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Serviced Office Group plc (SVO)

Preliminary Results for the year ended 31 December 2008

Serviced Office Group plc ('the Group') is an AIM-listed provider of flexible office space, which now operates from 17 centres providing a total of 2,993 workstations

HIGHLIGHTS

• Total revenues for the year of £6.89m (2007: £6.38m) an increase of 8%;

• EBITDA (pre effect of revaluation) of £1.3m (2007: £1.1m) an increase of 12%;

• Cash flow positive from operations;

• Operating (loss)/profit of £(5.02)m (2007: £1.32m);

• Loss before tax of £6.45m (2007: profit £36,000);

• Basic loss per share of 6.30p (2007: profit 0.04p); and

• Net asset value per share of 1.4p on both basic and fully diluted bases. 

Michael Kingshott, Chairman, comments:

  

'These demanding economic conditions have presented us with both challenges and opportunities. As with the commercial property market in general, we have seen the value of our property portfolio experience a significant reduction, albeit by a lesser degree that some of our competitors. 

'In terms of opportunities, we have secured four centres which we operate under management agreements. We have also acquired an existing serviced office centre for minimal outlay. This expansion combined with strong lead generation for the whole portfolio renews our confidence in the performance in the Group.'

30 June 2009

The Company confirms that the Company's Annual Report and Accounts for the year ended 31 December 2008 have been sent to shareholders and are available on the Company's website: http://www.servicedofficegroup.com 

Enquiries:

Serviced Office Group plc	Tel: 020 7583 8833
Michael Kingshott, Chairman
Stephen Clague, Finance Director
Evolution Securities	Tel: 020 7071 4300
Bobbie Hilliam
College Hill	Tel: 020 7457 2020
Gareth David

  

CHAIRMAN'S STATEMENT

Serviced Office Group plc provides flexible office space, virtual offices, meeting rooms and high-grade IT. The Group is currently operating and managing 17 locations. 

Financial highlights of these results include:

• Total revenues for the year of £6.89m (2007: £6.38m) an increase of 8%;

• EBITDA (pre effect of revaluation) of £1.3m (2007: £1.1m) an increase of 12%;

• Cash flow positive from operations;

• Operating (loss)/profit of £(5.02)m (2007: £1.32m);

• Loss before tax of £6.45m (2007: profit £36,000);

• Basic loss per share of 6.30p (2007: profit 0.04p); and

• Net asset value per share of 1.4p on both basic and fully diluted bases. 

Operational highlights for the period include:

• 5 new centres added post year end with 3 under management agreement with BT plc; 
• Number of workstations increased from 1,913 to 2,993, an increase of 56%; and
• Post year end purchase from UBS of its interest in Consort Property Holdings Limited which gives SOG 100% ownership, and which will produce a unaudited net asset value per share 4.2p and 3.4p on a fully diluted basis.

In my recent statements I have warned about the gathering economic storm. No one will now be in any doubt about the severity of the downturn in world trade and financial markets and the difficulties these have created for UK companies, particularly enterprises of relatively modest size such as your company.

However, I am pleased during these difficult times that year on year we have been able to report increased revenue due to the robust performance of our business centres. This is due to increased occupancy rate in our centres and emphasises the continued validity of our business model. As I have mentioned before, companies struggling against the enormous challenges faced over the past two years have turned to short-term rented office space rather than commit to long-term leases. 

Despite the difficulties that the property sector has been experiencing we have managed to improve our position in the market place. Our refurbishment programme has now been completed and we are seeing increased activity within those centres in some cases occupancy is close to 100% with a current average of 75% when taking into account the recently awarded management contracts.

The growth in our EBITDA, excluding the effect from the revaluation of investment properties, continues as we add more centres thereby enabling us to take advantage of our core costs. This has also led us to report another year of positive operational cash flow, which we expect to grow in the future as the company portfolio expands. 

As we expected the prices that we have been able to achieve in the market place have been under pressure but the demand for our space continues to be very active and in a number of cases we are getting renewals higher than in 2008. 

The turmoil in the property market has caused many owners to re-evaluate their position, and we are generating numerous approaches for our services both by way of management and possible joint ventures as a result of a continuing and successful marketing effort.

You will see from these accounts, that we have suffered a severe set-back in our net asset value resulting from the inescapable mark-down in property values. This was inevitable given the severe impact of corporate closures and mounting unemployment throughout industry and commerce, with the impact during the period under review being concentrated in London and the South-East, as difficulties in the financial markets took effect. Shareholders should remember, though, that professional valuers are having to work in an almost complete void of comparable evidence because the market in office buildings has not been tested other than by sellers under pressure to raise money. 

It is also noteworthy however that an increasing number of experienced property entrepreneurs have succeeded in raising large amounts of new equity in London to take advantage of opportunities which are now emerging.

Regarding our results it is important to bear in mind the impact of the transaction just announced in which we succeeded in buying out the interest owned by UBS in our Joint Venture company Consort Property Holdings Ltd ('Consort'). We have agreed the terms for the purchase of the 50% holdings in Consort currently owned by UBS. On completion of the purchase we will own 100% of the freeholds of Beckenham, Crawley, Teddington and Chiswick. The consideration will be paid in cash totalling £750,000 via the issuance of a convertible loan note. Consort achieved an EBITDA of £0.9 million in 2008 and has total bank debt of £12.3 million. The balance sheet effect of the transaction will be to add £2.5 million to the net assets of the Group and improve the ratio of bank loans to freehold property value by 11%. The acquisition and issue of the loan notes is conditional upon The Royal Bank of Scotland (which provides funding to both the Group and Consort) consenting to the acquisition and renewing the Group's facilities. 

Reflecting this acquisition in the balance sheet for 2008:

	As reported	Post acquisition
ASSETS
Non current	24,697	32,881
Current	1,148	1,313
	24,845	34,194
EQUITY
Share capital + premium	8,601	8,601
Profit and loss	(7,450)	(4,957)
	1,159	3,644
LIABILITIES
Non current	1,552	26,850
Current	23,134	3,700
	24,686	30,550

It should be noted that Teddington, Beckenham, Kingston as well as Hayes and Harrow are redevelopment sites which in the future will provide interesting opportunities for the company. 

As previously announced we have expanded our management business by securing four properties which we operate as serviced offices in Hemel Hempstead, Canary Wharf, Cannon Street, London, and in Bromley. In addition to which we acquired the lease of Vintage House on the Albert Embankment a property formerly operated by MLS bringing the total number of properties to 17. The company continues to look at ways of improving the management facilities to third party landlords as well as extending the number of locations where we are able to provide the KBC brand as serviced offices.

We launched the services of Streamwire during the year, providing IT, Telecommunications and data recovery services to third party clients as well as to occupiers of our own buildings. We continue to seek ways of growing this promising additional facility which we believe will become a valuable source of new revenue.  

Having established our presence in the market place, we are sure that the continued growth in the Operating and Management of serviced offices for third party landlords together with Streamwire IT and telecommunications infrastructure support offer exciting growth prospects. 

The business has strong cash flows and we continue to explore ways to strengthen the balance sheet. The Board is encouraged by the significant progress made during the last 12 months towards increased profitability. Further the quality of the property portfolio means the Company continues to receive good support from its debt providers, 

I would like to thank Aileen Pringle who retired from the board during the year for all her help and support to the company and also Catherine McEwan, who left to pursue other opportunities. Particular thanks are due to all of our staff who have helped us present the company so well, and who are achieving the growth that we are now experiencing. 

Current Trading and Future Prospects

These demanding economic conditions have presented us with both challenges and opportunities. As with the commercial property market in general, we have seen the value of our property portfolio experience a significant reduction, albeit by a lesser degree that some of our competitors. 

In terms of opportunities, we have secured four centres which we operate under management agreements. We have also acquired an existing serviced office centre for minimal outlay. This expansion combined with strong lead generation for the whole portfolio renews our confidence in the performance in the Group.

MICHAEL KINGSHOTT

Chairman

30 June 2009

  Directors' report

The directors present their annual report and the audited financial statements for the year ended 31st December 2008.

Principal activities

The Board consider that the ownership and operation of serviced office accommodation has been the Group's primary activity for 2008 and will be for subsequent periods. 

Business review and future developments

A review of the Group's business and an indication of likely developments are contained in the Operating and financial review on pages 14 and 15.

Key performance indicators ('KPI's')

The directors of the Group manage the Group's operations on a centre by centre basis. For an understanding of the development, performance or position of the business, refer to this page and pages 18 and 20. 

KPI's include:

• Occupancy - this measures the percentage of workstations that clients are contracted to pay for. Within the serviced office industry, occupancy of 80% is considered satisfactory.

• Sales lead measurement - as service office licences are relatively short, being usually less than twelve months, the directors routinely measure the level of enquiries by prospective clients, the subsequent viewings of offices and workstations contracted.

Principal risks and uncertainties

There are a number of risks and uncertainties which could have an impact on the Group's long term performance. The Group has a risk management structure in place designed to identify, manage and mitigate business risks. Risk assessment and evaluation is an essential part of the annual planning, budgeting and forecasting cycle.

The directors have identified the following principal risks and uncertainties. These do not constitute all of the risk facing the Group.

Financial market volatility adversely affecting the Group's financial performance

Most of the risks faced by the Group at the date of this report have been heightened by the volatility and deterioration of the financial markets during the last eighteen months, with a resultant reduction in supply of credit and its significant increase in cost. For the Group, these risks fall into certain categories as set out below, all of which have been proactively managed by the Board in the past and even more significantly in the current economic climate.

Liquidity risk affects the Group, in that this could result in it being unable to meet its financial obligations as they fall due. The Board's approach to managing liquidity is to ensure, as far as possible, that the Group will always have sufficient liquidity to meet its liabilities, without incurring unacceptable losses or risking damage to the Group's reputation and business. The Group typically ensures it has sufficient forecast cash and available facilities to meet expected cash outflows for a forward period of 24 months. 

The Group's fixed rate borrowings are exposed to a risk of change in their fair value due to changes in interest rates and its variable rate borrowings are exposed to a risk of change in cash flows due to changes in interest rates. Investments in short-term receivables and payables are not exposed to interest rate risk. The Group's policy of managing its exposure to changes in interest rates is generally achieved by the Group entering interest rate swaps or fixed rate contracts with financially secure counter parties denominated in Sterling, where considered appropriate by the Board. The Group holds financial instruments mainly to hedge financial risk or finance drawn for its operations, or for the temporary investment of short-term funds, and to manage the interest rate risks arising from its operations and sources of finance.

Credit risk arises if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The risk to the Group arises principally from the Group's receivables from customers. The demographics of the Group's customer base has less of an influence on credit risk. No single customer accounts for more than 2% of Group revenue. 

Economic downturn in its market

The Group operates solely from the UK. A worsening of the economic downturn in this market could adversely affect the Group's operating revenues thereby reducing operating performance and possibly resulting in operating losses.

The Group has taken a number of actions to mitigate this risk:

• The Group has purposely acquired freehold and long leasehold properties enabling it to realise these assets quickly if they prove to be uneconomic. 

• The Group regularly reviews the profile of clients to avoid undue reliance on one particular client or clients operating in a particular market.

Exposure to movements in the property market

The Group owns freehold and long leasehold interests in properties located in the UK. At 31 December 2008 they had a book value, reflecting a professional external open market value at that date, of £21.66m. These properties are used by the Group from which to operate the principal business of providing serviced office accommodation and are the principal asset elements in the Group's consolidated balance sheet. 

The disruption of the financial markets over the latest eighteen months has adversely affected property values and in the year ended 31 December 2008 the Group's property values reduced by £5.769m. The net assets of the Group at December 2008 totalled £25.845m. Should the Group's property values decline materially in future years, the net asset value of the Group will also reduce and this will have an adverse effect on shareholders' funds. As the Group's banking facilities contain loan to value covenants, this may reduce the Group's ability to raise finance secured on those properties.  

The Board monitors this position closely to ensure that shareholder net worth is not unnecessarily exposed to declines in property values. In addition, the operating nature of the Group's businesses and the experienced management teams used to deliver their performance, has demonstrated that the Group is not so markedly exposed to adverse movements in property values as the general property market has recently experienced and the expansion into management of centres, as opposed to direct ownership, is another step towards reducing the exposure to the property market and its decline in values.

Dividends 

The directors are not declaring a dividend for the year.

The retained loss for the year in the group was £5,546,000 (2007: profit £36,000),

Directors and directors' interests

The directors who held office during the year and up until the date of this report were as follows:

Michael Kingshott
Catherine McEwan	(resigned 19 March 2009)
Stephen Clague
Aileen Pringle	(resigned 11 December 2008)
Peter Duffy

    

The directors who held office at the end of the financial year had the following interests in the ordinary shares of the holding company according to the register of directors' interests:

   Directors' shareholdings

	At 31 December 2007 Number of 5p ordinary shares	At 31 December 2008 Number of 5p ordinary shares	Options over ordinary shares granted as at 31 December 2007	Options over ordinary shares granted as at 31 December 2008
Michael Kingshott	21,500,001	21,500,001	-	-
Catherine McEwan	-	-	-	-
Stephen Clague	-	-	1,272,727	1,272,727
Peter Duffy	-	-	-	-

None of the other directors who were serving as directors at the end of the year or who were appointed since the end of the year had any beneficial interest in the ordinary shares of the company during the year or since the year end.

As at 30 June 2009 there has been no movement in these shareholdings since the end of the financial year.

Employees

The group gives every consideration to applications for employment from disabled persons where the requirements of the job may be adequately covered by a handicapped or disabled person and continues to examine ways and means of providing continuing employment under normal terms and conditions and to provide training and career development and promotion wherever appropriate.

Significant shareholdings

As at 25 June 2009 the company had been notified or was aware that the following had direct or indirect interests in 3% or more of the issued share capital.

	No of Ordinary Shares	%
Sir Tom Farmer	21,500,000	24.4
John Morley	10,843,250	12.3
Tickgold Ltd	5,342,000	6.1
Peter O'Reilly	4,592,500	5.2
Pershing Nominees Ltd KSCLT ACCT	3,800,000	4.3

Policy and practice on payment of creditors

The group's policy, concerning the payment of creditors is to pay suppliers within 30 days of date of receipt of the invoice, except where other terms have been agreed in advance or in the case of supplier related problems. The number of days billings from suppliers to the Group outstanding at 31 December 2008 was 48 days.

Political and charitable contributions

The Group made no political contributions or donations to UK charities during the year (2007 £Nil)

Disclosure of information to auditors

Each director, as at the date of this report, has confirmed that insofar as they are aware there is no relevant audit information (that is, information needed by the Group's and Company's auditors in connection with preparing their report) of which the Group's and Company's auditors are unaware, and they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the Group's and Company's auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s234ZA of the Companies Act 1985.

  Auditors

A resolution to re-appoint Simpson Wreford & Partners as auditors will be put to the members at the forthcoming Annual General Meeting.

By order of the board

S Clague Secretary	Fleet House 8 - 12 New Bridge Street London EC4V 6AL
30 June 2009

Statement of directors' responsibilities

The directors are responsible for preparing the Annual Report, the directors' remuneration report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group and parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial statements are required by law to give a true and fair view of the state of affairs of the company and Group and of the Group's profit or loss for that period.  

In preparing those financial statements, the directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• state that the financial statements comply with IRFSs as adopted by the European Union;

• prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Group will continue in business, in which case there should be supporting assumptions or qualifications as necessary.

The directors confirm that they have complied with the above requirements in preparing the financial statements.

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the company and the Group and to enable them to ensure that the financial statements and the directors' remuneration report comply with the Companies Act 1985 and, as regards the Group financial statements, article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

  Operating and Financial Review

In terms of trading performance we are satisfied with the results for 2008. The number of serviced offices centres was maintained at 12 and our objective was to improve the performance of the portfolio. This was successful with an 8% increase in revenues and a 12% increase in EBITDA. However in line with the commercial property market, we have experienced a 20% decline in the values of the freehold properties.

OVERVIEW OF RESULTS OF THE YEAR

Turnover for the year ended 31 December 2008 was £6.891m and operating loss was £5.0m.  

The economic downturn has resulted in an increase in interest in our service offering and lead flow has been strong. Pressure on revenues per workstation has been very localised with some centres facing strong competition whilst others have been able to increase revenues. We constantly strive to improve our ability to succeed in such an environment with investment in marketing, staff selection and development, systems and physical appeal of the centres. 

 

OPERATING EXPENSES

Operating expenses including depreciation and amortisation but excluding revaluations were equivalent to 89% of sales and with careful cost management enabled management to show a healthy operating margin.

OPERATING PROFIT

Group operating loss was £5.0m having suffered a property write down of £5.8m. Margins are expected to improve in the forthcoming year with management keen to improve revenues while keeping costs under control with a good internal control environment.

 

INTEREST

Interest was due on the bullet loans in January 2009, which now includes the Group's share of the facility granted to the joint venture. The loan to the Company was due for repayment on 19 October 2009. The loan to the Joint Venture was due for repayment on 5 July 2012. 

TAXATION

The effective rate of corporation tax is lower than the normal rate of 28.5% due largely to losses not being recognised as a deferred tax asset.

LOSS PER SHARE

Loss per share is 6.30 pence for the current year. The fully diluted EPS is the same with a minimal dilution because of share options. The company policy is to reward staff with share options to ensure that the best quality staff are recruited and maintained.

DIVIDEND POLICY

No dividend will be payable for this year as the company seeks to achieve sufficient realised reserves in order to be able to pay dividends in the future.

BALANCE SHEET

Debtor days are 3 days and the company is progressively ensuring that debt is monitored and controlled by operational management.

  FUTURE DEVELOPMENTS

In these uncertain economic conditions our strategy has been to pursue low risk, low investment profitable growth. We have succeeded in securing management agreements for 4 centres and acquired an established serviced office business on competitive lease terms. We have invested in a marketing campaign to promote our managed service offering. This has been very successful and has offered opportunities that are under evaluation. We will also consider leased and freehold offices where the terms are exceptional. 

  Independent auditors' report to the members of Serviced Office Group plc

We have audited the Group and parent company financial statements (the 'financial statements') of Serviced Office Group Plc for the year ended 31st December 2008 which comprise the Group income statement, the Group and parent company balance sheets, the Group and parent cash flow statements, the Group and parent company statement of change in shareholders' equity and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the directors' remuneration report that is described as having been audited.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS

The directors' responsibilities for preparing the annual report, the directors' remuneration report and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted for use in the European Union are set out in the statement of directors' responsibilities.

Our responsibility is to audit the financial statements and the part of the directors' remuneration report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the company's members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the directors' remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you if, in our opinion, the directors' report is not consistent with the financial statements. The information given in the directors' report includes that specific information presented in the Operating and financial review that is cross-referenced to the review of the business sections of the directors' report.

In addition we report to you if in our opinion the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors' remuneration and other transactions is not disclosed.

We review whether the corporate governance statement reflects the company's compliance with the nine provisions of the Combined Code 2006 specified for our review by the Listing Rules of the Financial Services Authority only in so far as the company has voluntarily complied with the provisions of the code, and we report if it does not. We are not required to consider whether the Board's statements on internal controls cover all risks and controls, or form an opinion on the effectiveness of the Group's corporate governance procedures or its risk and control procedures.

We read other information contained in the annual report and consider whether it is consistent with the audited financial statements. The other information comprises only the directors' report, the unaudited part of the directors' remuneration report, the chairman's statement, the operating and financial review and the corporate governance statement. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

BASIS OF AUDIT OPINION

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the directors' remuneration report to be audited. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group's and company's circumstances, consistently applied and adequately disclosed.

  We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the directors' remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the directors' remuneration report to be audited.

OPINION

In our opinion

• The group financial statements give a true and fair view, in accordance with IFRSs as adopted for use in the European Union, of the state of the group's and the company's affairs as at 31st December 2008 and of its loss and cash flows for the year then ended;

• The parent company financial statements give a true and fair view, in accordance with IFRSs as adopted for use in the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company's affairs as at 31st December 2008 and of its cash flows for the year ended;

• The financial statements and the part of the directors' remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and

• The information given in the directors' report is consistent with the financial statements.

EMPHASIS OF MATTER - GOING CONCERN

In forming our opinion on the financial statements, which is not qualified, we have considered the adequacy of the disclosure made in the Summary of Significant Accounting Policies (note 2 to the financial statements) concerning the Group's and the Parent Company's ability to continue as a going concern. The note discloses the existence of material uncertainty in respect of continuing bank loan facilities which may cast significant doubt on the Group's and Parent Company's ability to continue as a going concern. The financial statements do not include the adjustments that would result if the Group and the Parent Company were unable to continue as a going concern.  

Simpson Wreford & Partners 

Chartered Accountants and Registered Auditors 

Suffolk House

George Street 

Croydon CR0 0YN 

30 June 2009 

 

  Consolidated income statement

	2008	2007
	£000	£000
Continuing operations
Sales	6,891	6,382
Cost of Sales	(4,784)	(4,342)
Gross profit	2,107	2,040
Net (loss)/gain from revaluation of investment properties	(5,769)	624
Administrative expenses	(1,354)	(1,347)
Operating (loss)/profit	(5,016)	1,317
Finance costs	(1,429)	(1,248)
Interest received	-	31
(Loss)/profit before income tax	(6,445)	100
Income tax credit/(expense)	899	(64)
(Loss)/profit for the year	(5,546)	36
Earnings per share:
Basic	(6.30)p	0.04p
Diluted	(6.30)p	0.04p

  Consolidated Balance Sheet 

     

	2008	2007
	£000	£000
ASSETS
Non current assets
Investment property	19,372	25,141
Property, plant & equipment	3,335	3,297
Intangible assets	1,489	1,489
Investments	498	493
Deferred tax asset	3	-
	24,697	30,420
Current assets
Inventories	63	63
Trade and other receivables	676	1,121
Cash and cash equivalents	409	275
	1,148	1,459
Total assets	25,845	31,879
EQUITY
Capital and reserves attributable to equity holders of the company
Called up share capital	4,400	4,400
Share premium account	4,209	4,200
Profit and loss account	(7,450)	(1,904)
Total equity	1,159	6,696
LIABILITIES
Non current liabilities
Borrowings	1,552	20,909
Deferred income tax	-	896
	1,552	21,805
Current liabilities
Trade and other payables	3,292	3,346
Borrowings	19,842	32
	23,134	3,378
Total liabilities	24,686	25,183
Total equity and liabilities	25,845	31,879

These financial statements on pages 18 to 40 were approved by the board of directors on 30 June 2009 and signed on behalf of the Board

Michael Kingshott	Stephen Clague
Director	Director

        

                

  Company balance sheet

     

	2008	2007
	£000	£000
ASSETS
Non current assets
Investments in subsidiaries	3,039	3,039
Investments	996	986
	4,035	4,025
Current assets
Trade and other receivables	1,644	1,612
Cash and cash equivalents	1	-
	1,645	1,612
Total assets	5,680	5,637
EQUITY
Capital and reserves attributable to
equity holders of the company
Called up share capital	4,400	4,400
Share premium account	4,209	4,200
Profit and loss account	(2,929)	(2,963)
Total equity	5,680	5,637
Total equity and liabilities	5,680	5,637

These financial statements on pages 18 to 40 were approved by the board of directors on 30 June 2009 and signed on behalf of the Board.

Michael Kingshott	Stephen Clague
Director	Director

  

Consolidated statement of changes in equity 

	Attributable to equity holders of the company
	Share	Share	Retained	Total
	Capital	Premium	Earnings	Equity
	£000	£000	£000	£000
Group
Balance at 1 January 2007	4,400	4,194	(1,940)	6,654
Profit for the year	-	-	36	36
Grant of employee share options	-	6	-	6
Balance at 31 December 2007	4,400	4,200	(1,904)	6,696
Balance at 1 January 2008	4,400	4,200	(1,904)	6,696
(Loss)/profit for the year	-	-	(5,546)	(5,546)
Grant of employee share options	-	9	-	9
Balance at 31 December 2008	4,400	4,209	(7,450)	1,159
	Share	Share	Retained	Total
	Capital	Premium	Earnings	Equity
	£000	£000	£000	£000
Company
Balance at 1 January 2007	4,400	4,194	(3,172)	5,422
Profit for the year	-	-	209	209
Grant of employee share options	-	6	-	6
Balance at 31 December 2007	4,400	4,200	(2,963)	5,637
Balance at 1 January 2008	4,400	4,200	(2,963)	5,637
Profit for the year	-	-	34	34
Grant of employee share options	-	9	-	9
Balance at 31 December 2008	4,400	4,209	(2,929)	5,680

 

 Consolidated Cash Flow Statement 

		2008		2007
		£000		£000
(Loss)/profit from operations		(5,016)		1,317
Adjustment for :
Depreciation of plant and equipment		497		437
Amortisation of bank loan arrangement costs		3		-
Revaluation of investment properties		5,769		(624)
Expense arising from grant of share options		9		6
Operating cash flow before movement in working capital		1,262		1,136
Decrease in receivables		61		160
Decrease / (Increase) in other current assets		384		(492)
Increase in payables		298		777
Cash generated from operations		743		1,581
Interest Paid		(1,780)		(657)
Net cash from operating activities		(1,037)		924
Cash flows from investing activities
Interest received		57		4
Purchase of investment property		-		(5,909)
Proceeds from sale of investment property		-		4,300
Purchases of plant and equipment		(535)		(1,928)
Proceeds from sale of plant and equipment		-		672
Loans to Joint Venture		(5)		(493)
Acquisition of subsidiaries, net of cash acquired		-		(7)
Net cash (used in) investment activities		(483)		(3,361)
Cash flows from financing activities
Proceeds from shareholder loans		16		1,480
Repayment of long-term borrowings		-		(5,250)
Finance lease capital repayments		(24)		-
Proceeds from long-term borrowings		400		6,147
Net (decrease) in cash and cash equivalents		134		(60)
Cash and cash equivalents at the beginning of the year		275		336
Cash and cash equivalents		409		275
Bank balances and cash		409		275

  Company cash flow statement 

		2008		2007
		£000		£000
Profit (Loss) from operations		34		209
Adjustment for :
Expense arising from grant of share options		9		6
Operating cash flow before movement in working capital		43		215
Decrease / (Increase) in other current assets		(32)		358
(Decrease) in payables		-		(2)
Net cash from operating activities		11		571
Cash flows from investing activities
Loans to JV		(10)		(986)
Net cash (used in) / received from investment activities		1		(986)
Net increase / (decrease) in cash and cash equivalents		1		(415)
Cash and cash equivalents at the beginning of the year		-		415
Cash and cash equivalents		1		-
Bank balances and cash		1		-

Notes to the financial statements

1. GENERAL INFORMATION

The Serviced Office Group plc ('the Company') and its subsidiaries (together 'the Group') are in the business of ownership and operation of serviced office accommodation.

The Company is a public limited company incorporated and domiciled in the United Kingdom. The address of its registered office is Fleet House, 8 - 12 New Bridge Street, London, EC4V 6AL.

The Company has its listing on the AIM market of the London Stock Exchange plc.

 

These consolidated financial statements have been approved for issue by the Board of Directors on 30 June 2009.

The registered company number is 04031883.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of preparation

The consolidated financial statements of Serviced Office Group plc have been prepared in accordance with EU endorsed International Financial Reporting Standards (IFRS), IFRIC interpretations and the Companies Act 1985 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available-for-sale financial assets, and financial assets and financial liabilities at fair value through profit or loss.

The consolidated financial information set out above does not constitute statutory financial statements for the years ended 31 December 2008 or 2007 as defined in Section 240 of the Companies Act 1985. The annual statutory report for the year ended 31 December 2007 has been filed with the Registrar of Companies and that for 2008 will be filed in due course. 

Going concern

The financial statements have been prepared on the going concern basis, which assumes that the Group will be able to meet its liabilities as they fall due in the ordinary course of business. The Group is dependent for its working capital requirements on cash generated from operations, cash holdings of £0.409m at 31 December 2008 and bank facilities totalling £20.509m, of which £19.809m of loans was drawn at 31 December 2008.£13.650m of loans are due to mature on 19 October 2009. 

The Group is required to comply with a number of covenants in its bank facilities and in the loan stock deeds, including a 'loan to value' covenant on the bank loans restricting this debt to 80% of the market values of the properties provided as security. Following the annual revaluation of the group's properties at 31 December 2008 this covenant was breached. As explained in note 16 to the financial statements, all the group's loan facilities are currently being renegotiated and the directors are confident that suitable terms can be agreed although clearly this is a material uncertainty.

The Directors have prepared cash flow projections for the period to 31 December 2012 which are based on certain assumptions regarding occupancy levels, rates chargeable and margins. These show that the Group is capable of continuing as a going concern provided suitable long term loan facilities are renewed, which may be at a higher interest premium reflecting the greater risk to the lender. 

The Directors are aware that future compliance with 'loan to value' based covenants could be affected if there are continued reductions in property values or significantly adverse trading conditions. It is recognised that in the current economic environment there are significant risks regarding future property values and the achievability of projected occupancy levels, room rates and margins in the business.

  

3. SEGMENTAL REPORTING

Primary reporting format - business segments

At 31 December 2008, all of the activities of the Group fall into one class of business, namely the ownership and management of business centres and this is the sole reportable segment.

Secondary reporting format - geographical segments

All activities of the Group originated in the South East of the United Kingdom.

3a Auditors' remuneration

	2008 £000	2007 £000
Fees payable for audit of parent company, consolidated accounts and JV investment	34	31
Fee payable to the company's and JV's auditors for other services: transaction related tax services subsidiary company audit other	14 8 5 3	- 8 - -

4.  INVESTMENT PROPERTY

	2008  £000	2007 £000
Group:
Fair Value
At 1 January 2008	25,141	22,908
Disposals to the JV	-	(4,300)
Arising on acquisition of investment properties	-	5,909
Net (loss)/gain from fair value adjustments of investment properties	(5,769)	624
At 31 December 2008	19,372	25,141

The Groups investment properties were revalued at 31 December 2008 by independent professionally qualified valuers Atis Real Weatheralls. Valuations were based on current prices in an active market.  

    

  5.  PROPERTY, PLANT AND EQUIPMENT 

	Plant & Equipment
	£000
Group:
Cost
At 1 January 2008	4,757
Additions	535
At 31 December 2008	5,292
Accumulated Depreciation
At 1 January 2008	1,460
Charge for the year	497
At 31 December 2008	1,957
Carrying Amount
At 31 December 2008	3,335
At 31 December 2007	3,297

The net book value of assets held under finance leases at 31st December 2008 was £105,000 (2007: £62,000)

6. INTANGIBLE ASSETS - GOODWILL

	2008  £000	2007 £000
Opening net book value	1,489	1,482
Arising on acquisition of subsidiaries	-	7
	1,489	1,489

7. INVESTMENTS

	2008  £000	2007 £000
Company
Subsidiary undertakings: Cost
Beginning of year	3,039	3,039
Additions	-	-
Disposals	-	-
	3,039	3,039
Amounts written off
Beginning of year	-	-
Amounts written off in year	-	-
Disposals	-	-
	-	-
Carrying Amount
At 31 December	3,039	3,039

  The principal undertakings in which the Group's interest at the year end is more that 20% are as follows:

	Country of	Principal		Percentage
	incorporation	activity		of ordinary
				shares held
Subsidiary undertakings
KBC Holdings Limited	England	Holding company		100%
KBC Harrow Limited	England	Serviced office provider	(*)	100%
KBC Hayes Limited	England	Serviced office provider	(*)	100%
KBC Kingston Limited	England	Serviced office provider	(*)	100%
KBC Bournemouth Limited	England	Serviced office provider	(*)	100%
KBC Willowbank Limited	England	Serviced office provider	(*)	100%
KASP Limited	England	Development company		100%
Companies marked with a (*) are held indirectly by the Company

Joint ventures

The Group had the following significant interests in JVs.

Consort Property Holdings Limited	England	Holding company		50%
KBC Teddington Limited	England	Serviced office provider	(**)	50%
KBC Chiswick Limited	England	Serviced office provider	(**)	50%
KBC Beckenham Limited	England	Serviced office provider	(**)	50%
KBC Crawley Holdings Limited	England	Holding company	(**)	50%
KBC Crawley	England	Serviced office provider	(**)	50%
Companies marked with a (**) are held indirectly by the Company through the JV, Consort Property Holdings Limited

  8. INVESTMENTS    

	2008  £000	2007   £000
Group:
Shareholder loans	498	493
Company:
Shareholder loans	996	986

The loans by the Group to the JV, Consort Property Holdings Limited, are unsecured.

Interest in joint venture

The Group has a 50% interest in a JV, Consort Property Holdings Limited, which owns and operates serviced office accommodation. The following amounts represent the Group's 50% share of the assets and liabilities, and sales and results of the JV. They are included in the balance sheet and income statement:

	2008	2007
	£000	£000
Assets:
Non-current assets	7,758	9,088
Current assets	249	324
	8,007	9,412
Liabilities:
Non-current liabilities	2,108	8,472
Current liabilities	7,284	644
	9,392	9,116
Net assets	(1,385)	296
Income	1,110	1,213
Expenses	2,790	918
Profit after income tax	(1,680)	295

There are no contingent liabilities relating to the Group's interest in the JVs.

9. INVENTORIES

	2008  £000	2007 £000
Land held for resale	63	63
	63	63

  10. TRADE AND OTHER RECEIVABLES

	2008  £000	2007 £000
Group:
Trade receivables	69	128
Prepayments	447	760
Other debtors	160	233
Receivable from related parties	-	-
	676	1,121
Company:
Amounts owed by Group companies	1,644	1,612
Other debtors	-	-
	1,644	1,612

There is no concentration of credit risk with respect to trade receivables as the Group has a large number of customers within its buildings.

11. CASH AND CASH EQUIVALENTS

	2008  £000	2007 £000
Group:
Cash at bank and in hand	409	275
	409	275
Company:
Short term bank deposits	1	-

12. BORROWINGS

	2008  £000	2007 £000
Group:
Current
Finance lease obligations	41	32
Bank borrowings	19,809	-
Less: unamortised costs of arrangement	(8)	-
	19,842	32
Non-current
Bank borrowings	-	19,409
Less: unamortised costs of arrangement	-	(10)
	-	19,399
Loans from shareholders of the JV	1,495	1,479
Finance lease obligations	57	31
	1,552	20,909

Bank borrowings are secured by the freehold and long leasehold investment properties.

The borrowings include amounts secured on investment property to the value of £19,809,000. This represents the value of the loans from The Royal Bank of Scotland plc which have been provided to the KBC Holdings Limited and the JV, Consort Property Holdings Limited.

The loans to the JV by its shareholders, which are the Company and UBS Investment Bank, are unsecured. Taking into account current market conditions the directors of Consort Property Holdings Limited consider that the most appropriate classification of the loan is in the 'more than two years but not more than five years' category.  

Maturity of financial liabilities

The maturity profile of the carrying amount of the Group's non-current liabilities, at 31 December 2008, was as follows:

	2008  £000	2007 £000
In more than one year but not more than two years	17	26
In more than two years but not more than five years	1,535	20,883
	1,552	20,909

The effective interest rates at the balance sheet date were as follows:

	2008  %	2007 %
Bank borrowing	6.5	7.0
Loans from shareholders	15.0	15.0
Finance lease	1.7	0.0

Renegotiation of bank facilities

The loans for both KBC Holdings Limited and the JV, Consort Property Holdings Limited, have covenants stating that the bank indebtedness should not exceed 80% and 75% respectively of the combined value of the freehold and leasehold properties provided as security. Following the annual revaluation of the Group's properties at 31 December 2008 and the inability to reduce indebtedness or provide further security, these covenants are currently breached. At 31 December 2008, the loans amounted to 98% and 79% respectively of the secured property value.

Since the loan to KBC Holdings Limited is due for renewal in October 2009 and the Group has contracted to purchase the other 50% of the shares in the JV, Consort Property Holdings Limited (see note 27), all the Group's facilities from The Royal Bank of Scotland are currently being renegotiated. The Directors strongly believe it is in the Group's long term interests to extend these facilities given the current level of liquidity in the financial markets, even if this has to be achieved at a increased cost.

In the meantime these loans are shown as current liabilities in the consolidated balance sheet at 31 December 2008 on page 18 of the financial statements. 

13. TRADE AND OTHER PAYABLES

	2008  £000	2007 £000
Group:
Trade payables	666	896
Social security and other taxes	255	83
Customer deposits	1,085	946
Accruals	1,286	1,421
	3,292	3,346

14. EXPENSES BY NATURE

	2008  £000	2007  £000
Rent, rates and establishment costs	3,073	2,744
Other overheads	1,324	1,378
Depreciation, amortisation and impairment charges	500	437
Employee benefit expense	1,241	1,130
	6,138	5,689
Number of employees	36	39

15. EMPLOYEE BENEFIT EXPENSE

	2008  £000	2007  £000
Wages and salaries	1,112	1,019
Social security costs	112	103
Share options granted to employees and directors	9	6
Pension costs - defined contribution plans	8	2
	1,241	1,130

16. FINANCE COSTS

	2008  £000	2007  £000
Interest expense:
- On bank borrowings	1,282	1,164
- On shareholder loans	147	84
	1,429	1,248

17. INCOME TAX (CREDIT)/EXPENSE

	2008  £000	2007 £000
Current tax		-
Deferred tax (Note 17)	(899)	64
	(899)	64

  The tax on the Group's (loss)/profit before tax differs from the theoretical amount that would arise using the tax rate applicable to profits of the UK companies as follows:     

	2008  £000	2007  £000
(Loss)/Profit before tax	(6,445)	100
Tax calculated at domestic rates applicable to profits in the UK	(1,840)	30
Losses not recognised as a deferred tax asset	892	82
Utilisation of losses not previously recognised	(8)	-
Expenses not deductible for tax purposes	11	9
Income not taxed	-	(4)
Change in tax rate used for deferred tax provision	35	(58)
(Over)/Under provision for prior year tax	(61)	5
Tax charge	(899)	64

The applicable tax rate was 28.5% (2007: 30%).

18. EARNINGS PER SHARE

	2008	2007
Weighted average number of shares in issue (thousands)	88,006	88,006
Profit attributable to equity holders of the company	(5,546)	36
Basic earnings per share (pence)	(6.30)	0.04

There is no difference between the basic and diluted earnings per share.

19. DISPOSAL OF SUBSIDIARIES

No subsidiaries were disposed of during the year. 

	2008 £000	2007 £000
	2008 £000	2007 £000
Investment property	-	4,300
Property, plant & equipment	-	672
Cash at bank and in hand	-	43
Creditors	-	(43)
Amounts owed to Group companies	-	(4,824)
Deferred tax	-	(57)
Net assets disposed	-	91

  20. COMMITMENTS

	2008 £000	2007 £000
Capital commitments
Capital expenditure contracted but not provided	-	-

Operating lease commitments - where a Group company is the lessee

The Group lease various buildings under non cancellable operating lease agreements, all of which have varying terms and break clauses.

The future aggregate minimum lease payments under non cancellable operating lease are as follows:

	2008  £000	2007  £000
No later than 1 year	-	342
Later than 1 year and no later than 5 years	535	-
Later than 5 years	488	668
	1,023	1,010

21. POST BALANCE SHEET EVENTS

The Company has agreed to acquire the remaining 50 per cent. of the issued shares in the JV, Consort Property Holdings Limited, from UBS AG, London Branch. The Company is financing the acquisition through the issue of £1,000,000 principal amount of convertible loan notes. The loan notes will be convertible into ordinary shares of the Company at 3.5p, the conversion price of 3.5p represents a premium of 33 per cent. to the closing middle market price of 2.63 pence per ordinary share of the Company on 25 June 2009, being the last practicable date prior to the publication of this report. The ordinary shares to be issued following conversion of the loan notes will represent approximately 32.5 per cent. of the Company's current issued ordinary share capital. 

The acquisition and issue of the loan notes is conditional upon The Royal Bank of Scotland (which provides funding to both the Group) consenting to the acquisition and renewing the Group's facilities. 

22. RELATED PARTY TRANSACTION

During the year Group companies entered into the following transactions with related parties who are not members of the Group.

    

	Sales		Purchases		Amounts owed to related parties		Amounts owed to related parties
	Year ended 31/12/08	Year ended 31/12/07	Year ended 31/12/08	Year ended 31/12/07	Year ended 31/12/08	Year ended 31/12/07	Year ended 31/12/08	Year ended 31/12/07
	£000	£000	£000	£000	£000	£000	£000	£000
Consort Property Holdings Ltd	721	110	-	-	34	127	-	-
Car Park Valeting Ltd	-	12	-	-	-	-	-	-

The Serviced Office Group has provided services to Car Park Valeting Ltd at arms length prices in the year. This company is controlled by MJ Kingshott who is also a director of the company.

23. ULTIMATE CONTROLLING PARTY

There is no ultimate controlling party of Serviced Office Group plc.

ENDFR CKKKBQBKDNAN