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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-30932
REGUS PLC
(Exact Name of Registrant as Specified in Its Charter)
England and Wales
(Jurisdiction of Incorporation or Organization)
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3000 Hillswood Drive
Chertsey KT16 0RS, England
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
American Depositary Shares evidenced by American Depositary Receipts, each
representing five Ordinary Shares, nominal value 5p per share
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: None
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The number of outstanding shares in the capital of Regus plc as
of December 31, 2002:
582,193,517 Ordinary Shares
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17 |_| Item 18 |X|
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TABLE OF CONTENTS
Page
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Introduction
Forward-Looking Statements......................................................4
Certain Information.............................................................4
Part I Item 1 Identity of Directors, Senior Management and Advisers....Not applicable
Item 2 Offer Statistics and Expected Timetable..................Not applicable
Item 3 Key Information.......................................................5
Bankruptcy Filing................................................5
Selected Financial Data..........................................7
Risk Factors....................................................10
Item 4 Information on the Company...........................................16
History and Development of Regus plc............................16
Business Overview...............................................18
Organizational Structure........................................24
Properties......................................................26
Item 5 Operating and Financial Review and Prospects.........................27
Operating Results...............................................27
Liquidity and Capital Resources................................ 39
Prospects.......................................................42
Item 6 Directors, Senior Management and Employees...........................43
Directors and Senior Management.................................43
Compensation....................................................44
Board Practices.................................................44
Employees.......................................................49
Share Ownership.................................................50
Item 7 Major Shareholders and Related Party Transactions....................60
Major Shareholders..............................................60
Related Party Transactions......................................60
Item 8 Financial Information................................................61
Consolidated Statements and Other Financial Information.........61
Legal Proceedings...............................................61
Significant Changes.............................................61
Item 9 Listing Details......................................................62
Market Price Information........................................62
Markets.........................................................63
Item 10 Additional Information ..............................................64
Memorandum and Articles of Association..........................64
Material Contracts..............................................64
Taxation........................................................64
Documents on Display............................................67
Item 11 Quantitative and Qualitative Disclosures about Market Risk...........68
Item 12 Description of Securities Other Than Equity
Securities.............................................Not applicable
Part II Item 13 Defaults, Dividend Arrearages and Delinquencies..........Not applicable
Item 14 Material Modifications to the Rights of
Security Holders and Use of Proceeds.................................69
Item 15 Controls and procedures..............................................69
Part III Item 18 Financial Statements..................................................70
Index to the financial statements...............................70
Item 19 Exhibits............................................................114
INTRODUCTION
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements. These forward-looking
statements are not historical facts, but rather are based on our current
expectations, estimates and projections about our industry, our beliefs and
assumptions. Words such as "anticipates", "expects", "intends", "plans",
"believes", "seeks", "estimates" and similar expressions are intended to
identify forward-looking statements. These statements are not guarantees of
future performance and are subject to risks, uncertainties and other factors,
some of which are beyond our control, are difficult to predict and could cause
actual results to differ materially from those expressed or forecasted in the
forward-looking statements. These risks and uncertainties are described in "Item
3. Key Information--Risk Factors" and elsewhere in this annual report. We
caution you not to place undue reliance on these forward-looking statements,
which reflect our management's view only as of the date of this annual report.
Certain Information
As used in this annual report, "we", "us", "our", the "Company" and "Regus"
refer to Regus plc and its subsidiaries, except where it is clear that such
terms mean only Regus plc.
We publish our consolidated financial statements in UK pounds sterling. In
this annual report, references to "pounds sterling", "pounds", "(pound)",
"pence" and "p" are to the currency of the UK and references to "US dollars",
"dollars", "$", "cents", or "c" are to the currency of the US. See "Item 3. Key
Information--Selected Financial Data--Exchange Rate Information" for historical
information regarding the noon buying rates in The City of New York for cable
transfers in pounds as certified for customs purposes by the Federal Reserve
Bank of New York with respect to the pound. You should not construe these
translations as representations that the pound amounts actually represent such
US dollar amounts or could have been or could be converted into US dollars at
the rates indicated or at any other rates.
This annual report includes product names and other trade names, logos and
trade marks, either registered or with respect to which applications are
pending, of Regus and of other companies.
Various amounts and percentages set out in this annual report have been
rounded and accordingly may not total.
4
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
BANKRUPTCY FILING
On January 14, 2003 (the "Petition Date"), Regus Business Centre Corp.,
Stratis Business Centers Inc., Regus Plc and Regus Business Centre BV
(collectively, the "Debtors") filed voluntary petitions for relief under Chapter
11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court")
under case numbers 03-20026 through 03-20029 (the "Chapter 11 Cases").
The Debtors filed for bankruptcy because the Chapter 11 process offered the
best available means to facilitate the implementation of necessary changes to
the Debtors' businesses to bring costs and operations in line with the current
business environment. In addition, the protections of the Chapter 11 process
offered the Debtors access to capital through debtor-in-possession financing
that otherwise would not have been available. The filing for bankruptcy
protection raises substantial doubt about the Group's ability to continue as a
going concern.
The Debtors are currently operating their business as
"debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code, the Federal
Rules of Bankruptcy Procedure and applicable court orders. In general, as
debtors-in-possession, the Debtors are authorized under Chapter 11 to continue
to operate as an ongoing business, but may not engage in transactions outside
the ordinary course of business without the prior approval of the Bankruptcy
Court. On June 10, 2003, the Bankruptcy Court signed the Final Order approving a
debtor-in-possession loan facility pursuant to which, Regus Management Ltd., a
subsidiary of Regus PLC that is not a party to the Chapter 11 Cases ("RML"), may
loan up to eighteen million US dollars (US$18,000,000) to the Debtors during the
bankruptcy proceedings. In return for any such loan, RML was granted a
first-priority security interest in certain collateral and was also granted a
priority administrative claim for any amounts loaned to the Debtors.
In order to exit Chapter 11 successfully, each of the Debtors (either
separately or together) will need to propose, and obtain confirmation by the
Bankruptcy Court of, a plan of reorganization that satisfies the requirements of
the Bankruptcy Code. A plan of reorganization would resolve, among other things,
each of the Debtors' obligations that arose prior to the filing of the Chapter
11 cases (i.e., "pre-petition"), set forth the revised capital structure of any
newly reorganized entity and provide for its corporate governance subsequent to
exit from bankruptcy.
Under the Bankruptcy Code, the Debtors had the exclusive right for 120 days
after the Petition Date to file a plan of reorganization and, if they did so, 60
additional days to obtain necessary acceptances of their plan. Such periods were
subject to extension by the Bankruptcy Court for cause. On June 10, 2003, the
Bankruptcy Court extended the Debtors' exclusive period to propose a plan for
reorganization through July 13, 2003 and to solicit acceptances of such plan
through September 13, 2003. The timing of filing a plan of reorganization by the
Debtors will depend on the timing and outcome of numerous other ongoing matters
in the Chapter 11 Cases. Bankruptcy law does not permit solicitation of votes on
a reorganization plan until the Bankruptcy Court approves the applicable
disclosure statement (the "Disclosure Statement") relating to the reorganization
plan. Although the Debtors expect to file a plan of reorganization that provides
for the emergence of each entity from bankruptcy as a going concern, there can
be no assurance at this time that any plan of reorganization will be confirmed
by the Bankruptcy Court or that any such plan will be implemented successfully.
5
If a plan of reorganization cannot be agreed or is otherwise not confirmed
by the Bankruptcy Court, the Chapter 11 Cases of Regus Business Center Corp, and
Stratis Business Centers Inc may be converted into Chapter 7 bankruptcy cases in
which a trustee would be appointed to investigate and liquidate those Debtors'
assets for distribution to creditors in accordance with the priorities
established by the Bankruptcy Code. Further, in this event, the Chapter 11 Cases
of Regus and Regus Business Centre BV may also be converted into Chapter 7 cases
and liquidated by a trustee in the US with distributions made to creditors in
the order of priority established under the Bankruptcy Code. It is also possible
that Regus PLC and Regus Business Centre BV may have to seek bankruptcy
protection and pursue reorganization or liquidation in their respective home
jurisdictions. In either event, shareholders would be very unlikely to receive
any recovery on their investment following the bankruptcy.
Under Section 362 of the Bankruptcy Code, the filing of a bankruptcy
petition automatically stays most actions against a debtor, including most
actions to collect pre-petition indebtedness or to exercise control over the
property of the debtor's estate. Absent an order of the Bankruptcy Court,
substantially all pre-petition liabilities are subject to settlement under the
plan of reorganization.
Under Section 365 of the Bankruptcy Code, debtors may assume, assume and
assign, or reject certain executory contracts and unexpired leases, including
leases of real property and leases of equipment, subject to the approval of the
Bankruptcy Court and certain other conditions. In general, rejection of an
unexpired lease or executory contract is treated as a pre-petition breach of the
lease or contract in question. Subject to certain exceptions, this rejection
relieves a debtor of performing its future obligations under that lease or
contract but entitles the lessor or contract counterparty to a pre-petition
general unsecured claim for damages caused by the deemed breach. Generally, the
assumption of an executory contract or unexpired lease requires a debtor to cure
most existing defaults under such executory contract or unexpired lease. In the
case of a lease of non-residential real property, debtors generally have an
obligation to remain current with respect to rent and other charges due under
the lease unless and until such lease is rejected. The Bankruptcy Code (Section
502(b)(6)) further provides a limitation on certain of the damages relating to
the rejection of a lease for non-residential real property and upon certain
damages relating to any rejected guaranty of such lease by another debtor
entity.
In connection with the conduct of their businesses, the Debtors are lessees
or sublessees under approximately 85 unexpired non-residential real property
leases of office space (collectively, the "Real Property Leases"). The premises
that are the subject matter of nearly all of the Real Property Leases consist of
office space that is utilized by the Debtors in providing executive suite
business offices to their clients. Given the nature of the Debtors' businesses,
unexpired leases of non-residential real property constitute the largest
operating expense of the Debtors on an ongoing basis. On February 20, 2003, the
Bankruptcy Court permitted the Debtors to enter into a lease renegotiation
program pursuant to which the Debtors were given the flexibility to either
reject, or to negotiate significant reductions of the ongoing rent, the amount
of space leased, and other obligations under, the Real Property Leases without
further court approval (the "Real Property Renegotiation Program"). The
essential purpose of the Real Property Renegotiation Program is to reach a
settlement with as many landlords as possible in an expeditious manner regarding
the amount of space leased, the applicable rental rate, and certain other of the
landlords' claims against the Debtors' estates, including claims arising under
the Bankruptcy Code. The Debtors have been engaged in these negotiations and
continue to resolve the claims of the various lessors and to work towards the
formulation of a plan of reorganization that will allow each of the Debtors to
emerge from bankruptcy.
The Debtors are also in the process of negotiating with other creditor
constituencies in an effort to reduce their operating expenses going forward and
to enable each of the Debtors to formulate a plan of reorganization. The Debtors
are also reviewing all of their personal property contracts and leases to
determine whether such contracts or leases should be renegotiated, rejected or
assumed. With respect to non-real property related contracts and leases, the
Debtors generally have through the time of the confirmation of the plan of
reorganization to determine whether to assume or reject such contracts or
leases. With respect to leases of non-residential real property, the time for
assumption or rejection is limited under the Bankruptcy Code unless the
Bankruptcy Court extends such deadline. On June 10, 2003, the Bankruptcy Court
extended the deadline for Debtors to assume or reject non-residential real
property leases until July 13, 2003. Counterparties to these rejected contracts
or leases may file proofs of claim against the Debtors' estate for such damages.
On February 20, 2003, the Bankruptcy Court fixed a deadline to which all
persons and entities could assert a proof of claim against any of the Debtors as
on or before April 7, 2003, at 5:00 P.M. Eastern Time. Due to the possibility of
additional rejection and abandonment related claims (which may arise should the
Debtors reject additional Real property Leases on personal property leases or
executory contracts) and due to the number of claims that were filed in each of
the cases, we are unable to project the magnitude of these claims with any
degree of certainty at this time.
6
The United States Trustee for the Southern District of New York (the "U.S.
Trustee") has appointed an official committee of unsecured creditors in the
Chapter 11 Cases (the "Creditors' Committee"). The Creditors' Committee and its
legal representatives have a right to be heard on all matters that come before
the Bankruptcy Court. There can be no assurance that the Creditors' Committee
will support the Debtors' positions or the Debtors' ultimate plan of
reorganization, once proposed, and disagreements between the Debtors and the
Creditors' Committee could protract the Chapter 11 Cases, could negatively
impact the Debtors' ability to operate during the Chapter 11 Cases and could
prevent the Debtors' emergence from Chapter 11.
At this time, it is not possible to predict accurately the effect of the
Chapter 11 reorganization process on the Debtors' businesses or when they may
emerge from Chapter 11. The Debtors' future results depend on the timely and
successful confirmation and implementation of a plan of reorganization. The
rights and claims of various creditors and security holders will be determined
by the plan as well. No assurance can be given as to what values, if any, will
be ascribed in the bankruptcy proceedings to each of these constituencies, and
it is possible that the equity of each of the Debtor entities, including the
Company, will be restructured in a manner that may dilute the interests of
current holders of such equities or reduce substantially or eliminate any
remaining value of such equities or securities.
Accordingly, we urge you to exercise appropriate caution with respect to
existing and future investments in any of such securities and claims.
SELECTED FINANCIAL DATA
Our selected financial data at December 31, 2001 and 2002 and for the years
ended December 31, 2000, 2001 and 2002 have been derived from our consolidated
financial statements prepared in accordance with generally accepted accounting
principles in the United Kingdom or UK GAAP and included in this annual report.
Our consolidated financial statements have been audited by KPMG Audit Plc,
independent accountants. The auditor's report, which is also included in this
annual report, contains an explanatory paragraph, referring to the matters,
including the previously mentioned bankruptcy filing that raise substantial
doubt about the Group's ability to continue as a going concern in its present
form. Our summary financial data for the year ended December 31, 1998 and at
December 31, 1998 and 1999 have been derived from our consolidated financial
statements that are not included in this annual report. You should read the
following data with the more detailed information contained in "Item 5,
Operating and Financial Review and Prospects" included herein.
We prepare our accounts in accordance with UK GAAP, which differs in
significant respects from generally accepted accounting principles in the United
States or US GAAP. For a discussion of significant differences between UK GAAP
and US GAAP and reconciliation of net loss and shareholders' funds to US GAAP,
see note 29 to the consolidated financial statements.
7
Year ended December 31,
---------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002(1)
----------- ----------- ----------- ----------- ----------- ----------
(pound) (pound) (pound) (pound) (pound) $
(in millions except per share data)
Amounts under UK GAAP:
Income Statement Data:
Revenue (including share of joint venture).. 111.6 200.6 429.2 524.6 445.4 717.9
Less: Share of revenue in joint venture(2).. - -(3) (8.1) (12.0) (9.8) (15.8)
----------- ----------- ----------- ----------- ----------- ----------
Total revenue............................... 111.6 200.6 421.1 512.6 435.6 702.1
Cost of sales (center costs)................ (97.2) (183.5) (320.8) (434.7) (413.3) (666.1)
Exceptional item(4) ........................ - - - (38.0) (57.0) (91.9)
----------- ----------- ----------- ----------- ----------- ----------
Gross profit (center contribution).......... 14.4 17.1 100.3 39.9 (34.7) (55.9)
Administration expenses..................... (29.6) (60.0) (86.9) (91.3) (61.1) (98.5)
Exceptional item(5)......................... - (5.1) (9.5) (52.5) (35.1) (56.6)
----------- ----------- ----------- ----------- ----------- ----------
Operating (loss) income..................... (15.2) (48.0) 3.9 (103.9) (130.9) (211.0)
Share of operating loss in joint venture(2). - (0.1) (1.0) (5.6) (5.5) (8.9)
----------- ----------- ----------- ----------- ----------- ----------
Total operating (loss) income............... (15.2) (48.1) 2.9 (109.5) (136.4) (219.9)
Profit on sale of group undertakings - - - - 22.7 36.6
----------- ----------- ----------- ----------- ----------- ----------
Profit before Interest and Tax (15.2) (48.1) 2.9 (109.5) (113.7) (183.3)
Net interest payable........................ (2.0) (6.8) (6.8) (0.6) (5.4) (8.7)
----------- ----------- ----------- ----------- ----------- ----------
Loss on ordinary activities before tax...... (17.2) (54.9) (3.9) (110.1) (119.1) (192.0)
Tax on loss on ordinary activities.......... (0.8) (1.5) (9.9) (10.1) (5.5) (8.8)
----------- ----------- ----------- ----------- ----------- ----------
Loss on ordinary activities after tax....... (18.0) (56.4) (13.8) (120.2) (124.6) (200.8)
Minority interests.......................... 0.1 - 0.3 1.9 1.2 1.9
----------- ----------- ----------- ----------- ----------- ----------
Net loss.................................... (17.9) (56.4) (13.5) (118.3) (123.4) (198.9)
=========== =========== =========== =========== =========== ==========
Net loss per share - basic and fully diluted (0.04) (0.12) (0.03) (0.21) (0.22) (0.35)
Net loss per ADS - basic.................... (0.21) (0.60) (0.14) (1.05) (1.10) (1.77)
- fully diluted............ (0.16) (0.60) (0.13) (1.05) (1.10) (1.77)
Weighted average number of shares
outstanding (in thousands)............... 427,729 469,486 497,889 563,528 564,052 564,052
Balance Sheet Data (at period end):
Fixed assets................................ 54.7 126.8 244.6 251.5 110.1 177.5
Cash........................................ 48.0 72.1 169.8 117.1 58.6 94.5
Total assets................................ 142.2 268.3 544.4 486.3 228.0 367.5
Other net current liabilities(6)............ (59.9) (120.4) (187.9) (246.7) (135.9) (219.0)
Creditors: amounts falling due after
more than one year....................... (29.1) (102.4) (23.8) (33.2) (61.4) (99.0)
Minority interests.......................... (0.2) (0.2) (0.4) 0.3 (0.2) (0.3)
Equity shareholders' (deficit) funds........ (13.9) (23.7) 203.1 88.4 (28.4) (45.7)
8
Year ended December 31,
---------------------------------------------------------------------------
1998 1999 2000 2001 2002 2002(1)
----------- ----------- ----------- ----------- ----------- ----------
(pound) (pound) (pound) (pound) (pound) $
(in millions except per share data)
Amounts under US GAAP:
Income Statement Data:
Net sales.................................... 111.6 200.6 421.1 512.6 435.6 702.1
Net loss..................................... (16.4) (70.6) (16.8) (51.4) (105.3) (169.7)
Net loss per share basic and fully diluted... (0.04) (0.15) (0.03) (0.09) (0.18) (0.29)
Net loss per ADS - basic and diluted ........ (0.19) (0.75) (0.17) (0.44) (0.90) (1.46)
Balance Sheet Data (at period end):
Total assets................................. 143.3 270.7 499.3 489.8 224.4 361.7
Long-term liabilities........................ (34.1) (110.9) (23.8) (25.7) (20.8) (33.5)
Cash (including restricted cash) (7)......... 48.0 72.1 169.8 97.5 58.6 94.5
Equity shareholders' funds (deficit)......... 10.0 (29.9) 168.7 119.3 21.4 34.5
(1) Pounds sterling amounts for 2002 have been translated into US dollars using
the noon buying rate in effect on December 31, 2002 of $1.6118 =
(pound)1.00. Such information is provided for the convenience of the reader
and is unaudited.
(2) Includes our 50% interest in Regus Equity Business Centers LLC, Regus
Business Centres Ltd, our joint venture in the US with Equity Office
Properties Trust, Regus Duke-Weeks Business Centers LLC and Regus Crescent
Business Centers LLC, accounted for under the equity method of accounting.
Additionally, though not themselves in bankruptcy, the reorganization in
the Chapter 11 Cases could also impact the joint ventures in light of our
interests in such joint ventures. For example, certain of the lease
obligations for the joint ventures are being renegotiated with certain
landlords as a part of the Debtors' Real Property Renegotiation Program.
(3) Constituted revenue of (pound)9,000 in 1999.
(4) Included costs related to reduction in workstation capacity, onerous
leases, restructuring and redundancy costs in both 2001and 2002.
(5) Included costs associated with our postponed flotation on the London Stock
Exchange in 1999, with the reduction of the reward employee share options
in 2000 and in 2001 with our aborted merger with HQ Global Holdings, Inc.,
our write-down related to the ESOP and software development assets and the
non-recoverable Ryder Cup sponsorship expenditure in 2001, impairment of
acquisition goodwill in both 2001 and 2002, cost of onerous leases, aborted
business sales and mergers and a business interruption insurance receipt in
2002.
(6) Other net current liabilities are current assets (excluding cash) less
current liabilities.
(7) Restricted cash is primarily deposits held as security for lease guarantees
and represented (pound)40.9 million at December 31, 2000, (pound)31.6
million at December 31, 2001 and (pound)28.7 million at December 31, 2002.
9
Exchange Rate Information
The tables below set forth, for the periods indicated, information
concerning the noon buying rates for pounds, expressed in US dollars per pound.
Year ended December 31,
Period
Year ended December 31, Average(1) Period End
- ----------------------- ---------- -----------
1998 1.66 1.66
1999 1.61 1.62
2000 1.51 1.50
2001 1.44 1.45
2002 1.51 1.61
2003 (through June 30) 1.61 1.65
(1) The average of the noon buying rates on the last day of each full month
during the period.
Month High Low
- ----- ---- ----
December 2002 1.61 1.56
January 2003 1.65 1.60
February 2003 1.65 1.57
March 2003 1.61 1.56
April 2003 1.60 1.55
May 2003 1.65 1.60
June 2003 (through June 30) 1.68 1.63
RISK FACTORS
You should carefully consider the risks described below as well as the
other information contained in this annual report in evaluating us and our
business. If any of the following risks actually occurs, our business, financial
condition or results of future operations could be significantly harmed. In that
case, the trading price of our shares and ADSs could decline and you may lose
all or part of your investment. This annual report contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of many factors, including the risks faced by us described below and elsewhere
in this annual report. You should also refer to the other information in this
annual report, including our consolidated financial statements and the related
notes.
Risks associated with the Chapter 11 process
As discussed in "Item No. 3. Key Information in Bankruptcy Filing" the
filing for bankruptcy protection by the Debtors is a risk factor with respect to
the continued operation of our business and the value of our equity. These
uncertainties raise substantial doubt about the Group's ability to continue as a
going concern in its present form. While the goal of the Chapter 11 Cases is the
confirmation of a plan of reorganization with respect to each Debtor that
enables such Debtor to emerge as a going concern, there is no guaranty that such
reorganization efforts will be successful or that the Debtors will be able to
confirm a plan of reorganization. Additionally, any confirmed plan of
reorganization will determine the rights and claims of various creditors and
security holders and may compromise and/or otherwise discharge certain of the
existing obligations of each of the Debtors. No assurance can be given as to
what values, if any, will be ascribed in the bankruptcy proceedings to each of
these constituencies, and it is possible that the equity of each of the Debtor
entities, including the Company, will be restructured in a manner that may
dilute the interests of current holders of such equities or reduce substantially
or eliminate completely any remaining value of such equities.
Moreover, if a plan of reorganization cannot be agreed or is otherwise not
confirmed by the Bankruptcy Court, the Chapter 11 Cases of Regus Business Centre
Corp and Stratis Business Centers, Inc. may be converted into a Chapter 7
bankruptcy in which a trustee is appointed to investigate and liquidate those
Debtors' assets for distribution to creditors in accordance with the priorities
established by the Bankruptcy Code. Further, in this event, the Chapter 11 Cases
of Regus and Regus Business Centre BV may also be converted into Chapter 7 cases
and
10
liquidated by a trustee in the US with distributions made to creditors in
the order of priority established under the Bankruptcy Code. It is also possible
that Regus and Regus Business Centre BV may have to seek bankruptcy protection
and pursue reorganization or liquidation in their respective home jurisdictions.
In this event, shareholders would be very unlikely to receive any recovery on
their investment following the bankruptcy
Risks associated with the Serviced Office Market
We face competition, and if we are unable to compete effectively, we may be
unable to maintain our network of centers and we may lose customers
Barriers to entry into the serviced office market at the local level are
low. Although barriers to establishing a national or international network are
higher, we cannot assure you that these barriers will remain or will deter new
entrants or existing competitors. In addition, there is the potential for local
operators to overcome these barriers to establishing wider networks by forming
alliances. There is also the potential for property companies, hotel operators
or other companies to enter the market, either alone or in collaboration with
service providers such as us. If we are unable to respond adequately to the
competitive challenges we face or establish a sustainable competitive advantage,
we may be unable to maintain our network of centers and we may lose market
share. In addition, in more competitive markets there is pressure on our prices,
causing an adverse impact on our revenue and profitability.
The concept of serviced offices may not be widely accepted in all markets
The acceptance of the concept of serviced offices is at varying stages of
development across the different geographical regions in which we operate. For
example, in many less developed countries, such as Russia and China, serviced
offices are a relatively new concept while in the UK, the US and Western Europe,
the serviced office market is more developed. However, even in these more
developed markets, the serviced office market represents only a small percentage
of the entire office market. We cannot assure you that the concept will become
increasingly accepted around the world. If the concept is not more widely
accepted in areas where we operate our centers, our revenue and profitability
could be adversely affected.
Current drivers of the long term growth of the serviced office market may
not develop as expected and could hinder market demand for serviced offices
There can be no assurance that the factors that we expect to drive the
long-term growth of the serviced office market in the future will in fact do so.
For example, the trends towards globalization of trade and increased outsourcing
of office and related services may not develop as expected.
Changes in the structure of the property industry could reduce demand for
serviced offices
In some markets, the attraction of our products derives in part from the
long length of leases for traditional office space. A shortening of normal lease
terms or other changes in the property market could make serviced offices less
attractive to customers.
Changes in work practices and technological advances could be detrimental
to our business
Changes in work practices could occur which are detrimental to our
business, such as a move to working at home where office infrastructure is not
necessary. In addition, technological advances could occur that facilitate this
shift to working at home. For example, improvements in the connectivity of homes
around the world could allow employees of our current and potential customers to
participate in video conferences at home or participate in virtual meetings from
home using broadband Internet or other technologies.
Technological advances could require us to make substantial investments to
maintain our competitive position
We provide our customers with access to information technology and
telecommunications equipment and infrastructure for use in their businesses. We
cannot assure you that there will not be significant developments in the
technology which businesses use that would require us to make a further
substantial investment in new technology to maintain our competitive position or
which would adversely affect the attraction of our products.
11
Risks associated with Regus
Our UK operation may decide to operate a different strategy to the rest of
the Group.
On December 30, 2002, we sold 58% of our UK operations to Alchemy Partners,
a private venture capital group. While we expect that the UK and our businesses
in the rest of the world will continue to work together as before, there can be
no guarantee of this.
In this event, cross-border sales may suffer, as well as an inability to
utilize previously achieved economies of scale.
Our UK operation will no longer provide the same cash inflows for the
benefit of the rest of the Group
As a result of the sale of 58% of our UK business, we will no longer
receive cash inflows from that business to the extent that we did prior to
December 30, 2002. This means that unless our business outside the UK improves,
particularly in the US, Germany and the Netherlands, we may be forced to seek
protection for Regus plc under UK insolvency laws. Regus may not be in a
position to confirm a plan of reorganization in its Chapter 11 Case and so may
be converted to a case under Chapter 7 of the Bankruptcy Code which would mean
that a trustee would be appointed to liquidate the Company's assets and
distribute the same to creditors in accordance with the provisions of the US
Bankruptcy Code. Additionally, the Company may be required to seek protection
and reorganization or liquidation under UK insolvency laws.
As demand for our business services falls, our profitability will be
disproportionately affected due to the long-term nature of our lease commitments
We lease substantially all of our properties. The length of our leases or
the period after which we can exercise any break option in the leases is nearly
always longer, and usually significantly longer, than the duration of our
contracts with customers, the majority of which are for the short-term leasing
of serviced office space between 3 and 18 months. As demand has fallen, we have
been unable to build or maintain either occupancy, rates or prices. For example,
to combat the economic downturn, we have entered into longer term contracts with
businesses at reduced average prices, which limits our ability to increase
prices as conditions improve. When revenues decline, we are not immediately able
to reduce our lease cost base and are also constrained in doing so over the long
term. Some of our leases contain restrictions that prevent us from transferring
the lease or assigning the premises. Additionally, significant costs could be
incurred as we dispose of unprofitable centers.
A reduction in revenues has resulted in a negative impact on our cash flow,
as a consequence of the nature of our working capital cycle. If revenues were to
deteriorate further, we would need to seek external funding or sell further
assets. Currently, we have no committed bank or other facilities that are not
cash collateralized. No assurance can be given as to whether or on what terms
external sources of funding would be available. As of May 31, 2003, we had cash
in hand or in the bank of (pound)48.5 million including (pound)30.0 million of
restricted cash.
Traditional office space may become a greater competitive threat in
difficult economic conditions.
In these difficult economic conditions, landlords are more willing to offer
incentives such as rent free periods or shorter leases. This is particularly the
case in markets which have substantial excess capacity, for example, the West
Coast of the US. In addition, many companies are seeking to reduce their costs
by subletting, in many cases at below market rents.
We are dependent on our Chief Executive
We believe that our future success depends on the continued service of Mark
Dixon, our Chief Executive and the founder of our business. While we have an
employment agreement with him, this agreement does not prevent him from
terminating his employment at any time on 12 months' notice. If we lose Mark
Dixon without suitable replacement, our business and future operations may by
adversely affected.
Our leases contain upward only rent reviews that could adversely impact our
cost base
We are exposed to movements in property markets. All of our UK leases,
together with a small number of other leases, contain provisions for upward only
rent reviews linked to open market rents that could adversely impact our cost
base. These rent reviews have potential increased cost implications in periods
of relatively high rents. If open market rents were to decrease, the rent
payable by us under these leases would stay the same as that
12
for the prior period and would not decrease in line with open market rents. We
cannot assure you that we will be able to maintain our margins in these
circumstances. Likewise, in the event of a reduction in the prices that we
charge our customers, whether as a result of a reduction in demand for serviced
offices or otherwise, we would not be entitled to reduce the rent payable by us,
even following rent reviews. In addition, the majority of our other leases
contain upward only rent reviews which are fixed or are linked to the consumer
price index or other inflation-related indices.
We are exposed to foreign exchange, economic and, in some instances,
political risks as well as other geographical risks related to the 50 countries
in which we operate, which could cause an adverse impact on our business
We operate business centers in 50 countries around the world and our overall
success as a global business depends, in part, upon our ability to succeed in
differing economic, social and political conditions. We are confronted with
different legal and regulatory requirements in many jurisdictions. These
include, but are not limited to, different tax regimes, laws relating to health
and safety, and laws relating to the repatriation of funds or nationalization of
assets. Our international operations also expose us to different local business
risks and challenges, such as exchange rate risks in translating non-sterling
profits, management and control of an international organization and other
political risks.
We may incur significant costs related to the refurbishment of our centers or
the reinstatement of the properties we rent
We have not undertaken a major refurbishment exercise to date since the majority
of our centers have been opened in the last few years. We anticipate that we
will be required to refurbish those of our business centers that are more than
seven to nine years old, but we cannot assure you that the costs, timing or
disruption of refurbishment will not impact our business to an extent greater
than anticipated.
In addition, the terms of most building leases require us to ensure that a
property is kept in good repair throughout the lease term and that alterations
carried out to the premises are reinstated at the end of the lease term. We
cannot assure you that reinstatement costs and, if we have failed to comply with
our repairing obligations during the lease term, full repairing costs will not
be incurred on termination of such leases, causing an adverse impact on our
results of operations and financial condition.
You may have difficulty assessing our business because the serviced office
market is a developing and rapidly evolving sector and there are very few other
public companies in this sector
As a company in the serviced office market, you may have difficulty assessing
our business because this market is a developing and rapidly evolving sector and
there are very few other public companies in this sector. In addition, we
believe that none of these other public companies is comparable to us for
reasons related to their geographical focus and corporate structure. Performance
and trends are therefore more difficult to assess than in many other more
established sectors.
Risks Associated with the ADSs
We have voluntarily delisted from Nasdaq and we now publish annual and
semiannual financial statements and only the annual financial statements contain
certain financial information reconciled to US GAAP
In view of the relatively small number of ADSs outstanding and the low
levels of trading volumes on the Nasdaq National Market in the United States, we
decided to delist voluntarily our ADSs from Nasdaq as of November 7, 2002. Our
ADSs are currently being quoted on the over-the-counter market in the United
States, a market that is characterized with lower levels of trading and
liquidity than Nasdaq.
In November 2002, we announced our decision to revert to a semiannual
reporting format and so discontinue our past practice of publishing quarterly
financial statements. In a further effort to save costs, we also announced in
August 2002 our decision to prepare and release certain financial information
reconciled to US GAAP only in our annual report on Form 20-F. Both changes in
reporting format are in accordance with all applicable UK and US securities laws
and the requirements of the London Stock Exchange. Nonetheless, these changes
reduce the frequency of updated financial information available to investors in
our securities.
13
We expect to terminate our ADS program in the United States
As our shareholders' base has migrated away from the US and to the UK
since our initial public offering in October 2000, we have decided, in an effort
to save costs, to terminate our ADS program administered by JPMorgan Chase Bank,
as depositary, by the end of August 2003. Once our ADS program has terminated,
each holder of ADSs will receive the appropriate number of our deposited
ordinary shares, upon surrender to the depositary of each ADS held. The
depositary may charge a fee to process the surrender of the ADSs and related
issuance of our ordinary shares. Our ordinary shares are traded in pounds
sterling and may be traded only on the London Stock Exchange. Upon the
termination of our ADS program, holders of our securities in the United States
will no longer have the benefit of the services provided by the depositary such
as the conversion of any dividend payments from pounds sterling into US dollars.
This could depress the price of our ordinary shares.
Possible Consequences of Bankruptcy Filing
At this time, it is not possible to predict accurately the effect of the Chapter
11 reorganization process on the Debtors' businesses or when they may emerge
from Chapter 11. The Debtors' future results depend on the timely and successful
confirmation and implementation of a plan of reorganization. The rights and
claims of various creditors and security holders (including holders of our
shares and ADSs) will be determined by the plan as well. The filing for
bankruptcy protection raises substantial doubt about the Group's ability to
continue as a going concern in its present form. No assurance can be given as to
what values, if any, will be ascribed in the bankruptcy proceedings to each of
these constituencies, and it is possible that our shares and ADSs' will be
restructured in a manner that may dilute the interests of current holders of
such securities or reduce substantially or eliminate any remaining value of such
securities.
We are subject to the control of Mark Dixon
Our Chief Executive, Mark Dixon, through Maxon Investments BV, owns beneficially
62.5% of our issued shares. As the majority shareholder, he is able to exercise
control over our operations, including the election of our board of directors,
the declaration of some dividends, the approval or disapproval of major
corporate transactions and the determination of other matters to be decided by
the holders of our shares. Our business goals and those of Mr. Dixon may not
always remain aligned. As a result, the market price of our shares and ADSs
could be adversely affected.
Substantial sales of our shares or ADSs could cause the price of our shares and
ADSs to decline
There can be no assurance that our directors and executive officers, Maxon
Investments BV or other existing shareholders will not elect to sell shares. The
market price of our shares and ADSs could decline as a result of any sales of
shares by our directors, executive officers or shareholders or the perception
that these sales could occur. If these, or any other, sales were to occur, we
may have difficulty in selling securities in the future at a time or at a price
we deem appropriate.
Your rights as shareholders are governed by English law, which significantly
limits your rights to bring derivative actions and may make it more difficult
for you to win US securities law claims against us
We are a public limited company incorporated under the laws of England and
Wales. The rights of holders of shares and, therefore, many of the rights of ADS
holders, are governed by English law and by our memorandum and articles of
association. These rights differ from the rights of shareholders in typical US
corporations. In particular, English law significantly limits the circumstances
under which shareholders of English companies may bring derivative actions.
Under English law generally, only we can be the proper claimant in proceedings
in respect of wrongful acts committed against us. In addition, it may be
difficult for you to prevail in a claim against us under, or to enforce
liabilities predicated upon, US securities laws.
The depositary is not responsible for any failure to carry out voting
instructions of ADR holders
The depositary will not be responsible for failing to carry out instructions to
vote the ADRs or for the manner in which the ADRs are voted or the effect of the
vote.
14
Holders of our ADRs may incur fees that holders of capital stock may not incur
ADR holders may be charged a fee for issuances of ADRs resulting from
distributions of shares, rights and other property and for each surrender of
ADRs in exchange for deposited securities. ADR holders or persons depositing
shares also may be charged cable, telex, facsimile, delivery and foreign
currency conversion charges of the depositary. We pay all other charges and
expenses of the depositary and any agent of the depositary other than the
custodian.
We may amend the deposit agreement without the consent of the ADR holders
We and the depositary may amend the deposit agreement without the consent of the
ADR holders. No amendment may impair the rights of ADR holders to surrender the
ADRs and receive the underlying securities. ADR holders must be given 30 days
notice of any amendment that affects any substantial existing right or imposes
or increases any fees or charges, except for taxes and other charges specified
in the deposit agreement.
15
ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF REGUS PLC
History
Our business was founded in 1989 by Mark Dixon, our Chief Executive, shortly
before we opened our first business center in Brussels. Our business growth
accelerated after we merged our operations with the slightly larger organization
owned by Reinhold City A.B. in 1990. In 1992, an investment vehicle owned by
Mark Dixon, Maxon Investments BV, bought out the majority shareholder. By the
end of 1992, we operated 11 centers in eight countries through operating
companies owned by Regus Business Centers BV. The following table shows our
expansion since 1992. Due to our rapid expansion up to 2002, comparisons with
prior periods may not be meaningful.
Year ended December 31,
-------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
------- ------ -------- -------- -------- -------- -------- --------- --------- ---------
Centers(1)........ 16 24 35 58 97 155 245 335 411(2) 407(3)
Workstations(4)... N/A N/A 2,884 5,152 9,157 16,293 29,777 50,333 76,540 87,494
Countries......... 8 14 16 22 23 30 45 48 50 50
Employees(5)...... 63 94 207 316 542 923 1,492 2,101 2,656 2,286
Revenues (in(pound)
millions)......... 6.7 11.3 19.4 32.9 58.8 111.6 200.6 421.1 512.6 435.6
(1) At period end. Includes closed centers through the periods up to closure.
(2) Includes 16 joint ventures.
(3) Includes 18 joint ventures
(4) Represents weighted average available workstations for the period. The
number of workstations is not available for 1993 and 1994 because we closed
a number of business centers in those years and we cannot accurately assess
the impact of the closures on the number of workstations.
(5) Average total employees for the period.
In July 1998, we reorganized our operations by inserting a UK holding
company, Regus Business Centers plc, between Regus Business Centers BV and Maxon
Investments BV. On July 18, 2000, we changed our name from Regus Business
Centers plc to Regus plc. Regus plc was incorporated in England and Wales as a
public limited company under the laws of England and Wales. Our principal
executive offices are located at 3000 Hillswood Drive, Chertsey KT16 0RS,
England and our telephone number is (44) (1932) 895-000. Regus Business Centers
Corp., our US headquarters, is located at Suite 412, 100 Manhattanville Road,
Purchase, NY 10577 and its telephone number is (914) 304-4100.
Maxon Investments BV owned all of Regus Business Centers plc until August
1998 when a consortium comprising an affiliate of Bankers Trust, now part of
Deutsche Bank, and two affiliates of Apollo acquired 17.5% of our share capital
for cash consideration of $100 million, of which $83 million was paid to us by
way of subscription for new shares and the balance of $17 million was paid to
Maxon Investments BV in consideration for the sale of existing shares. In
October and November 1999, we allotted a further 2.9% of our issued share
capital to two affiliates of Deutsche Bank and two affiliates of Apollo, for a
total consideration to us of (pound)20 million, as part of a wider arrangement
to which Maxon Investments BV was a party. The wider arrangement consisted of
Maxon Investments BV granting to those affiliates of Deutsche Bank and Apollo
options over a further 0.8% of our existing issued share capital (subject to
proportionate adjustment to reflect any reorganization of us) for an aggregate
strike price of (pound)1 in consideration of the waiver of certain rights held
by those parties.
In October 2000, we completed an initial public offering of 128,829,075
shares, raising (pound)250 million ($373 million) for the Company and (pound)81
million ($121 million) for certain selling shareholders. At that time, we listed
our ordinary shares on the London Stock Exchange and our ADSs were listed on
NASDAQ.
On April 23, 2001, we acquired Stratis Business Centers, Inc. in the US.
Under the terms of the agreement, we paid a total purchase price of $10 million.
Of this, $5 million was paid to the shareholders of Stratis in cash. The balance
of the purchase price was paid in shares of Regus plc, some of which are
restricted.
16
On April 25, 2001, we acquired Satellite/Skyport Conference Centers, an
operator of business centers in Belgium and the Netherlands, for NLG8 million
($3 million).
On June 4, 2001, we announced we were in discussions relating to a possible
transaction with Frontline Capital Group and HQ Global Holdings, Inc. On June 7,
2001, we announced that such discussion had been terminated. Costs of $4.7
million relating to the proposed transaction were recognized in the second
quarter of 2001. HQ Global Holdings, Inc. have subsequently entered bankruptcy
reorganization under Chapter 11 of the Bankruptcy Code.
On December 27, 2001, we entered into a subscription agreement pursuant to
which we issued (pound)40 million of non-convertible bonds. Following a
shareholder meeting held on February 13, 2002, these were subsequently exchanged
for (pound)40 million of 5 per cent convertible debentures and warrants to
purchase 5 million ordinary shares. All of the convertible debentures have been
repaid at par; warrants to purchase 2.5 million ordinary shares remain
outstanding.
On November 7, 2002, we voluntarily delisted our ADSs from the Nasdaq
National Market and our ADSs are currently being quoted on the over-the-counter
market in the United States. Our ordinary shares continue to be listed on the
London Stock Exchange.
On December 20, 2002, we entered into an agreement for the sale of 58% of
our UK business to Rex 2002 Limited, beneficially owned by Alchemy Partners, who
subscribed (pound)16.3 million for new shares and paid Regus an immediate cash
consideration of (pound)25.6 million ($41.3 million) for existing shares in the
UK business. At the same time Regus repaid a (pound)10.5 million ($16.9 million)
loan from the UK business, leaving the Regus Group with net cash from the
transaction of (pound)15.1 million ($24.3 million). In addition, deferred
consideration is receivable by Regus in two tranches: the first tranche of up to
(pound)10 million ($16.1 million) is dependent on the EBITDA (Earnings Before
Interest, Tax, Depreciation and Amortization) for the year ended 31 December
2002 and net liabilities and net cash at 31 December 2002 of the UK business
meeting certain parameters; and a second tranche equivilent to 70% of the amount
by which EBITDA for the year ended 31 December 2003 exceeds (pound)29 million
($46.7 million). (pound)10 million ($16.1 million) has been received in
connection with the first tranche of deferred consideration.
As described more fully in "Item 3. Key Information - Bankruptcy Filing",
on January 14, 2003, we filed a voluntary petition for relief under Chapter 11
of the Bankruptcy Code in the Court. The affected companies are Regus plc, Regus
Business Centre Corp, Regus Business Centre BV and Stratis Business Centres,
Inc. We do not expect to be in a position to file and distribute a Plan of
Reorganization (along with a Disclosure Statement, in a form approved by the
Bankruptcy Court, describing the details of such Plan of Reorganization) for the
approval of creditors of these companies until later this year.
Capital Expenditures
Capital expenditures decreased to (pound)20.3 million in 2002 from
(pound)128.5 million in 2001; it was (pound)86.6 million in 2000 and (pound)75.7
million in 1999. The earlier increases in capital expenditures were primarily
due to the purchase of office furniture, fixtures and fitting and telephone and
other office equipment, related to fit-outs of centers opened in each period.
Capital expenditure is depreciated over periods between 2-10 years. See "Item
18. Financial Statements". The reduction in capital expenditures in 2002 was
primarily due to a reduction in new center openings, plus an increased focus on
cash management.
Notwithstanding our cash flow from operating activities, the rate of
expansion in new center openings since 1997 was only partially financed by
operating cash flow. The average capital expenditure on fixtures and fittings
for a new business center and center expansions fell from approximately
(pound)1.0 million per center in 1999 to approximately (pound)0.8 million per
center opened in 2000 but rose to approximately (pound)1.2 million per new
center opened in 2001and 2002. This increase is primarily due to the average
size of centers opened during the year being significantly higher than centers
already opened.
All start-up costs and maintenance expenditure are charged to the profit
and loss account as incurred. Every seven to nine years, however, a major
refurbishment is expected and such expenditure would be included as capital
expenditure. However, the recent opening of most centers means that, with one
exception funded by the freehold owner of the entire building, no centers to
date have required such a refurbishment.
We have suspended our new center opening program while we consolidate
our position in difficult economic circumstances. The only new centers being
opened are those in respect of which leases or agreements for
17
lease were signed prior to July 2001. See "Item 4. Information on the Company -
Property and Supplier Relationships". We expect to incur (pound)2.4 million of
capital expenditure on these new centers in 2003. As at May 31, 2003, we have
incurred capital expenditure of (pound)1.1 million.
BUSINESS OVERVIEW
We are a provider of high quality business services to the global economy.
Our international network of adaptable business centers allows our customers to
outsource completely or in part their workspace requirements. Our business
center offerings include a client driven mix of workstations, conference rooms
and related support services, such as video conferencing, telecommunications,
Internet connectivity, reception and secretarial services. Customers can use all
or part of our business centers for durations of one hour to over ten years.
Our serviced business centers represent an alternative to traditional
office space. Located in downtown business districts, suburban office parks and
near transportation gateways, we can tailor our business centers to a variety of
customer requirements. These business services offer advantages of convenience,
flexibility and immediate availability. In addition, our business services can
cost less than traditional office leasing, depending upon individual
circumstances, such as the number of employees in the office and the term of
occupancy.
The following table shows the 50 countries in which we operated by region
and the number of centers in each country as of December 31, 2002 (giving a
total of 407 business centers worldwide).
UK and Ireland Italy (9) Americas China (6)
Ireland (2) Latvia (1) Argentina (1) Egypt (1)
UK (95) Luxembourg (1) Brazil (5) Israel (2)
The Netherlands (24) Chile (2) Japan (4)
Rest of Europe Norway (3) Mexico (7) Malaysia (1)
Austria (4) Poland (3) Panama (1) Morocco (1)
Belgium (10) Portugal (3) Peru (1) Philippines (2)
Czech Republic (3) Romania (1) US (96) Saudi Arabia (1)
Denmark (5) Russia (2) Canada (5) Singapore (2)
Finland (2) Slovakia (1) South Africa (6)
France (21) Spain (9) Rest of World Thailand (1)
Germany (34) Sweden (8) Australia (4) Tunisia (1)
Greece (2) Switzerland (5) Azerbaijan (1) Vietnam (2)
Hungary (3) Turkey (1) United Arab Emirates (1)
Ukraine (1)
Our growth has enabled us to develop a broad customer base, although a
large proportion of our customers, based on revenue, operate in sectors such as
information technology, financial services, consultancy and telecommunications.
Our customers increasingly demand technologically sophisticated and
flexible business services, such as ours. The desire of our customers to capture
the benefits offered by business models based upon outsourcing office and
related services, globalization of trade, advances in technology and changes in
work practices drives this demand for our business services. Our business
services assist our customers to compete effectively in an economic climate
increasingly characterized by the speed, flexibility and technology of the
Internet. We believe that new and established companies in varied industry
segments will continue to realize the competitive advantages offered by our
business services.
The Regus Strategy
Our long term goal is to become the leading provider of high quality
business services to the global economy. In bringing together people, property
and technology, we aim to provide a complete outsourced workspace to our
customers, allowing those customers to focus on their own businesses. The
continued worldwide economic downturn adversely affected our business in 2001
and 2002. The poor trading conditions required us to continue
18
with our modified short term strategy in order to meet the challenges presented
by prevailing economic conditions as follows:
Corporate Restructurings in the US and Germany
The purpose of the Chapter 11 Cases is to allow for restructuring and
reducing obligations in the US that we are hopeful will be accomplished through
a confirmed plan of reorganization. However, as described in "Item 3. Key
Information - Risk Factors" and "Item 3 Key Information - Bankruptcy Filing",
there are risks associated with the Chapter 11 Cases, including the risk that
the Debtors will not be able to confirm a plan of reorganization which may
result in the liquidation of the Debtor's assets or a plan of reorganization may
be confirmed that dilutes, reduces or eliminates the value of the equity of the
Company. The filing for bankruptcy protection raises substantial doubt about the
Group's ability to continue as a going concern in its present form.
We have reorganized our German business, closing 8 centers and making an
insolvency filing for one of our three German subsidiaries.
Suspension of New Center Openings
In 2002 we spent (pound)20.3 million on capital expenditure most of which
relates to 19 centers. In addition, new centers made a negative contribution
before exceptionals of (pound)7.6 million in 2002. We have decided that until
trading conditions improve we will not commit to any new centers which require
us to incur capital expenditure or start up losses. Accordingly, in the near
term, any new centers will either be management or franchise contracts.
Maximize Occupancy
In view of the fixed nature of a large proportion of our cost base, our
strategy is to maximize occupancy in our centers wherever possible. We have
introduced a new pricing policy which offers our customers lower prices in
return for longer term contracts, although this policy limits our ability to
increase prices as conditions improve. In addition, in certain markets we have
introduced additional incentives for limited time periods.
Improve Customer Value Proposition
We have restructured our products with a view to making them easier to
understand and, therefore, easier to buy. We have developed a series of
comprehensive packages covering voice and data connectivity and secretarial
services which are all-inclusive and remove the need for any add-on costs. We
have also successfully renegotiated certain elements of our variable costs such
as telephones and have passed these reductions onto customers through lower
prices.
Continued Focus on the Cost Base
We continue to look for opportunities to reduce both the variable and fixed
cost base. In particular, we are trying wherever possible to renegotiate our
leases to reduce rent. In addition, tight control over all discretionary
expenditure remains a feature of our near term strategy.
Over the longer term, our strategy remains unchanged with the following key
elements:
Further Develop the Regus Brand
We believe that raising awareness of the benefits of using serviced offices
and building a major international business services brand will further
encourage use of our business centers by important corporate customers. In
addition, we intend to leverage our brand and reputation for providing high
quality fixtures, fittings and infrastructure in our centers.
Improve the Yield from Existing Centers
We seek to continue to increase the revenues and profitability of our
existing business centers as they mature. We aim to achieve higher yields in the
following ways: steady elimination of price discounts in line with improved
occupancy, expanding the range and penetration of services offered to customers
within each business center and extracting cost savings through our purchasing
power.
19
Actively Manage Risk
Our business faces, among others, political, economic, liquidity and
capital risks, due to our international growth. We aim to continue to manage
such risks through the following mechanisms.
o At December 31, 2002, we had approximately 58,000 customers, spread across
50 countries. For the year ended December 31, 2002, no single customer
accounted for more than 2% of our total revenue. Our broad customer base
mitigates our risk of exposure to any one customer or market.
o We have entered into profit and risk sharing lease agreements with building
owners, called "turnover leases" and "part-turnover leases", and we expect
to enter into additional turnover and part-turnover leases. Under these
arrangements, a property owner agrees to defer base rents payable on a new
business center in exchange for future profit sharing if the business
center successfully matures.
o We have established joint ventures and intend to establish additional joint
ventures or make strategic arrangements with established property companies
through which we share the costs associated with acquiring prime office
locations for our business centers.
Expand Internationally Through Franchising and Management Contracts
We believe that the international expansion of our global network of
business centers can be accelerated though the selective franchising of our
brand and through the operation of management contracts. We will adopt
franchising in all countries and regions throughout the world to add to our
existing centers, so as to increase our geographic and locational presence. The
adoption of both franchising and management contracts allows the company to
secure income through royalties as well as the intangible benefit of a creating
an expanded global network without additional capital cost.
Management contracts will also prove an opportunity for us, as the current
economic climate may create opportunities for us by the placement of one of our
centers in buildings and our appointment as the manager of that center on behalf
of the building owner or landlord.
The Stratis brand is intended to appeal to customers on a tighter budget
than the traditional Regus customer. Hence, Stratis maintains an emphasis on
serving local or regional businesses rather than multinational ones. Stratis was
acquired in April 2001, (see "Item 4. Information on the Company - History and
Development of Regus plc"). Stratis filed a voluntary petition for relief under
Chapter 11 of the US bankruptcy code, (see "Item 3. Key Information - Bankruptcy
Filing").
Focus on Outsourcing Contracts.
We believe that the impact of the economic downturn is making more
organizations consider outsourcing their office requirements. For example, the
following contracts were in place as at March 31, 2003: Siebel has a global
outsourcing agreement with us, under which they occupy 201 workstations in 18
countries; DMR Consultancy had 268 workstations in 4 countries; Veritas had 140
workstations in 16 countries; and Bloomberg had 256 workstations in 12
countries.
We continue our policy of offering better prices and terms in order to win
this business and maintain longer term contracts. Partly as a result of this our
average price per workstation has fallen by 33% from (pound)780 in January 2002
to (pound)512 in May 2003.
Products and Services
Our business centers are the core of our offering of high quality global
business services. We design our business centers around a flexible arrangement
of workstations, conference rooms and reception areas. We staff all of our
business centers with employees trained to provide our customers with a high
level of service. We assure our customers of a uniform level of staff
professionalism through our training courses offered through Regus Academy, our
training and development program. Our global network of business centers offers
high standards of office design, fixtures, fittings, technology and staff. The
flexibility of our business centers has allowed us to develop a suite of
additional products and services that meet the requirements of all sizes of
corporate customers.
These products and services are designed to work as "components" that
integrate well into a customer's existing office infrastructure and with
emerging trends of outsourcing non-core activities and globalizing business
20
models. We market and sell these products and services together as complete
solutions and separately as components of a customer's existing office
infrastructure, depending on customer requirements.
The products and services that we offer in our business centers include the
following:
Workstations
Our principal business service, currently accounting for a substantial
proportion of our revenues, involves agreeing to use one or a number of our
workstations. Each workstation is in a fully equipped office with
telecommunications systems, data transmission services, reception areas and
supported, as needed, by trained receptionists and secretaries. A customer can
use a flexible number of workstations that vary in size from a private office
for a single individual to a large open plan office with multiple workstations.
All our workstations are furnished to uniformly high standards. Customers can
use workstations for any duration between one hour to ten years and beyond.
Customers are billed monthly on an itemized invoice.
Conference Rooms
Our conference rooms vary in size from small interview rooms to large
conference rooms accommodating up to 100 people. While we generally provide our
customers with conference rooms along with workstations, conference rooms are
also separately available at short notice for periods of one hour to one day or
longer to our customers who do not also require workstations.
Link
We offer a professional and confidential telephone answering and mail
handling service that allows small and medium sized business customers to
operate a virtual office with a business address at one of our business centers.
We have invested heavily in telecommunications technologies so that our
operators can answer each call with personalized greetings for each of our
customers. If desired, we can transfer calls to forwarding numbers or provide
callers with messages from our customer.
Video Conferencing
Most of our business centers maintain high quality video conferencing
facilities, bookable by the hour. These facilities are available to those
customers who use workstations at our business centers and to those customers
who only require video conference capability.
Touchdown
We offer a membership program which, upon completion of simple registration
procedures, provides customers with preferential, instant, easy access to our
international network of business centers. Membership allows a customer enhanced
flexibility to use our products and services at short notice anywhere in our
global network to suit our customers' business needs.
Netspace
We provide Netspace to companies that want to outsource the management of their
own office space. With Netspace, we provide all or a substantial amount of the
office services and manage the office without disturbing the customer's existing
office lease arrangements.
Related Services
We also offer, in most business centers, access to our global wide area
network which provides software and data transmission services as part of the
standard services available to our customers. In addition, we provide customers
using our workstations, conference rooms, Link and video conferencing products
with related services and facilities. These services, for which we charge
separately, include telephones, fax, photocopying, secretarial services,
catering, storage and parking.
We believe that businesses that are initially attracted to one of our
particular products, for example, a short term need for a single workstation,
may become convinced by our business center concept and use us as a solution to
their requirements for longer term workspace and related value added services.
21
Sales and Marketing
Our sales and marketing strategy, which involves a constant appraisal and
improvement of product mix, investment in local advertising and a continuing
focus on service quality, has been key to developing the Regus brand during
2002. During September 2002, we capitalized on the opportunity to increase brand
awareness and grow concept understanding in key markets through the world, via
our sponsorship of the Ryder Cup (which has now ended). In addition, during
November 2002, we were able to use our sponsorship of the Regus London Film
Festival and Regus London Film Festival on Tour to increase brand awareness in
the UK.
We market and sell our products and services around the world. As of
December 31, 2002, we had approximately 177 employees engaged in sales and
marketing across the globe. Our sales and marketing team aims to attract new
customers, to develop and expand relationships with existing customers and to
build a major business services brand. A team of telesales representatives and
analysts supports the direct sales functions. As an indirect sales channel, we
have established relationships with real estate brokers and other agents to
refer us business.
We have consistently invested in marketing activity. We use a wide range of
approaches, depending upon the market and specific sales objectives, in order to
provide sales leads. Our marketing campaign includes commercial radio and
television, brochures, newspaper and magazine advertising and direct marketing
mailings. We measure the efficiency of marketing activity on a cost per enquiry
and cost per sale basis.
Customers
We sell our products and services to a broad base of customers in many
different industries around the world.
At December 31, 2002, we had approximately 58,000 customers, spread across
50 countries. Many of our customers are major international corporations. For
the year ended December 31, 2002, no single customer accounted for more than 2%
of our total revenue. Our customers are drawn from a wide range of industry
sectors, including consulting, energy, financial services, information
technology, media, pharmaceuticals and telecommunications.
Property and Supplier Relationships
We consider the location of business centers to be of paramount importance
and have generally positioned them in city centers, at important transportation
hubs, such as major airports, and in business parks.
In 2002, despite signing no new lease commitments, we continued to develop
our global network by adding a further 18 centers and closed 22 centers. As a
result of opening centers that are generally larger, we increased the number of
workstations available at the end of the year by 14%, to 87,494, compared with
76,540 at the end of 2001. The rate of growth in the number of workstations may
become negative as a result of center closures. We have signed no new leases
since July 31, 2001, other than 1 lease as a result of a joint venture
agreement, and 3 as a result of new Netspace or management contracts. We expect
to open 6 (excluding franchised centers) new centers in 2003.
We continue to undertake renegotiations of the rental costs under our
leases wherever commercially possible. We have had some success in this
strategy, particularly in the Netherlands and Germany, where we expect to make
cash savings of approximately $90 million (on an annualized basis) on total
rental costs existing prior to these negotiations. In addition, we have to date,
through intensive negotiations in our Chapter 11 proceedings in the US, reduced
total rental costs by $44.3 million (on an annualised basis). We believe that,
if we can confirm a Plan of Reorganization, we will have reduced our total
rental obligations by $133.5 million over the next 3 years.
We work closely with the owners of our buildings and with our partners who
are involved in new products and initiatives. As the business has grown and
matured, we have strengthened our relationships with our principal suppliers, on
a mutually beneficial basis, and have achieved significant purchasing discounts
on certain products. We continue to develop non-exclusive partnerships with
"best-in-class" companies to facilitate entry into new and/or existing markets.
These enable us to introduce new products more efficiently and quickly and to
reduce the risk of doing so.
22
Competition
The serviced office market is new and fragmented. Many participants are
local entrepreneurs operating a small number of business centers. In the UK, for
example, the Business Center Association Limited comprises over 160 members who
operate business centers. Some market participants, however, have emerged to
compete on a broader geographic basis.
Principal Competitors
We believe that our principal competitors fall into the following
categories:
Traditional Office Space
In deciding how to meet their workspace requirements, our potential
customers will have the choice of either using a provider of serviced offices
such as ours or of leasing, building out and staffing traditional office space
themselves. As most businesses have historically relied on the internal
provision of office infrastructure, traditional office space remains the first
choice for many of our potential customers. Nevertheless, we believe that the
benefits of serviced offices will continue to persuade potential customers to
outsource their workspace requirements and rely on our expertise in providing
high quality business services.
In these difficult economic circumstances, we are seeing that traditional
office space is a major competitive threat as landlords are more willing to
offer incentives such as rent free periods or shorter leases. In addition, many
companies have found themselves with surplus office space which they are seeking
to sublet, at rates which are often below their own rent.
Global Serviced Office Competitors
HQ Global Workplaces, Inc. or HQ and, to a more limited extent, WWBCN, an
association of independent business center operators based mainly in Europe and
North America, are the only other serviced office providers with significant
presences on more than one continent.
HQ filed for bankruptcy reorganization under Chapter 11 of the Bankruptcy
Code on March 13, 2002. HQ recently filed its proposed plan of reorganization
and disclosure statement.
Regional Serviced Office Competitors
Two companies have established a large international presence in a single
region. Servcorp operates business centers in 33 cities principally in Australia
and the rest of the Asia Pacific region. Servcorp believes it is the market
leader in Australia, Japan, Singapore, Thailand, Malaysia and New Zealand. Ihr
Buro operates business centers mainly in Europe.
National Serviced Office Competitors
In addition to regional competitors, several businesses operate in the
serviced office market on a national level. Significant national competitors
include Marylebone Warwick Balfour, Citibase and FirstBase plc in the UK and
Your Office in the US. Many of these companies do not operate national networks
on the same scale as us and target products to different segments of the market
than we do.
Local Serviced Office Competitors
Within many countries where we operate, a large number of small,
entrepreneurial businesses operate serviced offices. These local businesses tend
to target smaller and less established companies and typically offer business
centers with fewer services than we do. As a result, we do not generally regard
these providers as a competitive threat for the near term. However, we
anticipate that as the market consolidates or as alliances emerge in the longer
term, some of these local businesses may represent more serious competition.
Market Entry by Property Owners
Our experience has been that property owners are attracted to the higher
yields that serviced offices can provide, but recognize their lack of
operational infrastructure to manage a business providing serviced offices. As a
23
consequence, we believe that property owners will continue to enter the serviced
office market through joint ventures and other partnerships but not as
independent competitors. Nonetheless, we anticipate that in the future some
property owners may enter the serviced office market on a standalone basis and
could provide us with new competition.
Intellectual Property and Other Proprietary Rights
We regard the protection of our intellectual property as critical to our
future success, and we rely on a combination of copyright, trademark, and trade
secret and contractual restrictions to establish and protect our proprietary
rights in products and services.
We have acquired trademark registration of the name "Regus" and the "Regus"
logo in the countries in which we have more established operations such as the
UK and other countries in Europe. We have made applications to register the name
"Regus" and the "Regus" logo as trade marks in a number of countries in which we
have recently begun to operate, or propose to franchise. In the US, we have
acquired trademark registrations of "Regus" and the "Regus" logo and we have
made applications to register "Touchdown" and "Netspace".
To date, we have not received any material notifications of trademark
infringement.
ORGANIZATIONAL STRUCTURE
Regus plc is the holding company for a number of undertakings which are our
operating companies. The following is a list of our undertakings as at May 31,
2003.
% of equity
Jurisdiction of and
Company Incorporation votes held
- ------- ------------- ------------
Regus Business Centre SA Argentina 100
Regus Centres Pty Ltd Australia 100
Regus Business Centre GmbH Austria 100
Skyport Bruxelles NV Belgium 100
Regus Business Centre SA Belgium 100
Regus Belgium NV Belgium 100
Regus do Brasil Ltda Brazil 100
Regus Business Centre Ltd Canada 100
Regus Business Centres Canada LP +++ Canada 60
Regus Business Centre Chile Ltda Chile 100
Regus Business Service Co Ltd China 95
Regus Business Services (Shanghai) Ltd China 100
Regus Colombia Ltda Colombia 100
Regus Business Centre sro Czech Republic 100
Regus Copenhagen ApS Denmark 100
Regus Business Centre (Egypt) Egypt 100
Host Regus Ltd England 100
Regus Business Centres (Holdings) Ltd England 100
Regus Business Centre Trading Ltd + England 100
Regus Business Centres (UK) Ltd# England 42
Regus City Ltd# England 42
Regus Management Limited England 100
Regus (UK) Limited# England 42
Regus Holdings (UK) Ltd# England 42
Regus (Manchester) Ltd# England 42
Regus Business Services Ltd# England 42
Regus Investments Ltd* England 100
Park Business Centres Ltd +++# England 21
Regus Investments Ltd England 100
Regus Finland Oy Finland 100
Regus Paris SA France 100
Regus Roissy SA France 100
Regus Business Centres GmbH Germany 100
Regus GmbH & Co KG Germany 100
24
% of equity
Jurisdiction of and
Company Incorporation votes held
- ------- ------------- ------------
RBC Deutschland GmbH Germany 100
Regus Hellas SA Greece 100
Regus Business Centre Ltd Hong Kong 100
Regus Central Europe Trading and Servicing Ltd Hungary 100
Regus Kft Hungary 100
Europa Business Centre Ltd Ireland 100
Regus Ireland Ltd Ireland 100
Regus Finance Ireland 100
Regus Franchise International Limited Ireland 100
Regus Business Centres Ltd Israel 100
Regus Business Centre Srl Italy 100
Regus Business Centre Italia SpA +++ Italy 65
Regus Japan KK Japan 100
Regus Korea Limited Korea 100
SIA Regus Business Centre Latvia 100
Regus Luxembourg SA Luxembourg 100
Regus Centres Sdn Bhd Malaysia 100
Regus Business Centre SA de CV Mexico 100
Regus Services SA de CV Mexico 100
Regus Maroc SARL Morocco 100
Regus Amsterdam BV Netherlands 100
Skyport International BV Netherlands 100
Regus Business Centre BV Netherlands 100
Regus International Holdings BV ++ Netherlands 60
Satellite Business Centre Schiphol BV Netherlands 100
Skyport Business Services BV Netherlands 100
Regus Business Services Ltd Northern Ireland 100
Regus Business Centre Oslo AS Norway 100
Regus Business Centre (Panama) SA Panama 100
Regus Business Centre (Peru) SA Peru 100
Regus Centres Inc Philippines 100
Regus Business Centre SP zoo Poland 100
Regus Business Centre Ltda Portugal 100
Regus Business Centre (Romania) SRL Romania 100
LLC Regus Business Centre Russia 100
Regus Centres Pte Ltd Singapore 100
Regus Business Services Marina Pte Ltd Singapore 100
Regus Singapore Business Centre Pte Ltd Singapore 100
Regus Business Centre Bratislava sro Slovakia 100
Regus Business Centre SA Spain 100
Business Centre Gothenburg AB Sweden 100
Business Centre Stockholm AB Sweden 100
Regus Business Centre (S) SA Switzerland 100
Regus Business Centre (Tanzania) Ltd Tanzania 100
Regus Centre (Thailand) Ltd Thailand 100
Regus Tunisie SARL Tunisia 100
Regus Is Merkezi Isletmeciligi Ltd Sirketi Turkey 100
Regus Business Centres (Ukraine) Ukraine 100
Regus Business Centre Corp USA 100
Regus Crescent Business Centres LLC +++ USA 50
Regus Duke-Weeks Business Centres LLC +++ USA 50
Regus Equity Business Centres LLC +++ USA 50
Stratis Business Centers, Inc USA 100
Regus Venezuela C.A. Venezuela 100
Regus Centre (Vietnam) Ltd Vietnam 100
* Regus plc owns these subsidiaries directly.
25
+ Our Azerbaijan business operates as a branch of this company.
++ Our South Africa business operates as a branch of this company.
+++ Joint ventures.
# Alchemy Partners owns the balance of shareholdings in these companies
(purchased as part of the sale of the UK business - see "Item 4 . Information on
the company - History and development of Regus Plc.")
PROPERTIES
We consider the location of our business centers to be of paramount
importance and we have generally restricted the placement of our business
centers to city centers, important transportation hubs, such as major airports,
and business parks. We have an international property team, which actively
manages our relationships with major property owners worldwide. Once we have
decided to lease a property, our team of designers, contractors and suppliers
work to build out the workstations and conference rooms to the consistently high
quality expected from our business centers.
Leasing
We lease substantially all of our property portfolio. Across the portfolio,
there are variations in lease durations and lease termination provisions, due to
differences in leasing practices in the different jurisdictions of our
operations. Accordingly, our ability to mitigate our obligations in the event of
a downturn in the performance of our business centers, by terminating or
renegotiating our leases, differs with the geographic variations.
A majority of our leases are on conventional rental terms and as such
provide for regular payments of agreed rent and for periodic reviews of rent
levels. Rent reviews are normally on terms in accordance with local market
practice. For example, UK leases provide for regular upward only rent adjustment
to the prevailing market rate, if higher than the agreed rent, while other
jurisdictions may have regular fixed rent increases or rent increases linked to
market indices. Upward only rent reviews mean that in a declining market, rents
can never be lowered.
Notwithstanding the difficulty in negotiating reductions in rent on
conventional leases, we have undertaken a large number of renegotiations of
lease terms. To date, through intensive negotiations in the Chapter 11 Cases, we
have reduced total rental costs in the US by $44.3 million (on an annualised
basis). Regus Business Centre Corp currently believes that if it can confirm a
plan of reorganization, it will have reduced its total rental obligations by
$133.5 million over the next 3 years. In addition to these reductions in the US,
these renegotiations have been most successful in the Netherlands and Germany,
where we have seen a reduction in rent of approximately (euro)5.7 million (on an
annualized basis) since June 2002.
In order to mitigate our exposure on long-term lease commitments as well as
aligning our interests with those of the building owner, we have entered into
some profit and risk sharing lease arrangements called "turnover leases". In a
typical turnover lease, we will only pay rent when and to the extent that the
center is cumulatively profitable after deducting operating costs and our
management fee. To the extent that there are sufficient cumulative profits, we
will pay the rent and also any accumulated rent unpaid since the start of the
lease. Once, and if, we have paid all the rent due, any remaining surplus profit
is paid out to us and the building owner annually on a pre-agreed basis which is
normally 50/50.
As a variant of this, we have also entered into "part-turnover leases",
whereby a portion of the rent which is the guaranteed rent is paid every quarter
to the landlord whether or not there is any profit. In these leases, usually a
smaller element of the rent paid to the landlord is dependent upon profit than
under a turnover lease.
Building owners will generally have a right to convert turnover and
part-turnover leases to conventional rent terms on a specified date, being no
earlier than the end of the fifth year of the lease term which, if exercised,
would normally give rise to right for us to terminate the lease.
Where we enter into formal joint ventures with property owners, the
economic result in respect of each property within the arrangement is very
similar to a turnover lease. In a typical joint venture, we share with our
partners the start-up costs of opening business centers, including the
fitting-out of the business centers. We receive a management fee for each center
which is deducted from the customer revenue which we collect. The rent is paid
by the joint venture vehicle to the property owner out of the remaining funds.
Finally, after all expenses, any profits in the joint vehicle are distributed
usually on a 50/50 basis. These joint ventures help us to mitigate the risk we
face in leasing properties for our business centers.
26
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECT
OPERATING RESULTS
The following discussion of our financial condition and results of
operation should be read in conjunction with the consolidated financial
statements and notes, included elsewhere in this document. Our consolidated
financial statement are prepared in accordance with UK GAAP which differs from
US GAAP as discussed in note 29 to the consolidated financial statements. This
discussion contains forward looking statements based upon current expectations
which involve risks and uncertainties. Actual results and timing of events may
differ significantly from those projected in these forward looking statements
due to a number of factors, including those set forth on page 9 of this document
in the section headed "Risk Factors" and elsewhere in this document.
It should be noted that the Chapter 11 Cases may have a significant impact
on operating results for the period commencing after the Petition Date. At this
time, it is not possible to predict accurately the effect of the Chapter 11
reorganization process on the Debtors' operating results or when, or if, they
may emerge from Chapter 11. The Debtors' future results depend on the timely and
successful confirmation and implementation of a plan of reorganization.
Overview
We are a provider of high quality, business services to the global economy.
Our international network of adaptable business centers allows our customers to
outsource completely or in part their workspace requirements. Our business
center offerings include a client driven mix of workstations, conference rooms
and related support services, such as video conferencing, telecommunications,
Internet connectivity and reception and secretarial services. Customers can use
all or part of our business centers for durations of one hour to over ten years.
Our serviced business centers represent an alternative to traditional
office space. Located in downtown business districts, suburban office parks and
near transportation gateways, we can tailor our business centers to a variety of
customer requirements. These business services offer advantages of convenience,
flexibility, immediate availability and cost over traditional office leasing.
The following table sets forth, for the periods indicated, the number of
our centers, workstations, countries in which we have centers and employees.
Year ended December 31,
---------------------------------------------
2000 2001 2002
------------ -------------- ------------
Centers(1)...................... 335(2) 411(3) 407(4)
Workstations(5)................. 50,333 76,540 87,494
Countries....................... 48 50 50
Employees(6).................... 2,101 2,656 2,286
(1) At period end. Including closed centers through the periods up to closure.
(2) Includes 3 centers closed and 17 centers expanded during 2000.
(3) Includes 11 centers closed and 23 centers expanded during 2001.
(4) Includes 22 centers closed during 2002.
(5) Represents weighted average available workstations for the period.
(6) Average total employees for the period.
Due to our rapid expansion during the four years ended December 31, 2001,
comparisons with prior periods may not be meaningful.
Our network of centers includes franchises, joint ventures and management
contracts in line with our new growth strategy.
27
Income Statement Items
Workstations
To describe the trends in our results in this discussion and analysis, we
have broken down our results by workstation, established vs. new centers and
geographic region. The number of "workstations" in a center is determined by the
number of persons who could be supported in the available space based on
management's assessment, taking into account local business customs. This
determination is made for available space at its opening and does not change
over time. The number of workstations in centers of the same size varies
considerably based on differences in local work practices and can vary over time
as existing centers are expanded by taking additional space in the same
building. Whenever we use the term "workstations" in this Annual Report, we are
referring to weighted average available workstations within a period regardless
of whether these workstations are occupied. Weighted average available
workstations for any period is calculated by adding the number of available
workstations at the end of each month of the period and dividing that number by
the total number of months in the period.
We believe that the analysis of our results by available workstation
capacity for our customers is more meaningful than any analysis by number of
centers open due to the effect of expansions, relocations and closures of
centers and the variation in the size of centers.
Established vs. New Centers
We operate our business by closely monitoring our center contribution.
Although there are material variances on a center by center basis, our
experience is that, within 18 months, a center has reached a relatively stable
level of center contribution margin. On this basis, we have analyzed our results
between established centers and new centers. "Established centers" refer to
centers that have been open for a period of at least eighteen months as at the
end of the relevant period and "new centers" refer to those centers that have
been open for less than eighteen months as at the end of the relevant period.
Due to the incurrence of significant new center start-up costs and the offering
of initial discounts to new customers to fill the center faster during the first
18 months of a new center's operation, we believe that this breakdown is
meaningful in order to segregate these effects into the new centers category.
Geographic Region
We break down our revenue, center contribution and operating result in this
section by geographic region in order to highlight the different drivers of our
growth and the status of our development based on geographic region. The prices
we charge for our centers depend, among other things, on the region where the
center is located and the location of the center within a region. Generally,
within a given country, the price per workstation has been higher in major
cities than in smaller cities and has been higher in developed countries than in
emerging market countries.
Occupancy
The following table sets forth, for the periods indicated, the weighted
average occupancy of our business centers on an established vs. new center
basis. We calculate occupancy of each business center on a month-end basis. The
weighted average occupancy percentage is calculated by dividing the total number
of occupied workstations by the total number of available workstations. A
workstation is deemed to be occupied if it has income in the month, unless such
income is in respect of contracts of less than one month in duration.
Year ended December 31,
-----------------------------------------------
2000 2001 2002
---------- ---------- ----------
% % %
Established centers.......... 83 69 61
New centers.................. 60 40 47
The weighted average occupancy of our established centers decreased in 2001
and 2002 as a result of the sharp economic downturn in the US at the start of
the year which subsequently deepened and spread to other markets during the
year.
28
The concept of weighted average occupancy needs to be treated with care for
three reasons:
o The weighted average occupancy of our new centers is substantially
affected by the opening of business centers as occupancy in new
centers generally builds over the first 12 months. Within a particular
period, the timing of openings of business centers has a distorting
effect on weighted average occupancy levels. This is particularly the
case for centers opened in the second half of the year.
o Expansions of existing business centers have an equivalent distorting
effect on weighted average occupancy levels of established centers.
o The opening of new centers in areas where there are existing centers
also distorts the weighted average occupancy levels of our business
centers because there are cases where our customers migrate from
established centers to new centers in the same area, causing occupancy
to increase in the new center and occupancy to decrease in the
established center. Over time, the occupancy levels of the two centers
generally even out, but in the initial period, there will be a
distortion in weighted average occupancy.
Currency fluctuations
As we conducted business in 50 countries as at December 31, 2002, a
substantial portion of our revenue and costs is derived from countries outside
the UK and therefore in currencies other than pounds sterling. In 2002,
approximately 61% of our revenue was denominated in currencies other than pounds
sterling. For a more detailed description of our exposure to currency
fluctuations, see "Item 11. Quantitative and Qualitative Disclosures about
Market Risk--Foreign Currency Exchange Rate Risk".
Results of Operations
Our revenue consists of revenue from our products, including office or
workstation revenue and related service revenue, including principally
telephone, information technology and data services, fax, photocopying,
secretarial services, catering, storage and parking.
Gross profit or center contribution is revenue less cost of sales. Cost of
sales consists of costs from the individual business centers, including property
lease costs, employee costs, start-up costs, including formation costs, costs
related to finding properties and any other opening costs, telephone costs,
equipment rental and depreciation. Initial start-up costs, including those
incurred in connection with the setting up of the legal and financial control
infrastructure, are typically higher for the establishment of the first center
in a new country. Thereafter, new centers in the same country benefit from this
initial investment by us. We charge start-up costs to the income statement as
they are incurred. Tangible fixed assets are capitalized and depreciated on a
straight line basis over the estimated useful life of each type of asset,
including office furniture, fixtures and fittings and telephones and other
office equipment. The center contribution margin is calculated by dividing
center contribution by revenue.
Our revenue is largely dependent upon the number of workstations (as
defined above), the price per workstation paid by our customers, occupancy rates
and any additional services used by our customers. Our prices are subject to any
regional differences as described under "--Geographic Region".
The principal cost of sales is the leasing of the property. We lease office
space either through conventional leases or turnover leases. The rent payable by
us on turnover leases is wholly or partially conditional on the profitability of
the center. For a description of turnover and part-turnover leases, see "Item 4.
Information on the Company -- Properties". For turnover leases, we estimate the
likely base rent payable based on performance in the period up to the first
break point in the lease for the tenant and, for accounting purposes, this
estimated base rent is spread on a straight line basis over that period. Any
subsequent changes in estimates are spread over the remaining period to the same
break point in the lease. In the case of full turnover leases, rent is due and
payable based upon the profitability of the center. The lease specifies a base
rent, which is due and payable once a cumulative operating surplus has been
achieved. In the case of partial turnover leases, the specified base rent is due
and payable on a guaranteed basis, with the remainder due and payable once a
cumulative surplus has been achieved. Amounts payable in respect of profit
shares are accrued once a sufficient net surplus has been made which would
result in a profit share being paid. Any incentives or rent free periods on
conventional leases and the conventional element of part-turnover leases are
spread on a straight line basis over the period to the first market rent review
or first break point in the lease, whichever is shorter, so that the amounts
charged to the income statement are the same each year over that period. Of the
total rent expense for the year ended December 31, 2000, 2001 and 2002 of
(pound)125.1 million, (pound)187.1 million and (pound)194.7 million,
respectively, the profit share element was (pound)6,434,000, (pound)5,612,000
and
29
(pound)1,138,000 respectively. The decrease of the profit share element from
2000 to 2002 is due to the adverse economic conditions.
We continue to undertake renegotiations of the rental costs under our
leases wherever commercially possible. We have had some success in this
strategy, particularly in the Netherlands and Germany, where we expect to make
cash savings of approximately $90 million (on an annualized basis) on total
rental costs existing prior to these negotiations. In addition, we have to date,
through intensive negotiations in our Chapter 11 proceedings in the US, reduced
total rental costs by $44.3 million (on an annualised basis). We believe that,
if we can confirm a Plan of Reorganization, we will have reduced our total
rental obligations by $133.5 million over the next 3 years.
In December 2002 the Group disposed of a 58% in the UK business and
retained a 42% interest. In future, the Group will account for the business as
an associated undertaking and therefore recognise its share of the operating
profit of the UK business in the profit and loss account for the year.
Gross loss (center contribution)
Our gross loss is our center contribution after sales and marketing costs
and regional and central overheads. Sales and marketing costs are closely
related to the aggregate number of centers and, in part, to the opening of new
centers. Regional and central overheads include salary and other compensation
costs from our corporate headquarters in the UK, our regional office network and
employees sent temporarily to open new centers.
Total gross loss for the year was (pound)34,707,000 compared to a profit of
(pound)39,891,000 in the prior year. Total gross loss is after exceptional cost
of sales of (pound)56,972,000 (2001: (pound)37,955,000) being onerous lease
charges, closure costs, restructuring costs and asset impairments. Gross profit
before exceptional items was (pound)22,265,000 in 2002 (pound)77,846,000 in
2001. We present cost of sales before exceptional items because we believe this
presentation provides readers with a useful view of our gross profit by
isolating certain charges and describing our performance without them.
2002 financial year compared to 2001 financial year
The following table sets forth, for the periods indicated, our revenue,
gross profit before exceptionals and workstations (i.e. weighted average number
of available workstations) by geographic region and by established centers vs
new centers.
Year ended December 31,
---------------------------------------------------------------------------------------------
2001 2002
--------------------------------------------- --------------------------------------------
Gross Profit Gross Profit
(Center (Center
Revenue Contribution) Workstations Revenue Contribution) Workstations
----------- ---------------- -------------- ---------- --------------- --------------
(in (pound) millions except workstations)
UK & Ireland... 213.6 59.4 25,471 173.3 30.5 26,912
Rest of Europe. 151.9 24.9 26.262 140.1 8.9 30,807
Americas....... 113.7 (10.0) 21,285 91.7 (19.7) 23,898
Rest of World.. 33.4 3.5 5,473 30.5 2.6 5,877
----------- ---------------- -------------- ---------- --------------- --------------
Total.......... 512.6 77.8 78,491 435.6 22.3 87,494
----------- ---------------- -------------- ---------- --------------- --------------
Established
centers........ 410.8 103.1 53.693 408.1 29.9 80,469
New centers.... 101.8 (25.3) 24,798 27.5 (7.6) 7,025
----------- ---------------- -------------- ---------- --------------- --------------
Total.......... 512.6 77.8 78,491 435.6 22.3 87,494
----------- ---------------- -------------- ---------- --------------- --------------
30
Revenue
Revenue on a global basis decreased 15% to (pound)435.6 million
(2001:(pound)512.6 million), with weighted average workstations increasing 11%
to 87,494 (2001: 78,491). As a result, total revenue per available workstation
("REVPAW") decreased 24% to (pound)4,979 (2001: (pound)6,531). Average occupied
workstations increased during 2002 ending the year up 15% to 52,659 (2001:
45,986).
Revenue from established centers decreased slightly to (pound)408.1
million in 2002 from (pound)410.8 million in 2001 and weighted average
workstations in our established centers increased 50% to 80,469 in 2002 from
53,693 in 2001. REVPAW in established centers decreased by 34% to (pound)5,072
(2001: (pound)7,650). Revenue from new centers decreased 73% to (pound)27.5
million and workstations in new centers decreased 72% to 7,025 in 2002 from
24,798 in 2001. REVPAW in our new centers decreased 5% to (pound)3,914 in 2002
from (pound)4,105 in 2001.
Revenue in the UK and Ireland decreased 19% to (pound)173.3 million (2001:
(pound)213.6 million), with workstations increasing 14% to 26,912. REVPAW
decreased to (pound)6,440 (2001: (pound)8,386). In 2001, we opened 3 new
centers, plus one managed center and 2 centers were closed.
Revenue in the rest of Europe decreased 8% to (pound)140.1 million (2001:
(pound)151.9 million), with workstations increasing 17% to 30,807 in 2002. In
2002, we opened 6 centers in the Rest of Europe, plus a franchise and closed 11.
Revenue in the Americas decreased 24% to (pound)91.7 million in 2002 from
(pound)113.7 million in 2001 with workstations increasing 12% to 23,898 in 2002.
In 2002, we opened 2 new centers in the Americas, plus one in a joint venture, 5
centers were closed.
Revenue in the Rest of World decreased 9% to (pound)30.5 million in 2002
from (pound)33.4 million in 2001, with workstations increasing 8% to 5,877. In
2002, we opened one center and one franchise, three centers were closed.
Gross loss (Center Contribution) before exceptional items
Center contribution before exceptional items, on a global basis decreased
71% to (pound)22.3 million (2001: (pound)77.8 million).
Center contribution before exceptional items from established centers
decreased 71% to (pound)29.9 million in 2002. The contribution margin
(contribution as a percentage of revenue) from established centers fell from 25%
to 7% between 2001 and 2002. Contribution from new centers increased to negative
(pound)7.6 million in 2002 from negative (pound)25.3 million in 2001.
Center contribution in the UK and Ireland decreased to (pound)30.5 million
(2001: (pound)59.4 million). Contribution margin in the UK and Ireland decreased
to 18% (2000: 28%).
Center contribution in the rest of Europe decreased 64% to (pound)8.9
million, with contribution margin decreasing to 6% (2001: 16%).
Contribution in the Americas decreased to a loss of (pound)19.7 million
(2001: loss of (pound)10 million). This decrease was as a result of the
significant economic downturn in the region during 2001 and 2002.
A contribution of (pound)2.6 million was recorded in the Rest of the World
for 2002 decreasing from a contribution in 2001 of (pound)3.5 million.
Administrative Expenses
Total administration expenses for the year were (pound)96,172,000 in 2002
and (pound)143,846,000 in 2001. These costs include an exceptional charge of
(pound)35,096,000 in 2002 and (pound)52,591,000 in 2001, which largely represent
onerous lease charges, closure and restructuring costs, a write off of goodwill
and a receipt under the business interruption insurance cover. Administration
costs, before exceptional items, was (pound)61,076,000 for 2002 and
(pound)91,256,000 for 2001. We believe administration costs before exceptional
items give the reader a better view of our ongoing administration costs.
31
The following table sets forth, for the periods indicated, our
administrative expenses before exceptional items.
Year ended December 31,
--------------------------
2001 2002
------- ---------
(in (pound) millions)
Sales and marketing costs......................... 48.2 33.8
Regional and central overheads.................... 43.1 27.3
------- --------
Total administrative expenses..................... 91.3 61.1
Total administrative expenses before exceptional items decreased 33% to
(pound)61.1 million in 2002. Administrative expenses before exceptional items
also fell as a percentage of revenue decreasing from 18% in 2001 to 14% in 2002.
Sales and marketing costs decreased 30% to (pound)33.8 million in 2002 (or 55%
of administrative expenses) from (pound)48.2 million in 2001 (or 53% of
administrative expenses). Regional and central overheads decreased 37% to
(pound)27.3 million in 2002 (or 45% of administrative expenses) from (pound)43.1
million in 2001 (or 47% of total administrative expenses).
2001 financial year compared to 2000 financial year
The following table sets forth, for the periods indicated, our revenue,
center contribution before exceptionals and workstations (i.e., weighted average
number of available workstations) by geographic region and established centers
versus new centers.
Year ended December 31,
---------------------------------------------------------------------------------------------
2000 2001
---------------------------------------------- ---------------------------------------------
Gross Profit Gross Profit
(Center (Center
Revenue Contribution) Workstations Revenue Contribution) Workstations
-------- ---------------- ------------ -------- ------------- --------------
(in (pound) millions except workstations)
UK & Ireland... 188.6 59.6 17,568 213.6 59.4 25,471
Rest of Europe. 118.9 29.2 17,565 151.9 24.9 26,262
Americas....... 86.5 13.9 10,900 113.7 (10.0) 21,285
Rest of World.. 27.1 (2.4) 4,300 33.4 3.5 5,473
-------- ------------- ------------ -------- ------------- --------------
Total.......... 421.1 100.3 50,333 512.6 77.8 78,491
-------- ------------- ------------ -------- ------------- --------------
Established 293.6 92.3 30,941 410.8 103.1 53,693
centers........
New centers.... 127.5 8.0 19,392 101.8 (25.3) 24,798
-------- ------------- ------------ -------- ------------- --------------
Total.......... 421.1 100.3 50,333 512.6 77.8 78,491
-------- ------------- ------------ -------- ------------- --------------
Revenue
Revenue on a global basis increased 22% to (pound)512.6 million (2000:
(pound)421.1 million), with weighted average workstations increasing 52% to
78,491 (2000: 50,333). As a result , total revenue per available workstation
("REVPAW") decreased 22% to (pound)6,531 (2000: (pound)8,366). In 2001, we
opened 71 new centers and our first 16 franchise centers, expanded 23 existing
centers and closed 11 centers.
Revenue from established centers increased 40% to (pound)410.8 million in
2001 from (pound)293.6 million in 2000 and weighted average workstations in our
established centers increased 68% to 53,693 in 2001 from 30,941 in 2000. REVPAW
in established centers decreased by 17% to (pound)7,650 (2000: (pound)9,489),
principally due to the increase in occupancy in 2001. Revenue from new centers
decreased 20% to (pound)101.8 million while workstations in new centers
increased 27% to 24,798 in 2001 from 19,392 in 2000. REVPAW in our new centers
decreased to (pound)3,914 in 2001 from (pound)6,575 in 2000, primarily due to
the drop in occupancy in the new centers to 40% in 2001 from 60% in 2000.
Included in the revenues in 2001 is (pound)0.9 million (2000: (pound)nil) of
franchise income, derived from royalties and franchise fees.
32
Revenue in the UK and Ireland increased 13% to (pound)213.6 million (2000:
(pound)188.6 million), with workstations increasing 35% to 25,471. REVPAW
decreased to (pound)9,080 (2000: (pound)10,736) principally due to the drop in
occupancy during 2001. In 2001, we opened 13 new centers, one of which was part
of a joint venture.
Revenue in the rest of Europe increased 28% to (pound)151.9 million (2000:
(pound)118.9 million ), with workstations increasing 49% to 26,262 in 2001. In
2001 we opened 26 centers in the rest of Europe, including 7 in Benelux, 6 in
France and 3 in both Germany and Italy.
Revenue in the Americas increased 31% to (pound)113.7 million in 2001 from
(pound)86.5 million in 2000 with workstations increasing 97% to 21,285 in 2001.
In 2001, we opened 28 new centers in the Americas, including 21 in the US, 1 in
Brazil and 2 in Mexico.
Revenue in the rest of the world increased 23% to (pound)33.4 million in
2001 from (pound)27.1 million in 2000, with workstations increasing 26% to
5,473. In 2001, we opened 4 centers in Singapore, the Phillipines, Israel and
for the first time a center in the Unite Arab Emirates.
Gross profit (Center Contribution) before exceptional items
Center contribution on a global basis decreased 22% to (pound)77.8 million
(2000: (pound)100.3 million). This decrease reflects the increasing trend
towards price discounted longer term contracts with the average contract
increasing from 6.5 months in 2000 to 11.1 months in 2001.
Contribution from established centers increased 12% to (pound)103.1
million, primarily as a result of the 68% increase in workstations to 51,932.
The contribution margin (contribution as a percentage of revenue) from
established centers fell by 6% to 25% between 2000 and 2001. Contribution from
new centers decreased to a negative (pound)25.3 million in 2001 from a positive
(pound)8.0 million in 2000.
Center contribution in the UK and Ireland remained constant at (pound)59.4
million (2000: (pound)59.6 million). Contribution margin in the UK and Ireland
decreased to 28% (2000: 32%), primarily as a result of the increase in average
contract length.
Center contribution in mainland Europe decreased 15% to (pound)24.9
million, with contribution margin decreasing to 16% (2000: 25%). The decreases
were principally due to the increase in average contract lengths.
Contribution in the Americas decreased to a loss of (pound)10.0 million
(2000: contribution of (pound)13.9 million). This decrease was a result of the
significant economic downturn in the region during 2001.
A contribution of (pound)3.5 million was recorded in the rest of the
world for 2001 from a loss in 2000 of (pound)2.4 million. This was principally
attributable to the maturing of existing centers.
Administration Expenses before exceptional items
The following table sets forth, for the periods indicated, our
administrative expenses.
Year ended December 31,
---------------------------
2000 2001
-------- -------
(in (pound) millions)
Sales and marketing costs.................... 43.5 48.2
Regional and central overheads............... 43.3 43.1
-------- -------
Total administrative expenses................ 86.8 91.3
Total administrative expenses before exceptional items increased 5% to
(pound)91.3 million in 2001. As a percentage of revenues, however,
administrative expenses decreased from 21% in 2000 to 18% in 2001, reflecting
increased efficiencies arising from the restructuring and our strategy of
focusing on countries and markets in which we have existing centers. Sales and
marketing costs increased 11% to (pound)48.2 million in 2001 (or 53% of total
administrative expenses) from (pound)43.5 million in 2000 (or 50% of total
administrative expenses). Regional and central overheads decreased 1% to
(pound)43.1 million in 2001 (or 47% of total administrative expenses) from
(pound)43.3 million in 2000 (or 50% of total administratvive expenses).
33
Profit/(loss) on the sale of group undertakings
In December 2002, the Group sold a 58% interest in the UK business to
Alchemy Partners, which gave rise to a profit on disposal of (pound)23.0
million. The Group retains a 42% interest in the UK business and will therefore
equity account for its interest in subsequent years.
In addition the Romanian business was sold during the year to a franchisee
at a small loss of (pound)0.3 million.
Exceptional items
Included in the results for 2002 are exceptional charges totalling
(pound)92.1 million (2001: (pound)90.5 million). The exceptional charges fall
into the following categories:
Onerous Leases, related closure and restructuring costs ((pound)54.3
million) - Decisions have been taken to re-structure group subsidiaries, these
costs include those relating to a chapter 11 filing in the US and the effects of
recognising onerous leases throughout the Group. Under UKGAAP an onerous
contract is defined as a contract in which the unavoidable costs of meeting the
obligations under it exceed the economic benefits expected to be received under
it. For Regus all Building Leases are regarded as long term contracts and in
accordance with their Accounting Policies accounted for as Operating Leases. If
it were not for the long term nature of our building leases and the severe cost
penalties resulting from early termination Regus would plan an early withdrawal
from any centers which are currently making losses or are expected to make
losses for the foreseeable future. These leases are therefore deemed to be
onerous under UKGAAP and a provision is required.
Write-down of tangible assets ((pound)36.9 million) - The directors have
determined that there has been a permanent impairment to the value of tangible
assets in centers expected to trade at a loss or to be closed, in total or in
part, before the end of the lease term.
Impairment of acquisition goodwill ((pound)4.0 million) - The directors
have determined that there has been further impairment to the goodwill arising
from prior year acquisitions.
Aborted business sales and mergers ((pound)0.7 million) - Professional
fees incurred on possible business disposal mergers subsequently aborted.
Business Interruption insurance receipt (-(pound)3.8 million) - Monies
were received for the loss of a business center, following the tragic events of
September 11th 2001.
Included in the results for 2001 are the exceptional charges totalling
(pound)90.5 million (2000: (pound)9.5 million). The exceptional charges fall
into the following categories:
Restructuring and redundancy costs ((pound)5.4 million) - As part of an
aggressive attack on its cost base, we have reviewed staffing levels across all
regions and all functions. We have reduced headcount by 800, representing
approximately 24% of the total workforce.
Reduction in workstation capacity ((pound)37.4 million) - We have has
reviewed the prospects for each of our centers in the light of recent market
conditions. We have decided to reduce capacity by 9,700 workstations,
representing 11% of the total network. The exceptional charge includes costs
associated with provisions for the onerous (i.e. loss making) element of our
leasehold obligations and asset impairments.
Write-down of investment in own shares ((pound)32.6 million) - As mentioned
in the second quarter results, the Directors have determined that, in the
circumstances, the carrying value of the investment in our own shares should be
written down to 21p per share, which was the market value on September 30, 2001.
This was offset by a writeback of (pound)8.8 million for the reduced cost of
granting reward options.
Write-down of software development assets ((pound)4.6 million) - The
Directors have reviewed the estimated useful life of external development costs
and determined to write off the remainder of these costs.
34
Fees in respect of an aborted merger with HQ global workplaces ((pound)3.3
million) - These are costs associated with the aborted merger of Frontline
Capital Group and HQ Global Workplaces.
Write-down of acquisition goodwill ((pound)4.9 million) - The Directors
have determined that there has been an impairment to the value of goodwill
arising from acquisitions and, accordingly, that the goodwill be written down.
Non-recoverable Ryder cup expenditure ((pound)2.3 million) - These costs
relate to the postponement of the 2001 Ryder Cup, for which we were a principal
sponsor.
Operating loss
The following table sets forth, for the periods indicated, our operating
loss by geographic region.
Year ended December 31,
----------------------
2001* 2002
------ ------
(in (pound) millions)
UK & Ireland ......................................... 44.3 18.0
Rest of Europe........................................ (8.3) (39.5)
Americas ............................................. (67.9) (86.2)
Rest of World ........................................ (2.7) (3.3)
Other office costs ................................... (74.9) (25.4)
------ ------
Total ................................................ (109.5) (136.4)
------ ------
*2001 figures have been restated to exclude internal management fees
Our operating loss on a global basis was (pound)136.4 million in 2002, an
increase from an operating loss of (pound)109.5 million in 2001. The loss for
the year is principally due to the (pound)92.1 million exceptional item and a
decrease of 71% in center contribution.
The following table sets forth, for the periods indicated, our
operating profit/(loss) by geographic region.
Year ended December 31,
-----------------------
2000 2001*
------ -------
(in (pound) millions)
UK & Ireland.......................................... 39.2 44.3
Rest of Europe........................................ 6.7 (8.3)
Americas.............................................. (12.4) (67.9)
Rest of World......................................... (10.5) (2.7)
Other office costs.................................... (20.1) (74.8)
------ -------
Total................................................. 2.9 (109.5)
------ -------
*2001 figures have been restated to exclude internal management fees
Our operating loss on a global basis was (pound)109.5 million in 2001,
a decrease from an operating profit of (pound)2.9 million in 2000. The loss for
the year is principally due to the (pound)90.5 million exceptional item and a
decrease of 22% in center contribution.
Net interest payable
The following table sets forth, for the periods indicated, our net interest
payable.
Year ended December 31,
-----------------------
2001 2002
------ -------
(in (pound) millions)
Interest expense on overdrafts and loans.............. 0.8 4.5
Interest expense on finance leases.................... 3.3 2.7
Interest income........................................ (3.9) (1.9)
Share of joint venture net interest payable........... 0.3 0.1
------ -------
Net interest payable 0.5 5.4
------ -------
35
The increase in interest payable was due primarily to the (pound)3.5
million interest paid on Regus' (pound)40 million convertible bond issued in
December 2001 and which was fully repaid during 2002. In addition there was a
reduced level of interest received as cash balances fell steadily throughout the
year.
The following table sets forth, for the periods indicated, our net interest
payable.
Year ended December 31,
-----------------------
2000 2001
------ --------
(in (pound) millions)
Interest expense on overdrafts and loans.............. 7.7 0.8
Interest expense on finance leases.................... 2.9 3.3
Interest income....................................... (3.9) (3.9)
Share of joint venture net interest payable........... 0.1 0.3
------ -------
Net interest payable 6.8 0.5
------ -------
Interest payable decreased substantially in 2001 compared to 2000 primarily
due to the interest payable on our (pound)100 million senior secured
multi-currency secured loan facility which was repaid from the proceeds of our
initial public offering in October 2000.
Tax on loss on ordinary activities
The following table sets forth, for the periods indicated, our tax on loss
on ordinary activities.
Year ended December 31,
-----------------------
2001 2002
------- -------
(in (pound) millions)
UK tax................................................ 5.6 5.8
UK tax under provided in prior years - 0.2
Overseas tax.......................................... 4.4 0.8
Overseas tax under provided in prior years - 0.2
Origination and reversal of timing differences 0.1 (1.5)
------- ------
Tax on loss on ordinary activities.................... 10.1 5.5
------ ------
Despite Regus' overall loss making position in 2001 and 2002, Regus
provided for tax liabilities in both periods, primarily because tax liabilities
arose on profits arising in the UK, Ireland and several continental European
countries. These taxable profits could not be offset by tax losses in all other
countries where Regus operates. The majority of Regus' operating companies have
tax losses available to carry forward against future profits. In some countries,
there are time restrictions on the carry forward of such losses. The Group
adopted the UK Financial Reporting Standard FRS 19 (Deferred Tax) with effect
from January 1, 2002. The impact of FRS 19 on the financial position of the
Group at 31 December 2001 was deemed not material and so no adjustment was made
to the balance sheet at that date. The impact on the tax charge for 2002 was
just (pound)0.1 million.
The following table sets forth, for the periods indicated, our tax on loss
on ordinary activities.
Year ended December 31,
-----------------------
2000 2001
------ -------
(in (pound) millions)
UK tax................................................ 5.2 5.7
Overseas tax.......................................... 4.7 4.4
------ ------
Tax on loss on ordinary activities.................... 9.9 10.1
------ ------
Despite our overall loss making position during each of the last three
years, we have provided for tax liabilities in all three periods, primarily
because tax liabilities arose on profits arising in the UK, Ireland and several
other continental European countries. However, these taxable profits could not
be offset by tax losses in all other countries where we operate. The majority of
our operating companies have tax losses available to carry forward against
future profits. In some countries, there are time restrictions on the carry
forward of such losses. We adopted the UK Financial Reporting Standard FRS 19
(Deferred Tax) with effect from January 1, 2002.
36
Recently Issued Accounting Announcements
US GAAP
SFAS 143
Statement of Financial Accounting Standard No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143), addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and for the associated asset retirement costs. SFAS No. 143 requires an
enterprise to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development and or normal use of the assets. The enterprise also
is to record a corresponding increase to the carrying amount of the related
long-lived asset (i.e., the associated asset retirement costs) and to depreciate
that cost over the life of the asset. The liability is changed at the end of
each period to reflect the passage of time (i.e., accretion expense) and changes
in the estimated future cash flows underlying the initial fair value
measurement. Because of the extensive use of estimates, most enterprises will
record a gain or loss when they settle the obligation. Enterprises are required
to adopt Statement No. 143 for fiscal years beginning after June 15, 2002. We
have not evaluated the impact on the consolidated financial statements of
adopting this standard.
SFAS 145
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." SFAS No. 145 provides for the rescission of
several previously issued accounting standards, new accounting guidance for the
accounting for certain lease modifications and various technical corrections
that are not substantive in nature to existing pronouncements. SFAS No. 145 will
be adopted beginning January 1, 2003, except for the provisions relating to the
amendment of SFAS No. 13, which will be adopted for transactions occurring
subsequent to May 15, 2002. Adoption of SFAS No. 145 will not have a material
impact on the consolidated financial statements.
SFAS 146
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No.
146 supersedes Emerging Issues Task Force No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring. SFAS No.146 eliminates the
provisions of EITF 94-3 that required a liability to be recognized for certain
exit or disposal activities at the date an entity committed to an exit plan.
SFAS No. 146 requires a liability for costs associated with an exit or disposal
activity to be recognized when the liability is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. We do not expect the adoption of SFAS 146 to have a material impact on our
results of operations or financial position.
SFAS 148
In December 2002 the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123". SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 123 amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS 148 permits two additional
transition methods for entities that adopt the preferable method of accounting
for stock-based employee compensation. Both of those methods avoid the ramp-up
effect arising from prospective application of the fair value based method. In
addition, to address concerns raised by some constituents about the lack of
comparability caused by multiple transition methods, this Statement does not
permit the use of the original Statement 123 prospective method of transition
for changes to the fair value based method made in fiscal years beginning after
December 15, 2003. In the absence of a single accounting method for stock-based
employee compensation, SFAS No. 148 requires disclosure of comparable
information for all companies regardless of whether, when, or how an entity
adopts the preferable, fair value based method of accounting.
37
SFAS 149
In April 2003 the FASB issued SFAS No. 149 "Amendment of FASB Statement No. 133"
on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No.133, "Accounting for Derivative instruments and
Hedging Activities". The Statement is generally effective for contracts entered
or modified after June 30, 2003 and is not expected to have a material impact on
our financial position or results of operations.
SFAS 150
On May 15, 2003, the FASB issued SFAS No.150 "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" which requires
issuers to classify as liabilities (or assets in some circumstances) three
classes of freestanding financial instruments that embody obligations of the
issuer. The Statement is generally effective for instruments entered into or
modified after May 31, 2003 and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The Company is evaluating
the impact on our financial position or results of operations.
US GAAP Reconciliation
Under US GAAP, net losses for the years ended December 31, 2000, 2001 and
2002 would have been (pound)16.8 million, (pound)51.5 million and (pound)105.3
million, respectively. Total shareholders' funds as of December 31, 2000, 2001
and 2002 would have been (pound)169 million, (pound)119 million and (pound)21
million, respectively. The principal differences between UK and US GAAP
applicable to our consolidated financial statements relate to compensation
expense associated with share options, the treatment of our shares held by the
employee share trust, deferred taxes, including those arising from US GAAP
adjustments, the deferral of the one-off franchise fees and the provision for
onerous lease commitments. The effect of these differences and other items
identified have been discussed in the notes to the consolidated financial
statements along with reconcilations of retained loss and total shareholders'
funds (deficit) under UK GAAP to similar measures under US GAAP. See note 29 to
the consolidated financial statements.
Critical accounting policies
To understand our financial statements, it is important to understand our
accounting policies. In preparing our financial statements in accordance with
accounting principles generally accepted in the United Kingdom and the United
States, management must make estimates and assumptions that impact the reported
amount of revenues, expenses, assets, liabilities and related disclosures at the
date of the financial statements and during the reporting period. Such judgments
are subjective and can be complex. Actual results could differ from those
estimates. Our critical accounting policies are as follows:
Basis of preparation
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United Kingdom
and the United States applicable to a going concern. Except as otherwise
disclosed, these principles assume that assets will be realized and liabilities
will be discharged in the ordinary course of business. The Company is currently
operating as a debtor in possession under Chapter 11 of the Bankruptcy Code and
its continuation as a going concern is contingent upon, among other things, its
ability to gain approval of the plan of reorganization by the requisite parties
under the Bankruptcy Code and be confirmed by the Bankruptcy Court, comply with
the DIP Credit Agreement, return to profitability, generate sufficient cash
flows from operations and obtain financing sources to meet future obligations.
There is no assurance that the Group will be able to achieve any of these
results. The Group's consolidated financial statements do not include any
adjustments relating to recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might result from
the outcome of these uncertainties.
Group onerous lease obligations
In accordance with UK GAAP (FRS12), we made a provision for potential future
losses arising from onerous (ie. loss making) leases in 2001 and 2002. Following
a review of our entire property portfolio, we made provisions of (pound)37.4
million and (pound)54.2 million, respectively. Under UKGAAP an onerous contract
is defined as a contract in which the unavoidable costs of meeting the
obligations under it exceed the economic benefits expected to be received under
it. For Regus all building leases are regarded as long term contracts and in
accordance with their accounting policies accounted for as operating leases If
it were not for the long term nature of our building leases
38
and the severe cost penalties resulting from early termination Regus would plan
an early withdrawal from any centers which are currently making losses or are
expected to make losses for the foreseeable future. These leases are therefore
deemed to be onerous under UKGAAP and a provision is required. The onerous lease
provision has been calculated as amounts agreed with US landlords and estimated
losses up to the next break point of the lease.
Building leases
Building leases are all accounted for as operating leases because
substantially all the risks and rewards of ownership remain with the lessor.
The rental on certain leases is wholly or partly conditional on the
profitability of the center and therefore the risk to the business, in terms of
rent, is reduced. Once all outstanding rent has been paid, landlords receive a
share of the profits of the center.
For leases which are wholly or partly conditional on the profitability of
the center, an estimate is made on the likely rent payable based on
profitability in respect of the period up to the date of the first market rent
review or first break point in the lease, whichever is sooner, and this is
spread on a straight line basis over that period. Any subsequent changes in
estimates are spread over the remaining period to the date of the first market
rent review of first break point in the lease, whichever is sooner. Amounts
payable in respect of profit shares are accrued once a sufficient net surplus
has been made which would resulting a profit share being paid.
Any incentives or rent free period on conventional leases and the
conventional element of leases which are partly conventional and partly
conditional on profitability, are spread on a straight line basis over the
period to the date of the first market rent review or first break point in the
lease, whichever is sooner, so that the amounts charged to the profit and loss
account are the same each year over that period.
Investment in Regus Employee Trust
During 1999, we established the Regus Employee Trust. The Regus Employee
Trust provides for the issue of options and the payment of bonuses to our
employees (including directors) at the discretion of the company. At December
31, 2002 the Regus Employee Trust held 18,120,670 shares in Regus plc.
Subsequently, the trustees have sold 12,000,000 of these shares, so that at June
21, 2003, the Regus Employee Trust held 6,120,670 shares.
During 2001, the directors determined that, in the circumstances, the
carrying value of the investments in own shares should be written down to 21p a
share which was the market value at September 30, 2001.
The investment in own shares have not been revalued for any subsequent increases
in market value since September 30, 2001. On May 31, 2003, the market value of
shares was 36p per share.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
There are significant uncertainties about the Group's ability to continue
as a going concern. Our liquidity requirements arise primarily from the need to
fund our lease commitments for our centers and capital expenditures for the
fit-out of new centers and the refurbishment of older established centers. To
date, these requirements have been funded largely through cash flow from
operations, the (pound)40 million convertible bond issued December 2001, bank
borrowings and equity funding from our existing shareholders. Albeit at much
lower levels to previous years, we continue to incur additional property leasing
costs and capital expenditures in order to maintain and improve the quality of
our centers. Management believes that the large majority of these requirements
will be met by cash flow from operations.
Generally, after the first six months of operation, our centers operate
with negative working capital, i.e., creditors, or accounts payable, exceed
debtors, or accounts receivable (on a quarterly basis). This is principally
caused by our standard terms and conditions of our agreements with our
customers, which typically require our customers upon signing their agreement
with us to pay a service retainer equal to two months workstation income and to
pay monthly rental payments in advance. The service retainers and the advance
rental payments are recorded as creditors.
39
The following table sets forth, for the periods indicated, information
about our cash flows under US GAAP.
Year ended December 31,
2000 2001 2002
(US GAAP)
(in (pound) millions)
Cash and cash equivalents at beginning of year.... 50.1 128.9 85.5
Cash from operating activities.................... 108.7 38.0 (17.7)
Cash used in investing activities................. (109.3) (104.6) (4.3)
Cash from financing activities.................... 68.4 24.3 (33.7)
Effect of exchange rate changes on cash........... 1.5 (1.1) 0.1
Other non-cash movement........................... 9.5 - -
------- -------- ------
Cash and cash equivalents at end of year.......... 128.9 85.5 29.9
------- -------- ------
Cash used in operating activities was (pound)17.7 million in 2002 compared
to cash generated of (pound)38.0 million in 2001 and (pound)108.7 million in
2000. Cash from operating activities has deteriorated since 2000, primarily due
to the impact on operating profit (before depreciation and asset impairment) of
lower sales prices resulting from the global economic downturn. The cash element
of operating profit (before amortisation and asset impairment) was a negative
(pound)33.8 million in 2002 compared to a positive (pound)44.4 million in 2000.A
steady reduction in the level of our creditors (known as accounts payable under
US terminology), down by (pound)164.9 million, has also adversely impacted our
operating cash flow. This is in part offset by a decrease in debtors (known as
accounts receivable under US terminology) of (pound)83.3 million.
Cash used in investing activities, including principally capital expenditure but
also financial investments, acquisitions and disposals, decreased significantly
to just (pound)4.3 million in 2002 from (pound)104.6 million in 2001 and
(pound)109.3 million in 2000. This was the result of a corporate decision to
stop new center openings and other related capital expenditure.
Cash incurred on financing activities was (pound)33.7 million in 2002 primarily
as a result of repayment of the (pound)40 million convertible bond issued in
2001. This compared to cash generated of (pound)24.3 million in 2001, including
the proceeds from the convertible bond, and (pound)68.4 million in 2000. In 2000
(pound)116.3 million was paid in respect of a loan received in 1999 and
(pound)235.8 million was received from the initial public offering after issue
costs of (pound)18.0 million. The decrease in cash from financing activities in
2002 and 2001 was principally because no capital was raised through the issuance
of shares during the year (2000: (pound)235.8 million).
The sum of cash and cash equivalents for any period does not include any
reduction for the cash that is collateralized to match bank guarantees. See "-
Capital Resources".
The Regus Group has sold a 58.0% interest in its UK business to Alchemy
partners ("Alchemy"). Alchemy subscribed (pound)16.3 million for new shares and
paid Regus (pound)25.6 million for existing shares in the UK business. At the
same time, Regus repaid a (pound)10.5 million loan from the UK business, leaving
the Regus Group with net cash from the transaction of (pound)15.1 million. In
addition, deferred consideration is receivable by Regus in two tranches: the
first tranche of up to (pound)10 million is dependant upon the EBITDA (Earnings
Before Interest, Tax, Depreciation and Amortisation) for the year ended 31
December 2002 and net current liabilities and net cash at 31 December 2002 of
the UK business meeting certain perameters; and a second tranche equivalent to
70% of the amount by which EBITDA for the year ended 31 December 2003 exceeds
(pound)29 million. Regus is also entitled to receive 42% of any dividends
declared by the UK business.
In July 2003 Regus received (pound)10 million in connection with the first
tranche of deferred consideration from the sale detailed above.
Save for this transaction, we were expecting to incur a working capital
funding shortfall in late December, estimated to be approximately (pound)6.0
million at the Group level, principally due to our US subsidiary, which for 2002
was averaging approximately (pound)2.0 million EBITDA loss per month, and
forthcoming quarterly payments of approximately (pound)18.5 million payable at
the end of December 2002.
We did not have any overdraft or debt facilities with which to bridge this
funding shortfall. Despite efforts to arrange a short-term debt solution, none
of the banks and other potential lenders approached were prepared to make
available the facility required.
40
Having considered the options available and given the position set out
above, we considered that the only option was the sale of 58.0% of our UK
business for the consideration as detailed above
The following tables illustrate the commitments for future expenditure as
at:
31 Dec 2002 31 Dec 2001
(pound)'000 (pound)'000
Contracts placed for future capital expenditure not
provided in the financial statements 925 5,246
31 Dec 2002 31 Dec 2001
Total Total
(pound) '000 (pound) '000
Minimum future lease payments under
non-cancellable operating leases:
Amounts due within one year 152,705 221,354
Amounts due between one and two years 146,038 217,154
Amounts due between two and three years 138,232 202,742
Amounts due between three and four years 117,317 189,295
Amounts due between four and five years 98,014 171,033
Amounts due after five years 243,823 748,401
------------ ------------
896,129 1,749,979
============ ============
The Group has bank guarantees and letters of credit held with certain
banks totaling (pound)26,134,000 (December 2001: (pound)28,358,000),
The Company also acts as a guarantor for certain obligations of other
subsidiary entities. At 31 December 2002 the Group had received a
number of claims principally from landlords relating to the terms of
building leases. Where appropriate the directors have made provisions.
Capital Resources
Significant sources of financing during the periods under discussion included
the following items:
o Taking into account the uncertain economic outlook for the global
economy in 2002, we decided to strengthen our financial position by
issuing (pound)40 million of five per cent non-convertible bonds in
December 2001. In February 2002, following an extraordinary general
meeting, the bonds were exchanged for (pound)40 million of five per
cent unsecured senior convertible debentures. The convertible
debentures were fully repaid in cash in ten equal instalments from
March 2002 to December 2002. Holders of the convertible debentures
also received warrants in over 5 million ordinary shares with an
exercise price of five pence per share. Any remaining unexercised
warrants will lapse three years after issue. To date (June 21, 2003),
2,500,000 remain unexercised.
o In October 2000, we and certain selling shareholders offered and sold
128,829,075 of our shares, nominal value 5p per share, and ADSs, each
ADS representing five shares, at a public offering price of
(pound)2.60 per share and $18.79 per ADS. We received net proceeds of
$353.1 million after deducting the underwriting discount and actual
offering expenses paid by us of $26.8 million.
As of December 31, 2002, we had total cash at bank of (pound)58.6 million,
short-term bank loans of (pound)4.1 million and a long-term loan from our UK
associate company of (pound)5.0 million. Our total cash at bank included cash
deposits of (pound)2.6 million collateralising bank loans and a further
(pound)28.4 million of deposits held by banks as security for the issuance of
bank guarantees to support lease commitments by Regus companies. We earn
interest on these deposits but we cannot use the fund for any other purpose.
In the five months ended May 31, 2003, revenues have remained flat. We have
been successful in terminating a number of property leases both in conjunction
with Chapter 11 proceedings in the US and by negotiation in select markets in
Europe. We are continuing with our policy of restricting new center openings to
managed centers and franchises, thereby minimising capital expenditure.
41
In July 2003, we announced that we had received (pound)10 million in
connection with the first deferred consideration payment following the sale of
58% of our UK business. These funds will be used in general operations and may,
in part, be used to fund an $18 million Debtor-In-Possession facility granted by
Regus Management Ltd to our US subsidiary. Under the terms of a
Debtor-In-Possession facility, the lender receives preferred status in the event
of a subsequent liquidation.
PROSPECTS
As described previously, the Chapter 11 Cases could have a significant
impact on our future prospects. The filing for bankruptcy protection by the
Debtors is a risk factor with respect to the continued operation of our business
and the value of the equity of the Company. While the goal of the Chapter 11
Cases is the confirmation of a plan of reorganization with respect to each
Debtor that enables such Debtor to emerge as a going concern, there is no
guaranty that such reorganization efforts will be successful or that the Debtors
will be able to confirm a plan of reorganization. Additionally, any confirmed
plan of reorganization will determine the rights and claims of various creditors
and security holders and may compromise and/or otherwise discharge certain of
the existing obligations of each of the Debtors. No assurance can be given as to
what values, if any, will be ascribed in the bankruptcy proceedings to each of
these constituencies, and it is possible that the equity of each of the Debtor
entities, including the Company, will be restructured in a manner that may
dilute the interests of current holders of such equities or reduce substantially
or eliminate any remaining value of such equities.
Moreover, if a plan of reorganization cannot be agreed or is otherwise not
confirmed by the Bankruptcy Court, the Chapter 11 Cases, of Regus Business
Centre Corp and Stratis Business Centers, Inc. may be converted into Chapter 7
bankruptcy cases in which a trustee would be appointed to investigate and
liquidate those Debtors' assets for distribution to creditors in accordance with
the priorities established by the Bankruptcy Code. Further, in this event, the
Chapter 11 Cases of Regus and Regus Business Centre BV may also be converted
into Chapter 7 cases and liquidated by a trustee in the US with distributions
made to creditors in the order of priority established under the Bankruptcy
Code. It is also possible that Regus and Regus Business Centre BV may have to
seek bankruptcy protection and pursue reorganization or liquidation in their
respective home jurisdictions. In this event, shareholders would be very
unlikely to receive any recovery on their investment following the bankruptcy.
Maintaining adequate liquidity in the Regus Group continues to be the Board's
highest priority. The sale of a majority stake in the UK business and filing
under Chapter 11 in the US are evidence of this. Based upon the assumptions set
out under "Item 18. Financial Statements - Accounting Policies - Going Concern",
the directors have prepared the accounts on a going concern basis.
After making appropriate enquiries, the directors consider that we have
adequate resources to continue in operational existence for the foreseeable
future. For this reason, the directors continue to adopt the going-concern basis
in preparing the financial statements.
However, this assumes that:
o A Plan of Reorganization, acceptable to Regus, will be approved by US
creditors and the US courts. A Plan of Reorganization acceptable to Regus
is one which will enable Regus US to achieve cash break-even within a
reasonably short timeframe and will result in a payment profile of claims
which can be met out of further cash flows of the Group;
o Regus' German business will also be successfully restructured so as to
achieve cash break-even within a reasonable short timeframe; and
o No significant deterioration in current trading.
Nevertheless, the outcome of the Chapter 11 proceedings is unpredictable and so
there is substantial doubt over the Group's ability to continue as a going
concern in its present form. We recognise that there is a risk that this will
not be possible. If the going concern basis were to be an inappropriate basis of
preparation, it would be necessary to provide for the expenses of realising the
group assets, reducing their values to realisable amounts in circumstances and
provide for unsettled claims to the extent that these are not covered by
existing provisions for asset impairments and onerous lease obligations.
42
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth our directors and executive officers and
their ages and positions.
Name (1) Position Age
- -------- -------- ---
Directors
John Matthews Non-Executive Chairman 58
Mark Dixon Director 43
Rudolf Lobo Director 47
Stephen Stamp Director 41
Martin Robinson Non-Executive Director 40
Roger Orf Non-Executive Director 50
Executive Officers
Mark Dixon Chief Executive 43
Rudolf Lobo Executive Director 47
Stephen Stamp Group Finance Director 41
John Mlynski Chief Operating Officer 45
(1) The address for each listed director and officer is c/o Regus plc, 3000
Hillswood Drive, Chertsey KT16 0RS, England.
Mr. Matthews was appointed as non-executive director in 1995. He became
non-executive chairman on July 1, 2002. He is also chairman of Crest Nicholson
plc, a property and construction company, and a director of Rotork plc (which
sells value actuators), SDL plc, a software and computer services company and
several private companies. He is chairman of the nomination committee and a
member of the audit and renumeration committees. A chartered accountant, he has
held senior positions in investment banking and in industry, having been a
managing director of County NatWest Ltd. and chief executive of Indosuez Capital
Ltd., both of which are financial services organizations. He was also deputy
chairman and deputy chief executive of Beazer plc, a company involved in
aggregates and construction.
Mr. Dixon is the founder of Regus. His entrepreneurial skill and drive have
made him a major contributor to the growth of the serviced office industry. He
is a member of the nomination committee.
Mr. Lobo joined Regus eleven years ago and was previously Group Finance
Director. He is responsible for commercial operations and has responsibility for
Regus' IT and e-business strategy. Previously, Mr. Lobo was the group company
secretary of Medicom International Ltd, a publisher of medical journals, and a
director of several of its subsidiaries.
Mr. Stamp joined us in January 2000 from Shire Pharmaceuticals Group plc, a
pharmaceuticals company, where he was Group Finance Director. Prior to joining
Shire in 1994, he was an assistant director of corporate finance at Lazard
Brothers and before that spent four years at KPMG London, qualifying as a
chartered accountant in 1987.
Mr. Orf was appointed as non-executive director in August 1998. He is Head
of European Operations for Lone Star, a property investment company. Previously,
Mr Orf made investments for his own account and managed investments on behalf of
Apollo Real Estate Advisors. Prior to 1995, Mr. Orf was in charge of European
real estate investment banking at Goldman Sachs where he was employed from April
1982 to 1995. He is Chairman of the audit committee and a member of the
remuneration and nomination committees.
Mr. Robinson was appointed as non-executive director in August 2002. He is
currently the Chief Executive Officer of Center Parcs Europe and Chairman of
Center Parcs UK, companies which provide holiday destinations. Prior to joining
Center Parcs in 1997, he was Commercial Director of S&N Retail, a company which
managed pubs and restaurants, as well as spending four years with the management
consultancy firm, McKinsey & Co.
43
Mr. Mlynski joined us in January 2001 and is responsible for the operations
of all of our centers worldwide. Prior to joining us, he was Chief Executive
Officer of tacticity.com, an internet retailer, and prior to that he was
President of Gateway Country Stores, a seller of information technology
equipment.
Except as set out below, none of the directors and executive officers
identified above has:
o any unspent convictions in relation to indictable offenses;
o been the subject of bankruptcy proceedings or an individual voluntary
arrangement;
o been a director of any company at the time of or within 12 months
preceding its receivership, compulsory liquidation, creditors'
voluntary liquidation, administration, entry into company voluntary
arrangements or entry into composition or arrangement with its
creditors generally or any class of creditors;
o been a partner in a partnership at the time of or within 12 months
preceding such partnership's compulsory liquidation, administration or
entry into a partnership voluntary arrangement or the appointment of a
receiver over any such partnership's assets;
o had a receiver appointed with respect to any assets belonging to him;
o been the subject of public criticism by any statutory or regulatory
authority, including recognized professional bodies; or
o been disqualified by a court from acting as a director of a company or
from acting in the management or conduct of the affairs of any
company.
In December 1998, our Chief Executive, Mark Dixon, was convicted by a
Magistrates Court of causing actual bodily harm. This plea related to a 1998
incident in which Mr. Dixon was involved in a fracas that led to an individual
sustaining minor injuries. The court sentenced Mr. Dixon to serve 50 hours of
community service and ordered him to pay (pound)815 in compensation. Mr. Dixon
has satisfied the court's sentence. Our board of directors has considered this
matter and has noted that Mr. Dixon has no other convictions and that the
offense did not involve dishonesty or business impropriety. The board of
directors has taken the view that the conviction has no material bearing on Mr.
Dixon's fitness to be a director and our Chief Executive.
COMPENSATION
The aggregate compensation paid by us to all persons who served in the
capacity as director or executive officer for the year ended December 31, 2002
(7 persons) was approximately (pound)644,500 in salaries, nothing in bonuses or
severance payments, (pound)55,600 for benefits in kind and (pound)54,700 in
pension contributions. Benefits in kind include car allowance, reimbursement of
gasoline costs and private medical insurance. Of these figures, an aggregate of
approximately (pound)513,800 was paid to directors, excluding pension
contributions of (pound)52,200. These figures do not include expenses reimbursed
to executive officers, including business travel, professional and business
association dues.
We have not made any currently outstanding loans to any of our directors.
In addition, we do not have any outstanding guarantees for the benefit of any of
our directors.
BOARD PRACTICES
The Board of Directors is committed to maintaining the highest standards
of corporate governance in line with the Combined Code, issued by the London
Stock Exchange in 1998, which sets out the Principles of Good Governance and the
Code of Best Practice. A summary of the Company's procedures for applying the
principles and the extent to which the provision of the combined code have been
applied, are set out below.
Compliance statement
We have complied with the provisions set out in Section 1 of the Code of
Best Practice prepared by the Committee on Corporate Governance and published in
June 1998 ("the Combined Code") throughout the year
44
ended December 31, 2002, with the exception of provision D2- Internal Control.
Adverse trading conditions required us to undertake extensive cost-cutting
measures. This inevitably had an impact on the integrity of the system of
internal control.
Board composition
The Board currently comprises three executive directors and three
independent non-executive directors, including a non-executive chairman. The
Chairman of the audit committee, currently Roger Orf, has acted as an
independent director since 1998. The Board schedules 8 meetings each year, but
arranges to meet at other times, as appropriate. It has a formal schedule of
matters specifically reserved for its decision and approval. The Board is
supplied with appropriate and timely information to enable it to discharge its
duties and requests additional information or variations to regular reporting as
it requires. A procedure exists for directors to seek independent professional
advice at our expense in the furtherance of their duties, if necessary. In
addition, appropriate training is made available for all new directors to assist
them in the discharge of their responsibilities. All directors have access to
the advice and services of the Company Secretary, who is responsible for
ensuring that Board procedures are followed and that applicable rules and
regulations are complied with. While all directors are expected to bring an
independent judgment to bear on strategy, performance, resources (including key
appointments) and standards of conduct, the independent non-executive directors
were selected and appointed for this purpose. All directors submit themselves
for re-election at least every three years and directors appointed during the
period are required to seek re-election at the next Annual General Meeting. The
independent non-executive directors understand that the Board will not
automatically recommend their re-election.
Board committees
The Board has a number of standing committees, which all have written
terms of reference setting out their authority and duties:
Audit committee - the members of this committee are Roger Orf (Chairman),
John Matthews and Martin Robinson (all independent non-executive directors). The
audit committee meets as required, but not less than two times a year. Its
responsibilities, in addition to those referred to under Internal Control,
include a critical review of the annual and interim financial statements
(including the Board's statement on internal control in the annual report) prior
to their submission to the Board for approval, when a report from the committee
is also given. The committee also reviews the scope and results of the external
audit and its cost effectiveness and the independence and objectivity of the
auditors. Although other directors, including the Group Finance Director, attend
audit committee meetings, the committee can meet for private discussions with
the internal and external auditors.
Nomination committee - the members of this committee are John Matthews
(Chairman), Roger Orf and Martin Robinson, all independent non-executive
directors and Mark Dixon. The committee meets as required but not less than once
a year. Its responsibilities include reviewing the Board structure, size and
composition, nominating candidates to the Board to fill Board vacancies when
they arise and recommending directors who are retiring by rotation to be put
forward for re-election.
Remuneration committee - the members of this committee are Martin Robinson
(Chairman), Roger Orf and John Matthews (all are independent non-executive
directors). For a statement setting out the role and responsibility of this
committee and our remuneration policy, see "- Remuneration Policy".
Internal Control
The Board acknowledges its overall responsibility for the Group's system
of internal control and for reviewing its effectiveness on a timely basis. The
internal control processes have been designed to identify, evaluate and manage
the key risks that we encounter in pursuing our objectives. Internal control
processes encompass all controls, including financial, operational and
compliance controls and risk management. Such a system is, however, designed to
manage rather than eliminate the risk of failure to achieve business objectives,
and cannot provide absolute assurance against material misstatement.
The Board conducts regular reviews of the Group's strategic direction.
Country and regional strategic objectives, quarterly plans and performance
targets for 2003 and beyond have been set by the executive directors and are
regularly reviewed by the Board in the context of our overall objectives.
45
The control framework and key procedures in place throughout the year
ended December 31, 2002 are:
o The executive directors ("the Group executive") normally meet monthly
together with certain other senior executives to consider our
financial performance, business development and our management issues.
Directors of key operating companies meet regularly.
o Major business risks and their financial implications are appraised by
the executives responsible as part of the budget process and these 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 crystallizing.
o Country and regional budgets, containing financial and operating
targets, capital expenditure proposals and performance indicators, are
reviewed by the Group executive and must support regional business
strategies.
o Monthly reports on Group and regional performances are provided to the
Group executive. Quarterly summaries and forecasts are presented to
the Board and discussed at Board meetings. Performance against budgets
and objectives is reviewed with regional management, as are forecasts
and material sensitivities. The Board regularly receives reports from
key executives and functional heads on matters such as forecasts,
business development, strategic planning, legal matters and corporate
affairs.
o A policy governs appraisal and approval of investment expenditure and
asset disposals. Post-investment reviews are undertaken.
o Other key policies and control procedures (including finance,
operations and health and safety) are available to all staff on
web-based systems.
Our internal audit function reports to management on our worldwide
operations. Its program of work and its findings, including any material control
issues and resultant actions, are reviewed by the audit committee. However, most
of the available resourse within the internal audit department in the second
half of the year was deployed in helping with the relocation of the UK
accounting function in mid year.
To underpin the effectiveness of controls, it is our policy to recruit
and develop appropriately skilled management and staff of high caliber and
integrity. High standards of business ethics and compliance with laws,
regulations and internal policies are demanded from staff at all levels.
2002 was a difficult year for the Group. Adverse trading conditions
required the Group to undertake extensive cost cutting measures. Nevertheless,
the following key mechanisms were available to the Board at various times during
the year in the conduct of its review of internal controls:
o An ongoing process, through Board meetings, senior management meetings and
divisional reviews, as well as other management meetings, for the formal
identification of the Company's significant operational risks and
mitigating control processes;
o The Treasury Risk Committee comprising the Group Finance Director, Company
Secretary, Group Tax Manager and Group Treasurer, which meets to consider
the specific risks associated with Treasury transactions, including the
approval of all transactions in financial derivatives;
o Since the third quarter of 2001, through mid 2002, there has been an
embedded system of reporting the effectiveness of key financial,
operational and compliance controls. This is a comprehensive
self-assessment system built up from center-level using our intranet.
Results and action plans are then reviewed by senior management and
summarized for the main Board; and
o A multi-disciplinary Group Risk forum, chaired by the company secretary,
reports to the Board on a quarterly basis. Although this lapsed in the
second quarter of 2002, the forum's mandate is to consider all aspects of
risk identification and management and its reports represent a key feature
of the process by which the Board assesses the overall effectiveness of our
system of internal control.
46
Communications with shareholders
We have a policy of maintaining an active dialogue with institutional
shareholders through individual meetings with senior management. A regular
program of meetings with major institutional shareholders is held in order to
discuss matters affecting our performance. In addition, presentations are made
two times a year after the announcement of results, the details of which,
together with our financial reports and announcements, are accessible via our
Internet site. We correspond regularly on a range of subjects with our
individual shareholders who have an opportunity to question the Board, as well
as the chairmen of the audit and remuneration committees, at the Annual General
Meeting.
The remuneration committee
The remuneration committee is chaired by Martin Robinson and its other
members are John Matthews and Roger Orf. All members of this committee are
independent non-executive directors. Other directors may be invited to attend
some meetings of the committee in an advisory capacity as the committee
considers appropriate. The committee will consider all material elements of
remuneration policy, remuneration and incentives of executive directors and
senior management with reference to independent remuneration research and
professional advice in accordance with the Combined Code on Corporate
Governance, and will make recommendations to the Board of Directors on the
framework for executive remuneration and its cost. The Board of Directors is
then responsible for implementing the recommendations and agreeing the
remuneration package of individual directors. Directors are not permitted, under
our Articles of Association, to vote on their own terms and conditions of
remuneration. The committee does not make recommendations on the remuneration of
non-executive directors, which is a matter solely for the full Board. The
members of the remuneration committee attend our Annual General Meeting and are
available to answer shareholders' questions about directors' remuneration.
Remuneration policy
Remuneration policy centers on ensuring that remuneration packages are
sufficiently competitive to attract, retain and motivate the right caliber of
executive directors and senior management. Incentive payments are conditional
upon demanding performance criteria so as to align incentive awards paid to
directors directly with the interest of shareholders. The remuneration committee
uses the services of external consultants to help it agree appropriate packages
reflecting the remuneration policy. The constituent parts of those packages are
set out in the following paragraphs.
Basic salary and benefits
Salaries are reviewed annually and determined by the committee, taking
into account the performance of the individual directors over the previous 12
months and the pay and employment conditions elsewhere. The committee also uses
information provided by external consultants relating to the rates of pay for
similar positions in comparable companies. Any increases in basic salary are
effective from January 1 in each year. The remuneration table included within
this report also shows benefits received in 2002. The main benefits relate to
the provision of company cars and the provision of private medical insurance for
the director and his immediate family.
Annual performance bonus
Under the annual bonus scheme, the executive directors are entitled to an
annual bonus of up to 40% of their basic salary, which is payable provided the
budget targets for the relevant financial year are achieved.
Long-term incentive plan
Other than share options, the executive directors do not participate in
any of the long-term incentive plans offered to senior management.
Share options
We believe that share ownership by employees, including the executive
directors, strengthens the link between their personal interests and those of
ordinary shareholders. We have established a number of employee share plans,
including the Regus Team Member Share Plan, a replacement plan known as the
Regus Global Share Plan and the Regus International Sharesave Plan. As at May
31, 2003, no options had been granted to executive
47
directors, other than those detailed in the table of directors' interests at the
end of this report. During 1999, we established the Regus Employee Trust. The
Trust is a discretionary trust for the benefit of employees, including executive
directors. The Trust may issue shares to our employees (including directors) at
the discretion of the Company. The Trust has purchased some of the shares in the
Company which would be required if participants were entitled to exercise the
maximum number of options outstanding under the share option plans.
Pensions
The executive directors participate in our Money Purchase (Personal
Pension) Scheme. We match employee contributions up to a maximum of 10% of basic
salary. The main benefits to executive directors, who contribute a percentage of
their gross salaries to the scheme, are:
o A pension, based on the value of fund built up from personal
contributions, at any age between 50 and the normal pension age of 65;
o A tax-free cash sum, payable when taking the benefits;
o Life assurance cover based on the level of contributions with the
opportunity to purchase additional cover, subject to Inland Revenue
limit of 5% of net relevant earnings; and
o Pension to spouse payable on death.
All executive directors are subject to the Inland Revenue cap on the
amount of salary which may be treated as pensionable.
Service contracts
On July 1, 2000, Mark Dixon, Rudolf Lobo and Stephen Stamp entered into
full-time rolling service agreements with Regus Management Limited. These are
terminable by either party giving not less than 12 months' notice to the other
party or automatically on the respective directors reaching the age of 65.
Martin Robinson, John Matthews and Roger Orf, as non-executive directors, have
been appointed pursuant to letters of appointment dated August 7, 2002, July 1,
2002 and August 29, 2000 respectively (as amended by letters dated November 28,
2002). These appointments are for three years, terminable on six months' notice
(3 months' in the case of Mr Roger Orf) by either party.
48
Directors' and Executive Officers' remuneration table
Total Total Pension scheme Pension scheme
Salary remuneration remuneration contributions contributions
/fees Bonus Benefits 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
(pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000
- ---------------------------------------------------------------------------------------------------------------------------
Executive Directors
Mark Dixon 125.0 - 27.7 152.7 228.6 27.6 22.7
Stephen Stamp 150.0 - 9.8 159.8 109.3 13.0 12.5
Rudolf Lobo 145.0 - 11.6 156.6 160.5 11.6 11.6
Non-executive Directors
George Gray (1) - - - - 37.5 - -
Roger Orf 9.1 - - 9.1 5.0 - -
John Matthews 28.1 - - 28.1 14.6 - -
Robert Kuijpers (1) - - - - 6.3 - -
Martin Robinson 7.5 - - 7.5 - - -
Executive Officers
John Mlynski 179.8 - 6.5 186.3 249.4 2.5 3.5
----------- ----------- ----------- ------------ ----------- -------------- --------------
Total 644.5 - 55.6 700.1 811.2 54.7 50.3
----------- ----------- ----------- ------------ ----------- -------------- --------------
(1) former director
During 2002, the following contractual emoluments were irrevocably waived
by the directors:
Director Amount Waived ((pound))
-------- -----------------------
Mark Dixon 270,000
Stephen Stamp 35,000
Rudolf Lobo 20,000
George Gray 40,000
John Matthews 29,375
Martin Robinson 2,490
Roger Orf 5,937
EMPLOYEES
We are a service business and the directors recognize that our success
depends to a large extent on the caliber and motivation of the individuals we
employ. We have actively encouraged and promoted a dynamic, high work ethic
environment. All employees are regarded as "team members", irrespective of
functional title or status. Team
49
members are kept informed of developments in the business through a bi-weekly
electronic newsletter and through RegusSmart, our intranet.
As of December 30, 2002, we employed a total of approximately 2,217 people:
575 in the UK and Ireland; 872 in the rest of Europe; 497 in the Americas; 224
in the rest of the world and 49 at our UK headquarters. The employees in each
region perform management, business center staffing, sales, marketing, and
customer support functions. At December 31, 2000, 2001 and 2002 we had 1,761,
2,615 and 1,654 employees, respectively. The drop in employee numbers on 31
December 2002 follows the sale of a majority interest in the UK in which 563
people are employed.
A key element of remuneration is performance related. Currently, staff are
able to earn bonuses of up to 25% of salary and managers are able to earn
bonuses of up to 40%. An employee share scheme was introduced in December 1999
under which grants had been made to the majority of our employees as at December
31, 2002. Details of the scheme are set out under "-- Employee Share Plans".
SHARE OWNERSHIP
The table below sets forth information regarding the beneficial ownership,
(excluding share options) of our directors and executive officers of our shares
as of May 31, 2003 (the most recent practicable date). Mark Dixon has increased
his shareholding by 10,000,000 ordinary shares since our initial public
offering.
Beneficial Ownership
Name of Beneficial Owner Number Percentage
------------------------ -------------- ---------------
Directors and
Executive Officers:
Mark Dixon (1)........ 365,329,286 62.46%
Rudolf Lobo........... 127,098 0.02%
Stephen Stamp......... 384,615 0.07%
John Matthews......... 359,724 0.06%
Roger Orf (2)......... 300,000 0.05%
Martin Robinson....... - -
John Mlynski.......... - -
(1) Mr. Dixon's beneficial ownership of shares is calculated by attributing to
him all shares owned by Maxon Investments BV, an entity in which Mr. Dixon holds
a 100% beneficial ownership interest.
(2) Mr. Orf's beneficial ownership of shares is calculated by attributing to him
all shares owned by Theatre Acquisitions LLC, an entity in which Mr. Orf holds a
100% beneficial interest.
50
Directors' and executive officers share options
Granted Lapsed Date from
Option December during during December Exercise which
type 31, 2001 2002 2002 31, 2002 price exercisable Expiry date
- ---------------------------------------------------------------------------------------------------------------------
Rudolf Lobo A 266,179 - - 266,179 5.0p 01/03 12/09
A 283,503 - - 283,503 145.5p 01/03 12/09
B 11,570,000 - - 11,570,000 0.375p 12/03 -
C 4,003 - 4,003 - 242.0p 01/04 07/04
Stephen Stamp A 2,790,203 - - 2,790,203 145.5p 01/03 01/10
C 4,003 - - 4,003 242.0p 01/04 07/04
John Mylinski D 16,000 - - 6,000 $18.1875 03/05 06/08
D 32,000 - - 32,000 $18.1875 03/05 06/08
D - 80,000 - 80,000 $2.81 03/06 05/09
D - 120,000 - 120,000 $2.81 03/06 05/09
A Awarded under the Regus Team Member Share Plan for nil consideration. The
grant to Mr. Stamp is subject to higher performance targets.
B Awarded to Mr. Lobo by Maxon pursuant to an agreement dated September 17,
1999 recording the terms of an agreement entered into on November 11, 1992
between Mr. Lobo and Maxon, as amended on June 30, 2000. These shares are
currently held by HSBC Trustees (Jersey) Limited and will not be capable of
exercise before 31 December 2003 other than in defined circumstances (which
include the discretion of Maxon). The shares subject to the option are
transferable to Mr. Lobo upon payment to Maxon of an exercise price of
(pound)45,000, which is equivalent to the market value of the relevant shares
at the time the parties entered into the option arrangements.
C Awarded under the Regus International Sharesave Plan, the maximum monthly
contribution for which may not exceed the amount permitted by the Income and
Corporation Taxes Act 1988.
D. Awarded over ADR's (equivalent to 5 ordinary shares) under the Regus Global
share Plan (International) for nil consideration.
All grants are subject to performance targets.
Employee Share Plans
We have established a number of employee share plans as described below. In
addition, our board of directors has authority to establish further plans
provided that the number of shares that may be issued under those plans count
against the limits described below, that those plans do not confer benefits on
employees that are substantially greater than the benefits which an employee
could receive from participating in the plans described below and that, once
established, such plans may not be amended without the approval of the
shareholders at a general meeting if such approval would be required to amend
the comparable provisions of the plans summarized below.
The Regus Team Member Share Plan
Our team member share plan is a share option plan administered by our board
of directors or a duly authorized committee. It is divided into a number of
subplans designed to allow employees who work abroad to be granted tax efficient
options wherever possible. There is also a subplan which allows our board of
directors to grant participants awards that entitle them to a cash payment
calculated by reference to the increase in the market value of our shares
between grant and exercise. Options entitle the holder to acquire our shares.
Options may either be options to subscribe for new shares or options to purchase
existing shares from an employee trust. Options are granted under this plan for
no consideration. Three types of options have been granted: performance, premier
and
51
reward options. Options were granted to substantially all employees as of
December 1, 1999. Further issues were made during 2000. Performance options are
subject to performance targets that must normally be satisfied before the
options may be exercised. Our board of directors has the discretion to waive
some or all of the exercise price of the reward options. Options are personal to
the option holder and may not be transferred.
Premier and, subject to meeting the performance targets, performance
options become exercisable in five installments no earlier than January 1 of
each of 2003, 2004, 2005, 2006 and 2007 for grants up to May 2000 and grants
made after this date are exercisable in five installments one year later than
each of the above. Reward options become exercisable in four tranches on January
1 of each of 2003, 2004, 2005, and 2006. If the participant's employment ends,
the options lapse unless the employment ends in specified circumstances, such as
disability or redundancy.
The following table sets forth, as of December 31, 2002, by date of grant,
the number and type of options granted, the number of shares over which options
were granted, the exercise price of the options and the end of the exercise
period of the options.
Total No. of End of
No. of No. of No. of Shares Over Exercise Exercise
Date of Grant Reward Premier Performance which Options Price of Period of
Options Options Options Granted Options(2) Options
- ----------------------- -------------- ---------- ----------- -------------- ----------------------- ---------
December 10, 1999 3,896,472 9,582,328 7,492,834 20,971,634 (pound)0.05/(pound)1.455 12/9/09
January 7, 2000(1) - 128,866 2,661,337 2,790,203 (pound)1.455 1/6/10
February 2, 2000 100,000 - - 100,000 (pound)0.05/(pound)1.455 2/1/10
May 17, 2000 50,633 30,085 30,343 111,061 (pound)0.05/(pound)1.455 5/16/10
August 21, 2000 - 2,587,245 1,061,013 3,648,258 (pound)2.60 8/20/10
September 18, 2000 - 164,516 261,779 426,295 (pound)2.60 9/17/10
Lapsed Options (1,085,122) (5,838,720) (2,561,340) (9,485,182) n/a n/a
Exercised Options (128,437) - - (128,437) n/a n/a
Total 2,833,546(2) 6,654,320 8,945,966 18,433,832 n/a n/a
(1) The grant on January 7, 2000 was to Mr. Stephen Stamp and is subject to
higher performance targets.
(2) We elected to waive partially the exercise price of all of the reward
options and reduce the exercise price from (pound)1.455 to (pound)0.05
during 2000.
The Regus Global Share Plan
Our global share plan is administered by the remuneration committee of our
board of directors, all of whose members are non-executive directors.
This option plan is divided into a number of subplans which have been
designed to allow employees to be granted tax efficient options wherever
possible. Our board of directors may from time to time create additional
subplans. There is also a subplan which allows the remuneration committee to
grant participants awards that entitle them to a cash payment calculated by
reference to the increase in the market value of our shares between grant and
exercise.
Options entitle the holder to acquire our shares or ADSs. Options may
either be options to subscribe for new shares or options to purchase existing
shares from an employee trust. There are two types of option: A options and B
options. The terms of the two options are similar except that B options must be
subject to performance targets whereas performance targets are optional for A
options.
Options are personal to the option holder and may not be transferred. No
payment is required for the grant of an option.
A person is eligible for an A option if he has been employed by us or a
participating subsidiary of ours for at least 12 months, or for such shorter
period, if any, as the remuneration committee may decide. The remuneration
committee may from time to time impose additional eligibility conditions
provided that the purpose or effect of those conditions is not to restrict
eligibility for A options to higher paid employees.
52
All employees, including executive directors, are eligible to receive B
options at the discretion of the remuneration committee. An employee who is a
director of any member of our group companies is not, however, eligible to
receive a B option unless he is required to devote substantially the whole of
his working time to his duties to us.
No options may be granted more than 10 years after the date on which
options are first granted under our global share option plan.
The exercise price may not be less than the market value of a share,
determined in accordance with the Taxation of Chargeable Gains Act 1992, for the
dealing day immediately preceding the date of grant or, where options are
granted pursuant to an invitation, the date of the invitation.
Except in relation to the first grant of options to an individual or in
circumstances determined by the remuneration committee to be exceptional, the
number of shares over which an employee may be granted a B option to subscribe
on any date, when added to the number of shares in respect of which he has been
granted B options to subscribe in the previous 12 months under this option plan,
is limited so that the total cost of exercise does not exceed once times his
annual remuneration.
All B options must, and A options may, be granted subject to a performance
target, the achievement of which is normally a condition precedent to the right
of exercise. The remuneration committee has the right to set different targets
from year to year. The remuneration committee also has the discretion to change
the performance target from time to time if events happen which make it fair and
reasonable to do so but not so as to make the performance target materially
easier or more difficult to satisfy. The remuneration committee may also waive
the performance target if it considers that it is fair and reasonable to do so.
The performance targets for any options granted to our executive directors will
be disclosed in our annual report each year.
Options are exercisable normally only during such period as the
remuneration committee may decide beginning not earlier than the third
anniversary and ending not later than the tenth anniversary of grant and only if
the performance target, if any, has been met. Special rules apply, however, on
termination of employment.
Options, other than those granted under the Inland Revenue approved part,
may be satisfied by the payment of a cash sum, or shares of an equivalent value,
representing the difference between the exercise price and the market value of
the shares at the date of exercise.
The following table sets forth, as of December 31, 2002, by date of grants;
the number of shares or ADSs over which options were granted, the exercise price
of the options and the end of exercise period of the options.
- ---------------------------------------------------------------------------------------------------------------
Total No. of shares Total No. of ADSs
Date of Grant over which options over which options Exercise price of End of Exercise
granted granted options period of Options
- ---------------------------------------------------------------------------------------------------------------
December 11, 2000 n/a 120,000 $25.00 12/10
- ---------------------------------------------------------------------------------------------------------------
March 26, 2001 1,942,441 n/a (pound)2.56 3/11
- ---------------------------------------------------------------------------------------------------------------
March 26, 2001 n/a 185,636 $18 3/16 3/11
- ---------------------------------------------------------------------------------------------------------------
June 8, 2001 351,388 n/a (pound)2.56 6/11
- ------------------------ ---------------------- --------------------- ---------------------- ------------------
June 8, 2001 n/a 124,439 $18 3/16 6/11
- ---------------------------------------------------------------------------------------------------------------
June 8, 2001 84,876 n/a (pound)2.275 6/11
- ---------------------------------------------------------------------------------------------------------------
June 8, 2001 n/a 83,949 $16.20 6/11
- ---------------------------------------------------------------------------------------------------------------
August 29, 2001 1,051,250 n/a (pound)0.475 8/11
- ---------------------------------------------------------------------------------------------------------------
August 29, 2001 n/a 143,000 $3.29 8/11
- ---------------------------------------------------------------------------------------------------------------
53
- ---------------------------------------------------------------------------------------------------------------
Total No. of shares Total No. of ADSs
Date of Grant over which options over which options Exercise price of End of Exercise
granted granted options period of Options
- ---------------------------------------------------------------------------------------------------------------
November 12, 2001 3,430,000 n/a (pound)0.335 11/11
- ---------------------------------------------------------------------------------------------------------------
November 12, 2001 n/a 141,000 $2.30 11/11
- ---------------------------------------------------------------------------------------------------------------
February 28, 2002 300,000 n/a (pound)0.2475 2/12
- ---------------------------------------------------------------------------------------------------------------
February 28, 2002 n/a 1,000 $2.00 2/12
- ---------------------------------------------------------------------------------------------------------------
March 28, 2002 88,052 n/a (pound)0.44 3/12
- ---------------------------------------------------------------------------------------------------------------
May 30, 2002 136,280 n/a (pound)0.385 5/12
- ---------------------------------------------------------------------------------------------------------------
May 30, 2002 n/a 200,000 $2.81 5/09
- ---------------------------------------------------------------------------------------------------------------
August 29, 2002 500,000 n/a (pound)0.0675 8/12
- ---------------------------------------------------------------------------------------------------------------
Lapsed Options (2,508,170) (375,809) n/a n/a
- ---------------------------------------------------------------------------------------------------------------
Total 5,376,117 623,215 n/a n/a
- ---------------------------------------------------------------------------------------------------------------
The Regus International Sharesave Plan (UK Part)
This savings-related share option plan, which is operated and administered
by our board of directors or a duly appointed committee, has been designed to be
approved by the Inland Revenue under the Income and Corporation Taxes Act 1988.
All UK employees who have one or more years of continuous service with us or any
subsidiary nominated to join in our savings-related share option plan, are
eligible to participate in any invitation. Our board of directors has the
discretion to reduce or eliminate the period of qualifying service and/or to
invite other of our employees to participate.
Options entitle the holder to acquire our shares. Options may either be
options to subscribe for new shares or options to purchase existing shares from
an employee trust. No payment is required for the grant of an option. Options
are personal to the participant and may not be transferred.
Whenever invitations to participate in our savings-related share option
plan are issued, each eligible employee may apply for an option, the total
exercise price of which does not exceed the monthly contributions and bonus
repayable under the Save-as-You-Earn (SAYE) contract to be entered into as a
condition of the grant of the option. The aggregate maximum monthly contribution
payable by an employee may not exceed such sum as may from time to time be
permitted by the Income and Corporation Taxes Act 1988.
The exercise price may not be less than 80% of the market value of a share,
determined in accordance with the Taxation of Chargeable Gains Act 1992, for the
dealing day selected by our board of directors in the period of 30 days
immediately preceding the date of grant.
In normal circumstances, an option may be exercised only during the period
of six months starting on the bonus date. The bonus date is the date on which
the bonus under the related SAYE contract is payable. This is the third or fifth
anniversary of the starting date of the SAYE contract and will be determined at
the time of grant. Early exercise is allowed in circumstances where a
participant's employment terminates for a specified reason such as death,
redundancy, disability or retirement. Except in such circumstances, options
lapse when the employment ends.
In all cases of early exercise, an option may be exercised only to the
extent of the amounts then paid under the related SAYE contract and any interest
or bonus payable thereon.
As of December 31, 2002, an option over 518,051 shares had been granted
under this plan, of which 368,113 have lapsed.
54
The Regus US Stock Purchase Plan
Our US plan is operated and administered by our board of directors or a
duly authorized committee. Participation in the US plan is limited to employees
of our US subsidiaries who have been continuously employed for such period, not
exceeding one year, as our board of directors may decide and who satisfy such
other criteria as our board of directors may from time to time decide. Offers to
participate in our US plan are issued to all eligible employees.
Options entitles the holder to acquire our shares or ADSs. Options may
either be options to subscribe for new shares or options to purchase existing
shares from an employee trust. Options will be personal to the participant and
may not be transferred. No payment is required for the grant of an option.
Offers to participate in our US Plan may be issued from time to time at the
discretion of our board of directors. Each employee who wishes to participate in
an offering must agree to save over a two year period. Savings are made by way
of payroll deduction. The minimum monthly contribution is 1% of the respective
employee's salary and the maximum (including any contributions still being paid)
is $400, or such higher amount as our board of directors may decide and which is
the US dollar equivalent of the maximum contribution permitted at the time under
a savings contract linked to an Inland Revenue approved savings-related share
option scheme, which amount shall not exceed $25,000 per calendar year.
Each option is over such number of shares as has an aggregate exercise
price equal to the amount which the eligible employee agrees to save over the
two year period to which, if our board of directors so decides, there may be
added additional contributions to represent notional interest on the employee's
savings.
The exercise price may not be less than 85% of the market value of a share,
determined in accordance with the Taxation of Chargeable Gains Act 1992, for the
dealing day immediately preceding the date of grant.
Subject to adjustment in the event of a variation of share capital, the
maximum number of shares which may be made available for our US plan will be
10,000,000.
Unless a participant chooses not to exercise his option prior to the end of
the two-year savings period, it may be exercised in full on the expiry of the
two-year savings period. Generally, options lapse when an employee ceases to be
employed by us but special rules apply when the employment ends for specified
reasons such as injury, redundancy and retirement. In these cases, the option
may be exercised to the extent of the participant's accumulated savings and
interest at the date of termination.
As of December 31, 2002, an option over 23,786 ADSs had been granted under
this plan, of which 23,156 have lapsed.
The Regus International Sharesave Plan
The terms of our international sharesave plan are similar in all material
respects to the UK part of our sharesave plan. It is designed, however, for
participants who are not subject to UK tax and does not include, therefore,
those provisions which are necessary to obtain Inland Revenue approval of our
sharesave plan.
As of December 31, 2002, an option over 216,479 shares had been granted
under this plan, of which 123,382 have lapsed.
The Regus International Sharesave Plan (Irish Part)
The terms of this plan are similar in all material respects to the UK part
of our sharesave plan except that it has been designed to qualify for approval
by the Irish tax authorities. No grant has been made under this plan.
The Regus International Sharesave Plan (French Part)
The terms of this plan are similar in all material respects to the UK part
of our sharesave plan, except there will only be a five year option period and a
longer period of 20 days to establish the exercise price. In addition, the
option may normally only be exercised in respect of 20% of the shares originally
comprised in it on the fifth anniversary of grant and on each of the following
four anniversaries. The plan has been designed to qualify for approval by the
French tax authorities.
55
As of December 31, 2002 an option over 59,042 shares had been granted under
this plan, of which 12,442 have lapsed.
The Regus All-Employee Share Ownership Plan
The ownership plan, which has been designed to be approved by the Inland
Revenue under the Finance Act 2000 is constituted by a trust deed. Save to the
extent required by the terms of the trust deed, the ownership plan is
administrated by our board of directors.
On any occasion on which our board of directors decides to operate the
ownership plan, it may be operated on one or more of the bases allowed by the
legislation. These are as follows:
(i) as a free plan;
(ii) as a partnership plan; and
(iii) as a matching plan.
Under the free plan, the employing companies will provide the trustees with
funds to enable them to subscribe for and/or purchase shares which will be
allocated to the eligible employees. The maximum individual allocation of shares
under the free plan in any tax year will be (pound)3,000.
Any allocation of shares under the free plan must be made on similar terms
but can be linked to such individual, team, divisional or corporate performance
as our board of directors may decide. The performance targets set for each unit
must be broadly comparable and must not contain any features which have the
effect of concentrating the awards on directors or higher-paid employees.
Shares under the free plan must be held by the trustees for a minimum
period of three years or for such longer period not exceeding five years as our
board of directors may decide. If a participant ceases to be employed by us
before the end of this period, his shares under the free plan must be withdrawn
from the trust. If the participant ceases to be employed within the minimum
three year period, or within such shorter period as our board of directors may
decide, otherwise than in specified circumstances such as redundancy or
disability, the free plan may provide that the shares under the free plan will
be forfeited.
Under the partnership plan, an eligible employee may enter into an
agreement with us to allocate up to (pound)1,500 of his pre-tax salary each year
to subscribe for and/or purchase shares. The agreement may provide for these
partnership shares to be bought within 30 days of the day on which the deduction
is made. Alternatively, the agreement may provide for the deductions to be
accumulated for a period, not exceeding 12 months, and for the shares to be
bought within 30 days of the end of that period. A participant may withdraw his
shares under this plan at any time.
If our board of directors decides to operate the partnership plan in any
period, it may also decide to operate the matching plan in the same period.
Under the matching plan, the employing companies will provide the trustees with
funds to enable them to subscribe for and/or purchase shares which will then be
allocated to the eligible employees up to a maximum ratio of two matching shares
for every partnership share. Participation in the matching plan must be open to
all eligible employees on the same basis.
Matching shares must be held by the trustees for a minimum period of three
years or for such longer period not exceeding five years as our board of
directors may decide. If a participant ceases to be employed by us before the
end of this period, his matching shares must be withdrawn from the trust. If the
participant ceases to be employed within the minimum three year period, or
within such shorter period as our board of directors may decide, other than for
a specified reason such as redundancy or disability or withdraws his partnership
shares from the trust before the end of the minimum three year period, the
matching plan may provide that his matching shares will be forfeited.
All of our UK resident employees who have not less than one year's
continuous service, or such shorter period as our board of directors may decide,
must be eligible to participate in the plan. Other employees may be eligible to
participate in the plan at our board of directors' discretion.
The subscription price of any shares issued for the purposes of the plan
will be determined by our board of directors. Except as required by legislation,
it may not be less than an amount equal to the market value of a share,
56
determined in accordance with the Taxation of Chargeable Gains Act 1992, for the
dealing day immediately preceding the date of subscription.
The ownership plan may provide that any dividends paid on the free,
partnership or matching shares will either be paid to the participants or
re-invested in the purchase of additional shares to be held in the ownership
plan for a period of three years.
The ownership plan may provide that the voting rights attributable to the
shares of a participant may not be exercised while the shares are held in the
trust. Alternatively, the participant may be allowed to direct the trustees on
how to exercise those voting rights. The trustees will not, however, exercise
the voting rights attributable to the shares held in the trust except in
accordance with the participant's instructions.
In the event of a general offer being made to the shareholders or a rights
or capitalization issue, participants will be able to direct the trustees how to
act on their behalf.
No grant has been made under this plan.
The Regus International All-Employee Share Ownership Plan
The terms of this plan are similar in all material respects to the
ownership plan. It is designed, however, for participants who are not subject to
UK tax and does not include those provisions which are necessary to obtain
Inland Revenue approval of the ownership plan.
No grant has been made under this plan.
Provisions Common to All Plans
Except as mentioned below, the following provisions are common to each of
the plans.
Plan Limit
On any date, the aggregate nominal amount of new shares which may be
allocated pursuant to a plan may not, when added to the nominal amount of new
shares allocated in the previous 10 years under all of our employee share
schemes but after the date of listing, exceed 10% of our equity share capital.
For these purposes, shares are allocated under option plans when the
options are granted and under other schemes when the shares are issued. Options
which lapse, by reason of non-exercise or otherwise, cease to count. No account
is taken of shares which are acquired by purchase rather than by subscription
except where such shares were first issued to an employee trust for the purpose
of satisfying a participant's rights. No account is taken of shares which an
employee purchases using his own funds except on the exercise of an option under
an option plan.
Change of Control
Subject as set out in the following paragraphs, the exercise of
options/awards under the plans will be permitted in the event of a change of
control, a reorganization, an amalgamation or a voluntary winding up of Regus
plc. Unless the remuneration committee decides otherwise, options under our team
member share plan and our global share option plan may be exercised even if the
performance targets have not been met. In the event of a change of control of
Regus plc, participants may surrender their options in return for substitute
options over shares in the acquiring company.
If control is obtained by or from a person who, together with persons
connected or associated with him, holds 50% or more of our shares on the
offering date, the exercise of options/awards will not be allowed except in the
case of the Irish Plan. In these circumstances, exercise will only be permitted
if either that person becomes bound or entitled to exercise rights of compulsory
acquisition under sections 429-430F of the Companies Act or our shares will
cease to be traded on a recognized stock exchange.
If the change of control forms part of a transaction as a result of which
more than 50% of the shareholders in the acquiring company will be the same as
our shareholders and the participants are offered compensation, whether in the
form of options over shares in the acquiring company or otherwise, which our
board of directors or, as the case may be, remuneration committee considers to
be fair and reasonable, our board of directors or remuneration
57
committee may decide that options/awards (other than those granted under the
Irish Plan) which are not otherwise exercisable apart from the change of control
may not be exercised.
Listing
Application will be made to the Financial Services Authority for admission
to the Official List of new shares issued under the plans and to the London
Stock Exchange for shares to be admitted to trading. New shares issued under the
plans will rank equally in all respects with existing shares except for rights
attaching to shares by reference to a record date prior to the date of
allotment.
Variation of Capital
In the event of a variation in our share capital or in such other
circumstances as our board of directors considers appropriate, our board of
directors may adjust options/awards in such manner as it determines to be
appropriate.
Benefits Non-Pensionable
Benefits under the plans will not form part of a participant's
remuneration.
Amendments and Termination
Our board of directors or, as the case may be, our remuneration committee
may make such amendments to the plans either as are necessary or desirable to
obtain or retain the approval, where applicable, of the relevant tax authorities
or to take account of changes to applicable legislation. Our board of directors
or the remuneration committee may also make such amendments to the plans and to
any option/award as may be necessary or desirable to obtain or maintain
favorable tax, exchange control or regulatory treatment for participants or for
any company in our group of companies.
Except as described above or for amendments designed to ease the administration
of the plans or for amendments to our team member share plan or our bonus plan,
no amendment which is to the advantage of employees or participants may be made
to those provisions dealing with eligibility, individual or plan limits, the
terms of options/awards or the adjustment of options/awards without the prior
approval of our shareholders at a general meeting.
Key Employee Retention and Severance Plans
In an effort to retain its key employees ("Key Employees") through the Chapter
11 Cases, Regus Business Center Corp. sought and received the approval of the
Bankruptcy Court (i) to implement a retention plan (the "Retention Plan") and
severance plan ("Severance Plan") for the Key Employees and (ii) to establish a
general bonus pool of $100,000 for discretionary bonuses to be paid to
individual employees during the pendency of the Chapter 11 Cases.
The Retention Plan and Severance Plan are designed to minimize employee turnover
by providing incentives for Key Employees to remain in the Debtors' employ and
to work towards a successful reorganization. The Key Employees are individuals
who each possess unique knowledge, skills, and experience as well as customer
relationships which are vital to the Debtors' businesses. Increased
responsibilities, general uncertainty and other burdens occasioned by the
Debtors' status as debtors-in-possession may otherwise lead such employees to
resign in the near future and pursue alternative employment, despite the
Debtors' need for their continued services. Thus, in order to retain the Key
Employees, we determined to provide a financial incentive for continued
employment and assure our employees that they will be rewarded for dedicated
service towards the Debtors' reorganization effort, and, in the unlikely event
that the reorganization effort is not successful, that they will receive
commercially reasonable compensation for their efforts.
The retention plans authorized by the Bankruptcy Court provide for three
categories of Key Employees: (1) Corporate Executives, (2) Sales Executives and
(3) Centre Management Employees.
The Corporate Executives consist of Regus Business Centre Corp.'s four most
senior U.S. executives: John Mylnski, Brian Horn, John Arenas and Robert
Gaudreau (the "Tier One Executives"), as well as five Area Operations Directors,
the Information Technology Director for the United States, the Controller for
the United States, the Director of Human Resources, the Director of Marketing,
the Director of Systems and the United States' Chief Financial Analyst (the
"Tier Two Employees)." The Sales Executives consist of seven regional sales
58
directors and the Centre Management Employees are those employees occupying
management positions in various business centers.
Pursuant to the Severance Plan, Regus Business Centre Corp. divided the Centre
Management Employees into two basic groups: those employees managing core
business centers whose leases will be assumed (the "Assumed Employees"), and
those employees working in business centers whose leases will be rejected (the
"Rejected Employees"). The Assumed Employees will be paid their existing salary
and one-half of their bonus compensation under the Debtors' current compensation
scheme. Upon the closure of a center, those Rejected Employees whose employment
is terminated will be paid actual base salary and a payment of two months of
severance compensation for the first year of service and one month per year
thereafter, with a minimum of three months of payments and a maximum of six
months of payments.
Pursuant to the Retention Plan, Regus Business Centre Corp. will pay guaranteed
bonuses to each of the Corporate Executives and the Sales Executives. In
addition, the Corporate Executives and the Sales Executives are eligible to
receive performance-based bonuses subject to the achievement of certain
performance targets.
As part of the Severance Plan, if their employment is terminated other than for
just cause, Regus Business Centre Corp. will pay to the Tier One Executives an
amount equal to one year base salary, plus all deferred and/or unpaid benefits
under the Retention Plan. The Severance Plan for the Tier Two Employees and the
Sales Executives consists of six months of base salary with mitigation.
Any payments made pursuant to the Retention Plan will be made in lieu of, and as
a replacement for, any other payment of bonus compensation for the year 2003
with respect to any Debtor's obligations under any employment contracts.
59
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
The table below sets forth information regarding the beneficial ownership
of our shares on a fully-diluted basis as of June 21, 2003 (except for lapsed
options which are at March 31, 2003), the most recent practicable date prior to
the date of this annual report. Percentage of beneficial ownership is based on
584,934,157 shares outstanding.
Beneficial ownership is determined in accordance with the rules of the US
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. The number of our shares held in the US amounts to 5%
of our total outstanding share capital. There are two holders of record of our
shares in the US. The address for each listed director or officer is c/o Regus
plc, 3000 Hillswood Drive, Chertsey KT16 0RS, England. We believe that the
persons named in the table have sole voting and investment power with respect to
all shares shown as beneficially owned by them. The shareholders listed below
have the same voting rights as our other shareholders.
Save as disclosed below, as of July 7, 2003 which is the most recent
practicable date prior to the date of this annual report, we are not aware of:
o any arrangements that might lead to a change in control of our business,
o any person who is interested in 3% or more of our capital or
o any person other than Maxon Investments BV who can, will or could directly
or indirectly, jointly or severally, exercise control over us.
Name of Beneficial Owner Number Percentage
- --------------------------------- ----------- -----------
Paramount Nominees Limited (1) 365,329,286 62.5%
HSBC Trustee (Jersey) Limited (2) 23,140,000 3.9%
Cantor Fitzgerald Europe (3) 107,731,000 18.4%
GNI Limited 33,472,556 5.7%
(1) The beneficiary is Maxon Investments BV. Mark Dixon owns 100% interest in
Maxon.
(2) The beneficiary of half of this holding is Rudolf Lobo, and half is for
Robert Gaudreau.
(3) These shares are held as part of a contract for difference with Indigo
Capital, LLC
There are no ongoing contractual or other arrangements between any of our
shareholders, including Maxon Investments BV, and us or our management other
than those described under "--Related Party Transactions" and the service
agreement of Mark Dixon described under "Item 6. Directors, Senior Management
and Employees--Board Practices--Directors' Service Agreements" and the loan
agreement pursuant to which Maxon Investments BV has lent Rudolf Lobo $500,000
at a rate of interest on the amount outstanding at the standard variable
mortgage rate of the UK's Nationwide Building Society plus a margin of 0.75%,
such amount being repayable on 6th April, 2004, and none of our shareholders
have any special rights to appoint a member to our board. Maxon Investments BV
has confirmed to us that it will not act in a manner which it knows would
prevent us from carrying on our business independently of Maxon Investments BV.
In addition, provisions in our Articles of Association and the relevant
provisions of the Listing Rules regulate Maxon Investment BV's relationship with
us. By virtue of these factors, our directors believe that we are capable of
carrying on our business independently of Maxon Investments BV and that all
transactions and relationships between us and Maxon Investments BV are, and will
be, at arms' length and on a normal commercial basis.
RELATED PARTY TRANSACTIONS
Option Agreements with Executive Officers
Rudolf Lobo, one of our directors and executive officers, has an interest
in 11,570,000 of our existing shares in respect of which options were granted by
Maxon Investments BV pursuant to an agreement dated September 17, 1999,
recording the terms of an agreement entered into on November 11, 1992 between
Mr. Lobo and Maxon Investments BV. The agreement was amended on June 30, 2000.
Each interest represents 1.9% of our issued share capital on a fully diluted
basis as at May 31, 2003. These shares are currently held by HSBC Trustees
(Jersey)
60
Limited and will not be capable of exercise before December 31, 2003,
other than in defined circumstances, which include the discretion of Maxon
Investments BV. The shares subject to the options are transferable to Mr. Lobo
upon payment to Maxon Investments BV of an exercise price of (pound)45,000 by
Mr. Lobo which is equivalent to the market value of the relevant shares at the
time the parties entered into the option arrangements.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Consolidated financial statements are set forth under "Item 18. Financial
Statements."
LEGAL PROCEEDINGS
As a result of the Chapter 11 Cases, we are involved or are likely to be
involved in legal proceedings within the Chapter 11 Cases with respect to
disputes with our creditors. We do not believe that any of the litigation
currently in progress in the Chapter 11 Cases is material and refer the reader
generally to "Item 3. Key Information in Bankruptcy Filing" with respect to the
description of the Chapter 11 proceedings.
Additionally, we are involved from time to time in various other legal
proceedings incidental to the ordinary course of our business. We are not and
have not been involved in any significant legal or arbitration proceedings and,
as far as our directors are aware, no such proceedings are pending or threatened
by or against us which may have, or have had within the previous 12 months, a
material effect of our financial position and results of operations.
SIGNIFICANT CHANGES
The filing of the Chapter 11 Cases, as more fully described in "Item 3. Key
Information - Bankruptcy Filing" and "Item 3. Key Information - Risk Factors",
represents - significant and material change since the date of the annual
financial statements.
61
ITEM 9. LISTING DETAILS
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from the
London Stock Exchange and the Nasdaq National Market and has not been prepared
or independently verified by us. This is the latest available information to our
knowledge.
MARKET PRICE INFORMATION
Shares
Our outstanding shares are listed and traded on the London Stock Exchange.
The shares were first listed on the London Stock Exchange in October 2000. The
prices for shares as quoted in the official list of the London Stock Exchange
are in pounds. The following table shows:
o the reported high and low closing prices quoted in pounds for the
shares on the London Stock Exchange; and
o the reported high and low closing prices for the shares, translated
into US dollars, based on the noon buying rate on the last business
day of each period presented.
Price Per Share Price per Share
------------------------ ---------------------
High Low High Low
----------- ----------- --------- ----------
Annual prices:
2000 (pound)3.76 (pound)2.60 $5.62 $3.89
2001 (pound)3.92 (pound)0.12 $5.70 $0.17
2002 (pound)0.58 (pound)0.03 $0.83 $0.05
Quarterly prices:
2001:
First Quarter (pound)3.92 (pound)2.50 $5.56 $3.55
Second Quarter (pound)3.14 (pound)1.45 $4.42 $2.04
Third Quarter (pound)1.62 (pound)0.21 $2.37 $0.31
Fourth Quarter (pound)0.62 (pound)0.12 $0.90 $0.17
2002:
First Quarter (pound)0.52 (pound)0.26 $0.73 $0.37
Second Quarter (pound)0.58 (pound)0.29 $0.83 $0.45
Third Quarter (pound)0.29 (pound)0.03 $0.45 $0.05
Fourth Quarter (pound)0.17 (pound)0.06 $0.26 $0.09
2003:
First Quarter (pound)0.25 (pound)0.10 $0.41 $0.17
Second Quarter
(through June 21, 2003) (pound)0.46 (pound)0.16 $0.75 $0.26
Monthly prices:
December 2002 (pound)0.16 (pound)0.08 $0.25 $0.12
January 2003 (pound)0.25 (pound)0.10 $0.41 $0.17
February 2003 (pound)0.20 (pound)0.16 $0.31 $0.26
March 2003 (pound)0.18 (pound)0.16 $0.28 $0.25
April 2003 (pound)0.29 (pound)0.16 $0.47 $0.26
May 2003 (pound)0.36 (pound)0.25 $0.59 $0.40
June 2003
(through June 21, 2003) (pound)0.46 (pound)0.32 $0.75 $0.54
On Friday May 30, 2003, the closing price of shares on the London Stock
Exchange was (pound)0.36 equivalent to $0.589 per share translated at the noon
buying rate of (pound)0.611 per $1.00 on May 30, 2003.
ADSs
Our ADSs, each representing five shares, were originally issued in October
2000 in a public offering and traded on the Nasdaq National Market. On November
7, 2002, we voluntarily delisted our ADSs from the Nasdaq National Market and
our ADSs are currently being quoted on the over-the-counter market in the United
States. We expect to terminate our ADS program in the United States by the end
of August 2003.
The following table sets forth, for the periods indicated, the reported
high and low closing prices on the Nasdaq National Market for the outstanding
ADSs until our delisting on November 7, 2002 and on the over-the-counter market
thereafter.
62
Price per ADS
-------------------------------
High Low
--------- ---------
Annual prices:
2000 $28.25 $19.94
2001 $28.13 $1.10
2002 $3.93 $0.30
Quarterly prices:
2001:
First Quarter $28.13 $19.94
Second Quarter $21.75 $9.95
Third Quarter $10.75 $1.80
Fourth Quarter $4.35 $1.10
2002:
First Quarter $3.50 $1.65
Second Quarter $3.93 $2.00
Third Quarter $1.95 $0.30
Fourth Quarter $1.25 $0.30
2003:
First Quarter $1.85 $1.00
Second Quarter (through June 21, 2003) $3.55 $1.15
Monthly prices:
December 2002 $1.08 $0.50
January 2003 $1.85 $1.15
February 2003 $1.70 $1.30
March 2003 $1.33 $1.10
April 2003 $1.64 $1.20
May 2003 $2.80 $1.90
June 2003 (through June 21, 2003) $3.55 $3.07
MARKETS
The ordinary shares have been approved for listing on the London Stock
Exchange under the symbol "RGU" and the ADSs are currently being quoted on the
over-the-counter market in the United States under the new symbol "REGSY".
63
ITEM 10. ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION
We incorporate by reference the information disclosed under "Description of
Share Capital" in our Registration Statement on Form F-1 (File No. 333-12504).
MATERIAL CONTRACTS
None.
TAXATION
The following is a discussion of the material UK and US federal income tax
consequences of the acquisition, ownership and disposition of shares and ADSs by
US Holders (as defined below). It is based, in part on the US/UK income tax
treaty currently in force. On July 24, 2001, the US and UK signed a new income
tax treaty (the "New Treaty") which, when it becomes effective upon
ratification, might alter the rules described in this discussion.
UK Tax Considerations
This discussion describes the material UK taxation ownership and
disposition of shares and ADSs by US holders (as defined below). Although it is
not entirely free from doubt, in practice, holders of ADSs should be treated as
holding the beneficial interest in shares represented by the relevant ADSs for
the purposes of UK tax and for the purpose of the US/UK income tax treaty with
respect to income and gains (the "Treaty"). The discussion is intended as a
general guide only and is based on current UK legislation and Inland Revenue
practice as at the date of this document. These comments do not deal with the
position of classes of shareholders subject to special rules, such as dealers in
securities.
For the purposes of this summary, an "Eligible US Shareholder" means a US
holder (as defined in "--United States Federal Income Tax Considerations") that
is a beneficial owner of a cash dividend and:
o is an individual or a corporation resident in the US for the purposes
of the Treaty and, in the case of a corporation, is not also resident
in the UK for UK tax purposes;
o is not a corporation which, alone or together with one or more
associated corporations, controls, directly or indirectly, 10% or more
of our voting stock;
o holds shares or ADSs or shares in a manner which is not effectively
connected with a permanent establishment in the UK through which that
US Holder carries on business or with a fixed base in the UK from
which that US Holder performs independent personal services; and
o is not otherwise ineligible for benefits under the Treaty in
connection with the ADSs or shares.
United Kingdom Taxation of Dividends
Under current UK legislation, we are not required to withhold any amounts
in respect of tax from our dividend payments.
Eligible US Shareholders
An Eligible US Shareholder is entitled, in principle, to receive a payment
from the UK Inland Revenue in respect of a dividend from us in an amount equal
to the tax credit (the "Tax Credit Amount") to which a UK resident individual is
generally entitled in respect of the dividend generally equal to one-ninth of
the dividend received. However, that entitlement is subject to a deduction of
tax withheld under the Treaty (the "UK Withholding Tax"). In this case, the
amount of such deduction will equal the Tax Credit Amount, i.e., one-ninth of
the dividend; therefore, an Eligible US Shareholder will not be able to claim
any payment from the UK Inland Revenue in respect of a dividend from us.
US Holders should be aware, however, that under the New Treaty, US Holders
(including Eligible US Shareholders) will not be entitled to any payment with
respect to the Tax Credit Amount.
64
United Kingdom Taxation on Chargeable Gains
Shareholders who are neither resident nor ordinarily resident for tax
purposes in the UK and Eligible US Shareholders will not be liable to UK tax on
chargeable gains realized on the disposal of their shares or ADSs (as the case
may be) unless the shareholder or Eligible US Shareholder carries on a trade,
profession or vocation in the UK through a branch or agency and has used, held
or acquired the shares or ADSs (as the case may be) for the purposes of such
trade, profession or vocation or such branch or agency.
Stamp Duty and Stamp Duty Reserve Tax
Subject to some exceptions, a conveyance or transfer on sale of shares
other than to a depositary or clearance service or its nominee or agent may
attract ad valorem UK stamp duty on the instrument of transfer at the rate of
0.5% of the amount or value of the consideration for the transfer, rounded up if
necessary to the nearest multiple of (pound)5. An unconditional agreement to
transfer shares other than to a depositary or clearance service or its nominee
or agent will generally give rise to stamp duty reserve tax at the rate of 0.5%
of the amount or value of the consideration for the transfer. However, if within
six years of the date of the agreement, or, if the agreement was conditional,
the date the agreement became unconditional, an instrument of transfer is
executed pursuant to the agreement and stamp duty is paid on that instrument,
then the charge to stamp duty reserve tax will be cancelled or, where the stamp
duty reserve tax charge has been paid, the stamp duty reserve tax will, provided
that a claim for repayment is made, be repaid.
A charge to stamp duty or stamp duty reserve tax may arise on the issue or
transfer of shares to an issuer of depositary receipts, to its nominee or agent
or to particular persons providing a clearance service, their nominees or their
agents. The rate of stamp duty or stamp duty reserve tax will generally be 1.5%
of either (a) in the case of an issue of shares, the issue price of the shares
concerned, or (b) in the case of a transfer of shares, the value of the
consideration or, in some circumstances, the value of the shares concerned. In
the case of stamp duty, the amount will be rounded up if necessary to the
nearest multiple of (pound)5.
No stamp duty reserve tax will be payable on an agreement to transfer an
ADR and provided that the ADR (and any instrument or written agreement of
transfer) is executed and retained at all times outside the UK it should not in
practice be necessary to pay stamp duty in respect of such transfer. On a
transfer of shares from the custodian of a depositary to a holder of an ADS upon
cancellation of the ADS where there is no transfer of beneficial ownership, a
fixed stamp duty of (pound)5 per instrument of transfer will be payable by such
holder.
Paperless transfers of shares within CREST are generally liable to stamp
duty reserve tax, rather than stamp duty. CREST is obliged to collect stamp duty
reserve tax on relevant transactions settled within the system. Deposits of
shares into CREST generally will not be subject to stamp duty or, unless the
transfer into CREST itself is for consideration, to stamp duty reserve tax.
Stamp duty reserve tax is generally the liability of the purchaser and
stamp duty is normally paid by the purchaser.
Special rules apply to market intermediaries and to some sale and
repurchase and stock borrowing arrangements.
Agreements to transfer shares to charities will not give rise to stamp duty
or stamp duty reserve tax.
If you are in any doubt as to your tax position or if you require more
detailed information than that outlined above you should consult an appropriate
professional adviser immediately.
United States Federal Income Tax Considerations
This discussion describes the material US federal income tax consequences
of the acquisition, ownership and disposition of shares and ADSs in the year
2002. This discussion of US federal income tax consequences applies to you only
if you are a US holder. For purposes of this discussion, you are a "US holder"
if you are a beneficial owner of shares or ADSs and you are, for US federal
income tax purposes:
o an individual citizen or resident of the US;
o a corporation, or an entity treated as a corporation, organized under
the laws of the US or any state thereof or the District of Columbia;
or
65
o otherwise subject to US federal income tax on a net income basis in
respect of the shares or ADSs.
This discussion applies only to holders who will hold shares or ADSs as capital
assets. This discussion is based:
o upon current US law, US Internal Revenue Service practice, US judicial
decisions, administrative pronouncements and US Treasury Regulations,
changes to any of which after the date hereof could apply on a
retroactive basis and affect the tax consequences described herein;
and
o in part upon representations of the Depositary and assumes that each
obligation provided for in or otherwise contemplated by the Deposit
Agreement and any related agreement will be performed in accordance
with its respective terms.
The following discussion does not address all of the tax consequences that
may be relevant to you in light of your particular situation. For example, this
discussion does not address the treatment of insurance companies, regulated
investment companies, tax-exempt organizations, financial institutions, holders
subject to the alternative minimum tax, securities broker-dealers, persons
holding through foreign partnerships or other pass-through entities, holders who
hold shares or ADSs as part of hedging or conversion transactions or holders who
own directly, indirectly or by attribution 10% or more of the voting power of
Regus and holders whose functional currency for US tax purposes is not the US
dollar.
You should consult your own tax advisers as to the particular tax
consequences to you under US federal, state and local and other laws, of the
acquisition, ownership and disposition of shares or ADSs. Holders of ADSs will
be treated as owners of the underlying shares attributable thereto.
Taxation of Sales or other Dispositions
If you sell or otherwise dispose of your shares or ADSs, you will recognize
capital gain or loss for US federal income tax purposes in the same manner as on
the sale or disposition of any other shares held by you as capital assets. As a
result, you will generally recognize capital gain or loss for US federal income
tax purposes equal to the difference between the amount realized and your
adjusted basis in the shares or ADSs. This capital gain or loss will be
long-term capital gain on loss if your holding period in the shares or ADSs
exceeds one year. Any gain or loss will generally be US source.
We believe that we will not be considered a "passive foreign investment
company" for US federal income tax purposes. However, since our status as a
passive foreign investment company depends on the composition of our income and
assets and the market value of our assets from time to time, there can be no
assurance that we will not be considered a possible foreign investment company
in any taxable year. If we were treated as a passive foreign investment company
in any taxable year during which you held shares or ADSs you may be subject to
certain adverse consequences, including the imposition of tax at higher rates
than would otherwise apply to income derived from the shares or ADSs as well as
additional tax form filing requirements.
DOCUMENTS ON DISPLAY
The documents concerning us which are referred to herein may be inspected
at the Securities and Exchange Commission. You may read and copy any document
filed or furnished by us at the SEC's public reference rooms in Washington D.C.,
New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
further information on the reference rooms.
66
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our treasury policy seeks to ensure that adequate financial resources are
available for the development and growth of its operations while managing its
currency, interest rate and counter-party risks. Our treasury strategy and
policy is developed centrally with subsidiary companies operating within a
framework of controls approved by the Board. We do not engage in speculative
transactions. Our policy on the major areas of treasury activity is set out
below.
Currency translation risk
The results of our foreign subsidiaries are translated into Sterling at
the average exchange rates for the period concerned. The balance sheets of
foreign subsidiaries are translated into Sterling at the closing exchange rates.
Any gains and losses resulting from the translation are recorded in reserves
where they are matched with the gains and losses on borrowings, foreign exchange
contracts, currency swaps or currency options, used to hedge the net assets of
subsidiaries. Our treasury makes proposals to a committee of the Board each
quarter on hedging its foreign assets in this way. Quantitative information on
fair value of instruments is given in note 21 in the accounts in this annual
report.
Currency transaction exposure risk
Currency transaction exposure arises where sales and purchases are
transacted by a business unit in a currency other than its own functional
currency. The majority of the Group's businesses, however, sell to clients and
pay suppliers in their local markets in their own functional currencies and
therefore have limited transaction exposure. Where this is not the case, it is
our policy to cover material transactions as soon as they are committed and to
use forward and/or option currency contracts to do so. Quantitative information
on currency exposure is given in note 21 in the accounts in this annual report.
Funding and deposits
Outstanding borrowings comprise office equipment financed through finance
and operating leases and specific loans from certain property owners advanced on
commercial terms. Wherever possible borrowings are matched to the local currency
of the borrower or, in the case of lease finance, to the life of the asset
financed. Surplus funds are deposited in investment grade instruments that carry
low credit risk and which are readily realisable in major currencies.
Counter-party risk
We actively manage our relationships with a panel of high-quality
financial institutions. Cash assets, borrowings and other financial instruments
are distributed against predetermined limits approved by the Board to control
exposure to any particular institution.
Interest rate risk
Our current policy is normally to borrow or invest surplus funds on a
floating rate basis. Group Treasury is, however, currently undertaking a review
of policy in light of our continued holding of surplus cash. This review will
consider the appropriateness of fixing interest rates using forward rate or
interest rate swap agreements. Quantitative information for interest rate risk
is given in note 21 of "Item 18 - Financial statements".
67
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDER AND USE OF
PROCEEDS
Not applicable. However, please see "Item 3. Key Information - Bankruptcy
Filing" and "Item 3. Key Information - Risk Factors" concerning possible
modifications to the rights of security holders that could result from the US
bankruptcy process.
ITEM 15. CONTROLS AND PROCEDURES
The Group's Chief Executive and its Financial Director, after evaluating the
effectiveness of the Group's disclosure controls and procedures (as defined in
the Exchange Rules Act 13a-14(c) and 15d-14(c)) within 90 days of the date of
this annual report on Form 20-F (the "Annual Report"), have concluded that, as
of such date, the Group's disclosure controls and procedures were effective to
ensure that material information relating to the Group was made known to them by
others within the Company, particularly during the period in which the Annual
Report was being prepared.
As discussed in "Item 6. Directors, senior management and employees"
certain key mechanisms available to the Board in the conduct of its review of
internal control did not function throughout the year. For example, the self
assessment system was only effective from the third quarter of 2001 through mid
2002. However, this did not impact on the Group's disclosure and control
procedures.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the Company's Chief Executive officer and its Finance Director completed
their evaluation, nor were there any significant deficiencies or material
weaknesses in the Company's internal controls requiring corrective actions.
68
PART III
ITEM 18. FINANCIAL STATEMENTS
INDEX TO THE FINANCIAL STATEMENTS
Signatures....................................................................71
Independent Auditor's report..................................................73
Consolidated profit and loss accounts.........................................74
Consolidated balance sheets...................................................75
Consolidated cash flow statements.............................................76
Consolidated statements of total recognised gains or losses...................77
Reconciliation of movements in Group shareholder's (deficit)/funds............77
Accounting policies...........................................................78
Notes to the consolidated financial statements................................84
1. Segmental reporting............................................84
2. Loss on ordinary activities before tax.........................85
3(a). Exceptional Items............................................85
3(b). Profit on sale of Group undertakings.........................85
4. Profit and loss account of holding company.....................85
5. Employees and directors........................................86
6. Net interest payable and other similar charges.................86
7. Taxation.......................................................87
8. Loss per share.................................................88
9. Goodwill.......................................................89
10. Tangible fixed assets.........................................90
11. Investments...................................................91
12. Debtors.......................................................92
13. Creditors - amount falling due within one year................92
14. Creditors - amount falling due after one year ................93
15. Maturity of debt..............................................93
16. Provisions for liabilities and charges........................94
17. Called up share capital.......................................94
18. Share premium account.........................................95
19. Reserves......................................................95
20. Cash flow statement...........................................95
21. Financial Instruments.........................................97
22. Employee share ownership plan................................100
23. Capital commitments..........................................101
24. Operating lease commitments..................................101
25. Contingent liabilities.......................................102
26. Related party transactions...................................102
27. Post balance sheet events....................................102
28. Ultimate parent company and controlling party................102
29. Summary of differences between UK and US GAAP financial
statements.................................................103
30. Additional US GAAP disclosures...............................106
31. Principal group companies....................................112
69
CERTIFICATE PROVIDED IN ACCORDANCE WITH SECTION 302 OF THE SARBANES-OXLEY ACT
I, Mark Dixon, certify that:
1. I have reviewed this annual report on Form 20-F of Regus plc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-15) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated July 14, 2003
By: /s/ Mark Dixon
Chief Executive Officer
70
CERTIFICATE PROVIDED IN ACCORDANCE WITH SECTION 302 OF THE SARBANES-OXLEY ACT
I, Stephen Stamp, certify that:
1 I have reviewed this annual report on Form 20-F of Regus plc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4 The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-15) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5 The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6 The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated July 14, 2003
By: /s/ Stephen Stamp
Group Finance Director
71
Independent Auditors' Report
To the Shareholders and the Board of Directors of REGUS PLC.
We have audited the accompanying consolidated balance sheets of REGUS PLC
and its subsidiaries (together, the Group), as of 31 December 2002 and 2001 and
the related consolidated profit and loss account, statements of cash flows and
total recognized gains and losses and reconciliation of movements in group
shareholders' (deficit)/funds for each of the years in the three-year period
ended 31 December 2002. These consolidated financial statements are the
responsibility of the Group's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. These standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Group as
of 31 December 2002 and 2001 and the results of their operations and their cash
flows for each of the years in the three-year period ended 31 December 2002 in
conformity with generally accepted accounting principles in the United Kingdom
The accompanying financial statements have been prepared assuming the Group will
continue as a going concern. As discussed in item 3 of the accounting policies
note to the consolidated financial statements, the Group has experienced
financial difficulties, including recurring losses, net current liabilities,
deficit equity, certain significant cash flow negative businesses and the filing
for relief under Chapter 11 of the US Bankruptcy Code by the Group's US
businesses, that raise substantial doubt about the Group's ability to continue
as a going concern in its present form. Future funding of the Group is dependent
upon:
o A Plan of Reorganisation acceptable to Regus being approved by US
creditors and the US courts. A Plan of Reorganisation acceptable to
Regus is one which will enable Regus US to achieve net cash generation
within a reasonably short timeframe and will result in a payment
profile of claims which can be met out of future cashflows of the
group;
o Regus' German business also being successfully restructured so as to
achieve cash break-even within a reasonably short timeframe; and
o There being no significant deterioration in current trading.
The consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted in
the United States of America. Application of accounting principles generally
accepted in the United States of America would have affected results of
operations for each of the years in the three-year period ended 31 December 2002
and shareholders' funds as of 31 December 2002 and 2001, to the extent
summarized in Note 29 to the consolidated financial statements.
By: /s/ KPMG Audit plc .......................................................
London England
June 4, 2003
72
Regus plc
Consolidated profit & loss account
12 months to 12 months to 12 months to
31 Dec 2002 31 Dec 2001 31 Dec 2000
Note (pound) '000 (pound) '000 (pound) '000
Turnover (including share of joint ventures) 1 445,407 524,622 429,200
Less: Share of turnover of joint ventures 1 (9,803) (11,989) (8,075)
------------------ ----------------- -----------------
Group turnover 435,604 512,633 421,125
------------------ ----------------- -----------------
Cost of sales (center costs) before exceptional items (413,339) (434,787) (320,832)
Exceptional cost of sales 3 (56,972) (37,955) -
------------------ ----------------- -----------------
Cost of sales (center costs) after exceptional items (470,311) (472,742) (320,832)
------------------ ----------------- -----------------
Gross (loss)/profit (center contribution) 1 (34,707) 39,891 100,293
------------------ ----------------- -----------------
Administration expenses before exceptional items (61,076) (91,255) (86,859)
Exceptional administration expenses 3 (35,096) (52,591) (9,501)
------------------ ----------------- -----------------
Administration expenses after exceptional items (96,172) (143,846) (96,360)
------------------ ----------------- -----------------
Group operating (loss)/profit (130,879) (103,955) 3,933
Share of operating loss in joint ventures 1 (5,497) (5,572) (1,027)
------------------ ----------------- -----------------
Total operating (loss)/profit: Group and share of joint (136,376) (109,527) 2,906
ventures
Profit on sale of group undertakings 22,716 - -
------------------ ----------------- -----------------
(Loss)/profit on ordinary activities before interest (113,660) (109,527) 2,906
Net interest payable and other similar charges 6 (5,404) (554) (6,763)
------------------ ----------------- -----------------
Loss on ordinary activities before tax 2 (119,064) (110,081) (3,857)
Tax on loss on ordinary activities 7 (5,480) (10,090) (9,926)
------------------ ----------------- -----------------
Loss on ordinary activities after tax (124,544) (120,171) (13,783)
Equity minority interests 1,145 1,933 253
------------------ ----------------- -----------------
Retained loss for the financial year 19 (123,399) (118,238) (13,530)
================== ================= =================
Loss per ordinary share: 8
Basic and diluted (p) (21.9) (21.0) (2.7)
See accompanying notes to consolidated financial statements
All results arose from continuing operations.
73
Regus PLC
Consolidated balance sheets
31 Dec 2002 31 Dec 2001
Note (pound)'000 (pound)'000
Fixed assets
Intangible assets 9 - 4,307
Tangible assets 10 93,772 242,299
Investments
Investment in own shares 11 3,805 3,805
Investment in associates 11 12,458 -
Other investments 11 29 33
Interest in joint ventures: 11
--------------- -------------
Share of gross assets - 15,656
Share of gross liabilities - (14,562)
---------------- -------------
- 1,094
--------------- -------------
Total investments 16,292 4,932
--------------- -------------
110,064 251,538
--------------- -------------
Current assets
Stocks 293 392
Debtors: amounts falling due within one year 12 59,025 114,288
Debtors: amounts falling due after more than one year 12 - 3,000
Cash at bank and in hand 58,610 117,074
--------------- -------------
117,928 234,754
Creditors: amounts falling due within one year 13 (177,963) (344,392)
--------------- -------------
Net current liabilities (60,035) (109,638)
Total assets less current liabilities 50,029 141,900
--------------- -------------
Creditors: amounts falling due after more than one year 14 (19,796) (24,806)
Provision for deficit on joint ventures
--------------- --------------
Share of gross assets 8,630 -
Share of gross liabilities (10,253) -
--------------- --------------
11 (1,623) -
Provisions for liabilities and charges 16 (57,242) (28,302)
--------------- -------------
Net (liabilities)/assets (28,632) 88,792
=============== =============
Capital and reserves
Called- up share capital 17 29,110 29,106
Share premium account 18 279,765 279,765
Other reserves 19 6,508 4,056
Profit and loss account 19 (343,775) (224,482)
--------------- -------------
Equity shareholders' (deficit)/funds (28,392) 88,445
Equity minority interests (240) 347
--------------- -------------
(28,632) 88,792
=============== =============
See accompanying notes to consolidated financial statements
74
Regus plc
Consolidated cash flow statements
12 months to 12 months to 12 months to
31 Dec 2002 31 Dec 2001 31 Dec 2000
Note (pound)'000 (pound)'000 (pound) '000
Cash (outflow)/inflow from continuing operating activities
Net cash inflow before exceptional items 5,820 56,140 117,899
Outflow related to exceptional items 20(a) (16,603) (12,144) -
------------ ------------ -----------
Net cash (outflow)/inflow from continuing operating activities 20(a) (10,783) 43,996 117,899
------------ ------------ -----------
Returns on investments and servicing of finance
Interest received 1,901 3,906 3,851
Interest paid (2,051) (252) (7,993)
Interest paid on finance leases (2,637) (3,351) (2,861)
------------- ------------ -----------
(2,787) 303 (7,003)
------------ ------------ -----------
Taxation
Tax paid (4,077) (6,275) (2,224)
------------ ------------ -----------
(4,077) (6,275) (2,224)
------------ ------------ -----------
Capital expenditure and financial investment
Purchase of tangible fixed assets (15,274) (105,633) (88,078)
Sale of tangible fixed assets 557 3,052 1,506
Purchase of own shares - - (42,500)
Purchase of investments - (26) -
------------ ------------ -----------
(14,717) (102,607) (129,072)
------------ ------------ -----------
Acquisitions and disposals
Sale/(purchase) of subsidiary undertakings 16,236 (5,712) -
Investment in joint ventures (743) (5,631) (3,789)
--------------- ------------ ------------
15,493 (11,343) (3,789)
--------------- ------------ ------------
Cash outflow before management of liquid resources and financing (16,871) (75,926) (24,189)
Management of liquid resources 20(b) 55,426 45,643 (78,712)
Financing 20(b) (32,276) 22,714 118,766
--------------- ------------ -----------
Increase/(decrease) in cash in the year 20(c)& 6,279 (7,569) 15,865
(d)
============== ============ ===========
See accompanying notes to consolidated financial statements
75
Regus plc
Consolidated statements of total recognized gains and losses
12 months to 12 months to 12 months to
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound)'000 (pound)'000 (pound)'000
Loss for the financial year (123,399) (118,238) (13,530)
Exchange differences 4,108 197 2,675
Tax charge on exchange differences - - (872)
------------- ---------- ------------
Total recognised gains and losses for the year (119,291) (118,041) (11,727)
============= ========== ============
Reconciliation of movements in Group shareholders' (deficit)/funds
12 months to 12 months to 12 months to
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound)'000 (pound)'000 (pound)'000
Loss for the financial year (123,399) (118,238) (13,530)
Net proceeds of ordinary shares issued 4 3,396 238,548
Exchange differences 4,108 197 2,675
Reclassification of fair value of warrants to non 2,450 - -
distributable reserves
Tax charge on exchange differences - - (872)
------------- ---------- -----------
Net (decrease)/increase in shareholders' funds (116,837) (114,645) 226,821
Shareholders' funds/(deficit) at 1 January 88,445 203,090 (23,731)
-------------- ---------- -----------
Shareholders' (deficit)/funds at 31 December (28,392) 88,445 203,090
============= ========== ===========
See accompanying notes to consolidated financial statements
76
Regus Plc
Accounting Policies
Description of business
Regus plc (the "Company"), formerly Regus Business Centres plc, and its
consolidated subsidiaries (the "Group") are engaged in the provision of fully
serviced business centers offering clients a mix of workstations, conference
rooms and related support services. The Group operates an international network
of business centers and is divided into four geographic regions, UK & Ireland,
Rest of Europe, Americas and Rest of World. Maxon Investments BV ("Maxon") is
the ultimate parent company and M L J Dixon, the Chief Executive of the Company,
has an effective controlling interest in the equity shares of the Company via
Maxon.
On January 14, 2003 the Company, Regus Business Centre Corp., Stratis Business
Centers Inc and Regus Business Centre BV (collectively, the "Debtors") filed
voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy code (the
"Bankruptcy Code") in the United States Bankruptcy Court of the Southern
District of New York (the "Court") under case numbers 03-20026 through 03-20029.
The Debtors are currently operating their business as "debtors-in-possession"
under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy
Procedure and applicable court orders. In general, as debtors-in-possession, the
Debtors are authorized under Chapter 11 to continue to operate as an ongoing
business, but may not engage in transactions outside the ordinary course of
business without the prior approval of the Bankruptcy Court.
Basis of preparation
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United Kingdom ("UK GAAP"),
under the historical cost convention. These principles differ in certain
significant respects from generally accepted accounting principles in the United
States ("US GAAP"). Application of US GAAP would have affected shareholders'
funds and results of operations at and for the years ended 31 December 2001 and
2002, to the extent summarised in note 29.
The preparation of financial statements in conformity with UK GAAP and US GAAP
requires management to make estimates and assumptions that reflect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses for an accounting period. Such estimates and assumptions could change
in the future as more information becomes known or circumstances change, such
that the Group's results may differ from the amounts reported and disclosed in
the financial statements. The following principal accounting policies have been
applied consistently in dealing with items which are considered material in
relation to the Group's financial statements.
Going Concern
Excluding the cash impact from the sale of the UK business, the Group recorded a
cash outflow of (pound)9.3 million. At 31 December 2002, the Group had net
current liabilities of (pound)60.0 million and net liabilities of (pound)28.6
million. In 2002, Regus UK was the largest cash generative business although,
following the disposal of a majority interest in Regus UK in 2002, the Group no
longer has access to these cash flows. The remainder of the Regus Group,
comprises a mixture of cash positive and cash negative businesses, the most cash
negative of which are the US and German businesses.
a) United States of America
In the year ended 31 December 2002, Regus' US business recorded an operating
loss of (pound)84 million. Regus had invested significantly in new centers on
the West Coast of the US in response to demand from technology companies in
particular. As the general economic downturn took effect, which was felt most
acutely in the technology sector, losses in Regus' US business widened as demand
for serviced offices fell. Throughout most of 2002, Regus sought to restructure
the terms of its leases and related guarantees through bilateral negotiation
with US landlords with the objective of bringing Regus US to cash break-even or
better.
77
Despite substantial progress towards a negotiated settlement, Regus was unable
to reach a satisfactory settlement with US landlords within the necessary
timeframe and therefore on 14 January 2003 Regus' US subsidiaries, Regus
Business Centres Corp. ("Regus US") and Stratis Business Centres Inc.
("Stratis") each filed a voluntary petition for relief under Chapter 11 of the
US Bankruptcy Code in the Court of the Southern District of New York. Regus plc
and Regus Business Centre BV, which are holding companies for the Regus Group
and have given guarantees in relation to certain leasehold liabilities of the US
business, also filed for relief under Chapter 11. Regus plc and Regus Business
Centres BV are not engaged in any form of administrative proceedings or other
arrangement with creditors outside of the US.
Chapter 11 gives each Regus company which has filed for Chapter 11 legal
protection from its US creditors by immediately freezing all pre-existing
financial claims of those creditors both in US and non-US courts. Thus, although
US landlords may have claims pursuant to guarantees given by either Regus plc or
Regus Business Centres BV, notwithstanding that neither Regus entity is US
domiciled, any such claims against those entities fall within the jurisdiction
of the US Courts and benefit from the protections afforded by Chapter 11.
Under Chapter 11, Regus US is able to elect whether it wishes to affirm or
reject leases on a case-by-case basis. To the extent that a lease is rejected,
the statutory maximum claim, in respect of future rent that the landlord would
have against each of the relevant lessee companies and the relevant guarantor
will be limited to the higher of (i) one years rent or (II) 15% of the remaining
lease term, not to exceed three years, in each case under the relevant. In the
absence of chapter 11, the termination of a lease would require the lessee (or
the guarantor) to pay all the rent due on the balance of the lease, subject to
any mitigation by the landlord.
Regus US is party to 74 real property leases and a further 8 equipment leases in
the US and, through a joint venture company, is party to a further 12 real
property leases. Most real property leases have 8-10 years unexpired term. Regus
US expects to use the provisions of Chapter 11 to reject some property leases.
In respect of the remaining US property leases, including leases held by joint
venture companies, negotiations with US landlords are at an advanced stage.
These negotiations anticipate modifications to existing leases including
reductions in space and/or rent in return for a compensation payment by Regus.
Once negotiations with US landlords and other US creditors are concluded, Regus
will prepare a Plan of Re-organisation which will include proposals for the
payment of claims and compensation payments. These payments are likely to be
paid over an extended period of time out of the projected cash flows of the
Regus Group. Once the Plan of Re-organisation has been agreed by US creditors
and confirmed by the US court, payment of settlements to US creditors can begin
and each Regus Chapter 11 Company can emerge from Chapter 11 protection. The
process of preparing, agreeing, filing and approving a Plan of Re-organisation
is likely to take a number of months. The Group is conducting its Chapter 11
proceedings in the belief that they will be concluded successfully, that the
group will achieve its projected cash flows and thereby be able to meet the
Court-approved Plan of Re-organisation.
b) Germany
In the year ended 31 December 2002, Regus' German businesses recorded an
operating loss before exceptional items of (pound)3.0 million. The German
business has also been re-organised with a view to bringing the German business
to cash break-even or better on a run rate basis. This re-organisation has
involved re-negotiation of certain leases and may result in the closure of one
cash negative German subsidiary.
c) Other factors
On 30 December 2002, Regus sold a 58% interest in its UK business to Alchemy
Partners ("Alchemy"). Alchemy subscribed (pound)16.3 million for new shares and
paid Regus (pound)25.6 million for existing shares in the UK business. At the
same time, Regus repaid a (pound)10.5 million loan from the UK business, leaving
the Regus Group with net cash from the transaction of (pound)15.1 million. In
addition, deferred consideration is receivable by Regus in two tranches: the
first tranche of up to (pound)10 million is dependant upon the EBITDA (Earnings
Before Interest, Tax, Depreciation and Amortisation) for the year ended 31
December 2002 and net current liabilities and net cash at 31 December 2002 of
the UK business meeting certain parameters; and a second tranche equivalent to
70% of the amount of by which EBITDA exceeds (pound)29 million. Regus is also
entitled to receive 42% of any dividends declared by the UK business. The
deferred consideration has not been recognised in these financial statements.
In July 2003, (pound)10 million (unaudited) was received in connection
with the first tranche of deferred consideration as set out above.
78
At 31 December 2002, the Group had available free cash balances of (pound)29.9
million, but no other undrawn bank facilities. Accordingly the Group is reliant
upon existing cash resources and operating cash flows to fund ongoing
activities.
The financial statements have been prepared on the going concern basis, which
assumes that:
o A Plan of Re-organisation, acceptable to Regus, will be approved by
the US creditors and the US courts. A Plan of Re-organisation
acceptable to Regus is one which will enable Regus US to achieve cash
break-even within a reasonably short timeframe and will result in a
payment profile of claims which can be met out of the future cash
flows of the Group;
o Regus' German business will also be successfully restructured so as to
achieve cash break-even within a reasonably short time frame; and
o No significant deterioration in current trading.
Nevertheless, the outcome of the Chapter 11 proceedings is unpredictable and so
there is substantial doubt over the Groups ability to continue as a going
concern in its present form. The Directors recognise that there is a risk that
continuation as a going concern will not be possible. If the going concern basis
were to be an inappropriate basis of preparation, it would be necessary for the
expenses of realising the group assets, reducing their values to realisable
amounts in these circumstances and provide for unsettled claims to the extent
that these are not covered by existing provisions for asset impairments and
onerous lease obligations.
Basis of consolidation
The consolidated financial statements include the accounts of the company and
all its subsidiary undertakings, which have all been prepared to 31 December
2002. Where subsidiary undertakings are acquired or disposed of during the year,
the consolidated profit and loss account includes only the results for the part
of the year during which they are subsidiary undertakings.
Transactions in foreign currencies
Assets and liabilities of foreign subsidiaries and related hedging instruments
are translated into sterling at the closing exchange rate prevailing at the
balance sheet date. Results of overseas undertakings are translated into
sterling at the average rates of exchange for the relevant period. Differences
arising from the re-translation of the results of overseas undertakings are
dealt with through reserves.
Transactions in foreign currency are recorded using the rate of exchange at the
date of the transaction. Monetary assets and liabilities denominated in foreign
currencies are translated using the rate of exchange prevailing at the balance
sheet date and the gains or losses on translation are included in the profit and
loss account.
Goodwill
Purchased Goodwill, (representing the excess of the fair value of the
consideration given and associated costs over the fair value of the separable
net assets acquired) arising on consolidation is capitalized as an intangible
fixed asset and amortised to nil by equal annual instalments over its estimated
useful life, normally 20 years.
On the subsequent disposal or termination of a business, the profit or loss on
disposal or termination is calculated after charging the unamortised amount of
any related goodwill (negative goodwill).
Associates
An associate is an undertaking in which the Group has a long-term interest,
usually from 20% to 50% of the equity voting rights, and over which it exercises
significant influence. The Group's share of its profits less losses of
associates is included in the consolidated profit and loss account and its
interest in their net assets, other than goodwill, is included in investments in
the consolidated balance sheet.
Joint Ventures
A joint venture is an undertaking in which the Group has a long term interest
and over which it exercises joint control. The Group's share of the profits less
losses of joint ventures is included in the consolidated profit and loss
79
account and its interest in their net assets, other than goodwill, is included
in investments in the consolidated balance sheet.
Tangible fixed assets and depreciation
Depreciation is provided on a straight line basis at rates calculated to write
off the cost of fixed assets to their estimated residual value over their
estimated useful lives at the following rates:
Furniture - 5 years
Fixtures and fittings - shorter of the lease term, the first break
point of the lease or 10
years
Telephones and office equipment - 5 years
Computer hardware - 3 years
Computer software - 2 years
Cars - 4 years
Fixed asset investments
Fixed asset investments are generally accounted for at cost less provision for
impairment.
Sale of Group Undertakings
Consideration for the sale of Group subsidiaries is not recognised until the
exact amount has been agreed.
Stocks
Stocks are stated at the lower of cost and net realisable value. Stocks relate
to items purchased for resale to customers and to items intended for
distribution within the business such as office supplies and marketing
materials.
Taxation
Deferred tax is recognised, without discounting, in respect of all timing
differences between the treatment of certain items for taxation and accounting
purposes which have arisen but not reversed by the balance sheet date, except as
otherwise required by FRS 19.
Refurbishment
The terms of most building leases require Regus to make good dilapidation or
other damage occurring during the rental period. Accruals for dilapidations are
only made when it is known that a dilapidation has occurred. However, due to the
nature of the business, centers are maintained to a high standard.
Turnover
Turnover represents the value of services provided to third parties in the year
and is exclusive of VAT and similar taxes.
Cost of sales
Cost of sales consists of costs from the individual business centers, including
property lease costs, employee costs and start-up costs.
Pensions
The Group operates defined contribution schemes. Contributions are charged to
the profit and loss account on an accruals basis.
80
Leases
a) Finance leases
Where the Group enters into a lease for furniture, fittings, equipment or cars
which entails taking substantially all the risks and rewards of ownership of an
asset, the lease is treated as a finance lease. This also includes occasions
where the Group takes interest bearing extended credit from suppliers and
certain loans from landlords.
Under all such lease arrangements the asset is recorded in the balance sheet as
a tangible asset and is depreciated over its estimated useful life in accordance
with the policy described above. Future instalments under such leases, net of
finance charges, are included in creditors.
Lease payments are apportioned between the finance element, which is charged to
the profit and loss account on a sum of the digits basis or a post-tax actuarial
basis, and the capital element, which reduces the outstanding obligation for
future instalments.
b) Building leases
Building leases are all accounted for as operating leases because substantially
all the risks and rewards of ownership remain with the lessor.
The rental on certain leases is wholly or partly conditional on the
profitability of the center and therefore the risk to the business, in terms of
rent, is reduced. Once all outstanding rent has been paid, landlords receive a
share of the profits of the center.
For leases which are wholly or partly conditional on the profitability of the
center, an estimate is made of the likely rent payable based on profitability in
respect of the period up to the date of the first market rent review or first
break point in the lease, whichever is sooner, and this is spread on a straight
line basis over that period. Any subsequent changes in estimates are spread over
the remaining period to the date of the first market rent review or first break
point in the lease, whichever is sooner. Amounts payable in respect of profit
shares are accrued once a sufficient net surplus has been made which would
result in a profit share being paid.
Any incentives or rent free periods on conventional leases and the conventional
element of leases, which are partly conventional and partly conditional on
profitability are spread on a straight line basis over the period to the date of
the first market rent review or first break point in the lease, whichever is
sooner, so that the amounts charged to the profit and loss account are the same
each year over that period.
Financial instruments
The Group uses various derivative financial instruments to hedge its exposures
to fluctuations in foreign exchange risks. These include forward currency
contracts and currency options.
The accounting method used for derivative financial instruments is determined by
whether or not the instrument is designated as a hedge of an existing exposure
and, if so by the accounting method used for the item being hedged.
The Group considers its derivative financial instruments to be hedges when
certain criteria are met.
Forward currency contracts
The Group's criteria to qualify for hedge accounting are:
o The instrument must be related to a foreign currency asset or
liability;
o It must involve the same currency as the hedged item;
o It must reduce the risk of foreign currency exchange movements on the
Group's operations.
The group has established policies and procedures for risk assessment and the
approval, reporting and monitoring of derivative financial instruments. The
group does not enter into financial instruments for trading or speculative
purposes.
81
Forward currency contracts are marked to market at the period end, with the
resulting exchange gains or losses taken to administration expenses in the
profit and loss account, except where the hedged item's exchange difference is
reflected in reserves (such as quasi equity loans). In this situation the gain
or loss is taken to reserves. The gains or losses on the forward contracts are
recognised when the gains or losses on the underlying hedged transactions are
recognised. The net resulting unrealised asset or liability is reflected in
debtors or creditors as appropriate.
Premiums or discounts on derivative financial instruments that hedge an existing
exposure are charged or credited to interest income or cost over the life of the
instrument. The related asset or liability is classified as an accrual or
prepayment.
Derivative financial instruments that are not designated as hedges are marked to
market using period end market rates and gains or losses are taken to the profit
and loss account.
Gains or losses arising on hedging instruments which are cancelled due to the
termination of the underlying exposure are taken to administration expenses
immediately.
Currency options
Under hedge accounting for currency options, the Group defers the instruments
impact on profit until it fully recognises the underlying hedged item in the
profit and loss account.
Option costs are charged to the interest cost over the life of the option
contract. The related asset is classified as prepayments.
At maturity, any realised gain on the option is recognised in the profit and
loss account in administration expenses.
Cash and liquid resources
Cash for the purposes of the cash flow statement, comprises cash in hand and
deposits repayable on demand, less overdrafts payable on demand. Liquid
resources are current asset investments which are disposable without curtailing
or disrupting the business and are either readily convertible into known amounts
of cash at or close to their carrying values or traded in an active market.
Liquid resources comprise term deposits of less than one year (other than cash),
government securities and investments in money market managed funds.
82
Notes to the financial statements
1 Segmental reporting
The following tables set out the Group's segmental analysis by geographic region
and by established and new centers. Established centers are those that have been
open for a period of at least 18 months as at the end of the relevant period and
new centers are those that have been open for less than 18 months as at the end
of the relevant period. The numbers reported include exceptional costs.
Turnover Gross profit/(loss) (center contribution)
12 months to 12 months to 12 months to 12 months to 12 months to 12 months
31 Dec 2002 31 Dec 2001 31 Dec 2000 31 Dec 2002 31 Dec 2001 to 31 Dec
2000
(pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000
Geographical analysis
United Kingdom & 176,680 215,188 188,862 31,370 56,916 59,619
Ireland
Rest of Europe 140,116 151,879 118,933 (20,633) 9,132 29,214
Americas 98,109 124,096 94,296 (45,490) (28,752) 13,850
Rest of World 30,502 33,459 27,109 46 2,595 (2,390)
------------ ------------ ------------ ------------ ------------ ------------
445,407 524,622 429,200 (34,707) 39,891 100,293
============ ============ ============ ============ ============ ============
Total Group 435,604 512,633 421,125
Total joint 9,803 11,989 8,075
ventures
============ ============ ============
Established centers 408,121 410,829 293,555 (27,077) 90,859 92,329
New centers 27,483 101,829 127,570 (7,630) (50,968) 7,964
------------ ------------ ------------ ------------ ------------ ------------
Total 435,604 512,633 421,125 (34,707) 39,891 100,293
============ ============ ============ ============ ============ ============
Operating profit/(loss) Net liabilities/assets
12 months 12 months 12 months
to 31 Dec to 31 Dec to 31Dec
2002 2001 2000 31 Dec 2002 31Dec 2001 31Dec 2000
(pound)'000 (pound) '000 (pound) '000 (pound)'000 (pound) '000 (pound)'000
Geographical analysis
United Kingdom & 18,031 44,267 39,193 6,227 46,932 20,852
Ireland
Rest of Europe (39,514) (8,341) 6,723 (76,478) (39,183) (31,622)
Americas (86,179) (67,937) (12,389) (137,421) (65,110) (1,924)
Rest of World (3,274) (2,729) (10,523) (31,716) (29,596) (29,474)
Other* (25,440) (74,787) (20,098) 210,756 175,749 244,832
------------- ------------- ------------- ------------ ------------ -------------
(136,376) (109,527) 2,906 (28,632) 88,792 202,664
============= ============= ============= ============ ============ =============
Total Group (130,879) (103,955) 3,933 (27,009) 87,698 198,524
Total joint
ventures (5,497) (5,572) (1,027) (1,623) 1,094 4,140
============= ============= ============= ============ ============ =============
Prior year figures have been re-presented to exclude internal management fees.
* includes non-regional exceptional costs.
Exceptional charges to the profit and loss account for 2002 by region were: United Kingdom and Ireland credit
(pound)0.8 million (2001: (pound)1.1 million); Rest of Europe (pound)31.8 million (2001: (pound)13.7 million);
Americas (pound)47.9 million (2001: (pound)28.0 million); Rest of World (pound)2.5 million (2000: (pound)0.9
million); and, Other (pound)10.7 million (2001: (pound)46.8 million).
There is no difference between segmental information on an origin basis and on a destination basis.
The directors are of the opinion that the whole of the turnover is derived from the same class of business.
83
2 Loss on ordinary activities before tax
12 months to 12 months to 12 months to
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound)'000 (pound) '000 (pound) '000
Loss before tax is stated after charging:
Depreciation of tangible fixed assets:
- owned assets 40,283 47,827 27,671
- assets under finance leases 16,113 16,060 12,875
loss/(profit) on sale of fixed assets 894 (32) 1,520
Provision for impairment of fixed assets - 12,166 -
(note3)
Goodwill amortization 238 196 -
Operating leases:
- property 137,990 191,842 136,969
- equipment 7,198 9,426 6,033
Audit fees:
- company 4 5 5
- group 611 782 546
Non audit fees paid to KPMG:
- UK companies - 153 204
- group 250 1,497 496
- Business disposal reporting 130 - -
Exceptional items (note 3) 92,068 90,546 9,501
Non-exceptional non audit fees are primarily in respect of tax compliance
services. In 2000, in addition to the fees above, audit fees of
(pound)240,000 and non audit fees of (pound)786,000 paid to KPMG were
offset against the share premium account.
3(a) Exceptional items
Included in the results for the year to 31 December 2002 were pre-tax
exceptional charges as follows:
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound)'000 (pound)'000 (pound)'000
Cost of sales:
Onerous leases, related closure and restructuring 20,130 37,955 -
costs
Write-down of tangible assets 36,842 - -
Administration expenses:
Onerous leases, related closure and restructuring 34,145 4,955 -
costs
Write-down of software assets - 4,566 -
Impairment of acquisition goodwill 4,002 4,916 -
Impairment of investment in own shares - 32,621 -
Aborted business sales and mergers 722 3,283 -
Non-recoverable Ryder Cup expenditure - 2,250 -
Business interruption insurance receipt (3,773) - -
Reduction in exercise price on options 9,501
------------- - -------------- ---------------
92,068 90,546 9,501
============= = ============== ===============
The impact of exceptional items on tax charge is given in note 8.
3(b) Profit on the sale of group undertakings
In the year two group undertakings were sold which generated a (pound)22.7
million profit. The most significant transaction was the sale of a 58%
interest in the UK business to Alchemy Partners, which contributed
(pound)23.0 million. In addition the Romanian business was sold to a
franchisee at a small loss of (pound)0.3 million.
4 Profit and loss account of holding company
Of the loss attributable to shareholders, a loss of (pound)288,043,000
(December 2001: profit of (pound)2,881,000, December 2000: loss of
(pound)11,922,000) is dealt with in the accounts of Regus plc. As permitted
by Section 230 of the UK Companies Act 1985, the Company has not presented
its own profit and loss account.
84
5 Employees and directors
12 months to 12 months to 12 months to
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound)'000 (pound) '000 (pound) '000
Staff costs for the Group during the year
Wages and salaries 58,318 71,672 61,648
Social security costs
Pension costs
7,958 11,127 7,851
504 360 260
------------ ------------ ------------
66,780 83,159 69,759
============ ============ ============
The Group contributes to the personal pension schemes of a small number of
employees. The amount which is included within creditors is (pound)16,300
(2001:(pound)18,000, 2000:(pound)44,000).
12 months to 12 months to 12 months
31 Dec 2002 31 Dec 2001 to
31 Dec 2000
Number Number Number
Average number of people (including executive
directors) employed
Centre staff 1,742 1,923 1,525
Sales staff 269 363 284
Finance staff 151 170 135
Other staff 124 200 157
------------ ------------ -----------
2,286 2,656 2,101
============ ============ ===========
12 months to 12 months to 12 months
31 Dec 2002 31 Dec 2001 to
31 Dec 2000
(pound) '000 (pound) '000 (pound) '000
Directors
Aggregate emoluments 514 562 988
============ ============ ===========
Company pension payments to money purchase scheme 48 47 48
============ ============ ===========
Highest paid director
Aggregate emoluments 160 229 448
============ ============ ===========
Company pension payments to money purchase scheme 13 23 28
============ ============ ===========
Retirement benefits are accruing to three directors under a money purchase
scheme. In 2000, two directors received share options under the long term
incentive scheme.
More detailed information on directors emoluments is provided in the
report of the Remuneration Committee.
6 Net interest payable and other similar charges
12 months to 12 months to 12 months to
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound)'000 (pound) '000 (pound) '000
Interest payable on overdrafts and loans 4,482 842 7,749
Interest payable on finance leases 2,700 3,339 2,867
------------ ------------ ------------
7,182 4,181 10,616
Interest income (1,917) (3,877) (3,863)
Share of joint venture net interest payable 139 250 10
------------ ------------ ------------
Net interest payable and other similar charges 5,404 554 6,763
============ ============ ============
85
7. Taxation
12 months to 31 2 months to 31 12 months to
December 2002 December 2001 31 December2000
(pound)'000 (pound) '000 (pound) '000
Current tax
United Kingdom
Corporation tax at 30% (2000 & 1999: 30%) 5,776 5,588 4,402
Under provision in respect of prior periods 212 - -
Foreign tax
Corporation taxes 852 4,440 4,752
(Over) / under provision in respect of 188 - (22)
prior periods
---------------- -------------- --------------
Total current tax 7,028 10,028 9,132
================ ============== ==============
Deferred tax
Origination and reversal of timing
differences
United Kingdom (555) 62 794
Foreign (993) - -
---------------- -------------- --------------
Total deferred tax (1,548) 62 794
---------------- -------------- --------------
Total tax on loss on ordinary activitities 5,480 10,090 9,926
=============== ============== ==============
Approximate gross tax losses to carry
forward against certain future overseas
corporation tax liabilities
199,536 126,561 76,910
=============== ============== ==============
No deferred tax has been provided on the unremitted accumulated reserves of
the subsidiary undertakings as accumulated reserves of subsidiary
undertakings are retained to finance their business.
At 31 December 2002, the total unremitted accumulated reserves of the
subsidiary undertakings were (pound)15,525,000 (2001: (pound)6,168,000
2000: (pound)2,047,000)
The tax losses above have the following expiration dates:
As at As at As at
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound)'000 (pound) '000 (pound) '000
2001 - - 196
2002 - 727 757
2003 1,850 1,682 2,592
2004 11,504 12,395 15,885
2005 8,536 8,712 7,574
2006 6,487 7,848 397
2007 9,321 3,479 482
2008 120,251 66,248 27,165
------------ ------------- -----------
157,949 101,091 55,048
Available indefinitely 41,587 25,470 21,862
------------ ------------- -----------
199,536 126,561 76,910
============ ============= ===========
86
A reconciliation of the actual tax charge resulting from applying the UK
statutory rate to the loss before tax is as follows.
12 months to 31 12 months to 12 months to 31
December 2002 31 December 2001 December 2000
(pound)'000 (pound)'000 (pound)'000
Loss on ordinary activities before tax (119,064) (110,081) (3,857)
Tax on loss on ordinary activities at 30% (35,719) (33,024) (1,157)
(2001: 30%)
Effects of:
Expenses not deductable for 17,987 26,128 2,668
tax purposes
Profit on disposal of (6,086) - -
interests in group companies
Depreciation in excess of 10,771 6,541 3,706
capital allowances
Utilization of tax losses (1,084) (953) (1,133)
Losses carried forward to future periods 20,684 17,938 6,907
Difference in tax rates on overseas earnings 75 (6,602) (1,837)
Adjustment to tax charge in respect of prior periods 400 - (22)
--------------- ------------ ---------------
Total current tax 7,028 10,028 9,132
Origination and reversal of timing differences (1,548) 62 794
--------------- ------------ ---------------
Actual tax charge 5,480 10,090 9,926
=============== ============ ===============
There was no tax charge arising from joint venture operations.
8 Loss per share
Loss per share has been calculated by dividing the retained loss for the
financial year by the weighted average number of ordinary shares in issue
excluding those held under the employee share trust.
There were no adjustments to the retained loss for the year for the diluted
earnings per share computations.
The 2002, 2001 and 2000 diluted shares were not included in the computation
of diluted earnings per share due to losses in those years, resulting in
options being antidilutive.
The following summarizes the calculation of loss per share for the years
ended 31 December 2000, 2001 and 2002:
31 Dec 2002 31 Dec 2001 31 Dec2000
Loss for the year ((pound)'000) (123,399) (118,238) (13,530)
Weighted average ordinary shares in Issue ('000's) 564,052 563,528 497,889
- basic and diluted
------------- ------------- ------------
Loss per ordinary share - basic and diluted (p) (21.9) (21.0) (2.7)
============= ============= ============
87
9 Goodwill
(pound) '000
Cost
At 1 January 2002 9,419
Additions 12
Exchange differences (84)
--------
At 31 December 2002 9,347
========
Amortization
At 1 January 2002 5,112
Charge for the period 238
Impairment 4,002
Exchange differences (5)
--------
At 31 December 2002 9,347
========
--------
Net book value at 31 December 2002 -
--------
Cost
At 1 January 2001 -
Additions 9,496
Exchange differences (77)
--------
At 31 December 2001 9,419
========
Amortization
At 1 January 2001 -
Charge for the period 196
Impairment 4,916
--------
At 31 December 2001 5,112
========
--------
Net book value at 31 December 2001 4,307
--------
In April 2001 the Group acquired three subsidiaries for a total
consideration of (pound)9.1 million: Stratis Business Centres Inc in the US
and Satellite and Skyport Business Centres in the Netherlands, consisting
of (pound)5.7 million cash and shares of (pound)3.4 million. The net
liabilities of the companies at the date of acquisition were (pound)0.3
million resulting in goodwill on acquisition of (pound)9.4 million. There
were no material fair value adjustments. Subsequently the directors have
determined that there has been an total impairment in the value of goodwill
arising from acquisitions and, accordingly, it is prudent that the goodwill
be written down. .
88
10 Tangible fixed assets
Furniture & Computers Motor Total
fittings vehicles
(pound)'000 (pound)'000 (pound)'000 (pound)'000
Cost
At 1 January 2001 244,693 21,497 422 266,612
Exchange differences (2,328) (183) (2) (2,513)
Additions 115,230 13,248 55 128,533
Acquisitions 676 136 - 812
Disposals (3,844) (2,272) (187) (6,303)
----------------- ------------- ----------- ----------
At 31 December 2001 354,427 32,426 288 387,141
----------------- ------------- ----------- ---------
Aggregate depreciation
At 1 January 2001 65,272 7,690 197 73,159
Exchange differences (997) (89) - (1,086)
Charge for the period 53,091 10,698 98 63,887
Provision for impairment 7,600 4,566 - 12,166
Disposals (980) (2,188) (116) (3,284)
----------------- ------------- ----------- -----------
At 31 December 2001 123,986 20,677 179 144,842
----------------- ------------- ----------- -----------
Net book value at 31 December 2001 230,441 11,749 109 242,299
================= ============= =========== ===========
Cost
At 1 January 2002 354,427 32,426 268 387,141
Exchange differences (10,221) (686) (10,907)
Additions 18,202 2,063 20,265
Business disposals (136,873) (6,963) (143,836)
Other disposals (3,680) (4,881) (160) (8,721)
----------------- ------------- ----------- -----------
At 31 December 2002 221,855 21,959 128 243,942
----------------- ------------- ----------- -----------
Aggregate depreciation
At 1 January 2002 123,986 20,677 179 144,842
Exchange differences (3,294) (448) 1 (3,741)
Charge for the period 49,069 7,290 37 56,396
Business disposals (70,840) (6,066) - (76,906)
Provision for impairment 36,842 - - 36,842
Disposals (2,275) (4,862) (126) (7,263)
----------------- ------------- ----------- -----------
At 31 December 2002 133,488 16,591 91 150,170
----------------- ------------- ----------- -----------
Net book value at 31 December 2002 88,367 5,368 37 93,772
================= ============= =========== ===========
The impairment provision has been calculated as follows:
- where a center has been identified for closure or partial closure the
fixed assets concerned have been fully written down.
- For others with a negative EBITDA in 2002 and an anticipated negative
EBITDA for 2003 the total fixed asssets have been written down to the
expected cash flows for the five year period 2003 to 2007, discounted
at a rate of 7%
The net book value of tangible fixed assets includes an amounts in respect
of fixed assets held under finance leases as follows:
Group Group
31 Dec 2002 31 Dec 2001
(pound)'000 (pound)'000
Cost 58,217 96,282
Depreciation (28,114) (43,169)
------------ -----------
Net book value 30,103 53,113
============ ===========
89
11 Investments
Investment Group Group Group Group Company
in own interest interest other Total shares in
shares in in joint investments group
associates ventures undertakings
(pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000
At 1 January 2001 47,021 - 4,134 6 51,161 5,631
Exchange differences - - 154 - 154 -
Additions - - 2,631 27 2,658 -
Revaluation (1,821) - - - (1,821) -
Provision for (41,395) - - - (41,395) -
impairment
Share of loss retained - - (5,825) - (5,825) -
----------- ------------ ------------ ------------ --------- -------------
At 1 January 2002 3,805 - 1,094 33 4,932 5,631
Exchange Differences - - (6) (4) (10) -
Additions - 12,458 746 - 13,204 6,205
Disposals - - 2,181 - 2,181 (5,631)
Provision for - - - - - (6,204)
impairment
Share of loss retained - - (5,638) - (5,638) -
----------- ------------ ------------ ------------ --------- -------------
At 31 December 2002 3,805 12,458 (1,623) 29 14,669 1
=========== ============ ============ ============ ========= =============
*The nominal value of the Group's investment in own shares is (pound)0.9
million. Note 22 provides details of investments in own shares.
Details of investments in subsidiary companies are given in section 30.
Group Group
31 Dec 2002 31 Dec 2001
Results of Regus UK (pound)'000 (pound)'000
Turnover - -
--------------------------------------------------------------------------
Profit before tax - -
Taxation - -
--------------------------------------------------------------------------
Profit after tax - -
--------------------------------------------------------------------------
Fixed assets 27,090 -
Current Assets 24,296 -
Liabilities due within one year (38,520) -
Liabilities due after one year (408) -
--------------------------------------------------------------------------
Net Assets 12,458 -
--------------------------------------------------------------------------
90
12 Debtors
Amounts falling due within one year
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound)'000 (pound)'000 (pound)'000
Trade debtors 21,622 45,103 60,990
Amounts owed by participating interest 1,966 4,136 1,862
Other debtors 20,449 30,144 29,940
Prepayments and accrued income 10,331 23,804 26,364
VAT recoverable 4,657 11,101 10,521
----------- ------------- --------------
59,025 114,288 129,677
----------- ------------- --------------
Amounts falling due after one year
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound)'000 (pound)'000 (pound)'000
Amounts owed by participating interest - 3,000 -
----------- ------------- --------------
- 3,000 -
----------- ------------- --------------
Total debtors 59,025 117,288 129,677
=========== ============= ==============
An allowance for bad and doubtful debts is recorded at the end of each
year based upon the expected collectability of all trade receivables. An
analysis of the bad and doubtful debt provision is as follows:
31 Dec 2002 31 Dec 2001
(pound)'000 (pound)'000
Opening balance 2,858 1,701
Additional charges to profit and loss account 3,243 1,916
Provision utilisation (107) (724)
Provision released on the sale of business (3,576) -
Exchange difference 24 (35)
-------------- -----------
Closing balance 2,442 2,858
============= ===========
13 Creditors - amounts falling due within one year
31 Dec 2002 31 Dec 2001
(pound)'000 (pound)'000
Bank loans and overdrafts 4,079 6,018
Non-convertible bond - 40,000
Other loans 699 724
Obligations under finance leases 11,788 14,909
Trade creditors 29,188 44,452
Customer deposits 36,430 72,584
Other tax and social security 4,439 12,364
Corporation tax 10,529 13,396
Deferred income 20,351 31,847
Deferred landlord contributions 1,241 7,195
Rent accruals 37,424 65,715
Other accruals 18,150 31,818
Other creditors 3,645 3,370
------------- ------------
177,963 344,392
============== ============
Certain bank loans are secured on the assets of the applicable
subsidiaries and bear interest at commercial rates. All other creditors
are unsecured and non-interest bearing.
91
14 Creditors - amounts falling due after more than one year
31 Dec 2002 31 Dec 2001
(pound)'000 (pound)'000
Bank loans 5 8
Loan from associate 5,000 -
Other loans 1,262 1,322
Obligations under finance leases 13,393 23,064
Accruals and deferred income 98 365
Other creditors 38 47
------------ -----------
19,796 24,806
============ ===========
Certain bank loans are secured on the assets of the applicable subsidiaries
and bear interest at local commercial rates.
The loan from associate incurs interest at a [insert rate here] and is
repayable after ten years.
All other creditors are unsecured and non-interest bearing.
As at 31 December 2002 the Group had no other available credit facilities
(December 2001: nil).
15 Maturity of debt
The maturity profile of the carrying amount of the Group's financial
liabilities as at 31 December was as follows:
Non-convertible Bank loans Finance
bond & overdrafts Other Loans leases Total
31 Dec 2002 31 Dec 2002 31 Dec 2002 31 Dec 2002 31 Dec 2002
(pound)'000 (pound)'000 (pound) '000 (pound)'000 (pound)'000
Within 1 year - 4,079 699 11,788 16,566
Between 1 and 2 years - 4 225 7,654 7,883
Between 2 and 5 years - 1 658 5,375 6,034
In 5 years or more - - 5,379 364 5,743
----------------- ------------- --------------- ------------- -----------
- 4,084 6,961 25,181 36,226
================= ============= =============== ============= ===========
Non-convertible Bank loans Finance
bond & overdrafts Other Loans leases Total
31 Dec 2001 31 Dec 2001 31 Dec 2001 31 Dec 2001 31 Dec 2001
(pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000
Within 1 year 40,000 6,018 724 14,909 61,651
Between 1 and 2 years - 4 260 11,231 11,495
Between 2 and 5 years - 4 716 11,196 11,916
In 5 years or more - - 346 637 983
--------------- ----------- -------------- ------------- -----------
40,000 6,026 2,046 37,973 86,045
=============== =========== ============== ============= ===========
The following provides additional disclosure for bank loans and overdrafts
and other loans:
31 Dec 2002 31 Dec 2001
(pound)'000 (pound)'000
Within 1 year 4,778 46,742
Between 1 and 2 years 229 264
Between 2 and 3 years 203 221
Between 3 and 4 years 146 383
Between 4 and 5 years 310 116
After 5 years 5,379 346
----------- -----------
11,045 48,072
=========== ===========
The following provides additional finance lease disclosure including the
interest components of future minimum lease payments (company nil):
92
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound)'000 (pound)'000 (pound)'000
Within 1 year 13,440 17,370 11,966
Between 1 and 2 years 8,656 12,597 11,967
Between 2 and 3 years 3,762 8,188 7,862
Between 3 and 4 years 1,050 3,403 1,970
Between 4 and 5 years 491 569 1,379
After 5 years 650 492 1,118
----------- ----------- -----------
Total commitment 28,049 42,619 36,262
Less amounts representing interest (2,868) (4,646) (4,498)
----------- ----------- -----------
Present value of future minimum lease payments 25,181 37,973 31,764
Within 1 year 11,788 14,909 10,614
----------- ----------- -----------
After 1 year 13,393 23,064 21,150
=========== =========== ===========
16 Provisions for liabilities and charges
Onerous lease Total
Deferred tax obligations
(pound) '000 (pound) '000 (pound) '000
At 1 January 2002 856 27,446 28,302
Provided in year - 50,785 50,785
Utilized in year (1,506) (19,250) (20,756)
Provisions released on the sale of - (563) (563)
business
Exchange differences 1 (527) (526)
------------ ------------- -------------
At 31 December 2002 (649) 57,891 57,242
------------ ------------- -------------
Amounts falling due within one year - 17,214 17,214
Amounts falling due after one year (649) 40,677 40,028
At 1 January 2001 794 - 794
Provided in year 62 28,165 28,227
Exchange differences - (719) (719)
------------ ------------- -------------
At 31 December 2001 856 27,446 28,302
------------ ------------- -------------
Amounts falling due within one year - 19,953 19,953
Amounts falling due after one year 856 7,493 8,349
There is no unprovided deferred tax liability (note 7)
17 Called up share capital
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound)'000 (pound)'000 (pound)'000
Authorised
800,000,000 (2001: 800,000,000)
ordinary shares of 5p each 40,000 40,000 40,000
----------- ----------- -----------
Allotted and fully paid
582,193,517 (2001: 582,112,320)
ordinary shares of 5p each 29,110 29,106 29,034
----------- ----------- -----------
During 2002, 81,197 new ordinary shares of 5 pence each were issued in
respect of exercised share options, see note 22.
As at 31 December 2002 warrants for 5,000,000 shares with an exercise price
of 5 pence per share were held by the convertible debenture holders. These
were granted in January 2002 to those who took up the company's (pound)40
million convertible bond offer in December 2001. These are exercisable at
any time between 14 February 2003 and 14 February 2005. Warrants for
2,500,000 shares have been exercised so far in 2003.
In April 2001, 1,388,895 new ordinary shares of 5 pence each were issued
for a total consideration of (pound)3,486,750 in respect of the acquisition
of Stratis Business Centres Inc.
In March 2000 1,855,670 new A ordinary shares of 5 pence each were allotted
for a total consideration of (pound)2,700,000.
In October 2000, 97,598,307 ordinary shares of 5 pence each were issued in
an Initial Public Offering for a total consideration of (pound)253,756,000.
At the same time, the new A & B ordinary shares of 5 pence each were
re-classified as ordinary shares of 5 pence each.
93
18 Share premium account (non distributable)
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound)'000 (pound) '000 (pound) '000
At 1 January 279,765 279,858 46,283
Premium on issue of shares during period - - 251,483
Issue costs* - (93) (17,908)
----------------------------------------------------
At 31 December 279,765 279,765 279,858
====================================================
* Issue costs for 2001 relate to additional costs associated with the
Initial Public Offering in 2000.
19 Reserves
Profit and loss Other (non
distributable)
(pound)'000 (pound)'000
At 1 January 2001 (106,417) 615
Retained loss for the period (118,238) -
Premium on shares issued for acquisitions - 3,417
Transfer to/from captial reserve (34) 34
Exchange differences 207 (10)
------------- -------------
At 1 January 2002 (224,482) 4,056
Loss for the period (123,399) -
Reclassify fair value of warrant interest
to non-distributable reserves - 2,450
Transfer to/from captial reserve 19 (19)
Exchange differences 4,087 21
------------- -------------
At 31 December 2002 (343,775) 6,508
============= =============
20 Cash flow statement
(a) Reconciliation of operating profit to
net cash inflow from operating activities
<caption>
12 months to 12 months to 12 months to
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound)'000 (pound) '000 (pound) '000
Continuing operating activities
Operating (loss)/profit (130,879) (103,955) 3,933
Depreciation charge 56,074 63,887 40,546
Goodwill amortization 238 196 -
Loss/(profit) on disposal of fixed assets 894 (32) 1,520
Impairment of goodwill 4,002 4,916 -
Impairment of fixed assets 36,842 12,166 -
Impairment of investment in own shares - 41,395 -
Increase in provisions 31,548 28,165 -
Decrease/(increase) in stocks 104 (109) (33)
Decrease/(increase) in debtors 25,114 17,208 (58,228)
(Decrease)/increase in creditors (34,720) (19,841) 130,161
------------ ------------ ------------
Net cash (outflow)/inflow from continuing operating
activities (10,783) 43,996 117,899
============ ============ ============
The cash outflow includes a (pound)16,603,000 outflow (2001: outflow
(pound)12,144,000) relating to the exceptional item charged during the
year (see note 3).
94
(b) Financing and management of liquid resources
12 months to 12 months to 12 months to
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound)'000 (pound) '000 (pound) '000
Management of liquid resources
New cash deposits (18,603) (50,981) (95,897)
Repayment of cash deposits 74,029 96,624 17,185
------------ ------------ ------------
55,426 45,643 (78,712)
============ ============ ============
Financing
New loans 5,850 42,180 13,945
Repayment of loans (41,063) (4,566) (116,325)
Payment of prinicipal under finance leases (13,979) (16,793) (14,702)
Issue of equity shares 16,916 1,985 253,756
Issue costs - (92) (17,908)
------------ ------------ ------------
(32,276) 22,714 118,766
============ ============ ============
(c) Reconciliation of net cash flow to movement in net funds/(borrowings)
12 months to 12 months to 12 months to
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound)'000 (pound) '000 (pound) '000
Increase/(decrease) in cash in the period 6,279 (7,569) 15,865
Cash outflow/(inflow) from change in borrowings and 49,192 (20,821) 117,082
finance leases
Cash (inflow)/outflow from change in liquid resources (55,426) (45,643) 78,712
------------ ------------ ------------
Change in net funds/(borrowings) resulting from cash 45 (74,033) 211,659
flows
Acquisitions (6,651) (783) -
Other non-cash items:
New finance leases (4,446) (22,901) (23,574)
Translation difference 2,407 (1,267) 1,830
------------ ------------ ------------
Movement in net funds/borrowings in the period (8,645) (98,984) 189,915
Net funds/(borrowings)/funds at 1 January 31,029 130,013 (59,902)
------------ ------------ ------------
Net funds/(borrowings) at 31 December 22,384 31,029 130,013
============ ============ ============
(d) Analysis of changes in net funds/(borrowings) in the period
Acquisitions Other non-
At 1 Jan and cash Exchange At 31 Dec
2002 Cashflow disposals changes movements 2002
(pound) '000 (pound) '000 (pound)'000 (pound) '000 (pound) '000 (pound) '000
Cash at bank and in hand 24,247 4,833 - (2) (13) 29,065
Overdrafts (2,781) 1,446 - - 82 (1,253)
---------- ------------ -------------- ------------ ------------- -----------
21,466 6,279 - (2) 69 27,812
Debt due after 1 year (1,330) (5,671) - 744 (9) (6,266)
Debt due within 1 year (43,961) 40,883 - (745) 297 (3,526)
Finance leases due after 1 year (23,064) 11,103 408 (2,898) 1,058 (13,393)
Finance leases due within 1 year (14,909) 2,877 941 (1,547) 850 (11,788)
---------- ------------ -------------- ------------ ------------- -----------
(83,264) 49,192 1,349 (4,446) 2,196 (34,973)
Liquid resources 92,827 (55,426) (8,000) 2 142 29,545
---------- ------------ -------------- ------------ ------------- -----------
31,029 45 (6,651) (4,446) 2,407 22,384
========== ============ ============== ============ ============= ===========
95
Other non-
At 1 Jan cash Exchange At 31 Dec
2001 Cashflow changes movements 2001
(pound) '000 (pound) '000 (pound) '000 (pound) '000 (pound) '000
Cash at bank and in hand 31,432 (5,983) - (1,202) 24,247
Overdrafts (1,203) (1,586) - 8 (2,781)
------------ ----------- ------------ -------------- ------------
30,229 (7,569) - (1,194) 21,466
Debt due after 1 year (1,487) 91 - 30 (1,330)
Debt due within 1 year (5,354) (37,705) (783) (36) (43,961)
Finance leases due after 1 year (21,150) 11,430 - (109) (23,064)
Finance leases due within 1 year (10,614) 5,363 - (39) (14,909)
------------ ----------- ------------ -------------- ------------
(38,605) (20,821) (783) (154) (83,264)
Liquid resources 138,389 (45,643) - 81 92,827
------------ ----------- ------------ -------------- ------------
130,013 (74,033) (783) (1,267) 31,029
=========== =========== ============ ============== ============
Other non-
At 1 Jan cash Exchange At 31 Dec
2000 Cashflow changes movements 2000
(pound) '000 (pound) '000 (pound) '000 (pound) '000 (pound) '000
Cash at bank and in hand 16,426 8,030 6,583 393 31,432
Overdrafts (1.923) 7,835 (7,229) 114 (1,203)
------------ ---------- ------------ ------------- -----------
14,503 15,865 (646) 507 30,229
Debt due after 1 year (82,738) (10,076) 91,387 (60) (1,487)
Debt due within 1 year (24,353) 112,456 (93,852) 395 (5,354)
Finance leases due after 1 year (13,674) 6,534 (14,000) (10) (21,150)
Finance leases due within 1 year (9,314) 8,168 (9,377) (91) (10,614)
------------ ---------- ------------ ------------- -----------
(130,079) 117,082 (25,842) 234 (38,605)
Liquid resources 55,674 78,712 2,914 1,089 138,389
------------ ---------- ------------ ------------- -----------
(59,902) 211,659 (23,574) 1,830 130,013
============ ========== ============ ============= ===========
Liquid resources at 31 December 2002 include cash held on deposit of which
(pound)2.6 million (December 2001: (pound)3.2 million, December 2000:
(pound)40.9 million) relates to collateral against bank loans and
(pound)26.1 million (December 2001: (pound)28.4 million, December 2000:
(pound)35.4 million) relates to deposits which are held by banks as
security for the issuance of bank guarantees to support lease commitments
by Regus operating companies. These amounts are blocked and are not
available for use by the business.
There are arrangements in place where cash balances and deposits with
banks in the UK and Netherlands can be offset against overdrawn accounts
in the same bank.
Non-cash changes comprise new finance leases and reclassifications between
categories.
21 Financial instruments
Short term debtors and creditors and intercompany balances
Short term debtors and creditors and intercompany balances have been
excluded from all the following disclosures other than the currency risk
disclosure.
Interest rate risk and currency profile of financial liabilities and assets
The following table analyses the currency and interest rate composition of
the Group's financial liabilities and assets, comprising gross borrowings,
and deposits where applicable.
96
31 December 2002
Weighted Weighted
average average
At At fixed period for
floating fixed Non-interest interest which rate
rates rates bearing Total rate is fixed
(pound)'000 (pound)'000 (pound)'000 (pound)'000 % Years
Financial
liabilities
Euro (1,533) (5,036) - (6,569) 7.7 1.9
Japanese Yen - (547) - (547) 6.6 0.6
Sterling (5,000) - - (5,000) - -
US Dollar (745) (18,645) - (19,390) 8.8 1.2
Others (3,767) (953) - (4,720) 11.0 2.3
------------ --------- ----------- ------------ ----------- --------------
(11,045) (25,181) - (36,226)
Financial assets
Chinese Rmb 731 - - 731 - -
Euro 15,978 - - 15,978 - -
Japanese Yen 372 - - 372 - -
Sterling 30,046 - - 30,046 - -
US Dollar 5,578 - - 5,578 - -
Others 5,905 - - 5,905 - -
------------ --------- ----------- ------------ ----------- --------------
58,610 - - 58,610
------------ --------- ----------- ------------
47,565 (25,181) - 22,384
============ ========= =========== ============
Of which:
Liquid resources 29,545 - - 29,545
Gross borrowings (11,045) (25,181) - (36,226)
Cash 29,065 - - 29,065
------------ --------- ----------- ------------
47,565 (25,181) - 22,384
============ ========= =========== ============
31 December 2001
Weighted Weighted
average average
At At fixed period for
floating fixed Non-interest interest which rate is
rates rates bearing Total rate fixed
(pound)'000 (pound)'000 (pound)'000 (pound)'000 % Years
Financial liabilities
Euro (3,380) (5,552) - (8,932) 7.7 2.3
Japanese Yen - (1,067) - (1,067) 6.6 1.3
Sterling - (42,926) - (42,926) 5.5 1.0
US Dollar - (28,428) - (28,428) 8.8 2.0
Others (4,692) - - (4,692) 11.0 2.4
------------ ----------- -------------- ------------- ============= ===============
(8,072) (77,973) - (86,045)
Financial assets
Australian Dollars 812 - - 812 - -
Euro 21,518 - - 21,518 - -
Japanese Yen 511 - - 511 - -
Sterling 80,904 - - 80,904 - -
US Dollar 8,511 - - 8,511 - -
Others 4,818 - - 4,818 - -
------------ ----------- -------------- ------------- ============= ===============
117,074 - - 117,074
------------ ----------- -------------- -------------
109,002 (77,973) - 31,029
============ =========== ============== =============
of which:
liquid resources 92,827 - - 92,827
gross borrowings (8,072) (77,973) - (86,045)
cash 24,247 - - 24,247
------------- ----------- ------------- -------------
109,002 (77,973) - 31,029
============= =========== ============= =============
The sterling fixed rate liabilities include (pound)40 million five per
cent non-convertible bonds. Once fair value of the warrants issued in
February 2002 is considered in accordance with FRS4, the effective annual
finance charge is 17 per cent.
97
Maturity analysis of undrawn committed borrowing facilities
The Group had no undrawn committed borrowing facilities available at the
31 December 2002 or 2001.
Currency exposures
As explained in the Financial Review, to mitigate the effect of the
currency exposures arising from its net investments overseas the Group
borrows, where appropriate, in the local currencies arising from its net
investments. Gains and losses arising on net investments overseas are
recognized in the statement of total recognized gains and losses.
The tables below show the extent to which Group companies have monetary
assets and liabilities in currencies other than their local currency.
Foreign exchange differences on retranslation of these assets and
liabilities are taken to the profit and loss account of the Group
companies and the Group.
31 December 2002
Net foreign currency monetary assets/(liabilities)
Euro Japenese Sterling US Others Total
Yen Dollar
(pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000
Functional currency of Group
operation
Euro - - (82) 135 (176) (123)
Sterling (8,742) - - (1,586) 2,225 (8,103)
US Dollar (3) - - - 242 239
Others (4,538) - 1 (3,217) (692) (8,446)
------------ ----------- ----------- --------- --------- -----------
(13,283) - (81) (4,668) 1,599 (16,433)
============ =========== =========== ========= ========= ===========
31 December 2001
Net foreign currency monetary assets/(liabilities)
Euro Japenese Sterling US Others Total
Yen Dollar
(pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000
Functional currency of Group
operation
Euro - 10,976 (56) 66,572 2,053 79,545
Sterling 817 - - (3,349) 6,458 3,926
US Dollar (43) - - - 1,196 1,153
Others (4,123) - (137) (7,712) (1,245) (13,217)
----------- ------------- ------------- ----------- ----------- -------------
(3,349) 10,976 (193) 55,511 8,462 71,407
=========== ============= ============= =========== =========== =============
Fair value disclosures
The following table provides a comparison by category of the carrying
amounts and the fair value of the Group's financial assets and liabilities
at 31 December.
Fair value is the amount at which a financial instrument could be
exchanged in an arm's length transaction between informed and willing
parties, other than a forced or liquidation sale and excludes acquired
interest.
Set out below the table is a summary of the methods and assumptions used
for each category of financial instrument.
Book value Fair value Book value Fair value
31 Dec 2002 31 Dec 2002 31 Dec 2001 31 Dec 2001
(pound)'000 (pound)'000 (pound)'000 (pound)'000
Primary financial instruments held or
issued to finance the Group's operations
Short-term borrowings (16,567) (15,504) (61,651) (60,499)
Long-term borrowings (19,659) (15,899) (24,394) (17,712)
Short-term deposits 29,545 29,545 92,827 92,827
Cash at bank and in hand 29,065 29,065 24,247 24,247
----------------- --------------- ---------------- -------------
Summary of methods and assumptions
Forward foreign currency contracts and currency options
Fair value is based on market price of comparable instruments at the
balance sheet date.
98
Short-term deposits and borrowings
The fair value of short-term deposits, loans and overdrafts approximates
to the carrying value because of the short maturity of these instruments.
The fair value of finance leases has been calculated by discounting future
cash flows at the Group's weighted average cost of capital.
Long-term borrowings
The fair value of bank loans and other loans approximates to the carrying
value because the majority are floating rate where payments are reset to
market rates at intervals of less than one year. The fair value of finance
leases has been calculated by discounting future cash flows at the Group's
weighted average cost of capital.
Hedges
There were no off-balance sheet (unrecognized) or on-balance sheet
(deferred) gains or losses in respect of financial instruments used as
hedges at the end of the year.
22 Employee share ownership plan ("ESOP")
During 1999 the Group established the Regus Employee Trust. The Trustee is
Mourant & Co Trustees Limited which is an independent professional trust
company residing in Jersey. The trust is a discretionary trust for the
benefit of employees (including directors). The ESOP provides for the
issue of options and the payment of bonuses to the Group's employees
(including directors) at the discretion of the Company. Regus is not
deemed to be the sponsor of the ESOP for the purposes of UITF17. The
Trustee is not entitled to receive dividends.
At 31 December 2002, the trust held 18,120,670 shares in Regus plc (note
11). The market value at 31 December 2002 was (pound)1.9 million. Costs
incurred by the trust are expensed in the profit and loss account. The
trust has subsequently sold 12 million shares.
At 31 December 2002, awards over a total of 23,809,949 (December 2001:
25,317,932) shares, net of lapses, had been granted to employees. The
awards have been issued in 14 tranches and some of the awards had been
granted subject to the performance of the Group (performance awards).
Details of the awards are provided below:
Exercise 31 Dec 2001 31 Dec 2002
Award Type Date price Number of New Lapses Exercise Number of
exercisable ((pound)) awards Awards awards awards
-----------------------------------------------------------------------------------------------------------------------
Performance 1 Jan 03 to 1 Jan 07 1.455 8,312,868 - (325,430) - 7,987,438
awards
1 Jan 04 to 1 Jan 08 2.600 971,034 - (12,506) - 958,528
26 Mar 04 to 26 Mar 06 2.560 1,391,537 - (470,418) - 921,119
8 Jun 04 to 26 Mar 06 2.560 301,491 - (42,967) - 258,524
8 Jun 04 to 26 Mar 06 2.275 84,876 - - - 84,876
29 Aug 04 0.475 50,000 - - - 50,000
12 Nov 04 0.335 195,000 - - - 195,000
31 Dec 05 to 28 Aug 12 0.068 - 500,000 - - 500,000
Non-performance 1 Jan 03 to 1 Jan 07 1.455 5,916,803 - (700,689) - 5,216,114
awards
1 Jan 03 to 1 Jan 06 0.050 3,160,555 - (245,812) (81,197) 2,833,546
1 Jan 04 to 1 Jan 08 2.600 1,728,768 - (290,562) - 1,438,206
29 Aug 04 0.475 50,000 - - - 50,000
12 Nov 04 0.335 3,155,000 - (130,000) - 3,025,000
28 Feb 05 to 27 Feb 12 0.248 - 155,000 - - 155,000
28 Mar 05 to 27 Mar 12 0.440 - 55,512 - - 55,512
30 May 05 to 29 May 12 0.385 - 81,086 - - 81,086
--------------------------------------------------------------
25,317,932 791,598 (2,218,384) (81,197) 23,809,949
==============================================================
99
22 Employee share ownership plan ("ESOP") (continued)
In addition at 31 December 2002, awards over 623,215 American Depository
Shares (December 2001: 547,369), net of lapses, had been granted to
employees. The awards have been issued in six tranches and some of the
awards had been granted subject to the performance of the Group
(performance awards). Details of the awards are provided below:
Exercise 31 Dec 2001 31 Dec 2002
Award Type Date price Number of New Lapses Exercise Number of
exercisable ($) awards Awards awards awards
Performance 26 March 04 to 26 March 06 18.188 134,741 - (63,096) - 71,645
awards
8 June 04 to 26 March 06 18.188 99,679 - (42,058) - 57,621
8 June 04 to 26 March 06 16.200 83,949 - - - 83,949
29 Aug 04 3.290 73,000 - - - 73,000
31 Dec 05 to 29 May 09 2.810 - 200,000 - 200,000
Non-performance
awards 29 Aug 04 3.290 20,000 - (10,000) - 10,000
12 Nov 04 2.300 136,000 - (10,000) - 126,000
29 Feb 05 to 27 Feb 12 2.000 - 1,000 - - 1,000
--------------------------------------------------------------
547,369 201,000 (125,154) - 623,215
==============================================================
The Group also operates a SAYE share ownership plan however the number of
shares involved is immaterial.
23 Capital commitments
31 Dec 2002 31 Dec 2001
(pound)'000 (pound)'000
Contracts placed for future capital
expenditure not provided in the 925 5,246
financial statements
24 Operating lease commitments
At 31 December the Group has lease agreements in respect of properties,
vehicles, plant and equipment, for which the payments extend over a number
of years.
Vehicles, Vehicles,
Property plant and Total Property plant and Total
31 Dec equipment 31 Dec 2002 31 Dec 2001 equipment 31 Dec
2002 31 Dec 2002 31 Dec 2001 2001
(pound) '000 (pound) '000 (pound) '000 (pound) '000 (pound) '000 (pound) '000
Annual commitments under
non-cancellable
operating leases expiring:
Within one year 2,282 946 3,228 4,285 1,311 5,596
Between one and five years 64,970 4,525 69,495 54,452 4,012 58,464
After five years 79,777 205 79,982 157,112 182 157,294
----------- ------------- ------------ ------------ ------------- -----------
147,029 5,676 152,705 215,849 5,505 221,354
=========== ============= ============ ============ ============= ===========
31 Dec 2002 31 Dec 2001
Total Total
(pound) '000 (pound) '000
Minimum future lease payments under non-cancellable operating leases:
Amounts due within one year 152,705 221,354
Amounts due between one and two years 146,038 217,154
Amounts due between two and three years 138,232 202,742
Amounts due between three and four years 117,317 189,295
Amounts due between four and five years 98,014 171,033
Amounts due after five years 243,823 748,401
------------- -------------
896,129 1,749,979
============= =============
100
25 Contingent liabilities
The Group has bank guarantees and letters of credit held with certain
banks totaling (pound)26,134,000 (December 2001: (pound)28,358,000).
The Company also acts as a guarantor for certain obligations of other
subsidiary entities. At 31 December 2002 the Group had received a number
of claims principally from landlords relating to the terms of building
leases. Where appropriate the directors have made provisions.
26 Related party transactions
During the year ended 31 December 2002 the Group received management fees
of (pound)1.3 million (December 2001: (pound)4.2 million) from its joint
venture entities as listed in note 30. At 31 December 2002, (pound)2.0
million (December 2001: (pound)4.1 million) was due to the Group from the
joint ventures.
27 Post balance sheet events
a) Audited
On 14 January 2003 Regus' US subsidiaries, Regus Business Center Corp
("Regus US") and Stratis Business Centres Inc ("Stratis"), each filed a
voluntary petition for relief under Chapter 11 of the US Bankruptcy Code
in the Court of the Southern District of New York. Regus Plc and Regus
Business Centres BV, which are holding companies for the Regus Group and
have both given guarantees in relation to certain leasehold liabilities of
the US business, also filed for relief under Chapter 11. Regus plc and
Regus Business Centres BV are not engaged in any form of administration
proceedings or any other arrangement outside of the US.
Similarly, on 22 April 2003, one of the Groups German subsidiaries was
placed in voluntary administration, which subsequently became an
involuntary liquidation.
b) Unaudited
In July 2003 we received (pound)10 million in connection with the first
tranche of deferred consideration for the disposal of a 58% stake in the
UK business.
28 Ultimate parent company and controlling party
Maxon Investments BV, a company incorporated in the Netherlands is
considered as the ultimate parent company. M L J Dixon is considered the
ultimate controlling party by virtue of his effective controlling interest
in the equity shares of the Company via Maxon Investments BV.
101
29 Summary of differences between UK and US GAAP financial statements
The Group's consolidated financial statements are prepared in accordance
with UK GAAP, which differs in certain respects from US GAAP. Differences
which have a significant effect on the consolidated net loss and
shareholders' funds of the Group are set out below.
Note 12 months to 12 months to 12 months to
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound) '000 (pound) '000 (pound) '000
Net loss as reported in accordance with UK GAAP (123,399) (118,238) (13,530)
US GAAP adjustments:
Franchise revenue (a) (204) (682) -
Compensation expense related to options granted (b) - - (6,836)
by shareholder
Compensation expense related to other variable (b) (375) (6,809) 3,997
plan options
Provision for onerous leases (c) 26,387 27,446 -
Profit on sale of group undertakings (d) (327)
Deferred taxes (e) (7,341) 5,438 (474)
Write down of employee share trust shares (f) - 41,395 -
------------------ ------------------ -----------------
Net loss in accordance with US GAAP (105,259) (51,450) (16,843)
================== ================== =================
Weighted average shares outstanding ('000) 582,172 581,649 502,773
Loss per ordinary share (p) (g) (18.1) (8.8) (3.4)
The following is a summary of the material adjustments to
shareholders' funds/ (deficit) which would have been required if US
GAAP had been applied instead of UK GAAP:
Note 31 Dec 2002 31 Dec 2001
(pound) '000 (pound) '000
Shareholders' funds/(deficit) as reported in accordance with UK (28,392) 88,445
GAAP
US GAAP adjustments:
Franchise revenue (a) (886) (682)
Compensation expense related to other variable plan options (b) 600 595
Provision for onerous leases (c) 53,670 27,446
Deferred taxes (e) - 7,341
Employee share trust (investment in own shares) (f) (3,805) (3,805)
Investments accounted for under the equity method 236 -
--------------- ----------------
Shareholders' funds/(deficit) recorded in accordance with US GAAP 21,423 119,340
=============== ================
(a) Franchise Revenue Recognition
UK GAAP does not require the receipt of up front franchise fees to be
recognized over the life of the franchise agreement but are recorded as
the revenue is received in the franchisers accounts. Under US GAAP, up
front payments from franchisees are required to be recognized over the
length of the agreement.
(b) Share option schemes
Under UK GAAP, options granted to employees by the Company to subscribe in
the Company's shares where the exercise price of the option is linked to
performance do not result in any compensation costs being recorded by the
Company if the stated exercise price is equal to or in excess of the fair
value of the underlying ordinary shares at the date of grant.
Under US GAAP, Accounting Principles Board Opinion No. 25, " Accounting
for Stock Issued to Employees" compensation cost must be recognized if the
option plan contains performance related criteria which results in the
option plan being accounted for as a variable plan. Expense is recorded in
each period to the measurement date or vesting date for increases in the
fair value of the underlying ordinary shares over the stated exercise
price of the share options with an offsetting credit to the share premium
amount. However under UK GAAP and US GAAP any cash awards are recorded as
a liability at each balance sheet date. Under UK GAAP, compensation
expense is not recorded in relation to options granted to an employee by
the primary shareholder of the Company.
102
In November 1999, Maxon granted an option in favor of affiliates of
Deutsche Bank and Apollo, two significant shareholders in the Group, over
3,926,484 shares for an aggregate strike price of (pound)1. The options
were exercisable within twelve months (or such shorter period ending on
the date on which an exit, being either an initial public offering or
completion of the disposal of all or substantially all of the Group's
shares or assets, occurs) from the earlier of the date on which the board
of Directors notifies the Deutsche Bank and Apollo affiliates in writing
that an exit is imminent and the date of an announcement to the public of
an intention to proceed with an initial public offering. UK GAAP is not
prescriptive with respect to accounting for transactions by the principal
shareholder which benefit the Group. Under US GAAP, AIN-APB25. No.1, "
Stock Plans Established by a Principal Stockholder" provides guidance for
accounting for compensatory and non-compensatory stock plans established
by a principal stockholder and, by analogy, for other transactions entered
into by a principal stockholder that may benefit the company. The option
agreement specified that it was for the benefit of Maxon and for the
benefit of and on behalf of the Group, and was made in consideration of
Deutsche Bank and Apollo waiving certain rights contained in the
shareholders' agreement. As such, the effects of the option would be
recorded wholly within shareholders' funds during 2000.
The compensation expense adjustment for 2002 of (pound)0.4 million is made
up as follows:
o a UK/US GAAP difference relating to Reward options of (pound)0.5
million. The original UK GAAP charge in 2000 was the difference
between the exercise price of the reward options at (pound)0.05 and
the IPO price of (pound)2.60 multiplied by the number of Reward
options issued (less lapsed Reward options). Under UK GAAP at
December 31, 2000 this was taken as a one-off charge and amounted
to (pound)9.2 million. Since the market price dropped to
around (pound)0.52 at December 31, 2001 the majority of the
accrual (pound)8.7 million was reversed on a UK GAAP basis in 2001 to
leave an accrual of (pound)0.5 million which has not been adjusted in
2002 and consequently has had no impact on the profit and loss
account for the year. Under US GAAP the compensation charge
of (pound)9.2 million is amortized over the vesting period. Therefore
the US GAAP charge is (pound)0.5 million for the year ended 31
December 2002.
o a UK/US GAAP difference relating to premier options of (pound)0.9
million. Under US GAAP the compensation charge, being the difference
between the excise price of (pound)1.455 and the market value at the
date of issue of (pound)2.60 is amortised over the vesting period.
There is no charge under UK GAAP in relation to these Premier
options.
o Shareholders' funds/(deficit) was not affected by the differences
between UK GAAP and US GAAP on these options as the difference
resulted in recording an increase to expense and a corresponding
increase to contributed capital, except for awards granted to
employees where the company will pay a cash bonus for the difference
between the fair value and the base price of the awards.
(c) Provision for onerous lease commitments
Under UK GAAP, a company is required to provide for the onerous (i.e.
loss-making) element of any present leasehold obligations. Regus reviewed
its entire property portfolio and made appropriate provision for those
leases which it felt were likely to result in net operating losses for the
foreseeable future. US GAAP requires no such provision.
(d) Profit on sale of Group undertakings
The profit on sale of a Group undertakings represents the profit on sale
of the UK business of (pound)23.0 million and a loss on the sale of
Romania of (pound)0.3 million. Under UK GAAP the profit or loss is
calculated by deducting the net assets disposed of from the proceeds.
Under US GAAP the net assets of the subsidiary differs from the net assets
under UK GAAP and so a GAAP adjustment arises.
(e) Deferred taxes
After adopting FRS 19, the standards for recognizing a deferred tax asset
are the same for both UK GAAP and US GAAP. However, under UK GAAP, no
deferred tax asset was recognized at December 31, 2001 upon the adoption
of FRS 19 based on an evaluation by management during 2002 that the
likelihood of realizing the deferred tax asset was not more likely than
not. For US GAAP purposes, based on all evidence available at December 31,
2001, a deferred tax asset was recognized; however, based on events that
occurred during 2002, such deferred tax asset has been fully provided for
with a valuation allowance.
(f) Employee share trust arrangements
An employee share trust has been established in accordance with certain
employee share option schemes. Under UK GAAP, the Company's ordinary
shares held by the employee share trust are included at either historical
net book value or, in certain circumstances, at closing market value in
fixed asset investments. As at 31 December 2002 the employee share trust
held ordinary shares with a historical net book value of (pound)3,805,000.
Under US GAAP, such shares are classified as treasury stock and presented
at their historical cost as a deduction in shareholders' equity.
103
(g) Earnings per share (EPS)
Under UK GAAP, primary EPS is based on the weighted average number of
ordinary shares outstanding during the period. Primary EPS is the
profit/(loss) in pence attributable to each equity share, based on the
profit/ (loss) for the financial period attributable to ordinary
shareholders divided by the weighted average number of ordinary shares in
issue during the period. This method is used in computing basic EPS under
US GAAP.
Under FRS 14 (Earnings per share), diluted EPS must be disclosed. This is
based on profit/(loss) for the financial period and computed using the
weighted average number of shares in issue during the period and the
dilutive effect of all share options and ordinary share equivalents. This
method is similar to the treasury stock method used to compute diluted EPS
for US GAAP purposes. Under UK GAAP, the weighted average number of
ordinary shares in issue during the period should exclude the shares held
by the Group's employee share ownership plans (ESOP) in respect of which
dividends have been waived. Under US GAAP, such shares are regarded as
treasury stock and are therefore not included for the purpose of the EPS
calculation. As of 31 December 2002, the ESOP had acquired 18,120,670
shares.
As of 31 December 2002, 31 December 2001 and 31 December 2000, potentially
dilutive options representing 26,926,024, 28,054,777 and 24,621,498
shares, respectively, were excluded from the calculation of basic EPS, as
they were deemed to be anti-dilutive.
Classification differences between UK & US GAAP
(h) Cash flows
Under UK GAAP, the Group complies with FRS 1 (revised) (Cash Flow
Statements), the objective and principles of which are similar to those
set out in Statement of Financial Accounting Standards No. 95 (Statement
of Cash Flows) (SFAS 95). The principal difference between the two
standards is in respect of classification. Under FRS 1 (revised), the
Group presents its cash flow for (a) continuing operating activities; (b)
returns on investment and servicing of finance; (c) taxation; (d) capital
expenditures and financial investment; (e) acquisitions and disposals; (f)
dividends to ordinary shareholders; (g) management of liquid resources;
and (h) financing activities. SFAS 95 requires only three categories of
cash flow activity, those relating to (a) operating; (b) investing; and
(c) financing activities.
The cash flows within the UK headings of " Continuing operating
activities", " Returns on investments and servicing of finance" and "
Taxation" would all be included within the heading of " Net cash provided
by operating activities" under SFAS 95. Likewise, the UK headings of "
Capital expenditure and financial investment" and " Acquisitions and
disposals" plus movements in restricted cash excluded from cash and cash
equivalents as set out below corresponds with " Cash flows from investing
activities" under SFAS 95, and " Management of liquid resources" and "
Financing" under UK GAAP, subject to movements in restricted cash being
classified within " Cashflows from investing activities" , correspond with
" Cash flows from financing activities" under US GAAP. Other non cash
movements comprise new finance leases and reclassifications between
categories and the amounts of these adjustments are set out in note 20(d).
In addition under FRS 1 (revised), cash represents cash at bank and in
hand less bank overdrafts. Movements of liquid resources are included
under a separate heading. Under US GAAP, cash and cash equivalents would
include cash and short-term investments with original maturities of three
months or less. It excludes restricted cash and primarily deposits held as
security for lease guarantees, of (pound)40,945,000, (pound)31,600,000 and
(pound)28,700,000 at 31 December 2000, 2001 and 2002 respectively.
Movements in restricted cash are classified within " Cashflows from
investing activities".
Set out below, for illustrative purposes, are summary consolidated
statements of cash flows under US GAAP:
12 months to 12 months to 12 months to
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound) '000 (pound) '000 (pound) '000
Net cash provided by operating activities (17,647) 38,024 108,672
Net cash used in investing activities (4,324) (104,605) (109,336)
Net cash (used in)/provided by financing activities (33,722) 24,300 68,431
Effect of exchange rate changes on cash 129 (1,121) 1,482
-------------- ---------------- ---------------
Net (decrease)/increase in cash and cash equivalents (55,564) (43,402) 69,249
Other non cash movement - - 9,497
-------------- ---------------- ---------------
(55,564) (43,402) 78,746
Cash and cash equivalents at the beginning of year 85,475 128,877 50,131
-------------- ---------------- ---------------
Cash and cash equivalents at the end of the year 29,911 85,475 128,877
============== ================ ===============
(i) Foreign Currency Translation
Under UK GAAP the financial statements of the Group's foreign subsidiaries
are measured using local currency (pounds sterling) as the functional
currency. Assets and liabilities of these subsidiaries are translated at
exchange rates as of the balance sheet date. Revenues and expenses are
translated at average rates of exchange in effect during the year. Gains
and losses arising on these translations are taken to reserves, net of
exchange differences arising on related foreign currency borrowings.
104
Under US GAAP, the financial statements of the Group's foreign
subsidiaries are measured using local currency (pounds sterling) as the
functional currency. Assets and liabilities of these subsidiaries are
translated at exchange rates as of the balance sheet date. Revenues and
expenses are translated at average rates of exchange in effect during the
year. The resulting cumulative translation adjustments are recorded as a
separate component of shareholders' funds/(deficit) as other comprehensive
income. Foreign currency transaction gains and losses are included in
consolidated net profit/(loss).
Under UK GAAP the cumulative foreign exchange differences as at 31
December, 2002, were (pound)4,111,000 (2001: (pound)3,000 , 2000:
(pound)(204,000)). Under US GAAP the cumulative foreign exchange
adjustments are (pound)4,454,000 (2001: (pound)346,000 , 2000:
(pound)129,000). The difference in foreign exchange differences between UK
and US GAAP relates to exchange differences on deferred tax assets held
under US GAAP.
(j) Current assets & liabilities
Current assets under UK GAAP include debtors which fall due after more
than one year and restricted cash. Under US GAAP, such assets would be
reclassified as non-current assets. Restricted cash of (pound)28,700,000
(Dec 2001: (pound)31,600,000) would be reclassified under US GAAP from
current assets to non-current assets.
(k) Extraordinary items
Under UK GAAP, extraordinary items are those possessing a high degree of
abnormality which arose from events or transactions that fall outside the
ordinary activities of the business. Extraordinary items are included in
the profit and loss account after " Profit on ordinary activities after
tax". It is very rare under UK GAAP for a business to account for an item
as extraordinary given the narrow definition.
Under US GAAP, extraordinary items are considered both unusual in nature
and infrequent in occurrence.
(l) SFAS 130 (Reporting Comprehensive Income)
Statement of Financial Accounting Standards No 130 (Reporting
Comprehensive Income) (SFAS 130) requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income should be reported in the financial statement that is displayed
with the same prominence as other financial statements. It requires that
an enterprise (i) classify items of other comprehensive income by their
nature in a financial statement and (ii) display the accumulated balance
of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of statement of financial
position. Required disclosures have been made in the Group's financial
statements in the statement of recognized gains and losses.
30 Additional US GAAP disclosures
(a) Income tax and deferred tax
Loss before tax under UK GAAP between UK and overseas was as follows:
12 months to 12 months to 12 months to
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound) '000 (pound) '000 (pound) '000
UK 27,866 (38,402) 21,994
Overseas (146,930) (71,679) (25,851)
------------------ ------------------- ---------------
(119,064) (110,081) (3,857)
================== =================== ===============
105
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at 31
December, 2002 and 2001 adjusted for US GAAP are presented below:
12 months to 12 months to
31 Dec 2002 31 Dec 2001
(pound) '000 (pound) '000
Deferred tax assets:
Net operating loss carry forwards 75,125 47,409
Start up costs and reserves 33,562 21,859
Other 25,437 10,253
------------------ ---------------
Total gross deferred tax assets 134,124 79,521
Less valuation allowance (130,028) (68,216)
------------------ ---------------
Net deferred tax assets after valuation allowance 4,096 11,305
------------------ ---------------
Deferred tax liabilities:
Accelerated capital allowances (1,086) (3,856)
Other (2,361) (964)
------------------ ---------------
Total gross deferred liabilities (3,447) (4,820)
------------------ ---------------
Net deferred tax assets 649 6,485
================== ===============
The valuation allowance for deferred tax assets as of 31 December 2002 and
2001 was (pound)127,883,000 and (pound)68,216,000, respectively. The net
change in the total valuation allowance for the years ended 31 December,
2002 and 2001 was an increase of (pound)59,667,000 and (pound)34,240,000
respectively. In assessing the realisability of deferred tax assets,
management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent on the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Management believes it is
more likely than not that the Group will realize benefits of these
deductible differences, net of existing valuation allowances at 31
December 2002.
(b) Share compensation
Employee Share Option Scheme
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (Accounting for Stock-Based
Compensation) (SFAS 123), which encouraged the use of a fair value based
method of accounting for compensation expense associated with share
options and similar plans. For US GAAP purposes, the Company has elected
to continue to use the intrinsic value based method prescribed by
Accounting Principles Board Opinion No. 25 (Accounting for Stock Issued to
Employees) (APB 25), as permitted by SFAS 123. SFAS 123 requires
additional disclosures, including pro-forma calculations of net earnings
and earnings per share as if the fair value method of accounting
prescribed by SFAS 123 had been applied in 1999, 2000 and 2001.
The Company issued share options to substantially all its employees during
1999. Further issues were made during 2000, 2001 and 2002. Employees
received share options to acquire a fixed number of shares based on their
salary level and position in the Company. All employees received options
that are subject to a performance target (the performance options) and all
employees received options designated as reward options. The exercise
price for share options granted to employees is fixed at the date of the
grant although the directors of the Company have the discretion to waive
some or all of the exercise price of the reward options. The fair value of
shares at the date of grant is equal to the exercise price.
The options vested on the later of a flotation of the Company's shares or
defined periods as follows: in the case of ordinary and performance
options, vesting occurs in three equal installments on 1 January of each
of 2003, 2004 and 2005. In the case of reward options, vesting occurs in
two equal installments on 1 January in each of 2003 and 2004. In each
case, the vesting period was extended by the directors as the market
capitalization of the Company on flotation exceeded (pound)1 billion. The
performance options require that the value of the Company's ordinary
shares outperform the Financial Times Stock Exchange 250 Index by the
following margins over the option period:
30% for options exercisable in 2003 or before;
40% for options exercisable in 2004; or
50% for options exercisable in 2005 or after.
If a target is not met, the performance options will only be exercisable
if and when a subsequent target is met.
Certain countries in which the Company operates do not provide for the
issuance and exercise of share options. In these situations, the awards
granted to the employees represent rights under which the Company will pay
a cash bonus to the employee for the difference between the fair value of
the Company's shares on the date of exercise and a base price for the
award. The base price is an amount determined by the board of directors of
the Company on the date of grant, which cannot be less than the fair value
of the Company's shares at that date. As of 31 December, 2002 and 2001,
these awards were not a material portion of the awards granted to date.
106
If a participant's employment with the Group ends, his options or awards
will normally lapse unless he leaves in specified circumstances such as
injury, disability or redundancy. In such circumstances, his option or
award may be exercised within 12 months of the later of the date on which
his employment ends and the last vesting date for the option or award.
Options outstanding 31 Dec 2000 Granted Forfeited & 31 Dec Granted Forfeited Exercised 31 Dec
Exercised 2001 2002
Number of options (000's)
UK shares
Exercise price (pound)0.050 3,611 - (450) 3,161 - (246) (81) 2,834
Exercise price (pound)0.068 - - - - 500 - - 500
Exercise price (pound)0.248 - - - - 155 - - 155
Exercise price (pound)0.335 - 3,430 (80) 3,350 - (130) - 3,220
Exercise price (pound)0.385 - - - - 81 - - 81
Exercise price (pound)0.440 - - - - 55 - - 55
Exercise price (pound)0.475 - 1,051 (951) 100 - - - 100
Exercise price (pound)1.455 16,664 - (2,434) 14,230 - (1,026) - 13,204
Exercise price (pound)2.275 - 85 - 85 - - - 85
Exercise price (pound)2.560 - 2,294 (601) 1,693 - (513) - 1,180
Exercise price (pound)2.600 3,747 - (1,048) 2,699 - (303) - 2,396
ADR shares
Exercise price $2.000 - - - - 1 - - 1
Exercise price $2.300 - 141 (5) 136 - (10) - 126
Exercise price $2.810 - - - - 200 - - 200
Exercise price $3.290 - 143 (50) 93 - (10) - 83
Exercise price $16.200 - 84 - 84 - - - 84
Exercise price $18.188 - 310 (76) 234 - (105) - 129
Exercise price $25.000 120 - (120) - - - - 0
SAYE shares
Exercise price (pound)2.42 59 - (8) 51 - (4) - 47
Exercise price (pound)2.64 734 - (271) 463 - (220) - 243
Exercise price (pound)15.98* 24 - (6) 18 - (17) - 1
* over ADR shares
Options have been issued at an exercise price ranging from (pound)0.05 to
(pound)2.600. From the date of modification to the date the award is
exercised, such awards shall be accounted for as variable. Compensation
expense is recorded over the vesting period.
The weighted average remaining contractual life amounts to 7.6 years (92
months) (2001: 8.5 years (103 months). The Company granted 20,971,634
options in December 1999, 2,790,203 options in January 2000, 100,000
options in February 2000, 111,061 options in May 2000, 3,648,258 options
in August 2000, 426,295 options in September 2000, 817,358 sharesave
options in November 2000, 1,942,441 in March 2001, 436,264 in June 2001,
1,051,250 in August 2001, 3,430,000 in November 2001, 300,000 in February
2002, 88,052 in March 2002, 136,280 in May 2002 and 500,000 in August
2002. In addition, the company issued 120,000 options over American
Depositary Receipts in December 2000, 185,636 in March 2001, 208,388 in
June 2001, 143,000 in August 2001, 141,000 in November 2001, 1,000 in
February 2002 and 200,000 in May 2002.
Share-based compensation represents the difference between the exercise
price of share options granted in 1999, 2000, 2001 and 2002 and the fair
market value of the underlying ordinary shares at each period end. The
Company recorded a compensation expense under APB 25 for the years ended
31 December 2001 of (pound)375,000 (Dec 2001: (pound)6,8 million; December
2000: ((pound)4.0 million)). The estimated fair value for purposes of APB
25 is based on a valuation of the Company at the time of the issuance of
shares in October and November 1999. The compensation charge net of
related tax effects that would have been included in the determination of
net income if the fair value method had been applied to all awards would
be a credit of (pound)1.2 million (2001: (pound)5.6 million, 2000:
((pound)6.8 million))
If compensation expense had been determined based upon the estimated grant
date fair value in accordance with SFAS 123, the Company's net loss for
the year ended 31 December, 2000, 2001 and 2002 would have been as
follows:
12 months to 12 months to 12 months to
31 Dec 2002 31 Dec 2001 31 Dec 2000
(pound) '000 (pound) '000 (pound) '000
Net Loss:
As reported (105,259) (51,450) (16,843)
Proforma (103,146) (47,318) (19,282)
Net loss per ordinary share (basic and diluted) p p p
As reported (18.1) (8.8) (3.4)
Proforma (17.7) (8.1) (3.8)
Fair values above were determined using the Black-Scholes
option-pricing model. The key assumptions used in the Black-Scholes
model were as follows:
Dividend yield 0% 0% 0%
Expected volatility 39% 61% 33%
Risk free interest rate 5.2% 5.2% 5.2%
Expected life 1-10 years 2-6 years 3-6 years
107
The weighted average fair value of stock options granted during 2000, 2001
and 2002 is (pound)2.59, (pound)0.45 and (pound)0.24 respectively and is
being amortized over the vesting periods ranging for up to five years from
Ist January 2003 to Ist January 2008.
SAYE scheme
The group operates several sharesave plans in various countries which
allow all employees to save a regular sum over 2 to 5 years after which
the accumulated fund belonging to the employee can be used to purchase
shares in Regus plc at a price from (pound)2.42 to (pound)2.64 depending
upon local country legislation, a discount of 15-20% at the date of the
grant. Any options granted where the discount on the exercise price is
greater than 15% are considered compensatory under US GAAP and any expense
is recognized over the life of the savings contract.
Executive Officer Share Option Agreements
In November 1992 Maxon entered into option agreements with certain
executive officers of the Company related to shares of the Company held by
Maxon as part of the compensation for the services of these executive
officers. These agreements covered 8% of the shares of the Company held by
Maxon, with a stated exercise price of (pound)0.00375 per share, both as
adjusted for subsequent share splits. Until 30 June, 2000, this exercise
price was subject to adjustment based on a proportional share of any
future capital contributions made by Maxon to the Company. There have been
no such contributions since the date of these agreements. These options
vest over periods from 31 December, 2002 to 31 December, 2003. On 30 June,
2000 the agreement was amended to fix the exercise price at (pound)0.00375
irrespective of any future capital contributions made by Maxon to the
Company.
In February 1999, Maxon entered into a supplemental agreement with one of
the executive officers whereby Maxon paid the executive officer US$2
million in exchange for the forfeiture of a portion of the shares covered
under the option agreements leaving a total of approximately 23,140,000
shares outstanding under the option agreements. The repurchase of the
options resulted in no additional compensation expense, as the previously
recorded compensation expense related to those options had already
exceeded the consideration paid for the retirement of those options.
As the exercise price was subject to adjustment, these option agreements
required variable plan accounting under APB 25 up to 30 June, 2000.
Accordingly, the Company has recorded a compensation gain/(expense) at
each period end for the increase or decrease in the value of the
underlying shares. From 1 July, 2000, as the exercise price is fixed,
these option agreements will require fixed plan accounting and hence no
further compensation gain or expense is expected. Therefore no
compensation gain/(expense) was recorded in the years ended 31 December
2002 and 31 December 2001 (Dec 2000: ((pound)6,836,000)) from the
fluctuations in the fair value of the underlying securities.
At 31 December 1999, there were no directly comparable quoted companies
against which the Company's shares can be valued. Hence the fair value of
the underlying shares have been calculated by reference to the
subscription prices for shares issued by the Company to independent third
parties on 3 August 1998 and October/November 1999. The subscription price
for the shares issued at 3 August 1998 and October/November 1999 have been
used to calculate the fair value of the options as at 31 December 1999.
(c) Stock purchase warrants and options
The Company entered into a medium term (pound)10 million secured loan
facility with Union Bank of Switzerland (UBS) dated 12 November, 1997. The
facility included a detachable stock warrant agreement of the same date
among Maxon, Mark Dixon and UBS that grants options to UBS on a proportion
of the shares of the Company held by Maxon. These options were exercisable
upon the earliest of an initial public offering of ordinary shares of the
Company's stock, a significant trade sale of the Company, or five years
from the date of the warrant agreement. Under the original agreement the
exercise price of the warrants was nominal and the number of shares
granted via these warrants was contingent upon the timing and valuation of
the Company, with a stated maximum value of (pound)8.5 million.
On 3 August, 1998 Maxon and UBS entered into a deed of amendment to the
UBS option agreement under which UBS agreed to waive its rights to receive
shares of the Company at the time of an initial public offering in
consideration for a payment by Maxon of (pound)8.5 million to be paid at
the time of the initial public offering.
Under UK GAAP this arrangement has no impact on the Company's financial
statements as the Company is not a party to the warrant agreement.
However, under US GAAP when the principal shareholder enters into
transactions that directly relate to obligations of the Company these
transactions should be accounted for as if the Company had entered into
the transaction directly.
At the date of the loan facility and warrant agreement, the fair value of
the related warrants of (pound)2.6 million is reflected under US GAAP as a
liability to the Company, due to UBS' ability to require the settlement of
warrants in cash, and as a discount against proceeds. This discount has
been amortized using the effective interest method over the life of the
loan, with additional interest expense of (pound)527,000 in the year ended
31 December, 1998. The loan facility was repaid in June 1999, with the
unamortized portion of the discount charged to the profit and loss account
at that time. The total additional interest expense in the year ended 31
December, 1999 was (pound)2,038,000, which includes the amortization of
(pound)263,000 and the write-off of the unamortized portion of the loan
discount of (pound)1,775,000.
108
The warrant liability was adjusted to the fair value at each balance sheet
date. The Company has recorded expenses of (pound)1.5 million and
(pound)nil for the years ended 31 December, 1999, and 2000 related to
these increases in fair value. This results in a liability of (pound)8.5
million at 31 December 1999. On the date of the IPO the warrant agreement
between UBS and Maxon was settled, and the liability was reclassified as a
contribution to share capital.
(d) Convertible Bond Issue
The Directors felt that the business would be additionally protected by
the creation of a cash reserve and raised (pound)40m on 28 December 2001
by way of a convertible bond issue.
The option to convert the bond lies with Regus (unless the share price
rises above 86.32 pence) and the Directors closely monitored the trading
performance and projected cashflows in order to be able to make an early
decision to convert the bond if conditions required. No such decision was
made in the year ended 31 December 2002.
(e) Segment information
SFAS 131 (Disclosures about Segments of an Enterprise and related
Information)
Statement of Financial Accounting Standards No. 131 (Disclosure about
Segments of an Enterprise and Related Information) (SFAS 131) requires
that companies disclose segment data based on how management makes
decisions about allocating resources to segments and measuring their
performance. It also requires entity-wide disclosures about the products
and services an entity provides, the material countries in which it holds
assets and reports revenues and its major customers.
Pursuant to the definitions contained in SFAS 131, the Company has eight
geographical reportable segments for the purposes of managing the
business: UK & Ireland, Benelux, Germany, Southern Europe, Northern
Europe, North America, South and Central America and Rest of the World.
Each segment has separate results that are reviewed by the Group's Chief
operating decision maker. Each segment provides the same products and
services. The accounting policies of the segments are the same as
described in the summary of significant accounting policies. Other office
costs comprise head office costs net of management charges to other
operating segments. Other assets comprise assets managed at a corporate
level and which are not attributed to individual segments.
The Group's interest, tax expense and exceptional items are managed
centrally at corporate level and are not attributed to individual
segments.
109
Turnover Gross profit (center contribution)
12 months to 12 months to 12 months 12 months to 12 months to 12 months to
31 Dec 2002 31 Dec 2001 to 31 Dec 31 Dec 2002 31 Dec 2001 31 Dec 2000
2000
(pound)'000 (pound) '000 (pound) '000 (pound)'000 (pound)'000 (pound)'000
Geographical analysis
United Kingdom & 176,680 215,188 188,862 31,370 56,916 59,619
Ireland
Benelux 31,413 32,504 25,432 (63) 4,599 8,123
Germany 28,550 33,652 27,388 (15,297) (3,520) 6,258
Northern Europe 25,298 24,754 23,847 (1,614) (4,981) 1,345
Southern Europe 54,855 60,422 42,266 (3,659) 13,036 13,488
North America 83,509 106,579 79,230 (45,921) (27,819) 12,407
South & Central America 14,600 17,517 15,066 431 2,595 1,443
Rest of world 30,502 34,006 27,109 46 (935) (2,390)
-------------- ------------- ------------- ------------- ------------- -------------
445,407 524,622 429,200 (34,707) 39,891 100,293
============== ============= ============= ============= ============= =============
Total Group 435,604 512,633 421,125
Total joint ventures 9,803 11,989 8,075
============== ============= =============
Operating profit/(loss) Net assets/(liabilities)
12 months to 12 months to 12 months to As at As at As at
31 Dec 2002 31 Dec 2001 31 Dec 2000 31 Dec 2002 31 Dec 31 Dec 2000
2001
(pound)'000 (pound) '000 (pound) '000 (pound)'000 (pound) '000 (pound) '000
Geographical analysis Restated Restated
United Kingdom & 18,031 32,416 33,720 6,227 46,932 20,852
Ireland
Benelux (4,354) 1,518 3,554 (1,124) 4,612 1,578
Germany (26,412) (6,273) 551 (42,857) (13,248) (7,331)
Northern Europe (2,602) (9,556) (8,272) (32,485) (33,667) (24,790)
Southern Europe (6146) 6,599 5,300 (12) 3,120 (1,079)
North America (84,032) (55,699) (12,724) (131,068) (57,388) 3,351
South & Central America (2,147) (2,590) (3,538) (6,353) (7,722) (5,275)
Rest of world (3,274) (1,221) (11,789) (31,716) (29,596) (29,474)
Other office costs, (25,440) (74,720) (3,896) 210,756 175,749 244,832
(liabilities)/assets
-------------- --------------- -------------- -------------------------- -------------
(136,376) (109,527) 2,906 (28,632) 88,792 202,664
============== =============== ============== ============= =========== =============
Total Group (130,879) (103,955) 3,933 (27,009) 87,698 198,524
Total joint ventures (5,497) (5,572) (1,027) (1,623) 1,094 4,140
============== =============== ============== ============= =========== =============
Total Assets Capital Expenditure
As at As at 12 months 12 months 12 months to
31 Dec 2002 31 Dec 2001 to 31 Dec to 31 Dec 31 Dec 2000
2002 2001
(pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound) '000
Geographical analysis
United Kingdom & Ireland 5,420 154,403 6,804 31,291 32,265
Benelux 24,884 31,954 3,061 7,496 7,963
Germany 9,868 16,827 843 4,496 3,062
Northern Europe 17,086 20,775 2,126 6,199 1,686
Southern Europe 37,459 44,523 1,603 13,447 5,992
North America 65,583 132,581 2,754 49,429 41,122
South & Central America 10,446 17,228 1,654 5,616 3,374
Rest of world 29,496 36,776 395 6,040 9,917
Other office assets, 208,504 238,332 1,025 4,519 6,271
expenditure
Less inter-company set off (180,754) (207,107) - - -
-------------- --------------- ------------- ----------- -------------
227,992 486,292 20,265 128,533 111,652
============== =============== ============= =========== =============
Total group 219,362 470,636
Total joint ventures 8,630 15,656
============== ===============
110
31 Principal group companies
Country of incorporation % of equity and
Name of group entity votes held
Regus Business Centre SA Argentina 100
Regus Centres Pty Ltd Australia 100
Regus Business Centre GmbH Austria 100
Regus Business Centre SA Belgium 100
Skyport Brussels NV Belgium 100
Regus Belgium NV Belgium 100
Regus do Brasil Ltda Brazil 100
Regus Business Centers Canada LP +++ Canada 60
Regus Business Centre Ltd Canada 100
Regus Business Centre Chile Ltda Chile 100
Regus Business Service Co Ltd China 95
Regus Business Services (Shanghai) Ltd China 100
Regus Colombia Ltda Colombia 100
Regus Business Centre s.r.o Czech Republic 100
Regus Copenhagen ApS Denmark 100
Regus Business Centre (Egypt) Egypt 100
Host Regus Ltd England 100
Park Business Centres Ltd +++ England 50
Regus Business Centres (Holdings) Ltd* England 100
Regus Business Centre Trading Ltd + England 100
Regus Business Centres (UK) Ltd England 100
Regus City Ltd England 100
Regus Management Limited England 100
Regus (UK) Limited England 100
Regus Finland Oy Finland 100
Regus Paris SA France 100
Regus Roissy SA France 100
Regus Business Centre GmbH Germany 100
Regus Hellas SA Greece 100
Regus Business Centre Ltd Hong Kong 100
Regus Central Europe Trading and Servicing Ltd Hungary 100
Regus Kft Hungary 100
Europa Business Centre Ltd Ireland 100
Regus Ireland Ltd Ireland 100
Regus Finance Ireland 100
Regus Franchise International Limited Ireland 100
Regus Business Centres Ltd Israel 100
Regus Business Centre Srl Italy 100
Regus Business Centres Italia SpA +++ Italy 65
Regus Japan KK Japan 100
Regus Korea Limited Korea 100
SIA Regus Business Centre Latvia 100
Regus Luxembourg SA Luxembourg 100
Regus Centres Sdn Bhd Malaysia 100
Regus Business Centre S.A. de C.V. Mexico 100
Regus Services S.A. de C.V. Mexico 100
Regus Maroc SARL Morocco 100
Skyport Business Services BV Netherlands 100
Satellite Business Centre Schiphol BV Netherlands 100
Skyport International BV Netherlands 100
Regus Amsterdam BV Netherlands 100
Regus Business Centre BV Netherlands 100
Regus International Holdings BV ++ Netherlands 60
Regus Business Centre Oslo AS Norway 100
Regus Business Centre (Panama) S.A. Panama 100
Regus Business Centre (Peru) S.A. Peru 100
Regus Centres Inc Philippines 100
Regus Business Centre SP zoo Poland 100
Regus Business Centre Ltda Portugal 100
Regus Business Centre (Romania) S.R.L. Romania 100
LLC Regus Business Centre Russia 100
Regus Centres Pte Ltd Singapore 100
Regus Business Centre Bratislava s.r.o Slovakia 100
Regus Business Centre SA Spain 100
Business Centre Gothenburg AB Sweden 100
Business Centre Stockholm AB Sweden 100
Regus Business Centre (S) S.A. Switzerland 100
111
Regus Business Centre (Tanzania) Ltd Tanzania 100
Regus Centres (Thailand) Ltd Thailand 100
Regus Tunisie SARL Tunisia 100
Regus Is Merkezi Isletmeciligi Ltd Sirketi Turkey 100
Regus Business Centres (Ukraine) Ukraine 100
Regus Duke-Weeks Business Centres LLC +++ USA 50
Stratis Business Centers Inc USA 100
Regus Business Centre Corp USA 100
Regus Crescent Business Centres LLC +++ USA 50
Regus Equity Business Centres LLC +++ USA 50
Regus Venezuela C.A. Venezuela 100
Regus Centre (Vietnam) Ltd Vietnam 100
Investments in Group undertakings are held at cost all of which are
included within the consolidated results. Shares listed above are held
directly by Regus plc. where indicated by an asterisk.
Other than Regus Business Centre BV, Regus Business Centres (Holdings) Ltd
and Regus Finance which are investment holding companies, and Regus
Management Limited which is a management company employing head office
staff, the principal activity of all other companies is the provision of
fully serviced business centers.
+ Our Azerbaijan business operates as a branch of this company.
++ Our South African business operates as a branch of this company.
+++ These are joint ventures.
112
ITEM 19. EXHIBIT INDEX
Exhibit Number Description of Document
- -------------- -----------------------
1.* Memorandum and Articles of Association of Regus plc.
2.* Service Agreement for Mark Dixon.
3.* The following exhibits were filed as part of the
Registration Statement on Form F-1 (Registration No.
333-12504) and incorporate by reference herein.
4.1 Form of specimen of certificate for share of Regus plc,
nominal value 5p per share.
4.2 Form of ADR (incorporated by reference in the Registration
Statement on Form F-6 filed with the Securities and Exchange
Commission on September 11, 2000).
4.3 Form of Deposit Agreement between Regus plc and Morgan
Guaranty Trust Company of New York, as depositary
(incorporated by reference in the Registration Statement on
Form F-6 filed with the Securities and Exchange Commission
on September 11, 2000).
4.4 Form of Registration Rights Agreement among, Regus plc, AP
Regus Investors LLC, AP Pelham Partners XI LLC, DB Capital
Partners Europe LP and Serviced Office Investments Limited.
10.1 Acquisition Subscription and Shareholders Agreements dated
August 3, 1998 and as amended as of November 27, 1998,
December 21, 1998, September 17, 1999, October 28, 1999 and
November 30, 1999 between Maxon Investments BV, Serviced
Office Investments Limited, BT Capital Partners Europe LP,
AP Pelham Partners XI LLC, AP Regus Investors LLC, Regus
Business Centres plc, Regus Business Centres BV and Apollo
Real Estate Investment Fund III LP.
10.2 Deed of Undertaking dated September 11, 2000 between Regus
plc and Maxon Investments BV.
10.3 Option Agreement dated November 12, 1997 as amended of
August 3, 1998 and September 20, 2000 among Maxon
Investments BV, Mark Dixon, Regus Business Centres BV, UBS
and Regus Business Centres plc.
10.4 Senior Secured Multicurrency Revolving Facilities Agreement
dated June 24, 1999 and as amended on August 26, 1999,
December 23, 1999, March 3, 2000 and August 7, 2000 between
Regus plc and its subsidiaries, Commerzbank, Deutsche Bank
and Merrill Lynch International.
10.5 Form of Loan Agreement between Regus (UK) Limited and
Mourant & Co Trustees Limited, as trustee of the Regus
Employee Trust.
10.6 Form of Agreement for the Purchase of Shares in Regus plc
between Maxon Investments BV and Mourant & Co Trustees
Limited, as trustee of the Regus Employee Trust.
10.7 Form of Agreement for the Purchase of Shares in Regus plc
between Serviced Office Investments Limited and Mourant & Co
Trustees Limited, as trustee of the Regus Employee Trust.
10.8 Form of Agreement for the Purchase of Shares in Regus plc
between DB Capital Partners Europe LP and Mourant & Co
Trustees Limited, as trustee of the Regus Employee Trust.
10.9 Form of Agreement for the Purchase of Shares in Regus
between AP Regus Investors LLC and Mourant & Co Trustees
Limited, as trustee of the Regus Employee Trust.
113
10.10 Form of Agreement for the Purchase of Shares in Regus plc
between AP Pelham Partners XI LLC and Mourant & Co Trustees
Limited, as trustee of the Regus Employee Trust.
4.* Form of 5% Convertible Debenture in the sum of
(pound)10,000,000 issued by Regus plc to HFTP Investment LLC
(and to two other investors in separate deeds in a further
aggregate sum of (pound)30,000,000).
5. Consent of KPMG Audit plc dated July 15, 2003
6. Share purchase and subscription agreement dated December 20,
2002 between Regus plc, Regus Management Limited, Regus
Holdings (UK) Limited and Rex 2002 Limited.
7. Shareholders' agreement dated December 30, 2002 between Rex
2002 Ltd, Regus Management Ltd, Regus Business Centre BV,
Regus Plc and Regus Holdings (UK) Ltd.
8. Certificate of the Chief Executive and Finance Director
pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
* Previously filed.
114
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
By: /s/ Mark Dixon
------------------------------
Name: Mark Dixon
Title: Chief Executive
Dated: July 11, 2003
115
EXHIBIT INDEX
Exhibit Number Description of Document
- -------------- -----------------------
1.* Memorandum and Articles of Association of Regus plc.
2.* Service Agreement for Mark Dixon.
3.* The following exhibits were filed as part of the
Registration Statement on Form F-1 (Registration No.
333-12504) and incorporate by reference herein.
4.1 Form of specimen of certificate for share of Regus plc,
nominal value 5p per share.
4.2 Form of ADR (incorporated by reference in the Registration
Statement on Form F-6 filed with the Securities and
Exchange Commission on September 11, 2000).
4.3 Form of Deposit Agreement between Regus plc and Morgan
Guaranty Trust Company of New York, as depositary
(incorporated by reference in the Registration Statement on
Form F-6 filed with the Securities and Exchange Commission
on September 11, 2000).
4.4 Form of Registration Rights Agreement among, Regus plc, AP
Regus Investors LLC, AP Pelham Partners XI LLC, DB Capital
Partners Europe LP and Serviced Office Investments Limited.
10.1 Acquisition Subscription and Shareholders Agreements dated
August 3, 1998 and as amended as of November 27, 1998,
December 21, 1998, September 17, 1999, October 28, 1999 and
November 30, 1999 between Maxon Investments BV, Serviced
Office Investments Limited, BT Capital Partners Europe LP,
AP Pelham Partners XI LLC, AP Regus Investors LLC, Regus
Business Centres plc, Regus Business Centres BV and Apollo
Real Estate Investment Fund III LP.
10.2 Deed of Undertaking dated September 11, 2000 between Regus
plc and Maxon Investments BV.
10.3 Option Agreement dated November 12, 1997 as amended of
August 3, 1998 and September 20, 2000 among Maxon
Investments BV, Mark Dixon, Regus Business Centres BV, UBS
and Regus Business Centres plc.
10.4 Senior Secured Multicurrency Revolving Facilities Agreement
dated June 24, 1999 and as amended on August 26, 1999,
December 23, 1999, March 3, 2000 and August 7, 2000 between
Regus plc and its subsidiaries, Commerzbank, Deutsche Bank
and Merrill Lynch International.
10.5 Form of Loan Agreement between Regus (UK) Limited and
Mourant & Co Trustees Limited, as trustee of the Regus
Employee Trust.
10.6 Form of Agreement for the Purchase of Shares in Regus plc
between Maxon Investments BV and Mourant & Co Trustees
Limited, as trustee of the Regus Employee Trust.
10.7 Form of Agreement for the Purchase of Shares in Regus plc
between Serviced Office Investments Limited and Mourant &
Co Trustees Limited, as trustee of the Regus Employee
Trust.
10.8 Form of Agreement for the Purchase of Shares in Regus plc
between DB Capital Partners Europe LP and Mourant & Co
Trustees Limited, as trustee of the Regus Employee Trust.
10.9 Form of Agreement for the Purchase of Shares in Regus
between AP Regus Investors LLC and Mourant & Co Trustees
Limited, as trustee of the Regus Employee Trust.
116
10.10 Form of Agreement for the Purchase of Shares in Regus plc
between AP Pelham Partners XI LLC and Mourant & Co Trustees
Limited, as trustee of the Regus Employee Trust.
4.* Form of 5% Convertible Debenture in the sum of
(pound)10,000,000 issued by Regus plc to HFTP Investment
LLC (and to two other investors in separate deeds in a
further aggregate sum of (pound)30,000,000).
5. Consent of KPMG Audit plc dated July 15, 2003.
6. Share purchase and subscription agreement dated December
20, 2002 between Regus plc, Regus Management Limited, Regus
Holdings (UK) Limited and Rex 2002 Limited.
7. Shareholders' agreement dated December 30, 2002 between Rex
2002 Ltd, Regus Management Ltd, Regus Business Centre BV,
Regus Plc and Regus Holdings (UK) Ltd.
8. Certificate of the Chief Executive and Finance Director
pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
*Previously Filed.
117