Regus plc Annual report and accounts 2000 R e g u s l p c A n n u a l r e p o r t a n d a c c o u n t s 2 0 0 0 www.regus.com Regus plc (formerly known as Regus Business Centres plc) 3000 Hillswood Drive Chertsey Surrey KT16 0RS United Kingdom Registered number: 3548821 Sponsors of the 2001 Ryder Cup Contents 2 Regus at a glance 4 Chairman’s statement 6 Review of operations 12 Financial review 16 Directors and advisers 18 Directors’ report 20 Corporate governance 22 Remuneration report 25 Auditor’s report 26 Consolidated profit and loss account 27 Balance sheets 28 Consolidated cash flow statement Regus around the globe 29 Consolidated statement of total recognised gains and losses Reconciliation of movements in Group shareholders’ funds 30 Accounting policies 33 Notes to the financial statements 53 Principal Group companies 55 Shareholder information 56 Five-year summary Financial calendar Argentina Australia Austria Azerbaijan Belgium Brazil Chile China Czech Republic Denmark Egypt Finland France Germany Greece Hungary Ireland Israel Italy Japan Latvia Luxembourg Malaysia Mexico Morocco The Netherlands Norway Panama Peru Philippines Poland Portugal Romania Russia Singapore Slovak Republic South Africa Spain Sweden Switzerland Tanzania Thailand Tunisia Turkey Ukraine United Kingdom USA Vietnam Regus is a provider of high-quality business services to the global economy. Its international network of adaptable business centres allows Regus customers to outsource completely or in part their workspace requirements. By December 2000, Regus operated 64,070 workstations in 335 centres across 48 countries. Regus plc Annual report and accounts 2000 1 Regus at a glance Financial highlights • Successful flotation raised £239 million (net) • Number of workstations increased 60% to 64,000 • Turnover up 110% from 1999 • US experienced growth of 503% in turnover Turnover 2000 by region (£m) Centre contribution (£m) EBIT before exceptional items (£m) Total workstations 2000 by region (thousands) • First operating profit recorded in history of Regus plc • Centre contribution (gross profit) increased 486% 27.1 86.5 3 . 2 9 188.6 7 . 1 4 • Operating cash flow up 721% to £117 million 118.9 • Substantially improved covenants, with cash of £170 million and net assets of £203 million Rest of Europe UK and Ireland Americas Rest of the World 7 9 9 1 8 . 9 0 . 3 2 8 9 9 1 9 9 9 1 0 . 8 0 0 0 2 3 . 1 - 6 . 8 - 6 . 4 2 - Established New Turnover by year (£m) EBITDA before exceptional items (£m) 1 . 1 2 4 0 0 5 0 0 4 0 0 3 0 0 2 0 0 1 0 6 . 0 0 2 6 . 1 1 1 7 9 9 1 8 . 8 5 8 9 9 1 9 9 9 1 0 0 0 2 2 2 6 3 1 0 . 3 5 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 2 . 0 - 8 . 5 - 0 . 3 2 - 2 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 0 0 1 0 8 0 6 0 4 0 2 0 0 2 - 0 4 - 0 6 0 5 0 4 0 3 0 2 0 1 0 0 1 - 0 2 - 0 3 - 8 9 9 1 9 9 9 1 4 . 2 1 0 0 0 2 7 9 9 1 2 2 6 3 1 6 . 4 - 2 . 5 1 - 0 . 3 4 - Operating cash flow before exceptional items (£m) 9 . 7 1 1 7 9 9 1 1 . 2 1 8 9 9 1 7 . 5 1 7 . 7 1 9 9 9 1 0 0 0 2 0 2 0 1 0 0 1 - 0 2 - 0 3 - 0 4 - 0 5 - 0 0 5 0 0 4 0 0 3 0 0 2 0 0 2 0 0 1 0 5.0 19.4 19.8 19.9 Rest of Europe UK and Ireland Americas Rest of the World Total workstations by year (thousands) 1 . 0 4 7 . 0 2 8 . 1 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 . 4 6 0 8 0 7 0 6 0 5 0 4 0 3 0 2 0 1 0 3 Chairman’s statement During 2000, the business grew at a spectacular rate. Revenue was up 110%, Ninety-three centres were added to our portfolio and we now operate in 48 countries. In addition, we listed on the London Stock Exchange and NASDAQ. 2000 was a landmark year for Regus. We enjoyed many successes, including simultaneous listings on the London Stock Exchange and NASDAQ in October. The offer was several times over- subscribed, raised £239 million (net) for the Group and resulted in a high-quality investor base. We repaid the £100 million multi-currency secured loan facility, which we raised in 1999, from the proceeds. These actions have positioned us well to continue the rapid development of Regus. The business grew during the year at a spectacular rate: we added another 93 centres to our portfolio and increased the number of countries in which we operate to 48 (1999: 45). We added 23,934 workstations, our key measure of volume, bringing the year-end total to 64,070. As a result, the Group recorded its first-ever operating profit before exceptional items. In line with our strategy of expanding in established markets, enhancing national networks, increasing customer awareness and attracting key national accounts, the bulk of the growth was in the US, where we added 10,945 workstations, with the balance mainly in the major towns and cities in which we already operate. Results Revenue for the year was up 110% at £421.1 million. Overall centre contribution increased 486% to £100.3 million, with established centres continuing to return a margin of 31%. Administrative expenses before exceptional items fell as a percentage of turnover to 21% (1999: 30%) and we recorded an operating profit before exceptional items of £12.4 million (1999: loss of £43.0 million). The exceptional item of £9.5 million relates to the cost associated with reducing the Reward Options exercise price from £1.455 to £0.05. After exceptional items the Group’s operating profit for the year was £2.9 million (1999: loss of £48.1 million). The Group’s EBITDA for the year was £43.5 million. (1999: negative £28.1 million). The Board Upon the Initial Public Offering (“IPO”), Mark Dixon relinquished his role as Executive Chairman, remaining as Chief Executive, and I was appointed Non-executive Chairman. From the end of March 2001 Robert Kuijpers will have resigned his position of non-executive director and will become CEO, International. There were no other changes to the Board. An exciting prospect for 2001 is our sponsorship of the Ryder Cup golf tournament, which will be held in September 2001 at The Belfry in the UK. This is the largest global sporting event of 2001, which will have major television coverage, and will give the Regus brand excellent exposure worldwide. Our clear strategy, focused management and highly-motivated workforce will, we believe, keep us at the forefront of the flexible office space market, and puts us in an ideal position to capitalise on changing work practices worldwide. George Gray 26 February 2001 During the year, we established an audit committee, a nomination committee and a remuneration committee. Our people 2000 was a particularly busy year for our management and team members. On behalf of the directors and shareholders I would like to thank all Regus people, who ensured that the business ran smoothly and grew rapidly, for their dedication and hard work. The future Trends in performance continue to be encouraging, and we believe the Company has an exciting future. With flexible office space accounting for less than 2% of the global office market we see no near-term constraint on our growth potential. The IPO provided the resources for us to grow through acquisition as well as organically. We will continue to focus resources on our core markets, particularly in the US. In non-core markets we seek to enter into profit-sharing deals including joint ventures, management contracts and franchising. Strategic alliances, joint ventures and acquisitions will enable us to expand the range of services we offer throughout the network. 4 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 5 Review of operations – developing our business through flexibility “ Regus were able to provide me with an ideal, flexible solution. Merrill Lynch was looking for an immediate outsourced solution – the new centre in London is ideal as it has been designed to investment banking standards.” Chris Oliver, MLEMEA Right: France, Paris Etoile - Balzac Regus is a leading provider of high-quality business services to the global economy. Our international network of adaptable business centres enables customers to outsource, completely or in part, their workspace requirements. Our centres offer a client-driven mix of workstations, conference rooms and support services, such as video conferencing, telecommunications, internet connectivity, reception and secretarial services. Customers can use all or part of our centres for one hour or for more than five years. Products and initiatives Our serviced business centres provide an alternative to traditional office space. Situated in downtown business districts, suburban office parks and close to transportation gateways, we tailor our business centres to meet a wide variety of customer needs. We offer convenience, flexibility and immediate availability. In addition, depending on circumstances such as the number of employees and the term of occupancy, they often prove to be cheaper than traditional office leasing. To add to the services we offer, we expect to provide a wider range of products in the near future: • Franchises We believe that we can grow our network of business centres more quickly through franchising, particularly in developing countries where the franchise can apply its local expertise and capital. We plan, therefore, to launch new centres in these areas through franchise arrangements, under which we will approve the location, design and marketing of the centres while extending the same quality control and staff training procedures to the franchise operators as we apply to all our proprietary business centres. • Regus Next Generation We plan to launch a new type of business centre, built from prefabricated materials and positioned outside regional cities and in other locations where land values are lower than those in our traditional heartland. Our strategy is to market these centres to SMEs at a lower price than, but at a similar margin to, our traditional centres. We have already signed one lease for a building in Harlow in the UK which will be completed during the first quarter of 2001. • Regus Workz We are piloting a new product, Regus Workz, which will offer business centres designed specifically for the more casual business cultures of the new economy. While interiors will be less formal, their quality will match our original centres. The first two pilots are Covent Garden, London, and Folsom St, San Francisco. Sales and marketing Our sales and marketing strategy, which involves a constant appraisal and improvement of product mix, investment in local advertising and a continuing focus on service quality, has been key to developing the Regus brand during 2000. During November 2000, Regus maximised on the opportunity to increase brand awareness and grow concept understanding in key markets through the UK, via the first ever title sponsorship of the Regus London Film Festival and Regus London Film Festival On Tour. The sponsorship enabled Regus to acquire new business as well as aiding retention of clients. The initiative has since been nominated and short-listed for an award in the Arts Sponsorship category of the upcoming Hollis Sponsorship Awards. Above: Denmark, Copenhagen - City “ Regus’ professionalism and willingness to assist has enabled our company to grow in Chicago from one to eight people in four short weeks.” Rob Murray, OneSoft “ Regus has great vision in providing completely fitted-out space. For large companies like ours, when we need growth we need something that’s right on time.” Meredith Fondahl, Charles Schwab & Co. Inc “ I can meet with Regus today and move tomorrow in most locations.” Herb Henderson, Madison River Communications To develop our brand awareness further, we signed our biggest-ever sponsorship deal at the end of the year when we became an Official Partner to the Ryder Cup 2001, probably the most prestigious sporting event of the year and one of the world’s top ten sporting events. We join other major global companies, such as IBM, KPMG and Pfizer, in supporting this golf tournament which features the best players from Europe and the US. In 2001 the event will run from 28 to 30 September at The Belfry, near Birmingham, UK. Since more than 35 countries take live TV coverage, more than 800 million viewers will see the Regus name every day during the event. Operations Regus considers the location of its business centres to be of paramount importance and has generally positioned them in city centres, at important transportation hubs, such as major airports, and in business parks. Our international corporate development team which, at the end of the year, consisted of 25 people, works with our regional management teams and property owners to identify suitable locations. In 2000, we continued to develop our global network by adding a further 93 centres and by expanding 17 existing centres. We closed three centres. As a result of opening centres that are generally larger, we increased the number of workstations available at the end of the year by 60%, to 64,070, compared with 40,136 at the 6 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 7 Review of operations – developing our business through global growth “The location of the Cape Town Regus Centre in Safmarine House, one of the city’s most prestigious buildings, was a major factor in its favour when we were deciding on branch office space. The centre projects the kind of international, upmarket image we must have.” Paul Grinups, Mobil Oil South Africa . end of 1999. This rate of growth is set to continue with a further 53 leases signed at the year end, all of which are due to open during 2001. In 2000 we focused on the strategically important US market and expanded within existing countries of operation; we added only three new countries in the year. In the US we added a further 37 centres – 10,945 workstations – to the 25 centres in existence at the end of 1999. Twenty-six of these new centres are Regus owned while 11 are joint ventures. In the UK and Ireland we opened 17 new centres, including four in central London. In mainland Europe, we opened 27 centres, including eight in Benelux, two in France, eight in Germany and three in Spain. In the rest of the world, we opened three centres in Australia and two in Japan. For the first time, we opened centres in Egypt, Azerbaijan and Tunisia. The past year also saw the signing of our largest centre to date: the Amsterdam Teleport Towers centre, which opened in January 2001, has some 1,028 workstations and is ideally placed to reap the rewards from the thriving Benelux market. Property and supplier relationships The corporate development team actively manages our relationships with major property owners throughout the world. Their objective is to position Regus as the partner of choice for any property owner. Regus can offer property owners a menu of deal structures, ranging from conventional leases through participation leases and management contracts to franchise, depending upon the property owner’s appetite for risk and reward. Once we have decided to lease a property, our team of designers, contractors and suppliers works to build out the workstations and conference rooms to our consistently high standards. We have established 50/50 joint ventures with Arlington Securities and Teesland Group plc in the UK, with Equity Office Properties Trust and Crescent in the US, Milano Centrale in Italy and Gesco in India. In each case we operate business centres in our partners’ buildings on a profit-share arrangement through which we are paid a management fee by the joint-venture company and share in the business centres’ profits. We have partnerships with Jones Lang LaSalle, the world’s largest chartered surveyors and international property consultants, and DIFA, Germany’s third-largest property fund. |n addition, we work closely with the owners of our buildings and with our partners who are involved in new products and initiatives. As the business has grown and matured, we have strengthened our relationships with our principal suppliers, on a mutually beneficial basis, and have achieved significant purchasing discounts on certain products. As a result, approximately 80% of our capital expenditure on new centres is placed with only 16 suppliers. We continue to develop non-exclusive partnerships with “best-in-class” companies to facilitate entry into new and/or existing markets. These enable us to introduce new products more efficiently and quickly and to reduce the risk of doing so. E-business We have always been determined that our clients should benefit from advances in technology. Our relationships with Hewlett Packard, Microsoft, Cisco and Ericsson continue to deliver improved efficiency, create new revenue streams and maintain a global standard. Above: Finland, Espoo - Spectri Business Park Mobil Oil South Africa (“Mobil SA”) is part of the world’s third-largest oil company, and is always looking for beneficial working relationships. It is company policy to outsource as much as possible, and this includes the management of its branch office facilities and support staff wherever feasible. Mobil SA was so satisfied with Regus’ service and facilities to date that it recently signed up for another year’s lease. Staff at Mobil SA’s Cape Town branch also make extensive use of the meeting rooms in the Regus centre, and of the skilled secretarial support services. Paul Grinups, Mobil Oil South Africa Total workstations by year (thousands) 1 . 4 6 0 8 0 7 0 6 0 5 0 4 0 3 0 2 0 1 0 1 . 0 4 7 . 0 2 8 . 1 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 During 2000 we initiated several pilot projects to increase IT services to meet our clients’ needs. These included Engineer Services – providing for a variety of break fix and local support – and en@ble Services – a selection of ASP services. We will extend these pilots in 2001 to four key regional markets, and will use their success to determine the roll-out programme. Collaboration with other IT partners has enabled us to develop “RegusNet”, which provides a high- speed secure internet access, together with a wide range of value-added IT services, for our clients. A principal objective of our e-business programme is to drive increased revenues and margins, primarily through increased efficiency. By delivering an integrated, internet-enabled systems platform across the Group, customers may make bookings, receive bills and make electronic payments from their own PCs. Because data is captured only once, accuracy and speed are improved and costs are reduced. The applications, built around PeopleSoft software, include financials, human resources, billing, e-procurement, purchase order and expenses, and form the backbone of our Management Information System. We have also implemented Pivotal customer relationship management. These applications employ the latest web technology and operate on a platform of Windows 2000 and RegusNet. 8 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 9 Review of operations – developing our business through infrastructure “ As organisations such as Regus help companies take advantage of opportunities on both sides of the Atlantic, our transatlantic business links will become even more intimate and advantageous for companies and consumers in both countries.” Richard Fursland, British American Chamber of Commerce Stage 1 of this project was completed successfully in the second half of 2000. Committed expenditure on applications alone is around £10 million. We have already begun to experience some benefits, but expect financial and operational savings to come through in the second half of 2001. People We recognise that the success of the Regus business depends to a large extent on the calibre and motivation of the people we employ. We have promoted a dynamic, high-work ethic with a strong culture of delivering excellent service to customers. We regard all our employees as “team members”, irrespective of their functional title or status. We keep them informed of developments through a tri-weekly electronic newsletter through our intranet, RegusSmart, and an annual conference. Professionalism is further enhanced through our training and development programme at the Regus Academy, where 551 team members have been trained this year, and 95 team members have been promoted. We have also developed The Regus Open Learning Institute, known as ROLI, which is a new web-based learning programme providing training for all Regus team members from their own laptop, anywhere, anytime. ROLI comprises three levels of distance learning on each functional area of the Regus business, from induction (basic level) to intermediate and advanced levels, to develop Regus experts in their chosen field. ROLI is of significant benefit in the development of team members’ careers. Once they have completed the basic, intermediate and senior programmes within their functional arena, they can develop significant expertise in other functional areas, in the direction of becoming a Regus expert in all areas of our business toward overall general management. At the end of 2000, we employed 2,615 people: 818 in the UK and Ireland; 908 in the rest of Europe; 512 in the Americas; 254 in the rest of the world; and 123 at Regus headquarters. Above: The Netherlands, Amsterdam - The Atrium Above: Belgium, Brussels - Park Atrium In the US, Intel has chosen Regus to solve a major commute problem for some 300 employees based in Silicon Valley. Regus centres in San Francisco’s financial district and Bay Area at San Ramon are now dedicated to Intel staff “hotdesking” – saving up to four hours commute time daily in some cases. With unemployment below 1% in this part of the US, Intel’s initiative is seen as an innovative way of maintaining staff loyalty. Intel is also a major client at Regus centres in Lima, Kiev, Santiago, Tel Aviv, Stockholm, Brussels and London. In Europe, Regus has launched a pilot scheme with Siemens that sets an exciting precedent for the way companies – and people – work. At Munich Airport, Regus is now running the first of several planned tailor-made business centres in Germany exclusively for Siemens. Further such fully-serviced centres are planned for Erlangen and Berlin, and may also expand to Dusseldorf and Frankfurt. Siemens chose the Regus option because of our flexibility; strength and breadth of international network; market experience; and proven high service standards. 10 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 11 Financial review The Group recorded an operating profit of £12.4 million Revenues (£m) (1999: loss of £43.0 million) on turnover of £421.1 million (1999: £200.6 million). The operating profit is stated before exceptional charges of £9.5 million relating to the Team Member Share Plan. EBITDA after exceptional items for 2000 was £43.5 million (1999: negative £28.1 million). 2 . 0 3 1 0 . 5 1 1 7 . 8 9 2 . 7 7 0 0 1 Q 0 0 2 Q 0 0 3 Q 0 0 4 Q 0 5 1 0 2 1 0 9 0 6 0 3 0 IPO Regus came to the market in October 2000, with a dual listing on the LSE and NASDAQ. The IPO raised £239 million (net), from which we repaid a £100 million senior multi-currency secured loan facility. Regus shares were offered at £2.60 each. At 31 December 2000 the share price stood at £3.62, giving a market capitalisation of more than £2.1 billion and putting us in 121st position in the FTSE 350. Revenue Revenue on a global basis increased 110% to £421.1 million (1999: £200.6 million), with weighted average workstations increasing 69% to 50,333 (1999: 29,777). As a result, total revenue per available workstation (“REVPAW”) increased to £8,367 (1999: £6,737). Revenue from established centres increased 119% to £293.6 million while weighted average workstations in established centres increased 84% to 30,941. Accordingly, REVPAW in established centres increased to £9,488 (1999: £7,990), principally due to an increase in both pricing and occupancy. Revenue from new centres increased 92% to £127.5 million and workstations in new centres increased 49% to 19,392. REVPAW in new centres increased to £6,578 (1999: £5,121) because we opened new centres in higher-priced markets and achieved faster fill rates. Revenue in the UK and Ireland increased 83% to £188.6 million (1999: £102.9 million), with workstations increasing 43% to 17,568. REVPAW increased to £10,736 (1999: £8,350). Year ended 31 December 2000 Year ended 31 December 1999 Results of operations UK and Ireland Rest of Europe Americas Rest of the World Revenue and contribution from centres Established centres New centres Weighted average Revenue Contribution workstations Number £m £m Revenue £m Contribution £m 188.6 118.9 86.5 27.1 421.1 59.6 29.2 13.9 (2.4) 17,568 17,565 10,900 4,300 100.3 50,333 102.9 73.7 15.6 8.4 200.6 Weighted average workstations Number 12,324 12,276 3,218 1,959 20.2 10.8 (6.0) (7.9) 17.1 29,777 Year ended 31 December 2000 Year ended 31 December 1999 Weighted average Revenue Contribution workstations Number £m £m Revenue £m Contribution £m Weighted average workstations Number 293.6 127.5 421.1 92.3 8.0 30,941 19,392 100.3 50,333 134.0 66.6 200.6 41.7 (24.6) 16,772 13,005 17.1 29,777 REVPAW – established centres (£) Centre contribution (£m) Weighted average workstations 4 1 6 , 2 9 5 4 , 2 6 9 1 , 2 7 8 9 , 1 0 0 1 Q 0 0 2 Q 0 0 3 Q 0 0 4 Q 0 0 0 , 3 0 0 5 , 2 0 0 0 , 2 0 0 5 , 1 0 0 0 , 1 0 0 5 0 0 . 7 2 9 . 2 2 6 . 5 1 7 . 1 1 1 . 1 - 5 . 0 1 4 . 7 3 . 6 0 0 1 Q 0 0 2 Q 0 0 3 Q 0 0 4 Q 0 3 5 2 0 2 5 1 0 1 5 0 5 - 3 6 2 , 5 2 7 0 0 , 7 2 3 0 8 , 4 2 2 8 8 , 2 2 0 0 6 , 4 2 3 1 1 , 9 1 0 0 1 Q 0 0 2 Q 0 0 3 Q 0 0 4 Q 8 1 4 , 6 2 7 4 2 , 1 3 0 6 0 5 0 4 0 3 0 2 0 1 0 Established New Established New In mainland Europe, revenue increased 61% to £118.9 million (1999: £73.7 million), with workstations increasing 43% to 17,565. REVPAW increased to £6,771 (1999: £6,004). Revenue in the Americas increased 455% to £86.5 million (1999: £15.6 million), primarily as a result of a 239% increase in workstations. Revenue in the Rest of the World increased 224% to £27.1 million (1999: £8.4 million), primarily as a result of a 119% increase in workstations. Centre contribution (gross profit) Centre contribution on a global basis increased 486% to £100.3 million (1999: £17.1 million). This increase is principally as a result of a 110% increase in revenue, offset in part by a 75% increase in cost of sales to £320.8 million (1999: £183.5 million). In our most important markets, particularly the UK, western Europe and the US, there was strong demand which resulted in new centres filling more quickly, in opportunities for price increases and in comparatively high levels of occupancy. Contribution from established centres increased 122% to £92.3 million, primarily as a result of an 84% increase in workstations, to 30,941. The contribution margin (contribution as a percentage of revenue) from established centres remained stable at 31%. Contribution from new centres increased to £8.0 million (1999: loss of £24.6 million), reflecting our strategy of focusing our new centre opening programme on countries in which we already operate. As a result, start-up costs of new centres were substantially reduced. Centre contribution in the UK and Ireland increased 196% to £59.6 million (1999: £20.2 million). Contribution margin in the UK and Ireland increased to 32% (1999: 20%), primarily as a result of higher occupancy and prices. The UK and Ireland continue to benefit from favourable economic conditions and a comparative shortage of office space, particularly in central London. Centre contribution in mainland Europe increased 170% to £29.2 million, with margin increasing to 25% (1999: 15%). By focusing on opening new centres only in countries where we had existing centres, the region benefited from reduced start- up costs compared with the previous year, as well as from particularly strong markets in western European capital cities. Contribution in the Americas increased to £13.9 million (1999: loss of £6.0 million). This was principally attributable to the maturing of existing centres. Losses in the Rest of the World decreased to £2.4 million (1999: loss of £7.9 million), primarily as a result of reducing the number of new centre openings from 13 in 1999 to nine in 2000. Administrative expenses Total administrative expenses increased 45% to £86.9 million, largely as a result of our substantial investment in sales, marketing and administrative infrastructure needed to support our expanding network. As a percentage of revenues, however, administrative expenses decreased to 21% for the year (1999: 30%), reflecting increased efficiencies arising from our strategy of focusing on countries and markets in which we had existing operations. Sales and marketing costs increased 28% to £43.5 million (1999: £34.0 million). Regional and central overheads increased 66% to £43.4 million (1999: £26.1 million). This was principally attributable to an increase in the number of employees in our headquarters and regional network, from 258 in 1999 to 292 in 2000. 12 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 13 Financial review continued Revenues (£m) 2 . 7 7 2 . 0 3 1 0 . 5 1 1 7 . 8 9 0 0 1 Q 0 0 2 Q 0 0 3 Q 0 0 4 Q 0 5 1 0 2 1 0 9 0 6 0 3 0 Exceptional item The £9.5 million exceptional item relates to the costs associated with the reduction of the exercise price of the Reward Options granted in the Team Member Share Plan. The original exercise price was £1.455 per share, which was written down to £0.05 per share following the successful IPO. Net interest payable Interest payable is principally affected by the interest payable on our £100 million senior multi- currency secured loan facility. This facility was repaid from the proceeds of the IPO. Interest income comprised interest on cash held in deposits generated from organic growth of our business and the excess portion of debt drawn down from our multi-currency secured loan facility. Tax on loss on ordinary activities Despite our overall loss-making position in 1999 and 2000, we provided for tax liabilities in both periods. The principal reason for this was that tax liabilities were incurred on profits arising in the UK, Ireland, Italy, Luxembourg, The Netherlands, Belgium, France, Switzerland and Spain. These taxable profits could not, however, be offset by tax losses in all other countries where we operate. The majority of our operating companies have tax losses available to carry forward against future profits. In some countries, there are time restrictions on the carry forward of such losses. Cash flow Operating cash flow before exceptional items was £117.9 million (1999: £17.7 million). Increased trading levels resulted in net working capital inflows of £71.9 million in the year. Capital expenditure increased to £111.7 million, of which £88.1 million was funded from cash resources and the balance through finance leases. After repaying the £100 million multi-currency secured loan facility the net proceeds of the IPO were £139.0 million. Treasury policy The Group’s treasury policy seeks to ensure that adequate financial resources are available for the development and growth of its operations while managing its currency, interest rate and counter- party risks. Group Treasury strategy and policy is developed centrally with subsidiary companies operating within a framework of controls approved by the Board. We do not engage in speculative transactions. Our policy on the major areas of treasury activity is set out below. Currency translation The results of the Group’s foreign subsidiaries are translated into Sterling at the average exchange rates for the period concerned. The balance sheets of foreign subsidiaries are translated into Sterling at the closing exchange rates. Any gains and losses resulting from the translation are recorded in reserves where they are matched with the gains and losses on borrowings, foreign exchange contracts, currency swaps or currency options, used to hedge the net assets of subsidiaries. Group Treasury makes proposals to a committee of the Board each quarter on hedging its foreign assets in this way. EBIT before exceptional items (£m) EBITDA before exceptional items (£m) Overheads (% of revenues) 0 . 9 6 . 7 8 . 2 0 0 1 Q 0 0 2 Q 0 0 3 Q 0 0 4 Q 0 . 7 - 0 1 8 6 4 2 0 2 - 4 - 6 - 2 1 - 0 . 8 1 5 . 2 1 0 0 1 Q 6 . 0 0 0 2 Q 0 0 3 Q 0 0 4 Q 5 2 9 . 1 2 0 2 5 1 0 1 5 0 0 3 5 2 0 2 5 1 0 1 5 0 2 . 9 8 . 2 1 3 . 9 5 . 0 1 0 . 0 1 1 . 9 0 . 2 1 8 . 9 0 0 1 Q 0 0 2 Q 0 0 3 Q 0 0 4 Q Sales/marketing General/administrative Interest rate risk The Group’s current policy is to borrow and invest surplus funds on a floating rate basis. Group Treasury is, however, currently undertaking a review of policy in light of the increase in surplus funds resulting from the IPO and the potential arrangement of debt facilities in 2001. This will consider the appropriateness of fixing interest rates using forward rate or interest rate swap agreements. Finance systems During 2000, we began the global implementation of PeopleSoft financial software. At the core of our e-business strategy, PeopleSoft will bring benefits in training, speed of processing and data analysis. We aim to have upgraded worldwide to the fully web-enabled PeopleSoft Version 8 by the end of 2001. Hyperion Enterprise was maintained as the Group’s financial reporting software and continued to be developed. Towards the end of the year we embarked on the development of a global budgeting and forecasting system using Applix software, to be used in conjunction with Hyperion Enterprise. Applix will be rolled out across the Group by March 2001 and is expected to bring greater flexibility, accuracy and speed of production to the forecasting and budgeting process. Currency transaction exposures Currency transaction exposure arises where sales and purchases are transacted by a business unit in a currency other than its own functional currency. The majority of the Group’s businesses, however, sell to clients and pay suppliers in their local markets in their own functional currencies and therefore have limited transaction exposure. Where this is not the case, it is our policy to cover material transactions as soon as they are committed and to use forward currency contracts to do so. Funding and deposits The Group is currently net cash positive, with substantial cash balances. During the year, the major debt facility was repaid in full and cancelled on receipt of proceeds from the successful IPO. Outstanding borrowings comprise office equipment financed through finance and operating leases and specific loans from certain property owners advanced on commercial terms. Wherever possible, these borrowings are matched to the local currency of the borrower or, in the case of lease finance, to the life of the asset financed. During 2001 we will arrange sufficient bank credit facilities on normal commercial terms to provide further liquidity or capital for growth. Surplus funds are deposited in investment grade instruments that carry low credit risk and which are readily realisable in major currencies. Counter-party risk The Group actively manages its relationships with a panel of high-quality financial institutions. Cash assets, borrowings and other financial instruments are distributed against predetermined limits approved by the Board to control exposure to any particular institution. 14 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 15 Directors and advisers Auditors KPMG Audit Plc St James’ Square Manchester M2 6DS Legal advisers to the Company as to English law Slaughter and May 35 Basinghall Street London EC2V 5DB Legal advisers to the Company as to US law Davis Polk & Wardwell 99 Gresham Street London EC2V 7NG Stephen Stamp Group Finance Director, age 39 Mr Stamp joined Regus in January 2000 from Shire Pharmaceuticals Group plc, where he was Group Finance Director. Prior to joining Shire in 1994, he was an assistant director of corporate finance at Lazard Brothers and before that spent four years at KPMG London, qualifying as a chartered accountant in 1987. He is also a non-executive director of Enact Pharma plc. John Matthews Non-executive Director, age 55 Appointed in 1995. He is also a director of Crest Nicholson plc (Chairman), Perry Group plc (Deputy Chairman), Rotork plc and several private companies. A chartered accountant, he has held senior executive positions in investment banking and in industry. He is Chairman of the audit committee and remuneration committee, and a member of the nomination committee. Robert Kuijpers Non-executive Director, age 62 Appointed in September 1999, Mr Kuijpers is Chief Executive Officer of DHL Worldwide Express. Prior to joining DHL in 1988, he was with H J Heinz in a number of positions, latterly as Managing Director for continental Europe. Before this, he held a number of positions in sales and marketing. Mr Kuijpers is a Dutch citizen, resident in Belgium. He is a member of the audit, nomination and remuneration committees. Roger Orf Non-executive Director, age 47 Managing Director and founding partner of Pelham Partners, a property investment and advisory company. Since that time Pelham Partners, working closely with Apollo Real Estate Advisors, has invested more than US$400 million of equity in 14 European countries. Prior to 1995 Mr Orf was in charge of Goldman Sachs’ European real estate department. Bankers NatWest Bank Plc 1 Princes Street London EC2R 8PB Financial advisers and stockbrokers Merrill Lynch International Ropemaker Place 25 Ropemaker Street London EC2Y 9LY Registrars Capita IRG Plc Bourne House 34 Beckenham Road Kent BR3 4TU Registered office and headquarters 3000 Hillswood Drive Chertsey Surrey KT16 0RS Website www.regus.com Registered number 3548821 The Board, from left to right: Rudy Lobo, Robert Kuijpers, Stephen Stamp, George Gray, Mark Dixon, John Matthews, Roger Orf George Gray Non-executive Chairman, age 62 Dr Gray was appointed as a non-executive director of Regus in August 1999. From 1987 until recently, he was Executive Chairman of Serco Group plc. He was appointed Chairman of Serco on completion of the management buy out from RCA. He is also a non-executive director of Misys plc. He is a member of the audit committee and remuneration committee and Chairman of the nomination committee. Mark Dixon Chief Executive, age 41 Founder of Regus. His vision of the future coupled with his entrepreneurial skill and drive have been responsible for the Group’s dynamic growth over the past ten years. He is recognised as a major contributor to the growth of the serviced office industry. He is a member of the nomination committee. Rudy Lobo Executive Director and Company Secretary, age 44 Mr Lobo joined Regus eight years ago and was previously Group Finance Director. He is responsible for commercial issues, risk management and legal services, and has responsibility for directing Regus’ IT and e-business strategy. Previously, Mr Lobo was the Group Company Secretary of Medicom International Ltd, a publisher of medical journals, and a director of several of its subsidiaries. 16 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 17 Directors’ report The directors present their report and the audited financial statements of Regus plc for the year ended 31 December 2000. Principal activities The Group is engaged in the provision of fully-serviced business centres. The Chairman’s statement, the Review of operations and the Financial review on pages 4 to 15 describe the principal activities of the Group during 2000. Business review and future developments In October 2000, the Group successfully floated on the London Stock Exchange and NASDAQ. The loss on ordinary activity before taxation for the year ended 31 December 2000 was £3.9 million (1999: loss £54.9 million). An indication of future developments is given in the Chairman’s statement. Change of name On 18 July 2000, the Company changed its name from Regus Business Centres plc to Regus plc. Dividends No dividend is proposed (1999: £nil). Directors and directors’ interests The directors who held office during the year were : M L J Dixon S A Stamp (appointed 7 January 2000) R J G Lobo J W Matthews R G Orf G G Gray R M Kuijpers P L Jenkins (resigned 7 January 2000) Statement of directors’ responsibilities Company law requires the directors to prepare financial statements for each financial period which give a true and fair view of the state of affairs and of the profit or loss of the Company and Group for that period. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and estimates that are reasonable and prudent; • state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and Group and to enable them to ensure that the financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and of the Group and to prevent and detect fraud and other irregularities. Substantial shareholdings The Company has been notified of the following holders of 3% or more of its issued share capital for the purposes of Section 198 of the Companies Act 1985, as at 26 February 2001: Paramount Nominees Ltd1 Chase Nominees Ltd HSBC Trustee (Jersey) Ltd2 Mourant and Co Trustees Ltd3 355,329,286 24,406,380 23,140,000 18,120,670 61.19% 4.20% 3.99% 3.12% 1 The beneficiary is Maxon Investments BV. M L J Dixon owns 100% interest in Maxon (page 24). Details of the directors’ interests and shareholdings are given in the Remuneration report on pages 22 to 24. 2 The beneficiary of half of this holding is R J G Lobo (page 24). In accordance with the Articles of Association, M J Dixon, R J G Lobo and J W Matthews retire by rotation and, being eligible, offer themselves for re-election at the Annual General Meeting. Employees It is the Group’s policy to communicate with all employees and to encourage them to take a wider interest in the affairs of their employing company and the Group. This is done in a variety of ways, including electronic media, in-house journals, bulletins and briefing sessions. The health and safety of employees is of paramount importance. Safety awareness is actively promoted in the working environment and is reviewed from time to time, in the light of good practice and developing legislation, in all businesses worldwide. The Group is committed to the principle of equal opportunity in employment, regardless of a person’s race, creed, nationality, sex, age, marital status or disability. Employment policies are fair, equitable and consistent with the skills and abilities of the employees and the needs of the Group’s businesses. These policies ensure that everyone is accorded equal opportunity for recruitment, training and promotion. Where an employee becomes disabled while employed by a Group company, every effort is made to enable that person to continue in employment. The number of employees and their remuneration are set out in note 5 to the financial statements. Political and charitable donations The Group made no political contributions in either 2000 or 1999. Donations to UK charities amounted to £18,190 (1999: £16,000). Payment of creditors It is the policy of the Group to agree terms of payment for its business transactions with its suppliers. Payment is then made in accordance with these, subject to the terms and conditions being met by the supplier. The Company does not follow any code or standard on payment practice. The Company has no trade creditors. 3 These shares are held by Regus Employee Trust (note 10). Introduction of the Euro The directors are aware of the potential impact of the introduction of the Euro and an action plan is in place. The effects on the business are not expected to be significant and costs will be expensed to the profit and loss account when incurred. Auditors Pursuant to Section 384 of the Companies Act 1985, a resolution for the re-appointment of KPMG Audit Plc as auditors of the Company is to be proposed at the forthcoming Annual General Meeting. By order of the Board 26 February 2001 R J G Lobo Company Secretary 3000 Hillswood Drive Chertsey Surrey KT16 0RS United Kingdom 18 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 19 Corporate governance The Board of Directors is committed to maintaining the highest standards of corporate governance in line with the Combined Code, issued by the London Stock Exchange in 1998, which sets out the Principles of Good Governance and the Code of Best Practice. A summary of the Company’s procedures for applying the principles and the extent to which the provisions of the Combined Code have been applied are set out below. Board composition The Board currently comprises three executive directors, three independent non–executive directors, including a non-executive chairman and Mr R G Orf who, by virtue of his interest in the share capital of the Company (as described in the Remuneration report) is not an independent non-executive director. The Chairman of the audit committee, currently Mr J W Matthews, has acted as senior independent director since 1995. The Board schedules seven meetings each year, but arranges to meet at other times, as appropriate. It has a formal schedule of matters specifically reserved for its decision and approval. The Board is supplied with appropriate and timely information to enable it to discharge its duties and requests additional information or variations to regular reporting as it requires. A procedure exists for directors to seek independent professional advice at the Company’s expense in the furtherance of their duties, if necessary. In addition, appropriate training is made available for all new directors to assist them in the discharge of their responsibilities. All directors have access to the advice and services of the Company Secretary, who is responsible for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. While all directors are expected to bring an independent judgment to bear on strategy, performance, resources (including key appointments) and standards of conduct, the independent non-executive directors were selected and appointed for this purpose. All directors submit themselves for re-election at least every three years and directors appointed during the period are required to seek re-election at the next AGM. The independent non-executive directors understand that the Board will not automatically recommend their re-election. Board committees The Board has a number of standing committees, which all have written terms of reference setting out their authority and duties: Audit committee – the members of this committee are Mr J W Matthews (Chairman), Dr G G Gray and Mr R M Kuijpers (all independent non-executive directors). The audit committee meets as required, but not less than four times a year. Its responsibilities, in addition to those referred to under Internal Control, include a critical review of the annual and interim financial statements (including the Board’s statement on internal control in the annual report) prior to their submission to the Board for approval, when a report from the committee is also given. The committee also reviews the scope and results of the external audit and its cost effectiveness and the independence and objectivity of the auditors. Although other directors, including the Group Finance Director, attend audit committee meetings, the committee can meet for private discussions with the internal and external auditors. Nomination committee – the members of this committee are Dr G G Gray (Chairman), Mr J W Matthews, Mr R M Kuijpers (all independent non-executive directors), and Mr M L J Dixon. The committee meets as required but not less than once a year. Its responsibilities include reviewing the Board structure, size and composition, nominating candidates to the Board to fill Board vacancies when they arise and recommending directors who are retiring by rotation to be put forward for re-election. Remuneration committee – the members of this committee are Mr J W Matthews (Chairman), Dr G G Gray and Mr R M Kuijpers (all independent non-executive directors). A statement setting out the role and responsibility of this committee and the Group’s remuneration policy is shown on pages 22 to 24. From the end of March 2001 Mr R M Kuijpers stepped down as a non-executive director and no longer serves on the committees above. Going concern After making appropriate enquiries, the directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going-concern basis in preparing the financial statements. Internal control The Board acknowledges its overall responsibility for the Group’s system of internal control and for reviewing its effectiveness on a timely basis. The internal control processes have been designed to identify, evaluate and manage the key risks that the Group encounters in pursuing its objectives. Internal control processes encompass all controls, including financial, operational and compliance controls and risk management. Such a system is, however, designed to manage rather than eliminate the risk of failure to achieve business objectives, and cannot provide absolute assurance against material misstatement. Board in the context of the Group’s overall objectives. The control framework and key procedures in place throughout the year ended 31 December 2000 are: • The executive directors (“the Group executive”) normally meet monthly together with certain other senior executives to consider Group financial performance, business development and Group management issues. Directors of key operating companies meet regularly to manage their respective businesses. • Major business risks and their financial implications are appraised by the executives responsible as part of the budget process and are endorsed by regional management. Key risks are reported to the Board and the audit committee. The appropriateness of controls is considered by the executives, having regard to cost/benefit, materiality and the likelihood of risks crystallising. • Country and regional budgets, containing financial and operating targets, capital expenditure proposals and performance indicators, are reviewed by the Group executive and must support regional business strategies. • Monthly reports on Group and regional performances are provided to the Group executive. Quarterly summaries and forecasts are presented to the Board and discussed at Group Board meetings. Performance against budgets and objectives is reviewed with regional management, as are forecasts and material sensitivities. The Board regularly receives reports from key executives and functional heads on matters such as forecasts, business development, strategic planning, legal and corporate. • Appropriate delegated authority levels are in force across the Group which prescribe the limits to which it can be committed. • A Group-wide policy governs appraisal and approval of investment expenditure and asset disposals. Post-investment audits are undertaken. • Other key policies and control procedures (including finance, operations and health and safety), which have Group-wide application, are available to all staff on web-based systems. Since the IPO on 17 October 2000, the Group has strengthened its internal audit function, co-sourced with Arthur Andersen, which reports to management on the Group’s worldwide operations. Its programme of work and its findings, including any material control issues and resultant actions, are reviewed by the audit committee. To underpin the effectiveness of controls, it is the Group’s policy to recruit and develop appropriately skilled management and staff of high calibre and integrity. High standards of business ethics and compliance with laws, regulations and internal policies are demanded from staff at all levels. Communications with shareholders A regular programme of meetings with major institutional shareholders is planned in order to communicate the Group’s performance and prospects. In addition, presentations will be made four times a year after the announcement of results, the details of which, together with Group financial reports and announcements, will be accessible via the Group’s internet site. The Company corresponds regularly on a range of subjects with its individual shareholders who have an opportunity to question the Board, as well as the Chairman of the audit and remuneration committees, at the Annual General Meeting. Compliance statement Since obtaining a listing on 17 October 2000, the Company has complied with the provisions set out in Section 1 of the Code of Best Practice prepared by the Committee on Corporate Governance and published in June 1998 (“the Combined Code”) except for the requirement of provision D2.1 of the Code (according to the Guidance notes issued to directors by the Turnbull working party issued in September 1999). This Code provision states that the directors should, at least annually, conduct a review of the effectiveness of the Group’s system of internal controls and should report to shareholders that they have done so. The review should cover all controls, including financial, operational and compliance controls and risk management. The following procedures will enable the Company to report full compliance for 2001 but were not in place throughout the year ending 31 December 2000: • Throughout 2001, an ongoing process for the formal identification of the Company’s significant risks and mitigating control processes will be in place. • An embedded system of reporting the effectiveness of controls (and, where relevant, management’s actions in response to any observed weaknesses) will be established during the first quarter of 2001. • A multi-disciplinary Group risk forum, chaired by Mr R Lobo, has been established to report to the Board on a quarterly basis from the first quarter of 2001. It will consider all aspects of risk management and, through its reports, will enable the Board to assess regularly the overall effectiveness of the Group’s system of internal control. The main Board conducted an in-depth review of the Group’s strategy prior to the Initial Public Offering on 17 October 2000 and it continues to conduct regular reviews of the Group’s strategic direction. Country and regional strategic objectives, quarterly plans and performance targets for 2001 and beyond have been set by the executive directors and are regularly reviewed by the main For the period prior to 17 October 2000, the Group complied with the remaining provisions of the Combined Code except for: • the requirement to re-elect directors at least every three years (provision A6.2); and • the establishment of an Audit Committee (provision A3.1). 20 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 21 Remuneration report The remuneration committee The remuneration committee is chaired by Mr J W Matthews and its other members are Dr G G Gray and Mr R M Kuijpers. All members of this committee are independent non-executive directors. The Group Chief Executive and/or other directors may be invited to attend some meetings of the committee in an advisory capacity as the committee considers appropriate. The committee will consider all material elements of remuneration policy, remuneration and incentives of executive directors and senior management with reference to independent remuneration research and professional advice in accordance with the Combined Code on Corporate Governance, and will make recommendations to the Board of Directors on the framework for executive remuneration and its cost. The Board of Directors is then responsible for implementing the recommendations and agreeing the remuneration package of individual directors. Directors are not permitted, under Regus’ Articles of Association, to vote on their own terms and conditions of remuneration. The committee does not make recommendations on the remuneration of non-executive directors, which is a matter solely for the full Board. The members of the remuneration committee attend the Company’s Annual General Meeting and are available to answer shareholders’ questions about directors’ remuneration. Remuneration policy Remuneration policy centres on ensuring that remuneration packages are sufficiently competitive to attract, retain and motivate the right calibre of executive directors and senior management. Incentive payments are conditional upon demanding performance criteria so as to align incentive awards paid to directors directly with the interest of shareholders. The remuneration committee uses the services of external consultants to help it agree appropriate packages reflecting the remuneration policy. The constituent parts of those packages are set out in the following paragraphs. Basic salary and benefits Salaries are reviewed annually and determined by the committee, taking into account the performance of the individual directors over the previous 12 months and the pay and employment conditions elsewhere in the Group. The committee also uses information provided by external consultants relating to the rates of pay for similar positions in comparable companies. Any increases in basic salary are effective from 1 January in each year. The remuneration table included within this report also shows benefits received in 2000. The main benefits relate to the provision of company cars and the provision of private medical insurance for the director and his immediate family. Annual performance bonus Under the annual bonus scheme the executive directors are entitled to an annual bonus of up to 40% of their basic salary, which is payable provided the budget targets for the relevant financial year are achieved. Long-term incentive plan Other than share options, the executive directors do not participate in any of the long-term incentive plans offered to senior management. Share options The Group believes that share ownership by employees, including the executive directors, strengthens the link between their personal interests and those of ordinary shareholders. Regus has established a number of employee share plans, including the Regus Team Member Share Plan, a replacement plan known as the Regus Global Share Plan and the Regus International Sharesave Plan. As at 26 February 2001 no options had been granted to executive directors, other than those detailed in the table of directors’ interests at the end of this report. During 1999 the Group established the Regus Employee Trust. The Trust is a discretionary trust for the benefit of employees, including executive directors. The Trust may issue shares to the Group’s employees (including directors) at the discretion of the Company. The Trust has purchased some of the shares in the Company which would be required if participants were entitled to exercise the maximum number of options outstanding under the share option plans. Pensions The executive directors participate in the Company’s Money Purchase (Personal Pension) Scheme. The Company matches employee contributions up to a maximum of 10% of basic salary. The main benefits to executive directors, who contribute a percentage of their gross salaries to the scheme, are: • A pension, based on the value of fund built up from personal contributions, at any age between 50 and the normal pension age of 65; • A tax-free cash sum, payable when taking the benefits; • Life assurance cover based on the level of contributions with the opportunity to purchase additional cover, subject to Inland Revenue limit of 5% of net relevant earnings; and • Pension to spouse payable on death. All executive directors are subject to the Inland Revenue cap on the amount of salary which may be treated as pensionable. Service contracts On 1 July 2000 Mr M L J Dixon, Mr R J G Lobo and Mr S A Stamp entered into full-time rolling service agreements with Regus Management Limited. These are terminable by either party giving not less than 12 months’ notice to the other party or automatically on the respective directors reaching the age of 65. Dr G G Gray, Mr R M Kuijpers, Mr J W Matthews and Mr R G Orf, as non-executive directors, have been appointed pursuant to letters of appointment dated 2 September 1999 (as amended by letters of amendment dated 30 November 1999 and 21 September 2000), 4 October 1999, 26 October 1999 and 29 August 2000 respectively. These appointments are for three years, terminable on three months’ notice by the Company or the directors. Directors’ remuneration table Salary/ fees £000 300.0 4.6 150.0 145.0 34.5 25.0 25.0 1.7 Bonus £000 Benefits £000 Total remuneration 2000 £000 Total remuneration 1999 £000 Pension scheme contributions 2000 £000 Pension scheme contributions 1999 £000 127.0 – 67.0 65.0 – – – – 21.0 0.2 8.3 13.8 – – – – 448.0 4.8 225.3 223.8 34.5 25.0 25.0 1.7 384.8 208.7 – 181.1 20.8 6.3 21.3 – 28.0 – 10.5 9.6 – – – – 56.0 0.9 – 7.7 – – – – 685.8 259.0 43.3 988.1 823.0 48.1 64.6 Executive Mark Dixon1 Peter Jenkins* Stephen Stamp1 Rudy Lobo1 Non-executive George Gray Robert Kuijpers John Matthews Roger Orf * Former director 1 In addition to the annual bonus of 40% of their basic salary, the directors indicated received a one-off bonus of $10,000 each. This was approved by the remuneration committee. 22 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 23 Remuneration report continued Auditor’s report to the members of Regus plc Directors’ shareholdings Mark Dixon1 Rudy Lobo Stephen Stamp George Gray (Chairman) Robert Kuijpers John Matthews Roger Orf 2 * Or at date of appointment if later. Ordinary shares Beneficial holdings 31 December 2000* Ordinary shares Beneficial holdings 31 December 1999* 355,329,286 38,462 384,615 38,462 – 10,385 8,583,844 358,598,516 – – – – – 8,953,844 1 Mr Dixon’s beneficial ownership of shares is calculated by attributing to him all shares owned by Maxon Investments BV, an entity in which Mr Dixon holds a 100% beneficial ownership interest. 2 Mr Orf’s beneficial ownership of shares is calculated by attributing to him all shares, including options, owned by AP Pelham Partners X1 LLC, an affiliate of Apollo Real Estate Investment Fund 111 LP. Mr Orf, as a director of AP Pelham Partners X1 LLC, exercises shared investment and voting powers over shares held by AP Pelham Partners X1 LLC. Directors’ share options Rudy Lobo Stephen Stamp Option type 31 December 1999 Granted during 2000 31 December 2000 Exercise price – 266,179 A – 283,503 A – B 11,570,000 – C 4,003 – 2,790,203 A 4,003 – C 266,179 283,503 11,570,000 4,003 2,790,203 4,003 5.0p 145.5p 0.375p 242.0p 145.5p 242.0p Date from which exercisable 1/1/03 1/1/03 31/12/03 1/1/04 7/1/03 1/1/04 Expiry date 31/12/09 31/12/09 – 1/7/04 7/1/10 1/7/04 A Awarded under the Regus Team Member Share Plan for nil consideration. The Board of Directors has the discretion to waive some or all of the exercise price. The grant to Mr Stamp is subject to higher performance targets. B Awarded to Mr Lobo by Maxon pursuant to an agreement dated 17 September 1999 recording the terms of an agreement entered into on 11 November 1992 between Mr Lobo and Maxon, as amended on 30 June 2000. These shares are currently held by HSBC Trustees (Jersey) Limited and will not be capable of exercise before 31 December 2003 other than in defined circumstances (which include the discretion of Maxon). The shares subject to the option are transferable to Mr Lobo upon payment to Maxon of an exercise price of £45,000, which is equivalent to the market value of the relevant shares at the time the parties entered into the option arrangements. C Awarded under the Regus International Sharesave Plan, the maximum monthly contribution for which may not exceed the amount permitted by the Income and Corporation Taxes Act 1988. Summary particulars of the Group’s share option schemes are given in note 21 on page 49. The market price of the shares at 31 December 2000 was 362p and the range since 17 October, the date of the IPO, was 277p to 376p. None of the directors had a beneficial interest in any contract of significance in relation to the business of the Company or its subsidiaries at any time during the financial year. There has been no change in the directors’ shareholdings (all of which are beneficial) and their share options between the year end and 26 February 2001. We have audited the financial statements on pages 26 to 54. Respective responsibilities of directors and auditors The directors are responsible for preparing the annual report. As described on page 19 this includes responsibility for preparing the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board, the Listing Rules of the Financial Services Authority and by our profession’s ethical guidance. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the directors’ report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and transactions with the group is not disclosed. We review whether the statement on pages 20 to 21 reflects the company’s compliance with the seven provisions of the Combined Code specified for our review by the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures. We read the information contained in the annual report, including the corporate governance statement, and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2000, and of the loss of the Group for the year then ended, and have been properly prepared in accordance with the Companies Act 1985. KPMG Audit Plc Chartered Accountants Registered Auditor 26 February 2001 24 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 25 Consolidated profit and loss account for the year ended 31 December 2000 Balance sheets as at 31 December 2000 12 months to 31 Dec 2000 £’000 12 months to 31 Dec 1999 £’000 Note Group 31 Dec 2000 £’000 Group 31 Dec 1999 £’000 Company 31 Dec 2000 £’000 Company 31 Dec 1999 £’000 Note Turnover (including share of joint ventures) Less: share of turnover of joint ventures Turnover Cost of sales (centre costs) Gross profit (centre contribution) Administration expenses before exceptional items Exceptional items Administration expenses after exceptional items Group operating profit/(loss) Share of operating loss in joint ventures Total operating profit/(loss): Group and share of joint ventures Net interest payable and other similar charges Loss on ordinary activities before tax Tax on loss on ordinary activities Loss on ordinary activities after tax Equity minority interests Retained loss for the financial year Loss per ordinary share: Basic (p) Diluted (p) Basic (p)* Diluted (p)* * Before exceptional items All results arose from continuing operations. 1 1 1 3 1 6 2 7 18 8 429,200 (8,075) 200,610 (9) 421,125 200,601 (320,832) (183,487) 100,293 17,114 (86,859) (9,501) (60,054) (5,125) (96,360) (65,179) 3,933 (1,027) 2,906 (6,763) (3,857) (9,926) (48,065) (92) (48,157) (6,782) (54,939) (1,524) (13,783) (56,463) 253 (13,530) 17 (56,446) (2.7) (2.6) (1.1) (1.1) (12.0) (12.0) (11.3) (11.3) Fixed assets Tangible assets Investments Investments in subsidiaries Investment in own shares Interest in joint ventures: Share of gross assets Share of gross liabilities Total investments Current assets Stocks Debtors Cash at bank and in hand Creditors: amounts falling due within one year Net current (liabilities)/assets Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Net assets/(liabilities) Capital and reserves Called-up share capital Share premium account Other reserves Profit and loss account Equity shareholders’ funds/(deficit) Equity minority interests 9 10 10 10 11 12 13 15 16 17 18 18 193,453 125,571 – – – – 5,631 – 5,631 – – 47,021 13,601 (9,461) 4,140 51,161 1,361 (155) 1,206 1,206 – – – 5,631 5,631 244,614 126,777 279 129,677 169,821 244 69,183 72,100 299,777 (317,883) 141,527 (189,860) – 202,466 98,387 300,853 (15,493) (18,106) (48,333) 285,360 226,508 78,444 290,991 (23,050) (102,350) (794) – – – – – – 5,631 5,631 – 43,932 18,466 62,398 (3,552) 58,846 64,477 – – 202,664 (23,906) 290,991 64,477 29,034 279,858 615 (106,417) 203,090 (426) 24,061 46,283 606 (94,681) (23,731) (175) 29,034 279,858 5,531 (23,432) 290,991 – 202,664 (23,906) 290,991 24,061 46,283 5,531 (11,398) 64,477 – 64,477 The financial statements on pages 26 to 54 were approved by the Board of Directors on 26 February 2001 and were signed on its behalf by: Mark Dixon Chief Executive Stephen Stamp Group Finance Director 26 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 27 Consolidated cash flow statement for the year ended 31 December 2000 Consolidated statement of total recognised gains and losses for the year ended 31 December 2000 Note 19(a) 19(a) Cash inflow from continuing operating activities Net cash inflow before exceptional items Outflow related to exceptional item Net cash inflow from continuing operating activities Returns on investments and servicing of finance Interest received Interest paid Interest paid on finance leases Debt arrangement fees paid Taxation Tax paid Capital expenditure Purchase of tangible fixed assets Sale of tangible fixed assets Purchase of own shares Acquisitions and disposals Investment in joint ventures Cash outflow before management of liquid resources and financing Management of liquid resources Financing 19(b) 19(b) 12 months to 31 Dec 2000 £’000 12 months to 31 Dec 1999 £’000 117,899 – 117,899 3,851 (7,993) (2,861) – (7,003) (2,224) (2,224) 17,731 (3,370) 14,361 1,287 (3,575) (2,943) (1,500) (6,731) (969) (969) (88,078) 1,506 (42,500) (76,024) 311 – (129,072) (75,713) (3,789) (3,789) (24,189) (78,712) 118,766 (1,296) (1,296) (70,348) (16,519) 96,979 Increase in cash in the period 19(c)(d) 15,865 10,112 Loss for the financial year Exchange differences Tax charge on exchange differences Total recognised losses for the year Reconciliation of movements in Group shareholders’ funds Loss for the financial year Net proceeds of ordinary shares issued Exchange differences Tax charge on exchange differences Net increase/(decrease) in shareholders’ funds Shareholders’ (deficit)/funds at 1 January Shareholders’ funds/(deficit) at 31 December 12 months to 31 Dec 2000 £’000 12 months to 31 Dec 1999 £’000 (13,530) 2,675 (872) (56,446) (1,160) – (11,727) (57,606) 12 months to 31 Dec 2000 £’000 12 months to 31 Dec 1999 £’000 (13,530) 238,548 2,675 (872) 226,821 (23,731) (56,446) 20,000 (1,160) – (37,606) 13,875 203,090 (23,731) 28 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 29 Accounting policies 1 Description of business Regus plc (the “Company”), formerly Regus Business Centres plc, and its consolidated subsidiaries (the “Group”) are engaged in the provision of fully serviced business centres offering clients a mix of workstations, conference rooms and related support services. The Group operates an international network of business centres and is divided into four geographic regions, UK and Ireland, Rest of Europe, Americas and Rest of World. Maxon Investments BV (“Maxon”) is the ultimate parent company and M L J Dixon, the Chief Executive of the Company, has an effective controlling interest in the equity shares of the Company via Maxon. 2 Basis of preparation The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United Kingdom (“UK GAAP”), under the historical cost convention. These principles differ in certain significant respects from generally accepted accounting principles in the United States (“US GAAP”). Application of US GAAP would have affected shareholders’ funds/(deficit) and results of operations at and for the years ended 31 December 1999 and 2000, to the extent summarised in note 27. The preparation of financial statements in conformity with UK GAAP and US GAAP requires management to make estimates and assumptions that reflect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses for an accounting period. Such estimates and assumptions could change in the future as more information becomes known or circumstances change, such that the Group’s results may differ from the amounts reported and disclosed in the financial statements. The following principal accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group’s financial statements. 3 Basis of consolidation The financial statements have been prepared using the merger accounting principles contained in FRS 6, Acquisitions and Mergers, in relation to the Group reorganisation which comprised the addition on 23 July 1998 of a new Group holding company, Regus plc, above the previous one, Regus Business Centre BV. Under merger accounting, the results and cash flows of the two companies are combined as though the structure was in place from 1 January 1997. Profit and loss and balance sheet comparatives are shown on the combined basis and adjustments have been made where necessary to adopt accounting policies consistent with UK GAAP rather than Dutch GAAP as used by the previous holding company. The consolidated financial statements incorporate the financial statements of the Company and all its subsidiary undertakings which are more than 50% owned subsidiaries. Subsidiary undertakings not more than 50% owned, including 50% owned joint ventures, are accounted for under the gross equity method and included in interest in joint ventures. All significant intercompany accounts and transactions have been eliminated on consolidation. 4 Transactions in foreign currencies Assets and liabilities of foreign subsidiaries and related hedging instruments are translated into Sterling at the closing exchange rate prevailing at the balance sheet date. Results of overseas undertakings are translated into Sterling at the average rates of exchange for the relevant period. Differences arising from the re-translation of the results of overseas undertakings are dealt with through reserves. Transactions in foreign currency are recorded using the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange prevailing at the balance sheet date and the gains or losses on translation are included in the profit and loss account. 5 Tangible fixed assets and depreciation Depreciation is provided on a straight-line basis at rates calculated to write off the cost of fixed assets over their estimated useful lives at the following rates: Furniture Fixtures and fittings Telephones and office equipment Computer hardware Computer software Cars – five years – shorter of the lease term, the first break point of the building lease or ten years – five years – three years – two years – four years 6 Fixed asset investments Fixed asset investments are generally accounted for at the lower of cost and recoverable amount. Investments designated as hedging instruments are carried at market value, any gains or losses being recognised consistently with the item being hedged. 7 Stocks Stocks are stated at the lower of cost and net realisable value. Stocks relate to items purchased for resale to customers and to items intended for distribution within the business, such as office supplies and marketing materials. Provision is made for any deterioration in net realisable value as a result of obsolescence or damage. 8 Deferred taxation Provision under the liability method is made for deferred taxation at the current rate of corporation tax on all timing differences, to the extent that they are expected to crystallise. 9 Refurbishment The terms of most building leases require Regus to make good dilapidation or other damage occurring during the rental period. Due to the nature of the business, centres are maintained to a high standard. Accruals for dilapidations are made only when it is known that a dilapidation has occurred. 10 Turnover Turnover represents the value of services provided to third parties in the year and is exclusive of VAT and similar taxes. Centre income is invoiced monthly in advance and is deferred until the month in which the services are provided. Income for other services supplied to clients using centres is charged and recognised in the month in which the related services are provided. 11 Cost of sales Cost of sales consists of costs from the individual business centres, including property lease costs, employee costs and start-up costs. 12 Start-up costs Start-up costs (including formation costs, costs related to finding property and any other centre opening costs) are charged to the profit and loss account as they are incurred. 13 Pensions The Group operates defined contribution schemes. Contributions are charged to the profit and loss account on an accruals basis. 14 Leases a) Finance leases Where the Group enters into a lease for furniture, fittings, equipment or cars which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a finance lease. This also includes occasions where the Group takes interest-bearing extended credit from suppliers and certain loans from landlords. Under all such lease arrangements the asset is recorded in the balance sheet as a tangible asset and is depreciated over the shorter of the lease term and its estimated useful life in accordance with the policy described above. Future instalments under such leases, net of finance charges, are included in creditors. Lease payments are apportioned between the finance element, which is charged to the profit and loss account on a sum-of-the- digits basis or a post-tax actuarial basis, and the capital element, which reduces the outstanding obligation for future instalments. b) Building leases Building leases are all accounted for as operating leases because substantially all the risks and rewards of ownership remain with the lessor. The rental on certain leases is wholly or partly conditional on the profitability of the centre and therefore the risk to the business, in terms of rent, is reduced. Once all outstanding rent has been paid, landlords receive a share of the profits of the centre. 30 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 31 Accounting policies continued 14 Leases continued For leases which are wholly or partly conditional on the profitability of the centre, an estimate is made of the likely rent payable based on profitability in respect of the period up to the date of the first market rent review or first break point in the lease, whichever is sooner, and this is spread on a straight-line basis over that period. Any subsequent changes in estimates are spread over the remaining period to the date of the first market rent review or first break point in the lease, whichever is sooner. Amounts payable in respect of profit shares are accrued once a sufficient net surplus has been made which would result in a profit share being paid. Any incentives or rent-free periods on conventional leases and the conventional element of leases, which are partly conventional and partly conditional on profitability, are spread on a straight-line basis over the period to the date of the first market rent review or first break point in the lease, whichever is sooner, so that the amounts charged to the profit and loss account are the same each year over that period. 15 Financial instruments The Group uses various derivative financial instruments to hedge its exposures to fluctuations in foreign exchange risks. These include forward currency contracts and currency options. The accounting method used for derivative financial instruments is determined by whether or not the instrument is designated as a hedge of an existing exposure and, if so, by the accounting method used for the item being hedged. The Group considers its derivative financial instruments to be hedges when certain criteria are met. Forward currency contracts The Group’s criteria to qualify for hedge accounting are: • The instrument must be related to a foreign currency asset or liability • It must involve the same currency as the hedged item • It must reduce the risk of foreign currency exchange movements on the Group’s operations. The Group has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instruments. The Group does not enter into financial instruments for trading or speculative purposes. Forward currency contracts are marked to market at the period end, with the resulting exchange gains or losses taken to administration expenses in the profit and loss account except where the hedged items’ exchange difference is reflected in reserves (such as quasi-equity loans). In this situation the gain or loss is taken to reserves. The gains or losses on the forward contracts are recognised when the gains or losses on the underlying hedged transactions are recognised. The net resulting unrealised asset or liability is reflected in debtors or creditors as appropriate. Premiums or discounts on derivative financial instruments that hedge an existing exposure are charged or credited to interest income or cost over the life of the instrument, the related asset or liability is classified as an accrual or prepayment. Derivative financial instruments that are not designated as hedges are marked to market using period-end market rates, and gains or losses are taken to the profit and loss account. Gains or losses arising on hedging instruments which are cancelled due to the termination of the underlying exposure are taken to administration expenses immediately. Currency options Under hedge accounting for currency options, the Group defers the instruments’ impact on profit until it fully recognises the underlying hedged item in the profit and loss account. Option costs are charged to the interest cost over the life of the option contract, the related asset is classified as prepayments. At maturity, any realised gain on the option is recognised in the profit and loss account in administration expenses. Notes to the financial statements for the year ended 31 December 2000 1 Segmental reporting The following tables set out the Group’s segmental analysis by geographic region and by established and new centres. Established centres are those that have been open for a period of at least 18 months as at the end of the relevant period and new centres are those that have been open for less than 18 months as at the end of the relevant period. Geographic analysis UK and Ireland Rest of Europe Americas Rest of World Total Group Total joint ventures Established centres New centres Total Geographic analysis UK and Ireland Rest of Europe Americas Rest of World Other Exceptional item Total Group Total joint ventures Turnover 12 months to 31 Dec 2000 £’000 Turnover 12 months to 31 Dec 1999 £’000 Gross profit/(loss) (centre contribution) 12 months to 31 Dec 2000 £’000 Gross profit/(loss) (centre contribution) 12 months to 31 Dec 1999 £’000 188,862 118,933 94,296 27,109 102,856 73,739 15,646 8,369 59,619 29,214 13,850 (2,390) 429,200 200,610 100,293 20,169 10,830 (6,012) (7,873) 17,114 421,125 8,075 200,601 9 293,555 127,570 134,016 66,585 92,329 7,964 41,673 (24,559) 421,125 200,601 100,293 17,114 Operating profit/(loss) 12 months to 31 Dec 2000 £000 Operating profit/(loss) 12 months to 31 Dec 1999 £’000 Net assets/ (liabilities) As at 31 Dec 2000 £’000 Net assets/ (liabilities) As at 31 Dec 1999 £’000 36,763 3,783 (14,646) (11,609) (1,884) (9,501) 4,830 (10,527) (19,812) (15,742) (1,781) (5,125) 21,304 (28,972) (308) (29,294) 249,435 (9,501) (5,952) (27,073) (15,189) (17,791) 47,224 (5,125) 2,906 (48,157) 202,664 (23,906) 3,933 (1,027) (48,065) (92) 198,524 4,140 (25,112) 1,206 There is no difference between segmental information on an origin basis and on a destination basis. The directors are of the opinion that the whole of the turnover is derived from the same class of business. 32 32 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 33 33 Notes to the financial statements for the year ended 31 December 2000 continued 2 Loss on ordinary activities before tax 5 Employees and directors Loss before tax is stated after charging: Depreciation of tangible fixed assets: – owned assets – assets under finance leases Loss on sale of fixed assets Operating leases: – property – equipment Audit fees: – Company – Group Non-audit fees paid to KPMG Audit plc and associates: – UK companies – Group – exceptional (note 3) Other exceptional items (note 3) 12 months to 31 Dec 2000 £’000 12 months to 31 Dec 1999 £’000 27,671 12,875 1,520 136,969 6,033 5 546 204 496 – 9,501 12,459 7,602 15 71,805 5,466 5 375 76 306 900 4,225 In addition to the fees above, audit fees and non-audit fees of £0.2 million and £0.8 million respectively paid to KPMG were offset against the share premium account. 3 Exceptional item The exceptional pre-tax charge of £9.5 million relates to costs associated with the write down of the Reward share options’ exercise price from £1.455 to £0.05. The exceptional pre-tax charge of £5.1 million in 1999 related principally to costs associated with the raising of loan finance and the postponed flotation work during 1999. 4 Loss of holding company Of the loss attributable to shareholders, a loss of £11.9 million (1999: loss of £11.7 million) is dealt with in the accounts of Regus plc. As permitted by Section 230 of the Companies Act 1985, the Company has not presented its own profit and loss account. Staff costs for the Group during the year Wages and salaries Social security costs Other pension costs 12 months to 31 Dec 2000 £’000 12 months to 31 Dec 1999 £’000 61,648 7,851 260 69,759 42,126 5,465 300 47,891 The Group contributes to the personal pension schemes of a small number of employees. The amount which is included within creditors is £44,000 (1999: £12,000). Included within the above staff costs in 1999 are £900,000 of exceptional costs in relation to the postponed flotation work (note 3). Average number of people (including executive directors) employed during the year Centre staff Sales staff Finance staff Other staff Directors Aggregate emoluments Compensation for loss of office Company pension payments to money purchase scheme Highest-paid director Aggregate emoluments Company pension payments to money purchase scheme 12 months to 31 Dec 2000 Number 12 months to 31 Dec 1999 Number 1,525 284 135 157 2,101 949 285 111 147 1,492 12 months to 31 Dec 2000 £’000 12 months to 31 Dec 1999 £’000 988 – 48 448 28 787 36 65 385 56 Retirement benefits are accruing to three directors under a money purchase scheme. One director (1999: one director) received share options under the long-term incentive scheme. More detailed information on directors’ emoluments is provided in the Remuneration report on pages 22 to 24. 34 34 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 35 35 Notes to the financial statements for the year ended 31 December 2000 continued 6 Net interest payable and other similar charges 7 Taxation continued Interest payable on overdrafts and loans Interest payable on finance leases Interest income Net interest payable and other similar charges 7 Taxation United Kingdom Corporation tax at 30% (1999: 30%) Deferred tax Under provision in respect of prior periods Overseas Corporation taxes Under provision in respect of prior periods Deferred tax Approximate gross tax losses to carry forward against certain future UK corporation tax liabilities Approximate gross tax losses to carry forward against certain future overseas corporation tax liabilities 12 months to 31 Dec 2000 £’000 12 months to 31 Dec 1999 £’000 7,759 2,867 10,626 (3,863) 6,763 7,495 2,965 10,460 (3,678) 6,782 12 months to 31 Dec 2000 £’000 12 months to 31 Dec 1999 £’000 4,402 794 – 5,196 4,752 (22) – 9,926 – – 180 180 1,322 124 (102) 1,524 – 5,855 76,910 57,718 A reconciliation of the actual tax charge resulting from applying the UK statutory rate to the loss before tax is as follows: UK statutory rate applied to result for year Adjusted for: Permanent differences: Professional fees associated with postponed flotation and costs of obtaining loan finance Other permanent differences Difference in taxation rates Tax losses utilised Deferred tax asset not booked in respect of: Tax losses carried forward Start-up costs and other reserves Adjustment in respect of prior periods Other items Actual tax charge Page 14 of the financial review provides an explanation of the tax charge. 8 Loss per share 12 months to 31 Dec 2000 £’000 12 months to 31 Dec 1999 £’000 (1,157) (16,502) – 451 (1,721) (1,133) 6,907 6,717 (22) (116) 9,926 2,010 217 (1,732) (795) 16,211 1,905 304 (94) 1,524 Loss per share has been calculated by dividing the retained loss for the financial year by the weighted average number of ordinary shares in issue excluding those held under the employee share trust. The loss per share before exceptional items has been calculated by adjusting the loss for the years ended 31 December 2000 and 1999 by the exceptional items of £9.5 million and £5.1 million and the tax thereon of £1.5 million and £1.5 million respectively. There were no adjustments to the retained loss for the year for the diluted earnings per share computations. The basic weighted number of ordinary shares has been adjusted by 13,829,065 (1999: nil) shares, relating to share options, to arrive at the diluted number of ordinary shares. The following summarises the calculation of loss per share for the years ended 31 December 1999 and 2000: No deferred tax has been provided on the unremitted accumulated reserves of the subsidiary undertakings as accumulated reserves of subsidiary undertakings are retained to finance their business. At 31 December 2000, the total unremitted accumulated reserves of the overseas subsidiary undertakings were £2.0 million (1999: £2.4 million). The tax losses above have the following expiration dates: Retained loss for the year (£’000) Weighted average ordinary shares in issue – basic (000) 2000 2001 2002 2003 2004 2005 2006 2007 and later Available indefinitely 31 Dec 2000 £’000 31 Dec 1999 £’000 Loss per ordinary share Loss per ordinary share (before exceptional items) – 196 757 2,592 15,885 7,574 397 27,647 55,048 21,862 76,910 860 915 1,497 3,489 10,010 273 298 16,547 33,889 29,684 63,573 – diluted (000) – basic (p) – diluted (p) – basic (p) – diluted (p) 12 months to 31 Dec 2000 12 months to 31 Dec 1999 (13,530) (56,446) 497,889 469,486 511,718 469,486 (2.7) (2.6) (1.1) (1.1) (12.0) (12.0) (11.3) (11.3) 36 36 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 37 37 Notes to the financial statements for the year ended 31 December 2000 continued 9 Tangible fixed assets – Group 11 Debtors Computers Motor vehicles £’000 £’000 Total £’000 Cost At 1 January 2000 Exchange differences Additions Disposals At 31 December 2000 Aggregate depreciation At 1 January 2000 Exchange differences Charge for the period Disposals At 31 December 2000 Furniture and fittings £’000 150,667 96 99,549 (5,619) 244,693 32,921 280 34,759 (2,688) 65,272 10,593 187 12,002 (1,285) 21,497 3,093 70 5,664 (1,137) 7,690 Net book value at 31 December 2000 Net book value at 31 December 1999 179,421 13,807 117,746 7,500 578 2 101 (259) 422 253 (2) 123 (177) 197 225 325 161,838 285 111,652 (7,163) 266,612 36,267 348 40,546 (4,002) 73,159 193,453 125,571 Amounts falling due within one year Trade debtors Amounts owed by participating interest Other debtors Prepayments and accrued income VAT recoverable Amounts falling due after one year Amounts owed by Group undertakings Total debtors Group 31 Dec 2000 £’000 Group 31 Dec 1999 £’000 Company 31 Dec 2000 £’000 Company 31 Dec 1999 £’000 60,990 1,862 29,940 26,364 10,521 129,677 31,153 – 14,951 16,121 6,958 69,183 – – – 393 – 393 – – – – – – – – 202,073 129,677 69,183 202,466 43,932 43,932 As at 31 December 2000 the provision for bad and doubtful debts was £1.7 million (1999: £1.0 million). An allowance for bad and doubtful debts is recorded at the end of each period based upon the expected collectability of all trade receivables. Analysis of the bad and doubtful debt provision is as follows: The net book value of tangible fixed assets includes an amount in respect of fixed assets held under finance leases as follows: Cost Depreciation Net book value 10 Investments At 1 January 2000 Exchange differences Additions Revaluation Share of losses retained At 31 December 2000 Group 31 Dec 2000 £’000 Group 31 Dec 1999 £’000 74,570 (28,078) 51,675 (15,900) 46,492 35,775 Opening balance Additional charges to profit and loss account Provision utilisation Exchange difference Closing balance Group Investment in own shares* £’000 – – 45,200 1,821 – 47,021 Group Interest in joint ventures £’000 1,206 170 3,791 – (1,027) 4,140 Company Shares in Group undertakings £’000 5,631 – – – – 5,631 Group Total £’000 1,206 170 48,991 1,821 (1,027) 51,161 * The nominal value of the Group’s investment in own shares is £0.9 million. Note 21 provides details of the investment in own shares. Details of investments in subsidiary companies are given on pages 53 to 54 of these accounts. Group 31 Dec 2000 £’000 Group 31 Dec 1999 £’000 1,047 842 (190) 2 1,701 732 439 (79) (45) 1,047 38 38 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 39 39 Notes to the financial statements for the year ended 31 December 2000 continued 12 Creditors – amounts falling due within one year 14 Maturity of debt Bank loans and overdrafts Other loans Obligations under finance leases Amounts owed to Group undertakings Trade creditors Customer deposits Other tax and social security Corporation tax Deferred income Deferred landlord contributions Rent accruals Other accruals Other creditors Group 31 Dec 2000 £’000 Group 31 Dec 1999 £’000 Company 31 Dec 2000 £’000 Company 31 Dec 1999 £’000 5,750 807 10,614 – 31,207 80,024 16,128 9,849 43,541 3,173 56,307 58,392 2,091 26,154 122 9,314 – 19,928 37,674 9,043 1,877 23,551 4,529 34,145 21,440 2,083 – – – 8,851 – – – 301 – – – – 6,341 317,883 189,860 15,493 3,249 – – – – – – 301 – – – – 2 3,552 As at 31 December 2000 other accruals included property taxes £4.5 million (1999: £2.6 million), telephone call cost accruals £1.4 million (1999: £1.1 million), marketing and advertising £3.4 million (1999: £1.4 million), commissions and bonuses £6.0 million (1999: £1.4 million), holiday pay £1.1 million (1999: £0.7 million), legal and audit fees £1.4 million (1999: £0.6 million), share option cost accruals £13.2 million (1999: £nil) and other accruals £27.4 million (1999: £13.6 million) The maturity profile of the carrying amount of the Group’s financial liabilities as at 31 December was as follows: Bank loans and overdrafts 31 Dec 2000 £’000 Other loans 31 Dec 2000 £’000 Finance leases 31 Dec 2000 £’000 Total 31 Dec 2000 £’000 Within one year Between one and two years Between two and five years After five years or more Within one year Between one and two years Between two and five years After five years or more 5,750 4 8 – 5,762 807 285 678 512 2,282 10,614 10,224 10,685 241 31,764 Bank loans and overdrafts 31 Dec 1999 £’000 Other loans 31 Dec 1999 £’000 Finance leases 31 Dec 1999 £’000 26,154 80,783 21 – 106,958 122 1,361 547 26 2,056 9,314 7,216 6,436 22 17,171 10,513 11,371 753 39,808 Total 31 Dec 1999 £’000 35,590 89,360 7,004 48 22,988 132,002 13 Creditors – amounts falling due after more than one year The following provides additional disclosure for bank loans and overdrafts and other loans: Bank loans Other loans Obligations under finance leases Accruals and deferred income Other creditors Group 31 Dec 2000 £’000 Group 31 Dec 1999 £’000 Company 31 Dec 2000 £’000 Company 31 Dec 1999 £’000 12 1,475 21,150 361 52 80,804 1,934 13,674 5,855 83 23,050 102,350 – – – – – – – – – – – – Within one year Between one and two years Between two and three years Between three and four years Between four and five years After five years or more Group 31 Dec 2000 £’000 Group 31 Dec 1999 £’000 Company 31 Dec 2000 £’000 Company 31 Dec 1999 £’000 6,557 289 249 238 199 512 8,044 26,276 82,144 343 88 137 26 109,014 – – – – – – – 3,249 – – – – – 3,249 The following provides additional finance lease disclosure including the interest components of future minimum lease payments: Certain bank loans are secured on the assets of the applicable subsidiaries and bear interest at local commercial rates. All other creditors are unsecured and non-interest bearing. Deferred tax has been provided to the extent that the directors believe on the basis of reasonable assumptions that it is probable that the liability will crystallise in the foreseeable future. As at 31 December 2000 the Group had £13.7 million (1999: £3.0 million) of other available credit facilities, none of which (1999: £0.8 million) was drawn, that bear interest at various commercial rates with maturities through December 2004. Within one year Between one and two years Between two and three years Between three and four years Between four and five years After five years or more Total commitment Less amounts representing interest Present value of future minimum lease payments Within one year After one year Group 31 Dec 2000 £’000 Group 31 Dec 1999 £’000 Company 31 Dec 2000 £’000 Company 31 Dec 1999 £’000 11,966 11,967 7,862 1,970 1,379 1,118 36,262 (4,498) 31,764 10,614 21,150 10,984 7,901 4,726 2,358 209 23 26,201 (3,213) 22,988 9,314 13,674 – – – – – – – – – – – – – – – – – – – – – – 41 40 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Notes to the financial statements for the year ended 31 December 2000 continued 15 Provisions for liabilities and charges 18 Reserves At 1 January 2000 Provided in year At 31 December 2000 There is no unprovided deferred tax. 16 Share capital Authorised 659,999,615 new A ordinary shares of 5 pence each 140,000,385 new B ordinary shares of 5 pence each 800,000,000 ordinary shares of 5 pence each Allotted and fully paid 385,665,000 new A ordinary shares of 5 pence each 95,557,208 new B ordinary shares of 5 pence each 580,676,185 ordinary shares of 5 pence each Group Deferred tax £’000 – 794 794 Group and Company 31 Dec 2000 £’000 Group and Company 31 Dec 1999 £’000 – – 40,000 40,000 – – 29,034 29,034 33,000 7,000 – 40,000 19,283 4,778 – 24,061 At 1 January 2000 Retained loss for the period Transfer to capital reserve Exchange differences Tax on exchange differences At 31 December 2000 19 Cash flow statement Group Profit and loss £’000 (94,681) (13,530) (9) 2,675 (872) (106,417) Group Other (non distributable) £’000 606 – 9 – – 615 Company Profit and loss £’000 (11,398) (11,922) – (112) – (23,432) Company Other (non distributable) £’000 5,531 – – – – 5,531 a) Reconciliation of operating profit/(loss) to net cash inflow from operating activities Continuing operating activities Operating profit/(loss) Depreciation charge Loss on disposal of fixed assets (Increase)/decrease in stocks Increase in debtors Increase in creditors Group 12 months to 31 Dec 2000 £’000 Group 12 months to 31 Dec 1999 £’000 3,933 40,546 1,520 (33) (58,228) 130,161 (48,065) 20,061 15 22 (32,573) 74,901 In March 2000, 1,855,670 new A ordinary shares of 5 pence each were allotted for a total consideration of £2.7 million. Net cash inflow from continuing operating activities 117,899 14,361 In October 2000, 97,598,307 ordinary shares of 5 pence each were issued in an Initial Public Offering for a total consideration of £253.8 million, at the same time new A and new B ordinary shares were reclassified as ordinary shares. The cash inflow for 1999 includes a £3.4 million outflow relating to the exceptional item charged during the year (note 3). 17 Share premium account At 1 January 2000 Premium on issue of shares during period Issue costs At 31 December 2000 Group and Company (non distributable) £’000 46,283 251,483 (17,908) 279,858 b) Financing and management of liquid resources Management of liquid resources New cash deposits Repayment of cash deposits Financing New loans Repayment of loans Payment of principal under finance leases Issue of equity shares Issue costs Group 12 months to 31 Dec 2000 £’000 Group 12 months to 31 Dec 1999 £’000 (95,897) 17,185 (105,536) 89,017 (78,712) (16,519) 13,945 (116,325) (14,702) 253,756 (17,908) 105,073 (12,298) (15,796) 20,000 – 118,766 96,979 42 42 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 43 43 Notes to the financial statements for the year ended 31 December 2000 continued 19 Cash flow statement continued 20 Financial instruments c) Reconciliation of net cash flow to movement in net funds/(borrowings) Increase in cash in the period Cash outflow/(inflow) from change in borrowings and finance leases Cash outflow from increase in liquid resources Change in net funds/borrowings resulting from cash flows Other non-cash items: New finance leases Exchange differences Movement in net funds/borrowings in the year Net (borrowings)/funds at 1 January Net funds/(borrowings) at 31 December d) Analysis of changes in net funds/(borrowings) in the period 12 months to 31 Dec 2000 £’000 12 months to 31 Dec 1999 £’000 15,865 117,082 78,712 10,112 (76,979) 16,519 211,659 (50,348) (23,574) 1,830 189,915 (59,902) (17,234) (1,280) (68,862) 8,960 130,013 (59,902) Cash at bank and in hand Overdrafts Debt due after one year Debt due within one year Finance leases due after one year Finance leases due within one year Liquid resources At 1 January 2000 £’000 16,426 (1,923) 14,503 (82,738) (24,353) (13,674) (9,314) (130,079) 55,674 Cash flow £’000 8,030 7,835 15,865 (10,076) 112,456 6,534 8,168 117,082 78,712 Non-cash changes £’000 6,583 (7,229) (646) 91,387 (93,852) (14,000) (9,377) (25,842) 2,914 (59,902) 211,659 (23,574) Exchange movements £’000 At 31 December 2000 £’000 393 114 507 (60) 395 (10) (91) 234 1,089 1,830 31,432 (1,203) 30,229 (1,487) (5,354) (21,150) (10,614) (38,605) 138,389 130,013 Liquid resources include cash held on deposit of which £40.9 million at 31 December 2000 (1999: £22.0 million) relates to deposits which are held by banks as security for the issuance of bank guarantees to support lease commitments by Regus operating companies. These amounts are blocked and are not available for use by the business. There are arrangements in place where cash balances and deposits with banks in the UK and the Netherlands can be offset against overdrawn accounts in the same bank. Non-cash changes comprise new finance leases and reclassifications between categories. Details of the role that financial instruments have had during the year in managing the risks that the Group faces are discussed in the Financial review on page 14 of the financial statements. Short-term debtors and creditors and inter-company balances Short-term debtors and creditors have been excluded from all the following disclosures other than the currency risk disclosure. Inter-company balances have been excluded from all the following disclosures except for the currency risk disclosure. Interest rate risk and currency profile of financial liabilities and assets The following table analyses the currency and interest rate composition of the Group’s financial liabilities and assets, comprising gross borrowings, and deposits where applicable. 31 December 2000 Financial liabilities Euro Japanese Yen Sterling US Dollar Others Financial assets Australian Dollar Euro Japanese Yen Sterling US Dollar Others Of which: Current asset investments Gross borrowings Cash Weighted average fixed interest rate % Weighted average period for which rate is fixed Years 8.0 6.8 9.8 8.9 11.3 – – – – – – 4.3 3.3 3.8 4.7 3.7 – – – – – – At floating rates £’000 (1,491) – (500) – (6,053) At fixed rates £’000 (3,037) (895) (6,078) (20,996) (758) (8,044) (31,764) 1,961 32,571 2,393 102,433 18,407 11,784 169,549 – – – – – – – 161,505 (31,764) 138,389 (8,044) 31,160 – (31,764) – 161,505 (31,764) Non-interest bearing £’000 – – – – – – – 39 2 95 94 42 272 272 – – 272 272 Total £’000 (4,528) (895) (6,578) (20,996) (6,811) (39,808) 1,961 32,610 2,395 102,528 18,501 11,826 169,821 130,013 138,389 (39,808) 31,432 130,013 44 44 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 45 45 Notes to the financial statements for the year ended 31 December 2000 continued 20 Financial instruments continued 31 December 1999 Financial liabilities Euro Japanese Yen Sterling US Dollar Others Financial assets Australian Dollar Euro Japanese Yen Sterling US Dollar Others Of which: Current asset investments Gross borrowings Cash Weighted average fixed interest rate % 8.5 7.2 10.3 9.3 11.5 – – – – – – – Weighted average period for which rate is fixed Years 4.5 3.5 4.0 5.0 4.0 – – – – – – – At floating rates £’000 (853) (11,526) (92,785) – (3,850) At fixed rates £’000 (3,590) (797) (11,434) (6,230) (937) (109,014) (22,988) 1,491 13,394 201 45,242 6,333 5,302 71,963 – – – – – – – (37,051) (22,988) 55,674 (109,014) 16,289 – (22,988) – (37,051) (22,988) Non-interest bearing £’000 – – – – – – – 35 – 39 40 23 137 137 – – 137 137 Total £’000 (4,443) (12,323) (104,219) (6,230) (4,787) (132,002) 1,491 13,429 201 45,281 6,373 5,325 72,100 (59,902) 55,674 (132,002) 16,426 (59,902) Maturity analysis of undrawn committed borrowing facilities The Group has the following undrawn committed borrowing facilities available at 31 December in respect of which all conditions precedent had been met at that date: Expiring within One year or less Between one and two years In more than two years 31 Dec 2000 £’000 31 Dec 1999 £’000 3,589 – – 3,589 10,000 – 1,250 11,250 20 Financial instruments continued Currency exposure As explained in the Financial review, to mitigate the effect of the currency exposures arising from its net investments overseas the Group borrows in the local currencies arising from its net investments. Gains and losses arising on net investments overseas are recognised in the statement of total recognised gains and losses. The tables below show the extent to which Group companies have monetary assets and liabilities in currencies other than their local currency. Foreign exchange differences on retranslation of these assets and liabilities are taken to the profit and loss account of the Group companies and the Group. 31 December 2000 Functional currency of Group operation Euro Sterling US Dollar Others 31 December 1999 Functional currency of Group operation Euro Sterling US Dollar Others Japanese Yen £’000 – 104 – 5 109 Japanese Yen £’000 – 368 – 84 452 Net foreign currency monetary assets/(liabilities) Sterling £’000 27,390 – 899 54 28,343 US Dollar £’000 6,268 6,607 – 2,023 Others £’000 144 9,031 (110) 2,450 14,898 11,515 Net foreign currency monetary assets/(liabilities) Sterling £’000 1,400 – – 26 1,426 US Dollar £’000 6,190 5,135 – 335 11,660 Others £’000 342 5,667 – 1,918 7,927 Euro £’000 – 2,550 12 27 2,589 Euro £’000 – 1,109 – 60 1,169 Total £’000 33,802 18,292 801 4,559 57,454 Total £’000 7,932 12,279 – 2,423 22,634 46 46 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 47 47 Notes to the financial statements for the year ended 31 December 2000 continued 20 Financial instruments continued 20 Financial instruments continued Fair value disclosures The following table provides a comparison by category of the carrying amounts and the fair value of the Group's financial assets and liabilities at 31 December. Fair value is the amount at which a financial instrument could be exchanged in an arm's length transaction between informed and willing parties, other than a forced or liquidation sale, and excludes accrued interest. Set out below the table is a summary of the methods and assumptions used for each category of financial instrument. Primary financial instruments held or issued to finance the Group's operations Short-term borrowings Long-term borrowings Short-term deposits Accounts receivable Accounts payable Cash at bank and in hand Derivative financial instruments held to hedge the currency exposure on expected future results Forward foreign currency contracts Currency options Book value 31 Dec 2000 £’000 Fair value 31 Dec 2000 £’000 Book value 31 Dec 1999 £’000 Fair value 31 Dec 1999 £’000 (17,171) (22,637) 138,389 60,990 (31,207) 31,432 (15,874) (16,837) 138,389 60,990 (31,207) 31,432 (35,590) (96,412) 55,674 31,153 (19,928) 16,426 (34,842) (92,531) 55,674 31,153 (19,928) 16,426 1,510 – 1,510 45 – – – – Summary of methods and assumptions Forward foreign currency contracts and currency options Fair value is based on market price of comparable instruments at the balance sheet date. Short-term deposits and borrowings, accounts receivable and payable The fair value of short-term deposits, loans, overdrafts, and accounts receivable and payable approximates to the carrying value because of the short maturity of these instruments. The fair value of finance leases has been calculated by discounting future cash flows at the Group’s weighted average cost of capital. Long-term borrowings The fair value of bank loans and other loans approximates to the carrying value because the majority are floating rate where payments are reset to market rates at intervals of less than one year. The fair value of finance leases has been calculated by discounting future cash flows at the Group’s weighted average cost of capital. Hedges The table below shows the extent to which the Group has off-balance sheet (unrecognised) and on-balance sheet (deferred) gains and losses in respect of financial instruments used as hedges at the beginning and end of the year. It also shows the amount of such gains and losses which have been included in the profit and loss account for the year and those gains and losses which are expected to be included in next year’s expected profit and loss accounts. All the gains and losses on the hedging instruments are expected to be matched by losses and gains on the hedged transactions or positions. Under the Group’s accounting policy, foreign currency assets and liabilities which are hedged using forward foreign currency contracts are translated at the period end rate and the forward contract is marked to market. The Group defers the impact of foreign currency options on profit until it fully recognises the underlying hedged item in the profit and loss account. The gains or losses on both these types of instrument are treated as deferred for the purposes of the table below. Gains and losses on hedges at 1 January 2000 Arising in previous years included in 2000 income Gains and losses not included in 2000 income Arising before 1 January 2000 Arising in 2000 Gains and losses on hedges at 31 December 2000 Of which: Gains and losses expected to be included in 2001 income Gains and losses expected to be included in 2002 income or later Unrecognised gains £’000 Unrecognised losses £’000 Unrecognised net gains/ (losses) £’000 Deferred gains £’000 Deferred losses £’000 Deferred net gains/ (losses) £’000 – – – 45 45 45 – – – – – – – – – – – 45 45 45 – – – – – – – – – – – – – – – – – – – – – – 21 Employee share ownership plan (“ESOP”) During 1999 the Group established the Regus Employee Trust. The Trustee is Mourant & Co Trustees Limited which is an independent professional trust company residing in Jersey. The Trust is a discretionary trust for the benefit of employees (including directors). The ESOP provides for the issue of options and the payment of bonuses to the Group’s employees (including directors) at the discretion of the Company. The Trustee is not entitled to receive dividends. At 31 December 2000 the Trust held 18,120,670 shares in Regus plc (note 10). The market value at 31 December 2000 was £65.6 million. Costs incurred by the Trust are expensed in the profit and loss account. 48 48 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 49 49 Notes to the financial statements for the year ended 31 December 2000 continued 21 Employee share ownership plan (“ESOP”) continued 23 Operating lease commitments At 31 December 2000, awards over a total of 28,047,451 (1999: 20,971,634) shares had been granted to employees. The awards have been issued in eight tranches and some of the awards had been granted subject to the performance of the Group (performance awards). Details of the awards are provided below: Award type Performance awards Non-performance awards Date first exercisable 1 January 2003 to 1 January 2007 1 January 2004 to 1 January 2008 1 January 2003 to 1 January 2007 1 January 2003 to 1 January 2006 1 January 2004 to 1 January 2008 Lapsed options at 31 December Net options at 31 December 31 December 2000 Number of awards 10,184,514 1,322,792 9,741,279 4,047,105 2,751,761 28,047,451 (4,025,953) 24,021,498 Exercise price £ 1.455 2.60 1.455 0.05 2.60 31 December 1999 Number of awards 7,492,834 – 9,582,328 3,896,472 – 20,971,634 – 20,971,634 Exercise price £ 1.455 1.455 1.455 In addition, at 31 December 2000, awards over 120,000 American Depositary Receipts (1999: nil) had been granted to an employee employed by the Group. The employee may begin to exercise these between 12 December 2003 and 12 December 2005. All these awards had been granted subject to conditions linked to the performance of the Group. The exercise price of these awards is $25.00. The Group also operates a SAYE share ownership plan. 22 Capital commitments At 31 December the Group had lease agreements in respect of properties, vehicles, plant and equipment, for which the payments extend over a number of years. Annual commitments under non-cancellable operating leases expiring: Within one year Between one and five years After five years Property £’000 2,601 78,830 59,829 141,260 Vehicles, plant and equipment £’000 31 Dec 2000 Total £’000 31 Dec 1999 Total £’000 1,903 7,527 31 9,461 4,504 86,357 59,860 150,721 1,169 35,797 61,667 98,633 Minimum future lease payments under non-cancellable operating leases: Amounts due within one year Amounts due between one and two years Amounts due between two and three years Amounts due between three and four years Amounts due between four and five years Amounts due after five years 31 Dec 2000 Total £’000 31 Dec 1999 Total £’000 150,721 149,732 143,571 114,692 88,320 245,420 98,633 103,079 97,087 83,487 58,609 177,472 892,456 618,367 Contracts placed for future capital expenditure not provided in the financial statements 14,279 17,432 – – The Group has bank guarantees and letters of credit held with certain banks, totalling £42.2 million (1999: £26.5 million). The Company also acts as a guarantor for certain obligations of other subsidiary entities. Group 31 Dec 2000 £’000 Group 31 Dec 1999 £’000 Company 31 Dec 2000 £’000 Company 31 Dec 1999 £’000 24 Contingent liabilities 25 Related party transactions During the year ended 31 December 2000 the Group received management fees of £3.0 million (1999: £nil) from its joint venture entities as listed on pages 53 and 54. At 31 December 2000, £1.9 million (1999: £nil) was due to the Group from the joint ventures. 26 Ultimate parent company and controlling party Maxon Investments BV, a company incorporated in The Netherlands, is considered as the ultimate parent company. M L J Dixon is considered the ultimate controlling party by virtue of his effective controlling interest in the equity shares of the Company via Maxon Investments BV. 50 50 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 51 51 Notes to the financial statements for the year ended 31 December 2000 continued Principal Group companies 27 Summary of differences between UK and US GAAP financial statements The Group’s consolidated financial statements are prepared in accordance with UK GAAP, which differs in certain respects from US GAAP. Effect of differences between UK and US GAAP The following is a summary of the material adjustments to net loss which would have been required if US GAAP had been applied instead of UK GAAP: Net loss reported in accordance with UK GAAP US GAAP adjustments: Stock purchase warrants Amortisation of debt discount Compensation expense related to options granted by shareholder Compensation expense related to other variable plan options Deferred taxes Income taxes on US GAAP adjustments Net loss in conformity with US GAAP Weighted average shares outstanding (000) Loss per ordinary share before extraordinary items (p) Loss per ordinary share after extraordinary items (p)1 12 months to 31 Dec 2000 £’000 12 months to 31 Dec 1999 £’000 (13,530) (56,446) – – (6,836) 3,997 (474) – (1,500) (2,038) (11,840) – 644 611 (16,843) (70,569) 502,773 (3.4) (3.4) 469,486 (14.7) (15.0) 1 In the year ended 31 December 1999 there was an extraordinary cost of £1,775,000 relating to the early extinguishment of debt. The following is a summary of the material adjustments to shareholders’ funds/(deficit) which would have been required if US GAAP had been applied instead of UK GAAP: Shareholders’ funds/(deficit) recorded in accordance with UK GAAP US GAAP adjustments: Stock purchase warrants and debt discount Compensation expense related to options granted by shareholder 1 Compensation expense related to other variable plan options2 Deferred taxes Income taxes on US GAAP adjustments Employee share trust (investment in own shares) Shareholders’ funds/(deficit) in conformity with US GAAP 31 Dec 2000 £’000 31 Dec 1999 £’000 203,090 (23,731) – – 10,778 1,902 (8,500) – – 2,376 (47,021) – 168,749 (29,855) 1 Shareholders’ funds/(deficit) was not affected by the differences between UK GAAP and US GAAP since these differences resulted in recording an increase to expense and a corresponding increase to contributed capital. 2 Shareholders’ funds/(deficit) was not affected by the differences between UK GAAP and US GAAP on these options as the difference resulted in recording an increase to expense and a corresponding increase to contributed capital, except for awards granted to employees where the Company will pay a cash bonus for the difference between the fair value and the base price of the awards. Name of Group entity Regus Business Centre SA Regus Centres Pty Ltd Regus Business Centre GmbH Regus Business Centre SA Stephanie Square Business Centre SA Regus do Brasil Ltda Regus Business Centre Ltd Regus Business Centre Chile Ltda Regus Business Service Co Ltd Regus Business Services (Shanghai) Ltd Regus Colombia Ltda Regus Business Centre s.r.o Regus Copenhagen Aps Regus Business Centre (Egypt) FoRe Business Centres Ltd ††† Host Regus Ltd Park Business Centres Ltd ††† Regus Business Centres (Holdings) Ltd * Regus Business Centres (UK) Ltd Regus Business Centre Trading Ltd † Regus City Ltd Regus Management Limited Regus (UK) Ltd Regus Finland Oy Regus Paris SA Regus Roissy SA Regus Business Centre GmbH Regus Hellas SA Regus Business Centre Ltd Regus Central Europe Trading and Servicing Ltd Regus Kft Europa Business Centre Ltd Regus Finance Regus Franchise International Ltd Regus Ireland Ltd Regus Business Centres Ltd Regus Business Centre Srl Regus Milano Centrale Business Centre S.p.A †† Regus Japan KK Regus Korea Limited SIA Regus Business Centre Regus Luxembourg SA Regus Centres Sdn Bhd Regus Business Centre SA de CV Regus Services SA de CV Regus Maroc SARL Regus Amsterdam BV Regus Business Centre BV Regus International Holdings BV †† Regus Business Centre Oslo AS Regus Business Centre (Panama) SA Regus Business Centre (Peru) SA Regus Centres Inc Regus Business Centre SP zoo Country of incorporation Argentina Australia Austria Belgium Belgium Brazil Canada Chile China China Colombia Czech Republic Denmark Egypt England England England England England England England England England Finland France France Germany Greece Hong Kong Hungary Hungary Ireland Ireland Ireland Ireland Israel Italy Italy Japan Korea Latvia Luxembourg Malaysia Mexico Mexico Morocco Netherlands Netherlands Netherlands Norway Panama Peru Philippines Poland 52 52 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 % of equity and votes held 100 100 100 100 100 100 100 100 95 100 100 100 100 100 50 100 50 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 65 100 100 100 100 100 100 100 100 100 100 60 100 100 100 100 100 53 53 Principal Group companies continued Shareholder information Name of Group entity Regus Business Centre Lda Regus Business Centre (Romania) SRL LLC Regus Business Centre Regus Centres Pte Ltd Regus Business Centre Bratislava sro Regus Business Centre SA Business Centre Gothenburg AB Business Centre Stockholm AB Regus Business Centre (S) SA Regus Business Centre (Tanzania) Ltd Regus Centres (Thailand) Ltd Regus Tunisie SARL Regus Is Merkezi Isletmeciligi Ltd Sirketi Regus Business Centres (Ukraine) Regus Business Centre Corp Regus Crescent Business Centres LLC ††† Regus Equity Business Centres LLC ††† Regus Business Centre Venezuela CA Regus Centre (Vietnam) Ltd Country of incorporation Portugal Romania Russia Singapore Slovak Republic Spain Sweden Sweden Switzerland Tanzania Thailand Tunisia Turkey Ukraine USA USA USA Venezuela Vietnam % of equity and votes held 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 50 100 100 Investments in Group undertakings are held at cost, all of which are included within the consolidated results. Shares listed above are held directly by Regus plc where indicated by an asterisk. Other than Regus Business Centre BV, Regus Business Centres (Holdings) Ltd and Regus Finance, which are investment holding companies, and Regus Management Limited which is a management company employing head office staff, the principal activity of all other companies is the provision of fully serviced business centres. A full list of the Group companies will be included in the Company’s annual return. † Our Azerbaijan business operates as a branch of this company. †† Our South Africa business operates as a branch of this company. ††† Joint ventures. Annual General Meeting The Annual General Meeting will be held at Regus City Point, 1 Ropemaker Street, London EC2Y 9HT, at 3.00pm on Tuesday 17 April 2001. The full Notice of Meeting and proxy card accompany this report. Registrar Administrative enquiries about the holding of Regus shares should be directed in the first instance to the Registrar whose address is: Capita IRG Plc Bourne House 34 Beckenham Road Beckenham Kent BR3 4TU United Kingdom Tel: +44 (0) 20 8639 2000 www.capita-irg.com American Depositary Receipts (ADRs) In the US, the Company’s ordinary shares are traded in the form of American Depositary Receipts, evidenced by ADRs, and are traded under the symbol “REGS” on NASDAQ. Each ADR represents five ordinary shares in Regus plc. Morgan Guaranty Trust Company of New York is the authorised Depositary Bank for the Regus ADR Programme. For enquiries on the ADR service please contact our representatives at: Morgan Guaranty Trust Company of New York PO Box 842006 Boston MA 02284-2006 USA Tel: +1 781 575 4328 Investor relations For investor enquiries, please contact: Dale Lawrence Director of Public Relations Regus plc 3000 Hillswood Drive Chertsey KT16 0RS United Kingdom by telephone +44 (0) 1932 895 000 by fax +44 (0) 1932 895 260 by email dale.lawrence@regus.com Unsolicited mail The Company is obliged by law to make its share register available to other organisations who may then use it for a mailing list. If you wish to limit the receipt of unsolicited mail you may do so by writing to: The Mail Preference Service (MPS) Freepost 22 London W1E 7EZ United Kingdom Tel: +44 (0) 845 703 4599 MPS will then notify the organisations which support its service that you do not wish to receive unsolicited mail. Further information Information about Regus may be found on the Regus website at: www.regus.com, or telephone +44 (0) 845 303 3004 (international direct dial). Registered office Regus plc 3000 Hillswood Drive Chertsey Surrey KT16 0RS United Kingdom Registered number 3548821 Tel: +44 (0) 1932 895 000 Fax: +44 (0) 1932 895 001 54 Regus plc Annual report and accounts 2000 Regus plc Annual report and accounts 2000 55 Five-year summary Financial calendar AGM 17 April 2001 Announcements of quarterly results Quarter 1 Quarter 2 Quarter 3 15 May 2001 14 August 2001 12 November 2001 Profit and loss data: 12 months to 31 Dec 1996 £m 12 months to 31 Dec 1997 £m 12 months to 31 Dec 1998 £m 12 months to 31 Dec 1999 £m 12 months to 31 Dec 2000 £m Turnover (including share of joint ventures) Less: share of turnover of joint ventures Turnover Cost of sales (centre costs) Gross profit (centre contribution) Administration expenses before exceptional items Exceptional items Administration expenses after exceptional items Group operating profit/(loss) Share of operating loss in joint ventures Total operating profit/(loss): Group and share of joint ventures Net interest payable and other similar charges Loss on ordinary activities before tax Tax on loss on ordinary activities Loss on ordinary activities after tax Minority interests Retained loss for the financial period Loss per ordinary share: Basic (£) Diluted (£) Weighted average number of shares outstanding (thousands) 32.9 – 32.9 (29.7) 3.2 (8.3) – (8.3) (5.1) – (5.1) (0.6) (5.7) (0.2) (5.9) – (5.9) 58.8 – 58.8 (50.3) 8.5 (13.1) – (13.1) (4.6) – (4.6) (1.8) (6.4) (0.5) (6.9) – (6.9) (0.01) (0.01) (0.02) (0.02) 111.6 – 111.6 (97.2) 14.4 (29.6) – (29.6) (15.2) – (15.2) (2.0) (17.2) (0.8) (18.0) 0.1 (17.9) (0.04) (0.04) 200.6 – 200.6 (183.5) 17.1 (60.0) (5.1) (65.1) (48.0) (0.1) (48.1) (6.8) (54.9) (1.5) (56.4) – (56.4) (0.12) (0.12) 429.2 (8.1) 421.1 (320.8) 100.3 (86.9) (9.5) (96.4) 3.9 (1.0) 2.9 (6.8) (3.9) (9.9) (13.8) 0.3 (13.5) (0.03) (0.03) 400,000 400,000 427,729 469,486 497,889 Balance sheet data (at year end): Fixed assets Cash Total assets Other net current liabilities Creditors: amounts falling due after more than one year Equity minority interests Equity shareholders funds/(deficit) 11.2 3.5 21.6 (14.5) (9.8) (0.1) (9.5) 24.0 14.8 53.0 (32.7) (22.8) (0.1) (16.6) 54.7 48.0 142.2 (59.9) (29.1) (0.2) 13.9 126.8 72.1 268.3 (120.4) (102.4) (0.2) (23.7) 244.6 169.8 544.4 (187.9) (23.8) (0.4) 203.1 56 Regus plc Annual report and accounts 2000 Designed and produced by C&FD. Chairman and Board photography by Neil Hurley at Redback. Printed in England by Fernedge.