485 2,800 (2,900) (154) – 5,781 90,339 10,441 1,224 1,604 (109) (500) 12,660 10b Property, plant and equipment Development property assets at cost £’000 Land and buildings at valuation £’000 Long leasehold land and buildings at valuation £’000 Short leasehold improvements at cost £’000 Fixtures, fittings and equipment at cost £’000 Motor vehicles at cost £’000 8,670 46 – – 8,716 – – – – 51,868 67 (2,700) 1,539 50,774 – 486 – (486) – 8,716 50,774 – – – – – – – – – – – 8,716 4,297 – – – – – 13,013 – – 1,604 – 1,604 50,774 17 – 148 – 2,800 (2,900) – – 3,521 51,412 – 487 – – (487) – – – (87) 2,260 5,121 – 13 – – (13) – 2,514 30 – – 2,544 1,420 89 – – 1,509 1,035 2,544 16 – – – – – 2,560 1,509 90 – – – 1,599 16,379 450 (681) – 16,148 8,659 611 (415) – 8,855 7,293 16,148 2,007 – – – 87 – 18,242 8,855 623 – – – 9,478 217 10 (82) – 145 99 18 (40) – 77 68 145 – – – (154) – – (9) 77 11 – (109) – (21) Group Cost or valuation 1 August 2012 Additions Disposals Revaluations 31 July 2013 Depreciation 1 August 2012 Depreciation Disposals Revaluations 31 July 2013 Net book value at 31 July 2013 Cost or valuation 1 August 2013 Additions Transfer from lease premium (note 10c) Non-current assets classified as held for sale Disposals Reclassification Revaluations 31 July 2014 Depreciation 1 August 2013 Depreciation Impairment Disposals Revaluations 31 July 2014 Net book value at 31 July 2014 11,409 51,412 5,121 961 8,764 12 77,679 If all property, plant and equipment were stated at historic cost the carrying value would be £44.5 million (2013: £43.5 million). Capital expenditure during the year totalled £6.5 million (2013: £0.6 million). This was primarily the build-outs at Maidenhead and Reading, the purchase of our new development site in Bristol and also included small limited expenditures at existing stores and further racking at the Saracen Olney store. It also included planning and other professional costs incurred in maximising the potential of our existing planning permissions. Property, plant and equipment (non-current assets) with a carrying value of £77.7 million (2013: £70.7 million including Maidenhead held in property lease premium) are pledged as security for bank loans as well as £2.9 million of non-current assets held for sale (see note 16a). The net book value of assets held under finance leases at 31 July 2014 was £nil (2013: £14,059). 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201460 Notes to the Financial Statements For the year ended 31 July 2014 10b Property, plant and equipment continued Market Valuation of Freehold and Operating Leasehold Land and Buildings On 31 July 2014, a professional valuation was prepared by valuers Cushman & Wakefield LLP (C&W) in respect of eleven freehold, one long leasehold and seven operating leasehold properties. The valuation was prepared in accordance with the RICS Valuation — Professional Standards, published by the Royal Institute of Chartered Surveyors (“the Red Book”). The valuations were prepared on the basis of Fair Value or Fair 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 ten 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 £79.1 million (2013: £67.7 million), of which £64.5 million (2013: £54.5 million) relates to freehold and long leasehold properties and £14.6 million (2013: £13.2 million) relates to properties held under operating leases. Freehold and long leasehold 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 fair value as fully equipped operational entities, having regard to trading potential. Of the £64.5 million valuation of the freehold properties £5.1 million (2013: £3.7 million) relates to the net book value of fixtures, fittings and equipment, and the remaining £51.4 million (2013: £50.8 million) relates to freehold and long leasehold properties. The 2014 valuation includes and reflects movements in value which have resulted from the operational performance of the stores and movements in the investment environment. Valuation Methodology C&W have adopted different approaches for the valuation of the leasehold and freehold assets as follows: Freehold and long leasehold 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. 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 19 trading stores (both freeholds and leaseholds) averages 67.9% (2013: 67.72%). 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 flows 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 18 stores the yield (net of purchaser’s costs) arising from the first year of the projected cash flow is 8.11% (2013: 7.17%). This rises to 10.64% (2013: 11.10%) 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 12.0% (2013: 12.02%). e. Purchaser’s costs of 5.8% have been assumed initially and sale plus purchaser’s costs totalling 7.8% are assumed on the notional sales in the 10th year in relation to the freehold stores. The fair value hierarchy within which the Fair Value Measurements are categorised is level 3, in accordance with IFRS 13 fair value measurements. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc61 10b Property, plant and equipment continued Property held under Operating Leaseholds 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 13 years and 8 months as at 31 July 2014 (14 years and 8 months: 31 July 2013). 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. In 2011, one of the Group store’s leases was renegotiated and includes a ten year option to renew the lease from March 2026 to March 2036. The option to extend is only operable in the event that all four of the leases applicable to this store are extended and this option is personal to Lok’nStore or another “major self-storage operator”, to be approved by the landlord (approval not to be unreasonably withheld). The C&W valuation on this store is based on this special assumption that the option to extend the lease for 10 years is exercised. This is consistent with the approach taken in 2012 and 2013. Immature stores C&W have assessed the value of each property individually. The degree of uncertainty relating to immature stores is greater than in relation to the balance of the properties due to there being even less market evidence that might be available for more mature properties and portfolios. C&W state that in practice, if an actual sale of the properties were to be contemplated then any immature low cash flow stores would normally be presented to the market for sale grouped with other more mature assets owned by the same entity, in order to alleviate the issue of negative or low short term cash flow. This approach would enhance the marketability of the group of assets and assist in achieving the best price available in the market by diluting the cash flow risk. C&W have not adjusted their opinion of Fair Value to reflect such a grouping of the immature assets with other properties in the portfolio and all stores have been valued individually. However, they highlight the matter to alert the Group to the manner in which the properties might be grouped in order to maximise their attractiveness to the marketplace. C&W have not assumed that the entire portfolio of properties owned by the entity 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 (either higher or lower) from the aggregate of the individual values for each property in the portfolio. 10c Property lease premiums The Maidenhead site was built out during the year and opened as a new trading store in December 2013. The long lease at Maidenhead was historically classified as a property lease non-current asset in the statement of financial position (2013: £2.8 million) due to 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 ground rent thereafter. Following the opening of this store during the year the amounts being held under lease premium has been transferred to property, plant and equipment in order to keep all costs associated with the store in one asset category particularly as this new Maidenhead store was valued for the first time by C&W in common with other trading stores. Group Balance at start of year Additions during the year Transfer to property, plant and equipment Disposal during the year Balance 31 July 2014 £’000 2,800 – (2,800) – – 2013 £’000 3,179 1,171 – (1,550) 2,800 10d Non-current assets held for sale £2.9 million of the asset relating to the existing trading store at Reading has been presented as held for sale. This follows the agreement to sell the site for residential development for £2.9 million, with the sale now considered as highly probable. The completion date for the transaction is expected around 31 October 2014. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201462 Notes to the Financial Statements For the year ended 31 July 2014 11 Investments Company Investments in subsidiary undertakings 31 July 2012 Capital contributions arising from share based payments 31 July 2013 Capital contributions arising from share based payments 31 July 2014 £’000 1,682 94 1,776 119 1,895 The Company holds more than 20% of the share capital of the following companies, all of which are incorporated in England and Wales: Lok’nStore Limited Lok’nStore Trustee Limited1 Southern Engineering and Machinery Company Limited Semco Machine Tools Limited2 Semco Engineering Limited2 % of shares and voting rights held Class of shareholding Ordinary Ordinary Ordinary Ordinary Ordinary Directly 100 – 100 – – Indirectly – 100 – 100 100 Saracen Datastore Limited1 Ordinary – 100 1. These companies are subsidiaries of Lok’nStore Limited. 2. These companies are subsidiaries of Southern Engineering and Machinery Company Limited and did not trade during the year. Nature of entity Self–storage Trustee Land Dormant Dormant Records Management & Serviced Archive Services 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. 12 Inventories Consumables and goods for resale The amount of inventories recognised as an expense during the year was £208,587 (2013: £179,833). 13 Trade and other receivables Trade receivables Other receivables Prepayments and accrued income Group 2014 £’000 131 Group 2014 £’000 1,542 666 693 2,901 Group 2013 £’000 138 Group 2013 £’000 1,249 733 435 2,417 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. Late charges are applied to a customer’s account if they are more than 10 days overdue in their payment. The Group provides for receivables based upon sales levels and estimated recoverability. There is a right of lien over the customers’ goods, so if they have not paid within a certain time frame, the Company has the right to sell the items they store to cover the debt owed by the customer. Trade receivables that are overdue are provided for based on estimated irrecoverable amounts, 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. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc 63 13 Trade and other receivables continued In respect of its serviced archive and records management business, customers are invoiced typically monthly in advance for the archive storage of their boxes, tapes and files. The provision of additional services, such as document box or tape collection and retrieval from archive, typically are invoiced monthly in arrears. The serviced archive segment with over 360 customers has a greater customer concentration with its ten largest corporate customers accounting for 31.4% (2013: 32.5%) of revenue its top 50 accounting for 59.3% (2013: 62.4%) and its top 100 accounting for 74.7% (2013: 77.6%) of revenue. Included in the Group’s trade receivables balance are receivables with a carrying amount of £235,470 (2013: £249,433) 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 its self-storage customers’ goods if these debts are not paid. The average age of these receivables is 39 days past due (2013: 39 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 bad debts Balance at the beginning of the year Impairment losses recognised Amounts written off as uncollectible Balance at the end of the year Group 2014 £’000 132 63 40 235 Group 2014 £’000 149 34 (20) 163 Group 2013 £’000 136 204 35 375 Group 2013 £’000 138 61 (50) 149 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. Ageing of impaired trade receivables 0–30 days 30–60 days 60+ days Total 14 Trade and other payables Trade payables Taxation and social security costs Other payables Accruals and deferred income Group 2014 £’000 – – 163 163 Group 2014 £’000 2,031 149 1,139 2,581 5,900 Group 2013 £’000 – – 149 149 Group 2013 £’000 1,256 434 912 2,196 4,798 The Directors consider that the carrying amount of trade and other payables and accruals and deferred income approximates fair value. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201464 Notes to the Financial Statements For the year ended 31 July 2014 15 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 include the borrowings disclosed in note 16a, 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. 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: Capital Management Gross borrowings Cash and cash equivalents Net debt Total equity Net debt to equity ratio Group 2014 £’000 (27,701) 2,178 (25,523) 45,210 56.4% Group 2013 £’000 (26,786) 4,244 (22,542) 40,372 55.8% The increase in the Group’s gearing ratio arises through the combined effect of an increase in debt arising from the purchase of the Bristol site, and the store building programme financed from cash resources. Total equity was also impacted by the one-off impairment charge of £1.6 million. An increase in the C&W valuation of its freehold and long leasehold properties a reversal in the liability arising on the market to market ‘fair value’ of the two interest rate swaps executed last year and cash generated from operations mitigated the overall effect. Exposure to credit and interest rate risk arises in the normal course of the Group’s business. A Derivative financial instruments and hedge accounting The Group’s activities expose it primarily to the financial risks of interest rates. Last year the Group executed two separate interest rate swaps with Lloyds TSB plc. These have been maintained and are reported fully in the Financial Review. B Debt management Debt is defined as non-current and current borrowings, as detailed in note 16a. Equity includes all capital and reserves of the Group. The Group is not subject to externally imposed capital requirements. The Group borrows through a senior five year term revolving credit facility, arranged through Lloyds TSB Group plc secured on its existing store portfolio and other Group assets with a net book value of £89.8 million (2013: £81.6 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 (2013: £40 million). This facility expires on 19 October 2016. Undrawn committed facilities at the year-end amounted to £12.3 million (2013: £13.2 million). 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 16a. 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 Group continues its two cash flow hedging interest rate swap arrangements in order to reduce the risk of such upward movements in LIBOR rate. These instruments and the movement in their fair values are detailed in note 16b. The following interest rates applied during the financial year: a. London Inter-Bank Offer Rate (LIBOR) plus 2.35%–2.65% Lloyds TSB plc margin based on a loan to value covenant test for the revolving advances amounting to £27.7 million (2013: £26.8 million). b. 40% of the applicable margin in 1 above for non-utilisation (i.e. that part of the facility which remains undrawn from time to time). As at 31 July 2014 the prevailing non-utilisation charge is calculated at a rate of 0.94%. c. Rates prevailing on the Group’s Interest rate swaps. See note 16b. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc65 15 Financial instruments continued Cash balances held in current accounts attract no interest but surplus cash is transferred daily to a treasury deposit account which earns interest at the prevailing money market rates1. All amounts are denominated in sterling. The balances at 31 July 2014 are as follows: Variable rate treasury deposits1 SIP trustee deposits Cash/(overdraft) in operating current accounts Other cash and cash equivalents Total cash and cash equivalents Group 2014 £’000 1,927 56 113 82 2,178 Group 2013 £’000 4,171 51 (74) 96 4,244 1. Money market rates for the Group’s variable rate treasury deposit track Lloyds TSB plc base rate. The rate attributable to the variable rate deposits at 31 July 2014 was 0.5%. 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. 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 2014, it is estimated that an increase of one percentage point in interest rates would have reduced the Group’s annual profit before tax by £77,005 (2013: £67,816) and conversely a decrease of one percentage point in interest rates would have increased the Group’s annual profit before tax by £77,005 (2013: £67,816). 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 of 2.84% applying to the variable rate borrowings of £7.7 million in the year (2013: £6.8 million/2.86%). 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. G Credit risk The credit risk management policies of the Group with respect to trade receivables are discussed in note 13. The Group’s self-storage business has no significant concentration of credit risk, with exposure spread across over 7,750 customers in our stores and no individual customer accounts for more than 1% of revenue. The serviced archive business with over 360 customers has a greater concentration of credit risk with its ten largest corporate customers accounting for 31.4% of revenue and its top 50 delivering 59.3% of revenue and its top 100 delivering 74.7% 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 2014 was £1,711,258 (2013: £1,430,879) on receivables and £2,177,630 (2013: £4,243,522) on cash and cash equivalents. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201466 Notes to the Financial Statements For the year ended 31 July 2014 15 Financial instruments continued H Maturity analysis of financial liabilities The undiscounted contractual cash flow maturities are as follows: 2014 — Group From two to five years From one to two years Due after more than one year Due within one year Total contractual undiscounted cash flows 2013 — Group From two to five years From one to two years Due after more than one year Due within one year Total contractual undiscounted cash flows I Fair values of financial instruments Categories of financial assets and financial liabilities Financial assets Trade and other receivables Cash and cash equivalents Derivative financial instruments Financial liabilities Trade and other payables Bank loans Finance lease payables Trade and other payables £’000 – – – 3,656 3,656 Trade and other payables £’000 – – – 3,038 3,038 Borrowings £’000 27,701 – – – 27,701 Interest on borrowings £’000 205 924 1,129 923 2,052 Borrowings £’000 26,781 – – 5 26,786 Interest on borrowings £’000 1,997 898 2,895 900 3,795 2014 £’000 1,711 2,178 51 2013 £’000 1,431 4,244 – (3,656) (27,445) – (3,038) (26,422) (5) 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. 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. J Company’s financial instruments The Company’s financial assets are amounts owed by subsidiary undertakings amounting to £2.3 million (2013: £3.2 million) which are classified as loans and receivables, and the investment in its subsidiary undertaking of £0.2 million (excluding capital contributions). 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. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc67 Group 2014 £’000 27,701 (256) 27,445 27,445 – – 27,445 Group 2013 £’000 26,781 (359) 26,422 26,422 5 5 26,427 16a Borrowings Non-current Bank loans repayable in more than two years but not more than five years Gross Deferred financing costs Net bank borrowings Non-current borrowings Current Finance lease liabilities Current borrowings Total borrowings The £40 million revolving credit facility with Lloyds TSB plc is secured by legal charges and debentures over the freehold and leasehold properties and other assets of the business with a net book value of £85.8 million together with cross-company guarantees from Group companies. The revolving credit facility is for a five-year term and expires on 19 October 2016. 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% Lloyds TSB plc 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: Gross finance liabilities — minimum lease payments Within one year Future finance charges on finance leases The present value of finance lease liabilities is as follows: Gross finance liabilities — minimum lease payments Within one year Group 2014 £’000 Group 2013 £’000 – – – – Group 2014 £’000 – – 6 6 (1) 5 Group 2013 £’000 5 5 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201468 Notes to the Financial Statements For the year ended 31 July 2014 16b Derivative financial instruments The Group continues to operate two separate £10 million interest rate swaps as a cash flow hedge with Lloyds TSB Bank plc both effective from 31 May 2012, the first at a fixed 1 month sterling LIBOR rate of 1.2% and the second at a fixed one-month sterling LIBOR rate of 1.15%. Both swaps run up to the expiration of the current banking facility in October 2016. The balance of the drawn facility of £7.7 million (2013: £6.8 million) remains at a floating rate. 3032816LS Interest rate swap 3047549LS Interest rate swap Currency GBP GBP Principal £’000 10,000 10,000 20,000 Maturity date 20/10/2016 20/10/2016 Fair value 2014 £’000 20 31 51 Fair value 2013 £’000 (143) (128) (271) The movement in fair value of the interest rate swaps of £321,654 (2013: £224,752) has been recognised in other comprehensive income in the year. 17 Deferred tax Deferred tax liability Liability at start of year Credited to income for the year Tax credited/(debited) directly to other comprehensive income Liability at end of year Group 2014 £’000 9,705 (168) 1,333 10,870 The following are the major deferred tax liabilities and assets recognised by the Group and the movements during the year: Accelerated Capital Allowances £ 1,434 Tax losses £ (232) Intangible assets £ 723 Other temporary differences £ (92) Revaluation of properties £ 6,147 Rolled over gain on disposal £ 2,093 Group 2013 £’000 10,073 (2) (366) 9,705 Total £ 10,073 At 1 August 2012 Charge/(credit) to income for the year Charge to other comprehensive income At 31 July 2013 Charge/(credit) to income for the year Charge to other comprehensive income At 31 July 2014 (359) 226 (127) – 1,075 366 – 1,441 – (6) 6 – – – 596 (33) – 563 (3) 60 (35) (8) 72 29 521 (260) (2) (426) 6,242 (495) 1,261 7,008 – 1,833 (366) 9,705 (4) (168) – 1,829 1,333 10,870 All of the Group’s tax losses have now been utilised with no tax losses available to carry forward for offset against future profits. The Group will therefore pay tax on the majority of its earnings this year. A potential deferred tax asset of £161,000 (2013: £65,000) arises in respect of the share options in existence at 31 July 2014 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 2014 as the share price at the year-end is below the exercise price of the options. The UK’s main rate of corporation tax reduced to 21% from 1 April 2014 with a further reduction to 20% from 1 April 2015. 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. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc69 2014 £’000 350 £’000 272 7 279 2013 £’000 350 £’000 268 4 272 Called up, allotted and fully paid Number Called up, allotted and fully paid Number 27,809,108 27,141,193 18 Share capital Authorised: 35,000,000 ordinary shares of 1 pence each (2013: 35,000,000) Allotted, issued and fully paid ordinary shares Balance 1 August Options exercised 667,915 shares (2013: 382,328 shares) Balance 31 July Number of shares at 31 July The Company has one class of ordinary shares which carry no right to fixed income. 19 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: 2014 Summary Enterprise Management Initiative Scheme Unapproved Share Options Approved CSOP Share Options Total 2013 Summary Enterprise Management Initiative Scheme Unapproved Share Options Approved CSOP Share Options Total As at 31 July 2013 No of options 163,368 2,156,583 233,775 2,553,726 As at 31 July 2012 No of options 349,166 2,442,175 283,713 3,075,054 Granted – 587,939 93,061 681,000 Granted – 408 23,592 24,000 Exercised (121,954) (468,411) (77,550) (667,915) Lapsed/ surrendered – – (3,000) (3,000) Exercised (185,798) (135,000) (61,530) (382,328) Lapsed/ surrendered – (151,000) (12,000) (163,000) As at 31 July 2014 No of options 41,414 2,276,111 246,286 2,563,811 As at 31 July 2013 No of options 163,368 2,156,583 233,775 2,553,726 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 2014 70 Notes to the Financial Statements For the year ended 31 July 2014 19 Equity settled share based payment plans continued The following table shows options held by Directors under all schemes. As at 31 July 2013 Options granted Options exercised EMI Scheme Unapproved Scheme Approved CSOP share options Total at 31 July 2014 At 31 July 2014 450,000 450,000 513,431 – 513,431 31,414 216,082 24,745 272,241 10,000 15,000 10,000 35,000 1,720,672 130,000 70,000 85,507 14,493 100,000 – 45,668 4,332 50,000 – – – – 350,000 – (300,000) (16,961) – (16,961) – (2,241) – (2,241) (10,000) – – (10,000) (329,202) – – – – – 31,414 – – 31,414 – – – – 31,414 580,000 220,000 581,977 – 581,977 – 259,509 – 259,509 – 15,000 10,000 25,000 1,666,486 – – – 14,493 14,493 – – 29,077 29,077 – – – – 43,570 580,000 220,000 581,977 14,493 596,470 31,414 259,509 29,077 320,000 – 15,000 10,000 25,000 1,741,470 2014 Executive Directors A Jacobs — Unapproved SG Thomas — Unapproved RA Davies — Unapproved RA Davies — CSOP RA Davies total CM Jacobs — EMI CM Jacobs — Unapproved CM Jacobs — CSOP CM Jacobs total Non-Executive Directors RJ Holmes — Unapproved ETD Luker— Unapproved CP Peal — Unapproved Non-Executive total All Directors total 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 two and a half or three years. No options have been granted under the EMI approved scheme in the year (2013: 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 six and a half to 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 (two and a half to three years after grant) and lapse (ten 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 £118,586 (2013: £94,256), all of which relates to equity settled share based payment transactions. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc 71 20 Enterprise Management Initiative Scheme The Company operates a share option scheme under the Enterprise Management Initiative (“EMI”), the vesting conditions of which have been met. Movements in the year are shown in the table below. Outstanding at 1 August Exercised during the year Outstanding at 31 July Exercisable at 31 July Weighted average exercise price 2014 pence 144.00 140.55 152.97 152.97 Options 2014 number 163,368 (121,954) 41,414 41,414 Weighted average exercise price 2013 pence 121.23 102.00 144.00 144.00 Options 2013 number 349,166 (185,798) 163,368 163,368 The share price at the year-end was 207.0 pence per share. The share price ranged from 143.36 pence per share to 217.95 pence per share during the year. The exercise prices for shares exercisable at 31 July 2014 ranged from 152.00 pence per share to 156.00 pence per share. The options outstanding at 31 July 2014 had a weighted average contractual life of 1.2 years (2013: 2.0 years). The following table shows options held by Directors under this scheme. CM Jacobs As at 31 July 2013 31,414 31,414 Granted Surrendered Exercised As at 31 July 2014 Exercise price (pence) Date from which exercisable Expiry date – – – – – – 31,414 31,414 152 30/07/08 30/07/15 21 Unapproved Share Options The Company issues unapproved share options, the vesting conditions of which have been met. Movements in the year are shown below: Outstanding at 1 August Granted during the year Forfeited during the year Exercised during the year Outstanding at 31 July Exercisable at 31 July Weighted average exercise price 2014 pence 133.00 168.96 – 118.73 144.68 141.69 Options 2014 number 2,156,583 587,939 – (468,411) 2,276,111 1,409,975 Options 2013 number 2,442,175 408 (151,000) (135,000) 2,156,583 1,637,869 Weighted average exercise price 2013 pence 124.19 136.00 73.00 58.00 133.00 140.00 The options outstanding at 31 July 2014 had a weighted average remaining contractual life of 5.5 years (2013: 4.7 years). The exercise prices for shares exercisable at 31 July 2014 ranged from 56.5 pence per share to 269.5 pence per share. The inputs into the Black–Scholes model used to value the options issued during the year are as follows: Date of grant 31 July 2014 31 Jan 2014 Expected life (years) 6 6 Share price at date of grant (pence) 207.00 136.00 Exercise price (pence) 207.00 136.00 Expected volatility (%) 39.17 40.25 Expected dividend yield (%) 3.06 3.02 Risk free interest rate (%) 2.15 1.89 Fair value charge per award (pence) 61.83 78.76 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201472 Notes to the Financial Statements For the year ended 31 July 2014 21 Unapproved Share Options continued The following unapproved share options have been granted to Directors of the Company. As at 31 July 2013 450,000 450,000 513,431 216,082 15,000 10,000 10,000 1,664,513 Exercised /lapsed – (300,000) (16,961) (2,241) – (10,000) – (329,202) As at 31 July 2014 580,000 220,000 581,977 259,509 15,000 – 10,000 1,666,486 Granted 130,000 70,000 85,507 45,668 – – – 331,175 A Jacobs S Thomas R Davies C Jacobs ETD Luker R Holmes C Peal Total Exercise price (pence) 56.5–213.5 56.5–213.5 56.5–213.5 56.5–269.5 56.5 – 56.5 Date from which exercisable 20/01/07–31/07/17 31/07/10–31/07/17 30/07/07–31/07/17 16/05/08–31/07/17 31/07/12 – 31/07/12 Expiry date 20/01/15–31/07/24 31/07/17–31/07/24 30/07/15–31/07/24 16/05/15–31/07/24 31/07/19 – 31/07/19 22 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 Outstanding at 31 July Exercisable at 31 July Weighted average exercise price 2014 pence 107.00 207.00 117.17 86.79 144.48 97.77 Options 2014 number 233,775 93,061 (3,000) (77,550) 246,286 86,422 Weighted average exercise price 2013 pence 94.17 136.00 108.00 85.00 107.00 85.00 Options 2013 number 283,713 23,592 (12,000) (61,530) 233,775 107,489 The options outstanding at 31 July 2014 had a weighted average remaining contractual life of 8.4 years (2013: 7.9 years). The exercise prices for shares exercisable at 31 July 2014 ranged from 85.0 pence per share to 207 pence per share. The inputs into the Black–Scholes model used to value the options issued during the year are as follows: Date of grant 31 July 2014 Expected life (years) Share price at date of grant (pence) 6 207.00 Exercise price (pence) 207.00 Expected volatility (%) 39.2 Expected dividend yield (%) Risk free interest rate (%) Fair value charge per award (pence) 3.1 2.15 61.83 The following CSOP approved share options have been granted to Directors of the Company. R Davies C Jacobs As at 31 July 2013 – 24,745 24,745 Granted 14,493 4,332 18,825 Exercised/ lapsed – – – As at 31 July 2014 14,493 29,077 43,570 Exercise price (pence) 207.0 85.0–207.0 Date from which exercisable 31/07/14 31/07/13–31/07/17 Expiry Date 31/07/24 31/07/20–31/07/24 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc73 23a Other reserves Group 1 August 2012 Share based remuneration (options) Cash flow hedge reserve net of tax Dividend paid 31 July 2013 Share based remuneration (options) IFRS 2 transfer to retained earnings Cash flow hedge reserve net of tax Dividend paid 31 July 2014 Cash flow hedge reserve £’000 (382) – 165 – (217) – – 250 – 33 Merger reserve £’000 6,295 – – – 6,295 – – – – 6,295 Other reserve £’000 4,236 – – (1,399) 2,837 – – – (1,543) 1,294 Capital redemption reserve £’000 34 – – – 34 – – – – 34 Share based payment reserve £’000 1,468 94 – – 1,562 119 (742) – – 939 Total £’000 11,651 94 165 (1,399) 10,511 119 (742) 250 (1,543) 8,595 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. Share based payment reserve Under IFRS 2 there is the option to make transfers from the share based payment reserve to retained earnings in respect of accumulated share option charges where the options have either been exercised or have lapsed post-vesting. The total amounts calculated and accordingly transferred to retained earnings amounted to £741,806. 23b Other reserves Company 1 August 2012 Share based remuneration (options) Dividend paid 31 July 2013 Share based remuneration (options) IFRS 2 transfer to retained earnings Dividend paid 31 July 2014 Other reserve £’000 4,056 – (1,399) 2,657 – – (1,543) 1,114 Share based payment reserve £’000 1,682 94 – 1,776 119 (742) – 1,153 Total £’000 5,738 94 (1,399) 4,433 119 (742) (1,543) 2,267 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201474 Notes to the Financial Statements For the year ended 31 July 2014 24 Retained earnings Group 1 August 2012 Purchase of shares into treasury Profit attributable to owners of Parent for the financial year Transfer from revaluation reserve (Additional depreciation on revaluation) Transfer from revaluation reserve Realised gain on disposal of property (net of deferred tax) 31 July 2013 Profit attributable to owners of Parent for the financial year Transfer from revaluation reserve (Additional depreciation on revaluation) Transfer from share based payment reserve (note 23a) Transfer from non-controlling interest 31 July 2014 Retained earnings before deduction of own shares £’000 8,138 – Own shares (note 25) £’000 (2,593) (1,648) Retained earnings Total £’000 5,545 (1,648) 1,421 193 1,120 10,872 197 207 742 280 12,298 – – – (4,241) – – – – (4,241) 1,421 193 1,120 6,631 197 207 742 280 8,057 The transfer from revaluation reserve represents the additional depreciation charged on revalued assets net of deferred tax. 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 of Lok’nStore Group plc. The Company loss for the year was £173,882 (2013: £203,637). 25 Own shares 1 August 2012 Purchase of shares in the year 31 July 2013 and 31 July 2014 ESOP shares Number 623,212 – 623,212 ESOP shares £ 499,910 – 499,910 Treasury shares Number 1,142,000 1,324,869 2,466,869 Treasury shares £ 2,092,902 1,648,134 3,741,036 Own shares total £ 2,592,812 1,648,134 4,240,946 Lok’nStore Limited holds a total of 2,466,869 of Lok’nStore Group plc ordinary shares of 1p each for treasury with an aggregate nominal value of £24,669 purchased for an aggregate cost of £3,741,036 at an average price of £1.503 per share. These shares represent 8.87% of the Parent Company’s called-up share capital. The maximum number of shares held by Lok’nStore Limited in the year was 2,466,869. No shares were disposed of or cancelled in the year. 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. 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 2014, the Trust held 623,212 (2013: 623,212) ordinary shares of 1 pence each with a market value of £1,290,049 (2013: £847,568). No shares were transferred out of the scheme during the year (2013: nil). No dividends were waived during the year. No options have been granted under the EBT. 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc26 Cash flows (a) Reconciliation of profit before tax to cash generated from operations Profit before tax Depreciation Amortisation of intangible assets Loss on disposal of freehold property Impairment of development land asset Equity settled share based payments Loss on sale of motor vehicles Interest receivable Interest payable Increase/(decrease) in inventories Increase in receivables Increase/(decrease) in payables Cash generated from operations (b) Reconciliation of net cash flow to movement in net debt Net debt is defined as non-current and current borrowings, as detailed in note 16a less cash and cash equivalents. (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 27 Commitments under operating leases At 31 July 2014 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 75 2013 £’000 1,426 1,204 165 86 – 94 18 (33) 1,175 2 (562) 711 4,286 2014 £’000 367 1,224 165 – 1,604 119 27 (26) 1,136 7 (484) 1,102 5,241 2014 £’000 (2,066) (914) (2,980) (22,543) (25,523) 2013 £’000 283 2,922 3,205 (25,747) (22,542) Group 2014 £’000 1,543 5,732 8,740 16,015 Group 2013 £’000 1,515 5,592 10,023 17,130 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. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201476 Notes to the Financial Statements For the year ended 31 July 2014 27 Commitments under operating leases continued The Group as lessor: Property rental income earned during the year was £79,426 (2013: £95,285). 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 served notice on all existing agreements contracted with tenants, under non-cancellable leases, in preparation for the demolition of the existing buildings. Consequently at the reporting date there are no future minimum lease payments: Within one year 28 Related party transactions The following balances existed between the Company and its subsidiaries at 31 July: Net amount due from Lok’nStore Limited Group 2014 £’000 – Group 2013 £ ‘000 92 2014 £’000 2,285 2013 £’000 3,207 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 2014. 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 11. 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. Short term employee benefits Post-employment benefits Share based payments Total 2014 £’000 822 30 68 920 2013 £’000 653 30 38 721 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 (2013: £6,000). The balance outstanding to Trucost plc at year-end was £nil (2013: £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 £23,256 (2013: £26,519). There were no amounts outstanding due to Keith Jacobs at the year-end (2013: £nil). The maximum balance outstanding at any time during the year is £3,789 (ex VAT) (2013: £3,153). 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group Plc77 29a Capital commitments and guarantees The Group has capital expenditure contracted but not provided for in the financial statements of £3.85 million (2013: £3.98 million) relating to the £2.5 million development commitment at Aldershot, remaining commitments on the build-out at Reading, demolition and remediation commitments at the new Southampton site and £0.44 million at Saracen relating to increasing warehouse racking, and various other minor works. 29b 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 £27.7 million (2013: £26.8 million). 29c 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 approached HMRC to request the implementation of a Partial Exemption Special Method (PESM). Lok’nStore has 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 initial assessment in the amount of £140,903 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 dispute. 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 The First Tier Tribunal Hearing (FTT) took place in July 2012 to consider the matter and judgment was received in September in favour of Lok’nStore. The Judge found that while there was some link between overhead costs and the cost of insurance there was not a significant link and concluded that the standard method was not a fair proxy for use and went on to find that our proposed method gave a more accurate proxy for use and should be accepted. HMRC were allowed leave to appeal to the Upper Tribunal (UT) in respect of the First Tier Tribunal Judgment. The Upper Tribunal Hearing took place in December 2013 to consider the matter. On 23 June 2014 the Upper Tribunal dismissed HMRC’s appeal. On 19 August 2014 HMRC confirmed to Lok’nStore that all residual input tax incurred by Lok’nStore may be recovered according to a PESM based on floor areas and values. Accordingly the floor-based special method now accepted will give a restriction of less than 0.1%, in which case the total amount of VAT (plus interest) to be assessed by HMRC would on the figures give a de minimis result. 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201478 Glossary Abbreviation Adjusted EBITDA Earnings before all depreciation and amortisation charges, losses or profits on disposal, share-based payments, acquisition costs, and non-recurring professional costs, finance income, finance costs and taxation AGM APD Bps C&W CAC Capex CGU CO2e CSOP EBT EMI EU GHG HMRC IAS IFRIC IFRS LIBOR LTV MWh Annual General Meeting Auditing Practices Board Basis Points Cushman & Wakefield Contributory asset charges Capital Expenditure Cash generating units Carbon Dioxide Emissions Company Share Option Plan Employee Benefit Trust Enterprise Management Incentive Scheme European Union Indirect greenhouse gas Her Majesty’s Revenue & Customs International Accounting Standard International Financial Reporting Interpretations Committee International Financial Reporting Standards London Interbank Offered Rate Loan to Value Ratio Megawatt Hour Operating Profit Earnings before interest and tax (EBIT) PESM RICS SMO sq. ft. Partial Exemption Special Method Royal Institution of Chartered Surveyors Standard Method Override Calculation Square Foot Store adjusted EBITDA Adjusted EBITDA (see above) but before central and head office costs. VAT Value Added Tax 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group PlcOur Stores 79 Head office Lok’nStore Plc 112 Hawley Lane Farnborough Hampshire GU14 8JE Tel www.loknstore.co.uk www.loknstore.com 01252 521010 Central Enquiries 0800 587 3322 info@loknstore.co.uk www.loknstore.co.uk Basingstoke, Hampshire Crockford Lane Chineham Basingstoke Hampshire RG24 8NA Tel Fax basingstoke@loknstore.co.uk 01256 474700 01256 477377 Crayford, Kent Block B Optima Park Thames Road Crayford Kent DA1 4QX 01322 525292 Tel Fax 01322 521333 crayford@loknstore.co.uk Eastbourne, East Sussex Unit 4, Hawthorn Road Eastbourne East Sussex BN23 6QA Tel Fax eastbourne@loknstore.co.uk 01323 749222 01323 648555 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 Fax farnborough@loknstore.co.uk 01252 511112 01252 744475 Harlow, Essex Unit 1 Dukes Park Edinburgh Way Harlow Essex CM20 2GF Tel Fax harlow@loknstore.co.uk 01279 454238 01279 443750 Horsham, West Sussex Blatchford Road Redkiln Estate Horsham West Sussex RH13 5QR 01403 272001 Tel Fax 01403 274001 horsham@loknstore.co.uk Luton, Bedfordshire 27 Brunswick Street Luton Bedfordshire LU2 0HG Tel Fax luton@loknstore.co.uk 01582 721177 01582 721188 Maidenhead, Berkshire Stafferton Way Maidenhead Berkshire SL6 1AY Tel Fax maidenhead@loknstore.co.uk 01628 878870 01628 620136 Milton Keynes, Buckinghamshire Etheridge Avenue Brinklow Milton Keynes Buckinghamshire MK10 0BB Tel Fax miltonkeynes@loknstore.co.uk 01908 281900 01908 281700 Northampton Central 16 Quorn Way Grafton Street Industrial Estate Northampton NN1 2PN 01604 629928 Tel 01604 627531 Fax nncentral@loknstore.co.uk Northampton Riverside Units 1–4 Carousel Way Northampton Northamptonshire NN3 9HG Tel Fax northampton@loknstore.co.uk 01604 785522 01604 785511 Poole, Dorset 50 Willis Way Fleetsbridge Poole Dorset BH15 3SY Tel Fax poole@loknstore.co.uk 01202 666160 01202 666806 Portsmouth, Hampshire Rudmore Square Portsmouth PO2 8RT Tel Fax portsmouth@loknstore.co.uk 02392 876783 02392 821941 Reading, Berkshire 251 A33 Relief Road Reading RG2 0RR reading@loknstore.co.uk Southampton, Hampshire Manor House Avenue Millbrook Southampton Hampshire SO15 0LF Tel Fax southampton@loknstore.co.uk 02380 783388 02380 783383 23602.04 31 October 2014 11:16 AM Proof 6a Annual Report and Accounts 201480 Our Stores Staines, Middlesex The Causeway Staines Middlesex TW18 3AY Tel Fax staines@loknstore.co.uk 01784 464611 01784 464608 Sunbury on Thames, Middlesex Unit C, The Sunbury Centre Hanworth Road Sunbury Middlesex TW16 5DA 01932 761100 Tel Fax 01932 781188 sunbury@loknstore.co.uk Swindon Kembrey Park, Wiltshire Kembrey Street Elgin Industrial Estate Swindon Wiltshire SN2 8UY Tel Fax swindoneast@loknstore.co.uk 01793 421234 01793 422888 Swindon (West), Wiltshire 16–18 Caen View Rushy Platt Industrial Estate Swindon Wiltshire SN5 8WQ Tel Fax swindonwest@loknstore.co.uk 01793 878222 01793 878333 Tonbridge, Kent Unit 6 Deacon Trading Estate Vale Road Tonbridge Kent TN9 1SW 01732 771007 Tel Fax 01732 773350 tonbridge@loknstore.co.uk Development locations Southampton, Hampshire Third Avenue Millbrook Southampton SO15 0JX North Harbour, Port Solent, Hampshire Southampton Road Portsmouth PO6 4RH Bristol Gallagher Trade Park Longwell Green Bristol BS30 Managed stores Aldershot, Hampshire (Opening 2016) 251 Ash Road Aldershot GU12 4DD Tel 0845 4856415 aldershot@loknstore.co.uk Ashford, Kent Wotton Road Ashford Kent TN23 6LL Tel Fax ashford@loknstore.co.uk 01233 645500 01233 646000 Crawley, West Sussex Sussex Manor Business Park Gatwick Road Crawley RH10 9NH Tel crawley@loknstore.co.uk 01293 738530 Woking Marlborough Road Woking GU21 5JG Tel Fax woking@loknstore.co.uk 01483 378323 01483 722444 23602.04 31 October 2014 11:16 AM Proof 6a Lok’nStore Group PlcAnnual Report and Accounts 2014 23602.04 31 October 2014 11:16 AM Proof 6a 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 n d A c c o u n t s f o r t h e y e a r e n d e d 3 1 J u l y 2 0 1 4 Head Office Lok’nStore PLC 112 Hawley Lane Farnborough Hampshire GU14 8JE Tel 01252 521010 www.loknstore.co.uk www.loknstore.com 23602.04 31 October 2014 11:16 AM Proof 6a 

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