TIDMSQB
RNS Number : 1242I
Squarestone Brasil Limited
09 June 2011
9 June 2011
SQUARESTONE BRASIL LIMITED
("Squarestone Brasil", "the Company" or the "Group")
FULL YEAR RESULTS ANNOUNCEMENT
For the period 29 January 2010 to 31 December 2010
Squarestone Brasil Limited (AIM: SQB.L; SQBW.L), the
Anglo-Brazilian real estate and investment company, today announces
its full year results for the period 29 January to 31 December
2010.
Highlights:
Financial
-- NAV per share 107.1p, with the adjusted NAV of 109.5p (1), up
from 93.3p at the half year.
-- Profit per share 7.28p - up from a loss of (2.63)p at the
half year.
-- Directors' valuation of the Group's share of Golden Square at
R$64.5m (GBP25.0m) representing a 40% increase over the value on
admission to AIM. This valuation is based on a valuation of the
property as a whole by Cushman & Wakefield (see note 16 for
further details).
-- As the Group is still in a development phase of Golden Square
the Directors anticipate profits will continue to be driven by the
increasing value of Golden Square as it nears completion.
-- Successful IPO and commencement of trading on the Alternative
Investment Market of the London Stock Exchange on 12 April
2010.
-- Initially raised GBP39.5m (including GBP11.2m reinvested by
original investors).
-- A further GBP0.88m has been reinvested by management.
-- the Group has benefitted from the decision to move the
majority of funds from Guernsey to Brazil due to the subsequent
appreciation of the Brazilian Real.
(1) Adjusted for Deferred tax in accordance with Best Practice
Recommendations issued by the European Public Real Estate
Association (EPRA) in October 2010.
Strategic and Operational
-- Successful completion of a project level agreement with BTG
Pactual and Walton Street Capital to fund the Golden Square
shopping mall to completion and an option to develop jointly at
least three additional shopping malls in Brazil. The agreement
provides the following benefits;
o Convertible bond investment of R$192.5/(GBP74.7m) committed by
BTG Pactual and Walton Street Capital to Golden Square project
company, providing all finance necessary to acquire 100% of the
Golden Square shopping mall and to fund its construction to
completion.
o BTG Pactual and Walton Street Capital to fund three further
50/50 equity investments in separate malls with the Group in return
for an option to purchase 49% of the Group's wholly owned Brazilian
management company.
o Underlines not only the support for the Group's management and
ambitions, but also their confidence in the potential of Golden
Square.
o Brings added value to the Group from the association and
support of one of the leading Brazilian investment banks and an
experienced international real estate investment fund manager.
-- Construction of 31,000 sq m Golden Square shopping mall
started in May 2011, expected to open by the end of the third
quarter of 2012.
-- Projected satellite rents for Golden Square are R$134 per
square metre per calendar month ("psm pcm"). However, the Group has
recently been receiving proposals for satellite stores at rents in
excess of R$200 psm pcm, an uplift of circa 50%, reflecting the
quality of our project and the growth of retail rents in Brazil.
Going forward, the Group intends to provide a quarterly project and
leasing update, the first of which we expect to announce at the end
of September.
-- Negotiations are in progress on an attractive pipeline of
deals to expand the Group's portfolio of shopping mall investments
in the Greater Sao Paulo region.
-- Negotiations are in progress with domestic and well known
international retailers to sign them as potential shopping mall
tenants.
-- Completed the acquisition of the Group's wholly owned
Brazilian management company and the minority interest in the
Special Purpose Entity that owned Golden Square.
-- Favourable macro-economic, demographic, consumer and real
estate factors in Brazil.
-- The Group is very well positioned to capitalise on the
significant shopping mall opportunities in Brazil.
-- Continuing investment into the Group's management team in
Brazil, including leasing, finance, and construction divisions.
James Morse, Chief Executive of Squarestone Brasil,
commented:
"The economic and financial indicators remain positive for the
Brazilian shopping mall sector and we believe that it remains an
attractive growth investment opportunity. Whilst there remains a
significant shortage of retail accommodation available to the large
and growing 'B' and 'C' classes (c. 130m people), Squarestone
Brasil recognises that, as consumer tastes become more
sophisticated, there is a greater need to deliver a high quality
retail and leisure experience in Brazil. The Squarestone management
team's international experience, partners and advisors will help
the Company deliver this type of cutting edge product.
Squarestone Brasil is now significantly stronger since forming
its joint venture with Delta II (a joint investment vehicle of BTG
Pactual and Walton Street Capital) and the Board believes the
Company is in an excellent position to capitalise on the
significant shopping mall opportunities. This will provide an
excellent springboard for value creation in the business and we
look forward to reporting on further progress in due course."
For further information contact:
Squarestone Brasil Tel: +44 (0)20 7074 1800
James Morse, Chief Executive
Robert Sloss, Executive Director
Tim Barlow, Executive Director
Liberum Capital (Nominated Adviser Tel : +44 (0)20 3100 2000
and Broker)
Chris Bowman
Kreab Gavin Anderson (PR Adviser) Tel: +44 (0)20 7074 1800
James Benjamin Email:
Natalie Biasin squarestone@kreabgavinanderson.com
Notes to Editors:
Squarestone Brasil Limited (AIM: SQB.L; SQBW.L) is an
Anglo-Brazilian real estate investment and development company
specialising in the Brazilian shopping mall sector. The Company
combines local real estate market knowledge with international
expertise in retailing, construction and development and is focused
on introducing to the Brazil shopping mall sector international
standards in terms of design, construction, operation and asset
management.
Squarestone Brasil Limited is a Guernsey registered and
domiciled company with an operational company in Sao Paulo. Its
Ordinary Shares and Warrants are traded on AIM where it was
admitted to trading in April 2010. The business carried on by
Squarestone Brasil was co-founded in 2007 by James Morse, Tim
Barlow and Robert Sloss.
Further information on Squarestone Brasil is available from the
Company's website www.squarestone.com.br
Chairman's Statement
Following the successful IPO of Squarestone Brasil in April
2010, the main focus of the Group has been the negotiation and
successful completion of a joint venture with BTG Pactual and
Walton Street Capital, one of the leading Brazilian investment
banks and an experienced international real estate investment fund
manager respectively. The conclusion of these negotiations has
resulted in an investment of R$192.5m into our Golden Square
projectcompany, SB Brast Participacoes S.A. ("SB Brast"). This
investment has come through a joint investment vehicle, Delta II,
in the form of a convertible bond, which will provide all of the
funds required to acquire 100% of the project and to complete the
development of the mall. The signing of this agreement has provided
two excellent financial partners with complementary skills to the
Group and is a strong endorsement of the Group's vision to deliver
international quality shopping malls to Brazil effectively and
successfully.
The conclusion of the joint venture has permitted a second major
event, the commencement of development works on our flagship mall,
Golden Square. This mall is now scheduled to be completed by the
end of the third quarter of 2012. Golden Square will be a mall of
31,000 sq m of net lettable area ("NLA") on three levels, designed
and built to international shopping mall standards combined with
the local culture, tastes and fashions of Brazil that is intended
to deliver the optimal tailored retailing experience targeting the
ABC socio-economic group, within Sao Paulo. Golden Square's goal is
to redefine the local retail experience based on international
standards, hosting both domestic and international retailers under
one roof and presenting a distinctive retail offer that currently
does not exist in this part of Greater Sao Paulo.
In addition to the Golden Square project, and following the
successful acquisition of the Group's Brazilian management company
in September 2010, the Group is continuing to invest in its team in
order to deliver a vertically integrated mall company, capable of
managing large scale projects from inception, to asset management.
We will continue with our policy of employing only Brazilian
nationals in the Brazilian management company, but combine them
with a team of international professional advisors to deliver
optimal performance.
Results and Operations
Squarestone Brazil reported a profit of GBP2,888,669 during the
period from 29 January 2010 to 31 December 2010, representing a
profit per ordinary share of 7.28p. This is a significant
improvement on the loss per share of (2.63p reported at the half
year.
The primary reasons for this improvement were the increase in
the fair value of investment property of GBP4,131,110 (after an
allowance for deferred tax on that increase) and a gain of
GBP1,798,136 on foreign currency translation, which arose from the
Board's decision to transfer the bulk of the Group's investment
funds to Brazil in order to provide some protection against
appreciation in the Brazilian Real, as has recently been seen.
As the Company is still in the development phase of Golden
Square the Directors anticipate profits will continue to be driven
by the increasing value of Golden Square as it proceeds to
completion.
The consolidated net asset value (NAV) of the Company at 31
December 2010 was GBP43,257,938 representing 107.1p per ordinary
share, an increase from 93.3p at the half year end. Under the Best
Practices Recommendations issued by the European Public Real Estate
Association, the NAV per share, which is adjusted for deferred tax,
is 109.5p, which the Board considers to be a more appropriate
measure of the Group's NAV as such deferred tax is likely to be
avoided by the careful management of disposals in line with the
beneficial tax structure of the Group.
Mall Market Overview
The growth in the Brazilian shopping mall sector has continued
over the past 6 months, fuelled by the wider economy's 7.5% growth
in 2010 (Central Bank of Brazil). Brazilian retail sales grew at a
record 10.9% throughout 2010 in a clear sign that the consumer has
been at the forefront of Brazil's growth over the past year. Strong
growth has already been recorded in the early part of 2011, albeit
with a slight slowdown due to a series of interest rate rises,
resulting from the pressures of inflation. In the second quarter of
2011 the BMI Brazil retail report forecasts that the country's
retail sales will grow from R$1,383.54bn (US$753.35bn) in 2011 to
R$2,029.99bn (US$1,105.34bn) by 2015. Real incomes also continue to
increase with the BMI Latin American monitor estimating per capita
income to more than double to US$16,457 by 2015. Generally,
positive trends in underlying economic growth, a large and growing
population, rising disposable incomes and continued strong consumer
confidence levels, are key factors behind the forecast growth in
Brazil's retail sales.
Aside from the expansion of domestic Brazilian brands, we are
seeing increasing levels of interest in the Brazilian retail market
from high quality international retailers. Squarestone Brasil is
continuing active negotiations with these well known international
retailers and domestic operators, to sign them as potential
occupiers. We believe that the international retailers' presence in
Golden Square would further enhance its shopper appeal.
The large quoted Brazilian shopping mall operators continue to
attract positive attention from both domestic and international
investors. Shopping mall companies offer investors access to the
Brazilian consumer growth opportunity, through highly diversified
and varied income streams. Risk is further reduced through
index-linking of rents, providing an important inflation hedge. As
a consequence, mall operators are able to attract funds for
expansion and the more development orientated companies are set to
increase their portfolios by up to 30% by the end of 2013. The
favourable consumer conditions and available capital are also
likely to result in further consolidation of the mall sector, which
remains highly fragmented. We also anticipate that Brazilian malls
will increase their share of retail sales, which currently stands
at a low level of 18%, as penetration of malls increases. This
compares starkly with Mexico at 50% (ICSC, ABRASCE), which is
considered to be one of the stronger Latin American economies after
Brazil and Chile.
Consumer Credit
The growth in the Brazilian economy in recent years has been
matched by the deepening of credit to both corporates and consumers
('Credit Deepening in Brasil' - BTG Pactual (April2011)). In
particular, credit to households more than doubled from 9% of GDP
in 2003 to 21% in 2010. Furthermore, there were 7 billion card
transactions made in 2010 involving over US$534 billion, compared
with 1.1 billion transactions in 2000 involving an estimated US$65
billion. Of particular note, is the fact that the value of a
typical transaction has fallen, as the lower paid now form a higher
proportion of all card holders, reflecting the greater social and
financial mobility of the population.
Brazil's credit position ('Credit Deepening in Brasil' - BTG
Pactual (April2011)) is very different from more mature economies.
Importantly, financial institutions in Brazil maintain relatively
low levels of leverage, securitisation markets are still just
developing, outstanding mortgage credit has not yet reached 4% of
GDP and the overall commitment of labour income to debt service has
remained stable at 22%. Chile, which is regarded as being one of
the strongest economies in Latin America, has a strong correlation
to Brazil, being a Latin American country and having similar levels
of per capita income. However, total bank-intermediated credit
stands at 70% of GDP in Chile, as opposed to 47% in Brazil, credit
to households stands at 40% and 21% of GDP and outstanding mortgage
credit stands at 20% and 4%, respectively. This suggests that
Brazil's credit exposure is still relatively low.
Despite higher inflation and recently announced increased taxes
on some loans, consumer spending continues to be underpinned by
rising incomes, a robust labour market, high employment levels and
wider access to credit.
Outlook
The economic and financial indicators remain positive for the
Brazilian shopping mall sector and we believe that it remains an
attractive growth investment opportunity. Whilst there remains a
significant shortage of retail accommodation available to the large
and growing 'B' and 'C' classes (c. 130m people), Squarestone
Brasil recognises that, as consumer tastes become more
sophisticated, there is a greater need to deliver a high quality
retail and leisure experience in Brazil. The Squarestone management
team's international experience, partners and advisors will enable
it to deliver this type of cutting edge product.
Squarestone Brasil is now significantly stronger since forming
its joint venture with Delta II (a joint venture investment vehicle
of BTG Pactual and Walton Street Capital) and the Board believes
the Company is in an excellent position to capitalise on the
significant shopping mall opportunities. This will provide an
excellent springboard for value creation in the business and we
look forward to reporting on further progress in due course.
Directors' Report
The Directors present their report and the audited consolidated
financial statements of the Group for the period from 29 January
2010 to 31 December 2010.
Principal Activities
Squarestone Brasil Ltd ("the Company") and its subsidiaries
(together, "the Group") are principally involved in investment in
retail property in Brazil.
The Company is a limited liability investment company
incorporated in Guernsey on 29 January 2010. The address of its
registered office is No. 1 Le Truchot, St. Peter Port, Guernsey,
GY1 3JX. The Company was listed on the Alternative Investment
Market of the London Stock Exchange on 12 April 2010.
Business Review
A review of the business during the period is contained in the
Chairman's Statement.
Results and Dividends
The results for the year are set out in the attached financial
statements.
The Company made a profit after taxation of GBP2,888,669. Total
Consolidated Income is GBP4,686,805 which includes gains on foreign
currency translation of GBP1,798,136 and an increase in the fair
value of investment properties of GBP4,131,110, after the offset of
deferred tax arising from that increase in fair value.
Earnings per share are 7.28p on an undiluted basis and are 7.27p
on a diluted basis.
Net asset value per share is 107.1p.
The Company is not proposing to pay a dividend, with funds being
retained for the continuing construction of Golden Square. The
Company's strategy is to reinvest profits and cash reserves into
future projects for capital gains.
In accordance with the European Public Real Estate Association
(EPRA) Best Practices Recommendations published in October 2010,
the Directors have set out below adjusted performance
indicators.
EPRA Adjusted Earnings and Earnings per share
The Directors consider that the EPRA adjusted loss per share is
not the most appropriate measure of the Group's performance, as the
objective of the EPRA measure is to identify the extent to which
the Group's dividend payments are underpinned by earnings from
recurring operational activities. As the Group is currently in a
development phase there are no recurring operational earnings, and
the Group's stated intention is not to pay dividends but to
reinvest funds in further development activities.
EPRA Net Asset Value and Net Asset Value per share
GBP
------------------------------------------------------- --------------
Net Assets per Statement of Financial Position 43,257,938
------------------------------------------------------- --------------
Deferred tax in respect of an increase in the fair
value of investment properties 955,995
------------------------------------------------------- --------------
EPRA Net Assets 44,213,933
------------------------------------------------------- --------------
Number of ordinary shares at the period end 40,384,960
------------------------------------------------------- --------------
EPRA NAV per share 109.5p
------------------------------------------------------- --------------
IFRS NAV per share 107.1p
------------------------------------------------------- --------------
The Directors consider that the EPRA NAV is the more appropriate
measure of NAV, as the Group has created a structure that is
designed to minimise taxes payable from underlying earnings in
Brazil, including gains on the sale of investment properties. The
structure permits tax on such gains to be avoided by disposing of
asset owning entities rather than the underlying assets. However,
as the underlying assets could be sold, with tax being incurred on
the resultant gains, IAS 12 Income Taxes requires the deferred tax
to be provided for in the financial statements.
Directors
The Directors, who served throughout the period, are as
follows;
Tim Walker (Chairman)
James Morse (Chief Executive)
Tim Barlow (Executive Director)
Robert Sloss (Executive Director)
Edwin Davies (Non-executive Director)
Quentin Spicer (Non-executive Director)
All of the Directors were appointed on 6 April 2010.
At each annual general meeting, one-third of the Directors shall
stand for re-election. Each Director who has acted in that capacity
for nine years will then be subject to annual re-election, if they
would not otherwise fall within the Directors to retire by
rotation. A retiring Director will be eligible for re-election.
The Executive Directors have been appointed on contracts that
run for an initial period of twenty four months, and are then
subject to 12 months notice from either party. Non-executive
Directors have been appointed on contracts that run for an initial
period of twelve months and are then subject to 3 months notice
from either party.
The contracts of all of the Directors commenced on the date of
the Company's admission to AIM, being 12(th) April 2010.
Details of Directors' remuneration are stated within the
Directors' remuneration report. Details of Directors' shareholdings
are set out in note 32 to the financial statements.
Substantial Shareholdings
The company has been notified of shareholders holding 3% or more
of the ordinary shares as follows;
Percentage
Ordinary shares of no par value Number Held of share capital
------------------------------------ --------------- ---------------------
Spearpoint Ltd 21,658,600 53.63%
------------------------------------ --------------- ---------------------
Prima SGR SpA 2,250,000 5.57%
------------------------------------ --------------- ---------------------
Moonshift Investments Limited 4,000,000 9.91%
------------------------------------ --------------- ---------------------
Monteagle Barlow Trust Limited 2,100,000 5.20%
------------------------------------ --------------- ---------------------
Napier Brown Holdings Limited 2,000,000 4.95%
------------------------------------ --------------- ---------------------
Aldersgate Investment Managers
LLP 1,500,000 3.71%
------------------------------------ --------------- ---------------------
Edwin Davies is a Director and beneficial owner of Moonshift
Investments Limited and Tim Barlow is a Director and shareholder of
Monteagle Barlow Trust Limited.
Substantial shareholders are stated as at 16(th) May 2011.
Directors' statement of responsibilities
Guernsey company law requires that the Directors prepare
financial statements for each financial year, which give a true and
fair view of the state of affairs of the Group at the end of the
year and of the profit or loss of the Group 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 whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
-- Prepare the financial statements on the going concern basis
unless it is inappropriate to assume that the Group will continue
in businesss.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Company and of the Group and to enable
them to ensure that the financial statements comply with The
Companies (Guernsey) Law, 2008, as amended, and IFRS as adopted by
the EU. They are also responsible for safeguarding the assets of
the Group and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
So far as each of the Directors is aware, there is no relevant
audit information of which the Company's auditor is unaware and
each has taken all steps he ought to have taken as a director to
make himself aware of any relevant audit information and to
establish that the Company's auditor is aware of that
information.
The Directors confirm that they have complied with the above
requirements in preparing the financial statements.
Annual General Meeting
The annual general meeting will be held in Guernsey at the
Company's registered office on 12(th) July 2011.
Auditors
BDO Limited (BDO) were appointed as first auditors of the Group
during the period.
BDO have expressed their willingness to continue in office and a
resolution to re-appoint them will be proposed at the forthcoming
Annual General Meeting.
By order of the Board,
Tim Barlow ( )
Corporate Governance
Combined Code
As an AIM listed group incorporated in Guernsey, there is no
requirement for the Group to comply with the Combined Code (June
2008) ("Combined Code"), issued by the Financial Reporting Council
(the "FRC"). However, the Board places a high degree of importance
on ensuring high standards of corporate governance are maintained
and has determined that it should be the Company's policy to ensure
that the Company complies with the Combined Code to the extent
appropriate, taking into account the size and nature of its
business. The Company has complied with the provisions set out in
the Combined Code to the extent considered appropriate by the
Board.
The Board and Committees
Board
The Chairman is Tim Walker.
The Board is comprised of three Non-executive Directors and
three Executive Directors.
The Board considers the Non-executive Directors, including the
Chairman, to be independent for the purposes of the Combined Code.
The Non-executive Directors all have a wide range of experience and
provide a mix of commercial and professional skills that are
appropriate to the governance of the Company and to its operational
activities.
The Board holds a minimum of four meetings each year, at which
the Board considers financial performance and investment strategy,
and all other matters that the Board consider necessary to ensure
that control is maintained over the Group's affairs. The Board met
on eleven occasions during the period ended 31(st) December 2010.
Attendance at those meetings by the Directors is shown on page
15.
Audit Committee
The Chairman of the Audit Committee is Tim Walker. The members
of the committee are the three Non-Executive Directors. Membership
of the Committee is reserved solely for Non-Executive, non-UK
resident Directors.
The Audit Committee meets at least twice each year to consider
the Group's half year accounts and the Group's annual financial
statements. At each of these meetings the Group's Auditor has the
opportunity to raise any matters that it considers should be
brought to the attention of the Committee. The Committee then
reports any such matter that it considers appropriate to the Board.
The Committee is also required to review the Group's financial
reporting procedures and to make a recommendation to the Board with
regard to the appointment or reappointment of the Group's auditors.
The Committee met once during the period ended 31(st) December 2010
to review the half year accounts of the Group.
Given the size and nature of the Group, the Audit committee does
not consider it necessary to have a separate internal audit
function. Jeffrey Pym, Group Finance Director, has a limited remit
in relation to the internal audit function, where he undertakes an
informal review of operations in Brazil, and is required to raise
any issues of concern with the Audit Committee. The Audit Committee
is aware of the conflict of interest between his role as Group
Finance Director and his role with regard to internal audit, and
take this into consideration when reviewing the sufficiency of
internal controls.
The requirement for an internal audit function is being kept
under review, and will be introduced once the Audit Committee
considers that the size and complexity of the Group merits an
independent internal audit function.
Remuneration Committee
The Chairman of the Remuneration Committee is Quentin Spicer.
The members of the Committee are the three Non-Executive Directors.
Membership of the Committee is reserved solely for Non-executive,
non-UK resident Directors.
The Remuneration committee meets as is deemed necessary by the
Chairman of the Committee or as requested by the Directors. Details
of the remuneration policy and Directors remuneration are set out
in a separate section below. The Committee met once during the
period ended 31(st) December 2010.
Nominations Committee
The Chairman of the Nominations Committee is Edwin Davies. The
members of the Committee are the three Non-Executive Directors.
Membership of the Committee is reserved solely for Non-Executive,
non-UK resident Directors.
The Nominations Committee is required to keep under review the
size, structure and composition of the board, and to ensure there
is an appropriate succession plan in relation to the board and
other committees.
The Nomination Committee meets as is deemed necessary by the
Chairman of the Committee or as requested by the Directors. The
Committee did not meet during the period ended 31(st) December
2010.
Attendance at Board or Committee meetings during the period to
31(st) December 2010
(Where 'N/A' is shown, the Director listed is not a member of
the Committee)
Nominations Remuneration
Board Audit Committee Committee Committee
----------------------- ------ ---------------- ------------ -------------
Tim Walker 9 1 0 1
----------------------- ------ ---------------- ------------ -------------
James Morse 6 N/A N/A N/A
----------------------- ------ ---------------- ------------ -------------
Tim Barlow 5 N/A N/A N/A
----------------------- ------ ---------------- ------------ -------------
Robert Sloss 4 N/A N/A N/A
----------------------- ------ ---------------- ------------ -------------
Edwin Davies 9 1 0 1
----------------------- ------ ---------------- ------------ -------------
Quentin Spicer 10 1 0 1
----------------------- ------ ---------------- ------------ -------------
Number of meetings in
the period 11 1 0 1
----------------------- ------ ---------------- ------------ -------------
Going Concern
During the period the Board has been kept informed of the
Group's financial position and have been presented with cash flow
sensitivity analyses that demonstrate that the Group has sufficient
financial resources to meet its contractual liabilities as they
fall due.
Since the period end the Group has entered into an agreement for
funding with BTG Pactual and Walton Street Capital, through their
joint venture investment vehicle, Delta II FIP. This has provided
the Group with sufficient funding to be able to complete the
construction of the Golden Square shopping centre in Sao Paulo,
Brazil. This has enabled the Group to include the results of the
valuation prepared by Cushman and Wakefield as set out in note 16
to the financial statements, which was prepared on the assumption
that the construction of Golden Square would be completed and would
be capable of generating operational cash flow in the future.
The Board, having made enquiries and considered the major risk
factors affecting the Group that give rise to significant financial
exposure, has a reasonable expectation that the Group has adequate
financial resources to continue operations for the foreseeable
future. Accordingly, the Group continues to adopt the going concern
basis in the preparation of these financial statements.
Directors' Remuneration
Remuneration Policy
The aims of the remuneration policy of the Group are as
follows;
-- To attract, retain and motivate key executives and senior
staff of the calibre and experience required by the Group in order
to deliver the Group's strategy and performance objectives.
-- To align, as far as possible, the interests of the key
executives and senior staff with those of the shareholders, through
the use of remuneration packages that balance short and long term
remuneration elements that include performance related and
non-performance related elements.
Non-performance elements are provided through basic salaries.
The performance element is provided through a management incentive
arrangement, whereby 25% of the growth in net asset value (NAV)
over a compound 15% p.a. threshold (the "incentive pool") is set
aside to be allocated between the Executive Directors and other
staff. The Executive Directors each receive 25% of the incentive
pool. Chris Coulson, Development Director and Jeffrey Pym, Group
Finance Director, both receive 5% of the incentive pool. The
remaining 15% of the pool is then available to be allocated to
other staff by the Remuneration Committee on a discretionary basis
based on recommendations made by the Executive Directors. The
Non-Executive Directors do not receive any remuneration from the
incentive pool, or any other form of performance related
remuneration.
The first payment under the management incentive arrangement is
to be based on the growth in NAV from admission of the Company to
the AIM market and 31 December 2011, and will be paid following the
approval of the financial statements for the year ended 31 December
2011.
No Director is responsible for deciding his own
remuneration.
Directors Remuneration details in respect of the period ended 31
December 2010
Management Other Benefits
Incentive (provision of
Basic salary/fee payments accommodation) Total
---------------- ----------------- ----------- ------------------ --------
Executive
---------------- ----------------- ----------- ------------------ --------
James Morse 173,454 Nil 35,499 208,953
---------------- ----------------- ----------- ------------------ --------
Tim Barlow 40,530 Nil Nil 40,530
---------------- ----------------- ----------- ------------------ --------
Robert Sloss 40,530 Nil Nil 40,530
---------------- ----------------- ----------- ------------------ --------
Total 254,514 35,499 290,013
---------------- ----------------- ----------- ------------------ --------
Non-Executive
---------------- ----------------- ----------- ------------------ --------
Tim Walker 26,250 N/A Nil 26,250
---------------- ----------------- ----------- ------------------ --------
Ed Davies 15,000 N/A Nil 15,000
---------------- ----------------- ----------- ------------------ --------
Quentin Spicer 15,000 N/A Nil 15,000
---------------- ----------------- ----------- ------------------ --------
Total 56,250 Nil 56,250
---------------- ----------------- ----------- ------------------ --------
Apart from the accommodation benefit identified in the above
table, none of the Directors received any other cash or non-cash
benefits, share options, long term incentive plan payments or
received the benefit of contributions to a pension scheme.
In addition, the Executive Directors who benefitted from the
sale of the Brazilian management company, Squarestone Brasil
Administeracao e Participacoes S.A. (SB SA), agreed to reinvest the
entire proceeds of the sale, net of tax on those proceeds, into
ordinary shares of the Company. Although this does not constitute a
remuneration benefit, it is an important mechanism for ensuring the
alignment of interest between the Executive Directors and other
shareholders.
Independent Auditor's Report to the Members of Squarestone
Brasil
We have audited the financial statements of Squarestone Brasil
Limited for the period ended 31 December 2010 which comprise the
Consolidated Income Statement, the Consolidated Statement of
Comprehensive Income, the Consolidated Statement of Financial
Position, the Consolidated Statement of Changes in Equity, the
Consolidated Statement of Cash Flows and the related notes 1 to 35.
The financial reporting framework that has been applied in their
preparation is applicable law and International Financial Reporting
Standards (IFRSs) as adopted by the European Union.
This report is made solely to the Company's members, as a body,
in accordance with Section 262 of The Companies (Guernsey) Law,
2008, as amended. Our audit work is undertaken so that we might
state to the Company's members those matters we are required to
state to them in an auditor's report and for no other purpose. To
the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company's
members as a body, for our audit work, for this report, or for the
opinions we have formed.
Respective responsibilities of the directors and auditor
As explained more fully in the Directors' Statement of
Responsibilities within the Directors' Report, the Directors are
responsible for the preparation of the financial statements and for
being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the
financial statements in accordance with applicable law and
International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board's
(APB's) Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from
material misstatement, whether caused by fraud or error. This
includes an assessment of: whether the accounting policies are
appropriate to the Group's and parent company's circumstances and
have been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by the
Directors; and the overall presentation of the financial
statements. In addition, we read all the financial and
non--financial information in the Annual Report to identify
material inconsistencies with the audited financial statements. If
we become aware of any apparent misstatements or inconsistencies we
consider the implications for our report.
Opinion on the financial statements
In our opinion the financial statements:
-- give a true and fair view of the state of the Group's affairs
as at 31 December 2010 and of the group's profit for the period
from 29 January 2010 to 31 December 2010;
-- have been properly prepared in accordance with IFRSs as
adopted by the European Union; and
-- have been properly prepared in accordance with the
requirements of The Companies (Guernsey) Law, 2008, as amended.
Independent Auditor's Report to the Members of Squarestone
Brasil (continued)
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters
where The Companies (Guernsey) Law, 2008, as amended, requires us
to report to you if, in our opinion:
-- proper accounting records have not been kept by the parent
company; or
-- the financial statements are not in agreement with the
accounting records; or
-- we have failed to obtain all the information and
explanations, which, to the best of our knowledge and belief, are
necessary for the purposes of our audit.
BDO Limited
CHARTERED ACCOUNTANTS
Place du Pre
Rue du Pre
St Peter Port
Guernsey
Date: 8(th) June 2011
Consolidated Income Statement
for the period 29 January 2010 to 31 December 2010
Period 29.01.10
Note to 31.12.10
GBP
Gross rental Income 5 -
Service charge income 6 -
Property operating expenses 7 (160,905)
Net rental cost (160,905)
================
Other operating income 8 401,719
Administrative and other expenses 9 (2,376,747)
Changes in fair value of investment
property 16 5,087,105
Profit from operations 2,951,172
----------------
Finance income 12 899,514
Finance expense 12 (4,401)
Net finance income 895,113
----------------
Profit before taxation 3,846,285
----------------
Tax charge on profit for the period 13 (957,616)
Profit for the period 2,888,669
================
Earnings per share
Basic (pence) 14 7.28
Diluted (pence) 14 7.27
================
All items for the above statement derive from continuing
operations.
Consolidated Statement of Comprehensive Income
for the period 29 January 2010 to 31 December 2010
Period 29.01.10
to 31.12.10
GBP
Group
Profit for the period 2,888,669
Other comprehensive income
Foreign currency gains on translation of
foreign operations 1,798,136
Total comprehensive income relating
to the period 4,686,805
================
Consolidated Statement of Financial Position
as at 31 December 2010
Note As at 31.12.10
GBP
Assets
Non-current assets
Investment property 16 25,039,896
Property, plant and equipment 17 58,061
Goodwill 18 436,903
Intangible Assets 19 923,062
Total non-current assets 26,457,922
Current assets
Trade and other receivables 22 788,170
Cash and cash equivalents 35 19,037,986
Total current assets 19,826,156
Total assets 46,284,078
---------------
Liabilities
Non-current liabilities
Other non-current liabilities 24 224,074
Deferred tax liability 25 955,995
Total non-current liabilities 1,180,069
Current liabilities
Trade and other payables 23 1,846,071
Total current liabilities 1,846,071
Total liabilities 3,026,140
---------------
TOTAL NET ASSETS 43,257,938
===============
Consolidated Statement of Financial Position (continued)
as at 31 December 2010
Equity As at 31.12.10
Share capital 26 -
Share premium reserve 33,266,112
Warrant reserve 29 5,158,507
Foreign exchange reserve 27 1,798,136
Share option reserve 29 146,514
Retained earnings 2,888,669
TOTAL EQUITY 43,257,938
================
The financial statements on pages 19 to 56 were approved and
authorised for issue by the Board of Directors on 8(th) June 2010
and were signed on its behalf by:
Tim Barlow
Director
Consolidated Statement of Changes in Equity
for the period 29 January 2010 to 31 December 2010
Attributable to equity shareholders
---------------------------------------------------------------------------------------
Foreign Share Non-
Share Warrant Exchange option Retained Controlling Total
premium reserve reserve reserve earnings Total Interest Equity
GBP GBP GBP GBP GBP GBP GBP GBP
At 29 January
2010 - - - - - - - -
Amount arising
on acquisition - - - - - - 378,350 378,350
Profit for
the period - - - - 2,888,669 2,888,669 - 2,888,669
Gain in
the period - - 1,798,136 - - 1,798,136 - 1,798,136
Ordinary
shares/warrants
issued 35,347,266 5,158,507 - - - 40,505,773 - 40,505,773
Issue costs (2,081,154) - - - - (2,081,154) - (2,081,154)
Acquired
in period - - - - - - (378,350) (378,350)
Share based
payment - - - 146,514 - 146,514 - 146,514
At 31 December
2010 33,266,112 5,158,507 1,798,136 146,514 2,888,669 43,257,938 - 43,257,938
============ ========== ========== ======== ========== ============ ============= ============
Consolidated Statement of Cash Flows
for the period 29 January 2010 to 31 December 2010
Period 29.01.10
Note to 31.12.10
GBP
Cash flows from operating activities
Profit after tax for the period 2,888,669
Adjusted for:
Depreciation of property, plant and
equipment 17 4,211
Change in value of investment properties 16 (5,087,105)
Finance income 12 (899,514)
Finance expense 12 4,401
Income tax expense 13 957,616
(2,131,722)
Increase in trade and other receivables (175,446)
Decrease in trade and other payables (337,775)
Income taxes paid (1,621)
Net cash flows from operating activities (2,646,564)
Cash flows from investing activities
Purchase of subsidiary 30 (360,151)
Cash acquired on purchase of subsidiary 30 849,238
Acquisition of investment property 30 (5,952,363)
Expenditure on investment property (376,889)
Purchase of property, plant and equipment 17 (2,758)
Acquisition of minority interest 30 (378,350)
Interest received 12 899,514
Net cash flows from investing activities (5,321,759)
Cash flows from financing activities
Proceeds from the issue of shares 26 27,168,000
Issue cost paid on issue of ordinary
shares and warrants (883,041)
Interest paid 12 (4,401)
Net cash flows from financing activities 26,280,558
Net increase in cash and cash equivalents 18,312,235
Cash and cash equivalents at the
beginning of the period -
Effect of exchange rates on cash
and cash equivalents 725,751
Cash and cash equivalents at the
end of the period 19,037,986
================
Notes to the Financial Statements
for the period 29 January 2010 to 31 December 2010
1 Policies
At the date of authorisation of these financial statements, the
following standards and interpretations applicable to the Group's
financial statements, which have not been applied in these
financial statements were in issue but not effective at the period
end date:
IAS 24 Related Party Disclosures (revised);
IFRIC 14/IAS 19 The Limit on a Defined Benefit Asset, Minimum
Funding Requirements and
their Interaction (amendment);
IFRS 7 Transfers of Financial Assets (amendment);
IAS 12 Deferred tax recovery of underlying assets
(amendment);
IFRS 9 Financial instruments;
IFRS 10 Consolidated Financial Statements;
IFRS 11 Joint Arrangements;
IFRS 12 Disclosures of interests in Other Entities ;
IFRS 13 Fair Value Measurement; and
IAS 28 Investments in Associates and Joint Ventures.
The directors' have made specific reference to certain of the
changes below. The directors' have not commented on amendments to
existing standards or the issue of new standards where changes are
not considered to relevant to the Group or will have not have
material impact on the Financial Statements of the Group once
effected.
The amendment to IAS 12 introduces a presumption that recovery
of the carrying amount of an asset upon which deferred tax has been
recognised will normally be through sale. The Directors do not
believe that this will have a significant impact on the measurement
of the current deferred tax liability. It may impact the
calculation of deferred tax on future investments.
IFRS 10 introduces additional qualitative elements to the
definition of "control" when determining whether it is appropriate
to consolidate investees. The directors' do not consider that
application of the standard will materially affect the presentation
of the Group Financial Statements.
IFRS 11 and IAS 28 are both effective for periods of account
beginning on or after 1 January 2013. The new standard removes the
option to proportionally consolidate Joint Arrangements. The
directors' consider that the changes may affect the presentation of
the Group Financial Statements once adopted.
Basis of preparation
The consolidated Financial Statements are prepared in accordance
with International Financial Reporting Standards ("IFRSs") and
International Financial Reporting Interpretations Committee
("IFRIC") interpretations as endorsed by the European Union ("EU")
and with those parts of The Companies (Guernsey) Law, 2008, as
amended, applicable to companies reporting under IFRS. The
Financial Statements are prepared in sterling, which is the
presentational currency of the Company and all its subsidiaries
("the Group"). The Group's functional currency is the Brazilian
Real as Brazil is the primary economic environment in which the
Group operates.
Basis of Consolidation
Subsidiaries
The consolidated Financial Statements include the Financial
Statements of the Company and all subsidiaries (entities controlled
by the Company). Control is assumed where the Company has the power
to govern the financial and operating policies of an investee
entity so as to gain benefits from its activities.
The Financial Statements of subsidiaries are included in the
consolidated Financial Statements from the date that the power to
control commences to the date that control ceases. All intercompany
balances and transactions are eliminated.
Business combinations are accounted for under the acquisition
method. Any excess of the purchase price of business combinations
over the fair value of the assets, liabilities and contingent
liabilities acquired and resulting deferred tax thereon is
recognised as goodwill.
Where properties are acquired through corporate acquisitions and
there are no significant assets or liabilities other than property,
the acquisition is treated as an asset acquisition.
Non-controlling interests in the net assets of consolidated
subsidiaries are identified separately from the Group's equity
therein. Non-controlling interests consist of the amount of those
interests at the date of the original business combination and the
minority's share of changes in equity since the date of the
combination.
Joint ventures
Joint ventures are those entities over whose activities the
Group has joint control, established by contractual agreement.
Interests in joint ventures are accounted for using proportional
consolidation.
Accounting practices of subsidiaries, joint ventures or
associates which differ from Group accounting policies are adjusted
on consolidation.
Goodwill
Goodwill represents the excess of the cost of an acquisition
over the Group's interest in the fair value of the net identifiable
assets of the acquired undertaking at the date of acquisition.
Goodwill is recognised as an intangible asset and is reviewed for
impairment at least on an annual basis. Any impairment is
recognised immediately in the consolidated income statement.
Goodwill in respect of overseas subsidiaries denominated in a
foreign currency is retranslated at each balance sheet date using
the closing rate of exchange. The resulting foreign exchange
differences are taken to the foreign exchange reserve.
Intangible assets
Intangible assets are recognised on business combinations if
they are separable from the acquired entity or give rise to
contractual/legal rights. The amounts subscribed to such
intangibles are measured at cost or fair value at the date of
acquisition, arrived at by using appropriate valuation techniques.
Following initial recognition, intangible assets are measured at
cost or fair value less any amortisation and any impairment
losses.
The Group currently only has one category of intangible asset,
Customer contracts and relationships. Given the size and limited
number of customer relationships these can be considered
individually and are subject to an annual impairment review, as it
is not possible to estimate their useful lives.
Property, plant and equipment
Items of property, plant and equipment are measured at cost less
accumulated depreciation and impairment losses. Cost includes
expenditure that is directly attributable to the acquisition of the
asset. Depreciation is recognised through the consolidated income
statement on a straight-line basis over the estimated useful lives
of each part of an item of property, plant and equipment. When
parts of an item of property, plant and equipment have different
useful lives, those components are accounted for as separate items
of property, plant and equipment. The estimated useful lives of the
current period are as follows:
Furniture and fixtures 10 years
Computer Equipment 4 years
The depreciation methods, useful lives and residual values of
the property, plant and equipment are reviewed at each reporting
date.
Dividends
Dividends payable on the ordinary share capital are recognised
in the year in which they are declared. Dividends are subtracted
directly from retained earnings.
Investment Property
Property held to earn rentals and/or for capital appreciation is
classified as investment property.
Investment properties are externally valued on an open market
basis at the balance sheet date. Any surplus or deficit arising on
revaluing investment properties or investment properties being
redeveloped is recognised in the consolidated income statement.
Investment properties in the course of construction for rental
purposes are stated at fair value. Changes in fair value are
recognised in the consolidated income statement.
In accordance with IAS 40 Investment Property, no depreciation
is provided in respect of investment properties or properties in
the course of construction.
Surpluses on sales of investment properties and properties in
the course of construction are calculated by reference to the
carrying value at the previous balance sheet date, adjusted for
subsequent capital expenditure.
Revenue recognition
Rental Income
Rental income will comprise income payable under operating
leases granted to tenants of units within the Shopping Malls that
are included in the investment property portfolio.
Rental income comprises base rents, which are fixed rents, and
turnover rents which are related to the level of sales achieved by
tenants.
Base rental income is recognised on an accruals basis. Base
rental income is recognised in the Consolidated Income Statement on
a straight line basis over the period of the lease term.
Turnover rent, being a contingent form of income, is recorded as
income in the periods in which it is earned.
Rent reviews are recognised when such reviews have been agreed
with tenants. Where a rent-free period is included in a lease, the
rental income foregone is allocated evenly over the period of the
lease. Where a lease incentive payment does not enhance the value
of a property, it is amortised on a straight-line basis over the
period of the lease.
Service charge income
Service charge income is income paid by tenants in respect of
communal services provide to the shopping mall. Service charge
income is recognised on an accruals basis.
Other Operating Income
Other Operating Income comprises marketing, promotional and
merchandising income, occupancy premiums, which are paid by tenants
to secure a unit within a shopping mall, management fees and other
sundry income. Other income, such as occupancy premiums and
management fees, is recorded as income on an accruals basis, where
the income relates to a specified period.
Management fees are recognised in the Consolidated Income
Statement on a straight line basis over the contractual period to
which they relate. Occupancy premiums are recognised in the
Consolidated Income Statement on a straight line basis over the
period of the lease term.
Occupancy premiums received in advance of the commencement of
the lease are recorded as deferred income and are released to the
Consolidated Income Statement over the lease term.
All Other operating income which is contingent, such as
marketing, promotional and merchandising income is recorded in the
Consolidated Income Statement in the period during which the income
is earned.
Revenue Taxes
Where revenue taxes arise on income, they are deducted, to the
extent it is non-recoverable, from the gross income of the income
category to which it relates.
Property Operating Expenses
Property operating expenses are expensed as incurred and any
property operating expenditure not recovered from tenants through
service charges (condominium charges) is charged in the
Consolidated Income Statement.
Trade Receivables
Trade and other receivables are measured initially at fair value
and subsequently at amortised cost. Appropriate allowances for
estimated irrecoverable amounts are recognised in the Consolidated
Income Statement when there is objective evidence that the asset is
impaired.
Investment Funds
Funds which are held in Brazil, that are temporarily surplus to
working capital requirements, are invested in low risk open ended
investment funds. These investment funds can be accessed without
notice or penalty, and have a maturity date of less than 3
months.
The Group classifies its investments into such funds as cash
equivalents, due to the liquidity and the low risk of such funds.
The Group recognises such financial assets on the date it commits
to purchase the instruments and records them at fair value in the
consolidated statement of financial position. From this date any
gains and losses arising from changes in fair value are recognised
in the consolidated income statement. The Fund derecognises these
financial assets when the contractual rights to the cash flows from
the financial asset expire or it transfers the financial asset and
the transfer qualifies for derecognition in accordance with IAS
39.
Share Capital and Share Premium
Share capital and share premium denominated in a foreign
currency is translated at the rate in operations at the date of
issue. It is not retranslated.
Foreign currency translation
Transactions in foreign currencies with overseas customers and
suppliers are converted at the rate in operation at the date which
transactions occur.
Monetary assets and liabilities are translated at the period-end
rates and the gains or losses on translation are included in the
consolidated income statement. Non-monetary assets and liabilities
that are measured in terms of historical cost in a foreign currency
are translated using the exchange rate at the date of the
transaction. Non-monetary assets and liabilities denominated in
foreign currencies that are stated at fair value are translated
using exchange rates ruling at the date the fair value was
determined.
Foreign trading profits and cash flows are translated at an
average rate for the period. The assets and liabilities of overseas
companies, including goodwill and fair value adjustments arising on
consolidation, are translated using foreign exchange rates ruling
at the balance sheet date.
On consolidation, the exchange differences arising from the
translation of the net investment in foreign entities are taken to
the foreign exchange reserve within equity. When a foreign entity
is sold, such exchange differences are recognised in the
consolidated income statement as part of the gain or loss on
sale.
Taxation
The Company is a limited company registered in Guernsey, Channel
Islands, and has obtained exempt company status in Guernsey under
the terms of the Income Tax (Exempt Bodies) (Guernsey) Ordinance,
1989. The Company will be able to continue to apply for exempt tax
status under the revised company income tax regime that came into
effect on 1 January 2008.
The Group is liable to Brazilian tax arising on the activities
of its Brazilian operations. Current tax is based on taxable profit
for the year and is calculated in this period using tax rates that
have been enacted or substantively enacted. Taxable profit differs
from net profit as reported in the income statement because it
excludes items of income or expense that are not taxable or tax
deductible in the period.
Deferred tax is provided for using the balance sheet liability
method, providing for the tax expected to be payable or recoverable
on differences between the carrying amount of assets and
liabilities in the Financial Statements and the corresponding tax
bases used in the computation of taxable profit.
Such deferred tax assets and liabilities are not recognised if
the temporary difference arises from goodwill or from the initial
recognition (other than in a business combination) of other assets
and liabilities in a transaction that affects neither the taxable
profit nor the accounting profit.
The carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered.
Administration fees
Fees payable under administration and services agreements are
charged to the consolidated income statement as they are
incurred.
Share-Based payment
No equity settled share based payments have been awarded to
employees.
Where equity instruments are granted to persons other than
employees, the consolidated income statement is charged with the
fair value of goods and services at the date of grant, with the
exception of share options granted in respect of future services
where the fair value is treated as a prepayment and charged to the
Consolidated Income Statement over the estimated period until the
options are exercised.
2 Critical Accounting Estimates and Judgments
The application of the Group's accounting policies requires
judgements, estimates and assumptions to be made concerning the
future and these can have a material effect on the carrying amounts
of assets and liabilities reported in the consolidated financial
statements. The resulting accounting estimates will by definition
seldom equal the related actual results. Estimates and judgements
are continually evaluated based on number of factors, including
expectations of future events that are believed to be reasonable
under the circumstances.
The estimates and assumptions that have a significant risk of
causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year are discussed below.
Estimates and assumptions:
(a) Valuation of investment property
The Group obtains valuations performed by external valuers in
order to determine the fair value of its investment property. This
is completed in accordance with appropriate sections of the current
Practice Statement contained in the Royal Institution of Chartered
Surveyors Appraisal and Valuation Standards, 6(th) Edition (the
"Red Book"). This is an internationally accepted basis of
valuation.
In completing these valuations the values consider the
following:
(i) Current prices in an active market for properties of a
different nature, condition or location (or subject to different
lease or other contract), adjusted to reflect those
differences;
(ii) Recent prices of similar property in less active markets,
with adjustments to reflect any changes in economic conditions
since the date of the transactions that occurred at those prices;
and
(iii) Discounted cash flow projections based on reliable
estimates of future cash flows, derived from the terms of existing
lease or other contracts and (where possible) from external
evidence such as current market rents for similar properties in the
same location and condition, and using discount rates that reflect
current market assessments of the uncertainty in the amount and
timing of cash flows.
The Directors review such independent valuations, and where it
is considered appropriate, will adjust the valuation to reflect any
future financial commitments relating to the investment property
that in the opinion of the Directors is necessary to reflect the
open market value of their interest in the property.
(b) Impairment of goodwill
Goodwill only arises in business combinations. The amount of
goodwill recognised is dependent on the allocation of the purchase
price to the fair value of the identifiable assets acquired and
liabilities assumed. The determination of the fair value of the net
assets and liabilities is based, to a considerable extent on the
Directors' judgement.
Goodwill is capitalised as an intangible asset with any
impairment in the carrying value being charged to the consolidated
income statement. The Group is required to test, on an annual
basis, whether goodwill has suffered any impairment. The carrying
value is the higher of fair value of the asset less costs to sell
and value in use.
(c) Income taxes
The Group is subject to income tax in different jurisdictions
and significant judgement is required in determining the provision
for income taxes. During the ordinary course of business, there are
transactions and calculations for which the ultimate tax
determination is uncertain. As a result, the company recognises tax
liabilities based on estimates of whether additional taxes and
interest will be due. This assessment relies on estimates and
assumptions and may involve a series of complex judgments about
future events. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences
will impact income tax expense in the period in which such
determination is made.
(d) Recognition of deferred tax assets
The recognition of deferred tax assets is based upon whether it
is probable that sufficient and suitable taxable profits will be
available in future, against which the reversal of temporary
differences can be deducted. Recognition therefore involves
judgement regarding the future financial performance of the
particular legal entity or tax group in which the deferred tax
asset has been recognised.
3 Financial Instruments - Risk Management
The Group's activities expose it to a variety of financial risks
in relation to the financial instruments it uses:
-- Credit risk
-- Foreign exchange risk
-- Liquidity risk
The principal financial instruments used by the Group, from
which financial instrument risk arises, are as follows:
-- Cash and cash equivalents
-- Trade receivables
-- Trade and other payables
-- Amounts owed to JV Partner
A summary of the financial instruments held by category is
provided below:
Financial assets
Loans
and
receivables
2010
GBP
Cash 879,839
Investments in investment fund 18,158,147
------------
Total Cash and cash equivalents 19,037,986
Trade receivables 414,665
------------
Total financial
assets 19,452,651
Financial liabilities
Financial
liabilities
at
amortised
cost
2010
GBP
Trade and other
payables 750,035
Amounts owed to
JV Partner 1,055,639
------------
Total financial
liabilities 1,805,674
General objectives, policies and processes
The Board has overall responsibility for the determination of
the Group's risk management objectives and policies and, whilst
retaining ultimate responsibility for them, it has delegated the
authority for designing and operating processes that ensure the
effective implementation of the objectives and policies to the
Group's finance function. The Board receives reports from the Group
Finance Director through which it reviews the effectiveness of the
processes put in place and the appropriateness of the objectives
and policies it sets.
The overall objective of the Board is to set polices that seek
to reduce risk as far as possible without unduly affecting the
Group's competitiveness and flexibility. Further details regarding
these policies are set out below:
Credit risk
Credit risk is the risk of financial loss to the Group if a
customer or counterparty to a financial instrument fails to meet
its contractual obligations.
Credit risk also arises from cash and cash equivalents and
deposits with banks and financial institutions. The credit risk is
limited because the majority of the Group's financial assets are
held with banks and financial institutions that have been assigned
a high credit-rating by international credit-rating agencies. Only
those banks and financial institutions with a minimum rating "A"
(by Standard & Poor's Corporation) are accepted.
Investments in investment funds are valued daily at the
respective value of the shares disclosed by the Manager of the
funds.
At 31 December 2010 the amount held in these funds comprised an
investment in an open-ended investment fund incorporated in Brazil
("Fundo de Investimento em Cotas de Fundos de Investimento
Santander Referenciado DI, managed by Banco Santander S.A.), with
the investment objective to invest in fixed income instruments,
issued by Brazilian entities and government, with an expected
return of a proportion of the Brazilian Interbank short-term
floating rate.
The Group does not enter into derivatives to manage credit risk,
although in certain isolated cases may take steps to mitigate such
risks if it is sufficiently concentrated.
Quantitative disclosures of the credit risk exposure in relation
to financial assets are set out below. Further disclosures
regarding trade and other receivables, which are neither past due
nor impaired, are provided in note 22.
Credit risk - financial
assets Carrying Maximum
value Exposure
2010 2010
GBP GBP
Cash 879,839 879,839
Investments in investment
fund 18,158,147 18,158,147
----------- -----------
Total Cash and cash
equivalents 19,037,986 19,037,986
Trade receivables 414,665 414,665
Total financial assets 19,452,651 19,452,651
Rating Balance
Credit risk - cash and cash equivalents at at
31 Dec 31 Dec
2010 2010
RBSi A 708,182
Dexia A 152,982
Santander A 18,176,822
Total cash and cash equivalents 19,037,986
Foreign exchange risk
Foreign currency risk arises both where sale or purchase
transactions are undertaken in currencies other than the respective
functional currencies of group companies (transactional exposures)
and where the results of overseas companies are consolidated into
group's presentational currency of Sterling (translational
exposures).
The Group is predominantly exposed to currency risk on
investments made in projects based in Brazil, therefore the primary
exposures relate to the Brazilian Real (R$). The Group aims to fund
expenses and investments in the respective currency and to manage
foreign exchange risk at a local level by matching the currency in
which revenue is generated and expenses are incurred. Where it is
considered the risk to the Group is significant, group treasury
will enter into a matching forward contract with a reputable
bank.
Only in exceptional circumstances will the Group consider
hedging its net investments in overseas operations as generally it
does not consider that the reduction in foreign currency exposure
warrants the cash flow risk created from such hedging
techniques.
The table below summarises the Group's currency profile at 31
December 2010:
Foreign exchange
risk Sterling R$ Total
2010 2010 2010
GBP GBP GBP
As at 31 December
2010
Current assets
Cash and cash equivalents 861,164 18,675 879,839
Investments in investment
fund - 18,158,147 18,158,147
Trade receivables - 414,665 414,665
861,164 18,591,487 19,452,651
Current liabilities
Trade and other
payables 236,637 513,398 750,035
Amounts owed to
JV Partner - 1,055,639 1,055,639
236,637 1,569,037 1,805,674
The Group has the majority of its assets and liabilities
denominated in the Brazilian Real. As a consequence, the Group's
results can be adversely affected by a depreciation of the Real
against Sterling. From the financial period ended 31 December 2010
until 22(nd) May 2011, the exchange rate has varied from R$2.5483
to R$2.7184. If at the period end the Real had depreciated against
Sterling to a level of R$2.75, representing a 6.7% depreciation,
the effect on the Group's net assets at that date would, if all
other variables held constant, have resulted in a decrease of
GBP2,677,237 (6.2%). The post-tax profit for the period would have
decreased by GBP259,915 (9.0%).
Liquidity risk
Liquidity risk arises from the Group's management of working
capital. It is the risk that the Group will encounter difficulty in
meeting its financial obligations as they fall due.
The Group's policy is to ensure that it will always have
sufficient cash to allow it to meet its liabilities when they
become due. To achieve this aim, it seeks to maintain cash balances
(or agreed facilities) to meet expected requirements for a period
of at least 45 days.
The Board receives rolling 12-month cash flow projections on a
quarterly basis. At the end of the financial year, these
projections indicated that the Group expected to have sufficient
liquid resources to meet its obligations under all reasonably
expected circumstances and will not need to raise further
finance.
The liquidity risk of each Group entity is managed centrally by
the group treasury function. The budgets are set locally and agreed
by the Board in advance, enabling the Group's cash requirements to
be anticipated. Where facilities of Group entities need to be
increased, approval must be sought from the Group Finance Director.
Where the amount of the facility is above a certain level agreement
of the Board is needed.
At the period end the Group did not have, nor was it dependent
on the arrangement of debt finance to meet any its contractual
liabilities. The Group's policy is not to enter into any
contractual obligation for site acquisition or construction
contracts without having funding or financial facilities in place
to meet all resulting obligations. Although available, arranging
debt finance in Brazil can be a protracted exercise. Accordingly,
the Group will consider the use of debt finance if available in a
suitable time-scale. The business strategy of the Group is not
dependent on such finance.
The following table sets out the contractual maturities
(representing undiscounted contractual cash-flows) of financial
liabilities:
Liquidity risk Between
Up to 3 and
3 12 Total
months months
GBP GBP GBP
At 31 December 2010
Trade and other
payables 750,035 - 750,035
Amounts owed to
JV Partner 398,216 657,423 1,055,639
Total exposure 1,148,251 657,423 1,805,674
JV Partner risk
The Golden Square Mall is held via a joint venture arrangement
and certain of the Group's future shopping mall assets are likely
to be held in joint venture arrangements. Although the Group will
seek, where possible to mitigate joint venture risk by maintaining
project control, disputes may arise between joint venture partners
which could mean that the Group is not able to manage or deal with
a particular asset in the way and in the time that it would wish
and this may adversely affect the Group's business, financial
condition and results of operations. These arrangements involve
risks that are not present with projects which are wholly-owned,
including:
-- the possibility that a joint venture partner might at any
time have economic or other business interests that are
inconsistent with those of the Group;
-- the possibility that a joint venture partner may be in a
position to take action contrary to the Group's instructions, or
requests, or contrary to the Group's policies or objectives, or
frustrate the execution of acts which the Group believes to be in
the best interests of any particular project;
-- the possibility that a joint venture partner may have
different objectives from the Group, including with respect to the
appropriate timing and pricing of any sale, or refinancing of a
development and whether to enter into agreements with potential
contractors, tenants or purchasers;
-- the possibility that a joint venture partner might become
bankrupt or insolvent; and
-- the possibility that the Group may be required to provide
finance to make up for any shortfall, due to a joint venture
partner failing to provide such equity finance, or to furnish any
required collateral to the financing banks.
Disputes or disagreements with a joint venture partner may
result in significant delays and increased costs associated with
the development of the Group's properties. Even when the Group has,
or will have, a controlling interest, certain major decisions (such
as whether to sell, refinance or enter into a lease or contractor
agreement and the terms on which to do so) may require the joint
venture partner's, or other third parties' approval. If the Group
is unable to reach, or maintain agreements with its joint venture
partners, or other third parties on the matters relating to the
operation of its business, its financial condition and its results
of operations may be materially adversely affected.
Capital risk management
The Group's objectives when maintaining capital are to safeguard
the entity's ability to continue as a going concern, so that it can
continue to provide returns for shareholders and benefits for other
stakeholders, and to maintain an optimal capital structure to
reduce the cost of capital.
The Group sets the amount of capital it requires in proportion
to risk. The Group manages its capital structure and makes
adjustments to it in the light of changes in economic conditions
and the risk characteristics of the underlying assets. In order to
maintain or adjust the capital structure, the Group may adjust the
amount of dividends paid to shareholders, return capital to
shareholders, issue new shares, or sell assets to reduce debt.
Consistent with others in the industry, the Group monitors
capital on the basis of the debt to adjusted capital ratio. This
ratio is calculated as net debt divided by total capital. Net debt
is calculated as total borrowings (as shown in the consolidated
statement of financial position) less cash and cash equivalents.
Total capital is calculated as equity, plus preference shares and
net debt.
In the period to 31 December 2010 the Group had a net cash
position, therefore the gearing ratio was zero.
4 Segmental Reporting
The Directors consider that there are two potential business
segments being the development of and the management of shopping
centres in Brazil. Currently, the performance of these two segments
is not reported separately, as with current levels of activity the
Directors do not consider that such analysis would provide
significant additional benefits when allocating resources or in
assessing performance. As activity levels increase in the future,
the Directors do anticipate that such analysis would be beneficial
and accordingly, segmental reporting is likely to be
introduced.
The Group's non-current assets of GBP26,457,922 are all located
in Brazil.
The Group's other operating income of GBP401,719 is all derived
from one client which is located in Brazil.
5 Gross rental income
Due to the property being under construction, there was no
rental income in 2010.
6 Service charge income
Due to the property being under construction, there was no
service charge income in 2010.
7 Property operating expenses
2010
GBP
Condominium expenses 91,851
Leasing Commissions 69,054
Total property operating
expenses 160,905
Condominium expenses relate to the operational expenses borne by
the tenants, such as utilities and insurance costs. Where there are
vacant units or the shopping mall is not yet open, these costs are
borne by the Landlord.
8 Other operating income
Other operating income arises mainly from the management fees
charged to a third party for mall management services. The fees are
calculated as a percentage of the Gross Asset Value of the property
being managed, as agreed with the third party on an annual basis.
Such services are not considered to be part of the Group's revenue
generating activities and as such the Group presents this income
separately from revenue.
Payments have also been received in respect of occupancy
premiums, which give the right to tenants to occupy units within
the shopping centre once it has opened. Until such time as the
shopping centre opens these premiums are treated as deferred income
as disclosed in note 24 to the financial statements.
Non-current liabilities.
2010
GBP
Management fees 383,257
Other operating
income 18,462
Total other
operating income 401,719
========
9 Administrative and other expenses
2010
GBP
Staff costs (note 10) 614,994
Management fees (note
32) 215,753
Share based payment
(note 29) 5,983
Fees payable to the
auditors (note 11) 457,678
Legal and professional
fees 269,233
Abortive project cost 160,567
Administration expenses 637,151
Property operating lease
(note 28) 11,177
Depreciation (note 17) 4,211
Total administrative and
other expenses 2,376,747
10 Staff costs
2010
GBP
Staff costs (including
directors) comprise:
Wages and salaries 519,168
National insurance
contributions 30,826
Pensions * 4,662
Other benefits 60,338
614,994
* Pensions include contributions paid under the defined
contribution arrangements.
Key management personnel compensation
Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the
activities of the Group, including the directors of the
company.
2010
GBP
Remuneration for management
services 408,061
National insurance contributions 15,382
Non-executive directors'
remuneration 56,250
Pension contributions 4,662
Other benefits 35,499
519,854
11 Fees Payable to the Auditors
2010
GBP
Remuneration to the principal auditor in
respect of audit fees:
Statutory audit of the company and consolidated
accounts 115,000
Remuneration to the principal auditor in
respect of other services:
Other services pursuant
to legislation 23,213
Remuneration to associates of the principal auditor
in respect of other services
Other services relating to corporate finance
transaction 100,194
238,407
2010
GBP
Remuneration to other group auditors comprises:
Statutory audit of subsidiary
accounts 56,271
Other services relating
to Taxation 163,000
219,271
Total fees payable to Auditors 457,678
12 Finance income and expense
2010
GBP
Finance Income
Interest received on
bank deposits 10,593
Interest received on investment
in investment fund 888,921
Total finance income 899,514
2010
Finance expense GBP
Other interest payable (4,401)
Total finance expense (4,401)
Net finance income recognised
in profit or loss 895,113
13 Tax
The Company is a Limited company registered in Guernsey, Channel
Islands, and has obtained exempt company status in Guernsey under
the terms of the Income Tax (Exempt Bodies) (Guernsey) Ordinance,
1989. The Company will be able to continue to apply for exempt tax
status under the revised company income tax regime that came into
effect on 1 January 2008.
The Group's Brazilian subsidiaries are subject to Brazilian
corporate income tax on income and capital gains arising from their
operations, after the deduction of allowable expenses.
The Group has taken advantage of Brazilian tax legislation,
through the use of a Fundos de Investimento em Participacoes
("FIP"), a closed-ended investment vehicle, regulated by CVM Ruling
No. 391 of July 16, 2003, as amended ("CVM Ruling No 391/03"). A
FIP is a closed-ended investment vehicle that may acquire shares,
certificates of shares, debentures, subscriptions warrants, or
other bonds and securities convertible, or exchangeable for shares,
issued by Brazilian closely and/or publicly-held companies.
Under Brazilian tax law, subject to the FIP adhering to certain
investment and ownership criteria, distributions from the FIP to
its foreign investors can benefit from 0% rate of tax. In addition,
current legislation exempts a FIP from income taxes with respect to
income and capital gains resulting from the acquisition and
disposal of investments in Brazil (such as the shares of its
portfolio).
The fair value adjustment of the investment property results in
a temporary difference between the carrying value of the property
and its tax basis. The group recognises a deferred tax liability of
GBP955,995 giving rise to a charge in the period as shown in the
Consolidated Income Statement.
2010
GBP
Current taxation
charge 1,621
Deferred tax charge for
the period (note 25) 955,995
Tax Charge for the
period 957,616
The charge for the period can be reconciled to the profit per
the consolidated income statement as follows:
2010
GBP
Profit before tax 3,846,285
----------
Tax at the effective rate
in Brasil of 34% 1,307,737
Income or expenditure in jurisdictions
not subject to tax* (43,908)
Utilisation of previously unrecognised
tax losses (452,755)
Disallowable expenditure 146,542
Tax charge for the
period 957,616
*for the purpose of the above table Guernsey and Luxembourg are
treated as jurisdictions not subject to tax.
In accordance with IAS 12 'Income Taxes', the applicable tax
rate has been determined to be the primary corporate tax rate
applicable in Brazil, as although the parent company is resident in
Guernsey, the main flows of income and expenditure will arise in
Brazil.
14 Earnings per share
Basic earnings per share are calculated by dividing the profit
for the year of GBP2,888,669 by the weighted average number of
shares in issue during the period.
2010
GBP
Basic Diluted
Profit for the year 2,888,669 2,888,669
Weighted average number of ordinary
shares in issue 39,700,203 39,724,268
Earnings per share 7.28p 7.27p
=========== ===========
At 31 December 2010, there were 708,450 share options and
26,923,307 warrants which could potentially dilute earnings in
future. The average share price during the period was above the
subscription price of the options. The options have been included
in the diluted earnings per share calculation in accordance with
IAS 33. The options cannot be exercised until after the third
anniversary of admission to AIM. The average share price was below
the subscription price of the warrants, and these have been
excluded from the diluted earnings per share calculation.
15 Dividends
No dividends have been declared or paid to date.
16 Investment property
2010
GBP
At 29 January 2010 -
Acquisition 18,567,177
Capital expenditure during the
period 381,811
Foreign exchange rate movements 1,003,803
Change in fair value 5,087,105
At 31 December 2010 25,039,896
The Company owns 50% of the freehold interest in the Golden
Square Shopping Centre development in Sao Paulo, Brazil. The
property was valued on 31 December 2010 on an open market basis by
qualified valuers from Cushman & Wakefield, an independent firm
of chartered surveyors. The valuations were carried out in
accordance with guidance issued by the Royal Institution of
Chartered Surveyors. The property was valued at R$189.16m
(GBP73.40m). The value of the Company's 50% share is R$94.58m
(GBP36.70m).
The terms of the joint venture agreement require the Group to
contribute more than 50% of the total construction costs of the
development in order to settle part of the site acquisition cost.
This contribution is adjusted for inflation from the date of
acquisition. At the period end the Directors adjusted the Group's
share of the value of the property to reflect these anticipated
additional future contributions to the construction costs of the
development. The Directors believe that this adjustment was
necessary to reflect the open market value of the Group's interest
in the property. The amount of this adjustment included at 31
December 2010 was R$30.05m (GBP11.66m).
At the year end, based on the events occurring after the
reporting date, as set out in note 34 to the financial statements,
this contribution was effectively crystalised.
The property is in the course of construction with completion
anticipated by the end of the third quarter of 2012. In the period
ended 31 December 2010 there was no rental income received.
Occupancy premiums of R$0.6m (GBP0.2m) were received but are not
recognised as income until the property has been completed at which
time the premiums will be amortised over the period of the lease.
Condominium expenses and leasing commission expenses incurred are
shown in note 7 to the financial statements.
17 Property, plant and equipment
Equipment
and Fittings
Cost or valuation
Balance at 29 January 2010 -
Acquired with Subsidiary 56,543
Additions 2,758
Foreign exchange rate movements 3,801
Balance at 31 December 2010 63,102
Depreciation
Balance at 29 January 2010 -
Depreciation charge for the period 4,211
Foreign exchange rate movements 830
Balance at 31 December 2010 5,041
Net book Value at 31 December 2010 58,061
=============
18 Goodwill and impairment
2010
Cost GBP
Balance at 29 January
2010 -
Acquired through business combinations
(note 30) 414,609
Foreign exchange rate
movements 22,294
Balance at 31 December
2010 436,903
2010
GBP
Accumulated amortisation and impairment
Balance at 29 January
2010 and 31 December
2010 -
========
Net book value at 31 December
2010 436,903
Goodwill arose on the acquisition of Squarestone Brasil
Administeracao e Participacoes S.A. ("SB SA"). Details of the
transaction are set out in note 30 to the financial statements.
Goodwill impairment is reviewed by management annually. The
recoverable amount is determined based on fair value less costs to
sell. Management do not consider that there is an active market for
such an asset as defined in IAS 36 Impairment of Assets. However,
events after the end of the accounting period, as set out in note
34 to the financial statements, have allowed management to
determine a reliable estimate of the amount obtainable from the
sale in accordance with IAS 36 Impairment of Assets.
Having assessed the current contractual income and costs of SB
SA at 31 December 2010, management have determined that the
recoverable amount, based on a signed option agreement, is in
excess of the carrying value of goodwill, and accordingly no
impairment of the goodwill has been recognised during the
period.
19 Intangible Assets
2010
Cost GBP
Balance at 29 January
2010 -
Acquired through business
combinations 875,960
Foreign exchange rate
movements 47,102
Balance at 31 December
2010 923,062
2010
GBP
Accumulated amortisation and impairment
Balance at 29 January
2010 and 31 December
2010 -
========
Net book value at 31 December
2010 923,062
The intangible asset acquired through the business combination
described in note 30 is the value of the customer relationships
acquired in that transaction. The Directors have estimated the
future post tax cash flows relating to existing contractual
customer relations and applied a discount rate that reflects the
required return that the Directors apply to the assets utilised by
the Group.
The Directors have not attributed a useful economic life to
these relationships, as they do not believe that this can be
reliably estimated. Given the value and small number of the
relationships the Directors have undertaken an impairment review
effective as at 31 December 2010. The Directors have determined
that there has been no adverse change in the contractual nature of
the relationships and accordingly have not identified an impairment
loss during the period.
20 Subsidiaries
The principal subsidiaries of Squarestone Brasil Limited, which
have been included in these consolidated financial statements, are
as follows:
Proportion
of ownership
interest
Country at 31 December
Name of incorporation Activity 2010
SB Brast
Participacoes Shopping mall
S.A. Brazil development 100%
Squarestone
Brasil
Administeracao e
Participacoes Property
S.A. Brazil management 100%
21 Joint ventures
The Group has a 50% interest in a jointly controlled asset,
Golden Square Shopping Mall, which has been accounted for by
proportional consolidation. The following amounts have been
recognised in the Group's consolidated financial statements
relating to this jointly controlled entity:
2010
GBP
Non-current assets 25,039,896
Current assets 316,691
Current liabilities (1,533,631)
Non-current liabilities (1,796,942)
Net assets 22,026,014
Income -
Increase in fair value of investment
property 5,087,105
Expenses (1,124,443)
Profit after tax 3,962,662
22 Trade and other receivables
2010
GBP
Trade receivables 414,665
Total financial assets other than cash and cash
equivalents classified as loans and
receivables 414,665
Prepayments 134,858
Accrued income 177,790
Other receivables 60,857
Total trade and other receivables 788,170
Total trade and other receivables fall due as set out below:
2010
GBP
Up to 3 months 203,268
3 to 6 months 549,523
6 to 12 months -
After 12 months 35,379
788,170
The trade and other receivables due after 12 months relate to
the pre-paid element of the share option reserve which is amortised
over 5 years. There are no debts overdue.
23 Trade and other payables
2010
GBP
Trade payables 139,602
Other payables 410,541
Owed to Joint venture partner 1,055,639
Accruals 199,892
Total financial liabilities, excluding
loans and borrowings
classified as financial liability
measured at amortised cost 1,805,674
Other payables - tax and
social security payments 40,397
Total trade and other payables 1,846,071
Trade and other payables fall due for payment as set out
below:
2010
GBP
Up to 3 months 1,188,648
3 to 6 months 657,423
6 to 12 months -
1,846,071
24 Other Non-current liabilities
2010
GBP
Deferred income 224,074
========
Deferred income relates to occupancy premiums paid in advance by
tenants to secure a unit in the shopping centre. It is released to
the Consolidated Income Statement from the commencement of the
store lease over the term of the lease. The opening of the mall is
scheduled for the end of the third quarter of 2012. Premiums are
only refundable if the shopping centre does not open or the
Landlord fails to give tenants six months notice of any change in
the date of opening.
25 Deferred tax
Deferred tax is calculated in full on temporary differences
under the balance sheet method using tax rates applicable to each
individual territory.
The movement on the deferred tax account is as shown below:
2010
GBP
At 29 January 2010 -
Charged to income statement 955,995
At 31 December 2010 955,995
A deferred tax liability has been recognised on the uplift in
the fair value of investment property owned by an overseas
subsidiary. The uplift in fair value has been offset by tax
deductible losses incurred previously, to the extent that the
Directors consider it is probable that these losses will be offset
against the uplift in fair value for the purposes of calculating
corporate income tax in Brazil on the disposal of the property.
The Directors, although having recognised the deferred tax
liability in accordance with IAS 12 Income Taxes, consider that
such deferred tax liabilities will not become payable due to the
structure of the Group, which permits such taxes to be avoided
through the sale of the relevant subsidiary rather than the
investment property. However, as there is the possibility of tax
arising were the investment property to be sold, deferred tax is
provided on any increase in the fair value of the investment
property.
Other than the use of losses to reduce the deferred tax
liability as stated above, no deferred tax assets have been
recognised in respect of any other tax losses or other temporary
differences.
The movements in deferred tax assets and liabilities (prior to
the offsetting of balances within the same jurisdiction as
permitted by IAS 12) during the period are shown below.
Charged Charged
to Income to
Asset Liability Net statement equity
2010 2010 2010 2010 2010
GBP GBP GBP
Revaluations - (1,729,616) (1,729,616) (1,729,616) -
Available losses - 773,621 773,621 773,621 -
Net tax liabilities - (955,995) (955,995) (955,995) -
The available losses can be carried forward indefinitely, and
can be used to offset operating profits or capital gains.
26 Share capital
2010 2010
Number GBP
Ordinary shares of no par value 40,384,960 -
Of the issued shares of 40,384,960, 39,500,960 were issued on 12
April 2010 on admission of the Company to AIM. Included within the
shares issued on admission were 1,092,960 which were issued in
return for services provided by advisors to the Company, 11,240,000
that were issued in relation to the acquisition of the investment
property and 27,168,000 that were issued for cash.
A further 884,000 shares were issued under the reinvestment
agreements signed by SPIM (600,000 shares) and Blaen Coed (284,000
shares), whereby these companies reinvested the proceeds they
received from the sale of SBSA at a premium of GBP1 per share. SPIM
and Blaen Coed were also issued 2 warrants for every 3 shares in
accordance with the warrants offered to other shareholders on
admission to AIM, and under the same terms and conditions.
The shares were paid up by SPIM on 26 October 2010 and by Blaen
Coed on 11(th) November 2010.
The Company was incorporated with an unlimited number of shares
at no par value.
27 Reserves
The following describes the nature and purpose of each reserve
within equity:
Reserve Description and purpose
Share premium Amount subscribed for share capital in excess
of nominal value.
Warrant reserve The consideration attributed to the subscriptions
of warrants less associated cost of issuance.
Foreign exchange reserve Gains/losses arising on retranslating the
net assets of overseas operations into sterling.
Share Option reserve The fair value of share options at the date
of grant.
Retained earnings All other net gains and losses and transactions
with owners (e.g. dividends) not recognised
elsewhere.
28 Leases
Operating leases - lessee
The Group holds an operating lease in respect of its office in
Sao Paulo. The lease expires on 29 November 2011, with an annual
rent payable of R$84,000 (GBP32,000).
The total future value of minimum lease payments is due as
follows:
2010
GBP
Not later than one
year 29,000
Operating leases - lessor
On completion of the Golden Square Shopping Mall, the Group will
lease the investment property under non-cancellable operating lease
agreements. The group is currently in the process of negotiating
such leases. The leases have varying terms, escalation clauses and
renewal rights. Rental income from operating leases is recognised
as rental income on a straight line basis over the term of the
relevant lease.
29 Share-based payments
Share options
The Company operates an unapproved equity-settled share based
remuneration scheme for certain business advisors. Upon the
Company's Admission to AIM, as part consideration for the services
provided by certain advisors options were granted pursuant to which
the advisers have the right to subscribe for a total of 708,450
shares at GBP1 per share. The options can be exercised between the
3(rd) and 10(th) anniversary of admission. The options can only be
exercised where the share price has traded at an average price for
the preceding 10 days of GBP1.00 multiplied by 1.15 for each
completed year since admission to AIM.
Warrants
The Group has issued 26,923,317 warrants to holders of ordinary
shares on a two for three basis, which can be exercised before the
third anniversary of admission to AIM at a price of 120p. Of the
26,333,983 warrants that were issued on admission for a total
consideration of GBP5,045,591, 728,640 warrants valued at
GBP139,607 were issued to advisers in return for services in
raising funds.
No warrants were issued to advisors in respect of the
acquisition of the minority interest in SB Brast Participacoes S.A.
or in relation to the acquisition of Squarestone Brasil
Administeracao e Participacoes S.A. ("SB SA"). Under the agreement
to purchase SB SA, consideration was paid to Squarestone Property
Investment Management, a company jointly owned by Tim Barlow and
Robert Sloss, amounting to GBP600,000, being comprised of 600,000
shares of no par value and 400,000 warrants. Under that same
agreement consideration was also paid to Blaen Coed Participacoes e
Servicos Limitada ("Blaen Coed") a company wholly owned by Mr James
Morse, amounting to GBP284,000, being comprised of 284,000 shares
of no par value and 189,334 warrants.
Details of the acquisition of SB SA are set out in note 30 to
the financial statements.
The following information is relevant in the determination of
the fair value of options granted during the year:
Share
options Warrants
Option pricing model
used Monte Carlo Black Scholes
Weighted average share
price at grant date GBP1.02 GBP1.02
Exercise price GBP1.52 GBP1.20
Weighted average contractual life 3 years 3 years
Expected volatility 34.40% 34.40%
Risk-free interest
rate 1.20% 1.20%
Expected volatility was determined by reference to comparable
listed companies. The risk free rate is based on the yield per the
UK Sovereign Benchmark Curve at the option grant date, based on the
expected life of the option.
The total number and value of the equity settled share based
payments at the end of the period are summarised below:
Share options Warrants
Granted during the period
(number) 708,450 26,923,317
Unit value (rounded) GBP0.207 GBP0.192
Total valuation GBP146,514 5,158,507
The Group recognised a total share-based payment expense in the
period of GBP5,983, as set out in note 9 to the financial
statements.
Of the share options issued GBP105,152 were granted to advisors
in respect of services provided in respect of the admission to AIM.
Accordingly, these have been included in issue costs and debited to
the share premium reserve. The remaining GBP41,362 share options
were granted to advisors in respect of future services.
Accordingly, these have been treated as a prepayment of fees and
will be released to the Consolidated Income Statement on a straight
line basis over 5 years.
The Group did not enter into any share-based payments with any
Directors or employees during the current period.
30 Acquisitions during the period
On 12 April 2010, pursuant to a series of sale and purchase
agreements dated 6 April 2010, Squarestone Brasil Limited, through
its wholly owned subsidiary Squarestone General Partner Limited,
acquired 100% of the share capital of three Luxembourg holding
companies and the right to redeem convertible bonds or loan notes
plus accrued interest issued by such Luxembourg companies.
The transaction has been treated as an asset acquisition.
Details of the fair value of identifiable assets and liabilities
acquired, and the purchase consideration are as follows:
Fair value of identifiable assets
and liabilities acquired Book value
GBP
Investment property 18,567,177
Trade and other receivables 469,250
Cash 848,812
Current liabilities (1,069,559)
Non-current liabilities (1,253,674)
Less: minority interest (369,643)
Total net assets 17,192,363
Fair value of consideration
paid GBP
Cash 5,952,363
Ordinary shares 100p 11,240,000
Total consideration 17,192,363
On 3 September 2010, pursuant to an acquisition agreement signed
on 1 April 2010, Squarestone Brasil 2 Fundo de Investimento em
Participacoes acquired 100% of the shares of Squarestone Brasil
Administeracao e Participacoes S.A. These shares were acquired from
Squarestone Property Investment Management Limited (SPIM), a
company owned jointly by Robert Sloss and Tim Barlow, and Blaen
Coed Participacoes e Servicos Limitada (Blaen Coed), a company
owned by James Morse, for GBP1.25m. Of these proceeds SPIM has
re-invested GBP600,000 and Blaen Coed has re-invested GBP284,000
into the Company, representing all of the post tax proceeds after
the deduction of Brazilian withholding tax and Brazilian corporate
income tax.
The Directors consider that this acquisition was necessary to
ensure that the Group could continue to access the international
management experience of the SB SA team, which should allow the
Golden Square shopping centre to be let at the desired rent levels
and to be completed on time and within budget. The Directors
anticipated that there would be considerable further growth in the
shopping mall sector in Brasil, which would increase the demand for
high quality mall management services. Such services would then
attract a premium, which could be mitigated by securing an internal
mall management resource to provide these services.
Fair value of identifiable assets
and liabilities acquired Book Value Adjustment Fair value
GBP GBP GBP
Property, plant and equipment 56,543 - 56,543
Trade and other
receivables * 102,112 - 102,112
Intangible assets - 875,960 875,960
Cash 426 - 426
Current liabilities (84,686) - (84,686)
Total net assets 74,395 875,960 950,355
=========== =========== ===========
Fair value of consideration
paid GBP
Cash 360,151
Ordinary shares
100p 1,004,813
Total consideration 1,364,964
Goodwill (note 18) 414,609
========
* All trade and other receivables at the date of acquisition are
expected to be recoverable.
The Directors, having assessed the nature of goodwill and
recognised the acquisition of Customer Relationships as being a
separately identifiable intangible asset, as set out in note 19,
Intangible Assets, determined that goodwill also included a
component attributable to the value of the in-place workforce
acquired with SB SA.
The Directors identified the replacement cost of the workforce
and assessed the loss of effectiveness during the training period
of new staff to determine the value of the in-place workforce as
GBP132,700. The remaining value of goodwill of GBP281,909 as
identified above in the rationale for the acquisition, includes the
potential premium that may be payable in the future for securing
external shopping mall management services, which would be avoided
by acquiring an internal resource to provide this service. The
Directors do not consider that they are able to estimate a reliable
value for this component of goodwill.
On 8 July 2010, pursuant to an acquisition agreement signed on 1
April 2010, Squarestone Brasil Fundo de Investimento em
Participacoes acquired the remaining shares in SB Brast
Participacoes S.A. The shares were acquired from Verzasca Limitada
for R$975,000 (GBP378,350) of which, post tax, Verzasca Limitada
has agreed to re-invest GBP200,000 in Squarestone Brasil Limited
following completion of the share sale.
Fair value of identifiable assets
and liabilities acquired Book value
GBP
Investment properties 412,220
Trade and other
receivables 4,668
Cash 4,182
Current liabilities (26,296)
Non-current liabilities (21,346)
Total net assets 373,428
===========
Fair value of consideration paid GBP
Cash 378,350
--------
Total consideration 378,350
--------
Included in Capital Expenditure on investment
property (note 16) 4,922
========
31 Results arising from the Business Combination
SB SA was acquired on 3 September 2010. The table below shows
the results arising from the business combination included in the
consolidated income statement from acquisition and for the full
year as required by IFRS 3 Business Combinations.
From Full
Acquisition Year
GBP GBP
Income 250,705 773,861
Expenses (225,646) (662,804)
Tax (1,621) (13,166)
Profit after taxation 23,438 97,891
============= ==========
32 Related party transactions
Parties are considered to be related if one party has the
ability to control the other party or exercise significant
influence over the other party in making financial or operational
decisions. Squarestone Property Investment Management Limited
(SPIM) provide administrative and support services to the Group
under the terms of the Administrative and Support Services
Agreement. Tim Barlow and Robert Sloss, the directors and
shareholders of SPIM are Directors of the Company and therefore
SPIM is considered a related party. Details of the management fees
due under this agreement are set out below.
Blaen Coed Participacoes e Servicos Limitada (Blaen Coed), a
company controlled by James Morse, the Group's Chief Executive,
provides the services of James Morse to the Group under a services
agreement. Blaen Coed is paid a fee of R$644,000 per annum
inclusive of Brazilian revenue taxes.
Transactions between the Company and its subsidiaries, which are
related parties, have been eliminated on consolidation and are not
disclosed in this note. Further disclosures concerning transactions
with the Company's Directors are made in the Remuneration report,
note 10 to the financial statements Staff Costs, note 29 Share
based Payments and note 30 Acquisitions during the period. There
are no loan balances with directors. Blaen Coed receives fees
quarterly in advance and at the period end had received fees of
GBP20,521 in relation to the quarter ending after the period end.
The details of consideration paid to Blaen Coed and SPIM in
relation to the acquisition of SBSA are disclosed in note 30.
SPIM Management fee
An Administration and Support Services Agreement signed and
dated 6 April 2010 exists between the Company and SPIM pursuant to
which SPIM has agreed to provide day-to-day administration and
support services to the Company from the date of the Company's
Admission to AIM. In consideration for its services, SPIM will be
entitled to receive a ratcheting quarterly management fee based
upon "Equity Funds" being the aggregate of, (i) the Enlarged Share
Capital multiplied by the Placing Price, (ii) in the event that the
Company raises further funds through the issue of further Ordinary
Shares the gross proceeds of such further issues, and (iii) the
resulting proceeds arising for the Company on the exercise of
Warrants or Options. Depending upon the size of Equity Funds from
time to time the quarterly fee payable will be:
Value of Equity Funds Quarterly fee
(GBP) (GBP)
0 - 49,999,999 75,000
50,000,000 - 99,999,999 100,000
100,000,000 - 149,999,999 125,000
150,000,000 and over 175,000
The fee will be increased yearly from the second anniversary of
Admission in line with the percentage increase in the UK Retail
Prices Index. The Administration and Support Services Agreement is
subject to termination by either party on twelve months' notice,
such notice not to have effect until the second anniversary of
Admission.
During the year management fees and expenses of GBP349,413 have
been incurred relating to SPIM, all of which were paid during the
year.
Other related party transactions are as follows:
Related party Type Balance
relationship of transaction Amount due
2010
GBP
Purchases from related
SPIM Ltd party - Management fees 215,753 -
Purchases from related
party - expenses 133,660 -
-------- ---------
349,413 -
Purchases from related
Blaen Coed Ltd party 208,953 (20,521)
558,366 (20,521)
At the 31 December 2010, the Directors' beneficial interests in
the ordinary share capital of the Company were;
Amount
Director Shareholder GBP
Tim Walker Tim Walker 25,000
Edwin Davies Moonshift Investments Limited 4,000,000
Tim Barlow Tim Barlow 50,000
Squarestone Property Investment Management
Limited 300,000
Robert Sloss Granton Investments Limited 150,000
Squarestone Property Investment Management
Limited 300,000
James Morse Blaen Coed (Guernsey) Limited 284,000
33 Contingent liabilities
Other than those set out in note 16 to the financial statements,
Investment Property, there were no other contingent liabilities or
assets at the period end.
34 Events after the reporting date
On 31 March 2011, SB Brast entered into a sale and purchase
agreement with Sao Bernardo Shopping Center S.A.to acquire the
remaining 50% ownership of the Golden Square Shopping Mall, and to
settle the remaining amounts still payable under the original sale
and purchase agreement entered into in July 2008, as set out in
note 16 to the financial statements. The total amount payable under
this agreement is R$95.20m (GBP36.94m), including a deferred
payment of R$35.20m (GBP13.66m) which falls due on completion of
the construction of the shopping mall. The value of the deferred
payment is subject to an adjustment by the movement in the
Brazilian IGP-M inflation index between the date of the signing of
the sale and purchase agreement to the date on which the deferred
payment is subsequently made.
This transaction will be treated as an asset acquisition in
accordance with the accounting treatment applied to the acquisition
of the initial 50% interest as set out in note 30, Acquisitions in
the Period, and is therefore outside the scope of IFRS 3, Business
Combinations.
At the same date SB Brast entered into a convertible bond with
Delta II Fundo de Investimento em Participacoes ("Delta II"), which
will provide funds of up to R$192.50m (GBP74.70m) in order to fund
the acquisition of the remaining 50% and to complete the cost of
construction.
Interest on the convertible bond will accrue until a date 6
months after the opening of the shopping centre, or 24 months from
the date of signing of the convertible bond agreement if earlier.
At that date interest will be payable on the principal and accrued
interest. Amortisation of the convertible bond will commence at a
date 12 months following the opening of the shopping centre or 30
months from the date of signing of the convertible bond agreement
if earlier, and will end at the date on which the bond terminates,
which is 8 years from the date of signing of the convertible bond
agreement.
Delta II has the option to convert the bond at a date up to 6
months after opening of the mall.
The issuance of the convertible bond allows SB Brast to acquire
of the remaining 50% of the Golden shopping centre and to fully
fund the construction costs of the mall. It is anticipated that
this will enable the completed mall to be opened by the end of the
third quarter of 2012. The anticipated completion of the Mall has
permitted Cushman and Wakefield to value the mall on the basis of a
completed mall discounted back to 31 December 2010 after allowing
for the costs of construction. This valuation is the basis of the
carrying value of the property at 31 December 2010 as set out in
note 16 to the financial statements.
As part of this series of transactions, the Group has also
entered into an option agreement with Delta II under which Delta II
has the right to acquire 49% of the ordinary share capital of SB SA
for a price based on the adjusted EBITDA of SB SA. The option is
exercisable only if Delta II provides equity funding for a total of
four shopping centres. This number will include Golden Square if
the bond issued to Delta II by SB Brast were to be converted to
equity.
35 Notes supporting statement of cash flows
Cash and cash equivalents for purposes of the consolidated
statement of cash flows comprises:
2010
GBP
Cash available on
demand 846,905
Short-term deposits 32,934
Investment in investment
fund 18,158,147
Total Cash and Cash Equivalents 19,037,986
Registered Office and advisors
Registered office
No. 1 Le Truchot
St. Peter Port
Guernsey
GY1 3JX
Nominated Adviser and Broker
Liberum Capital Limited
Ropemaker Place, Level 12
25 Ropemaker Street
London, EC2Y 9LY
United Kingdom
Legal Advisers to the Company
(as to English Law)
Lawrence Graham LLP
4 More London Riverside
London, SE1 2AU
United Kingdom
Legal Advisers to the Company
(as to Guernsey Law)
Carey Olsen
Carey House
Les Banques
St. Peter Port
Guernsey, GY1 4BZ
Legal Advisers to the Company
(as to Brazilian Law)
Campos Mello Associados
Avenida Presidente Juscelino Kubitschek, 360 10 andar
CEP: 04543-000
Sao Paulo, SP
Brazil
Bankers
RBS International
PO Box 62
Royal Bank Place
1 Glategny Esplanade
St. Peter Port
Guernsey, GY1 4BQ
Independent Group Auditors
BDO Limited
P O Box 180, Place Du Pre,
Rue Du Pre, St Peter Port,
Guernsey, GY1 3LL
Independent Brazilian Subsidiary Auditors
KPMG
Rua Renato Paes de Barros, no. 33
Itaim Bibi
CEP 04530-90
Sao Paulo, SP
Brazil
Registrar
Capita Registrars (Guernsey) Limited
Longue Hougue House
St. Sampson
Guernsey, GY2 4JN
Property Valuer
Cushman & Wakefield LLP
43-45 Portman Square,
London, W1A 3BG
United Kingdom
Cushman & Wakefield (Brasil)
Praca Jose Lannes, 40- 3 Floor
CEP 04571-100
Sao Paulo, SP
Brazil
This information is provided by RNS
The company news service from the London Stock Exchange
END
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