Regus Group Plc Annual Report 2012

Plain-text annual report

Regus plc Annual Report and Accounts 2012 Enabling the future of work The world’s largest provider of ﬂ exible workplaces Regus is the major player in the fast developing industry of ﬂ exible work provision – the platform of choice from which businesses of all sizes operate. Over a million customers a day beneﬁ t from our locations spread across almost 100 countries. With our ever expanding range of innovative products and services we enable people to work their way, whether it’s from home, on the road or from an ofﬁ ce. Inside this report Directors’ report: Business review Regus is a well-managed, established business operating in a growing market. It continues to perform well and produce strong shareholder returns. The structural shift to ﬂ exible work presents the Group with signiﬁ cant opportunities for continued proﬁ table growth. Directors’ report: Corporate governance The Board is committed to the high standards of corporate governance as set out in the UK Corporate Governance Code. Financial statements This section of the Report contains statutory ﬁ nancial information for the year ended 31 December 2012. Our business and 2012 performance Our market; our opportunity Why customers choose Regus Chairman’s statement Our strategy Chief Executive’s review Implementing the strategy Chief Financial Ofﬁ cer’s review Corporate responsibility Board of directors Other statutory information Corporate governance Directors’ statements Remuneration report Auditors’ report Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated balance sheet Consolidated statement of cash ﬂ ows Notes to the accounts Parent company accounts Shareholder and other information This section contains information for shareholders, including contacts and glossary. Segmental analysis Five year summary Shareholder information 2 4 6 8 9 10 14 15 20 21 22 24 31 32 42 43 44 45 46 47 48 90 92 94 95 Visit us online at www.regus.com/investors www.regus.com/investors 1 i w e v e r s s e n s u B i e c n a n r e v o g e t a r o p r o C s t n e m e t a t s l i a c n a n F i n o i t a m r o f n i l r e d o h e r a h S Our business Regus is a well-managed, established business operating in a growing market. It continues to perform well and produce strong shareholder returns. 243 new locations in 2012 £175.3m invested in growth 99 countries now included in the network 37% increase in membership up to more than 1.3m 5 countries now covered by Third Place The Regus connected network of more than 1,400 locations, across almost 100 countries, gives businesses, large and small, the high quality environments they need to do business: from city centre, urban and suburban to business parks and travel hubs. Our workspaces provide people with a convenient, high-quality, fully resourced space to work, whether they need it for a few minutes or a few years; giving them what they need, when they need it. Businesses come to Regus because we help them work more productively and more effectively; increasingly we are helping them deal with the challenges and opportunities presented by the structural shift to ﬂ exible working. This mega trend sees businesses turning more of their employees into mobile workers. There are currently more than a billion mobile workers worldwide and the proliferation of smartphones, tablets, laptops and cloud-based systems means that this number will only increase. Yet too many businesses are ﬁ nding growth in this new mobile world of business too difﬁ cult; technology and equipment aren’t enough to make people more productive. Making a ﬂ exible and mobile business work well is hard, which is why Regus exists. Regus pioneered ﬂ exible workspaces more than 20 years ago and we now lead the world in helping businesses make mobility work for them. We are part of the future of modern mobile working. We enable businesses to be ﬂ exible about where they do business, where their people work from and how they reduce costs. Regus puts companies in control of how and where they work, allowing them to be more productive but ensuring they only pay for workspace when and where they need it. In doing so we have built a respected, proﬁ table, world class business which is set for further growth and success. To achieve our ambitions we organise our business into three distinct but interlinked segments:- • A well-established and consistently high performing Mature Centres business. Cash generation is strong and continues to demonstrate robust year-on-year improvements. This part of our business is actively managed to achieve high margin returns; • A fast growing New Centres business which is closely managed to deliver ﬁ nancial maturity as quickly as possible, delivering cash and proﬁ ts in line with the rest of the mature estate. These new centres then join the mature ones within two years of opening thereby driving growth in that business; and • Third Place locations creating new avenues for growth. We continue to experience strong end user demand to place our facilities within third party networks such as motorway service stations, railway stations and retail outlets. What these locations share is an increased use by mobile workers making it a natural ﬁ t with our capabilities. Whilst early in its development, this opportunity is exciting and has signiﬁ cant potential. Growth in our mature estate, achieved through the maturing of new centres, generates the returns which enable us to re-invest to drive further proﬁ table growth. At the same time, the larger we become, the greater our economies of scale. The result is that increased revenues and lower unit costs combine to drive stronger shareholder returns. 2 Regus plc Annual Report and Accounts 2012 Our 2012 performance at a glance Strong, sustained and proﬁ table results across all areas of our business. Key highlights • Group revenue growth of 9.2%, Mature like-for-like revenue growth of 2.9%, both at constant currency • Mature operating profit up 65% to £170.5m with a mature operating margin improvement to 15.2% • Group operating profit increased 66% to £90.2m (2011: £54.5m) • Net cash of £120.0m at year end • Full year dividend increased 10% to 3.2p (2011: 2.9p) i w e v e r s s e n s u B i Number of centres split mature and new Mature operating proﬁt Mature operating margin 1,411 £170.5m 15.2% 382 1,029 255 948 164 920 220 758 128 855 167.5 170.5 19.1 96.6 106.8 63.7 15.2 10.2 10.3 6.5 08 09 10 11 12 08 09 10 11* 12 08 09 10 11* 12 Mature free cash ﬂow £144.3m Mature notional earnings per share Net investment in growth 14.0p £175.3m 144.3 14.1 14.0 175.3 137.6 117.1 70.3 55.1 8.1 8.6 5.4 86.4 71.4 26.2 08 18.2 09 10 11* 12 08 09 10 11* 12 08 09 10 11* 12 Mature New * These ﬁ gures are prepared on a consistent basis, i.e. the Mature Centre business adjusted results for 2012 reﬂ ect only the performance of centres that were open on or before 31 December 2010. 2011 Mature Centres are those that were open on or before 31 December 2009. www.regus.com/investors 3 Our market; our opportunity The structural shift to ﬂ exible work presents the Group with signiﬁ cant opportunities for continued proﬁ table growth. How and where people work is being inﬂ uenced by a wide variety of factors, including, but not limited to, technological advancements, globalisation and changing workforce dynamics. Add to that an era of corporate belt-tightening and economic volatility and the task of structuring an effective and productive work environment becomes even more complex. How a business, irrespective of its size, goes about organising itself to work will determine proﬁ t or loss, expansion or contraction, success or failure. The mainstreaming of mobile technology, smartphones and tablets, has made work something one does rather than a place to go. No longer tethered to a ﬁ xed location, customers and prospects, partners and suppliers, advisers and colleagues are geographically dispersed. As a result, heavy reliability on virtual interactions from home, on the road or at third party locations, diminishes the role of long-term ﬁ xed ofﬁ ce space. Various studies estimate that there are some 1.3bn mobile workers. The simple fact is that the traditional approach to corporate real estate is unable to deal with the challenges and signiﬁ cant opportunities which the shift to ﬂ exible work is creating. As a result, the mismatch between these new ways of working and traditional corporate real estate is causing excessive waste for businesses – at a time when they can ill afford it. In some cases as much as 90% of the costs of providing workspace within a business are currently wasted. The more time workers spend away from their company-owned ofﬁ ces, the more money a company wastes on unused space, energy and technology. Regus is beneﬁ ting from a desire of organisations of all sizes and from all sectors to divest corporate real estate and provide workers with anytime, anywhere, pay-as-you-go, high-quality touchdown space. This structural shift to ﬂ exible work presents the Group with signiﬁ cant opportunities for continued proﬁ table growth. The larger and deeper our network becomes, the more attractive our proposition is and the greater our ability to capitalise fully as this new market grows and matures. Work today 3.1bn Workers in the world 12.8bn Hours wasted annually by US commuters 4 Regus plc Annual Report and Accounts 2012 1.3bn Mobile workers 66% Of workers would consider a paycut for more ﬂ exible work conditions 72% Of workers say ﬂ exible working makes them more productive 90% Potential cost saving from ﬂ exible vs ﬁ xed work “ Flexible working both meets the needs of employees and improves companies’ capacity to serve customers…and, in doing so, it secures competitive advantage.” BT: Flexible working – can your company compete without it? “ There are strong indications that employers can improve the productivity of their employees by allowing them to work ﬂ exibly.” Microsoft: Attitudes to ﬂ exible working ssor this picture. “ The best available evidence suggests that encouraging more ﬁ rms to consider adopting ﬂ exible practices can potentially boost productivity, improve morale, and beneﬁ t the U.S. economy…it is critical for the 21st century U.S. workplace to be organised for the 21st century workforce.” USA: Executive ofﬁ ce of the President, Council of Economic Advisers – work-life balance and the economics of workplace ﬂ exibility QuickTime™ and a are needed to see this picture. decompressor i w e v e r s s e n s u B i “ ...companies should seriously consider expanding the use of these [ﬂ exible work] practices as numerous beneﬁ ts exist for the company, the employee and the larger community.” School of Management Sciences, Pretoria, South Africa: Flexible work practices – an effective instrument in the retention of talent “ [For employers] ﬂ exible working can help retain staff, widen the [available] talent pool…increase commitment and loyalty of staff members. This can in turn translate into improved productivity and by extension improved proﬁ tability.” UK Department for Work and Pensions Taskforce “ Workplace ﬂ exibility is believed to have an overwhelmingly positive effect on engagement, motivation and satisfaction. Seven to eight of every 10 respondents believe their workforce would say there is a positive or extremely positive effect of ﬂ exibility programmes on employee engagement (72%), employee motivation (71%) and employee satisfaction (82%).” World of Work: Survey on workplace ﬂ exibility www.regus.com/investors 5 Why customers choose Regus We offer value, scale, great customer service and are easy to deal with. “We chose Regus because the range of services allows us to concentrate on business and growth.” Matthias Wilberg, Commercial Director, Heinz Switzerland • Network – anywhere business happens, a Regus isn’t far away; be that a central business district or a town, a railway station or retail outlet, we provide the very best places, and locations from which people can work, efﬁ ciently and effectively. Regardless of who they are or what they do, we enable our customers to beneﬁ t from and leverage our geographic scale, which exceeds most of the world’s very largest companies. And as our network grows by at least one new location a day, our ability to be even closer to the customer increases as well. • Innovation – our scale means our innovation leads the industry and over the last 20 years we have become sensitive to the precise needs of business. From the launch in 2007 of our mobile work membership scheme, Businessworld, through to our latest innovation, DocumentStation, a cloud based printing service, we are constantly adding to the products and services that customers can access ‘Only at Regus’. Ultimately customers work with us because they believe they have a better chance of success than if they didn’t. Our job is to make sure that we are 100% focused on making sure this happens. Customers come to Regus because they want to conduct their business operations efﬁ ciently, simply and with minimal hassle. They come to us because they need help in moving to a more ﬂ exible way of working. They come to us because they want to focus on their business rather than where they run it from. They stay because we are far more cost effective than traditional ways of working and because we provide an excellent service. We are committed to providing our customers with the right workplace at the right time, in the right location every time. We provide space for just a few minutes to many years; space to drop-in and catch up on emails between meetings, to a network of ﬁ xed locations around the globe. Across all sectors and budgets we have shaped our products and services to deliver against our customers’ needs, when they need it. Over the last 23 years we have honed our approach so that we are acutely aware of the needs of business. At the heart of our customer offer is our team; dedicated, hard-working, passionate people who help make sure that our customer’s success is our success. We make signiﬁ cant investments in training and development through our School of Excellence programme which equips our front-line team members with the right skills to ﬂ ourish. As a growing business those that are successful often ﬁ nd themselves either training and developing new members of our team or developing other parts of the business; the way we help our people grow ensures we attract and retain the very best. Aside from our great people, the core of our offer to customers is based around two principal differentiators – our network and our ability to innovate: 1 2 3 4 1 Staples, Reading, UK 2 Extra Motorway Services, Cobham, UK 3 Amersfoort Railway Station, Netherlands 4 Extra Motorway Services, Cobham, UK 5 Laren Community Centre, Netherlands 6 Regus plc Annual Report and Accounts 2012 “Simple, cost effective and does not require a long-term commitment. Regus makes setting up in a new country risk and hassle free.” Wolfgang Gollub, Senior Manager, administration – general affairs Toshiba Europe GmbH “The great beneﬁ t of being with Regus is it’s so easy to expand. Every day they evolve their service as they learn more about how we do things differently at Google.” Dr Paul Barreto, Country Manager, Google Portugal “We needed instant availability on ﬂ exible terms, a prestigious location and high quality ofﬁ ces that were in keeping with our own quality image. We looked at a number of buildings and providers, but nothing came close to Regus.” Bernard Carey, Director, BMW 5 i w e v e r s s e n s u B i www.regus.com/investors 7 Chairman’s statement We are pleased to report another year of strong results for Regus, building on our performance of the last few years. Douglas Sutherland Chairman Group revenues grew 9.2% at constant currency rates to £1,244.1m (2011: £1,162.6m), operating proﬁ ts, beneﬁ ting in part from disciplined cost management, improved by 66% to £90.2m (2011: £54.5m), and earnings per share increased from 4.3p to 7.5p. On a like-for-like basis, revenues in our Mature business improved by 2.9% at constant currency to £1,124.1m (2011: £1,114.3m), while operating proﬁ t increased by 65% to £170.5m (2011: £103.6m) as gross margins increased to 29.0% (2011: 25.9%). Additionally, our Mature Centres continued to be highly cash generative, with free cash ﬂ ow (after tax, ﬁ nance costs and maintenance capital expenditure) of £144.3m, representing a mature free cash ﬂ ow yield of 12.8% or 15.3p per share. Alongside our focus on Mature Centre performance, we continued with our strategy to expand Regus’ global network, in order to serve the growing demand for our products and services. Our strategic expansion includes both targeted organic growth and carefully selected acquisitions. During 2012 we added 243 centres, taking us to a year-end total of 1,411. Strategy Regus’ strategy is to serve and proﬁ t from the structural shift towards ﬂ exible work by being the platform of choice from which business operates. The structural shift towards ﬂ exible work is taking place on a global scale and across all business sectors. The step-up of investment in our network in response to growing demand for our services will, together with continued innovations in product offerings and customer service, enable us to maintain our market leading position. We continue to build our management capabilities in line with our growth objectives through the development of our people, processes and systems, supplemented by the strategic hiring of experienced professionals. Consistent with management’s priorities, execution of our strategy includes continuing to improve the proﬁ tability of our mature centres, investing for attractive returns and growing long-term earnings per share. Growth of our Mature business is achieved primarily through the maturing of our new centres. Our mature centres are highly cash generative and this allows us to continue to expand through organic growth and carefully selected acquisitions, enabling us to better serve our existing customers Board composition and performance With a view to the future development of the Group as well as a desire to continue to enhance diversity and succession planning for Board roles, we plan to increase the size of the Board over time. The Nomination Committee has implemented an ongoing programme of engagement with highly qualiﬁ ed potential Non-Executive Directors of varied backgrounds and gender to support this process. A formal external evaluation of the performance of the Board was carried out during the year by an independent leadership consultancy with experience in conducting such reviews. The external evaluation results were reviewed by the Board and are being addressed in our efforts to continuously improve the processes and effectiveness of the Board. No reportable matters were noted by the evaluation and we continue to have full conﬁ dence in the Board’s members and processes. 8 Regus plc Annual Report and Accounts 2012 as well as attract new customers in new markets. Based on Regus’ strong ﬁ nancial performance, we are conﬁ dent these investments will translate into future proﬁ ts. Overall, this set of results again reﬂ ects our resilient business model and the continued success of our growth strategy. The Group has again proved itself capable of delivering strong and sustainable growth and returns. Our people As a growth orientated company, the Board is only too aware of how important a committed and motivated workforce is to us achieving our aspirations. As such, we remain focused on maintaining high levels of employee engagement, training and development. I would like to place on record my thanks to all our team members around the world for their continued hard work and dedication. The strong results we present are a testament to their endeavours. Dividend Given the strong performance of the business, the Board is recommending a ﬁ nal dividend of 2.2p. Subject to the approval of shareholders at the 2013 AGM, this will be paid on 31 May 2013 to shareholders on the register at the close of business on 3 May 2013. This represents an increase in the full year dividend of 10% to 3.2p (2011: 2.9p). Douglas Sutherland Chairman 5 March 2013 Our strategy Regus aims to serve and proﬁ t from the structural shift to ﬂ exible work by being the platform of choice from which businesses operate. Our strategic aims Our approach What we did in 2012 Grow mature revenues and margin Expand our network Revenue growth achieved primarily through addition of maturing new centres, but also through incremental new revenue sources. Active management of the mature estate delivers high occupancy and usage. Together with lower relative overheads, this improves margins. 2010 new centres matured well with no overall dilutive effect on our Mature business and delivered a post-tax return on gross investment that exceeded 27%. Like-for-like revenues were up 2.9% and mature REVPOW increased by 2.4%, both at constant currency. Growth is demand led, though we are always mindful of the risk and return with each opportunity. We extend our network into new markets; both in-country and new country, only growing in existing locations where we have excessive demand. 243 new locations added across all continents (including openings in ﬁ ve new countries) which contributed to a 17% increase in network reach. i w e v e r s s e n s u B i Accelerate product and service innovation Our scale means we are the only industry player that can constantly innovate. Much is market led, responding to, as well as anticipating, customer needs. Our approach to new product development is referred to as ‘Only at Regus’. Major investment into an upgrade of our technology infrastructure to support new initiatives such as: ten-fold increase in bandwidth available to customers; launching Voice over IP; new cloud printing service. Maximise the strengths of our brand and network Growth of the network into locations nearer where people live and work drives awareness and interaction. Continued investment in focused, targeted local marketing to attract new customers. Multiple new channels through partnerships with organisations such as BMW. Record levels of new customer leads. Third Place agreements now in place across ﬁ ve countries – UK, France, Germany, Netherlands and Switzerland. Strengthen management Make sure we have the right people in the right places; empowering local management and delegating decision making. This provides better intelligence and insight as well as faster and more appropriate response times. We now have country managers in place for all our countries and at the same time have made key strategic hires within our Group function. Control overheads Achieved through operational excellence, scale and innovation. As our network grows so we achieve signiﬁ cant scale beneﬁ ts and operational leverage. Smarter purchasing then adds additional beneﬁ t. Decrease in overheads per centre: whilst our network grew by 17.3%, overhead costs increased by only 4.1% at constant currency. www.regus.com/investors 9 Chief Executive’s review A robust performance with improvements across the board. I am delighted to be yet again reporting another set of excellent results, made all the more satisfying given the challenging macro economy. We have increased revenue, improved proﬁ t margins and delivered strong cash generation. As demand has continued to grow, we undertook a signiﬁ cant acceleration of new centre expansion, with 243 new centres added. This contributed to a 17% growth in our network, on top of 11% in the prior year. As the structural shift to ﬂ exible work accelerates, we see signiﬁ cant additional opportunities to invest in expanding and improving our offer to customers and are conﬁ dent this will deliver excellent returns for shareholders. This conﬁ dence is underpinned by the encouraging performance of our new centres and the strong results from our growing mature estate. “ Healthy occupancy and increasing REVPOW are driving margin improvements.” Mark Dixon Chief Executive Ofﬁ cer Over the period Group revenues increased by 7.0% to £1,244.1m (2011: £1,162.6m), operating proﬁ t increased to £90.2m (2011: £54.5m), EPS increased by 74% to 7.5p and, subject to shareholder approval, we will increase the ﬁ nal dividend by 10% to 2.2p, making a total of 3.2p for the year (2011: 2.9p). Our balance sheet remains strong with net cash of £120.0m and during the year we secured a £200m revolving credit facility, providing us with further funding ﬂ exibility. As previously announced the reported results have beneﬁ ted from the accounting changes we implemented with effect from 1 January 2012. Accordingly, we set out in the table below the impact of these changes to highlight the strong adjusted performance. In our Mature Centres business, operating proﬁ ts rose by 65% to £170.5m, with free cashﬂ ow (after tax, ﬁ nance costs and maintenance capital expenditure) at £144.3m (15.3p per share), on the back of revenues up 2.9% at constant currency rates to £1,124.1m. Customer numbers were up 37%; our network increased by 17%; and we opened in four new countries. In total we invested £175.3m in our New Centres business during 2012 compared with £103.4m last year. Our New Centres continue to perform as expected, as they progress towards ﬁ nancial maturity. This, combined with the performance of our mature centres, demonstrates the underlying strength of our business. £m Revenue Gross proﬁ t (centre contribution) Gross margin Operating proﬁ t Operating margin Proﬁ t before tax Taxation Proﬁ t for the period Earnings per share (p) EBITDA EBITDA Margin Reported 2012 1,244.1 Accounting Changes – Adjusted 2012 1,244.1 Adjusted 2011 1,162.6 Accounting Changes – Reported 2011 1,162.6 320.7 25.8% 90.2 7.3% 85.1 (14.2) 70.9 7.5 159.4 12.8% (21.6) (21.6) (21.6) – (21.6) (8.2) 299.1 275.2 24.0% 23.7% 68.6 50.6 5.5% 4.4% 63.5 45.5 (14.2) (8.9) 49.3 36.6 5.2 4.0 151.2 124.1 12.2% 10.7% (3.9) (3.9) (3.9) 0.1 (3.8) (5.2) 279.1 24.0% 54.5 4.7% 49.4 (9.0) 40.4 4.3 129.3 11.1% 10 Regus plc Annual Report and Accounts 2012 The market opportunity – a structural shift towards ﬂ exible work Regus’ business model is ﬁ rmly focused on serving and proﬁ ting from the structural shift towards ﬂ exible work by being the platform of choice from which businesses operate. The way in which people work is changing at an accelerating rate, driven by a wide variety of factors including technological change, globalisation and changing workforce dynamics, with growing recognition from large organisations that these changes can underpin substantial productivity, capital expenditure and cost improvements. As this trend develops the demand for high quality, short-term, drop-in space and the services which go with them, continues. This plays perfectly to our business model. Our step-up in investment reﬂ ects the growth in demand, with customers seeking work locations ranging from traditional business centres, railway stations, motorway service stations, to airports and retail outlets. Our business We look at our business as three discrete but interlinked segments, all of which made strong progress over the course of the year. Mature Centre business (centres open on or before 31 December 2010) The performance of our Mature Centres business remains fundamental to the Group. In 2012 the business continued to move forward. We remain pleased with the levels of occupancy we are achieving (which averaged 85.8% through the year) and the improvement to REVPOW, which increased to £7,565, an improvement of 2.4% (up £183) at constant currency rates and 0.4% (up £32) at actual rates, a continued sign of robust yield management. This healthy occupancy and increased REVPOW were the principal drivers of the improvement in adjusted mature gross proﬁ t margin to 27.9% (2011: 26.0%). The 2010 new centres, which joined the mature estate in 2012, generated strong margins in line with the rest of the mature estate after being open less than two years on average. Moreover, for the year in question the 2010 centres achieved a post-tax return on the gross investment in excess of 27%. We continue with our active management of the mature network to deliver high occupancy and usage. This, when coupled with lower relative overheads, generates improved operating proﬁ t margins. To achieve this, we focus on the following: • Improving portfolio balance and diversiﬁ cation – Widening the reach of our network into new countries – Deepening the network within countries • Diversifying the customer base – Assisting large Enterprise organisations in transitioning to more ﬂ exible work models. Over the year agreements were signed with Telefonica, Aviva and ABN Amro amongst others – Developing new channels – for example we signed a deal with BMW in the UK whereby MINI ﬂ eet drivers will be provided with a Businessworld membership allowing them on-demand access to the Regus network • Expanding the product offering – Major improvements to our technology infrastructure to meet customer demands for improved performance, reliability and self-service. Key projects included: upgrading internet performance tenfold; the development and launch of CallStream VoIP platform; and an innovative mobile cloud printing service called DocumentStation • Yield management – Providing the right space to the customer to maximise the revenue generated • Network optimisation – Ensuring that locations remain viable and taking action where they are not performing • Lease management – Ensuring we have sufﬁ cient ﬂ exibility within our portfolio. Currently over 82% of leases associated with our Mature business are either ﬂ exible or variable Making progress against our strategy Our strategic aims: Our focus for 2013: Grow mature revenues and margin Expand our network Accelerated product and service innovation Maximise the strengths of our brand and network Strengthen management Ensure our 2011 centres further mature, add to the overall Mature business performance and deliver similar ROIs to those opened in 2010; make additional incremental improvements to mature margins and mature REVPOW. i w e v e r s s e n s u B i As we aim for a network of at least 2,000 locations by 2014, we will continue to grow in response to customer demand and local market opportunities. Working on signiﬁ cant enhancements to the co-working, Virtual Ofﬁ ce and Businessworld products, as well as developing additional value added business services for customers. Continue with global deployments of new technology, voice and cloud printing platforms. New teams focused on driving additional incremental revenue and opportunities from the network. Third Place to rapidly develop as we work with more partners. Focus on bedding in new structure and developing in-country management. Strengthen Group functions to provide best possible support framework. Control overheads Achieve additional decreases in overheads per workstation through scale beneﬁ ts and smarter purchasing. www.regus.com/investors 11 Chief Executive’s Review continued Increased investment for future cash ﬂ ow Why is growth so important? • Continued customer demand • Substantial opportunities to invest above our hurdle rate • Scale drives reduction in overheads per centre • Further strengthening of the network What we delivered in 2012 • 17% growth of centre network (2011: 11%) – 243 new centres • Strong 2010 and 2011 centre performance endorsed Regus’ growth strategy Net increase in size of network +208 Net openings +101 +119 +208 +589 2,000 1,411 1,203 1,084 983 09 10 11 12 Medium term target Net annual growth of estate +17.3% +17.3 +10.3 +11.0 +0.5 09 10 11 12 New Centres (open on or after 1 January 2011) We closely manage new locations. Our goal is for them to generate cash and proﬁ ts in line with the rest of the mature estate as soon as possible. Speciﬁ cally: • Our 2011 centres ﬁ nancial proﬁ le is in line with expectations. Totalling 139 new openings, these generated £74.0m of revenue and made a positive centre contribution of £3.8m. In the months following opening a signiﬁ cant amount of sales and marketing effort is required to support occupancy growth. Consequently, after application of overhead, the drag on operating proﬁ t of these centres in 2012 was £16.6m, although this ﬁ gure in H2 2012 was only £3.6m as they were maturing. As in previous years we expect 12 Regus plc Annual Report and Accounts 2012 these centres to contribute to operating proﬁ t as they enter the mature estate. • The 243 centres that we added during 2012 generated revenues of £39.0m and made a negative centre contribution of £8.7m, in line with our expectations. These additions contributed to a 17% increase in our overall network. The heavy overhead investment required to open and support these new centres, as well as the negative gross proﬁ t as they open, resulted in a drag of £62.5m on the Group’s operating proﬁ t. The current economic climate and weakness in the commercial property market continue to present us with excellent opportunities to grow our network on preferred terms and with a lower risk proﬁ le. As well as enabling us to respond to the strong demand we are experiencing across almost all markets, growth builds our network effect, ﬁ lling in portfolio gaps and allowing us to beneﬁ t from economies of scale – whilst our network grew by 17% over the period in question, our total Group overhead costs increased by 4.1% at constant currency (2.4% at actual rates). We remain focused on opportunities, both organic and through acquisition, that are prudent and capable of delivering sustainable returns. Acquisitions must meet the same exacting investment criteria that we apply to organic openings. Our management team has signiﬁ cant experience of integrating acquisitions, making rapid operational and ﬁ nancial improvements and then taking those acquired businesses to the next stage of their development, thereby further enhancing returns. Third Place Our move into Third Place is a direct result of strong customer demand and from partner organisations inviting us to develop service offerings within their networks. These spaces, such as motorway service stations and railway stations, are ones from which people are increasingly likely to work when on the move; enabled primarily by mobile technology. We continue to respond proactively to and be led by end-user demand in this exciting new ﬁ eld. Achievements of note during 2012 include the expansion of our locations on the Dutch rail network with NS Trains; a new deal signed in the third quarter with SBB Railways in Switzerland; the opening of the ﬁ rst business centre locations on the UK motorway service network at three Extra locations; and facilities within four Staples stores in the UK. Since year end we have extended our relationship with Shell to cover 69 locations (ranging from drop-in business lounges to wiﬁ hotspots) across the Berlin Metropolitan area and signed an agreement to add additional locations to the UK motorway network with Welcome Break. It should be noted that the capital expenditure involved in third place locations is signiﬁ cantly lower than for our core Mature and New Centre businesses. While the potential of our Third Place business is exciting – wherever people may ﬁ nd themselves working, there is an opportunity for Regus to improve that experience – it is important to stress that it remains small and embryonic at this stage and is currently immaterial in the context of our core centre operations. Improving our management team As the network grows so our ability to deliver at the local level becomes far more dependent on the strength of our local, in-country management teams. In 2012 we continued to see the beneﬁ ts of our approach to recruiting ahead of our growth curve. The process is ongoing and we are making signiﬁ cant hires at a country management level to ensure that the improvement in our results continues. At the same time we appointed several highly experienced professionals to occupy strategic roles within the Group. Operational review Over the year the Group opened 243 new centres (2011: 139) with the total number as of 31 December 2012 standing at 1,411 (2011: 1,203). This growth resulted in an increase in total workstation capacity (including non-consolidated workstations) of 17.7% to 240,131 and the number of consolidated workstations as at 31 December 2012 by 18.4% to 229,615. Over the period customer numbers increased by 37% to approximately 1.35 million. To review our business more meaningfully, we will concentrate on our mature business performance development, which represents like-for-like business: Americas Our Americas business posted another strong performance. Mature revenues were up 4.1% at constant currency to £480.0m (up 3.6% at actual rates), with average mature occupancy of 88.6% during the period (2011: 87.7%). On an adjusted basis mature gross margins improved to 31.1% (2011: 28.7%). During the year, we added 126 centres, including our ﬁ rst in Halifax, Canada; Vitoria, Brazil; and Pasadena, USA, as well as entering Ecuador. This growth contributed to a 13% increase in the average number of consolidated workstations from 80,064 in 2011 to 90,617 in 2012. EMEA The region delivered mature revenues of £275.2m, an increase of 1.6% at constant On a regional basis, mature revenues and contribution can be analysed as follows: Revenue Contribution Reported Mature* Margin (%) Adjusted** Mature Margin (%) £m Americas EMEA Asia Paciﬁ c UK Other Total 2012 480.0 275.2 163.4 204.2 1.3 2011 463.3 288.8 159.8 200.7 1.7 1,124.1 1,114.3 2012 152.9 80.1 53.5 37.9 1.3 325.7 2012 2012 2011 2011 2011 132.7 31.9% 28.6% 31.1% 28.7% 75.2 29.1% 26.0% 27.8% 26.1% 45.1 32.7% 28.2% 30.6% 28.5% 32.1 18.6% 16.0% 17.9% 16.1% – 3.3 288.4 29.0% 25.9% 27.9% 26.0% – – – i w e v e r s s e n s u B i * The mature business comprises centres owned and operated on or before 31 December 2010 ** The adjusted mature margin is before the impact of accounting changes implemented from 1 January 2012 currency, and achieved an average mature occupancy of 82.4% (2011: 83.8%). Mature gross margin, adjusted to remove the impact of the accounting changes, improved over the period to 27.8% (2011: 26.1%). During the year, we added 33 centres which contributed to a 7% increase in the average number of consolidated workstations from 38,473 in 2011 to 41,531 in 2012. We opened our ﬁ rst centres in Port Elizabeth, South Africa; Stavanger, Norway; and Antananarivo, Madagascar, as well as opening in Zambia. Asia Paciﬁ c This business delivered mature revenues of £163.4m, up 3.1% on constant currency (up 2.3% at actual rates) and achieved an average mature occupancy of 86.0% (2011: 84.3%). Adjusted mature gross margins improved to 30.6% (2011: 28.5%). During the year we added 79 new centres including Wellington, New Zealand; Sapporo, Japan; and Tianjin, China, as well as opening in Cambodia and Sri Lanka. This contributed to a 25% increase in the average number of consolidated workstations from 27,757 in 2011 to 34,557 in 2012. UK Our UK business delivered mature revenues of £204.2m, up 1.7% on 2011. Adjusted mature gross margins improved to 17.9% (2011: 16.1%), and average mature occupancy remained robust at 83.0% (2011 84.1%). Over the period there was a modest reduction of 1.5% in the average number of consolidated workstations to 37,754 (2011: 38,346) following a small net closure of centres. Outlook Mature proﬁ tability and building long-term earnings per share and shareholder value through targeted growth remain our core focus areas. Accordingly, we will continue to focus on improving margins in our Mature business and investing in new centres which will deliver incremental returns over the medium term. It remains our intention to achieve a global network of at least 2,000 centres by the end of 2014. We expect to add at least 350 centres, including 64 from the acquisition of MWB Business Exchange, in 2013. This number may increase if we ﬁ nd additional compelling opportunities or, alternatively, decrease if we cannot ﬁ nd enough opportunities that meet our strict ﬁ nancial returns criteria. Current trading since the year end has been good and in line with our expectations. As such, we look to the year ahead with conﬁ dence. Mark Dixon Chief Executive Ofﬁ cer 5 March 2013 www.regus.com/investors 13 Implementing the strategy; delivering on our plan Our approach to planning is systematic and rigorous, our country managers focused on delivery. In an organisation that covers 99 countries and more than 200 deﬁ ned geographic areas, having a systematic and rigorous approach to how we turn our strategy into reality is critical to business success. Each country has a comprehensive plan that is owned by the country manager. At a high level the aim of the plan is to clearly deﬁ ne how the mature margin and growth targets will be delivered, what resources will be required, the people development plan, and, crucially, how best to serve the customer. Each plan takes our six strategic principles (outlined on page 9) as its core reference point, but with speciﬁ c focus on mature margin and network growth. These transcend the Group and are against which all activities must be aligned to ensure success. Goals are agreed through a two way dialogue with the central senior management which ensures buy-in and transparency. It is this open culture and accountability which then ensures the goals have the best chance of being achieved. The plan clearly states what high level actions will be needed to achieve the goals and speciﬁ cally what resources will be required from the Group. At the heart of each plan is the customer – consideration of their needs, the opportunities we have to better serve them and where they are looking for us for more support. From this comes the team structure: how we will make sure we have the right people, in the right place, at the right time, focused on the right things. Supporting this are the central functions, such as IT and Procurement, which are there to act as enablers for each country plan. The purpose of the centre is to align itself behind the country goals and enable them to be successful. It creates the supporting infrastructures that make success more likely, for example shared procurement that reduces costs on a per centre basis therefore helping the country achieve its margin targets. It is the responsibility of the central functions to also ensure that their plan articulates how their goals are aligned with and support the Group’s core strategic objectives. 14 Regus plc Annual Report and Accounts 2012 “ Each plan takes our six strategic principles as its core reference point, but with speciﬁ c focus on mature margin and network growth.” A wide variety of tools exists to support the delivery of the plan, as well as to monitor performance. A process of regular reviews and implementation checks ensure timely delivery, primarily through holding teams accountable in a transparent way. This formal business review process is a broad mechanism to review progress, understand issues and provide course corrections. The identiﬁ cation of issues not only ensures the country can take prompt action on those areas of the plan which are failing, but also helps the centre know how well the strategy is playing out so that course corrections can be made in a timely fashion and implemented in other geographies if appropriate. The process of review is essential to check the appropriateness and effectiveness of the goals, the strategic pillars and performance, as well as to allow for adjustment due to changing market dynamics. However, ultimately, the successful execution of the plan rests on the quality of our people as they act as the critical link between it and delivery of the strategy. Our business review process i e w v e 6. R r o t i n o M e r u s a e m & . 5 1. S fra et p m e l a n w n i o n r g k 2 . t a r g e t s A g r e e 4 . I m ple m ent n P l a 3 . Chief Financial Ofﬁ cer’s review A strong ﬁ nancial performance in a year of signiﬁ cant progress. Dominique Yates Chief Financial Ofﬁ cer i w e v e r s s e n s u B i The Group has delivered strong, proﬁ table growth, in line with expectations, despite prevailing currency headwinds and an uncertain economic environment throughout 2012. We improved the performance of our Mature Centres business, increasing like-for-like revenues by 2.9% at constant currency rates. At actual rates this was an increase of 0.9%, from £1,114.3m to £1,124.1m. Similarly as the table below shows, margin performance advanced with the mature adjusted gross margin increasing from 26.0% to 27.9% and, with a strong focus on controlling absolute overheads and improving efﬁ ciency, adjusted operating margin improved still further from 9.4% to 14.1%. This delivered a 51% growth in mature adjusted operating proﬁ t from £104.8m to £158.5m. Average mature occupancy was up to 85.8% from 85.6% in 2011 and REVPOW grew by 2.4% over 2011 at constant currency rates. Cash conversion remains a strong feature of the Mature Centres business. Over the course of the year £144.3m of free cash ﬂ ow was generated, equivalent to a free cash ﬂ ow margin of 12.8%, or 15.3p per share. This has allowed the Group to accelerate investment into attractive growth opportunities in order to meet the growing demand for the products and services that the Group supplies. Overall we invested £175.3m in our New Centres business and during 2012 we added 243 new centres. As expected, the fourth quarter was a particularly active period with 122 centres added to the network. Many of these came via bolt-on acquisitions. Notwithstanding this signiﬁ cant investment in our business, we ended the year in a strong ﬁ nancial position. Net cash at 31 December 2012 stood at £120.0m (2011: £188.3m). To increase the Group’s ﬂ exibility for further growth a four-year, £200m revolving credit facility was signed on 6 August 2012. Reﬂ ecting the ﬁ nancial and operational progress the Group has made, we are recommending a 10% increase in the full year dividend from 2.9p to 3.2p. Segmental presentation To fully understand the fundamental underlying performance of the business it is necessary to look at our mature and new centres separately. This highlights the changing ﬁ nancial characteristics of the centres over time, with new ones negatively impacting proﬁ tability, particularly in their opening year. from 1 January 2012) to better reﬂ ect the underlying economic reality of the business in the ﬁ nancial statements. As expected these changes have materially beneﬁ ted reported proﬁ tability for 2012. We have, where appropriate, highlighted the net impact of these changes on the Group’s performance. These changes had no impact on Group cash ﬂ ow. Given that year-on-year comparisons will again be like-for-like at the level of reported ﬁ gures, it is not the Board’s intention to carry this additional disclosure into 2013. Mature Centres business (centres open on or before 31 December 2010) The table below shows the strong development of the mature performance. At the end of December 2012 there were 1,029 centres in the mature estate, which represented approximately 73% of our global portfolio. Our focus here has remained resolutely on driving the margin forward at the centre level (gross proﬁ t), by providing the right space to the customer to maximise the revenue generated, and delivering additional overhead efﬁ ciency to generate growth in operating margins. Accounting changes As announced during the year and following a review of our accounting policies on asset capitalisation and depreciation, we implemented two changes (effective Our Mature Centres made good progress against both goals during the year, which is pleasing given the near absence of favourable macro trends. Revenue from these centres was £1,124.1m, an increase Mature Centre performance £m Revenue Gross proﬁ t (centre contribution) Gross margin Overheads Joint ventures Operating proﬁ t Operating margin EBITDA EBITDA margin Reported 2012 1,124.1 Accounting Changes – Adjusted 2012 1,124.1 Adjusted 2011 1,114.3 Accounting Changes – Reported 2011 1,114.3 Adjusted % increase 0.9% Reported % increase 0.9% 325.7 29.0% (154.9) (0.3) 170.5 15.2% 223.1 19.8% (12.0) – – (12.0) 313.7 27.9% (154.9) (0.3) 158.5 14.1% 223.1 19.8% 289.6 26.0% (184.9) 0.1 104.8 9.4% 173.1 15.5% 1.2 – – 1.2 288.4 25.9% (184.9) 0.1 103.6 9.3% 173.1 15.5% 8% 16% 51% 29% 13% 16% 65% 29% www.regus.com/investors 15 Chief Financial Ofﬁ cer’s Review continued of 2.9% at constant currency (up 0.9% at actual exchange rates). This performance reﬂ ects average occupancy, at 85.8%, being consistently maintained at the high levels achieved in 2011, as well as growth in REVPOW. Mature REVPOW for the year improved to £7,565, an increase of 2.4% (up £183) at constant currency rates and up 0.4% (up £32) at actual rates. Not only does this like-for-like revenue growth build on the strong performance experienced since the second half of 2011 but we ended the year strongly, with REVPOW increasing 2.6% year-on-year in the fourth quarter on a constant currency basis. Reported gross proﬁ t (centre contribution) increased 13% to £325.7m from £288.4m. Excluding the impact of the accounting changes, there was an underlying improvement of 11% at constant currency (up 8% at actual rates), reﬂ ecting the operational leverage beneﬁ t of higher revenue and strong discipline over managing centre costs. Accordingly, the adjusted gross margin has increased from 26.0% to 27.9%. Overheads allocated to the mature estate reduced from £184.9m in the corresponding period to £154.9m which was a very pleasing result. This continues the sequential half yearly decline seen over the last few years as the Group continues to beneﬁ t from strong cost discipline across the entire business and the ability to leverage this overhead base over a signiﬁ cantly larger number of centres. Accordingly, overheads as a percentage of revenues have continued to decline from 16.6% of mature revenues in 2011 to 13.8% for 2012. As a result, our reported mature operating proﬁ t increased 65% from £103.6m to £170.5m, improving the operating margin from 9.3% to 15.2%. Excluding the impact of the accounting changes, adjusted operating proﬁ ts increased 51% from £104.8m to £158.5m. Reported mature EBITDA increased from £173.1m to £223.1m with the margin improving from 15.5% to 19.8%. The table below sets out a notional EPS calculation for our mature business on both a reported and on an adjusted basis. The increase in notional adjusted mature EPS provides a more representative picture of the development in operating performance of the business, given the accounting changes outlined above. Commensurate with the strong advance in operating proﬁ t, notional adjusted mature EPS has improved by 67% with the reported mature EPS reaching 14.0p. Mature Centres cash ﬂ ow Another attractive characteristic of the Mature business is its cash generation and, once again, the conversion of mature proﬁ tability into cash has been strong, continuing to make a signiﬁ cant contribution to the funding of our new centre growth. Mature Centre cash ﬂ ow £m EBITDA Working capital (estimated) Maintenance capital expenditure Other items Finance costs (all allocated to Mature) Taxation* Mature free cash ﬂ ow 2012 223.1 2011 173.1 6.7 31.2 (48.1) (1.9) (46.9) (1.5) (2.4) (33.1) (0.9) (19.9) 144.3 135.1 * Tax at 20% of proﬁ t before tax Maintenance capital expenditure for the year was little changed at £48.1m (2011: £46.9m), representing 4.3% of annual mature revenues, in line with our guidance of 4-5%. As anticipated, after a working capital outﬂ ow in the ﬁ rst half of £7.8m we saw this reverse and ﬁ nished with a full year inﬂ ow. Mature free cash ﬂ ow generation for 2012 represents a very creditable 15.3p per share. Notional Mature earnings per share £m Mature operating proﬁ t Net interest Taxation Notional mature proﬁ t after tax Notional mature EPS Reported 2012 170.5 (5.1) (33.1) Accounting Changes (12.0) 0.0 2.4 132.3 14.0 (9.6) Adjusted 2012 158.5 (5.1) (30.7) 122.7 13.0 Adjusted 2011 104.8 (5.1) (20.0) 79.7 8.5 Accounting Changes 1.2 0.0 (0.3) 0.9 Reported 2011 103.6 (5.1) (19.7) 78.8 8.4 Adjusted % increase 51% Reported % increase 65% 54% 68% 53% 67% 16 Regus plc Annual Report and Accounts 2012 New Centres (open on or after 1 January 2011) Responding to strong and growing customer demand, we continue to invest in growing our network. In line with the updated guidance we issued in October 2012, the business opened 243 new centres. At the end of December 2012 we had 382 new centres, comprising 27% of the total number of centres. We are realising the beneﬁ t of the substantial investment made to support our growth strategy. During the ﬁ rst half of the year we opened 76 centres, a signiﬁ cant increase compared to the 48 that were opened in the corresponding period of 2011. During the second half this rate of expansion accelerated with the addition of 167 centres (H2 2011: 91 centres). The proﬁ t and cash ﬂ ow proﬁ le of new centres can vary considerably in the early months inﬂ uenced by factors such as their location and whether they are acquired or organic openings. Their impact on the reported results also depends on the timing of the opening within the year. Overall, these new centres have represented a material investment and, with the increase in the pace of openings, represent a material drag on the Group’s income statement. This arises from the signiﬁ cant investment into central overheads and the initial negative gross margin while occupancy builds. The performance of our new centres continues to be in line with management expectations. We view new centres as our future mature estate. For example, consistent with our maturity classiﬁ cation, on 1 January 2012 the centres opened during 2010 joined the Mature business. In line with our expectations, the 2010 openings continued to mature over the course of 2012 and narrow the performance gap with the longer established Mature 2009 business (centres opened on or before 31 December 2009). In 2012, the 2010 openings achieved a gross margin before depreciation and amortisation (CBITDA) of 30.2%, compared to 33.4% on the 2009 Mature Centres business. Using the measure of CBITDA eliminates the higher level of depreciation incurred by the 2010 openings compared to older centres in the Mature 2009 business and provides a more meaningful comparison of operational performance. At the same time, the 2010 centres achieved a post-tax cash return of over 27% on gross investment during 2012. We over anticipate that, in due course, the new 2011 and 2012 openings will deliver a similarly strong performance. The table below illustrates the impact on the income statement of these new openings as well as the impact of the accounting changes implemented. New Centre performance £m 2011 Openings 2012 Openings Revenue 2011 Openings 2012 Openings Gross proﬁ t (centre contributions) Overheads Operating proﬁ t EBITDA Reported 2012 74.0 39.0 113.0 3.8 (8.7) Accounting Changes – – – (1.5) (8.1) Adjusted 2012 74.0 39.0 113.0 2.3 (16.8) Adjusted 2011 20.1 – 20.1 (13.6) – (4.9) (74.2) (79.1) (63.1) (9.6) – (9.6) 8.2 (14.5) (74.2) (88.7) (71.3) (13.6) (36.1) (49.7) (46.1) Accounting Changes – – (5.2) – (5.2) – (5.2) (5.3) Reported 2011 20.1 – 20.1 (8.4) – (8.4) (36.1) (44.5) (40.8) i w e v e r s s e n s u B i The 2011 openings continued to progress to maturity in line with management’s expectations. As described above, the initial ﬁ nancial proﬁ le of a new centre can be inﬂ uenced by a number of factors. In the case of our 2011 openings, these were weighted towards the end of the year. As the anticipated build in occupancy occurred, so the expected ﬁ nancial performance materialised. The 2011 openings contributed a positive gross proﬁ t by the second quarter of 2012. This momentum continued and generated a gross proﬁ t for the year of £3.8m. By the fourth quarter these centres were close to operating proﬁ t break even. Also, as anticipated, the openings in 2012 delivered a negative gross proﬁ t of £8.7m and, as is normal, attracted a signiﬁ cant level of overhead costs, resulting in an overall drag of £62.5m on Group operating proﬁ t. We set out below the cash ﬂ ow impact of the investment in new centres: Investment in new centres £m EBITDA Working capital (estimated) Growth capital expenditure Taxation New investment in growth 2012 (63.1) 2011 (40.8) 39.7 19.6 (171.1) 19.2 (91.4) 9.2 (175.3) (103.4) During 2012 the Group signiﬁ cantly increased its investment into growing the business from £103.4m to £175.3m. New centres continue to have a positive impact on working capital. Every potential new centre location is rigorously evaluated by the investment committee and has to meet stringent ﬁ nancial hurdles before being approved. This is a process we continue to focus on. Closures In addition to the normal expiry of lease commitments we constantly review our portfolio of centres against strong performance criteria. Accordingly, during 2012 we closed or relocated 26 centres (2011: 20). These centres contributed an www.regus.com/investors 17 Chief Financial Ofﬁ cer’s Review continued operating loss of £1.2m in 2012, against a loss of £4.6m in the corresponding period. Third Place Our Third Place business has gained momentum during 2012 and the pipeline of potential opportunities is strong. While we are encouraged with progress made to date, it still remains too early to evaluate the full ﬁ nancial potential, both in terms of investment and returns. As such, we have continued to report the results within our ‘New Centre’ segment. When the business becomes more meaningful, we will separate out the results. As previously stated, there is no relaxation of our investment criteria in appraising these opportunities. Overheads In a year when we have signiﬁ cantly increased our network, we have maintained a strong focus on cost management. Total overhead costs increased just 4.1% at constant currency (2.5% at actual rates) to £230.2m (2011: £224.7m). Our network increased by 17% in the same period and our overhead per available workstation was back below the level in 2010. As a result, total Group overheads as a percentage of revenue have fallen to 18.5% (2011: 19.3%). This has been achieved whilst increasing investment in areas which differentiate us from other market participants: in the product development team to drive innovation; and in our property team to drive accelerated growth, which in itself drives additional overhead costs as new centres require a higher investment in sales and marketing than Mature Centres. Other costs continue to be rigorously controlled which, along with efﬁ ciency and productivity improvement, ensures that we continue to realise the beneﬁ ts of economies of scale. The methodology by which we have allocated overheads to the various elements of our business is consistent with that used in presenting the results for 2011. There are four elements to the allocation: • It is estimated that 90% of property team costs are spent on supporting our growth programme; • On average, each additional centre costs £130,000. This reﬂ ects the cost of management time, sales and marketing set-up costs (which are deducted before the allocation of sales and marketing costs as outlined below), Group operating proﬁ t reconciliation £m Revenue Cost of sales Centre contribution Overheads Share of proﬁ t on JV Operating proﬁ t EBITDA £m Revenue Cost of sales Centre contribution Overheads Share of proﬁ t on JV Operating proﬁ t EBITDA Mature centres 2012 1,124.1 (798.4) 325.7 (154.9) (0.3) 170.5 223.1 New centres 2012 113.0 (117.9) (4.9) (74.2) – (79.1) (63.1) Closed centres 2012 7.0 (7.1) 0.1 (1.1) – (1.2) (0.7) Mature centres 2011 1,114.3 (825.9) 288.4 (184.9) 0.1 103.6 173.1 New centres 2011 20.1 (28.5) (8.4) (36.1) – (44.5) (40.8) Closed centres 2011 28.2 (29.1) (0.9) (3.7) – (4.6) (2.4) Total 2012 1,244.1 (923.4) 320.7 (230.2) (0.3) 90.2 159.3 Total 2011 1,162.6 (883.5) 279.1 (224.7) 0.1 54.5 129.3 18 Regus plc Annual Report and Accounts 2012 human resources, recruitment and training costs, administrative and ﬁ nance set-up costs and professional costs associated with acquisitions; • For the remainder of the sales and marketing costs, the principle is that the allocation is made on the basis of new workstation sales as the nature of the spend is to generate new enquiries and to convert these into new sales; and, • For all other overhead costs we follow the principle of allocating the costs pro-rata by reference to time-apportioned available workstation numbers. Group operating proﬁ t reconciliation The tables below reconcile the elements of our business by maturity to the Group consolidated income statement down to operating proﬁ t and including EBITDA. Overall, Group revenues increased 7.0% from £1,162.6m to £1,244.1m (a 9.2% increase at constant currency rates). Reported gross proﬁ t increased 15% from £279.1m to £320.7m and, with the operational leverage enjoyed by the business, operating proﬁ t advanced 66% from £54.5m to £90.2m. Net ﬁ nance costs Although the Group remains in a strong net cash position despite the signiﬁ cant investment into New Centre growth, a net ﬁ nance charge of £5.1m was incurred (2011: £5.1m). As expected, the net charge was impacted in the second half by £2.2m of costs related to the new four-year, £200m revolving credit facility and the renewal of our £85m guarantee facility for a further four years. The Group also incurred a notional interest charge of £1.4m (2011: £2.0m) relating to the accounting treatment of a fair value adjustment on an acquisition in 2006. Tax The tax charge for the year was 16.7% (2011: 18.2%). As previously highlighted, this is low as a result of the accounting changes outlined above, which had a material positive impact on reported proﬁ tability but limited implications for taxation. i w e v e r s s e n s u B i The Board continues to believe that 20% remains the long-term underlying effective tax rate for the Group. Earnings per share The Group earnings per share increased to 7.5p (2011: 4.3p). 2012 saw a signiﬁ cant increase in the centre network and, as previously highlighted, our new centres create a signiﬁ cant drag on proﬁ ts, which impacts the statutory earnings per share for the Group. The weighted average number of shares in issue remained broadly unchanged at 941,921,816 (2011: 941,898,916). No shares were purchased by the Group during the period. Cash ﬂ ow and funding The table below reﬂ ects the Group’s cash ﬂ ow. Underlying cash generation from the Mature business remains strong with a mature free cash ﬂ ow of £144.3m. Again, the mature cash ﬂ ow has largely funded the uplift in investment in new centre openings. During 2012, £175.3m was invested in new centres compared to £103.4m in the corresponding period. Notwithstanding this growth investment, the Group remained in a healthy ﬁ nancial position. At 31 December 2012 the Group had net cash of £120.0m (2011: £188.3m). Group cash ﬂ ow £m Mature cash ﬂ ow New investment in new centres Closed centres cash ﬂ ow Exceptional items Total net cash ﬂ ow from operations Dividends Corporate ﬁ nancing activities Change in cash & cash equivalents Opening net cash Exchange movements Closing net cash To provide additional ﬂ exibility, on 6 August 2012 the Group signed a four-year, £200m revolving credit facility with a consortium of six banks. our stringent returns criteria. Accordingly, we have always indicated that we can shut off growth very quickly in the event that we determine a need to do so. As our business grows (we have opened 382 centres over the last two years to stand at 1,411 centres at 31 December 2012), the underlying operational cash generation increases further, as does our ability to fund growth from internal cash generation. We estimate that, all other things being equal, we would be able to fund approximately 250 new centres in 2013 from internally generated funds. Currently, however, we expect to add at least 350 centres during 2013 (including 64 through the acquisition of MWB Business Exchange). If we achieve this level of new centre openings, we would anticipate ending 2013 with a modest, positive net cash position. We believe that the combination of our strong net cash position, increased operational cash generation and access to the revolving credit facility, provide the Group with the appropriate ﬁ nancial headroom to execute our strategy and remain focused on maintaining a robust capital structure. The Group is driven by risk-adjusted returns and will only continue to invest if the environment and centre performance meet 2012 144.3 (175.3) (6.4) – (37.4) (28.2) (0.3) (65.9) 188.3 (2.4) 120.0 2011 135.1 (103.4) (4.5) (1.9) 25.3 (25.0) 0.1 0.4 191.5 (3.6) 188.3 Risk management The principal risks and uncertainties affecting the Group remain unchanged. A detailed assessment of the principal risks and uncertainties which could impact the Group’s long-term performance and the risk management structure in place to identify, manage and mitigate such risks can be found in the corporate governance section (pages 24 to 30). We continue to monitor the attempts by the International Accounting Standards Board to ﬁ nd a solution to the perennial debate on lease accounting. Until the second Exposure Draft is published it remains unclear how this debate will conclude. Regardless, it will have no impact on the underlying commercial dynamics of our business. Timing around the publication of the second Exposure Draft remains ﬂ uid. Related parties Details of related party transactions that have taken place in the period can be found in note 30 to the 2012 Annual Report and Accounts. There have been no changes to the type of related transaction entered into by the Group that had a material effect on the ﬁ nancial statements for the period ended 31 December 2012. Dividends Subject to shareholder approval, we will increase the ﬁ nal dividend for 2012 by 10% to 2.2p (2011: 2.0p). This will be paid on Friday 31 May 2013, to shareholders on the register at the close of business on Friday 3 May 2013. This represents an increase in the full year dividend of 10%, taking it from 2.9p for 2011 to 3.2p for 2012. Dominique Yates Chief Financial Ofﬁ cer 5 March 2013 www.regus.com/investors 19 Corporate responsibility Reducing our environmental impact; supporting our communities. Our Portuguese team supported the Portuguese Association for the Rights of Children and Family, collecting toys, clothes, food and school equipment for disadvantaged children. Similarly in Argentina our centres collected and donated toys for the Isidro Children’s Hospital in Buenos Aires. In China our teams joined forces with the Concordia Welfare and Education Foundation which helps to educate children in parts of Asia Paciﬁ c where education can be prohibitively expensive. Our UK business continued its long association with Macmillan Cancer Support and DeBra, a charity for children with a genetic skin condition, raising £12,000 through an annual rafﬂ e. Environmental Regus are currently in the ﬁ nal stages of appointing a global energy consultancy to manage, monitor and maintain the Group’s global carbon footprint with respect to Scope 1 and Scope 2 carbon reporting. The primary driver of this is to help the business accurately understand its carbon footprint and then put in place targets and plans to reduce. In doing so we aim to replicate the success of our pilot UK programme across our global network. In line with our published Environmental Policy, we have for the past few years actively reduced our carbon emissions (particularly through our use of gas and electricity) and we are pleased to report that the overall reduction of our UK carbon footprint from our base line of 2007 has been maintained at 29% and we remain on target to achieve a 50% reduction by 2020. Given the rapid progress made in 2010 and 2011, especially with building voltage optimisation, new chiller and boiler controls and behavioural changes, we found it difﬁ cult to make further savings to achieve an additional 5% reduction for 2012. Stronger progress was made with regards to our dry mixed recycling programme, which, with the focus of our in-centre Greener Working Champions, meant we achieved our 2012 target of a 35% reduction. We continue to be full participants in the UK government’s Carbon Reporting Commitment (CRC), having successfully purchased and surrendered 34,072 carbon allowances for 2011/12. It was also pleasing to note that despite 2012 being a year of consolidation we still managed to reduce our carbon allowance requirement by 2.6% from last year’s 34,969. Charitable activities Our team members are active participants in their local communities and in 2012 with the support of the business achieved great things. Following the devastating ﬂ oods in the Philippines, Regus donated a total of £20,000 of which £4,000 came directly from team members. These monies were provided to the Philippine charity Gawad Kalinga and are being used to build new homes for families affected by the ﬂ ood. Building commenced this month and will be completed before the next ﬂ ood season in June 2013. Over the last two years our US team has supported the Susan G Komen foundation raising in excess of US$100,000. This has provided more than 12,000 screening mammograms and supported more than 2,000 women with case management and treatment assistance. Our progress this year Regus UK YTD Rolling kg CO2 pa per Occupied Workstation Reduction of the UK carbon footprint 29% since 2007 Target achieved 35% dry mixed recycling n o i t a t s k r o W d e p u c c O i r e p a p 2 O C g k 190 180 170 160 150 140 130 120 110 100 90 20 Regus plc Annual Report and Accounts 2012 Actual reduction of 10.3% by Dec 2010 Actual reduction of circa 29% by end Dec 2012 34% expected reduction by Dec 2013 (from Dec 2007 baseline) 2008 2009 2010 2011 2012 2013 Actual reduction Original target reduction Revised target reduction Board of directors The role of the Board is to provide entrepreneurial leadership and to review the overall strategic development of the Group. Douglas Sutherland (N) Chairman Lance Browne (A, N, R) Senior Independent Non-Executive Director Douglas Sutherland was appointed Non-Executive Director of Regus on 27 August 2008 and was appointed Non-Executive Chairman on 18 May 2010. Douglas was Chief Financial Ofﬁ cer of Skype during its acquisition by eBay and was also Chief Financial Ofﬁ cer at SecureWave during its acquisition by PatchLink. Prior to this, Douglas was previously an Arthur Andersen Partner with international management responsibilities. He has served as a director of companies in several jurisdictions and was the founding Chairman of the American Chamber of Commerce in Luxembourg. Douglas is currently also a Director of Median Kliniken S.à r.l. and Median Gruppe S.à r.l. Lance Browne was appointed Non-Executive Director of Regus on 27 August 2008, became Senior Independent Director on 18 May 2010 and Chairman of the Nomination Committee on 27 September 2012. Lance is Vice Chairman of Standard Chartered Bank (China) Limited, Chairman of Travelex (China), and Non-Executive Director of G3. He was previously Non-Executive Director of IMI plc, Senior Advisor to the City of London, Chairman of China Goldmines plc, and Director of Business Development at Powergen International (HK). Mark Dixon Chief Executive Ofﬁ cer Elmar Heggen (A, N, R) Independent Non-Executive Director Chief Executive Ofﬁ cer and founder, Mark Dixon is one of Europe’s best known entrepreneurs. Since founding Regus in Brussels, Belgium in 1989, he has achieved a formidable reputation for leadership and innovation. Prior to Regus he established businesses in the retail and wholesale food industry. A recipient of several awards for enterprise, Mark has revolutionised the way business approaches its property needs with his vision of the future of work. Elmar Heggen was appointed Non-Executive Director of Regus on 1 June 2010 and was appointed Chairman of the Audit Committee on 27 September 2012. Elmar has extensive management experience and is currently Chief Financial Ofﬁ cer and Head of the Corporate Centre at RTL Group, the leading European entertainment network, where he has held various roles since 2000. Elmar began his career at the Felix Schoeller Group, becoming Vice President & General Manager of Felix Schoeller Digital Imaging in the UK in 1999. e c n a n r e v o g e t a r o p r o C Dominique Yates Chief Financial Ofﬁ cer Alex Sulkowski (A, N, R) Independent Non-Executive Director Dominique Yates was appointed Chief Financial Ofﬁ cer on 1 September 2011. Previously he served as Chief Financial Ofﬁ cer at both LM Windpower, the Netherlands-headquartered renewable energy company, and Symrise AG, the MDAX listed speciality chemicals company. He also held senior positions at Imperial Tobacco Group plc, including Group Financial Controller, General Manager of France, Switzerland, Italy and Malta, and Group Business Development Director. He is a qualiﬁ ed chartered accountant. Alex Sulkowski was appointed Non-Executive Director of Regus on 1 June 2010; he also serves as Chairman of the Remuneration Committee, having been appointed on 27 September 2012. Alex has over 30 years of experience in international ﬁ nance structures, private equity, tax advice and real estate. He is currently the Managing Director of Third Millennium Investments SA and is a founding member of Taxand, the largest global network of independent tax advisers. Prior to this Alex enjoyed a career with Arthur Andersen, responsible for the Belgium and Luxembourg tax practices, prior to joining Ernst and Young in 2002 as the Partner responsible for the Luxembourg tax practice and then serving as the Managing Partner of Atoz Tax Advisors from 2004 through 2009. Notes (A) Member of the Audit Committee (N) Member of the Nomination Committee (R) Member of the Remuneration Committee www.regus.com/investors 21 Other statutory information Directors’ Report The Directors of Regus plc (société anonyme) (the ‘Company’) present their Annual Report and the audited financial statements of the Company and its subsidiaries (together the ‘Group’) for the year ended 31 December 2012. Directors The Directors of the Company who held office during the financial year were: Executive Directors Mark Dixon Dominique Yates Non-Executive Directors Douglas Sutherland Lance Browne Elmar Heggen Alex Sulkowski Biographical details for the Directors are shown on page 21. Details of the Directors’ interests and shareholdings are given in the Remuneration Report on pages 32 to 41. The Corporate Responsibility Statement, Corporate Governance Statement, Remuneration Report and Director Statements on pages 20 to 41 all form part of this report. Principal activity The Company is the world’s leading provider of global office outsourcing services. Business review The Directors have presented a business review as follows: The Chief Executive’s Review and Financial Review on pages 10 to 19 respectively address: • review of the Company’s business (pages 10 to 14); • trends and factors likely to affect the future development, performance and position of the business (pages 10 to 14); • development and performance during the financial year (pages 15 to 19); and • position of the business at the end of the year (page 18 to 19). The Corporate Responsibility Report, on page 20, includes the sections of the Business Review in respect of: • environmental matters; • employees; and • social and community issues. The Corporate Governance Statement, on pages 24 to 30, includes a description of the principal risks and uncertainties facing the Company. The Directors’ Statements on page 31 includes the statutory statement in respect of disclosure to auditors. The Directors do not consider any contractual or other relationships with external parties to be essential to the business of the Group. Results and dividends Profit before taxation for the year was £85.1m (2011: £49.4m). The Directors are pleased to recommend a final dividend of £20.7m (2011: £18.8m), being 2.2 pence per share (2011: 2.0 pence per share). The total dividend for the year will therefore be 3.2 pence per share, made up of the interim dividend of 1.0 pence per share paid in October 2012 (2011: 0.9 pence per share) and, assuming the final dividend is approved by shareholders at the forthcoming AGM, an additional 2.2 pence per share (2011: 2.0 pence per share) which is expected to be paid on 31 May 2013 to shareholders on the register at the close of business on 3 May 2013. Policy and practice on payment of creditors The Group does not follow a universal code dealing specifically with payments to suppliers but, where appropriate, our practice is to: • agree the terms of payment upfront with the supplier; • ensure that suppliers are made aware of these terms of payment; and • pay in accordance with contractual and other legal obligations. At 31 December 2012, the number of creditor days outstanding for the Group was 22 days (2011: 30 days) and for the Company was 41 days (2011: 34 days). Going concern The Directors, having made appropriate enquiries, have a reasonable expectation that the Group and the Company have 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 Accounts on pages 43 to 89. In adopting the going concern basis for preparing the financial statements, the Directors have considered the further information included in the business activities commentary as set out on page 13, as well as the Group’s principal risks and uncertainties as set out on pages 26 and 27. Based on the performance of the Group, its financial position and cash flows, the Board is satisfied that the Group is well placed to manage its business risks successfully. Further details on the going concern basis of preparation can be found in note 23 of the notes to the accounts on page 71. Employees The Group treats applicants for employment with disabilities with full and fair consideration according to their skills and capabilities. Should an employee become disabled during their employment, efforts are made to retain them in their current employment or to explore opportunities for their retraining or redeployment elsewhere within the Group. Political and charitable donations It is the Group’s policy not to make political donations either in the UK or overseas. The Group made charitable donations of £30,000 during the year (2011: £30,000). 22 22 Regus plc Annual Report and Accounts 2012 Capital structure The Company’s share capital comprises 950,969,822 issued and fully paid up ordinary shares of 1p nominal value in Regus plc (2011: 950,969,822). All ordinary shares have the same rights to vote at general meetings of the Company and to participate in distributions. There are no securities in issue that carry special rights in relation to the control of the Company. The Company’s shares are traded on the London Stock Exchange. Details of the role of the Board of Directors (the ‘Board’) and the process for the appointment of directors can be found on pages 24 to 26. At the Company’s Annual General Meeting held on 15 May 2012 the shareholders of the Company approved a resolution giving authority for the Company to purchase in the market up to 94,194,574 ordinary shares representing approximately 10% of the issued share capital (excluding Treasury shares) as at 13 April 2012. No shares were purchased pursuant to this authority during the year. Details of the Company’s employee share schemes can be found in the report of the Remuneration Committee on pages 32 to 41. The outstanding awards and options do not carry any rights in relation to the control of the Company. Substantial interests At 5 March 2013, the Company has been notified of the following interests held in the issued share capital of the Company. Estorn Limited* Prudential plc Odey Asset Management Blackrock Inc Standard Life Group Ameriprise Financial Inc Number of ordinary shares 322,744,607 158,450,222 48,533,069 47,764,890 46,538,104 46,441,761 % of issued share capital 34.26% 16.82% 5.15% 5.07% 4.93% 4.93% * Mark Dixon indirectly owns 100% of Estorn Limited Auditors In accordance with Luxembourg law, a resolution for the reappointment of KPMG Luxembourg S.à r.l. as auditors of the Company is to be proposed at the forthcoming Annual General Meeting. Approval This report was approved by the Board on 26 February 2013. On behalf of the Board Tim Regan Company Secretary 5 March 2013 e c n a n r e v o G e t a r o p r o C e c n a n r e v o g e t a r o p r o C 23 www.regus.com/investors 23 Corporate governance The Board is committed to the high standards of corporate governance as set out in the UK Corporate Governance Code (formerly the Combined Code) published in May 2010 (the ‘Code’) for financial periods beginning after 29 June 2010. The new edition of the Code was published in September 2012 and applies to reporting periods beginning on or after 1 October 2012 (the ‘Revised Code’). Although not yet officially applicable to the Company, the Board considers it good practice for the Company to comply with the Revised Code as far as is practical for a Luxembourg company to do so. The Code and the Revised Code are both available at www.frc.org.uk. The Board is accountable to the Company’s shareholders and this report describes how the Board applied the principles of good governance. The Board At 31 December 2012, the Board of Directors was made up of six members comprising the Chairman, two Executive Directors and three Non-Executive Directors. Biographical details of the Directors are set out on page 21. The Board is mindful of the benefits of strength and diversity in the Board. Our aim is to have a Board which is reflective of the broad range of skills, backgrounds and experience necessary to properly serve our shareholders. We have pursued this objective by engaging Board members whom, while several have a financial background, have had broad executive responsibilities and bring very different and complementary personal experiences and approaches to matters including the evaluation of opportunities and management of risks. Our Board members represent four different nationalities and five countries of residence. Along with their international operational experience, they also bring a depth of working knowledge covering multiple industries, business models, corporate cultures, organisational models, functional areas and business issues. The Nomination Committee’s decisions are based on merit while reflecting our intent to increase diversity, including gender diversity. The Board considers that its current balance ensures that no individual or group dominates its decision making process. Role of the Board The primary role of the Board is to provide entrepreneurial leadership and to review the overall strategic development of the Group. The Board approves the corporate plan and the annual budget and reviews performance against targets at every meeting. Capable management and relevant technical expertise in the business are critical to the implementation of the strategy. Individuals with strategic responsibilities are invited to present to and discuss with the Board on a rotating periodic basis. Through the Audit Committee, the Directors ensure the integrity of financial information and the effectiveness of financial controls and the internal control and risk management system. The Board has delegated authority to the Remuneration Committee to set the remuneration policy for Directors and senior management. The Nomination Committee recommends the appointment of Board Directors and has responsibility for succession planning at Board level. The various Board Committees (the ‘Committees’) have authority to make decisions in their areas of expertise. Frequency of meetings There were nine main Board meetings during 2012. The number of meetings of the Board and Committees and individual attendance by the Directors are shown below. Main Board Audit Committee Nomination Committee Remuneration Committee Total meetings Douglas Sutherland Mark Dixon Dominique Yates Lance Browne Elmar Heggen Alex Sulkowski 9 9 9 9 8 9 9 6 6 6 6 5 5 5 5 5 5 5 5 5 Matters reserved for the Board The Board has a formal schedule of matters reserved to it for its decision, to ensure that no one individual has unfettered powers of decision. These include: • approval of regulatory announcements including the interim and annual financial statements; • terms of reference and membership of the Board and its Committees; • changes to the Group’s capital structure; • changes to the Group’s management and control structure; • capital investment in excess of £5m; and • material contracts (annual value in excess of £5m). Minutes are taken of all Board discussions and decisions and all Directors are encouraged to request inclusion of any unresolved concerns that they may have in the Board minutes. Roles of Board members There is a clear division of responsibilities between the Chairman and the Chief Executive. The Chairman Douglas Sutherland is responsible for leadership of the Board, setting its agenda and monitoring its effectiveness. He ensures effective communication with shareholders and that the Board is aware of the views of major shareholders. He facilitates both the contribution of the Non-Executive Directors and constructive relations between the Executive Directors and Non-Executive Directors. The Chairman, together with the Company Secretary, is responsible for ensuring all Directors are properly briefed on issues arising at Board meetings and that they have full and timely access to relevant information. The Chairman is considered by the Board to be independent in character and judgement. 24 24 Regus plc Annual Report and Accounts 2012 e c n a n r e v o G e t a r o p r o C e c n a n r e v o g e t a r o p r o C The Chief Executive Mark Dixon is responsible for formulating strategy and for its delivery once agreed by the Board. He creates a framework of strategy, values, organisation and objectives to ensure the successful delivery of key targets, and allocates decision making and responsibilities accordingly. Non-Executive Directors The Non-Executive Directors each bring their own senior level of experience and objectivity to the Board. The independent counsel brought to the Group by the Non-Executive Directors enhances the overall decision making of the Board. Non-Executive Directors are appointed for an initial three year term are subject to election by shareholders at each Annual General Meeting (‘AGM’) after their appointment. Company Secretary The Company Secretary, Tim Regan, is responsible for advising the Board, through the Chairman, on all governance matters and for ensuring that appropriate minutes are taken of all Board meetings and discussions. The appointment and removal of the Company Secretary is a matter reserved for the Board. Board Committees The Board has delegated certain of its governance responsibilities to the Audit, Nomination and Remuneration Committees. The Company Secretary acts as secretary to all of the Board Committees and minutes of meetings are circulated to all Board members. The terms of reference of the Committees have been documented and approved by the Board and are available on the Company’s website: www.regus.com. A brief summary of the members, activities and terms of reference of the Committees is provided below. Audit Committee Elmar Heggen (Chairman) Lance Browne Alex Sulkowski The Board has delegated to the Audit Committee the responsibility for applying an effective system of internal control and compliance, accurate external financial reporting, fulfilling its obligations under law and the Code; and managing the relationship with the Company’s external auditors. The Committee consists entirely of Non-Executive Directors, all of whom are considered by the Board to be independent in character and judgement, and are competent in accounting and/or auditing. The Audit Committee meets at least three times a year. At the request of the Chairman, the external auditors, the Executive Directors, the Company Secretary and the Group Head of Internal Audit and Risk Management attend each meeting. Summary terms of reference: • Financial reporting – provide support to the Board by monitoring the integrity of financial reporting and ensuring that the published financial statements of the Group and any formal announcements relating to the Company’s financial performance comply fully with the relevant statutes and accounting standards. • Internal control and risk systems – review the effectiveness of the Group’s internal controls and risk management systems. • Internal audit – monitor and review the annual internal audit programme ensuring that the internal audit function is adequately resourced and free from management restrictions, review and monitor responses to the findings and recommendations of the internal auditors. • External audit – advise the Board on the appointment, reappointment, remuneration and removal of the external auditors. • Employee concerns – review the Company’s arrangements under which employees may in confidence raise any concerns regarding possible wrongdoing in financial reporting or other matters. The Audit Committee ensures that these arrangements allow proportionate and independent investigation and appropriate follow-up action. The Audit Committee also meets independently with the Company’s auditors and with the Group Head of Internal Audit and Risk Management to informally discuss matters of interest. External auditors KPMG Luxembourg S.à r.l. were the Company’s auditors for the year ended 31 December 2012. For 2013, the Audit Committee has recommended to the Board that a resolution to reappoint KPMG Luxembourg S.à r.l. as the Company’s auditors be proposed at the AGM. The Audit Committee will continue to keep under review the independence and objectivity of the external auditors, the effectiveness of the audit process and the rotation of the lead audit partner. The scope and extent of non-audit work undertaken by the Company’s external auditors is monitored by and, above certain thresholds, requires prior approval from the Audit Committee to ensure that the provision of non-audit services does not impair their independence or objectivity. During the year, KPMG performed due diligence work on certain acquisitions. KPMG is prohibited from providing services that would be considered to jeopardise their independence such as book keeping services, valuations and system design. Remuneration Committee Alex Sulkowski (Chairman) Lance Browne Elmar Heggen Details of the Remuneration Committee and its activities during the year are set out in the Remuneration Report on pages 32 to 41. Nomination Committee Lance Browne (Chairman) Elmar Heggen Alex Sulkowski Douglas Sutherland The Nomination Committee meets as required during the year to consider matters delegated to it under its terms of reference. Board effectiveness, performance and leadership were discussed informally by the Board as a whole. 25 www.regus.com/investors 25 Corporate governance continued Summary terms of reference: • Board appointment and composition – to regularly review the structure, size and composition of the Board and make recommendations on the role and nomination of Directors for appointment and re-appointment to the Board for the purpose of ensuring a balanced and diverse Board in respect of skills, knowledge and experience. • Board Committees – to make recommendations to the Board in relation to the suitability of candidates for membership of the Audit and Remuneration Committees. The appointment and removal of Directors are matters reserved for the full Board. • Board effectiveness – to assess the role of Chairman and Chief Executive and make appropriate recommendations to the Board. • Board performance – to assist the Chairman with the annual performance evaluation to assess the performance and effectiveness of the overall Board and individual Directors. • Leadership – to remain fully informed about strategic issues and commercial matters affecting the Company and to keep under review the leadership needs of the organisation to enable it to compete effectively. Principal risks and uncertainties There are a number of risks and uncertainties which could have an impact on the Group’s long-term performance. The Group has a risk management structure in place designed to identify, manage and mitigate business risks. Risk assessment and evaluation is an essential part of the annual planning, budgeting and forecasting cycle. The Directors have identified the following principal risks and uncertainties affecting the Company. These do not constitute all of the risks facing the Group. Economic downturn in significant markets The Group has a significant proportion of its centres in the Americas (predominantly the USA) and Europe. An economic downturn in these markets could adversely affect the Group’s operating revenues thereby reducing operating performance or, in an extreme downturn, resulting in operating losses. Generally, the terms on which the Group earns revenues from customers and pays its suppliers (principally landlords) are matched to reduce working capital needs. However, a reduction in revenues, with no immediate decline in the cost base, could result in significant funding shortfalls in the business. Any funding shortfall may require the Group to seek external funding or sell assets in the longer term. In addition, competition may increase as a result of landlords offering surplus space at discounted prices and companies seeking to reduce their costs by sub-letting space. These factors could result in reduced revenue for the Group as the prices it is able to charge customers would be reduced. The Group has taken a number of actions to mitigate this risk: • the Group has entered into performance-based leases with landlords where rent costs vary with revenues earned by the centre; • building lease contracts include break clauses at periodic intervals to allow the Group to exit leases should they become onerous. In cities with a number of centres this allows the Group to stagger leases such that an orderly reduction in exposure to the location may be facilitated; and • the profile of clients in a centre is continually reviewed to avoid undue reliance on a particular client or clients in a particular industry group. Additionally, in the event of a downturn, the Group has a number of options for mitigating losses, for example by closing centres at lease break points. The Group’s strategy also focuses its growth into emerging markets that will reduce the proportion of the Group’s revenue generated from the USA and Europe over time and provide better protection to the Group from an economic downturn in a single market. Exposure to movements in property markets A number of the Group’s lease contracts contain market rent review clauses. This means that the costs of these leases may vary as a result of external movements in the property market. In particular, in the UK, lease contracts typically contain ‘upward only’ rent reviews which means that should open market rents decrease, then Regus could be exposed to paying higher than market rent in these locations. If the Group is unable to pass on increased rent costs to customers due to local property market conditions then this could result in reduced profitability or operating losses in these markets. Equally, for Group lease contracts without market rent review clauses, the Group may benefit from paying below market rent in a market with increasing open market rents. This may allow the Group to improve profitability if the movements in open market rents are passed on to clients. The length of the Group’s leases (or the period after which the Group can exercise any break option in the leases) is usually significantly longer than the duration of the Group’s contracts with its customers. If demand falls, the Group may be unable to increase or maintain occupancy or price levels and if revenue declines the Group may be unable to reduce the lease cost base. Additional costs could be incurred if the Group disposes of unprofitable centres. 26 26 Regus plc Annual Report and Accounts 2012 Changes in assumptions underlying the carrying value of certain Group assets could result in impairment Regus completes a review of the carrying value of its assets annually to assess whether those carrying values can be supported by the net present value of future cash flows derived from such assets. This review examines the continued appropriateness of the assumptions in respect of which the carrying values of certain of the Group’s assets are based. This includes an assessment of discount rates and long-term growth rates, and timing and quantum of future capital expenditure. Due to the Group’s substantial carrying value of goodwill under IFRS, the revision of any of these assumptions to reflect current or anticipated changes in operations or the financial condition of the Group could lead to an impairment in the carrying value of certain assets in the Group. While impairment does not impact reported cash flows, it does result in a non-cash charge in the consolidated income statement and thus no assurance can be given that any future impairments would not affect the Company’s reported distributable reserves and therefore its ability to make distributions to its shareholders or repurchase its shares. The Group’s geographic expansion may increase exposure to unpredictable economic, political and legal risks Political, economic and legal systems in emerging markets have historically been less predictable than in countries with more developed institutional structures. As the Group increasingly enters into emerging markets, the value of the Group’s investments may be adversely affected by political, economic and legal developments which are beyond the Group’s control. Exposure to movements in exchange rates The Group has significant overseas operations whose businesses are generally conducted in the currency of the country in which they operate. The principal exposures of the Group are to the US dollar and the euro with approximately 35% of the Group’s revenues being attributable to the US dollar and 15% to the euro. Given that transactions generally take place in the functional currency of Group companies, the Group’s exposure to transactional foreign exchange risk is limited. However, the translation into sterling of overseas profits and net assets will be affected by prevailing exchange rates. In the event that either the US dollar or euro were to significantly depreciate or appreciate against sterling, this would have an adverse or beneficial impact to the Group’s reported performance and position respectively. The financial risk management objectives and policies of the Group, together with an analysis of the exposure to such risks, are set out in note 23 of the Accounts. Wherever possible, the Group attempts to create natural hedges against currency exposures through matching income and expenses, and assets and liabilities, in the same currency. Given the continued volatility in exchange rates since January 2009 the Board has approved a policy which allows the Group to hedge, subject to strict limits, the rates at which overseas earnings are translated. This will enable the Group to have more certainty over the sterling value of these earnings. Group Structure As a Jersey-incorporated company having its place of central administration (head office) in Luxembourg and being tax resident in Luxembourg, the Company is required to comply with both Jersey law and Luxembourg law, where applicable. In addition, the Company’s ordinary shares are listed on the Official List of the UK Listing Authority and admitted to trading on the main market of the London Stock Exchange. It is possible that conflicts may arise between the obligations of the Company under the laws of each of these jurisdictions or between the applicable laws and the Listing Rules. If an irreconcilable conflict were to occur then the Company may not be able to maintain its status as a company tax resident in Luxembourg. The Group manages the risk that a significant tax liability could arise by taking appropriate advice, both in carrying out the Group reorganisation and on an ongoing basis. In addition, the Group believes that under current laws and regulations the risk of irreconcilable conflicts between current laws and regulations impacting Regus plc is also low. All shareholders are paid dividends directly from Regus plc SA (‘plc’). All dividend payments are made without deduction of Luxembourg withholding tax, regardless of the residence of the recipient. In general terms, UK resident shareholders receiving dividends from plc should be taxed in the same way as if they had received a dividend from a UK company. Tax outcomes do, however, depend on the specific circumstances of shareholders and any shareholder in doubt about their tax position (including, in particular, UK resident but non-UK-domiciled individuals who have elected to be taxed on a remittance basis) should consult their own professional adviser. Centrally managed applications and systems All of the Group’s systems and applications are housed in a central data centre. Should the data centre be impacted as a result of circumstances outside of the Group’s control there could be an adverse impact on the Group’s operations and therefore its financial results. This risk is managed through a detailed service arrangement with our external data centre provider which incorporates appropriate back-up procedures and controls. Internal controls The Board has ultimate responsibility for maintaining a sound system of internal control and for periodically reviewing its effectiveness. e c n a n r e v o G e t a r o p r o C e c n a n r e v o g e t a r o p r o C 27 www.regus.com/investors 27 Corporate governance continued In accordance with the revised guidance set out in the Turnbull Report ‘Internal Control: Revised Guidance for Directors on the Combined Code’, an ongoing process has been established for identifying, managing and evaluating the risks faced by the Group. The Group’s system of internal controls is designed to: • facilitate the effective and efficient response to risks which might affect the achievement of the Group’s objectives; • safeguard assets from inappropriate use or from loss or fraud; • help ensure the quality of internal and external financial reporting; and • help ensure compliance with applicable laws and regulations. No system of internal control can provide absolute assurance against material misstatement or loss. The Group’s system of controls helps to manage, rather than eliminate, the risk of failure to achieve business objectives, and can only provide reasonable assurance that potential problems will normally be prevented or will be detected in a timely manner for appropriate action. Strategy and risk management The Board conducts regular reviews of the Group’s strategic direction. Country and regional strategic objectives, quarterly plans and performance targets for 2013 have been set by the Executive Directors and are regularly reviewed by the Board in the context of the Group’s overall objectives. There is an ongoing process for identifying, evaluating and managing the risks faced by the Group. Major business risks and their financial implications are appraised by the responsible executives as a 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. Key risks and actions to mitigate those risks are regularly considered by the Board and are formally reviewed and approved by the Board annually. Control environment High standards of behaviour are demanded from staff at all levels in the Group. The following procedures are in place to support this: • a clearly defined organisation structure with established responsibilities; • the induction process is used to educate new team members on the standards required from them in their role, including business ethics and compliance, regulations and internal policies; • all team members are provided with a copy of the ‘Team Member Handbook’ which contains detailed guidance on employee policies and the standards of behaviour required of staff; • policies and procedure manuals and guidelines are readily accessible through the Group’s intranet site; and • operational audit and self-certification tools which require individual centre managers to confirm their adherence to Group policies and procedures. To underpin the effectiveness of controls, it is the Group’s policy to recruit and develop appropriately skilled management and staff of high calibre, integrity and with appropriate disciplines. Whistle-blowing policy The Company has an externally hosted whistle-blowing channel (‘EthicsPoint’), which is available to all employees via email, and on the Company’s Intranet website. The aim of the policy is to encourage all employees, regardless of seniority, to bring matters that cause them concern to the attention of the Audit Committee. The Business Assurance Director, where appropriate in consultation with the executive management team, decides on the appropriate method and level of investigation. The Audit Committee is notified of all material disclosures made and receives reports on the results of investigations and actions taken. The Audit Committee has the power to request further information, conduct its own inquiries or order additional action as it sees fit. Control processes The Company has had procedures in place throughout the year and up to 5 March 2013, the date of approval of this Annual Report, which accord with the Revised Internal Control Guidance for Directors in the Code. These include the following: • the Board normally meets with regional executives every six months to carry out a wide-ranging review of Group and regional financial performance, business development opportunities, Group infrastructure and general Group management issues; • the annual budget process is driven from senior management meetings. Budgets are prepared at a detailed level by business centre and roll-up at country and regional level. The Executive Directors review regional budgets to ensure consistency with regional strategic objectives and the final budget is reviewed and approved by the Board. The approved budget forms the basis of business management throughout the year; • operational reports and financial reports are prepared and distributed to the Board on a monthly basis. Actual results are reviewed against budget and forecast, and explanations are received for all material movements; • key policies and control procedures (including finance, operations, and health and safety) are documented in manuals having Group-wide application. These are available to all staff via the Group’s intranet system; 28 28 Regus plc Annual Report and Accounts 2012 • the Board has formal procedures in place for the review and approval of investment and acquisition projects. The Group Investment Committee (comprising the Executive Directors) reviews all investments prior to approval by the Board. Additionally the form and content of investment proposals is standardised to facilitate the review process; • the Group has clearly delegated authority limits with regard to the approval of transactions; and • numerous reports are generated from the Group’s sales and operating systems on a daily, weekly and monthly basis to provide management at all levels with performance data for their area of responsibility which helps them to focus on operational issues that may require their input. Information and communications processes The senior management team are integrally involved in the business and to this extent regularly discuss and address issues and opportunities with regional and functional teams. Formal business review meetings, chaired by Mark Dixon, are held with the regional teams and functional heads on a monthly basis. Regular staff communications include general information on the business from senior management as well as operational guidance on changes in policies and procedures. Sales staff and operational management periodically attend regional sales or management conferences at which information on operational issues is shared. Delegates present the key messages to employees who did not attend the event. Monitoring effectiveness The following key mechanisms were available to the Board at various times during the year in the conduct of its review of internal controls: • review of the Group’s monthly management accounts which contain detailed analysis of financial performance for the Group and each of the Group’s geographic reporting segments; • an ongoing process of review, through Board meetings, senior management meetings and divisional reviews as well as other management meetings, for the formal identification of significant operational risks and mitigating control processes; • delivery of centrally coordinated assurance programme by the Internal Audit department that includes key business risk areas. The findings and recommendations of each review are reported to management and the Audit Committee to support the Board in its role of ensuring a sound control environment; • monthly reporting on the development of the profitability of new centres to allow appraisal of the effectiveness of investment activity; and • annual internal control self-assessment and management certification exercise covering the effectiveness of financial and operational controls. This is based on a comprehensive internal control questionnaire collated and reviewed by Internal Audit. Results and any necessary mitigating action plans are presented to senior management and the Board. Succession Our efforts to increase our management capacity and capabilities through continuing development of our people and supplemented by the hiring of experienced professionals not only supports our ability to execute our growth strategy but also enables us to address succession in a more robust way throughout the Group. Beginning in 2013, succession planning discussions are an integral part of our business planning and review processes. With a view to the future development of the Group as well as the desire to continue to enhance diversity and succession planning for Board roles, we plan to increase the size of the Board over time. The Nomination Committee has implemented an ongoing programme of engagement with highly qualified potential Non-Executive Directors of varied backgrounds and gender to support this process. Other matters Board performance evaluation A formal external evaluation of the performance of the Board was carried out during the year by an independent leadership consultancy, Panthea, with experience in conducting such reviews. The evaluation was conducted over a three-month period and consisted of a series of one-to-one interviews, a questionnaire and attendance by the evaluator at a Board meeting. The external evaluation results were reviewed by the Board and Nomination Committee and are being addressed in our efforts to continuously improve the processes and effectiveness of the Board. No reportable matters were noted by the evaluation and we continue to have full confidence in the Board’s members and processes. Training and resources Appropriate training is made available for all new Directors to assist them in the discharge of their responsibilities. Training is provided on an ongoing basis to meet particular needs with the emphasis on governance and accounting developments. During the year the Company Secretary, Tim Regan, provided updates to the Board on relevant governance matters, whilst the Audit Committee regularly considers new accounting developments through presentations from management, internal audit and the external auditors. The Board programme includes presentations from management in addition to the Executive Directors which, together with site visits, increase the Non-Executive Directors’ understanding of the business and sector. e c n a n r e v o G e t a r o p r o C e c n a n r e v o g e t a r o p r o C 29 www.regus.com/investors 29 Non-Executive Directors are also subject to the re-election requirements and serve the Company under letters of appointment, which have an initial three-year term. Compliance statement The Company has complied with the provisions set out in section E of the Code throughout the year ended 31 December 2012, with the exception of the following: • Provision E.1.1 – The Senior Independent Non-Executive Director Lance Browne does not have regular meetings with major external shareholders. The Board considers it appropriate for the Chairman to be the main conduit with investors, rather than the Senior Independent Non-Executive Director. The Chairman participates in investor meetings and makes himself available for questions, in person, at the time of major announcements. The Chairman regularly updates the Board and particularly the Senior Independent Non-Executive Director on the results of his meetings and the opinions of investors. On this basis, the Board considers that the Senior Independent Non-Executive Director is able to gain full awareness of the issues and concerns of major shareholders. Notwithstanding this policy, all Directors have a standing invitation to participate in meetings with investors. Corporate governance continued All Directors have access to the advice and services of the Company Secretary, who is responsible for ensuring that Board procedures, corporate governance and regulatory compliance are followed and complied with. Should a Director request independent professional advice to carry out his duties, such advice is available to him at the Company’s expense. Directors and officers insurance The Group’s insurance programme is reviewed annually and appropriate insurance cover is obtained to protect the Directors and senior management in the event of a claim being brought against any of them in their capacity as Directors and officers of the Company. Dialogue with shareholders The Company reports formally to shareholders twice a year, with the half year results typically announced in August or September and the preliminary final results announced normally in March. There are programmes for the Chief Executive and Chief Financial Officer to give presentations of these results to the Company’s institutional investors, analysts and media in London and other key locations. The Chief Executive and Chief Financial Officer maintain a close dialogue with institutional investors on the Company’s performance, governance, plans and objectives. These meetings also serve to develop an ongoing understanding of the views and any concerns of the Company’s major shareholders. The Non-Executive Directors are given regular updates as to the views of the institutional shareholders and the Chairman is available to meet with these shareholders on request. The principal communication with private shareholders is through the Annual Report, the half year results and the AGM. The Company continues to engage the services of Brunswick as its investor relations adviser. AGM The AGM each year is held in May in Luxembourg and is attended, other than in exceptional circumstances, by all members of the Board. In addition to the formal business of the meeting, there is normally a trading update and shareholders are invited to ask questions and are also given the opportunity to meet the Directors informally afterwards. Notice of the AGM together with any related documents are required to be mailed to shareholders at least 30 clear days before the meeting and separate resolutions are proposed on each issue. The voting in respect of all resolutions to be put to the AGM is conducted by means of a poll vote. The level of proxy votes cast and the balance for and against each resolution, together with the level of abstentions, if any, are announced to the meeting following voting on a poll. Financial and other information is made available on the Company’s website: www.regus.com. Re-election of the Board As required by the Code, all Directors submit themselves for re-election by shareholders annually and Directors appointed during the period since the last AGM are required to seek election at the next AGM under the Company’s articles of association. 30 30 Regus plc Annual Report and Accounts 2012 Directors’ statements Statutory statement as to disclosure to auditor The Directors who held office at the date of approval of this Directors’ Report confirm that: • so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware; and • each Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. These annual accounts have been approved by the Directors of the Company. The Directors confirm that the annual accounts have been prepared in accordance with applicable law and regulations and that they include a fair review of the development and performance of the business and the position of the parent company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. We, the Directors of the Company, confirm that to the best of our knowledge: • the financial statements prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation as a whole; and • the Directors’ Report, including content contained by reference, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the Board Mark Dixon Chief Executive Officer Dominique Yates Chief Financial Officer 5 March 2013 e c n a n r e v o G e t a r o p r o C e c n a n r e v o g e t a r o p r o C Statement of Directors’ responsibilities in respect of the annual report and financial statements The Directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under that law, they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with Luxembourg Generally Accepted Accounting Practice and applicable law. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and their profit or loss for the period. In preparing each of the Group and parent company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; • for the parent company annual accounts, state whether applicable Luxembourg accounting standards have been followed, subject to any material departures disclosed and explained in the parent company annual accounts; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and which disclose with reasonable accuracy at any time the financial position of the parent company and to enable them to ensure that it’s financial statements comply with applicable law and regulations. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ Report, a Remuneration Report and a Corporate Governance Statement that complies with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s websites. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 31 www.regus.com/investors 31 Remuneration report The Committee also assessed performance for the awards to Mr Dixon under the Regus plc 2008 Value Creation Plan. As the share price targets had not been met by 31 March 2012, no VCP Entitlements vested during 2012. The final Measurement Date for awards under this plan is 31 March 2013, and it is currently anticipated that the award will lapse in full. 2013 Matching Share awards In 2013, the Committee intends to make Matching Share awards to the executive directors and other senior executives under the Co-Investment Plan, based on the Investment Shares deferred from 2012. This will be the first award since 2010. These awards will vest in equal tranches over three, four and five years subject to achieving stretching Earnings Per Share and Total Shareholder Return targets over these periods. The Committee believes that these performance conditions help to align the reward of our Executive Directors and senior executives with the delivery of significant value for our shareholders. Agenda for 2013 During the course of 2013, the Committee will be preparing for the new executive remuneration reporting requirements being introduced in the UK. We look forward to receiving your support for the Directors’ Remuneration Report at the 2013 AGM. Alex Sulkowski Chairman of the Remuneration Committee 5 March 2013 Letter from the Remuneration Committee Chairman Dear Shareholder I am pleased to be writing to you in my capacity as the new chairman of the Remuneration Committee (the ‘Committee’). This is the first year that Regus has provided such a letter from the Committee to shareholders – it is my intention to provide an overview of the main aspects of the work of the Committee every year to be read in conjunction with the main Remuneration Report (the ‘Report’) below. I hope that you will note that we have revised the format and level of disclosure of the Report to take into account shareholder comments and views which we have received during the year. Executive pay and remuneration packages continue to make headlines and I am fully aware that you, as shareholders, will be reading both this letter and the Report with these in mind. At Regus, we have always linked salary, bonuses and long-term incentives with performance. We need to provide remuneration packages that will attract, retain and motivate people of the highest calibre and experience but we seek to ensure that pay outs are proportionate and are made only if performance demands it. This philosophy can be seen in action in this Report: 2013 base salary decisions During 2012, the Committee decided to award Mark Dixon a base salary increase of 3.9% with effect from 1 January 2013. The Committee felt the salary increase for Mr Dixon was appropriate and was in line with the range of salary increases awarded to higher achievers within the wider workforce. No salary increase has been awarded to Mr Yates for 2013 as the Committee determined that his base salary continues to be both competitive and reasonable. 2012 annual bonus out-turns Given the financial performance of the business in 2012, in particular the increase in operating profit referred to in page 10, the Committee considered it appropriate to award the Chief Executive Officer and Chief Financial Officer a maximum bonus equal to 100% of salary. 50% of this bonus will be deferred into Investment Shares under the Regus Co-Investment Plan. Long-term incentives 2012 out-turns The Committee assessed performance for certain Matching Shares and LTIP awards previously made to Mr Dixon under the Co-Investment Plan in 2008, 2009 and 2010 and determined that 25% of the relevant awards should vest based on EPS performance. The remainder of these awards will lapse. 32 Regus plc Annual Report and Accounts 2012 Remuneration Report This report has been prepared by the Remuneration Committee (the ‘Committee’) of Regus plc (société anonyme) (the ‘Company’) and approved by the Company’s Board of Directors (the ‘Board’). The report complies with the requirements of Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and, in compliance with such regulations, a separate resolution approving this report will be put to shareholders at this year’s Annual General Meeting. This report sets out the Company’s policy on Directors’ remuneration for the forthcoming year as well as information on remuneration paid to Directors during the year. Unaudited Information Membership and responsibilities of the Committee The Committee, which met five times during the year, is made up of three Independent Non-Executive Directors and chaired by Alex Sulkowski, who replaced Elmar Heggen as Chairman on 27 September 2012. During the year the members of the Committee were: • Alex Sulkowski • Lance Browne • Elmar Heggen The Committee has responsibility for determining, in consultation with the Chairman and/or Chief Executive as appropriate, the total remuneration package of the Executive Directors and senior managers, including bonuses, incentive payments and share options or other share awards. The Board has delegated to the Committee responsibility to: • determine and agree with the Board the remuneration policy for the Executive Directors and other senior management positions within the Regus Group (the ‘Group’); and • approve the design of, and determine targets for, any performance-related pay schemes operated by the Company and approve the total annual payments made under such schemes. During the year, the Committee received ad-hoc advice on executive remuneration from Deloitte LLP. Deloitte also provided unrelated tax advice to Regus during 2012. The Committee is comfortable that the Deloitte LLP engagement partner and team, that provide remuneration advice to the Committee, do not have connections with Regus that may impair their independence. Deloitte is a member of the Remuneration Consultant’s Group and, as such, voluntarily operates under the code of conduct in relation to executive remuneration consulting in the UK. The Committee’s terms of reference are available on the Company’s website: www.regus.com. The members of the Committee attend the Company’s Annual General Meeting and are available to answer shareholders’ questions about Directors’ remuneration. Compliance with the best practice provisions In accordance with the Board’s commitment to maintaining high standards of Corporate Governance, the Committee has complied with all remuneration-related aspects of the revised UK Corporate Governance Code during the year. Remuneration policy The principal objectives of the Committee’s remuneration policy are: • to focus on rewarding exceptional pay for exceptional performance: executives should be focused on delivering exceptional returns to shareholders over both the short and long term and be given the opportunity to receive exceptional levels of reward if such performance is delivered. Conversely, if returns are conservative, compensation levels should be conservative; and • to provide remuneration packages that will attract, retain and motivate people of the highest calibre and experience needed to shape and execute the Company’s strategy and to deliver exceptional shareholder value. The guiding principles which the Committee has regard to and balances, as far as practicable, in determining policy and objectives for 2013 and future years are: • to maintain a competitive package of total compensation, commensurate with comparable packages available with similar companies operating in similar markets; • to make a significant percentage of potential maximum reward conditional on short and long-term performance; • to ensure that the interests of the executives are closely aligned with those of the Company’s shareholders through the provision of share-based incentives (including bonus deferral and long-term incentives over a period of up to five years); • to link reward to the satisfaction of targeted objectives which are the main drivers of shareholder value; and • to be sensitive in determining Executive Directors’ remuneration to pay and employment conditions throughout the Group. An overview of the main elements of the packages and the performance conditions are set out in the table below. Further details are provided in the remainder of the Report. e c n a n r e v o G e t a r o p r o C e c n a n r e v o g e t a r o p r o C www.regus.com/investors 33 Remuneration report continued Element Base salary Purpose / policy Operation in 2013 Set at a level which reflects the relative market value of an individual’s role, their position and sustained performance. Benefits Provide monetary and non-monetary benefits that are competitive. With effect from 1 January 2013, base salaries for Executive Directors are: • CEO – £587,000 • CFO – CHF 495,000 In 2013, benefits include: • Company car/allowance (CEO only); • Fuel allowance (CEO only); • Private health insurance; • Housing allowance (CFO only); and • Representation allowance (CFO only). Pension Provide retirement benefits in a way that does not create an unnecessary level of financial risk for the business. During 2013, Executive Directors will participate in the Company’s money purchase scheme. Set at a relatively low level compared to market to enable a focus on variable pay rather than fixed pay. Under this scheme, the Company will match contributions of up to a maximum of 7% of salary. Annual bonus Supports and rewards the delivery of the annual business strategy and financial performance. To enhance the link to long-term shareholder value creation, up to 50% of the annual bonus can be deferred into the CIP as Investment Shares which are subject to a three-year holding period (and may be matched under the CIP, see below). Co-Investment Plan (CIP) Supports the delivery of the long-term business strategy and the enhancement of shareholder value. First element In return for deferring part of their bonus, Executive Directors are eligible to receive an award of Matching Shares, which are subject to a three-year performance period. The maximum number of Matching Shares that can be awarded to a participant in any one year is 200% of salary (i.e. a maximum ratio of 4:1 for each Investment Share). Second element The Committee can also make stand-alone long-term incentive awards (LTIP awards) under the CIP. Maximum LTIP awards are 100% of salary. Maximum bonus opportunities for 2013 will be: • CEO – 100% of salary • CFO – 100% of salary First element As Executive Directors will defer 50% of their 2012 bonus as Investment Shares they will be eligible to receive Matching Share awards of 200% of salary, which will follow a three-year performance period, on the basis of the following measures: • Earnings Per Share; and • Total Shareholder Return Second element No LTIP awards will be made in 2013. Shareholding guidelines Firmly aligns the Executive Directors interests with shareholders. Executive Directors are expected to build up a shareholding equivalent to 200% of salary. 34 Regus plc Annual Report and Accounts 2012 The table below illustrates the balance between fixed and performance-related (variable) compensation for the Executive Directors for 2013: Fixed Variable Mark Dixon CEO Dominique Yates CFO 28% 72% 28% 72% Fixed compensation comprises salary, benefits and pension contributions. Variable compensation includes the maximum bonus opportunity and a maximum award of Matching Shares under the Regus Co-Investment Plan (CIP). Non-Executive Directors are remunerated with fees, set at levels that are sufficient to attract and retain their services and are in line with market rates. The Non-Executive Directors do not receive any pension or other benefits, other than appropriate expenses, nor do they participate in any bonus or share option schemes. Service contracts Details of contracts currently in place for Directors are as follows: Executive Officer, the Committee re-balanced his package to increase the level of fixed remuneration, whilst maintaining a reduced but sufficient performance related element. In line with this, the Chief Executive Officer’s base salary was increased to £565,000 for 2012. For 2013, the Committee has decided to award the Chief Executive Officer an increase in his base salary of 3.9% taking his base salary to £587,000 with effect from 1st January 2013. The increase awarded to the CEO is in line with the range of increases made to higher achievers within the wider workforce. The Committee is not proposing to make any changes to the base salary of the Chief Financial Officer. His base salary will therefore continue to be CHF 495,000 for 2013. As previously disclosed, if there is a material change in the Swiss Franc / Pound Sterling exchange rate, there will be an adjustment to the salary of the Chief Financial Officer. Benefits include a company car or allowance and fuel allowance (Chief Executive Officer only), housing allowance and representation allowance (Chief Financial Officer only) and private health insurance. Effective date of contract Term Notice period and maximum provision for compensation Annual bonus scheme The Committee believes firmly in the effectiveness of short-term incentives as a mechanism for incentivising and rewarding annual financial performance for shareholders. Accordingly, incentive schemes are widely used across the business. e c n a n r e v o G e t a r o p r o C e c n a n r e v o g e t a r o p r o C Executive Mark Dixon Dominique Yates Non Executive Lance Browne Elmar Heggen Alex Sulkowski Douglas Sutherland 14.10.08 01.09.11 27.08.08 01.06.10 01.06.10 27.08.08 – – 12 months 12 months 3 yrs 3 yrs 3 yrs 3 yrs 6 months 6 months 6 months 6 months For Executive Directors termination payments, which may be made as a payment in lieu of notice, are limited to 12 months’ base salary in the case of the Chief Executive Officer and 12 months’ base salary and benefits in the case of the Chief Financial Officer. Remuneration packages The remuneration for the Executive Directors during the year comprised a basic salary, a benefit package and participation in the annual bonus scheme. As disclosed last year, in order to ensure that the interests of the Executive Directors continue to be closely aligned with those of the Company’s shareholders, the Committee re-introduced the Regus plc Co-Investment Plan (the ‘CIP’), which had first been approved by shareholders at the 2005 Annual General Meeting and subsequently reapproved in 2008 for 2012. Awards are expected to be made in March 2013. Basic salary and benefits As noted last year, given the personal shareholding of the Chief The Committee sets bonus targets and eligibility each year. In 2012, in re-balancing and simplifying the remuneration package for Executive Directors, the maximum bonus potential for the Executive Directors for the year was reduced from 200% of annual salary (consisting of a standard bonus and a discretionary bonus) to 100% of annual salary. The 2012 annual bonus was based on stretching operating profit targets. Based on performance in the year (discussed in more detail on pages 16 to 19), the Committee determined that the target was met in full and, as such, the Chief Executive Officer and Chief Financial Officer will each receive a bonus equal to 100% of salary, in respect of the year. For the purposes of measuring performance, the positive impact of the changes in accounting policy and estimates, implemented during 2012, were excluded. Half of this bonus is paid in cash and half will be awarded in the form of ‘Investment Shares’ in the Company, the vesting of which will be deferred for three years, under the rules of the CIP (discussed in more detail below). The number of Investment Shares to be awarded will depend on the Company’s share price on the date of award (immediately subsequent to the publication of this report). The monetary value of Investment Shares will not exceed 50% of salary. For 2013, the maximum annual bonus opportunity for Executive Directors will remain at 100% of base salary, and will continue to be based on stretching operating profit targets. Bonuses are non-pensionable. Non-Executive Directors do not receive a bonus. www.regus.com/investors 35 Remuneration report continued Pension benefits The Executive Directors participate in the Company’s Money Purchase (Personal Pension) Scheme. The Company matches contributions up to a maximum of 7% of basic salary. The Committee considers that the pension benefits of the Executive Directors are low compared with comparative companies but prefers to offer enhanced variable compensation (rather than a fixed additional pension contribution). The Group does not operate a group-wide defined benefit pension scheme (with the exception of Switzerland, where pension schemes are treated as such for accounting purposes) and has no plans to introduce such a scheme. Long Term Incentives Overview The Company operates three long-term incentive plans: the CIP, the Regus plc Share Option Scheme and the Regus plc 2008 Value Creation Plan. During 2013, it is currently intended that awards will only be made under the CIP. Co-Investment Plan (‘CIP’) The Committee is keen to encourage Executive Directors to build significant shareholdings in relation to their remuneration. As a condition of participation in the CIP, it is expected that members will, over time, build up a shareholding equivalent to two times their salary using shares acquired from the scheme. There are two elements to the CIP: The first element operates in conjunction with the annual bonus whereby a gross bonus of up to 50% of basic annual salary is awarded as a deferred amount of shares (‘Investment Shares’) to be released at the end of a defined period of not less than three years. The participant may then earn additional shares (‘Matching Shares’) based on the number of Investment Shares awarded and the Company’s future performance over the long term. The maximum number of Matching Shares which can be awarded to a participant in any calendar year under the CIP is 200% of salary. As such the maximum number of Matching Shares which can be awarded, based on Investment Shares awarded, is in the ratio of 4:1. The second element of the CIP provides for the Committee to make stand-alone long-term incentive awards (‘LTIPs’) without reference to Investment Shares up to a maximum of 100% of salary per calendar year. An LTIP is a conditional right over a specified number of shares with the release being dependent on the extent to which (if at all) the challenging performance conditions set by the Committee at the time of the LTIP award are satisfied. No awards (of either Matching Shares or LTIPs) were made under the CIP to Executive Directors in 2012 or 2011. Awards of Matching Shares to be made in 2013 In 2013, the Committee intends to make awards of Matching Shares under the CIP (no LTIP awards will be made). As noted above, the Executive Directors deferred 50% of their 2012 annual bonus in to the CIP as Investment Shares. In return, and subject to the future performance of the Company, they will be eligible to receive up to four Matching Shares for each Investment Share. This is equivalent to a maximum award of 200% of salary. Subject to the following performance conditions below, the Matching Shares awarded in March 2013 will vest in three equal tranches after three, four and five years (i.e. in March 2016, March 2017 and March 2018, respectively). 75% of the award will be based on Earnings Per Share (EPS) performance in the final year of each respective performance period, in accordance with the following schedule: Vesting scale 25% 50% 75% 100% EPS performance in year ending 2015 2016 12.0p 12.6p 13.3p 14.0p 14.0p 14.6p 15.3p 16.0p 2017 16.0p 16.6p 17.3p 18.0p Straight-line vesting between these points. No vesting for below the threshold performance level. The Committee believes EPS is the most appropriate measure of the financial and operational performance delivered for shareholders. For the purposes of this assessment, EPS will be defined as basic EPS of the Group as adjusted to take into account one-off exceptional items which do not appropriately reflect underlying performance of the Group. The equivalent EPS figure for 2012 would be 7.5p, and therefore the targets represent at the maximum approximately 19% growth per annum, which the Committee believes is very stretching in the current environment. The remaining 25% of the award will be based on Total Shareholder Return (TSR) performance over each respective performance period, in accordance with the following schedule: Vesting scale Regus TSR vs the FTSE All Share Index 0% 25% 100% Below index Equal to index Equal to index + 15% p.a. Straight-line vesting between these points. TSR will be measured using a three month averaging period at the start and end of each performance period. The Committee believes that the use of TSR ensures that an appropriate element of reward is based on value delivered for shareholders. Measurement against a broad equity market index is considered appropriate given the lack of an obvious comparator group for Regus. 36 Regus plc Annual Report and Accounts 2012 Awards vesting based on performance in respect of 2012 Mark Dixon received Matching Share awards in 2008 and 2009 and a further LTIP award in 2010, in each case under the CIP. The vesting for the first tranche of each of the 2008 and 2009 awards (i.e. one third of each award) and for the full 2010 LTIP award were based on EPS (75% of the award) and TSR (25% of the award) performance targets to be measured to 31 December 2012. The Committee has assessed performance against the EPS targets set at the time of award and concluded that based on an adjusted EPS of 15.3p, which reflects underlying performance, adjusted to exclude the positive impact of the changes in accounting policy and estimates implemented during 2012, and excluding certain growth costs and one-off exceptional items, in accordance with the terms of the original award, 25% of the first tranche of the 2008 and 2009 awards and the 2010 LTIP award should vest. This reflected partial achievement against the EPS component. The remainder of these awards (including the TSR component) will lapse in full. Regus plc Share Option Plan (the ‘SOP’) The SOP was introduced in 2008 in order to assist in the recruitment and retention of key employees and directors. Under the SOP, participants are granted options to buy shares in the Company at no less than the market value of the shares at the grant date. Such options may be either options to subscribe for new shares or options to purchase existing shares to be satisfied from an employee trust. Options may also be granted subject to a performance target which must then, in normal circumstances, be met before the option may be exercised. As long as Executive Directors participate in the CIP, they will not be eligible to receive any share option awards. The only outstanding grant made to Executive Directors under this plan was made in 2011 to aid the recruitment of the Chief Financial Officer. On joining the Company, the Chief Financial Officer was granted market value options (i.e. with an exercise price equal to the value of the shares at the time of the grant) over 1 million shares. The performance condition attached to this award required that the Company achieve an operating profit target in 2012. Based on operating profit achieved in 2012, the Committee has determined that 91% of the option award will, subject to continued employment, vest and become exercisable in equal tranches in 2014, 2015 and 2016. Regus plc 2008 Value Creation Plan (the ‘VCP’) The VCP was introduced in 2008 as a one-off award with the objective of delivering exceptional rewards to participants provided absolute returns to shareholders are exceptional. The VCP operates over a five year period, and will end in March 2013. Participants in the VCP are granted entitlements (‘VCP Entitlements’) to receive a maximum number of shares which shall be earned by the conversion of the VCP Entitlements into an option or series of options (the ‘VCP Options’) which may be granted on certain dates (the ‘Measurement Dates’) based on the Company’s share price e c n a n r e v o G e t a r o p r o C e c n a n r e v o g e t a r o p r o C performance. The exercise price for VCP Options will be the closing share price on the date of the Company’s 2008 AGM. VCP Entitlements granted in 2008: Number of shares subject to VCP Entitlement* *VCP Entitlements hold no value. Mark Dixon 3.5m The share price of the Company will be calculated at each Measurement Date and compared against a matrix of extremely stretching fixed share price targets to determine the number of shares subject to the VCP Entitlement which a VCP Option will be granted over. If a lower share price target is achieved, a VCP Option shall be granted over a lesser number of shares with the ability for the balance to be received at a subsequent measurement date subject to relevant share price targets being achieved. The share price targets for the VCP Entitlements granted in 2008 are as set out in the following table: Measurement date 31/03/11 31/03/10 (Shares awarded less shares already awarded) 31/03/12 31/03/13 Share price is less than £2.60 Share price is more than £2.60 but less than £3.50 Share price is more than £3.50 but less than £4.50 Share price £4.50 or more – – – – 2.5m 1.8m 1.2m 0.6m 3.5m 2.5m 1.8m 1.2m – 3.5m 2.5m 1.8m In respect of the first, second and third Measurement Dates (31 March 2010, 31 March 2011 and 31 March 2012 respectively), the Company’s share price was below the target and no VCP Entitlements vested. It is anticipated that the final tranche, based on the Measurement Date of 31 March 2013, will lapse in full. www.regus.com/investors 37 Remuneration report continued The final Measurement Date for awards under the plan is 31 March 2013. If a minimum share price of £2.60 is not achieved at this date, no VCP Entitlements will vest and the Plan will terminate. Chairman and Non-Executive Directors The fees for the Chairman are determined by the Remuneration Committee and the fees for the Non-Executive Directors are determined by the Chairman and the Executive Directors. Fees are set at levels that are sufficient to attract and retain individuals with the required skills, experience and knowledge to allow the Board to effectively carry out its duties. The fees recognise the responsibility of the role and the time commitments required. No increase in the fees for the Chairman or Non-Executive Directors was made in 2012 and no increases are currently planned for 2013. The only change made to the fee structure in 2012 was to introduce a £6,000 p.a. Committee Chairmanship fee for the Chairman of the Nomination Committee which is effective from 27 September 2012. The following table summarises Non-Executive fees for 2013: Chairman fee Non-Executive Director fee Additional fees: Senior Independent Director Chair of the Remuneration Committee Chair of the Audit Committee Chair of the Nomination Committee £165,000 £42,000 £6,000 £8,000 £8,000 £6,000 The Chairman and the Non-Executive Directors do not receive pension or other benefits, other than appropriate expenses, nor do they participate in any bonus or share option schemes. The fees paid during the year to each Non-Executive Director are shown in the table on page 39. Total Shareholder Return (TSR) 60 50 40 30 20 10 0 -10 -20 -30 -40 -50 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Regus FTSE 250 FTSE All Share The above graph shows the Company’s performance, measured by TSR for the Group compared with the performance of the FTSE 250 Index and the All Share Index. The Committee consider the FTSE 250 Index relevant since it is an index of companies of similar size to the Company. As detailed earlier in the report, the Company considers its TSR performance for share awards under the CIP in comparison to that of the All Share Index. External appointments As at 31 December 2012, the Executive Directors did not hold any external positions for which they received fees. Executive Directors are permitted to accept appointments on external boards or committees so long as these are not deemed to interfere with the business of the Group. Any fees received in respect of these appointments would be retained directly by the relevant Executive Director. 38 Regus plc Annual Report and Accounts 2012 – 165.0 1,181.0 822.9 57.0 50.0 50.0 2,325.9 2011 Total £’000 e c n a n r e v o G e t a r o p r o C e c n a n r e v o g e t a r o p r o C Directors’ emoluments The aggregate emoluments, excluding pensions, of the Directors were as follows: Salary £’000 Fees £’000 Benefits £’000 Compensation for loss of office £’000 Bonus* £’000 2012 Total £’000 Chairman Douglas Sutherland Executive Mark Dixon Dominique Yates Non-Executive Lance Brown Elmar Heggen Alex Sulkowski – 165.0 – 565.0 334.6 – – – 899.6 – – 57.0 50.0 50.0 322.0 51.0 153.7 – – – 204.7 – – – – – – – * Half of the bonus was paid in cash and half in Investment Shares, deferred for three years under the CIP 565.0 334.6 – – – 899.6 Salary £’000 Fees £’000 Benefits £’000 Compensation for loss of office £’000 Bonus £’000 Chairman Douglas Sutherland Executive Mark Dixon Dominique Yates(a) Stephen Gleadle(b) Non-Executive Lance Brown Elmar Heggen Alex Sulkowski – 152.5 522.8 110.0 200.0 – – – 832.8 – – – 54.7 48.3 48.3 303.8 – 48.1 42.0 26.2 – – – 116.3 – – 152.5 – – 300.0 – – – 300.0 522.8 110.0 150.0 – – – 782.8 1,093.7 262.0 676.2 54.7 48.3 48.3 2,335.7 (a) Dominique Yates joined the Board with effect from 1 September 2011 (b) Stephen Gleadle stepped down from the Board with effect from 31 August 2011 Mark Dixon was the highest paid Director in both 2012 and 2011. Benefits include car and fuel allowance, representation allowance, medical insurance and life assurance. For the CFO, they also include a housing allowance, but do not include car and fuel allowance. www.regus.com/investors 39 Remuneration report continued Pension contributions £’000 Mark Dixon Stephen Gleadle Dominique Yates 2012 39.5 n/a 9.6 49.1 2011 36.6 12.1 n/a 48.7 Directors’ share interests The following Directors held beneficial interests in the share capital of the Company at 31 December 2011, 31 December 2012 and 5 March 2013. 5 March 2013 Ordinary Shares of 1p 31 December 2012 Ordinary Shares of 1p 31 December 2011 Ordinary Shares of 1p Executive Mark Dixon(a) Dominique Yates Non-Executive Lance Browne Elmar Heggen Alex Sulkowski Douglas Sutherland 322,744,607 322,744,607 322,028,792 641,989 641,989 641,989 – – – 400,000 – – – 400,000 – – – 400,000 (a) The interests of Mark Dixon are held indirectly through Estorn Limited, an entity in which Mark Dixon controls 100% of the share capital. Directors’ share options As at 31 December 2012, the beneficial interest of the Directors in options granted under the Regus plc Share Option Plan are shown below. Dominique Yates At 1 January 2012 Awards Granted 2012 1,000,000 – Awards Exercised 2012 – Awards Lapsed 2012 At 31 December 2012 Exercise price of grant (p) Date first exercisable Expiry date – 1,000,000 74.35 1/09/2014 02/09/2021 Share Options Directors’ interests under the Long Term Incentive Plan (‘LTIP’) Details of awards over ordinary shares in the Company granted to the Directors under the LTIP, as nil cost options, are as follows: Mark Dixon At 1 January 2012 520,149 Awards Granted 2012 – Awards Lapsed 2012 – Awards Exercised 2012 LTIP At 31 December 2012 – 520,149 40 Regus plc Annual Report and Accounts 2012 Directors’ interests under the CIP Details of awards over ordinary shares in the Company granted to the Directors under the CIP, all for nil consideration, are as follows: Investment Shares Mark Dixon Dominique Yates Matching Shares Mark Dixon Dominique Yates At 1 January 2012 Investment Awards exercised 2012 Awards lapsed 2012 Matching Awards exercised 2012 CIP Awards made 2012 At 31 December 2012 715,815 – 715,815 – 2,863,260 – – – – – – – – – – – – – – – – – 2,863,260 – The market price of the Company’s ordinary shares at 28 December 2012, the last dealing day of 2012, was 108.2p and the range during the year was 82.65p to 117.5p. None of the Directors had a beneficial interest in any contract of any significance in relation to the business of the Company or its subsidiaries at any time during the financial year. Annual resolution Shareholders will be given the opportunity to approve the Remuneration Report at the AGM on 21 May 2013. Audit requirement Under Luxembourg law and regulations there is no requirement for the sections on Directors’ remuneration, shareholdings and pension benefits on pages 39 to 40 inclusive to be audited; therefore all sections of the Remuneration Report are unaudited. On behalf of the Board Alex Sulkowski Chairman, Remuneration Committee 5 March 2013 e c n a n r e v o G e t a r o p r o C e c n a n r e v o g e t a r o p r o C www.regus.com/investors 41 Opinion In our opinion, the consolidated financial statements, as set out on pages 43 to 89, give a true and fair view of the consolidated financial position of Regus plc (société anonyme) as of 31 December 2012, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. Report on other legal and regulatory requirements The consolidated Directors’ report, including the corporate governance statement, which is the responsibility of the Board of Directors, is consistent with the consolidated financial statements and includes the information required by the law with respect to the Corporate Governance Statement. KPMG Luxembourg S.à r.l. Cabinet de révision agréé Thierry Ravasio Luxembourg, 5 March 2013 Auditors’ report To the Shareholders of Regus plc S.A. 26, Boulevard Royal L-2449 Luxembourg REPORT OF THE REVISEUR D’ENTREPRISES AGREE Report on the consolidated financial statements We have audited the accompanying consolidated financial statements of Regus plc (société anonyme), which comprise the consolidated balance sheet as at 31 December 2012 and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information, as set out on pages 43 to 89. Board of Directors’ responsibility for the consolidated financial statements The Board of Directors is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Responsibility of the Réviseur d’Entreprises agréé Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted for Luxembourg by the Commission de Surveillance du Secteur Financier. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the judgement of the Réviseur d’Entreprises agréé, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the Réviseur d’Entreprises agréé considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 42 Regus plc Annual Report and Accounts 2012 Consolidated income statement Continuing operations Revenue Cost of sales Gross profit (centre contribution) Administration expenses Share of (loss)/profit on joint ventures Operating profit Finance expense Finance income Profit before tax for the year Tax charge Profit after tax for the year Profit attributable to: Equity shareholders of the parent Non-controlling interests Profit for the year Earnings per ordinary share (EPS) after exceptional items: Basic (p) Diluted (p) * Restatement described in note 2 Year ended 31 Dec 2012 Total £m 1,244.1 (923.4) 320.7 (230.2) (0.3) 90.2 (5.9) 0.8 85.1 (14.2) 70.9 70.9 – 70.9 7.5 7.5 Notes 3 20 5 8 8 9 10 10 Year ended 31 Dec 2011 (Restated*) Total £m 1,162.6 (883.5) 279.1 (224.7) 0.1 54.5 (6.4) 1.3 49.4 (9.0) 40.4 41.7 (1.3) 40.4 4.3 4.3 s t n e m e t a t s l i a c n a n F i 43 www.regus.com/investors 43 Consolidated statement of comprehensive income Profit for the year Other comprehensive income: Actuarial loss for the year Foreign currency translation differences for foreign operations, net of income tax Other comprehensive income for the year, net of income tax Total comprehensive income for the year Total comprehensive income attributable to: Equity shareholders of the parent Non-controlling interests Total comprehensive income for the year * Restatement described in note 2 Notes 25 Year ended 31 Dec 2012 £m Year ended 31 Dec 2011 £m (Restated*) 70.9 (0.1) (14.5) (14.6) 56.3 56.3 – 56.3 40.4 (0.1) (4.1) (4.2) 36.2 37.5 (1.3) 36.2 44 44 Regus plc Annual Report and Accounts 2012 Consolidated statement of changes in equity Attributable to equity holders of the parent (a) Balance at 1 January 2011 Impact of change in accounting policy** Restated balance at 1 January 2011 Total comprehensive income for the year: Profit for the year (Restated*) Other comprehensive income: Actuarial loss for the year (note 25) Foreign currency translation differences for foreign operations, net of tax Total other comprehensive income, net Total comprehensive income for the year Transactions with owners, recorded directly in equity Share-based payments Ordinary dividend paid Acquisition of non-controlling interest Settlement of share awards Restated balance at 31 December 2011 Total comprehensive income for the year: Profit for the year Other comprehensive income: Actuarial loss for the year (note 25) Foreign currency translation differences for foreign operations, net of tax Total other comprehensive income, net Total comprehensive income for the year Transactions with owners, recorded directly in equity Share-based payments Ordinary dividend paid Acquisition of non-controlling interest Settlement of share awards Share capital £m Treasury shares £m 9.5 – 9.5 (7.1) – (7.1) – – – – – – – – – – – – – – 9.5 – – – – (7.1) – – – – – – – – – – – – – – – – – 0.1 Foreign currency translation reserve £m 52.6 – 52.6 – – (4.1) (4.1) (4.1) – – – – 48.5 – – (14.5) (14.5) (14.5) – – – – Revaluation reserve £m 10.5 – 10.5 Other £m 15.3 – 15.3 Retained earnings £m 404.9 8.2 413.1 Total equity attributable to equity holders £m Non- controlling interests £m 485.7 8.2 493.9 0.1 – 0.1 Total equity £m 485.8 8.2 494.0 – – – – – – – – – – 41.7 41.7 (1.3) 40.4 (0.1) (0.1) – (0.1) – (0.1) 41.6 (4.1) (4.2) 37.5 – – (1.3) (4.1) (4.2) 36.2 – – – – 10.5 – – – – 15.3 0.6 (25.0) (5.1) (1.2) 424.0 0.6 (25.0) (5.1) (1.2) 500.7 – – 1.2 – – 0.6 (25.0) (3.9) (1.2) 500.7 70.9 (0.1) (14.5) (14.6) 56.3 0.6 (28.2) – (2.0) 527.4 s t n e m e t a t s l i a c n a n F i – – – – – – – – – – – – – – – – – – – – – – – – – – – – 70.9 70.9 (0.1) (0.1) – (0.1) 70.8 (14.5) (14.6) 56.3 0.6 (28.2) – (2.1) 0.6 (28.2) – (2.0) Balance at 31 December 2012 9.5 (7.0) 34.0 10.5 15.3 465.1 527.4 * Restatement described in note 2 ** Net of foreign exchange impact (a) Total reserves attributable to equity holders of the parent • Share capital represents the net proceeds (the nominal value) on the issue of the Company’s equity share capital. • At 31 December 2012 Treasury shares represent 8,982,139 (2011: 9,070,906) ordinary shares of the Group that were acquired for the purposes of the Group’s employee share option plans and the share buy-back programme. During the period, nil shares were purchased in the open market and 88,767 Treasury shares held by the Group were utilised to satisfy the exercise of share awards by employees. As at 5 March 2013, 8,982,139 Treasury shares were held. • The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries and joint ventures. • The revaluation reserve arose on the restatement of the assets and liabilities of the UK associate from historic to fair value at the time of the acquisition of the outstanding 58% interest on 19 April 2006. • Other reserves include £37.9m arising from the Scheme of Arrangement undertaken on 14 October 2008, £6.5m relating to merger reserves and £0.1m to the redemption of preference shares partly offset by £29.2m arising from the Scheme of Arrangement undertaken in 2003. 45 www.regus.com/investors 45 Consolidated balance sheet As at 31 Dec 2012 £m As at 31 Dec 2011 £m (Restated*) As at 1 Jan 2011 £m (Restated*) Notes 12 13 14 9 15 20 16 9 22 17 9 18 18 19 17 18 18 9 19 20 25 21 317.0 46.9 437.5 33.9 35.7 1.7 872.7 290.8 5.7 – 132.3 428.8 1,301.5 (447.7) (151.1) (6.8) (0.6) (4.8) (1.5) (612.5) (183.7) 689.0 (147.4) (0.1) (6.8) (1.3) (4.6) (1.2) (0.2) (161.6) (774.1) 527.4 9.5 (7.0) 34.0 10.5 15.3 465.1 527.4 – 527.4 1,301.5 285.4 45.9 333.5 32.2 37.9 2.6 737.5 271.3 7.4 – 197.5 476.2 1,213.7 (425.1) (141.6) (6.3) (1.5) (0.9) (3.0) (578.4) (102.2) 635.3 (117.8) (0.8) (6.0) (0.5) (8.2) (1.2) (0.1) (134.6) (713.0) 500.7 9.5 (7.1) 48.5 10.5 15.3 424.0 500.7 – 500.7 1,213.7 282.4 48.4 279.5 36.6 34.0 3.9 684.8 248.7 13.3 10.4 194.2 466.6 1,151.4 (388.4) (125.8) (17.0) (2.3) (5.5) (2.8) (541.8) (75.2) 609.6 (99.1) (1.9) (3.4) (0.1) (9.8) (1.3) – (115.6) (657.4) 494.0 9.5 (7.1) 52.6 10.5 15.3 413.1 493.9 0.1 494.0 1,151.4 Non-current assets Goodwill Other intangible assets Property, plant and equipment Deferred tax assets Other long-term receivables Investments in joint ventures Current assets Trade and other receivables Corporation tax receivable Liquid investments Cash and cash equivalents Total assets Current liabilities Trade and other payables (incl. customer deposits) Deferred income Corporation tax payable Obligations under finance leases Bank and other loans Provisions Net current liabilities Total assets less current liabilities Non-current liabilities Other payables Obligations under finance leases Bank and other loans Deferred tax liability Provisions Provision for deficit on joint ventures Retirement benefit obligations Total liabilities Total assets less liabilities Total equity Issued share capital Treasury shares Foreign currency translation reserve Revaluation reserve Other reserves Retained earnings Total shareholders’ equity Non-controlling interests Total equity Total equity and liabilities * Restatement described in note 2 Approved by the Board on 5 March 2013 Mark Dixon Chief Executive Officer Dominique Yates Chief Financial Officer 46 46 Regus plc Annual Report and Accounts 2012 Consolidated statement of cash ﬂ ows Profit before tax for the year Adjustments for: Net finance costs Share of loss/(profit) after tax on joint ventures Depreciation charge Loss on disposal of property, plant and equipment Amortisation of intangible assets Loss on disposal of intangible assets Decrease in provisions Share-based payments Other non-cash movements Operating cash flows before movements in working capital (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables Cash generated from operations (before exceptional items) Cash inflow/(outflow) from exceptional items Cash generated from operations (after exceptional items) Interest paid on finance leases Interest paid on credit facilities Tax paid Net cash inflow from operating activities Investing activities Purchase of subsidiary undertakings (net of cash acquired) Disposal of subsidiary undertakings (net of cash disposed of) Dividends received from joint ventures Proceeds on sale of property, plant and equipment Purchase of property, plant and equipment Purchase of intangible assets Interest received Decrease in liquid investments Net cash outflow from investing activities Financing activities Net proceeds from issue of loans Repayment of loans Repayment of capital elements of finance leases Acquisitions of non-controlling interests Settlement of share awards Payment of ordinary dividend Net cash outflow from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of exchange rate fluctuations on cash held Cash and cash equivalents at end of year * Restatement described in note 2 Year ended 31 Dec 2012 £m Year ended 31 Dec 2011 £m (Restated*) 85.1 49.4 5.1 0.3 63.6 0.1 5.5 0.1 (5.1) 0.6 (3.8) 151.5 (24.9) 71.3 197.9 – 197.9 (0.1) (3.0) (13.9) 180.9 (43.3) – 0.8 1.5 (169.2) (6.8) 0.7 – (216.3) 6.4 (1.9) (1.4) – (2.0) (28.2) (27.1) (62.5) 197.5 (2.7) 132.3 5.1 (0.1) 68.1 1.2 6.7 – (1.4) 0.6 (2.0) 127.6 (29.1) 79.9 178.4 (1.9) 176.5 (0.2) (1.9) (10.6) 163.8 (6.2) (1.8) 1.4 – (124.1) (3.9) 1.2 10.4 (123.0) 0.2 (1.3) (2.0) (3.9) (1.2) (25.0) (33.2) 7.6 194.2 (4.3) 197.5 Notes 8 20 5, 14 5, 13 19 26 20 14 13 8 26 11 22 47 www.regus.com/investors 47 s t n e m e t a t s l i a c n a n F i Notes to the accounts 1. Authorisation of financial statements The Group and Company financial statements for the year ended 31 December 2012 were authorised for issue by the Board of Directors on 5 March 2013 and the balance sheets were signed on the Board’s behalf by Mark Dixon and Dominique Yates. Regus plc S.A. is a public limited company incorporated in Jersey and registered and domiciled in Luxembourg. The Company’s ordinary shares are traded on the London Stock Exchange. The Group financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the European Union (‘Adopted IFRSs’). The Company prepares its parent Company annual accounts in accordance with Luxembourg GAAP; extracts from these are presented on page 90. 2. Accounting policies Basis of preparation The Group financial statements consolidate those of the parent Company and its subsidiaries (together referred to as the ‘Group’) and equity account the Group’s interest in the associate and jointly controlled entities. The extract from the parent Company annual accounts presents information about the Company as a separate entity and not about its Group. The accounting policies set out below have been applied consistently to all periods presented in these Group financial statements. Amendments to adopted IFRSs issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC) with an effective date from 1 January 2012 did not have a material effect on the Group financial statements. IAS 12 Income Taxes (Amendment) – Deferred Taxes: Recovery of Underlying Assets introduces a rebuttable assumption that deferred tax on investment properties measured at fair value will be recognised on a sale basis, unless an entity has a business model that would indicate the investment property will be consumed in business. The adoption of this amendment has no impact on the financial position or performance of the Group. IFRS 1 First-time Adoption of International Financial Reporting Standards (Amendment) – Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters provides guidance on how an entity should resume presenting IFRS financial statements when its functional currency ceases to be subject to severe hyperinflation. The amendment also removes the legacy fixed dates in IFRS 1 relating to derecognition and day one gain or loss transactions. In the amended standard these dates coincide with the date of transition to IFRS. The adoption of this amendment has no impact on the financial position or performance of the Group. IFRS 7 Financial instruments Disclosures (Amendment) requires additional quantitative and qualitative disclosures relating to the transfer of assets, when financial assets are derecognised in their entirety, but the entity has a continuing involvement in them, and when financial assets are not derecognised in their entirety. The adoption of this amendment has no impact on the financial position or performance of the Group. Judgements made by the Directors in the application of these accounting policies that have significant effect on the consolidated financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 32. The consolidated financial statements are prepared on a historical cost basis, with the exception of certain financial assets and liabilities that are measured at fair value. The Directors, having made appropriate enquiries, have a reasonable expectation that the Group and the Company have 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 consolidated financial statements on pages 43 to 89. In adopting the going concern basis for preparing the consolidated financial statements, the Directors have considered the further information included in the business activities commentary as set out on pages 10 to 13 as well as the Group’s principal risks and uncertainties as set out on pages 26 and 27. Further details on the going concern basis of preparation can be found in note 23 to the notes to the accounts on page 71. These Group consolidated financial statements are presented in pounds sterling (£), which is Regus plc’s functional currency, and all values are in million pounds, rounded to one decimal place, except where indicated otherwise. The attributable results of those companies acquired or disposed of during the year are included for the periods of ownership. Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Group’s share of the total recognised income and expense of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases or the associate qualifies as a disposal group at which point the investment is carried at the lower of fair value less costs to sell and carrying value. 48 48 Regus plc Annual Report and Accounts 2012 Joint ventures include jointly controlled entities that are those entities over whose activities the Group has joint control, established by contractual agreement. The consolidated financial statements include the Group’s share of the total recognised gains and losses of jointly controlled entities on an equity accounted basis, from the date that joint control commences until the date that joint control ceases or the jointly controlled entity qualifies as a disposal group at which point the investment is carried at the lower of fair value less costs to sell and carrying value. When the Group’s share of losses exceeds its interest in a joint venture, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of a joint venture. On 19 April 2006 the Group acquired the remaining 58% of the shares of the UK business that were not already owned by the Group. As a result the Group fully consolidated the UK business from that date. The acquisition was accounted for through the purchase method and as a consequence the entire assets and liabilities of the UK business were revalued to fair value. The effect of these adjustments on the 42% of the UK business already owned was reflected in the revaluation reserve. On 14 October 2008, Regus plc acquired the entire share capital of Regus Group plc in exchange for the issue of new shares of Regus plc on the basis of one share in Regus plc for one share held previously in Regus Group plc. At the date of the transaction, Regus plc had nominal assets and liabilities and therefore the transaction was accounted for as a reverse acquisition of Regus plc by Regus Group plc. Consequently no fair value acquisition adjustments were required and the aggregate of the Group reserves have been attributed to Regus plc. IFRSs not yet effective The following IFRSs have been issued but have not been applied by the Group in these consolidated financial statements as they are effective for years beginning on or after 1 January 2013 or have not yet been endorsed by the European Union. Their adoption is not expected to have a material effect on the consolidated financial statements unless otherwise indicated: IAS 1 Financial Statement Presentation introduces amendments to improve the presentation of the components of other comprehensive income. This statement is effective for years beginning on or after 1 July 2012. IAS 19 Employee Benefits (Amendment) requires significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. The adoption of this amendment is not expected to have an impact on the financial position or performance of the Group. This statement is effective for years beginning on or after 1 January 2013. IAS 28 Investments in Associates and Joint Ventures (Revised) – As a consequence of the New IFRS 11 Joint Arrangements, and IFRS 12 Disclosure of Interests in Other Entities, IAS 28 Investments in Associates, has been renamed IAS 28 Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The revised standard becomes effective for annual periods beginning on or after 1 January 2014. IAS 32 Financial Instruments: Presentation – The amendments do not change the current offsetting model in IAS 32. The amendments clarify that the right of set-off must be available today – that is, it is not contingent on a future event. This statement is effective for years beginning on or after 1 January 2014. IFRS 1 First-time Adoption of International Financial Reporting Standards (Amendment) aligns IFRS 1 with the IAS 20 requirements (after its revision in 2008) to prospectively fair value government loans with a below-market rate of interest. The statement has added an exception that allows a first-time adopter to use its previous GAAP carrying amount for such loans on transition to IFRS. The exception applies to recognition and measurement only. Management should use the requirements of IAS 32, ‘Financial instruments: Presentation’, to determine whether government loans are classified as equity or as a financial liability. This statement is effective for years beginning on or after 1 January 2013. IFRS 7 Financial Instruments Disclosure – The amendment requires an entity to disclose information about rights of set-off and related arrangements. This statement is effective for years beginning on or after 1 January 2013. IFRS 9 Financial Instruments – Classification and Measurement addresses the classification and measurement of financial assets and liabilities as defined in IAS 39. This statement will be effective for years beginning on or after 1 January 2015. IFRS 10 Consolidated Financial Statements replaces IAS 27 Consolidated and Separate Financial Statements by changing whether an entity is consolidated by revising the definition of control. It also addresses the issues raised in SIC-12 Consolidation – Special Purposes Entities. The statement also provided a number of clarifications on applying this new definition of control. This statement will be effective for years beginning on or after 1 January 2014. 49 www.regus.com/investors 49 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 2. Accounting policies (continued) IFRS 11 Joint Arrangements established principles for the financial reporting by parties to a joint arrangement. Joint control is defined as the contractually agreed sharing on control of an arrangement, which exists only when the decisions about the relevant activities require the unanimous consent of the parties sharing control. This statement will be effective for years beginning on or after 1 January 2014. IFRS 12 Disclosure of Interests in Other Entities combines, enhances and replaces the disclosure requirements for subsidiaries, joint arrangements, associated and unconsolidated structured entities. This statement will be effective for years beginning on or after 1 January 2014. IFRS 13 Fair Value Measurement establishes a single source of guidance for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. This statement will be effective for years beginning on or after 1 January 2013. The Group did not adopt any standards, interpretations and amendments to standards which were available for optional early adoption and relevant to the Group. The Group will adopt the above standards or amendments in the year in which they become effective and/ or endorsed by the European Union, whichever is later. Change in accounting policy On 1 January 2012 the Group changed its accounting policy with respect to the treatment of new centre costs. The Group believes that the capitalisation of these costs more accurately reflects the cost of bringing its assets to their usable condition. Certain related costs previously expensed will be capitalised as part of property, plant and equipment. This change in accounting policy was applied retrospectively. The effects on the consolidated balance sheet were as follows: £m Balance as reported at 1 January 2011 Net effect of costs capitalised on 1 January 2011 Restated balance at 1 January 2011 £m Balance as reported at 31 December 2011 Net effect of costs capitalised on 1 January 2011 Net effect during the year Restated balance at 31 December 2011 £m Net effect of costs capitalised on 1 January 2012 Net effect during the year Net impact at 31 December 2012 The effects on the consolidated statement of comprehensive income were as follows: £m Costs capitalised Depreciation of costs capitalised Tax expense Net effect during the year Property, plant & equipment Deferred tax asset 270.8 8.7 279.5 37.1 (0.5) 36.6 Property, plant & equipment Deferred tax asset 320.9 8.7 3.9 333.5 32.8 (0.5) (0.1) 32.2 Property, plant & equipment Deferred tax asset 12.6 6.3 18.9 (0.6) – (0.6) Retained Earnings 404.9 8.2 413.1 Retained Earnings/ Income Statement 412.0 8.2 3.8 424.0 Retained Earnings/ Income Statement 12.0 6.3 18.3 Year ended 31 Dec 2012 Year ended 31 Dec 2011 8.2 (1.9) – 6.3 5.2 (1.3) (0.1) 3.8 50 50 Regus plc Annual Report and Accounts 2012 The effects on the earnings per share were as follows: Basic (p) Diluted (p) Year ended 31 Dec 2012 Year ended 31 Dec 2011 0.7 0.7 0.3 0.3 Basis of consolidation Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences. The results are consolidated until the date control ceases or the subsidiary qualifies as a disposal group at which point the assets and liabilities are carried at the lower of fair value less costs to sell and carrying value. Impairment of non-financial assets The carrying amounts of the Group’s assets other than deferred tax assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For goodwill, intangible assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount was estimated at 31 October 2012 and updated at 31 December 2012. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Calculation of recoverable amount The recoverable amount of relevant assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Goodwill All business combinations are accounted for using the purchase method. Goodwill represents the difference between the cost of acquisition over the share of the fair value of identifiable assets (including intangible assets), liabilities and contingent liabilities of a subsidiary, associate, asset deal acquisition or jointly controlled entity at the date of acquisition. Positive goodwill is stated at cost less any provision for impairment in value. An impairment test is carried out annually and, in addition, whenever indicators exist that the carrying amount may not be recoverable. Positive goodwill is allocated to cash-generating units for the purpose of impairment testing. Business combinations that took place prior to the Group’s transition date to IFRS on 1 January 2004 have not been restated under the requirements of IFRS. Intangible assets Intangible assets acquired separately from the business are capitalised at cost. Intangible assets acquired as part of an acquisition of a business are capitalised separately from goodwill if their fair value can be identified and measured reliably on initial recognition. The Group conducted a review of the estimated useful life for other intangible assets. During 2012, the expected useful life for certain asset categories were adjusted prospectively to more accurately reflect the period in which the intangible assets are expected to be available for the Group. Intangible assets are amortised on a straight-line basis over the estimated useful life of the assets as follows: Brand – Regus brand Brand – Other acquired brands Computer software Customer lists Management agreements Amortisation of intangible assets is expensed through administration expenses in the income statement. Indefinite life 20 years 5 years 2 years Minimum duration of the contract 51 www.regus.com/investors 51 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 2. Accounting policies (continued) Acquisitions of non-controlling interests Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result. Adjustments to non-controlling interests arising from transactions that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary. Leases Plant and equipment leases for which the Group assumes substantially all of the risks and rewards of ownership are classified as finance leases. All other leases, including all of the Group’s property leases, are categorised as operating leases. Finance leases Plant and equipment acquired by way of a finance lease is capitalised at the commencement of the lease at the lower of its fair value and the present value of the minimum lease payments at inception. Future payments under finance leases are included in creditors, net of any future finance charges. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. Finance charges are recognised in the income statement over the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Operating leases Minimum lease payments under operating leases are recognised in the income statement on a straight-line basis over the lease term. Lease incentives and rent free periods are included in the calculation of minimum lease payments. The commencement of the lease term is the date from which the Group is entitled to use the leased asset. The lease term is the non-cancellable period of the lease, together with any further periods for which the Group has the option to continue to lease the asset and when at the inception of the lease it is reasonably certain that the Group will exercise that option. Contingent rentals include rent increases based on future inflation indices or non-guaranteed rental payments based on centre turnover or profitability and are excluded from the calculation of minimum lease payments. Contingent rentals are recognised in the income statement as they are incurred. Onerous lease provisions are an estimate of the net amounts payable under the terms of the lease to the first break point, discounted at an appropriate weighted average cost of capital. Exceptional Items Exceptional items are those items which are separately disclosed by virtue of their size or incidence to enable a full understanding of the Group’s financial performance. Such items are included within the income statement caption to which they relate, and are separately disclosed either in the notes to the consolidated financial statements or on the face of the consolidated income statement. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets as follows: Buildings Fixtures and fittings Furniture Office equipment and telephones Motor vehicles Computer hardware Year ended 31 Dec 2012 50 years 10 years 10 years 5 years 4 years 3 – 5 years Year ended 31 Dec 2011 20 years Over the shorter of the lease term and 10 years 10 years 5 – 10 years 4 years 3 – 5 years The useful life of certain plant, property and equipment were revised in 2012 (refer to note 14). Revenue Revenue from the provision of services to customers is measured at the fair value of consideration received or receivable (excluding sales taxes). Where rent free periods are granted to customers, rental income is spread on a straight-line basis over the length of the customer contract. Workstations Workstation revenue is recognised when the provision of the service is rendered. Amounts invoiced in advance are deferred and recognised as revenue upon provision of the service. Customer service income Service income (including the rental of meeting rooms) is recognised as services are rendered. In circumstances where Regus acts as an agent for the sale and purchase of goods to customers, only the commission fee earned is recognised as revenue. 52 52 Regus plc Annual Report and Accounts 2012 Management and franchise fees Fees received for the provision of initial and subsequent services are recognised as revenue as the services are rendered. Fees charged for the use of continuing rights granted by the agreement, or for other services provided during the period of the agreement, are recognised as revenue as the services are provided or the rights used. Membership card income Revenue from the sale of membership cards is deferred and recognised over the period that the benefits of the membership card are expected to be provided. These categories represent all material sources of revenue earned from the provision of global workplace solutions. Employee benefits The Group’s major pension plans are of the defined contribution type. For these plans the Group’s contribution and other paid and unpaid benefits earned by the employees are charged to the income statement as incurred. For the defined benefit obligation plans, the employer’s portion of past and current services cost is charged to operating profit, with the interest cost net of expected return on assets in the plans reported within other finance costs. Actuarial gains or losses are recognised in full, directly in other comprehensive income such that the balance sheet reflects the plan’s deficits as at the balance sheet date. The defined benefit obligation is calculated annually by external actuaries using the projected unit credit method. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using an appropriate discount rate. In determining this discount rate, management considers the interest rates of corporate bonds in the respective currency with at least AA rating, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The mortality rate is based on publicly available mortality tables for the specific country. Future salary increases and pension increases are based on expected future inflation rates for the respective country. Further details about the assumptions used are given in note 25. Share-based payments The share option programme entitles certain employees and Directors to acquire shares of the ultimate parent company; these awards are granted by the ultimate parent. The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using the Black-Scholes valuation model or the Monte Carlo method, taking into accounts the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is due only to share prices not achieving the threshold for vesting. Share appreciation rights (CIP) are also granted by the Company to certain employees. The fair value of the amount payable to the employee is recognised as an expense with a corresponding increase in equity. The fair value is initially recognised at grant date and spread over the period during which the employees become unconditionally entitled to payment. The fair value of the share appreciation rights is measured based on the Monte Carlo valuation model, taking into account the terms and conditions upon which the instruments were granted. The Group also operates a Value Creation Plan which awards entitlements to certain employees and Directors of the Group. These entitlements are convertible into options over ordinary shares subject to the Group’s share price reaching certain targets. The fair value of the amount payable to the employee is recognised as an expense with a corresponding increase in equity. The fair value is initially recognised at the date of the award of the entitlements and spread over the period during which the entitlements are convertible into ordinary shares. The fair value of the entitlements is based on the Monte Carlo valuation model, taking into account the terms and conditions upon which the instruments were granted. 53 www.regus.com/investors 53 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 2. Accounting policies (continued) Taxation Tax on the profit for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets and liabilities that affect neither accounting nor taxable profit other than in a business combination; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised for all unused tax losses only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Restructuring provisions are made for direct expenditures of a business reorganisation where the plans are sufficiently detailed and well advanced and where the appropriate communication to those affected has been undertaken at the balance sheet date. Provision is made for onerous contracts to the extent that the unavoidable costs of meeting the obligations under a contract exceed the economic benefits expected to be delivered, discounted using an appropriate weighted average cost of capital. Net finance expenses Interest charges and income are accounted for in the income statement on an accruals basis. Financing transaction costs that relate to financial liabilities are charged to interest expense using the effective interest rate method and are recognised within the carrying value of the related financial liability on the balance sheet. Fees paid for the arrangement of credit facilities are recognised as a prepayment and recognised through the finance expense over the term of the facility. In the event of a facility being drawn the relevant unamortised portion of the fee is recognised within the carrying value of the financial liability and charged to the interest expense using the effective interest rate method. Where assets or liabilities on the Group balance sheet are carried at net present value, the increase in the amount due to unwinding the discount is recognised as a finance expense or finance income as appropriate. Costs arising on bank guarantees and letters of credit and foreign exchange gains or losses have been classified as other finance costs. Interest bearing borrowings and other financial liabilities Financial liabilities, including interest bearing borrowings, are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, financial liabilities are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. The Group derecognises financial liabilities when the Group’s obligations are discharged, cancelled or expire. Financial liabilities are classified as financial liabilities at fair value through profit or loss where the liability is either held for trading or is designated as held at fair value through profit or loss on initial recognition. Financial liabilities at fair value through profit or loss are stated at fair value with any resultant gain or loss recognised in the income statement. Financial assets Financial assets are classified as either at fair value through profit or loss, held to maturity investments, available for sale financial assets or loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined on initial recognition. Trade and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortised cost using the effective interest rate method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when recognition would be immaterial. Liquid investments consist of held to maturity bonds and deposits. 54 54 Regus plc Annual Report and Accounts 2012 Foreign currencies Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the closing rate of exchange at the balance sheet date and the gains or losses on translation are taken to the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. The results and cash flows of overseas operations are translated using the average rate for the period. Assets and liabilities, including goodwill and fair value adjustments, of foreign operations are translated using the closing rate with all exchange differences arising on consolidation being recognised other comprehensive income, and presented in the foreign currency translation reserve in equity. Exchange differences are released to the income statement on disposal. Under the transition requirements of IFRS, cumulative translation differences for all foreign operations have been set to zero at 1 January 2004. Cash and cash equivalents Cash and cash equivalents comprise cash at bank and in hand and are subject to an insignificant risk of changes in value. Derivative financial instruments The Group’s policy on the use of derivative financial instruments can be found in note 23. Derivative financial instruments are measured initially at fair value and changes in the fair value are recognised through profit or loss unless the derivative financial instrument has been designated as a cash flow hedge whereby the effective portion of changes in the fair value are deferred in equity. Foreign currency translation rates US dollar Euro Japanese yen At 31 December Annual average 2012 1.62 1.23 140 2011 1.55 1.20 120 2012 1.59 1.23 128 2011 1.61 1.15 128 3. Segmental analysis – statutory basis An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including those that relate to transactions with other operating segments. An operating segment’s results are reviewed regularly by the chief operating decision maker (the Board of Directors of the Group) to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. The business is run on a worldwide basis but managed through four principal geographical segments: Americas; Europe, Middle East and Africa (EMEA); Asia Pacific; and the United Kingdom. The United Kingdom segment does not include the Group’s non-trading holding and corporate management companies that are based in the UK and the EMEA segment does not include the Group’s non-trading head office and holding companies that are based in Luxembourg and Switzerland. The results of business centres in each of these regions form the basis for reporting geographical results to the chief operating decision maker. All reportable segments are involved in the provision of global workplace solutions. The Group’s reportable segments operate in different markets and are managed separately because of the different economic characteristics that exist in each of those markets. Each reportable segment has its own discrete senior management team responsible for the performance of the segment. The accounting policies of the operating segments are the same as those described in the Annual Report and Accounts for Regus plc for the year ended 31 December 2011. The performance of each segment is assessed on the basis of the segment operating profit which excludes certain non-recurring items (including provisions for onerous contracts and asset write-downs), exceptional gains and losses, internal management charges and foreign exchange gains and losses arising on transactions with other operating segments. 55 www.regus.com/investors 55 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 3. Segmental analysis – statutory basis (continued) Americas 2012 £m 2011 £m EMEA 2012 £m 2011 £m Asia Pacific 2012 £m 2011 £m United Kingdom 2012 £m 2011 £m All other operating segments 2012 £m 2011 £m Total 2012 £m 2011 £m 533.9 477.5 301.2 301.7 195.9 169.1 211.8 212.6 1.3 1.7 1,244.1 1,162.6 0.2 534.1 – 477.5 0.3 301.5 0.7 302.4 – 195.9 – 169.1 1.6 213.4 1.5 214.1 – 1.3 – 2.1 1.7 1,246.2 2.2 1,164.8 150.5 130.3 76.8 69.2 55.5 44.6 36.6 31.7 1.2 1.4 320.6 277.2 72.2 53.2 26.2 18.4 31.7 22.9 12.4 3.7 (1.9) (0.3) 140.6 97.9 – (0.3) – – (0.2) – 0.9 – 0.1 1.0 (0.2) 0.3 – (0.5) 0.3 – (0.7) 0.4 (1.2) (1.6) 0.1 (0.9) (2.3) 0.1 – – – – – – (0.3) (2.4) 0.5 0.1 (3.4) 0.8 33.2 32.1 12.0 14.8 10.3 12.8 11.3 13.2 1.9 0.7 68.7 73.6 (1.1) 683.7 (399.1) (1.2) 593.4 (323.0) 9.1 296.2 (334.5) (2.1) 287.6 (310.0) 6.3 201.3 (178.7) 9.3 176.4 (165.7) (2.6) 316.7 (306.6) 1.6 300.5 (285.7) 2.5 1.7 (0.6) 14.2 1.4 1.6 1,499.6 (0.6) (1,219.5) 9.0 1,359.5 (1,085.0) 284.6 270.4 (38.3) (22.4) 22.6 10.7 10.1 14.8 1.1 1.0 280.1 274.5 99.0 74.1 24.0 22.0 28.6 19.7 11.4 9.3 – – 163.0 125.1 Revenues from external customers Revenues from internal customers Segment revenues Gross profit (centre contribution) (Restated*) Reportable segment profit (Restated*) Share of profit/(loss) of joint ventures Finance expense Finance income Depreciation and amortisation (Restated*) Taxation (income)/charge (Restated*) Assets (Restated*) Liabilities Net assets/(liabilities) (Restated*) Non-current asset additions (Restated*) * Restatement described in note 2 Revenue in the other segmental category is generated from services related to the provision of workplace solutions including fees earned from franchise agreements and commissions earned from the sale of outsourced workplace solution products. Revenue from internal customers is determined by reference to current market prices. £m Reportable segment results Exclude: Internal revenue Corporate overheads Foreign exchange gains and losses Published Group total Revenue 1,246.2 (2.1) – – 1,244.1 Gross profit (centre contribution) Operating profit Share of JV profit Finance expense Finance income 2012 Depreciation and amortisation Profit before tax 320.6 (2.1) 2.2 – 320.7 140.6 – (50.0) (0.1) 90.5 (0.3) – – – (0.3) (2.4) – (2.2) (1.3) (5.9) 0.5 – 0.3 – 0.8 68.7 – 0.4 – 69.1 138.4 – (51.9) (1.4) 85.1 56 56 Regus plc Annual Report and Accounts 2012 £m Reportable segment results Exclude: Internal revenue Corporate overheads Foreign exchange gains and losses Published Group total * Restatement described in note 2 Gross profit (centre contribution) 277.2 (2.2) 4.1 – 279.1 Revenue 1,164.8 (2.2) – – 1,162.6 Operating profit Share of JV profit Finance expense Finance income 2011 (Restated*) Depreciation and amortisation Profit before tax 97.9 – (43.3) (0.2) 54.4 0.1 – – – 0.1 (3.4) – (0.4) (2.6) (6.4) 0.8 – 0.5 – 1.3 73.6 – – 1.2 74.8 95.4 – (43.2) (2.8) 49.4 £m Reportable segment results Exclude: Segmental inter-company amounts Corporate overheads assets and liabilities (excluding amounts due to/from reportable segments) Cash Deferred Taxation Other Published Group total Assets Liabilities 1,499.6 (324.6) (1,219.5) 465.7 73.0 22.0 31.5 1,301.5 – – (20.3) (774.1) £m Reportable segment results Exclude: Segmental inter-company amounts Corporate overheads assets and liabilities (excluding amounts due to/from reportable segments) Cash Deferred Taxation* Other Published Group total Assets Liabilities 1,359.5 (291.4) (1,085.0) 382.8 113.4 19.0 13.2 1,213.7 – – (10.8) (713.0) * Restatement described in note 2 2012 Net assets/ (liabilities) 280.1 141.1 73.0 22.0 11.2 527.4 2011 (Restated*) Net assets/ (liabilities) 274.5 91.4 113.4 19.0 2.4 500.7 57 www.regus.com/investors 57 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 4. Segmental analysis – entity-wide disclosures The Group’s primary activity and only business segment is the provision of global workplace solutions and therefore all revenue is attributed to a single group of similar products and services. It is not meaningful to separate this group into further categories of products. Revenue is recognised where the service is provided. The Group has a diversified customer base and no single customer contributes a material percentage of the Group’s revenue. The Group’s revenue from external customers and non-current assets analysed by foreign country is as follows: External revenue 2012 Non-current assets(a) 2011 (Restated*) External revenue Non-current assets(a) 3.0 400.6 213.0 627.5 1,244.1 0.6 373.8 163.6 300.8 838.8 3.4 365.1 213.0 581.1 1,162.6 0.6 320.6 165.2 218.9 705.3 £m Country of domicile – Luxembourg United States of America United Kingdom All other countries (a) Excluding deferred tax assets * Restatement described in note 2 5. Operating profit Operating profit has been arrived at after charging/(crediting): Depreciation on property, plant and equipment Owned assets Finance leases Amortisation of intangibles Provision for bad debts Loss on disposal of property, plant and equipment Loss on disposal of intangibles Exchange losses recognised in the income statement Rents payable in respect of operating leases Property Contingent rents paid Equipment Amortisation of UK acquisition fair value adjustments Staff costs * Restatement described in note 2 Fees payable to the Group’s auditor for the audit of the Group accounts Fees payable to the Group’s auditor and its associates for other services: The audit of the Company’s subsidiaries pursuant to legislation Other services pursuant to legislation Tax services Other services 58 58 Regus plc Annual Report and Accounts 2012 Notes 14 14 13 13 7 2012 £m 62.7 0.9 5.5 2.2 0.1 0.1 0.4 430.6 15.5 1.5 (4.1) 257.4 2012 £m 0.3 1.3 – – 2011 £m (Restated*) 66.2 1.9 6.7 5.1 1.2 – 0.4 414.9 14.9 1.5 (4.6) 232.7 2011 £m 0.2 1.3 0.1 0.1 6. Exceptional items Administration expenses: 2011 Restructuring plan (charge) 2010 Restructuring plan release/(charge) 2012 £m – – – 2011 £m (2.5) 2.5 – No exceptional items were incurred during the year ended 31 December 2012. During the year ended 31 December 2011 the Group completed the restructuring of specific entities within the Group at a net cost of £2.5m. This balance consists of expenditure arising on the following categories: asset write-down, reorganisation costs and other costs. There is no provision recognised at year end. 7. Staff costs The aggregate payroll costs were as follows: Wages and salaries Social security Pension costs Share-based payments The average number of persons employed by the Group (including Executive Directors), analysed by category and geography, was as follows: Centre staff Sales & marketing staff Finance staff Other staff Americas EMEA Asia Pacific United Kingdom Corporate functions Details of Directors’ emoluments and interests are given on pages 32 to 41 in the Remuneration Report. 2012 £m 216.2 37.5 3.1 0.6 257.4 2011 £m 194.1 35.2 2.8 0.6 232.7 2012 Average full time equivalents 2011 Average full time equivalents 4,478 943 827 890 7,138 2,701 1,668 991 881 897 7,138 3,984 871 774 823 6,452 2,483 1,610 960 976 423 6,452 59 www.regus.com/investors 59 s t n e m e t a t s l i a c n a n F i 2012 £m (0.9) (0.1) (1.0) (3.5) (1.4) (5.9) 0.7 0.1 0.8 (5.1) 2012 £m (19.9) 4.4 (0.2) (15.7) (6.7) 9.0 (0.8) 1.5 (14.2) 2011 £m (1.2) (0.2) (1.4) (3.0) (2.0) (6.4) 1.2 0.1 1.3 (5.1) 2011 £m (Restated*) (13.5) 1.5 7.4 (4.6) (7.3) 4.4 (1.5) (4.4) (9.0) Notes to the accounts continued 8. Net finance expense Interest payable and similar charges on bank loans Interest payable and similar charges of finance leases Total interest expense Other finance costs Unwinding of discount rates Total finance expense Total interest income Unwinding of discount rates Total finance income Net finance expense 9. Taxation (a) Analysis of charge in the year Current taxation Corporate income tax Previously unrecognised tax losses and temporary differences (Under)/over provision in respect of prior years Total current taxation Deferred taxation Origination and reversal of temporary differences Previously unrecognised tax losses and temporary differences (Under)/over provision in respect of prior years Total deferred taxation Tax charge on profit * Restatement described in note 2 60 60 Regus plc Annual Report and Accounts 2012 (b) Reconciliation of taxation charge Profit before tax Tax on profit at 28.8% (2011: 28.8%) Tax effects of: Expenses not deductible for tax purposes Items not chargeable for tax purposes Recognition of previously unrecognised deferred tax assets Movements in temporary differences in the year not recognised in deferred tax Other movements in temporary differences Adjustment to tax charge in respect of previous years Differences in tax rates on overseas earnings * Restatement described in note 2 2012 % (28.8) (10.1) 23.0 15.7 (18.3) 0.4 (1.2) 2.6 (16.7) 2011 (Restated*) % (28.8) (12.9) 41.3 11.9 (26.5) (14.5) 11.9 (0.6) (18.2) £m 49.4 (14.2) (6.4) 20.4 5.9 (13.1) (7.2) 5.9 (0.3) (9.0) £m 85.1 (24.5) (8.6) 19.6 13.4 (15.6) 0.3 (1.0) 2.2 (14.2) The applicable tax rate is determined based on the tax rate in Luxembourg which was the statutory tax rate applicable in the country of domicile of the parent Company of the Group for the financial year. In 2011 the Group benefited from a credit in relation to the settlement of a number of tax audits in respect of previous years. (c) Factors that may affect the future tax charge Unrecognised tax losses to carry forward against certain future overseas corporation tax liabilities have the following expiration dates: 2012 2013 2014 2015 2016 2017 2018 2019 2020 and later Available indefinitely Tax losses available to carry forward Amount of tax losses recognised in the deferred tax asset* Total tax losses available to carry forward * Restatement described in note 2 The following deferred tax assets have not been recognised due to uncertainties over recoverability. Intangibles Accelerated capital allowances Tax losses Rent Short-term timing differences * Restatement described in note 2 2012 £m – 1.0 1.3 0.8 3.2 10.6 3.9 1.6 83.6 106.0 152.2 258.2 120.6 378.8 2012 £m 41.8 10.1 73.6 5.5 9.0 140.0 2011 £m 2.3 1.3 3.7 0.5 3.7 4.2 3.6 – 100.1 119.4 139.4 258.8 100.4 359.2 2011* £m 44.9 11.8 78.9 0.2 7.5 143.3 Estimates relating to deferred tax assets, including assumptions about future profitability, are re-evaluated at the end of each reporting period. 61 www.regus.com/investors 61 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 9. Taxation (continued) (d) Corporation tax Corporation tax payable Corporation tax receivable (e) Deferred taxation The movement in deferred tax is analysed below: Deferred tax asset At 1 January 2011 Change in accounting policy* At 1 January 2011 (restated*) Current year movement Prior year movement Direct reserves movement Transfers Exchange movement At 1 January 2012 (restated*) Current year movement Prior year movement Direct reserves movement Transfers Exchange movement At 31 December 2012 Deferred tax liability At 1 January 2011 Current year movement Prior year movement Acquisitions Transfers Exchange movement At 1 January 2012 Current year movement Prior year movement Transfers Exchange movement At 31 December 2012 * Restatement described in note 2 2012 £m (6.8) 5.7 2011 £m (6.3) 7.4 Intangibles £m Property, plant and equipment £m (Restated*) Tax losses £m (Restated*) Rent £m (Restated*) Short term temporary differences £m (Restated*) Total £m (Restated*) (21.1) – (21.1) (13.1) (0.3) – 0.1 0.6 (33.8) (4.4) – – 0.1 2.4 (35.7) (0.2) – – – (0.1) – (0.3) (0.1) – (0.1) – (0.5) 28.1 (2.9) 25.2 (0.5) 0.4 – – (0.6) 24.5 (1.6) (0.8) – 0.6 (0.9) 21.8 – – – – – – – 0.1 – (0.6) – (0.5) 15.0 1.5 16.5 (4.2) 15.9 – 0.1 (0.3) 28.0 7.8 (0.2) – – 0.2 35.8 – – 0.1 – (0.1) – – – – – – – 18.8 0.1 18.9 3.8 0.4 – 0.3 (0.4) 23.0 0.1 0.2 – (0.1) (1.3) 21.9 0.2 0.1 – – (0.3) – – – – 0.1 – 0.1 (3.7) 0.8 (2.9) 11.0 (18.1) – 0.2 0.3 (9.5) 0.5 – – 0.1 (1.0) (9.9) (0.1) – 0.1 – (0.2) – (0.2) (0.1) – (0.1) – (0.4) 37.1 (0.5) 36.6 (3.0) (1.7) – 0.7 (0.4) 32.2 2.4 (0.8) – 0.7 (0.6) 33.9 (0.1) 0.1 0.2 – (0.7) – (0.5) (0.1) – (0.7) – (1.3) The movement in deferred taxes included above are after the offset of deferred tax assets and deferred tax liabilities where there is a legally enforceable right to set off and they relate to income taxes levied by the same taxation authority. 62 62 Regus plc Annual Report and Accounts 2012 Deferred tax assets recognised on short-term temporary differences consist predominantly of provisions deductible when paid and share- based payments. Deferred tax assets have been recognised in excess of deferred tax liabilities on the basis that there are forecast taxable profits in the entities concerned. At the balance sheet date, the temporary difference arising from unremitted earnings of overseas subsidiaries was £172.3m (2011: £182.1m (restated)). The only tax that would arise on these reserves would be non-creditable withholding tax. 10. Earnings per ordinary share (basic and diluted) 2012 2011 (Restated*) Profit attributable to equity shareholders of the parent (£m) Weighted average number of shares outstanding during the year Average market price of one share during the year Weighted average number of shares under option during the year Exercise price for shares under option during the year * Restatement described in note 2 2012 £m 70.9 Basic and diluted profit for the year attributable to shareholders and basic earnings per share Diluted earnings per share Weighted average number of shares for basic EPS (number) Weighted average number of shares under option during the year Weighted average number of shares that would have been issued at average market price Weighted average number of awards under the CIP and LTIP Weighted average number of shares for diluted EPS (number) * Restatement described in note 2 70.9 40.4 941,921,816 941,898,916 94.79p 3,674,249 58.23p 100.12p 10,778,358 68.56p Profit 2011 £m (Restated*) 2012 pence Earnings per share 2011 pence (Restated*) 40.4 7.5 7.5 4.3 4.3 941,921,816 941,898,916 3,674,249 10,778,358 (8,037,963) 1,207,103 (2,286,139) 2,465,389 945,869,314 945,752,415 Options are considered dilutive when they would result in the issue of ordinary shares for less than the market price of ordinary shares in the period. The amount of the dilution is taken to be the average market price of shares during the period minus the issue price. 11. Dividends Dividends per ordinary share proposed Interim dividends per ordinary share declared and paid during the year 2012 2.2p 1.0p 2011 2.0p 0.9p Dividends of £28.2m were paid during the year (2011: £25.0m). The Company has proposed to shareholders that a final dividend of 2.2p per share will be paid (2011: 2.0p). Subject to shareholder approval it is expected that the dividend will be paid on 31 May 2013. 63 www.regus.com/investors 63 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 12. Goodwill Cost At 1 January 2011 Recognised on acquisition of subsidiaries Exchange differences At 1 January 2012 Recognised on acquisition of subsidiaries Exchange differences At 31 December 2012 Net book value At 1 January 2012 At 31 December 2012 £m 282.4 4.6 (1.6) 285.4 39.3 (7.7) 317.0 285.4 317.0 Cash generating units (CGUs), comprising individual business centres, are grouped by country of operation for the purpose of carrying out impairment reviews of non-current assets as this is the lowest level at which goodwill can be assessed. Goodwill acquired through business combinations is held at a country level and is subject to impairment reviews based on the cash flows of these CGUs. The goodwill attributable to the reportable business segments is as follows: Carrying amount of goodwill included within the Americas business segment Carrying amount of goodwill included within the EMEA business segment Carrying amount of goodwill included within the Asia Pacific business segment Carrying amount of goodwill included within the UK business segment 2012 £m 185.3 10.3 25.1 96.3 317.0 2011 £m 171.3 5.9 11.9 96.3 285.4 The carrying value of goodwill and indefinite life intangibles allocated to two CGUs, the USA and UK, is material relative to the total carrying value comprising 90% of the total. The remaining 10% of the carrying value is allocated to a further 20 countries (20 cash generating units). The goodwill and indefinite life intangibles allocated to the USA and the UK cash generating units are set out below: USA UK Other cash generating units Goodwill £m 158.8 96.3 61.9 317.0 Intangible assets £m – 11.2 – 11.2 2012 £m 158.8 107.5 61.9 328.2 2011 £m 149.5 107.5 39.6 296.6 The indefinite lived intangible asset relates to the brand value arising from the acquisition of the remaining 58% of the UK business in the year ended 31 December 2006 (see note 13). The recoverable amount of each of the CGUs above has been determined based on their value in use, calculated as the present value of future cash flows attributable to the unit. The value in use for each CGU has been determined using a model which derives the individual value in use for each unit from the value in use of the Group as a whole. Although the model includes budgets and forecasts prepared by management it also reflects external factors, such as capital market risk pricing as reflected in the market capitalisation of the Group and prevailing tax rates, which have been used to determine the risk adjusted discount rate for the Group. Management believe that the projected cash flows are a reasonable reflection of the likely outcomes over the medium to long term. In the event that trading conditions deteriorate beyond the assumptions used in the projected cash flows, it is also possible that impairment charges could arise in future periods. 64 64 Regus plc Annual Report and Accounts 2012 The following key assumptions have been used in calculating value in use for each group of CGUs: • Future cash flows are based on the budget for 2013 approved by the Board. The model excludes cost savings and restructurings that are anticipated but had not been committed to at the date of the determination of the value in use. Thereafter forecasts have been prepared by management for a further four years from 2013 that reflect an average annual growth rate of 3% (2011: 3% to 5.6%). • These forecasts exclude the impact of both organic and acquisitive growth expected to take place in future periods. Management consider these projections to be a reasonable projection of margins expected at the mid-cycle position reflecting the current uncertain global economic conditions. Cash flows beyond 2017 have been extrapolated using a 2% growth rate which management believe is a reasonable long-term growth rate for any of the markets in which the relevant CGUs operate. A terminal value is included in the assessment reflecting the Group’s expectation that it will continue to operate in these markets and the long-term nature of the businesses. • The Group applies a country specific pre-tax discount rate to the pre-tax cash flows for each CGU. The country specific discount rate is based on the underlying weighted average cost of capital (WACC) for the Group. Based on a very conservative set of assumptions, the Group WACC is then adjusted for each CGU to reflect the assessed market risk specific to that country. The Group WACC increased marginally to 14% in 2012 (2011: 13%). The market risk adjustment has been set between 16% and 20% (2011: 13% to 19%). The trading conditions in which the Group operates are subject to competitive and economic pressures that can have a material effect on the operating performance of the business. Current market conditions remain challenging for the Group and the current global conditions make forecasting medium-term cash flows more difficult than is traditionally the case. The forecast cash flows used to derive the value in use are sensitive to changes in revenues (driven by changes in prices, occupancy or a combination of both), costs and discount rates (including the market assessment of the risks of the Group reflected in the Group’s market capitalisation). Actual conditions could result in either better or worse cash flows than included in the value in use calculation. Should current economic conditions prove to be more prolonged or to deteriorate greater than currently expected this would adversely impact the forecast cash flows and could result in impairments to goodwill and indefinite lived intangible assets in future periods. The amount by which the value in use exceeds the carrying amount of the CGUs are sufficiently large to enable the Directors to conclude that a reasonably possible change in the key assumptions would not result in an impairment charge in any of the CGUs. Foreseeable events are unlikely to result in a change in the projections of such a significant nature as to result in the CGUs carrying amount exceeding their recoverable amount. The key assumptions used in the US model are prudent in 2013 and forecast the centre contribution to drop to 25% from 28%. Revenue and costs grow at 3% per annum from 2012 maintaining a terminal 2017 centre gross margin of 25%. Thereafter a 2% long-term growth rate is assumed on revenue and cost into perpetuity. The cash flows have been discounted using a pre-tax discount rate of 19% (2011: 18%). The UK model assumes an ongoing recovery reverting to mid-cycle revenue and occupancy being achieved in 2017 prior to the application of the long-run growth rate and discount rates used. This model forecasts a 2013 centre contribution of 22%, with an average centre contribution of 21% over the next five years. Thereafter a 2% long-term growth rate is assumed on revenue and cost into perpetuity. The cash flows have been discounted using a pre-tax discount rate of 15% (2011: 13%). Management has considered the following sensitivities: Market growth and WIPOW – Management has considered the impact of a variance in market growth and WIPOW. The value in use calculation shows that if the long-term growth rate was reduced to nil, the recoverable amount of the US and UK CGUs would still be greater than their carrying value. Discount rate – Management has considered the impact of an increase in the discount rate applied to the calculation. The value-in-use calculation shows that for the recoverable amount of the CGU to be less than its carrying value, the pre-tax discount rate would have to be increased to 28% (2011: 25%) for the US CGU and 28% (2011: 17%) for the UK CGU. There is no goodwill relating to Group’s joint ventures. 65 www.regus.com/investors 65 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 13. Other intangible assets Cost At 1 January 2011 Additions at cost Acquisition of subsidiaries Disposals Exchange rate movements At 1 January 2012 Additions at cost Acquisition of subsidiaries Disposals Exchange rate movements At 31 December 2012 Amortisation At 1 January 2011 Charge for the year Disposals Exchange rate movements At 1 January 2012 Charge for year Disposals Exchange rate movements At 31 December 2012 Net book value At 1 January 2011 At 31 December 2011 At 31 December 2012 Brand £m Customer lists £m Software £m 53.8 – – – – 53.8 – – – (1.7) 52.1 13.8 2.0 – – 15.8 2.1 – (0.6) 17.3 40.0 38.0 34.8 22.1 0.1 0.4 – – 22.6 0.2 1.1 – (0.5) 23.4 17.0 2.6 – – 19.6 1.3 – (0.3) 20.6 5.1 3.0 2.8 16.3 3.8 – – (0.2) 19.9 6.6 – – (0.5) 26.0 13.0 2.1 – (0.1) 15.0 2.1 – (0.4) 16.7 3.3 4.9 9.3 Total £m 92.2 3.9 0.4 – (0.2) 96.3 6.8 1.1 – (2.7) 101.5 43.8 6.7 – (0.1) 50.4 5.5 – (1.3) 54.6 48.4 45.9 46.9 Included with the brand value is £11.2m relating to the acquisition of the remaining 58% of the UK business in the year ended 31 December 2006. The Regus brand acquired in this transaction is assumed to have an indefinite useful life due to the fact that the value of the brand is intrinsically linked to the continuing operation of the Group. As a result of the Regus brand acquired with the UK business having an indefinite useful life no amortisation is charged but the carrying value is assessed for impairment on an annual basis. The brand was tested at the balance sheet date against the recoverable amount of the UK business segment at the same time as the goodwill arising on the acquisition of the UK business (see note 12). The remaining amortisation life for non-indefinite life brands is 12 years. 66 66 Regus plc Annual Report and Accounts 2012 14. Property, plant and equipment Cost At 1 January 2011 Change in accounting policy At 1 January 2011 (Restated*) Additions Acquisition of subsidiaries Disposals Exchange rate movements Change in accounting policy At 1 January 2012 (Restated*) Additions Acquisition of subsidiaries Disposals Exchange rate movements At 31 December 2012 Accumulated depreciation At 1 January 2011 Change in accounting policy At 1 January 2011 (Restated*) Charge for the year Disposals Exchange rate movements Change in accounting policy At 1 January 2012 (Restated*) Charge for the year Disposals Exchange rate movements Balance at 31 December 2012 * Restatement described in note 2 Net book value At 1 January 2011 (Restated*) At 31 December 2011 (Restated*) At 31 December 2012 * Restatement described in note 2 Additions include £nil in respect of assets acquired under finance leases (2011: £nil). The net book value of furniture, fittings and motor vehicles includes amounts held under finance leases as follows: Cost Accumulated depreciation Net book value Land and buildings £m Furniture, fittings and motor vehicles £m (Restated*) Computer hardware £m Total £m (Restated*) 5.6 – 5.6 – – – – – 5.6 2.5 – – – 8.1 – – – 0.3 – – – 0.3 0.3 – – 0.6 5.6 5.3 7.5 672.7 11.9 684.6 112.6 2.5 (8.1) (9.4) 5.2 787.4 155.2 12.0 (17.0) (28.0) 909.6 416.1 3.2 419.3 61.0 (6.8) (5.9) 1.3 468.9 57.4 (15.3) (17.6) 493.4 265.3 318.5 416.2 42.5 – 42.5 6.3 – (1.4) (0.4) – 47.0 11.5 0.4 (0.2) (4.2) 54.5 33.9 – 33.9 5.5 (1.4) (0.7) – 37.3 5.9 (0.2) (2.3) 40.7 8.6 9.7 13.8 2012 £m 22.7 (18.3) 4.4 720.8 11.9 732.7 118.9 2.5 (9.5) (9.8) 5.2 840.0 169.2 12.4 (17.2) (32.2) 972.2 450.0 3.2 453.2 66.8 (8.2) (6.6) 1.3 506.5 63.6 (15.5) (19.9) 534.7 279.5 333.5 437.5 2011 £m 24.4 (18.4) 6.0 67 www.regus.com/investors 67 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 14. Property, plant and equipment (continued) Change in estimate The Group conducted a review of the estimated useful life for property, plant and equipment. On 1 January 2012, the expected useful life for certain asset categories was adjusted to more accurately reflect the period over which the assets are expected to be available for use by the Group. The effect of these changes on the depreciation expense, recognised in costs of sales, in current period and expected in future years is as follows: £m Impact on the income statement 15. Other long-term receivables 2012 15.3 2013 9.8 2014 4.4 2015 (0.4) Deposits held by landlords against rent obligations Amounts owed by joint ventures Prepayments and accrued income 16. Trade and other receivables Trade receivables Amounts owed by joint ventures Other receivables Deposits held by landlords against rent obligations Prepayments and accrued income VAT recoverable 17. Trade and other payables Trade payables Other tax and social security Customer deposits Deferred landlord contributions Amounts owed to joint ventures Rent accruals Other accruals Other payables Total current Deferred landlord contributions Rent accruals Other payables Total non-current 68 68 Regus plc Annual Report and Accounts 2012 2016 (4.9) 2012 £m 30.9 2.8 2.0 35.7 2012 £m 115.4 2.9 27.0 20.7 92.7 32.1 290.8 2012 £m 46.1 42.7 198.6 19.8 0.6 43.2 75.4 21.3 447.7 2012 £m 76.0 67.9 3.5 147.4 After (24.2) 2011 £m 34.3 1.9 1.7 37.9 2011 £m 105.7 4.0 28.4 15.4 91.2 26.6 271.3 2011 £m 61.6 31.9 184.3 16.4 0.7 43.1 69.6 17.5 425.1 2011 £m 58.8 56.5 2.5 117.8 18. Borrowings The Group’s total loan and borrowing position at 31 December 2012 and at 31 December 2011 had the following maturity profiles: Bank and other loans Repayments falling due as follows: Amounts falling due after more than one year: In more than one year but not more than two years In more than two years but not more than five years In more than five years Total non-current Total current Total bank and other loans Obligations under finance leases The maturity of the Group’s finance obligations is as follows: Amounts payable Within one year or on demand In more than one year but not more than two years In more than two years but not more than five years Less: finance charges allocated to future periods Present value of future minimum lease payments Total current Total non-current 19. Provisions At 1 January Provided in the period Utilised in the period Provisions released Exchange differences At 31 December Analysed between: Current Non-current At 31 December Onerous leases and closures £m Restructuring £m 8.5 0.9 (1.8) (2.2) (0.1) 5.3 0.9 4.4 5.3 0.9 – (0.6) (0.2) (0.1) – – – – Other £m 1.8 0.3 (1.1) (0.2) – 0.8 0.6 0.2 0.8 2012 Total £m 11.2 1.2 (3.5) (2.6) (0.2) 6.1 1.5 4.6 6.1 Onerous leases and closures £m Restructuring £m 10.7 0.4 (2.0) (0.5) (0.1) 8.5 1.4 7.1 8.5 0.7 0.3 (0.1) – – 0.9 0.9 – 0.9 2012 £m 2.1 4.7 – 6.8 4.8 11.6 2012 £m 0.6 0.1 – 0.7 – 0.7 0.6 0.1 0.7 Other £m 1.2 0.7 (0.1) – – 1.8 0.7 1.1 1.8 2011 £m 3.4 2.6 – 6.0 0.9 6.9 2011 £m 1.5 0.9 – 2.4 (0.1) 2.3 1.5 0.8 2.3 2011 Total £m 12.6 1.4 (2.2) (0.5) (0.1) 11.2 3.0 8.2 11.2 69 www.regus.com/investors 69 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 19. Provisions (continued) Onerous leases and closures Provisions for onerous leases and closures costs relate to the estimated future costs on centre closures and onerous property leases. The maximum period over which the provisions are expected to be utilised expires by 31 December 2022. Restructuring The restructuring provision was fully utilised during the financial year (2011: £0.9m). Other Other provisions include the estimated costs of claims against the Group outstanding at the year end, of which, due to their nature, the maximum period over which they are expected to be utilised is uncertain. 20. Investments in joint ventures Total £m 2.6 (1.4) 0.1 0.1 1.4 (0.8) (0.3) 0.2 – 0.5 2011 £m 20.0 (17.5) 2.5 (0.3) 2.2 7.3 16.0 (17.7) (5.0) 0.6 At 1 January 2011 Dividends paid Share of profit/(loss) Exchange rate movements At 1 January 2012 Dividends paid Share of profit/(loss) Other Exchange rate movements At 31 December 2012 Investments in joint ventures £m Provision for deficit in joint ventures £m 3.9 (1.4) 0.1 – 2.6 (0.8) (0.3) 0.2 – 1.7 (1.3) – – 0.1 (1.2) – – – – (1.2) The results of the joint ventures below are the full results of the joint ventures and do not represent the effective share: 2012 £m 25.4 (24.6) 0.8 (0.4) 0.4 7.2 15.2 (17.9) (7.1) (2.6) Income statement Revenue Expenses Profit before tax for the year Tax charge Profit after tax for the year Net (liabilities)/assets Fixed assets Current assets Current liabilities Non-current liabilities Net (liabilities)/assets 70 70 Regus plc Annual Report and Accounts 2012 21. Share capital Ordinary equity share capital Authorised Ordinary 1p shares at 1 January & 31 December Issued and fully paid up Ordinary 1p shares at 1 January & 31 December 2012 Nominal value £m Number 2011 Nominal value £m Number 8,000,000,000 80.0 8,000,000,000 950,969,822 9.5 950,969,822 80.0 9.5 Treasury share transactions involving Regus plc shares As at 1 January 2012, 8,982,139 (2011: 9,070,906) shares were held as Treasury shares. During the year ended 31 December 2012, Regus plc repurchased nil (2011: nil) of its own shares in the open market and utilised 88,767 (2011: nil) Treasury shares held by the Group to satisfy the exercise of share awards by employees. The holders of ordinary shares in Regus Group plc were entitled to receive dividends as were declared by the Company and were entitled to one vote per share at meetings of the Company. Treasury shares do not carry such rights until reissued. 22. Analysis of financial assets Cash and cash equivalents Gross cash Debt due within one year Debt due after one year Finance leases due within one year Finance leases due after one year Net financial assets At 1 Jan 2012 £m Cash flow £m Non-cash changes £m Exchange movements £m At 31 Dec 2012 £m 197.5 197.5 (0.9) (6.0) (1.5) (0.8) (9.2) 188.3 (62.5) (62.5) (3.9) (0.9) 0.8 0.6 (3.4) (65.9) – – – – – – – – (2.7) (2.7) – 0.1 0.1 0.1 0.3 (2.4) 132.3 132.3 (4.8) (6.8) (0.6) (0.1) (12.3) 120.0 Cash and cash equivalent balances held by the Group that are not available for use amounted to £64.7m at 31 December 2012 (2011: £25.5m). Of this balance, £19.9m (2011: £19.8m) is pledged as security against outstanding bank guarantees and a further £44.8m (2011: £5.7m) is pledged against various other commitments of the Group, including £40.0m cash held in escrow against the eventual acquisition of the MWB Business Exchange Plc. Non-cash changes comprise the amortisation of the debt issue costs, new finance leases entered into and movements in debt maturity. 23. Financial instruments and financial risk management The objectives, policies and strategies applied by the Group with respect to financial instruments and the management of capital are determined at Group level. The Group’s Board maintains responsibility for the risk management strategy of the Group and the Chief Financial Officer is responsible for policy on a day-to-day basis. The Chief Financial Officer and Group Treasurer review the Group’s risk management strategy and policies on an ongoing basis. The Board has delegated to the Group Audit Committee the responsibility for applying an effective system of internal control and compliance with the Group’s risk management policies. The Audit Committee is supported by the Head of Risk Management in performing this role. Exposure to credit, interest rate and currency risks arise in the normal course of business. Going concern The Business Review on pages 2 to 20 of the Annual Report and Accounts sets out the Group’s strategy and the factors that are likely to affect the future performance and position of the business. The financial review on pages 15 to 19 within the Business Review reviews the trading performance, financial position and cash flows of the Group. During the year ended 31 December 2012 the Group made a significant investment in growth and the Group’s net cash position declined by £68.3m to £120.0m as at 31 December 2012. In addition to the Group’s strong cash flow generated from its mature centres, the Group established a new four year £200m revolving credit facility with a group of relationship banks. After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and accordingly continue to adopt the going concern basis in preparing the Annual Report and Accounts. 71 www.regus.com/investors 71 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 23. Financial instruments and financial risk management (continued) Credit risk Credit risk could occur where a customer or counterparty defaults under the contractual terms of a financial instrument and arises principally in relation to customer contracts and the Group’s cash deposits. A diversified customer base and requirement for customer deposits and payments in advance on workstation contracts, which contribute the majority of the Group’s revenue, minimise the Group’s exposure to customer credit risk. No single customer contributes a material percentage of the Group’s revenue. The Group’s policy is to provide against trade receivables when specific debts are judged to be irrecoverable or where formal recovery procedures have commenced. A provision is created where debts are more than three months overdue which reflects the Group’s historical experience of the likelihood of recoverability of these trade receivables. These provisions are reviewed on an ongoing basis to assess changes in the likelihood of recoverability. The maximum exposure to credit risk for trade receivables at the reporting date, analysed by geographic region, is summarised below. Americas EMEA Asia Pacific UK 2012 £m 26.2 42.2 21.7 25.3 115.4 2011 £m 21.9 41.7 17.5 24.6 105.7 All of the Group’s trade receivables relate to customers purchasing workplace solutions and no individual customer has a material balance owing as a trade receivable. The ageing of trade receivables at 31 December was: Not overdue Past due 1 – 30 days Past due 31 – 60 days More than 60 days Gross 2012 £m 82.0 22.9 5.3 11.0 121.2 Provision 2012 £m – – (0.1) (5.7) (5.8) At the year end 31 December 2012, the Group maintained a provision of £5.8m against potential bad debts (2011: £11.8m) arising from trade receivables. The Group had provided £2.2m (2011: £5.1m) in the year and utilised £8.2m (2011: £5.0m). Customer deposits of £198.6m (2011: £184.3m) are held by the Group, mitigating the risk of default. The Group believes no provision is generally required for trade receivables that are not overdue as the Group collects the majority of its revenue in advance of the provision of office services and requires deposits from its customers. Cash investments and derivative financial instruments are only transacted with counterparties of sound credit ratings, and management does not expect any of these counterparties to fail to meet their obligations. Liquidity risk The Group manages liquidity risk by reviewing its global cash position on a weekly basis and expects to have sufficient liquidity to meet its financial obligations as they fall due. The Group has free cash and liquid investments (excluding blocked cash) of £67.6m (2011: £172.0m) which the Directors consider adequate to meet the Group’s day to day requirements. In August 2012, the Group signed a new £200m four year unsecured revolving credit facility with a consortium of six relationship banks. In addition, the Group renegotiated the £100m Bank Guarantee and Letter of Credit facility provided by one bank to align the conditions and the maturity with the £200m facility. Both facilities are subject to financial covenants relating to operating cash flow, net debt to EBITDA, and EBITDA plus rent to interest plus rent. The Group is in compliance with all covenant requirements. Although the Group has net current liabilities of £183.7m (2011: £102.2m), the Group does not consider that this gives rise to a liquidity risk. A large proportion of the net current liabilities comprise non-cash liabilities such as deferred income which will be recognised in future periods through the income statement. Although the Group holds customer deposits of £198.6m (2011: £184.3m) these are spread across a large number of customers and no deposit held for an individual customer is material. Therefore the Group does not believe the balance represents a liquidity risk. The net current liabilities, excluding deferred income, were £32.6m at 31 December 2012 (2011 net current assets: £39.5m). It is considered appropriate to exclude deferred income in assessing the liquidity of the Group as it reflects the future non-refundable contractual revenue of the Group to be recognised as revenue in future periods. 72 72 Regus plc Annual Report and Accounts 2012 Market risk The Group is exposed to market risk primarily related to foreign currency exchange rates, interest rates, and the market value of our investments in financial assets. These exposures are actively managed by the Regus treasury in accordance with a written policy approved by the Board of Directors and subject to internal controls. We do not use financial derivatives for trading or speculative reasons. Interest rate risk The Group manages its exposure to interest rate risk through the relative proportions of fixed rate debt and floating rate debt, as well as investment in financial assets. Our surplus cash balances are invested short term, and at the end of 2012 no cash was invested for a period exceeding three months. The Board of Directors believes that the Group has no material exposure to interest rate fluctuations as the Group does not have any significant interest bearing loans or long-term financial investments. Foreign currency risk The Group presents its consolidated financial statements in GBP. As a consequence the Group is exposed to foreign currency exchange rate movements. The majority of day-to-day transactions of overseas subsidiaries are carried out in local currency and the underlying foreign exchange exposure is small. Transactional exposures do arise in some countries where it is local market practice for a proportion of the payables or receivables to be in other than the functional currency of the affiliate. Intercompany charging, funding and cash management activity may also lead to foreign exchange exposures. It is the policy of the Group to seek to minimise such transactional exposures through careful management of non-local currency assets and liabilities, thereby minimising the potential volatility in the income statement. Net investments in Regus affiliates with a functional currency other than GBP are of a long-term nature and the Group does not normally hedge such foreign currency translation exposures. From time to time the Group uses short-term derivative financial instruments to manage its transactional foreign exchange exposures where these exposures cannot be eliminated through balancing the underlying risks. No transactions of a speculative nature are undertaken. Other market risks The Group does not hold any available-for-sale equity securities and is therefore not subject to risks of changes in equity prices in the income statement. Capital management The Group’s parent Company is listed on the UK stock exchange and the Board’s policy is to maintain a strong capital base. The Chief Financial Officer monitors the diversity of the Group’s major shareholders and further details of the Group’s communication with key investors can be found in the Corporate governance report on pages 24 to 30. In 2006, the Board approved the commencement of a progressive dividend policy to enhance the total return to shareholders. The Group’s Chief Executive Officer, Mark Dixon, is the major shareholder of the Company and all executive members of the Board hold shares in the Company. Details of the Directors’ shareholdings can be found in the report of the Remuneration Committee on pages 32 to 41. In addition the Group operates various share option plans for key management and other senior employees. At the 2008 Annual General Meeting shareholders approved a resolution for the Group to re-purchase up to 10% of its issued share capital in the market. In June 2007, the Group commenced a share buyback programme to meet both the need to issue shares under the Group’s share option programme and, more generally, as a means of returning cash to shareholders. In the year ended 31 December 2012 Regus plc purchased 1,765,783 (2011: 1,212,797) of its own shares in the open market and utilised these to satisfy employee share awards. Regus plc did not re-purchase any of its own shares in the open market to hold as Treasury shares. As at 5 March 2013, 8,982,139 shares were held as Treasury shares. The Company declared an interim dividend of 1.0p per share (2011: 0.9p) during the year ended 31 December 2012 and proposed a final dividend of 2.2p per share (2011: 2.0p per share), a 10% increase on the 2011 dividend. The Group’s objective when managing capital (equity and borrowings) is to safeguard the Group’s ability to continue as a going concern and to maintain an optimal capital structure to reduce the cost of capital. The Group holds minimal debt and is in a strong cash position therefore it is majority equity funded. The Board balances the higher returns possible with higher levels of borrowings with the stability and security afforded by a sound capital position as well as the strategy of accelerated organic growth. 73 www.regus.com/investors 73 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 23. Financial instruments and financial risk management (continued) Effective interest rates In respect of financial assets and financial liabilities, the following table indicates their effective interest rates at the balance sheet date and the periods in which they mature. Interest payments are excluded from the table. The undiscounted cash flow of these instruments is not materially different from the carrying value. As at 31 December 2012 Cash and cash equivalents Trade and other receivables Financial assets(b) Finance lease liabilities Bank loans Other loans Customer deposits Trade and other payables Foreign currency swaps Financial liabilities As at 31 December 2011 Cash and cash equivalents Trade and other receivables Financial assets(b) Finance lease liabilities Bank loans Other loans Customer deposits Trade and other payables Foreign currency swaps Financial liabilities Effective interest rate %(a) Carrying value £m Contractual cash flow £m Less than 1 year £m 1-2 years £m 2-5 years £m More than 5 years £m 0.4 – – 3.3 8.6 6.8 – – – – 132.3 231.8 364.1 (0.7) (7.0) (4.6) (198.6) (187.8) – (398.7) 132.3 237.5 369.8 (0.7) (7.4) (4.6) (198.6) (187.8) (16.4) (415.5) Effective interest rate %(a) Carrying value £m Contractual cash flow £m 0.6 – – 3.1 8.1 5.5 – – – – 197.5 216.4 413.9 (2.3) (6.3) (0.7) (184.4) (188.8) – (382.5) 197.5 228.1 425.6 (2.3) (6.6) (0.7) (184.4) (188.8) (2.2) (385.0) 132.3 204.0 336.3 (0.6) (0.4) (4.6) (198.6) (184.3) (16.4) (404.9) Less than 1 year £m 197.5 191.9 389.4 (1.5) (0.3) (0.7) (184.4) (186.3) (2.2) (375.4) – 15.4 15.4 (0.1) (2.2) – – (3.5) – (5.8) – 18.1 18.1 – (4.8) – – – – (4.8) – – – – – – – – – – 1-2 years £m 2-5 years £m More than 5 years £m – 17.3 17.3 (0.7) (3.5) – – (2.5) – (6.7) – 18.9 18.9 (0.1) (2.8) – – – – (2.9) – – – – – – – – – – (a) All financial instruments are classified as variable rate instruments (b) Financial assets are all held at amortised cost 74 74 Regus plc Annual Report and Accounts 2012 Sensitivity analysis At 31 December 2012 it is estimated that a general increase of one percentage point in interest rates would increase the Group’s profit before tax by approximately £1.3m (2011: £1.7m) with a corresponding increase in total equity. It is estimated that a five percentage point weakening in the value of the US dollar against pounds sterling would have decreased the Group’s profit before tax by approximately £2.8m for the year ended 31 December 2012 (2011: £1.2m). It is estimated that a five percentage point weakening in the value of the euro against sterling would have decreased the Group’s profit before tax by approximately £0.7m for the year ended 31 December 2012 (2011: £0.5m). It is estimated that a five percentage point weakening in the value of the US dollar against pounds sterling would have decreased the Group’s total equity by approximately £9.4m for the year ended 31 December 2012 (2011: £7.3m). It is estimated that a five percentage point weakening in the value of the euro against pounds sterling would have decreased the Group’s total equity by approximately £0.1m for the year ended 31 December 2012 (2011: £0.4m). Fair value disclosures The fair values together with the carrying amounts shown in the balance sheet are as follows: Cash and cash equivalents Trade and other receivables Finance lease liabilities Bank loans Other loans Customer deposits Trade and other payables Unrecognised gain Carrying amount £m 132.3 231.8 (0.7) (7.0) (4.6) (198.6) (187.8) (34.6) 2012 Fair value £m 132.3 231.8 (0.7) (7.0) (4.6) (198.6) (187.8) (34.6) – Carrying amount £m 197.5 216.4 (2.3) (6.3) (0.7) (184.4) (188.8) 31.4 2011 Fair value £m 197.5 216.4 (2.0) (6.3) (0.7) (184.4) (188.8) 31.7 0.3 Summary of methods and assumptions: Cash and cash equivalents, trade and other receivables/payables and customer deposits For cash and cash equivalents, receivables/payables with a remaining life of less than one year and customer deposits, the book value approximates the fair value because of their short-term nature. Finance lease liabilities The fair value of finance leases has been calculated by discounting future cash flows at an appropriate discount rate which reflects current market assessments and the risks specific to such liabilities. Loans and overdrafts The fair value of bank loans, overdrafts and other loans approximates the carrying value because interest rates are at floating rates where payments are reset to market rates at intervals of less than one year. Derivative financial instruments The following table summarises the notional amount of the open contracts as at 31 December 2012: Foreign exchange contracts Committed bank facilities At 31 December 2012 At 31 December 2011 2012 CHF m – 2012 EUR m 20.1 2011 CHF m 2.9 2011 EUR m 0.2 Principal £m 290.0 100.0 Available £m 200.5 13.3 In August 2012, the Group signed a new £200m four year unsecured revolving credit facility with a consortium of six relationship banks. In addition, the Group renegotiated the £100m Bank Guarantee and Letter of Credit facility provided by one bank to align the conditions and the maturity with the £200m facility. Both facilities are subject to financial covenants relating to operating cash flow, net debt to EBITDA, and EBITDA plus rent to interest plus rent. The Group is in compliance with all covenant requirements. 75 www.regus.com/investors 75 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 24. Share-based payment There are three share-based payment plans, details of which are outlined below: Plan 1: Regus Group Share Option Plan During 2004 the Group established the Regus Group Share Option Plan that entitles Executive Directors and certain employees to purchase shares in Regus plc (previously Regus Group plc). In accordance with this programme, holders of vested options are entitled to purchase shares at the market price of the shares at the day before the date of grant. The Regus Group also operates the Regus Group Share Option Plan (France) which is included within the numbers for the Regus Share Option Plan disclosed above. The terms of the Regus Share Option Plan (France) are materially the same as the Regus Group Share Option Plan with the exception that they are only exercisable from the fourth anniversary of the date of grant assuming the performance conditions have been met. Reconciliation of outstanding share options At 1 January Granted during the year Lapsed during the year Exercised during the year Outstanding at 31 December Exercisable at 31 December 2012 Weighted average exercise price per share 96.22 84.95 107.74 – 89.53 Number of share options 7,814,746 13,867,539 (950,379) – 20,731,906 57.00 3,170,139 2011 Weighted average exercise price per share 80.19 106.00 107.09 – 96.22 57.00 Number of share options 20,731,906 11,269,000 (4,789,407) – 27,211,499 3,170,139 Date of grant Numbers granted Weighted average exercise price per share Lapsed Exercised At 31 Dec 2012 Exercisable from Expiry date 23/07/2004 18/05/2010 28/06/2010 01/09/2010 01/04/2011 (Grant 1) 01/04/2011 (Grant 2) 30/06/2011 31/08/2011 02/09/2011 06/10/2011 30/06/2012 Total 4,106,981 3,986,000 617,961 160,646 2,100,000 300,000 9,867,539 300,000 1,000,000 300,000 11,269,000 34,008,127 57.00 100.50 75.00 69.10 114.90 114.90 109.50 67.00 74.35 64.10 84.95 91.69 – (385,000) (54,751) – (654,402) (300,000) (3,992,633) – – – (473,000) (5,859,786) (936,842) – – – – – – – – – – (936,842) 3,170,139 23/07/2007 23/03/2013 3,601,000 28/06/2013 563,210 01/09/2013 160,646 01/04/2014 1,445,598 01/04/2014 – 30/06/2014 5,874,906 31/08/2014 300,000 01/09/2014 1,000,000 01/10/2014 300,000 10,796,000 13/06/2015 27,211,499 23/07/2014 23/03/2020 28/06/2020 01/09/2020 01/04/2021 01/04/2021 30/06/2021 31/08/2021 02/09/2021 01/10/2021 13/06/2022 230,000 options awarded during the year under the Regus Share Option Plan (France) are included in the above table (2011: 404,015), 261,560 lapsed during the year (2011: 353,186) and none were exercised during the year (2011: nil). Performance conditions for share options The options awarded in 2004 included certain performance criteria that needed to be met in order for the share options to vest. The share options vested based on the basic earnings per share (adjusted for non-recurring items and goodwill and intangible amortisation) that exceeded the targets linked to the Retail Price Index. The basic earnings per share for performance purposes was 1p. 100% of the options awarded in July 2004 vested during 2007. The options awarded in April, June and September 2010 contain the following performance conditions. 50% of the options will be eligible to vest if the Regus Total Shareholder Return (‘TSR’) % achieved relative to FTSE All Share Total Return index is at least at the median over the performance period. The remaining 50% of the options will be eligible to vest subject to the EPS conditions in the table below: 76 76 Regus plc Annual Report and Accounts 2012 Vesting Scale 25% 50% 75% 100% Once performance conditions are satisfied those options that are eligible to vest will vest as follows: March 2013 March 2014 March 2015 EPS Target Y/E 2012 15p 16p 17p 18p Proportion to Vest 1/3 1/3 1/3 The performance targets for the options awarded in April 2011 (Grant 1), based on pre-growth profit for the year ending 31 December 2011, were partially met. Those options that are eligible to vest will vest as follows: April 2014 April 2015 April 2016 Proportion to Vest 1/3 1/3 1/3 The Group and regional performance targets for the options awarded in June 2011, based on pre-growth profit for the year ending 31 December 2011, were partially met. Those options that are eligible to vest will vest as follows: April 2014 April 2015 April 2016 Proportion to Vest 1/3 1/3 1/3 The options awarded in April (Grant 2), August and October 2011 are conditional on the ongoing employment of the related employees for a specified period of time. Once this condition is satisfied those options that are eligible to vest will vest as follows: April 2014 April 2015 April 2016 Proportion to Vest 1/3 1/3 1/3 s t n e m e t a t s l i a c n a n F i The options awarded in September 2011 are subject to a performance target based on the consensus operating profit for the year ending 31 December 2012, such that the number of shares vesting will be subject to the satisfaction of a pre-determined operating profit target in 2012. Once performance conditions are satisfied those options that are eligible to vest will vest as follows: April 2014 April 2015 April 2016 Proportion to Vest 1/3 1/3 1/3 The options awarded in June 2012 are subject to Group performance targets based on pre-growth profit for the year ending 31 December 2012, such that the number of shares vesting will be determined as follows: Vesting Scale Good Better Best Pre-growth profit £105m £120m £135m 77 www.regus.com/investors 77 Notes to the accounts continued 24. Share-based payment (continued) Once performance conditions are satisfied those options that are eligible to vest will vest as follows: April 2014 April 2015 April 2016 Proportion to Vest 1/3 1/3 1/3 Measurement of fair values The fair value of the rights granted through the employee share purchase plan was measured based on Monte Carlo simulation or the Black-Scholes formula. The expected volatility is based on the historic volatility adjusted for any abnormal movement in share prices. The inputs to the model are as follows: Share price on grant date Exercise price Expected volatility Number of simulations Number of companies Option life Expected dividend Fair value of option at time of grant Risk free interest rate June 2012 October 2011 September 2011 August 2011 June 2011 88.55p 84.95p 47.87% – 52.74% 30,000 – 3 – 5 years 3.27% 29.88p – 31.12p 0.65% – 1.11% 68.30p 64.10p 46.55% – 53.26% 30,000 – 3 – 5 years 3.88% 23.04p – 22.43p 1.15% – 1.67% 72.50p 74.35p 46.08% – 52.59% 30,000 – 3 – 5 years 3.66% 22.89p – 22.71p 1.16% – 1.75% 75.90p 67.00p 46.13% – 52.61% 30,000 – 3 – 5 years 3.49% 27.32p – 27.01p 1.29% – 1.91% 110.70p 109.50p 44.99% – 51.55% 30,000 – 3 – 5 years 2.35% 39.41p – 40.96p 1.81% – 2.57% April 2011 (Grant 2) 110.70p 114.90p 45.41% – 52.18% 30,000 – 3 – 5 years 2.35% 38.27p – 39.80p 1.70% – 2.48% April 2011 (Grant 1) 116.30p 114.90p 45.54% – 51.23% 30,000 – 3 – 5 years 2.24% 42.19p – 44.80p 2.33% – 3.04% Share price on grant date Exercise price Expected volatility Number of simulations Number of companies Option life Expected dividend Fair value of option at time of grant Risk free interest rate September 2010 EPS TSR June 2010 EPS TSR March 2010 EPS TSR 70.60p 69.10p 45.61% – 50.28% 30,000 FTSE All Share Index 3 – 5 years 3.40% 22.80p – 23.60p 1.51% – 2.17% 70.60p 69.10p 45.61% – 50.28% 30,000 FTSE All Share Index 3 – 5 years 3.40% 21.51p – 21.51p 1.51% – 2.17% 73.20p 75.00p 46.18% – 54.32% 30,000 FTSE All Share Index 3 – 5 years 3.28% 35.20p – 42.70p 2.76% – 3.05% 73.20p 75.00p 46.99% – 56.36% 30,000 FTSE All Share Index 3 – 5 years 3.28% 12.40p – 17.40p 2.76% – 3.05% 94.00p 100.50p 47.02% – 64.82% 30,000 FTSE All Share Index 3 – 5 years 2.55% 45.49p – 61.77p 3.07% – 3.38% 94.00p 100.50p 46.74% – 55.98% 30,000 FTSE All Share Index 3 – 5 years 2.55% 19.50p – 26.30p 3.07% – 3.38% Plan 2: Regus plc Co-Investment Plan (CIP) and Long Term Incentive Plan (LTIP) The CIP operates in conjunction with the annual bonus whereby a gross bonus of up to 50% of basic annual salary will be taken as a deferred amount of shares (‘Investment Shares’) to be released at the end of a defined period of not less than three years, with the balance paid in cash. Awards of Matching Shares are linked to the number of Investment Shares awarded and will vest depending on the Company’s future performance. The maximum number of Matching Shares which can be awarded to a participant in any calendar year under the CIP is 200% of salary. As such the maximum number of Matching Shares which can be awarded, based on Investment Shares awarded, is in the ratio of 4:1. The LTIP provides for the Remuneration Committee to make stand-alone long-term incentive awards without reference to the annual bonus up to a maximum of 100% of salary per calendar year. 78 78 Regus plc Annual Report and Accounts 2012 Reconciliation of outstanding share options At 1 January CIP awards granted during the year LTIP awards granted during the year Lapsed during the year Exercised during the year Outstanding at 31 December Exercisable at 31 December 2012 Number of awards 16,597,482 – – – (1,854,550) 14,742,932 2011 Number of awards 21,114,781 – – (3,304,502) (1,212,797) 16,597,482 4,447,433 654,497 The weighted average share price at the date of exercise for share awards and options exercised during the year ended 31 December 2012 was 114.66p (2011: 77.67p). Plan LTIP LTIP* Date of grant 03/11/2005 23/03/2010 Numbers granted 3,723,235 2,900,472 6,623,707 Lapsed Exercised (1,092,819) (515,415) (1,608,234) (2,551,331) – (2,551,331) At 31 Dec 2012 79,085 2,385,057 2,464,142 Release date 03/11/2008 23/03/2013 * Of the awards of investments and matching shares under the LTIP on 23 March 2010, 1,028,539 were conditional share awards and 1,871,933 were nil cost options. Plan CIP: Investment shares CIP: Matching shares CIP: Investment shares CIP: Matching shares Date of grant 18/03/2008 18/03/2008 23/03/2009 23/03/2009 Numbers granted 1,557,391 5,922,916 2,212,734 8,614,284 18,307,325 Lapsed Exercised (86,956) (1,182,796) (172,835) (1,607,368) (3,049,955) (1,300,560) – (1,678,020) – (2,978,580) At 31 Dec 2012 169,875 4,740,120 361,879 7,006,916 12,278,790 Release date 18/03/2011 * See below 23/03/2012 * See below * As indicated in the Remuneration Report in the Annual Report for the year ended 31 December 2009, the Remuneration Committee felt it inappropriate to set specific performance conditions for Matching Shares under the CIP which were awarded in March 2008 and March 2009. Measurement of fair values The fair value of the rights granted through the employee share purchase plan was measured based on Monte Carlo simulation. The inputs to the model are as follows: Share price on grant date Exercise price Number of simulations Number of companies Award life Expected dividend Fair value of award at time of grant Risk free interest rate 23/03/2010 LTIP(a) 23/03/2009 CIP(b) 18/03/2008 CIP(b) 03/11/2005 LTIP(c) 108.10p Nil 250,000 32 3 years 2.22% 47.00p 1.86% 65.50p Nil 200,000 32 3 years 2.72% 47.97p 1.92% 80.50p Nil 200,000 36 3 years 1.19% 61.21p 3.86% 92.25p Nil 60,000 29 3 years Nil 65.00p 4.47% (a) The LTIP awards have a release date of 23 March 2013. There is no expiry date and therefore remaining contractual life is on the basis that the awards release immediately. The LTIP nil cost options have a vesting date of 23 March 2013 and an expiry of 23 March 2020. The performance conditions are set out below. (b) The CIP Matching Shares and Share Option Plan awards made in 2008 and 2009 did not have performance conditions set by the Remuneration Committee at the date of the award. A valuation was performed for those awards based on the terms that applied to similar awards made in previous years. The Remuneration Committee set the performance conditions for the awards made in 2008 and 2009 effective from 22 March 2010 and the valuation of these awards was updated in the year ended 31 December 2010 (c) The LTIP Awards of 3 November 2005 had a release date of 3 November 2008. There was no expiry date and therefore remaining contractual life is on the basis that the awards release immediately. The LTIP nil cost options had a vesting date of 3 November 2008 and an expiry date of 3 November 2015. 79 www.regus.com/investors 79 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 24. Share-based payment (continued) It is recognised by the Remuneration Committee that the additional EPS targets represent a highly challenging goal and consequently in determining whether they have been met the Committee will exercise its discretion. The overall aim is that the relevant EPS targets must have been met on a run rate or underlying basis. As such an adjusted measure of EPS will be calculated designed to assess the underlying performance of the business. While the Remuneration Committee reserves the right to adjust EPS as it sees fit at the time, by way of example, the following adjustments are currently anticipated: • In a growth company such as Regus, costs are necessarily incurred in one year to drive profits in future years. Thus it is important to ensure management is not incentivised to cut back on these investments to meet EPS targets in any one year. Accordingly those costs, incurred in the vesting year, which it considers necessary to drive future growth, will be excluded from the EPS calculation. These would include, inter alia, the costs of the business development departments, excess marketing expenditures and current year losses from investing in new locations. • Any one-off or non-recurring costs will be excluded. • It is expected that in the period between 2006 and 2008 the cash tax rate will rise as cumulative tax losses are utilised thereby increasing progressively the challenge of achieving a 14p EPS target. This will then be further complicated by the need to recognise deferred tax assets as the business strengthens reducing the accounting rate of tax in one year and increasing it in the next. To provide greater clarity and incentive to management EPS will be calculated based upon the cash tax rate up to a maximum of 30%. • The Remuneration Committee is of the opinion that the EPS and free cash flow performance targets are a transparent and accurate measure of the Company’s performance at this time and are the key corporate metrics for driving long-term shareholder value. In addition, the TSR condition will ensure that executives are encouraged to focus on ensuring that the Company’s return to shareholders is competitive compared to comparable companies. The performance conditions are as follows: The Remuneration Committee agreed to the following modifications to the awards made in 2008 and 2009 and that the following performance conditions would apply to these awards effective from 22 March 2010. The total number of awards made in 2008 and 2009 to each participant was divided into three separate equal amounts and was subject to future performance periods of three, four and five years respectively. Thus, conditional on meeting the performance targets, the first amount vests in March 2013, the second vests in March 2014 and the third vests in March 2015. These vesting dates relate to the financial years ending 31 December 2012, 31 December 2013 and 31 December 2014 respectively. The vesting of these awards is subject to the achievement of challenging corporate performance targets. 75% of each of the three amounts is subject to defined earnings per share (EPS) targets over the respective performance periods. The remaining 25% of each will be subject to relative total shareholder return (TSR) targets over the respective periods. The targets are as follows: % of awards eligible for vesting 25% 50% 75% 100% EPS targets for the financial years ending 2014 2013 2012 15p 16p 17p 18p 17p 20p 23p 26p 18p 22p 26p 30p No shares will vest in each respective year unless the minimum EPS target for that year is achieved. % of awards eligible for vesting Nil 25% Increments of 0.75% 100% (a) over three, four or five year performance period. Regus TSR % achieved relative to FTSE All Share Total Return index(a) 100% Above 100% but below 101% For each complete 1% above 100% 200% or above Plan 3: Regus plc Value Creation Plan The VCP was introduced in 2008 as a one-off award with the objective of delivering exceptional rewards to participants provided absolute returns to shareholders are exceptional. The VCP operates over a five year period from May 2008 to March 2013. Participants in the VCP are granted entitlements (‘VCP Entitlements’) to receive a maximum number of shares which shall be earned by the conversion of the VCP Entitlements into an option or series of options (the ‘VCP Options’) which may be granted on certain dates (the ‘Measurement Dates’) based on the Company’s share price performance. The exercise price for VCP Options is the closing share price on the date of the Company’s 2008 AGM. 80 80 Regus plc Annual Report and Accounts 2012 Reconciliation of outstanding share options At 1 January VCP entitlements awarded during the year Lapsed during the year Outstanding at 31 December Plan VCP Tier 1 awards VCP Tier 2 awards VCP Tier 3 awards VCP Tier 4 awards 2012 2011 Number of entitlements 12,857,142 – (3,599,999) 9,257,143 Number of entitlements 21,000,000 – (8,142,858) 12,857,142 Date of award Numbers awarded Lapsed Exercised At 31 Dec 2012 20/05/2008 20/05/2008 20/05/2008 20/05/2008 3,500,000 6,000,000 10,000,000 3,000,000 (1,700,000) (4,457,143) (4,857,143) (2,228,571) 22,500,000 (13,242,857) – – – – – 1,800,000 1,542,857 5,142,857 771,429 9,257,143 Measurement date – – – – 31/03/2010 – 31/03/2013 The exercise price for VCP Options is the closing share price on the date of the Company’s 2008 AGM. No awards were exercisable at the year end (2011: nil). Measurement of fair values The fair value of the rights granted through the employee share purchase plan was measured based on Monte Carlo. The inputs to the model are as follows: Share price on award date Exercise price Number of simulations Number of companies Award life Expected dividend Total fair value of awards at time of grant Risk free interest rate 21/05/2008 VCP 107.00p 107.00p 200,000 36 1.86 yrs – 4.86 yrs 0.93% £1.3m 4.71% 81 www.regus.com/investors 81 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 24. Share-based payment (continued) The performance conditions are as follows: Number of shares earned less those earned at any prior measurement date Tier 1 awards Tier 2 awards Tier 3 awards Tier 4 awards First measurement date 31/03/2010 Second measurement date 31/03/2011 Third measurement date 31/03/2012 Fourth measurement date 31/03/2013 Share price less than £2.60 Share price is £2.60 or more but less than £3.50 Share price is £3.50 or more – 2,500,000 3,500,000 – – 4,285,714 7,142,857 6,000,000 10,000,000 – 2,142,857 3,000,000 Share price less than £2.60 Share price is £2.60 or more but less than £3.50 Share price is £3.50 or more but less than £4.50 Share price is £4.50 or more Share price less than £2.60 Share price is £2.60 or more but less than £3.50 Share price is £3.50 or more but less than £4.50 Share price is £4.50 or more Share price less than £2.60 Share price is £2.60 or more but less than £3.50 Share price is £3.50 or more but less than £4.50 Share price is £4.50 or more – 1,800,000 2,500,000 3,500,000 – 1,200,000 1,800,000 2,500,000 – 600,000 1,200,000 1,800,000 – – 5,142,857 3,085,714 7,142,857 4,285,714 6,000,000 10,000,000 – 2,057,143 3,085,714 4,285,714 – 1,028,571 2,057,143 3,085,714 – 3,428,571 5,142,857 7,142,857 – 1,714,286 3,428,571 5,142,857 – 1,542,857 2,142,857 3,000,000 – 1,028,571 1,542,857 2,142,857 – 514,285 1,028,571 1,542,857 The VCP awards have measurement dates of 31 March 2010, 31 March 2011, 31 March 2012 and 31 March 2013. If at the measurement dates, the share price targets have been met the eligible VCP entitlements will be converted into options over ordinary shares. The options are not subject to further performance conditions but are exercisable on the following basis: Percentage of entitlements converted to options at the 31/03/2010 measurement date that can be exercised Percentage of entitlements converted to options at the 31/03/2011 measurement date that can be exercised Percentage of entitlements converted to options at the 31/03/2012 measurement date that can be exercised Percentage of entitlements converted to options at the 31/03/2013 measurement date that can be exercised In year ended 31/12/2010 In year ended 31/12/2011 In year ended 31/12/2012 In year ended 31/12/2013 40% – – – 20% 40% – – 20% 30% 40% 20% 30% 60% – 100% 82 82 Regus plc Annual Report and Accounts 2012 25. Retirement Benefit Obligations The Group accounts for the Swiss pension plans as defined benefit plans under IAS 19. The Group has recognised £0.5m (2011: £0.4m) of pension costs in the income statement, together with a loss of £0.1m (2011: £0.1m) in other comprehensive income. Reconciliation of balance sheet movements The reconciliation of assets and liabilities recognised in the balance sheet are as follows: £m Fair value of plan assets Present value of obligations Net funded obligations 31.12.2012 31.12.2011 2.7 (2.9) (0.2) 2.4 (2.5) (0.1) As required by IAS 19 liabilities for benefit obligations are determined using the projected unit credit actuarial valuation method. This is an accrued benefits valuation method that discounts the best estimate of future cash flows and makes allowance for projected earnings. The Group does not operate any unfunded defined benefit pension plans. Changes in present value of defined benefit obligations and fair value of plan assets Changes in the present value of the defined benefit obligation were as follows: £m At 1 January Current service costs Plan participants’ contributions Benefit payments Interest cost Net insurance premiums and expenses Actuarial (gain)/loss for the year Exchange rate differences At 31 December Changes in the fair value of plan assets were as follows: £m At 1 January Employer contributions Plan participants’ contributions Benefit payments Expected return on plan assets Actuarial gain/(loss) for the year Net insurance premiums and expenses Exchange rate differences At 31 December 31.12.2012 31.12.2011 (2.5) (0.5) (0.3) 0.3 – 0.2 (0.1) – (2.9) (1.1) (0.4) (0.3) (0.8) – 0.2 (0.1) – (2.5) 31.12.2012 31.12.2011 2.4 0.3 0.5 (0.3) – – (0.2) – 2.7 1.1 0.4 0.3 0.8 – – (0.2) – 2.4 83 www.regus.com/investors 83 s t n e m e t a t s l i a c n a n F i Notes to the accounts continued 25. Retirement Benefit Obligations (continued) Income and expenses The amounts that have been recognised in the income statement and other comprehensive income for the year ended 31 December 2012 are as follows: £m 31.12.2012 31.12.2011 Analysis of amounts (charged)/credited to the income statement: Service cost component (net of plan participants’ contributions) Interest cost component Expected return on plan assets Total (charge)/credit to operating profit Analysis of amounts recognised in other comprehensive income: At 1 January Net actuarial gains/(losses) recognised for the year At 31 December (0.5) – – (0.5) (0.1) (0.1) (0.2) (0.4) – – (0.4) – (0.1) (0.1) Current service costs have been included in administrative expenses. Interest costs and expected return on plan assets have been included in finance expenses. The actual return on plan assets was £33,000 (2011: £36,000). Major assumptions The major assumptions, adopted by the Group, when valuing the defined benefit obligations under IAS 19 are as follows: Discount rate Inflation rate Expected return on plan assets Future salary increase Future pension increase Average remaining years of service life 31.12.12 01.01.12 1.75% 1.00% 1.75% 1.00% 0.00% 10.5 2.25% 1.00% 2.25% 1.00% 0.00% 10.9 Life expectancy is reflected in the defined benefit obligations by using up-to-date mortality tables. The mortality and invalidity assumptions, adopted by the Group, are based on the LPP 2010 tables as follows: Mortality tables LPP 2010 Analysis of scheme assets The major categories of plan assets as a percentage of total plan assets are as follows: Money market Fixed income Equity Real Estate Other Total Life expectancy at age 65 2012 Life expectancy at age 65 2011 Male Female 19.56 21.89 19.56 21.89 31.12.12 01.01.12 1.3% 82.7% 0.6% 11.8% 3.6% 100% 4.3% 75.3% 0.6% 12.4% 7.4% 100% Sensitivities An increase of 0.25% in the discount rate would decrease the defined benefit obligation by 4.2%. A decrease of 0.25% in the discount rate would increase the defined benefit obligation by 4.5%. 84 84 Regus plc Annual Report and Accounts 2012 26. Acquisitions During the year ended 31 December 2012 the Group made a number of immaterial acquisitions for a total consideration of £49.6m. Net assets acquired Intangible assets (note 13)* Property, plant and equipment (note 14) Other assets Current liabilities Non-current liabilities Goodwill arising on acquisitions Total consideration Deferred consideration Cash flow on acquisition Cash paid Net cash outflow Book value £m Provisional Fair value adjustments £m Provisional Fair value £m – 5.1 3.8 (4.1) (2.9) 1.9 1.1 7.3 – – – 8.4 1.1 12.4 3.8 (4.1) (2.9) 10.3 39.3 49.6 6.3 43.3 43.3 43.3 * Intangible assets comprise the fair value of customer contracts or, in the case of managed centres, the fair value of the management contract acquired The goodwill arising on the above acquisitions reflects the anticipated future benefits Regus can obtain from operating the businesses more efficiently, primarily through increasing occupancy and the addition of value adding products and services. £20.0m of the above goodwill is expected to be deductible for tax purposes. There was no material contingent consideration arising on the above acquisitions. The acquisition costs associated with these transactions were £0.9m, recorded within administration expenses within the consolidated income statement. During the year ended 31 December 2011 the Group made a number of immaterial acquisitions for a total consideration of £6.5m. Book value £m Final Fair value adjustments £m Fair value £m s t n e m e t a t s l i a c n a n F i Net assets acquired Intangible assets (note 13)* Property, plant and equipment (note 14) Current liabilities Non current liabilities Goodwill arising on acquisitions Total consideration Deferred consideration Cash flow on acquisition Cash paid Net cash outflow – 1.3 (0.7) (0.3) 0.3 0.4 1.2 – – 1.6 0.4 2.5 (0.7) (0.3) 1.9 4.6 6.5 0.3 6.2 6.2 6.2 * Intangible assets comprise the fair value of customer contracts or, in the case of managed centres, the fair value of the management contract acquired The goodwill arising on the above acquisitions reflects the anticipated future benefits Regus can obtain from operating the businesses more efficiently, primarily through increasing occupancy and the addition of value adding services. £1.6m of the above goodwill is expected to be deductible for tax purposes. There was no contingent consideration arising on the above acquisitions. The acquisition costs associated with these transactions were £0.3m, recorded within administration expenses within the consolidated income statement. 85 www.regus.com/investors 85 Notes to the accounts continued 26. Acquisitions (continued) Acquisition of non-controlling interests On 31 May 2011, the Group acquired the remaining 40.95% interest in Regus Business Centres Canada Limited for £3.9m. The carrying amount of Regus Business Centres Canada Limited’s net assets on the date of acquisition was a net liability of £2.9m. There were no non-controlling interests acquired during the year ended 31 December 2012. 27. Capital commitments Contracts placed for future capital expenditure not provided in the financial statements 2012 £m 22.8 2011 £m 11.8 These commitments are principally in respect of fit out obligations on new centres opening in 2012. In addition our share of the capital commitments of joint ventures amounted to £nil at 31 December 2012 (2011: £nil). 28. Non-cancellable operating lease commitments At 31 December 2012 the Group was committed to make the following payments in respect of operating leases: Lease obligations falling due: Within one year Between two and five years After five years Motor vehicles, plant and equipment £m 0.3 0.4 – 0.7 Property £m 437.5 1,092.3 407.3 1,937.1 2012 Total £m 437.8 1,092.7 407.3 1,937.8 Motor vehicles, plant and equipment £m 0.3 0.1 – 0.4 Property £m 410.3 993.4 376.0 1,779.7 2011 Total £m 410.6 993.5 376.0 1,780.1 Non-cancellable operating lease commitments exclude future contingent rental amounts such as the variable amounts payable under performance based leases where the rents vary in line with a centre’s performance. 29. Contingent assets and liabilities The Group has bank guarantees and letters of credit held with certain banks amounting to £101.4m (2011: £103.7m). There are no material lawsuits pending against the Group. 30. Related parties Parent and subsidiaries entities The financial statements include the results of the Group and the subsidiaries listed in note 31. Joint ventures The following table provides the total amount of transactions that have been entered into with related parties for the relevant financial year. £m 2012 Joint Ventures 2011 Joint Ventures Management fees received from related parties Amounts owed by related party Amounts owed to related party 1.9 1.5 5.3 6.7 5.0 6.3 As at 31 December 2012, £nil of the amounts due to the Group have been provided for (2011: £nil). 86 86 Regus plc Annual Report and Accounts 2012 Key management personnel No loans or credit transactions were outstanding with Directors or officers of the Company at the end of the year or arose during the year, that are required to be disclosed. Compensation of key management personnel (including Directors): Key management personnel include those personnel (including Directors) that have responsibility and authority for planning, directing and controlling the activities of the Group: Short-term employee benefits Share-based payments 2012 £m 6.3 0.3 6.6 2011 £m 5.3 0.2 5.5 Share-based payments included in the table above reflect the accounting charge in the year. The full fair value of awards granted in the year was £1.1m (2011: £1.9m). These awards are subject to performance conditions and vest over three, four and five years from the award date. Transactions with related parties During the year ended 31 December 2012 the Group acquired goods and services from a company indirectly controlled by a Director of the Company amounting to £30,073 (2011: £7,807). The goods and services were acquired in arm’s-length transactions. There was a nil balance outstanding at the year end (2011: nil). s t n e m e t a t s l i a c n a n F i 87 www.regus.com/investors 87 Notes to the accounts continued 31. Principal Group companies The Group’s principal subsidiary undertakings at 31 December 2012, their principal activities and countries of incorporation are set out below: Name of undertaking Principal activity – Trading companies Country of incorporation % of ordinary share and votes held Name of undertaking Principal activity – Holding companies Country of incorporation % of ordinary share and votes held British Virgin Islands Denmark England England England England England England England France Germany Regus H Holdings Inc RGN General Partner Holdings Corp Canada RGN Limited Partner Holdings Corp Canada Canada Insignia Partnership Canada RGN Services Limited Regus Management de Chile Ltda Chile Regus Denmark Holding AS Regus Group Limited Regus Investments Limited Regus Business Centres (Holding) Regus Business Centres (Trading) Limited Regus H Holdings Regus H (UK) Regus Holdings UK Limited Regus Holdings SAS Regus Deutschland GmbH Regus Germany Holding GmbH & Co. KG Regus Management GmbH Pathway IP S.àr.l. (formerly Regus No.2 S.à.r.l.) RBW Global Holding S.àr.l. (formerly Regus Businessworld (Luxembourg) S.à.r.l.) Regus Middle East S.àr.l. Regus India Holdings Limited Regus Pakistan Holdings Limited Regus Mexico S. de RL de CV Regus Netherlands BV Regus Business Centres BV Regus Business Centre Norge AS Norway Regus Holding GmbH Regus Corporation LLC Regus Holdings LLC Regus H Holdings LLC Regus International Services SA Germany Germany Luxembourg Luxembourg Mauritius Mauritius Mexico Netherlands Netherlands Switzerland United States United States United States Uruguay Luxembourg 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Regus do Brasil Ltda HQ Do Brazil Administracao de bens e servicos ABC Business Centres Ltd Regus Paris SAS Regus GmbH & Co. KG Regus Business Centres Italia Srl Regus Japan KK Regus Management de Mexico, SA de CV Regus Amsterdam BV Regus Business Centre SA HQ Global Workplaces, LLC Regus Business Center LLC Regus Management Singapore Pte Ltd Brazil Brazil England France Germany Italy Japan Mexico Netherlands Switzerland United States United States Singapore Principal activity – Management companies Regus Australia Management Pty Limited Australia Belgium Regus Belgium SA Colombia Regus Colombia Limitada Croatia Regus Poslovni Centar d.o.o Czech Republic Denmark England Regus Management s.r.o Regus Management Aps Regus Group Services Ltd Business Centres Management Estonia OU Regus Asia Pacific Management Limited Hong Kong Latvia Regus Management Latvia UAB Regus Management Lithuania Lithuania Regus Management Malaysia Sdn Bhd Malaysia Regus Malta Management Ltd Regus Amsterdam BV Regus Management Singapore Pte Ltd Regus Management Group (Pty) Ltd Regus Management Espana SL Regus Global Management Centre SA Regus Yonetim ve Danismanlik Ltd Sirketi Turkey Regus Vietnam Assets Management Malta Netherlands Singapore South Africa Spain Switzerland Vietnam Estonia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 88 88 Regus plc Annual Report and Accounts 2012 32. Key judgemental areas adopted in preparing these accounts The preparation of financial statements in accordance with IFRS requires management to make certain judgements and assumptions that affect reported amounts and related disclosures. Fair value accounting for business combinations For each business combination, we assess the fair values of assets and liabilities acquired. Where there is not an active market in the category of the non-current assets typically acquired with a business centre, or where the books and records of the acquired company do not provide sufficient information to derive an accurate valuation, management calculate an estimated fair value based on available information and experience. The main categories of acquired non-current assets where management’s judgement has an impact on the amounts recorded include tangible fixed assets, customer list intangibles and the fair market value of leasehold assets and liabilities. For significant business combinations management also obtain third party valuations to provide additional guidance over the appropriate valuation to be included in the financial statements. Valuation of intangibles and goodwill We evaluate the fair value of goodwill and intangibles to assess potential impairments on an annual basis, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. We evaluate the carrying value of goodwill at the appropriate cash-generating unit level and make that determination based upon future cash flow projections, which assume certain growth projections which may or may not occur. We record an impairment loss for goodwill when the carrying value of the intangible asset is less than its estimated recoverable amount. Further details of the methodology and assumptions applied to the impairment review in the year ended 31 December 2012, including the sensitivity to changes in those assumptions, can be found in note 12. Tax assets and liabilities We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. Changes in existing laws and rates, and their related interpretations, and future business results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. Our accounting for deferred tax consequences represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates. It is current Group policy to recognise a deferred tax asset when it is probable that future taxable profits will be available against which the assets can be used. The Group considers it probable if the entity has made a taxable profit in the previous year and is forecast to continue to make a profit in the foreseeable future. Where appropriate the Group assesses the potential risk of future tax liabilities arising from the operation of its business in multiple tax jurisdictions and includes provisions within tax liabilities for those risks that can be estimated reliably. Changes in existing tax laws can affect large international groups similar to Regus and could result in significant additional tax liabilities over and above those already provided for. Onerous lease provisions We have identified certain poor performing centres where the lease is considered onerous, i.e. the Group does not expect to recover the unavoidable lease costs up to the first break point. The accounts include a provision for our estimate of the net amounts payable under the terms of the lease to the first break point, discounted at the Group weighted average cost of capital, where appropriate. Dilapidations Certain of our leases with landlords include a clause obliging the Group to hand the property back in the condition as at the date of signing the lease. The costs to bring the property back to that condition are not known until the Group exits the property so the Group estimates the costs at each balance sheet date. However, given that landlords often regard the nature of changes made to properties as improvements, the Group estimates that it is unlikely that any material dilapidation payments will be necessary. Consequently provision has been made only for those potential dilapidation payments when it is probable that an outflow will occur and can be reliably estimated. 33. Subsequent event On 20 February 2013, the Group acquired control of MWB Business Exchange Plc from MWB Property Limited. Due to the timing of this transaction, it is not practical to disclose the information associated with the initial accounting for this acquisition. 89 www.regus.com/investors 89 s t n e m e t a t s l i a c n a n F i Parent company accounts Summarised extract of company balance sheet (prepared under Luxembourg GAAP) Assets C. Fixed assets III. Financial assets 1. Shares in affiliated undertakings 2. Loans to affiliated undertakings 4. Loans to undertakings with which the company is linked by virtue of participating interests D. Current assets II. Debtors 2. Amount owed by affiliated undertakings a) becoming due and payable within one year III. Transferable securities 2. Own shares (8,982,139 shares of £0.01 per share (2011: 9,070,906 shares)) IV. Cash at bank and in hand E. Deferred charges Total assets Liabilities A. Capital and reserves I. Subscribed capital II. Share premium and similar premiums IV. Reserves 1. Legal reserve 2. Reserve for own shares 4. Other reserves V. Results brought forward VI. Results for the financial year VII. Interim dividends C. Provisions 2. Provisions for taxation 3. Other provisions D. Non-subordinated debts 4. Trade creditors a) becoming due and payable within one year 6. Amounts owed to affiliated undertakings a) becoming due and payable within one year Total liabilities Approved by the Board on 5 March 2013 Mark Dixon Chief Executive Officer Dominique Yates Chief Financial Officer 90 90 Regus plc Annual Report and Accounts 2012 As at 31 Dec 2012 (Luxembourg GAAP) £m As at 31 Dec 2011 (Luxembourg GAAP) £m 750.0 – – 1.1 7.0 – 0.2 758.3 9.5 53.7 0.9 7.0 513.0 186.8 (9.9) (9.4) 751.6 0.1 – 1.2 5.4 6.6 758.3 778.2 0.3 0.3 14.9 7.1 0.1 0.2 801.1 9.5 53.7 0.9 7.1 512.9 221.0 (6.8) (8.5) 789.8 – 0.3 0.3 10.7 11.0 801.1 Accounting policies Basis of preparation The annual accounts have been prepared in accordance with Luxembourg legal and regulatory requirements under the historical cost convention which differ in material respects from IFRS in both the measurement and presentation of certain transactions. The Company is included in the consolidated financial statements of Regus plc. The balance sheet has been extracted from the full accounts of Regus plc for the period ended 31 December 2012 which are available from the Company’s registered office, 26 Boulevard Royal, Luxembourg and which will be filed with both the Luxembourg Chamber of Commerce and the Jersey Register of Companies. Financial assets Shares in affiliated undertakings are valued at purchase price including acquisition costs. Where any permanent diminution in value is identified, value adjustments are recorded in the profit and loss account. These value adjustments are not continued if the reasons which caused their initial recording cease to apply. s t n e m e t a t s l i a c n a n F i 91 www.regus.com/investors 91 Segmental analysis Segmental analysis – management basis (unaudited) Mature1 Workstations4 Occupancy (%) Revenue (£m) Contribution (£m) REVPOW 2011 Expansions2 Workstations4 Occupancy (%) Revenue (£m) Contribution (£m) 2012 Expansions2 Workstations4 Occupancy (%) Revenue (£m) Contribution (£m) Closures3 Workstations4 Occupancy (%) Revenue (£m) Contribution (£m) Total Workstations4 Occupancy (%) Revenue (£m) Contribution (£m) Unallocated contribution (£m) REVPAW (£) Period End workstations5 Mature 2011 Expansions 2012 Expansions Total Americas 2012 EMEA 2012 Asia Pacific 2012 76,312 88.6 480.0 152.9 7,099 8,853 74.1 34.1 0.8 5,382 56.3 18.6 (3.9) 70 97.1 1.2 0.7 90,617 85.3 533.9 150.5 – 5,892 76,443 8,805 20,939 106,187 35,987 82.4 275.2 80.1 9,280 3,358 62.7 16.8 (1.4) 1,834 47.9 6.5 (2.6) 352 83.4 2.7 0.7 41,531 79.3 301.2 76.8 – 7,252 40,576 4,603 4,807 49,986 24,909 86.0 163.4 53.5 7,629 5,268 70.3 21.2 4.2 4,271 46.2 10.8 (2.4) 109 87.0 0.5 0.2 34,557 78.7 195.9 55.5 – 5,669 25,181 5,327 12,416 42,924 United Kingdom 2012 36,016 83.0 204.2 37.9 6,827 489 81.5 1.9 0.2 492 82.8 3.1 0.3 757 66.9 2.6 (1.8) 37,754 82.7 211.8 36.6 – 5,610 40,253 451 330 41,034 Other 2012 Total 2012 – – 1.3 1.2 – 173,224 85.8 1,124.1 325.6 7,565 – – – – – – – – – – – – – – 1.3 1.2 – – – – – – 17,968 71.0 74.0 3.8 11,979 52.5 39.0 (8.6) 1,288 74.8 7.0 (0.2) 204,459 82.5 1,244.1 320.6 0.1 6,085 182,453 19,186 38,492 240,131 92 92 Regus plc Annual Report and Accounts 2012 Segmental analysis – management basis (unaudited) Americas 2011 EMEA 2011 Asia Pacific 2011 Mature1 Workstations4 Occupancy (%) Revenue (£m) Contribution (£m) REVPOW 2011 Expansions2 Workstations4 Occupancy (%) Revenue (£m) Contribution (£m) 2011 Closures3 Workstations4 Occupancy (%) Revenue (£m) Contribution (£m) 2012 Closures3 Workstations4 Occupancy (%) Revenue (£m) Contribution (£m) Total Workstations4 Occupancy (%) Revenue (£m) Contribution (£m)6 Unallocated contribution (£m) REVPAW (£) Notes: 75,716 87.7 463.3 132.7 6,977 2,856 59.0 7.7 (2.7) 1,054 72.3 1.1 (0.5) 438 94.9 5.4 0.8 80,064 86.5 477.5 130.3 – 5,964 35,765 83.8 288.8 75.2 9,636 1,606 44.4 5.3 (4.3) 780 73.8 3.3 (0.9) 322 81.6 4.3 (0.8) 38,473 81.6 301.7 69.2 – 7,842 24,896 84.3 159.8 45.1 7,614 2,187 47.5 5.9 (1.0) 432 72.7 2.2 (0.1) 242 85.9 1.2 0.6 27,757 81.6 169.1 44.6 – 6,092 United Kingdom 2011 35,669 84.1 200.7 32.1 6,691 349 73.6 1.2 (0.4) 400 63.5 0.7 0.2 1,928 83.8 10.0 (0.2) 38,346 83.7 212.6 31.7 – 5,544 Other 2011 – – 1.7 1.4 – – – – – – – – – – – – – – – 1.7 1.4 – – Total 2011 172,046 85.6 1,114.3 286.5 7,566 6.998 52.8 20.1 (8.4) 2,666 71.5 7.3 (1.3) 2,930 84.3 20.9 0.4 184,640 84.2 1,162.6 277.2 1.9 6,297 1 The mature business comprises centres not opened in the current or previous financial year 2 Expansions include new centres opened and acquired businesses 3 A 2012 closure is defined as a centre closed during the 12 months ended 31 December 2012. A 2011 closure is defined as a centre closed during the 12 months ended 31 December 2011 4 Workstation numbers are calculated as the weighted average for the year 5 Workstation available at period end 6 Restatement described in note 2 n o i t a m r o f n i l r e d o h e r a h S 93 www.regus.com/investors 93 Five year summary Revenue Cost of sales before non-recurring costs Non-recurring cost of sales Cost of sales Gross profit (centre contribution) Administration expenses before non-recurring expenses Non-recurring administration expenses Administration expenses Operating profit Exceptional income from legal settlement Operating profit (after exceptional) Share of post-tax (loss)/profit of joint ventures Share of post-tax profit of associate Profit before financing costs Finance expense Finance income Profit before tax for the year Tax charge Profit after tax for the year Attributable to: Equity shareholders of the parent Minority interests Earnings per ordinary share (EPS): Basic (p) Diluted (p) Weighted average number of shares outstanding (‘000’s) Balance sheet data (as at 31 December) Intangible assets Property, plant and equipment Deferred tax assets Trade and other receivables Cash, cash equivalents and liquid investments Total assets Current liabilities Non-current liabilities Provisions Equity minority interests Equity shareholders funds’ Total liabilities and shareholders’ funds * Restatement described in note 2 Full year ended 31 Dec 2012 £m Full year ended 31 Dec 2011 £m (Restated*) Full year ended 31 Dec 2010 £m (Restated*) Full year ended 31 Dec 2009 £m (Restated*) Full year ended 31 Dec 2008 £m (Restated*) 1,244.1 (923.4) – (923.4) 320.7 (230.2) – (230.2) 90.5 – 90.5 (0.3) – 90.2 (5.9) 0.8 85.1 (14.2) 70.9 70.9 – 70.9 7.5p 7.5p 941,922 363.9 437.5 33.9 333.9 132.3 1,301.5 612.5 157.0 4.6 – 527.4 1,301.5 1,162.6 (883.5) – (883.5) 279.1 (224.7) – (224.7) 54.4 – 54.4 0.1 – 54.5 (6.4) 1.3 49.4 (9.0) 40.4 41.7 (1.3) 40.4 1,040.4 (823.1) (11.9) (835.0) 217.3 (193.3) (3.9) (197.2) 24.0 – 8.2 1.3 – 9.5 (2.1) 1.8 9.2 (5.9) 3.3 2.9 0.4 3.3 1,055.1 (819.8) – (819.8) 235.3 (166.1) (2.6) (168.7) 69.2 18.3 84.9 2.0 – 86.9 (3.6) 3.3 86.6 (19.2) 67.4 66.7 0.7 67.4 1,077.2 (769.6) – (769.6) 307.6 (161.7) – (161.7) 145.9 – 145.9 2.3 – 148.2 (3.4) 6.3 151.1 (34.3) 116.8 115.8 1.0 116.8 4.3p 4.3p 941,899 0.3p 0.3p 947,463 7.1p 7.0p 948,204 12.2p 12.0p 950,320 331.3 333.5 32.2 319.2 197.5 1,213.7 578.4 126.4 8.2 – 500.7 1,213.7 330.8 279.5 36.6 299.9 204.6 1,151.4 541.8 105.8 9.8 0.1 493.9 1,151.4 307.4 247.8 65.1 250.3 245.1 1,115.7 504.5 96.6 8.2 – 506.4 1,115.7 330.3 285.7 79.0 282.4 219.5 1,196.9 592.3 108.1 8.5 0.3 487.7 1,196.9 94 94 Regus plc Annual Report and Accounts 2012 Shareholder information Corporate directory Secretary and Registered Office Tim Regan, Company Secretary Regus plc (Société Anonyme) Registered Office: Lime Grove Street Green Street St Helier Jersey JE1 2ST Registered Head Office: 26 Boulevard Royal L-2449 Luxembourg Registered Number Jersey 101523 Luxembourg R.C.S. B 141 159 Registrars Capita (Registrars) Jersey Limited 12 Castle Street St Helier Jersey JE2 3RT Auditor KPMG Luxembourg S.à r.l. 9 Allée Scheffer L-2520 Luxembourg Legal advisers to the Company as to English law Slaughter and May One Bunhill Row London EC1Y 8YY Legal advisers to the Company as to Luxembourg law MNKS Vertigo Polaris Building 2 – 4 rue Eugene Ruppert L-2453 Luxembourg Corporate Stockbrokers Investec Bank plc 2 Gresham Street London EC2V 7QP Goldman Sachs Peterborough Court 133 Fleet Street London EC4A 2BB Reservations UK telephone: US telephone: Websites www.regus.com www.hq.com 0870 880 8484 1.877.REGUS.87 or 001 954 331 1647 n o i t a m r o f n i l r e d o h e r a h S 95 www.regus.com/investors 95 Shareholder information continued Glossary Available workstations The total number of workstations in the Group (also termed Inventory). During the year, this is expressed as a weighted average. At period ends the absolute number is used. Centre Contribution Gross profit comprising centre revenues less direct operating expenses but before administrative expenses EBITDA Earnings before interest, tax, depreciation and amortisation EBITDAR Earnings before interest, tax, depreciation, amortisation and rent Enquiries Client enquiries about Regus products or services Expansions A general term which includes new business centres established by Regus and acquired centres in the year Forward Order Book The future workstation revenue already contracted with clients at a point in time Like for like The financial performance from centres owned and operated for a full 12 months prior to the start of the financial year which therefore have a full year comparative Mature business Operations owned for a full 12 month period prior to the start of the financial year which therefore have a full year comparative Occupancy Occupied workstations divided by available workstations expressed as a percentage Occupied workstations Workstations which are in use by clients. This is expressed as a weighted average for the year. REVPAW Total revenue per available workstations (Revenue/Available workstations) REVPOW Total revenue per occupied workstation WIPOW Workstation income per occupied workstation 96 96 Regus plc Annual Report and Accounts 2012 The Forest Stewardship Council® (FSC) is an international network which promotes responsible management of the world’s forests. Forest certiﬁ cation is combined with a system of product labelling that allows consumers to readily identify timber-based products from certiﬁ ed forests. Designed and produced by Black Sun Plc | www.blacksunplc.com Printed in England by the Pureprint Group Regus plc S.A. 26 Boulevard Royal L-2449 Luxembourg www.regus.com View more online at www.regus.com

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